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Ashford Hospitality Trust, Inc. (NYSE:AHT)

Q1 2010 Earnings Call Transcript

May 6, 2010 12:00 pm ET

Executives

Tripp Sullivan – IR, Corporate Communications

Monty Bennett – CEO

David Kimichik – CFO and Treasurer

Doug Kessler – President

Analysts

Will Marks – JMP Securities

Smedes Rose – KBW

Andy Wittman – Robert W. Baird

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ashford Hospitality first quarter 2010 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, May 06, 2010.

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

Tripp Sullivan

Thank you Sarah. Welcome to the Ashford Hospitality Trust conference call to review the company's results for the first quarter of 2010. 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 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 May 05, 2010 and may also be accessed through the company's Web site 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.

Monty Bennett

Thank you. The most recent quarter continues to demonstrate the benefits of our strategies to maximize operating performance, manage our debt, and enhance shareholder value. Our AFFO per diluted share for the quarter of $0.33 compared to 0.31 a year ago exceeded consensus estimates by 33%. We believe this increase over last year’s AFFO is a significant accomplishment given the intervening market turbulence. This consistency of earnings validates our investments, operational, and capital markets strategies.

Over the last three months, we have seen a significant improvement in the lodging industry. For instance, in our portfolio we experienced a RevPAR decline of 11% in January, a decline of 5% in February, and an increase of almost 3% in March. This is a fairly rapid recovery and a very positive trend. For the entire quarter, pro forma RevPAR for the hotels not under renovation was down 2.6% compared to the prior year, and down 4.1% for all hotels. ADR was down 9.4% while occupancy was up 371 basis points for all hotels. We believe the industry has moved beyond the inflection point in the cycle, but is still cautious about the trend.

Regarding operations, our asset management team continued to focus on bottom line results. Our hotel EBIT to margins dropped year over year by 145 basis points for hotels not under renovation, and 200 basis points for all hotels. Our affiliated manager Remington contributed consistently to these results.

Turning to capital expenditures, we completed $18.2 million of projects for the quarter of which $3.1 million was owner funded. We remain on track for our targeted spend of $87 million for 2010 as we continue to selectively upgrade hotels to improve their competitive positions in the market. The diversity of our assets in major markets, the strength of our brands, and the amount of capital we spend to maintain the competitiveness of our hotels have positioned our portfolio to benefit from the market recovery. We also expect to benefit from very limited new supply in our markets, which should be a positive catalyst for years to come.

We also made progress on our debt strategies by extending maturities and restructuring loans. Our goal is to push up loan maturities to better coincide with the recovery in market values to facilitate future refinancing of sales. Our interest rate strategy implemented in March 2008 to swap to floating-rate debt continued to have a significant positive impact on our results as interest rates remained near historic lows, and recent comments by the Fed have indicated the possibility of lower rates for some time to come. This strategy sets us apart from our peers and has contributed to our positive cash flow.

During the quarter we repurchased 5.1 million shares of our common stock. We suspended preferred shares repurchases several quarters ago. Our fully diluted share count, as of the end of the quarter, is 52.7% of our peak share count. This reduction is substantial and we believe compares very favorably to our peers, most of whom raise equity at significantly lower share prices in current trading levels, and have been challenged to deploy capital for hard to find hotel transactions. Given our average repurchase price of $3.15 per share for the common, and $6.47 per share for preferred since inception compared to yesterday’s closing prices, we have created almost $0.5 billion of shareholder value assuming we were to reissue like amounts of the bought back shares today.

Now that our company has experienced a full cycle in the hotel industry beginning with the downturn in 2003 when we went public to the current situation today, we have noted that our total shareholder return performance over one, two, three, four and five-year periods has exceeded our peer group. We also believe that the combination of several factors position Ashford to exceed the performance of its peers at some equivalent EBITDA growth percentages. Because we are more leveraged and have substantially reduced our share count, the incremental EBITDA growth leads to superior per share metrics, which would apply to market multiples mainly to better share price performance.

Looking ahead to the rest of the year, our top priorities remain unchanged. We will allocate capital to generate the best returns for our shareholders, and deploy our debt market strategies to coincide with improving hotel EBITDA trends. We will continue to eliminate maturities ahead of the curve where possible and maximize operating performance with an emphasis on GOP margin and cost reductions.

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

David Kimichik

Thanks Monty. For the first quarter we reported net income to common shareholders of $305,000; adjusted EBITDA of $49,268,000; and AFFO of $24,481,000 or $0.32 per diluted share.

At quarter’s end Ashford had total assets of $3.9 billion, including $172.2 million of unrestricted cash. We had $2.8 billion of mortgage debt with a blended average interest rate of 2.94%. Including the $1.8 billion interest rate swap, 98% of our debt is now floating, and the weighted average maturity is 5.1 years.

Since the length of the swap does not match the term of the underlying fixed rate debt, for GAAP purposes, the swap is not considered an effective hedge. The result of this is that the changes in the market value of these instruments must be run through our P&L each quarter as unrealized gains or losses on derivatives. These are non-cash entries, which will affect our net income but will be added back for purposes of calculating our AFFO. In the first quarter it was a gain of $13,908,000.

At quarter’s end, our portfolio consisted of 102 hotels in continuing operations containing 22,141 rooms. Additionally, as of March 31, we owned a position in four mezzanine loans with total book value of principal outstanding of $56.2 million, with average annual unleveraged yield of 7.1%. The loan position in other mezzanine loans was zero book value and no yield. Hotel operating profit for the entire portfolio was down by $7.7 million or 12.2% for the quarter.

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 58.8% versus a not-to-exceed level of

65% for our credit facility covenants. At quarter-end our share count was 75.7 million fully diluted shares outstanding, which is comprised of 52.9 million common shares, 15.4 million OP units, and 7.4 million shares our series E convertible preferred.

Regarding the Westin O'Hare, we have been working with a special service on the loan to arrange a consensual deed in lieu of foreclosure. Based on the status, we are required to write down the book value in the fourth quarter the estimated fair market value, which resulted in an impairment of $59.3 million. Once the deed in lieu of foreclosure is finished, we will then record a gain of approximately $53 million to the level of the non-recourse debt on the property or net impairment of $6.3 million.

Our Courtyard in Manchester, Connecticut secured a $5.8 million loan maturing in January 2011, and we recently elected to stop making payments. After several attempts to have this asset moved to special servicing, we focused at the last remaining option to facilitate what we hope will be a constructive dialogue for an extension.

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

Doug Kessler

For several years now, we have been talking about building and maintaining an investment platform that can withstand an economic downturn and deliver results. I believe this quarter is a great example of the benefits of this platform as well as our build lead to differentiate ourselves from the peer group.

We have also demonstrated a strong access to capital during the downturn. Since January 2009 we have financed, refinanced or modified $441 million of loans. These transactions netted us an additional $16.5 million in gross loan proceeds and unencumbered two of our hotels. At a time when hotel financing was virtually nonexistent, we are extremely pleased with our success in modifying our loans. During the first quarter, we restructured a loan for $156.2 million that extended a 2011 maturity to 2013, eliminated coverage tests, and reduced our cash management provisions. As it stands today, we have no remaining hard maturities in 2010 with only $209 million left for 2011 of which $203.4 million mature in December of 2011. We are working with lenders to extend these and other maturities.

Turning to our interest rate strategy, we continued to benefit from the combination of swaps in floor doors. Over the last 12 months, we have been able to save $57 million in interest expense. Given the current structure of our interest rate hedges, rates could increase by another 45 basis points without any significant change in the benefit we receive. As we have noted before, as long as LIBOR remains below 3.2% and a 11-fold increase from its current level, we will continue to receive positive benefits from the strategy.

As of March 31, the market value of our swap and related financial transactions is $108.4 million. Recall that our intent of this strategy was to offset the weakness in the economy by capitalizing on the correlation between RevPAR and LIBOR. While the Fed has indicated they intend to keep rates low for an extended period of time, we fully anticipate an increase in rates in the not-too-distant future and are closely monitoring the relationships among economic data that funds rate and RevPAR.

A sustainable improvement in the overall economy will likely bring rates up and presumably lodging performance too. With improved RevPAR in recovery, our capital markets and interest rate strategy will have accomplished our desired results of providing shareholders more consistent earnings in up and down cycles.

In terms of investments, we have not seen much change since our last call except there is even more capital now in the sidelines from private buyers as well as recent lodging IPOs. With the overall lodging market improving and the risk free rates still low, we expect cap rates will remain low and generally unattractive to us as a buyer. We believe we made the best investment possible by acquiring ourselves, namely 102 asset diversified hotel portfolio with positive cash flow, well maintained assets with plenty of CapEx funding.

We did search through the repurchase of our common stock at an average share price of $3.15, 40% of current value. Regarding the availability of hotel debt, we continued to see increase appetite among lenders at more reasonable LTVs of 60%, with debt yields in the low double digits and rates with a handle.

We are encouraged by the incremental improvement in both the capital and debt markets, and as in the past are consistently mining the market and reviewing public and private opportunities to access capital that is consistent with our long-term objectives. In conclusion, you will continue to see us remain very disciplined.

We will now open it up to any questions you may have.

Question-and-Answer Session

Operator

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

Will Marks – JMP Securities

Yes, good morning everyone. I had a question on – first of all, you made mention of this as being April, did you give any RevPAR stats for April or would you?

Monty Bennett

We have not given RevPAR status for April and we do not like to give that kind of guidance and outlook.

Will Marks – JMP Securities

We are hearing comments from other companies, not that they are applying pressure but is there any change with March or can you give us just some feedback in terms of how business is going maybe month by month for the year?

Monty Bennett

We can for January, February and March, in fact I read it in my script but beyond the first quarter we just had a policy of not jumping out there, so I would like to step back and not do that. We were down 11% in January, have you got that?

Will Marks – JMP Securities

Yes, I have got that so that is no problem.

Monty Bennett

Right.

Will Marks – JMP Securities

I guess moving on to in terms of brands, how do you – are you seeing much of a difference, I guess once again this is an outlook question, but how do you feel your position versus the overall lodging sectors and the travel stats, shall we keep looking at it upscale and upper upscale as your concept?

Monty Bennett

Yes, much of our properties are about half in upper upscale and about half in upscale, and we have tried to geographically diversify our property so that we track the industry pretty close and we normally do. So there is not a big change from that. As far as your brands go, we have Marriott that started to roll out over a few quarters now sales force one and at least so far it is impacting us negatively. Now they tell us that it should help us after it gets implemented but we are yet to have seen those results and are very, very nervous about it, extremely nervous. So we will see if that initiative of theirs is successful as we all hope it to be.

Will Marks – JMP Securities

Okay thank you and just one final big picture question, on valuation metrics, do you look closely at price per key and where do you feel like you are trading right now, I guess I can make the calculation myself but maybe I will let you state it.

Monty Bennett

I have not done the calculation right now, maybe the guys here can sit and calculate while we are talking, but clearly – all our peers for that matter is trading at significantly below replacement cost. Kimo [ph], do you have that number off hand?

David Kimichik

I want to say it is in the $130,000 per key range roughly, but I do not have the exact number.

Will Marks – JMP Securities

Okay and where do you think replacement cost is?

Monty Bennett

Replacement cost for our portfolio is we have got a mix of select service and (inaudible) service and so we will list off the replacement cost of ours in the 200 around. Kimo sitting here he thinks they are on the positive side of 200, so in that range at least.

Will Marks – JMP Securities

Obviously your stocks moved up but in terms of other cycles over the last couple of cycles, have you seen this type of discount before?

Monty Bennett

By discount you mean values?

Will Marks – JMP Securities

Yes, in terms of values, your price per key versus replacement cost.

Monty Bennett

You know this is one of the worst the industry has seen since the great depression. Now, my father was in the industry just located in the Southwest during the 80s and that was really, really bad, in fact Kimo was working here at the time as well, and I would say it is probably nationally about as bad as it was regionally back then. So we saw huge drops in values again just in the Southwest with oil bust during the 80s, but on a national scale this is the biggest we have ever seen. I imagine private market values have dropped maybe about 50% from high as in late 2006 early 2007 to what the trading is today. 40% to 50% I should say, the values are not 50% to 60% of what they are at.

Will Marks – JMP Securities

Okay, great, that is all from me, thanks.

Monty Bennett

Thanks.

Operator

Thank you and our next question comes from the line of Smedes Rose with KBW. Please go ahead with your question.

Smedes Rose – KBW

Hi I was just wondering, I guess two questions, are the results of the Westin O'Hare still in your numbers or have you removed them?

Monty Bennett

They are still in our numbers and we have not removed them because although we are working to pan that asset back to the lender, it is not panned back yet nor is it with the receiver. Therefore they are still in our numbers.

Smedes Rose – KBW

Okay, and then can you give your thoughts on share repurchases going forward, are you in the market now in the second quarter or do you feel like you have sort of done on that side or what is your –

Monty Bennett

Sure, we are hesitant to give too much details on it because we do not want the marketplace to take advantage of what our strategies are, but I can give you kind of a general outlook and that is that as our stock price approaches the high single digits, what we find is that alternative uses of capital match the returns of our share buybacks. And then as you get into the low double digits, you get to a range where other uses of capital exceed the economics of buying back shares.

So as the price goes up then it definitely becomes less attractive for us. Now, those metrics that I just laid out are dependent upon a couple of things. It is dependent upon how many shares we bought back because the more we buy back, then the more those ranges will change and also our outlook on what the future holds for the hotel industry. So the more bullish we think the future will be as far as our underwriting will have an effect on the price compared to how negative we think the outlook turns out to be.

So we have suspended the preferred buying several quarters ago, so that is not something that we have been involved in or anticipate buying any signs in the foreseeable future but the common is something that we still take a look at depending on what the stock price is.

Smedes Rose – KBW

Okay, thank you.

Operator

Thank you. (Operator instructions) And our next question comes from the line of Andy Wittman with Robert W. Baird. Please proceed with your question.

Andy Wittman – Robert W. Baird

Good morning guys. I just wanted to ask a question starting off with I guess the mezzanine loan portfolio, maybe I missed this but could you guys give an update on maybe the coverage to the loans that you have there and maybe an average coverage number I guess mostly just the former sales and loans, is it a bigger slice of that, I just wanted to get an understanding of how that is performing?

Monty Bennett

Overall they are performing poorly but I will let Kimo here to respond.

David Kimichik

We did not give an average coverage, we just quoted a rate of return, we are currently receiving a 7.1 unleveraged.

Monty Bennett

But that is on the ones that we have not written down.

David Kimichik

That is correct.

Monty Bennett

So, as you know Andy there are a number of loans that we have written down and a few that we have not. So that is the return we are receiving on the ones that we have not written down.

Andy Wittman – Robert W. Baird

Okay so 7.1%, I am trying to understand if that is full coverage or a haircut from what you said you are receiving if you are getting paid out in full.

Monty Bennett

You are asking me if we are getting paid in full on those loans?

Andy Wittman – Robert W. Baird

Yes in terms of are they covering that service today or they are not the back end gets – that will be determined in the future but I just want to understand the coverage today.

Monty Bennett

I see, they are paying every one of the loans that have not been written down are paying the full contractual payments. Right here off hand, I cannot tell whether the owner on each of those has not come out of the pocket each month or not, but if not having to come off of pocket it sure is close I know on a couple of them.

Andy Wittman – Robert W. Baird

Okay, and then I guess I just wanted to touch on the capital allocation a little bit, You mentioned that you are probably not a net buyer today, are you a net seller if cap rates are low, are you charging the market a few properties to find out the uses for that capital?

Monty Bennett

Sure, let me just modify what I said a minute ago Andy and that is that we have one of our mezz loans that is not paying current, that we have not written down, and we have not written down because we have got some personal guarantees on it but one of our mezz loans is not paying current.

Could you repeat your question again?

Andy Wittman – Robert W. Baird

The desire to potentially sell assets in the low cap rate environment.

Monty Bennett

We are not too inclined to sell assets in this environment. It is great from a low cap rate standpoint but it is also low EBITDA and low NOI. That does not mean that we will not sell any but generally we do not think it is a great time to sell assets and would rather not do so. Doug, any comment on that?

Doug Kessler

There will still be a lot of market on the sideline looking but just if you can run any sort of MPV [ph] analysis, we believe we will be better off concerning sales with more stronger cash flows coming from the assets, so not really motivated. We did get a fair amount of unsolicited interest given the quality of our assets.

Monty Bennett

We are marketing one asset, we have not decided whether to sell it or not but we are marketing one asset for sale that is the Hilton Suites in Auburn Hills and that is a non-core asset for us.

Andy Wittman – Robert W. Baird

Okay that makes sense. A little bit on the interest hedges, is there a possible capital allocation you think there, I know this year you are kind of – you have got a notional value of like $5.4 billion kind of outstanding, I know you have bought some forward starting hedges in the future, next year is not as hedged as this year, is that something that is in your consideration?

Monty Bennett

It is in our consideration. We have not decided if we want to change anything about that or not, but this year is more hedged than next year as far as the notional amount out and we are taking a look at it. We see the recovery happening and the point of the hedge as you know is to do just that is to hedge, and if we see the recovery (inaudible) then we would be probably be inclined not to do anything, but we are still concerned that we might go out and buy some more hedges. But we will probably be looking at this sometimes late summer or early fall I would imagine for next year.

Andy Wittman – Robert W. Baird

Okay, just in terms of the value on the existing loans that you have, I know that on the balance sheet for $108 million in the past you have kind of commented that unwind, I mean you do not necessarily think that that would be market where you could do the transaction. Do you have an estimate of the market value to unwind if you were to do that?

Monty Bennett

Sure we think that that $108 million is the market value or the right value but I guess what we are trying to relay is that there is friction cost in trying to get someone to buy that from you. So I think we probably have to give 5% or 10% or something on that in order to put that amount of cash in our pocket, that is what we wanted to do. And we have been approached by a number of people, banks looking to transact and to take it off our hands, and wanted to be a great cash slug for us as we have explained to them then we lose our hedge and this strategy was not so much to make the whole bunch of money, it was to hedge our performance. So making that money would be nice but we want to stay hedged that is relatively much more important to us.

Andy Wittman – Robert W. Baird

Okay that makes a lot of sense. I am going to keep going if you do not mind, I just want to get a reminder on the credit covenants, was it April 2011 where the covenant ratio in terms of coverage ratchets up a little bit or can you just remind us of what that was?

Monty Bennett

That is right, it was 1.25 now and then in April 2011 it goes up to 1.35,and at the end of the first quarter of this year we ended at 1.69.

Andy Wittman – Robert W. Baird

Okay have you been in discussions about refinancing the credit line and can you just give us any color on that?

Monty Bennett

Not too much color other than we are always in discussion. So about refinancing the credit line we are just trying to figure out what the right time is. While in one hand we want to go out and address that and take care of it for obvious reasons, in the other hand, everyday the marketplace gets better and the terms get better. So we are kind of still walking along a tight rope of trying to balance those, but we are going to probably go and talk to them and pick up discussions with them here over the summer that does not mean that we will necessarily do something.

Andy Wittman – Robert W. Baird

Okay, great, that is all I have, thanks guys.

Monty Bennett

Thank you.

Operator

Thank you and Mr. Bennett there appear to be no further questions at this time. So I will now turn the conference back over to you.

Monty Bennett

All right, we thank you and thank you for your participation on today’s call. We look forward to speaking with you again on our next quarter’s call.

Operator

Thank you and 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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