Ashford Hospitality Trust CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 5.10 | About: Ashford Hospitality (AHT)

Ashford Hospitality Trust, Inc. (NYSE:AHT)

Q3 2010 Earnings Conference Call

November, 04 2010 12:00 pm ET

Executives

Monty Bennett - Ashford Hospitality Trust, Inc. - CEO

David Kimichik - Ashford Hospitality Trust, Inc. - CFO and Treasurer

Tripp Sullivan – Investor Relations

Analysts

Smedes Rose - KBW

Will Marks - JMP Securities

Andrew Wittmann - Robert W. Baird

Presentation

Operator

Ashford Hospitality Trust, Inc third quarter 2010 earnings conference call, during the presentation all participants will be in a listen only mode. Afterwards we’ll conduct a question and answer session. At that time if you have a question please press the start followed by the four on your telephone. If at nay time during the conference you need to reach an operator please press star zero. As a reminder this conference is being recorded, Thursday, November 4th, 2010. I would now like to turn the conference over to Tripp Sullivan, Investor Relations. Please go ahead, sir.

Tripp Sullivan

Thank you, Myra, welcome to this Ashford Hospitality Trust conference call to review the company’s results for the third quarter of 2010. On the call today will be Monty Bennett, Chief Executive Officer and David Kimichik, Chief Financial Officer.

The results as well as notice and accessibility of this conference call are on a listen only basis over the internet and were released yesterday afternoon in a press release that has been covered by the financial media. As we start let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and 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 un-known risks which could cause actual results to differ materially from those anticipated.

These risk factors are more fully discussed in the section entitled risk factors and ask for the registration statement on form F-3 and other filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made until the date of this call and the company is not obligated to update or revise them. In addition through terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company’s earnings release and the company tables are scheduled which has been filed or maintained with the SEC on November 3rd, 2010 and may also be accessed through the company’s website at www.ahtreit.com.

Each listener is encouraged to review those reconciliations provided in the earnings release together.

Montgomery Bennett

Thank you, Tripp. Doug Kessler, our President, is on the road today and unfortunately couldn’t dial-in. I will offer some opening comments then turn it over to Kimo for a review of the financial highlights. I’ll then discuss our capital allocation strategies at the end of our call.

Kimo

As compared to our peers we have had time to take a different approach to our investment capital market strategies. We continue to demonstrate the platform comprised of a diverse portfolio and relentless focus on maximizing efforts, capital markets, ingenuity, and management interests closely aligned with shareholders and produce strong returns that outperform the competition. A clear indication of the success of our efforts is that our one, two, three, four, five and six year total shareholder returns exceed each of our peers. In fact for the most recent quarter we continue to (inaudible) strong year over year growth pace with an 83% increase in (inaudible) vote per share at $0.33. Once again that’s among the strongest growth reported today and for among our launching peers.

It’s also the highest per share (inaudible) in the third quarter since our inception and is a direct result of wealth to continue in the capital market and asset strategies. Turning to the performance of our portfolio we reported a 6.1% increase in rev par for hotels not under renovation in the quarter. APR was 7.7% and occupancy was up 372 basis points. That versus a 3.4% decline in APR in the second quarter. I think we can safely say the industry is beyond the recovery.

Strong complex performance has been accompanied by strong operating results. We are consistently focused on cost control and continue to in part this operating discipline on our managers and (inaudible) above 50% and drive growth in hotel EBITDA margin. For the hotels not under renovation EBITDA margin increased 192 basis points from a year ago to 25.6% while for all hotels EBITDA margin increased 173 basis points to 25.4%. Our affiliated manager, Remington, significantly contributed to these results. And we also had a strong contribution from the brands as we continue to work very closely with him to keep costs under control. To wrap up the third quarter and too date, the fourth quarter, we have actively worked to create liquidity, extend our maturities and to reduce our overall leverage.

As a result we enter the quarter with a leverage ratio of just under 55% compared with 59% at year-end 2009. During the quarter we eliminated one of our upcoming maturities with a loan restructuring and asset sale and completed the consensual deed holder transaction. We’ve created 215 million (inaudible) capacity on our revolving credit line and currently have only $35 million strong. As it stands today we have only $209 million in hard maturities in 2011. Most of which occurs in December and $242 million in 2012 and are working to address these loans. Although we have not made any recent share repurchases our share buy back programs have incentive through the third quarter reflection. The repurchase of $73.6 million common shares representing a 50% reduction from our pink share accounts.

These shares were acquired at an average price of $3.26 per share. Based upon yesterday’s closing price of $10.46 per share. This strategy has created approximately $530 million in shareholder value. Assuming in like kind amount of shares for it to be reissued. We strongly believe that our share holder strategies are superior to delivering immediate and longer term attrition as compared to many of our peers. In which equity, at the worst possible time and low share prices. Lastly, to turn to capital expenditures we completed $13 million of projects in the quarter. That leaves us on target to expend approximately $60 million for the year as we continue to selectively upgrade hotels to improve their competitive position in the markets.

Our priorities are unchanged for the balance of the year. We have an intense focus on improving our balance sheet on liquidity while controlling costs and leveraging off of the improving trends. We will also continue to be creative and flexible in pursing capital market opportunities. We will execute each of these with the commitment to improving share holder returns. In conclusion we believe we have proven to be good stewards of our share holder’s investments during one of the most trying times in lodging industry and remaining closely aligned with their interests within in Sutter’s ownership of 20% of the company.

The strategies we are instigating and the moves we have made to capture value illustrate our commitment to outpace our peers going forward. I’d now like to turn the call over to David Kimichik to review our financial results.

David Kimichik

Thanks, Monty, in the third quarter we reported net income to common share holders of $36,281,000. Adjusted EBITDA of $47,959,000 and the FFO of $23,532,000 versus $0.33 per diluted share. At the quarter’s end Ashford had total assets of $3.7 billion with $2.5 billion of mortgage debt and blended average interest rates of 2.9%. Including, our interest rate swap, 100% our debt refloating as of September 30th. Diluted average maturity is 4.8 years.

After factory and the new swap transactions, we close at October 19th the refinancing of the Gateway Marriott, 75% of our debt is now fixed and our overall cost to debt is currently 3.08%. Since the life of the swap did not match the term at the end of line fixed rate debt of GAAP purposes the swap is not considered an effective hedge. The result of this is because of changes in market value in these instruments, these are instruments (inaudible) 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. It will be income will be added back for purposes of calculating our AMFO. For the third quarter the gain of $382,000 and year to date is a gain of $30,824,000.

At quarter end our portfolio consists of 100 hotels and continuing operations to gain $21,392 rooms. Additionally, as of September 30th, we earned a position in form loans and e-loans with total book value of principle outstanding of $69.1 million. Hotel operating processes, the entire portfolio, is up by $5.8 million or 11.7% for the quarter. Our quarter end adjusted EBITDA as a fixed charge ratio now stands at 1.83 times versus the required minimum of 1.25 times.

Ashford’s net debt to gross assets is up to 54.9% versus not to exceed level of 65% for our credit facility covenants. At quarter end our share count was 73.0 million fully diluted shares outstanding which is comprised of $51.1 million common shares; 14.5 million OP units and 7.4 million shares of our Series-B Convertible Preferred. I’d now like to turn the call back over to Monty to discuss our capital market strategy.

Montgomery Bennett

Thanks, (inaudible), there’s an increasing amount of transaction activity underway in the launching sector in terms of the investments, loans, and the product capital markets. Investors are responding to the improving real estate fundamentals over the sector and are targeting more capital for hotel lending and ownership. As a result we have worked productively to improve our balance sheet and enhanced liquidity on favorable terms and taking advantage of changes in the capital markets.

First, I would like to share with you some of our capital market activities. During the third quarter we observed a reinvigorated preferred market and tightening of stripped yields on preferred and as a result issued 3.3 million shares of our Series-B Preferred Stock then raised $74.1 million.

We caught it during a down turn; we had purchased 3.1 million shares of the Series- A and B Preferred Stock at an average price of $6.47 per share. Issuing the Series-B shares back to the market at a gross price of $23.178 in – traded in value of $55.1 million. We used the proceeds to pay down outstanding borrowings on our credit facility. Regarding interest rate management, based upon the current terms available in the swap market we announced late last month the convergence of our $1.8 billion interest rate swap back to a fixed rate of 4.09%.

Resulting in locked-in annual interest expense savings of approximately $32 million for the remaining term of the swap. With this new transaction we’ve locked-in close to the maximum possible annual savings from the swap over the remaining term while eliminating the risk of potential (inaudible) increases, all at no tax cost to us. Moreover it be 15 Florida orders for 2010 and 2011. It may provide additional economic benefit. We are very pleased that this proactive strategy accomplished our objective. With hotel pricing increasing we believe it makes sense to explore selling assets.

Certain assets I should say, during the quarter we sold a Hilton Suite in Auburn Hills, Michigan for $5.1 million. In the same month we transferred the Western O’Hare to the special service albeit consensual data to deliver foreclosure. We recorded a gain of $56.2 million to the level of non-recourse debt off the property tax, having previously written down the book value to the estimated fair market value which resulted in an impairment that $59.3 million at that time.

We are currently in the market with three full service hotels; names are the JW Marriott, San Francisco, Hilton Rye Town and Hilton El Conquistador along with three select service assets. On the financing front during the quarter we restructured the loan on the JW Marriott, San Francisco, to fully kick in the maturity from 2011 to 2015. Subsequent to quarter end, we refinanced a Marriott Gateway in Crystal City that provided $105 million in proceeds for a 10-year loan of a fixed rate of 6.62% with 30 year amortization.

This new loan replaces the $60.8 million loan that was set to mature in 2012. We used the proceeds to reduce amounts drawn on our line of credit. Looking ahead to the balance of the year in 2011 we remain encouraged by the traction and fundamentals of training activity. We’ve always exhibited an inclination to recycle our capital. To find more, a previous deployment opportunity, utilizing where possible and certainly generated internal capital over external capital in order to maximizing shareholder appreciation.

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

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen.(Operator Instructions) One moment please for our first question. The first question comes from Andrew Wittmann with Baird, please go ahead.

Andrew Wittmann - Robert W. Baird

Morning, guys, I just had a few questions this morning. First, I was wondering if you could provide any update on the Highland Mezz that you bought in the venture last quarter, any update there?

Monty Bennett

Sure, as you will recall some time ago we entered a venture with Prudential, we bought a position in the Mezz Six. The Highland Portfolio was purchased by JER of subsequent to that and about two or three months ago we bought another piece and that’s a portion of the Mezz Four position. And we did that both in order to realize what we though would be great returns on that investment and the strategy to also help protect our other investment of Mezz Six.

We are currently in discussions with all the parties and continue to remain in discussions with them and we should have something to report because by the time -- we’d love to have resolved something sooner than all this but unfortunately nothing has been resolved. So we continue to have dialogue and hope that we can come to some type of arrangement so that nothing comes continuous among all the parties. But that’s of course dependent upon all parities involved so nothing really new to report there other than that, we’re still in discussions.

Andrew Wittmann - Robert W. Baird

Okay and just any idea on timing of disposition of that? Is it this year still, or do you think it floats over into next year?

Monty Bennett

I just don’t know. I just don’t know, like I said it depends upon the other parties and each party has got different agendas and stakes are involved and so there’s regulatory issues that I’m not even aware of, so I think my respective is we would like it resolved, yesterday, just because we lack the certainty of it. But unfortunately we just are dealing with folks that have different time tables so I just don’t know.

Andrew Wittmann - Robert W. Baird

Okay. Then just maybe this one is a little bit better for Kimo. Just with the gain for the, I guess for the deed-back of Westin O'Hare, does that force your hand for any sort of dividend payment to avoid paying tax this year? Or is there enough flexibility in your dividend policy right now where that gain does not force a dividend?

David Kimichik

It does not force a dividend.

Andrew Wittmann - Robert W. Baird

Okay. And just I guess kind of more broadly on the dividend, clearly with the cash flows being pretty strong, you just pointed out third-quarter FFO, highest you've ever reported -- are we getting to the point where you have to start contemplating taxable income or paying just a regular quarter dividend again? Can you just give us kind of what you're thinking on that?

Monty Bennett

This is Monty, for this year it’s not an issue and the guidance that we had last December was that although, each quarter with the side about the dividend that we’re inclined not to pay a dividend this year. As far as next year goes; as you’re aware it’s a very complicated calculation as to whether (inaudible) to pay it or not and with a process of looking at forecasts and going through that and so we plan to have an announced policy in December as is our custom about what our intent is for the upcoming year and we’ll have all that announced stuff by then.

So unfortunately I just can’t give you – we just haven’t done all the work necessary in order to give you that answer.

Andrew Wittmann - Robert W. Baird

Okay. That makes sense. Then just I guess kind of one final question. It's kind of just on the balance sheet management. If you look at a debt to EBITDA measure, clearly the Company looks very highly leveraged still, we would think in excess of 8 times. But cash flows with your lower cost of debt look strong. It looks like the credit facility is going to probably get paid back if you don't buy or sell anything here, probably sometime in first quarter, just through cash flow. Can you just tell us how you're thinking about leverage, considering that cash flows are good, but leverage remains high? And as you continue to either sell assets with debt on it and can -- and actually build up more of a cash balance, what you plan to do with the cash balance? Do you go out and buy maybe unencumbered hotels and bring your net debt to EBITDA metric down that way? Or how do you go about and address that?

Monty Bennett

Sure, our belief as a company is on the different. Is different than our peers, we think running the company -- real estate company for 35% debt is harmful to the equity returns of the share holders. It’s just too low. We’re happy here with something closer to a 50% or 60% debt to cost. So our EBITDA debt numbers are high but that’s because we went through the worst succession in history and that’s why you have a debt level that’s much lower than 100% in order to make it through those tough times and so we did and we seem to have done so very well. So kind taking your question and turning it just a little bit instead of our focus on reducing debt our focus is more on reducing risks and we have some – just a few recourse liabilities to the company.

The credit facility and the debt on the JW Marriott out in San Francisco is I believe our only other recourse obligation. So as you can see our moves here recently; we’re looking to reduce that exposure of recourse. Because regardless of what you’re overall debt level is unless it’s recoursed to the company you can let that group of properties go back to the lenders. So in real estate especially I think it’s not a total debt look that’s important, its - is all the debt crossed, is it non-recourse? And so we pay down our revolver substantially and when the market to sale that JW Marriott which it would do then it’ll pay off our debt recourse debt.

So our inclination now is to reduce the amount of recourse debt, not really the overall amount of debt. As we ultimately attest there’s a few uses for it. One is to acquire properties, the challenge that we’ve got and our payers have but they don’t seem to be as focused on it as we are, is that there’s some great opportunities to be had up there to buy and to make some nice equity returns on but the cost of equity is high. And so you really have to compare how well you think an asset that you’re buying is going to perform against your existing portfolio.

Because you have to go – you’d have to rearrange that in order to go buy it and that’s a hard call to make, so as they accumulate cash what we’ll probably do is looking for acquisition opportunities or additional CapEx or some of the other many site potential uses that are out there. But not necessarily to pay down any non-recourse debt, we’d rather just keep the cash on our balance sheet.

Andrew Wittmann - Robert W. Baird

Great. That's a good answer. Thank you very much.

Operator

Thank you, ladies and gentlemen (Operator instructions) And our next question comes from Will Marks with JMP Securities, please go ahead.

Will Marks - JMP Securities

Thanks, hello Monty, (inaudible) a question on -- you guys are nice to give the breakdown toward the end of your note on page 15 of how the margin changes during the quarter. I noticed that the room’s margin declined a little bit, and yet you had good RevPAR growth. Can you just comment on that, and maybe what it takes for that number to move up?

Monty Bennett

Sure, what metrics move up is 80 (inaudible) instead of occupancy growth. Just that all of our rev par increase was in occupancy and that creates more in-room expenses and so it makes it tough to hold those rooms marginless as occupancy only.

And it switches to ADR or just to give you a little bit more balance of ADR we expect that to hold a little more firmly or improve.

Will Marks - JMP Securities

Okay, thanks. And Kimo, on the model, I know you don't give guidance, but maybe you can give some thoughts on these expense items. I noticed that on the property tax line and the corporate G&A line, it seems like the run rate declined a little bit. And I know there are some seasonal issues, but do you think third-quarter numbers are maybe indicative of what we should see in future quarters?

David Kimichik

Let me just do the property taxes and let Kimo on the corporate G&A. The property taxes are numbers that we book you know based upon – we accrued based upon what was last year or what the taxing authority has issued us notes on. It’s only when we actually get a property tax abatements and actually are able to reduce our rates do we credit them against that accrual and so we’ve been getting some reductions in property tax expenses over the past three quarters.

Largely from our appeals that we put in from 2009, this doesn’t show very many 2010 appeals yet. So what you have in the property tax numbers is really two numbers, one kind of the existing ongoing rates, but then some accrual reversals for those two, three, four, five, where we’ve gotten some substantial reductions in the past quarter. Now going forward that ongoing rate will be slightly lower but then we’ll have some more hopefully of these reductions and unfortunately for you guys that are trying to forecast it’s hard for us to know if we’re going to get those reductions and if so which boarder we’re going to get those reductions.

Our hope is that that property tax number will continue to come down, which means we’ll get some more reductions, Kimo?

Kimo

On G&A, Will, I think that the quarterly number is probably consistent with the year to date number on a run rate basis. So I would go ahead and just forecast that out.

Will Marks - JMP Securities

Okay, great. And a final question, I guess big picture for you, Monty, I think you touched a little bit on it. But in terms of locking in rates, big-picture view, you guys have done a great job, I guess, of predicting in this regard. What you think is going to happen to rates in the next year? It's a big question, but you've been right in the past.

Monty Bennett

Well, we think rates will continue to stay very low. Outside some type of major market financial crisis. I don think we’re through this financial crisis. I think there’s still some danger in the financial markets with the amount of debt that the country’s running up. The basing of the dollar and what that does to exchange rates. So the financial markets are (inaudible) and scary, at least to me right now.

So outside of what may happen there, I think the Fed is going to keep those rates low. But there’s always a wild card of some other crazy events in the financial markets which could make rates spike like they did. I think it was in December of – October 2008 so when we saw that we could lock down these rates, very close to maximizing our maximum potential benefits. Well then the risk would (inaudible) and he said, well why not lock it in, I think we gave up maybe like nine basis points was the most we could have otherwise gotten if rates do indeed stay low, which we think they’re going to be and in return we eliminate the risk of some type of financial market crisis again.

So for that nine basis points per two and a half years we just thought it was a good trade for our investors to build for certainty.

Will Marks - JMP Securities

Okay, thank you very much.

Operator

Thank you, the next question comes from the Smedes Rose with KBW, please go ahead.

Smedes Rose - KBW

Hey thanks, I wanted to ask you, from the proceeds from your issuing the preferred during the quarter, was there a reason why you couldn't retire -- I guess it's the Series B that are included in your fully diluted share count? It just seems like that would have been more, I guess, accretive to FFO. And also, I think there's a required dividend on those shares. Would that have been an option?

Monty Bennett

That was an option and we talked about it a lot here internally amongst management team and ultimately with the board. And we just thought that reducing our recourse exposure at the time was probably the best way to go and we thought would have in more time to retire that Series-B, since then our stock has run up – the whole industry has run up more than I would have anticipated and so that’s still on our list . Something we want to do and maybe use of that additional cash that was asked about earlier but it would …

Smedes Rose - KBW

So you have the right to, I guess to call that, I guess, whenever you want, essentially? Is that how that works, or …

Monty Bennett

… well, we – I’m not sure exactly what our rights are, right here, I rather think it’s (inaudible) off hand but we’re in conference for about a month with those folks and some kind of – there’s all this opportunity to take them out depending upon what they’re stock price is and the like so. Okay.

Smedes Rose - KBW

I wanted to ask you, too, on the JW Marriott in San Francisco, is your primary reason for selling it because you want to not have the recourse debt? Wouldn't there be an option to put nonrecourse debt on it and to pay off the recourse debt? Or do you just feel like the pricing is so good right now it's a good time to sell, or …

Monty Bennett

This here’s a two-for or a three-for. By selling it we get rid of that recourse debt that’s on it. By selling it there’s a substantial amount of equity in the property. We can use those proceeds to turn around and pay off our credit facility line which is recourse debt and perhaps use it towards retirement of the Security Tackle B and there’s a lot of equity because – in the property, because there’s a lot of people out in San Francisco chasing after it and we saw what a couple of other assets traded for out there. For substantial prices and so we though we’d take advantage of that and sell it. We see that some of the prices are out there, we can bank on some really strong growth and so if we can kind of lock in that expected growth out there today and accomplish these two or three other objectives then why not?

Smedes Rose - KBW

Okay, and then I just wanted to make sure I heard correctly. You are also in the market with the Hilton Rye Town and the Hilton El Conquistador; was that right?

Monty Bennett

Yes.

Smedes Rose - KBW

Okay. And then also three -- did you say limited-service assets?

Monty Bennett

Yes.

Smedes Rose - KBW

Okay. Okay, thank you.

Monty Bennett

Okay.

Operator

Thank you and Mr. Bennett, there are no further questions at this time. I’ll turn the conference back to you for closing remarks.

Monty Bennett

All right, well, thank you and thank everyone for their participation on today’s call. We look forward to speaking with you again next time.

Operator

Thank you ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.

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