Ashford Hospitality Trust, Inc. (NYSE:AHT)
Q2 2014 Results Earnings Conference Call
August 8, 2014 11:00 a.m. ET
Scott Eckstein – Investor Relations
Monty Bennett – Chief Executive Officer and Chairman
Deric Eubanks - Chief Financial Officer
Jeremy Welter – Executive Vice President, Asset Management
Douglas Kessler – President
Andrew Didora - Bank of America
Ryan Meliker - MLV & Company
Robin Farley - UBS
Austin Wurschmidt - KeyBanc Capital Markets
Chris Woronka - Deutsche Bank
Nikhil Bhalla - FBR Capital Markets
Patrick Scholes - Suntrust Robinson Humphrey
Good day and welcome to the Ashford Hospitality Trust and Ashford Hospitality Prime Second Quarter 2014 Conference Call. Today's call is being recorded. At this time I would turn the conference to your host, Scott Eckstein. Please go ahead, sir.
Thank you, operator. Good day, everyone, and welcome to today’s conference call to review results for both Ashford Hospitality Trust and Ashford Hospitality Prime for the second quarter of 2014 and to update you on recent developments.
On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Douglas Kessler, President; Deric Eubanks, Chief Financial Officer and Jeremy Welter, Executive Vice President of Asset Management.
The results as well as a notice of the accessibility of this conference call on a listen-only basis over the internet were distributed yesterday afternoon in press releases that have 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 both company's 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 releases and accompanying tables or schedules which have been filed on Form 8-K with the SEC on August 7, 2014 and may also be accessed through both companies’ website at www.ahtreit.com and www.ahpreit.com. Each listener is encouraged to review those reconciliations provided in the earnings releases together with all other information provided in the releases.
I will now turn the call over to Monty Bennett. Please go ahead, sir.
Thank you and good morning. During the second quarter, the performance of both Ashford Trust an Ashford Prime demonstrated our continuing ability to capitalize on the positive lodging industry fundamentals we are currently seeing. We continue to focus on finding innovative ways to create near term and long-term shareholder value for our two platforms.
Our outlook for the hotel sector remains positive and we are confident these initiatives are adding value for our shareholders. As a team, we at Ashford have always employed a methodical, analytically driven approach when making day-to-day business decisions and more complex strategic transactions. This remains true in both of our platforms. Our process has stood the test of time as this management team has achieved a 230% total return to our shareholders since Ashford Trust's IPO in 2003 compared with the 147% return from our peers over the same time period.
We have continued to outperform our peers in every yearly cumulative total shareholder return period since our IPO. While our Ashford Prime portfolio is still in the early stages of its development as an independent public company, we expect to continue to this record of success with that platform as well. An integral part of this methodology is our commitment to acting as shareholders in our companies. That is really not difficult for us because we are shareholders. Our insider ownership in Ashford Trust is 17% and following the spin-off and subsequent equity raise, our insider ownership is 13% in Ashford Prime.
The next closest hotel REIT peer has 4% insider ownership. Over the years, collectively we have sold very little of our stock and have made material cash purchase of shares. In fact, back in March, I have bought $500,000 of Ashford Prime stock in the open market. The vast majority of our management team's' net worth is in Ashford Trust and Ashford Prime stock. Because of this, we work diligently to be good stewards of our investors' capital since our own capital is at risk with yours.
We consider this to be one of our key differentiators and competitive advantages. I believe we have the most highly aligned, stable and effective management team in the hotel industry. The same people that took Ashford Trust public over ten years ago are still here with the exception of our former CFO, David Kimichik, who recently retired after a 32 year career with Ashford and its predecessor. In terms of operational expertise, if you look at just the top ten most senior executives in our company, we have well over 200 years of cumulative lodging and real estate experience in a variety of roles including acquisitions and dispositions. Asset management, property management, finance, accounting etcetera.
So it's this same management team that continues to manage both the Ashford Trust and Ashford Prime investment strategies. Prime has a focused investment strategy targeting high RevPAR hotels and resorts located predominantly in domestic and international gateway markets with conservative leverage levels. It has a well defined investment strategy and we continue to deleverage towards its five times or less net debt plus preferred equity to EBITDA target.
We expect Prime's execution of its investment strategy to be more traditional and steady as we continue to build out this portfolio. Ashford Trust on the other hand will continue to be opportunistic and will focus on all segment of the hospitality industry with RevPAR criteria outside the Ashford Prime investment focus and at all levels of the capital structure. Trust will continue to operate at higher leverage levels than Prime and will be a leveraged way to invest in the lodging cycle. For both our platforms, I would like to reiterate that our focus remains on creating accretive growth.
When we say accretive, we mean accretive to our expected five-year total shareholder returns. So if you see us pursue an investment, you can be assured that in our view, investors will be better off from a five-year total return standpoint with that investment in the portfolio than without it. We are not interested in growing either platform just for growth's sake and are only interested in growing if our shareholders will be better off because of that growth. In the first half of 2014, lodging sector fundamentals have continued to feel RevPAR growth and improved profitability.
We have experienced steady demand growth for U.S. lodging accommodations and expect this will remain strong for some time. The main factor driving these fundamentals is that projected levels of new supply have remained at historical lows and we do not expect this changing in the near term. In fact, supply growth is expected to remain well below its long-term average, with PKF projecting net supply growth of only 1.0% and 1.3% in 2014 and 2015 respectively. Presently, PKF does not see the national annual supply growth exceeding its long-tem average until at least 2017. This favorable supply dynamic is resulting in strong industry RevPAR forecast with PKF forecasting that 2014 RevPAR will increase by 6.7% over 2013.
Further, PKF's projected RevPAR growth forecast for 2015 is currently 7.1%, driven by expectations for growth in both lodging demand and ADR. In the second quarter, RevPAR for all Ashford Trust hotels increased 7.7%, much of this growth was due to the new initiatives we have underway at our affiliate manager Remington that I have discussed in detail on previous calls. During the quarter, Ashford Trust continued to make significant progress from a capital structure perspective.
In April, Ashford Trust priced a follow-on public offering 8,350,000 shares of common stock at $10.70, generating total net proceeds of $85.5 million. Trust used the proceeds from its equity raise to acquire two hotels. Subsequent to the end of the quarter, Trust completed the $8 million acquisition of the 39 room Ashton Hotel in downtown Fort Worth, Texas, and a $50 million acquisition for the 357 room Fremont Marriott, Silicon Valley.
While the Ashton acquisition was a small deal for us, we viewed it as a compelling opportunity given its high quality and location proximate to the Hilton, Fort Worth also owned by Ashford Trust. With the ability to install Remington as the property manager and the synergies available with the nearby Hilton which is also managed by Remington, we felt like this was an attractive investment opportunity. We are extremely pleased with the acquisition of the Fremont Marriott, Silicon Valley consider the tremendous upside potential we see for this hotel.
The hotel is in excellent physical condition with minimal CapEx needs, having recently undergone a significant renovation that was completed in 2013. Additionally, the Fremont Marriott is ideally located in a high barrier to entry market that is also one of the nation's fastest growing RevPAR markets due to its close proximity to the many technology oriented companies located in the Bay Area. We are extremely optimistic about this hotel's future operating performance, given its location, the quality of its physical products and Remington's proven ability to improve operating margins.
Additionally, the Trust recently refinanced three mortgage loans that had a combined outstanding balance $325 million, with new loans totaling $469 million resulting in approximately $104 million in excess proceeds after closing costs and capital expenditure reserves. We were also able to unencumber two small hotels that we are in the process of marketing for sale. As previously announced, earlier this year, Ashford Trust board of directors unanimously approved a plan to spin off its asset management business into a separate publicly traded company in the form of the taxable distribution to Ashford Trust shareholders, to be comprised common stock and Ashford Inc., a successor company of Ashford Trust's existing advisor subsidiary, Ashford Hospitality Advisors LLC, which currently advises Ashford Prime.
In connection with this spin-off, it is anticipated that Ashford Inc. will enter into a 20-year advisory agreement to externally Ashford Trust. In addition, Ashford Inc. will continue to externally advise Ashford Prime. We plan to file a listing application for Ashford Inc. with the NYSE MKT Exchange. We expect this distribution to be declared during the third quarter of 2014. However, it remains subject to certain conditions. We expect to have more information to share with you about the spin-off in the near future.
Turning to Ashford Prime. During the second quarter RevPAR for Ashford Prime hotels increased 4.6%. When excluding assets located in Washington DC, Chicago and the Philadelphia markets, RevPAR increased to a strong 11.2% for all Prime hotels. Much of the performance was driven by our West Coast assets which continue to outperform. This includes RevPAR growth of 12.6% for our Courtyard San Francisco Downtown, 17.5% for our Hilton La Jolla Torrey Pines, and 12.6% for our Courtyard Seattle Downtown. While flow-through at the property level was strong, our EBITDA flow-throughs were impacted by higher property taxes and higher property level incentive management fees. This should improve as we move into the second half of the year and anniversary some of these incentive management fee increases.
We continue to be pleased with the high quality nature and the long-term growth prospects of the Ashford Prime portfolio. Jeremy, will provide more insight into this portfolio a little later in this call.
Prime is currently trading at a trailing-12 month NOI cap rate of 7.0%, based upon HPS research and where we are seeing similar assets trade in the private market, we estimate a private market trailing 12-month NOI cap rate of around 6.0% is more appropriate. This 100 basis points cap rate premium we estimate equates to over $5 share in value. We are committed to maximizing values for our shareholders in both platforms and we will work to continue to execute on each company's investment strategy while exploring all options to realize full value.
As previously announced, the board of directors of Ashford Trust declared a dividend of $0.12 per share for the second quarter of 2014. The board for directors for Ashford Prime declared a second quarter 2014 quarterly cash dividend of $0.05 per share. Both Ashford Trust and Ashford Prime will continue to review their dividend policies in a quarter-to-quarter basis.
I would like to mention some of the innovative ways we are seeking to increase our transparency and communication with investors. We recently launched the Ashford App which is a free mobile App that is available in the Apple App store and Google Play store for Android by searching Ashford and is targeted toward the hospitality REITs investor community. We designed the App as a one stop resource for everything associated with Ashford related companies as well as the entire hospitality REIT sector.
Another example of our innovative spirit is that I started a Twitter profile about a year ago and you can follow me at @MBennettAshford. I hope you will download the App and find it to be a useful investment research tool and that you will also follow me on Twitter.
In conclusion, we are very pleased with our market share gains this quarter for both Ashford Trust and Ashford Prime. We are very excited about the prospects for our planned spin-off Ashford Inc. The same management team responsible for Ashford Trust's historical performance will now be able to work through these multiple platforms giving us more flexibility and resources to implement new and creative strategies to create shareholder value. Through these spin-offs, we will have taken some of the different strategies that we part of the Ashford Trust and separated them into different vehicles so that investors can invest with this management team but in the strategy that works best for their objectives.
We continue to believe we are well positioned as hospitality sector conditions continue to improve and we look forward to updating you on our progress in future calls.
Lastly, on a personal note, I want to offer my thanks to our former Chief Financial Officer, David Kimichik. Kimo recently retired following a carrier spanning over 32 years with the company and its predecessor. His many contributions were a great part of our success over the years. We are all very grateful to Kimo and I want to personally thank him for his many years of service to Ashford and wish him a long and happy retirement.
Deric Eubanks, formerly our Senior Vice President of Finance has succeeded Kimo as the Chief Financial Officer and Treasurer. Many of you know Deric, who has been with us since Ashford Trust's IPO in 2003 and has played a key role in our history as a public company. Deric's deep knowledge of our business strategy and the capital markets as well as his investor relations experience has resulted in a seamless transition.
With that I will now turn the call over to Deric to our financial performance for the quarter.
Thanks, Monty. For the second quarter of 2014, Ashford Trust reported AFFO per diluted share of $0.39 compared with $0.55 a year ago. It's important to note that the second quarter of 2013 included the operations of the Ashford Prime hotels. Ashford Prime reported AFFO per diluted share of $0.45 compared with $0.44 a year ago.
For the second quarter, we reported adjusted EBITDA of $96.4 million for Ashford Trust and $25.9 million for Ashford Prime. This adjusted EBITDA result for Ashford Prime reflected a 35% increase over the prior year. At quarter's end, Ashford Trust had total assets of $3.6 billion including the Highland portfolio which is not consolidated. It has $1.8 billion of mortgage debt in continuing operations and $2.6 billion overall including Highland. The total combined debt for Ashford Trust currently has a blended average interest rate of 5.57% and is currently 54% fixed rate and 46% floating rate, all of which have interest rate caps in place.
Including the market value of Ashford Trust's OP units of Ashford Prime and as pro rata share of the net working capital of the Highland portfolio, Ashford Trust ended the quarter with net working capital of $467 million.
Ashford Prime at quarter’s end had total assets of $1.3 billion. It had $767 million of mortgage debt in continuing operations which had a blended average interest rate of 4.99% and is currently 55% fixed rate, and 45% floating rate, all of which have interest rate caps in place.
At quarter’s end, the Ashford Trust portfolio consisted of 114 hotels, with 22,667 net rooms and the Ashford Prime portfolio consisted of ten hotels with 3,472 net rooms. Ashford Trust share count currently stands at 110.9 million fully diluted shares outstanding, which is comprised of 90.9 million common shares and 20 million OP units. While Ashford Prime share count currently stands at 34.5 million fully diluted shares outstanding which is comprised of 25.4 million common shares and 9.1 million OP units. I would also like to point out that Ashford Trust recorded a $10.8 million accrual for a litigation judgment in the second quarter. This judgment relates to tenant dispute from 2008 at one of its hotels where Ashford Trust believed the tenant had violated various lease provisions of the lease agreement and was therefore in default.
The tenant counter-claimed and asserted multiple claims including that he had wrongfully evicted. The litigation proceeded to a jury trial in June of 2014 and the jury awarded the tenant total claims of $10.8 million. We strongly disagree with this verdict and are in the process of appealing it. In the results for the second quarter, we have adjusted for this accrual for purposes of calculating adjusted EBITDA and AFFO.
I would now like to turn it over to Jeremy to discuss our asset management accomplishments for the quarter.
Thank you, Deric. RevPAR at the ten properties in the Ashford Prime portfolio increased 4.6% in the second quarter of 2014, as difficult market conditions in Washington DC, Chicago and Philadelphia weighed on our results. However, that 4.6% portfolio RevPAR growth translated into a significant increase in market share versus the same period last year which illustrate the high quality nature of the Ashford Prime portfolio.
Half of the Ashford Prime properties experienced double-digit RevPAR growth in the quarter. Strength in the West Coast markets continued through the second quarter where Ashford Prime's four properties produced a combined RevPAR growth of 11.9%. I would also like to point out that we are pleased with the strong start to the third quarter with a year-over-year increase in RevPAR of 11.4% in July with the Ashford Prime portfolio.
Among these properties is the Hilton La Jolla, which grew RevPAR by 17.5% in the quarter. This asset continues to excel since the completion of a stunning renovation of the property in the second quarter of 2013, yielding a significant return on our capital expenditure. San Francisco and Seattle continue to be strong markets for Ashford Prime, where our three properties produced a combined RevPAR growth of 10.4% for the quarter.
Another source of growth this quarter came from the Renaissance, Tampa property, which increased RevPAR by 13.4% due to multiple citywide events. It has been five months since Ashford Prime closed on the Sofitel, Chicago acquisition in the heart of downtown Chicago. Our team has spent much time with the property, identifying opportunities to improve asset performance. Since the acquisition, we have already identified and implemented cost cuts that we believe will result in approximately $700,000 in annualized cost savings.
While the Chicago market has had a difficult last couple of quarter, we are still very excited about the addition of this hotel to the portfolio and are very optimistic about its long-term prospects. Ashford Prime acquired the Pier House Resort in Key West in March. But I would like to point out that the second quarter marked the one year anniversary of the Ashford Trust's acquisition of the hotel and the conversion to Remington management. Since the acquisition, we have overhauled the entire property operations including but not limited to, sales strategies, parking operations and overall cost controls.
I am excited to report that in its first full year under Ashford and Remington control, RevPAR increased to 14.2% while total revenue increased by $2.2 million. The aforementioned strategies enabled 90.2% of that revenue increase to flow to EBITDA. These outstanding financial results confirm our initial optimism about the transaction. Overall, we are pleased with our asset performance in the second quarter. However, I would like to bring your attention to a couple of headwinds for the market during the past period.
The most significant factor is Easter holiday move from March last year to April this year which negatively impacted corporate travel in the quarter. Its effect was more pronounced in the upper, upscale and luxury class hotels which are more sensitive to corporate segments. Another noteworthy mention is the materially weaker citywide calendars versus the second quarter last year in Chicago Philadelphia and Washington DC.
However, in spite of these citywide headwinds, the three affected Prime properties all maintained or gained share during the quarter enabling a portfolio-wide market share increases.
I am now going to discuss the Ashford Trust portfolio which grew RevPAR by 7.7% in the second quarter. This came through a 4.3% increase in rate and a 3.3% increase in occupancy. Ashford Trust also performed well against its competitors posting a measurable gain and market share for the quarter. As with the Ashford Prime, the West Coast drove substantial growth for the Ashford Trust portfolio. San Diego, Portland and San Francisco, Oakland assets selectively grew RevPAR by double-digits in the quarter.
Another strong market for Ashford Trust was Nashville where the 673 room Nashville Renaissance grew RevPAR by 13.2% over the prior year. This performance comes in the first full quarter since we complete a full rooms renovation in February of this year. The new product mix is modern design with a distinct influence of music city, creating a perfect environment for corporate groups and leisure travelers alike. Nashville has been one of the strongest U.S. markets year-to-date and we believe combining a fresh product with a fast paced growth in Nashville market will enable the asset to deliver exceptional results for the foreseeable future.
I would like to share with you another renovation we recently completed at the Crowne Plaza Ravinia, in the perimeter of -- area of Atlanta, Georgia. The property features updated rooms, corridors and lobby with access to the stunning Ravinia gardens. The finished product perfectly unites sophisticated contemporary styling of a city hotel with the amenity and spacious feel of a suburban property. We believe this renovation as a (indiscernible) deployment of capital as a perimeter market in Atlanta is beginning to show signs of strength after a relatively stagnant post-recessionary period.
Despite still being under-renovation in the quarter, the Crowne Plaza Ravinia grew RevPAR by 10.5%. And this trend is likely to continue as this well positioned hotel is poised to ride the up cycle in the Atlanta market. In August of last year Ashford Trust announced a conversion of the Beverly Hills Crowne Plaza to a Marriott, to be completed in the first half of 2015. As a team, we identified a gap in the supply of Marriott rooms in that market with no full service Marriott within 6.5 miles of this property. As of the second quarter, we are actively renovating the property in preparation for the conversion.
I am excited to announce the recent completion of a very attractive model room that truly embodies our concept for the new full service property. We will soon begin the same process on the reminder of the room in preparation of the opening of the Marriott Beverly Hills. The second quarter marks the end of the renovation heavy first half of the year for the Ashford Trust portfolio. During the quarter our asset managers worked proactively with Remington project management and our property managers to minimize the displacement and the overall impact from these renovations. This focus on mitigating renovation headwinds, led the hotels under renovation to grow RevPAR by 7.3%, only 50 basis points less than the hotels not under renovation which grew RevPAR by 7.8%.
Since completing the acquisition of the Highland portfolio, Ashford has completed renovations for many of those properties over the last three years. With the majority of the renovations for the Highland portfolio completed, the second half of this year is forecasted to have significantly less renovation displacement compared the same period last year.
I would like to share another exciting accomplishment for our team this quarter. June 1st commenced the renewal period for our property insurance program for both Ashford Trust and Ashford Prime and a large opportunity for us to reduce expenses. We were able to achieve significant savings on a year-over-year basis amount to over $1.2 million or a 10.8% reduction in cost on both portfolios. This is a great example of our constant focus on adding value to our assets and the ownership level.
I will conclude by emphasizing the common trend across both portfolios in the quarter and that’s market share growth. In our past few calls, I have discussed several active initiatives within Ashford as well as our affiliate manager Remington, aimed at optimizing revenues and growing market share across both Ashford Trust and Ashford Prime. Some of these initiatives include hiring of new personal, investment in sophisticated revenue management data and implementation of an enterprise business intelligence system.
Year-to-date, we have truly being to see these strategies pay dividends as both portfolios have substantially gained RevPAR against competitors. While operational efficiency and stringent cost controls remain part of Ashford's core identity, we believe maximizing revenue growth particularly during this favorable stage of the business cycle would deliver optimal bottom line results for our shareholder.
With that, I will turn the call over to Douglas.
Thank you, Jeremy. Since the end of the first quarter, Ashford Trust has continued to strengthen its capital structure by capitalizing on attractive market conditions to strategically manage our debt maturities while generating excess proceeds to bolster our cash position and also raising equity for two acquisitions.
During the quarter Ashford Trust completed a follow on public offering of 8,350,000 shares of common stock at a price of $10.70 per share and used the proceeds from the offering to acquire the Ashton Hotel and the Fremont Marriott Silicon Valley. As a reminder, during the downturn we purchased over $75 million shares of Ashford Trust common stock in the open market at an average price of around $3 per share. So reissuing those shares at a price of $10.70 resulted in significant value creation for Ashford Trust's shareholders.
Turning to financing activity during the quarter. Ashford Trust refinanced the $5 million loan secured by the Courtyard Manchester with a new $6.9 million loan. The new loan has a tenure term with a fixed interest rate of 4.99% and 30-year amortization. Ashford Trust owns this hotel and a joint venture with Interstate Hotels and Resorts where Ashford Trust owns 85% and Interstate owns 15%. The excess proceeds after transaction costs were distributed to the partners on a pro rata basis.
Additionally, Ashford Trust recently announced the successful refinancing of three mortgage loans with a combined outstanding balance of approximately $325 million. The three previous mortgage loans that were refinanced include the $135 million J.P. Morgan Floater Loan; the $101 million UBS 1 loan; and the $89 million Merrill Lynch 3 loan. The new loans total $469 million and include a $301 million loan with a two-year initial term and three one-year extension options that bears interest at a floating rate of LIBOR plus 4.35%; a $63 million loan with a two-year initial term and three one-year extension options that bears interest at a floating rate of LIBOR plus 4.35%; a $68 million loan with a ten-year term that bears interest at a fixed rate of 5.20%; a $13 million loan with a ten-year term that bears interest at a fixed rate of 4.85%; and a $25 million loan with a ten-year term that bears interest at a fixed rate of 4.90%.
In total, the refinancing resulted in excess net proceeds after closing costs and capital expenditure reserves, of approximately $104 million and unencumbered two hotels, Hampton Inn Terre Haute and the Homewood Suites Mobile. As we do with all of our capital allocation decisions, we took a very strategic approach to this refinancing in terms of the mix of fixed and floating rate loans, prepayment terms and the asset make up of each loan pool. We are very pleased with this strategic refinancing and you should expect us to purse similar refinancings in the future as we work to stay in front of our upcoming debt maturities.
We continue to see improving liquidity and more favorable lending terms in the market. Spreads are tightening, LTV are increasing, debt yields are shrinking and terms are generally more borrower friendly. While Ashford Trust expects to operate with an opportunistic view on leverage and liquidity, Ashford Prime will continue to be more conservative in its use and structure of leverage. Subsequent to the end of the quarter, Ashford Trust closed on two hotel acquisitions. In July, Ashford Trust closed on the $8 million acquisition of the 39-room Ashton Hotel in downtown Fort Worth, Texas for and in early August closed on the $50 million acquisition of the 357 room Marriott Fremont Silicon Valley. While the Ashton Hotel represents a small deal size for Ashford Trust, we found it to be a very compelling opportunity for several reasons.
It's the only luxury hotel in downtown Fort Worth. It is also located two blocks from the Hilton Fort Worth which is also owned by Ashford Trust. With the ability to install Remington as the property manager and the synergies available with the nearby Hilton which is also managed by Remington, we believe this investment opportunity was too attractive to pass up. Subsequent to the closing we financed this hotel with a $5.5 million non-recourse mortgage loan with a term of five years.
Ashford Trust's acquisition of the Fremont Marriott Silicon Valley is a great example of the opportunistic nature of its investment strategy. Ashford Trust was able to acquisition this hotel at an approximate 45% discount to estimated replacement cost. We consider this a very attractive purchase for several reasons. The Fremont Marriott is the only full service hotel in Fremont so it has an exceptional position in its market to draw corporate demand from neighboring companies in Silicon Valley and the surrounding Bay Area. The hotel has ample facilities to accommodate this featuring about 15,000 square feet of meeting space, spread across 19 flexible meeting areas. The hotel is in exceptional physical condition with minimal CapEx needs, having recently undergone a significant renovation of approximately $8.1 million or $23,000 per key, which was completed in 2013.
We were also able to install Remington as the property manager at closing. Given Remington's proven ability to increase margins at similar hotels, we saw an attractive opportunity to significantly increase the operating performance the hotel. Lastly, the hotel is located in a high barrier to entry, fast growing RevPAR market. On a forward 12-month basis the purchase price represents an estimated cap rate of 8.1% on net operating income, which equates to an expected 10.0 times forward EBITDA multiple. We financed the hotel with a $37.5 million non-recourse mortgage loan that bear interest at a floating rate of LIBOR plus 4.2%. And the loan has a two-year term with three one-year extension options.
Turning to Ashford Prime. This was a relatively quite quarter following the high activity we saw in the first quarter, which included the public offering of 9.2 million shares of common stock that was closed in January and the acquisitions of the 415 room Sofitel, Chicago Water Tower and the 142 room Pier House Resort. These two acquisitions demonstrate our strategic commitment to high RevPAR hotels in gateway and resort locations. We do expect to continue growing this platform but only in a manner that brings shareholder accretion. As we stated previously, we remain open to exploring all avenues to maximize value for our shareholders.
Note, our other option property, the Marriott Gateway in Crystal City has a 12 exercisable term that runs from May 2014 through May 2015. Given Ashford Prime’s existing exposure to the DC market and the Capital Hilton and the current price of Ashford Prime stock, we do not expect Ashford Prime to exercise that option in the near term.
When it comes to deal pipeline, we are already seeing the strategic benefits of having two platforms. Investment activity for each company will vary depending upon the marketed and off-marketed deal flow along with each company's respective cost of capital. So far, both companies have either announced or completed two transactions year-to-date. Namely Pier House and Sofitel for Ashford Prime and Marriott Fremont and Ashton for Ashford Trust. We continue to mind the market for transactions as well as alternative ways to invest in accretive growth.
We have underwritten many transactions this year and have shown discipline in our pursuit of investments with respect to underwriting assumptions and pricing metrics. It is worth noting that the pipeline for prime is currently very competitive but we are looking closely at a few opportunities. With the existing size of Prime, each incremental transaction has greater impact to the overall performance of the company. While Prime has a strategic focus on gateway markets, we have seen greater competition and multiple expansion on international transactions in our targeted gateway markets.
As a result, any near term foreign transaction activity is diminished since we do not see sufficient share price accretion. This is of course a fluid situation and our share price performance and/or a change in the foreign investment pipeline could change this.
The Ashford Trust pipeline is active but we have to be very selective from a strategic standpoint. We are also seeing an uptick in portfolio opportunities. This is a common characteristic at this point of cycle. With two platforms in Prime and Trust, we have the ability to mix and match assets and capital to maintain a strong competitive bidding position against the private equity funds.
In conclusion, year-to-date we have continued to pursue attractive investment opportunities in both of our platforms. At the same time, we continue to be proactive with our upcoming debt maturities. In doing so, we have taken a disciplined approach to managing our capital structure. For Ashford Trust, our focus remains opportunistic with respect to refinancing and investment decisions. At Ashford Prime, we will continue to execute on its well defined investment strategy in a manner that is accretive to shareholder value.
Again, we are significant shareholders ourselves in both of these companies holding 17% of Ashford Trust and 13% of Ashford Prime. So rest assured, your management team is dedicated to maximizing shareholder value and delivering superior returns because we are invested right alongside all of you.
That concludes our prepared remarks and we will now open it up for your questions.
(Operator Instructions) We will take our first question from Andrew Didora with Bank of America.
Andrew Didora - Bank of America
Monty, maybe the first one, just wanted to touch upon the margins at Ashford Trust. Up just 56 basis points on a very RevPAR number. I was looking at the data that you guys disclosed in your press release. It looks like it was incentive fees and some new franchise fees eat into some of the upside. Just looking back at historical performance, it seemed like 1Q had some similar headwinds but drew margins over 125 basis points. I guess, back half of the year, do you think this variability will continue and then maybe can you give us a sense of what we should think of in terms of margin growth in sort of a mid-single digit RevPAR environment.
Sure. This margin growth is lower than what we have typically achieved. Those incentive management fees in trust were primarily paid to our Remington and that was because of some really strong management fees Remington are capped to the -- they are capped at 1% of gross revenues. And so there is certainly a limitation to how many of those fees are paid in our five properties based upon fitting in budget or not. As far as what the future holds, we don’t give guidance on that but we could off line work with you and help you calculate about how much management fees were paid so far and therefore you can know at least how much more on the maximum side could be paid as part of that incentive. Those franchise fees headwinds were a result of us converting some properties to franchises in approximately May of 2013, some Marriott managed. Now, overall the cost structure of those assets came down even with the franchise base. But franchise fees do show up as a variance and that will go away going forward because we have lacked that information.
Andrew Didora - Bank of America
Got it. Okay. Makes sense. And then kind of a similar question at Prime. Sorry, you might have mentioned this briefly in your prepared remarks but just wanted to ask you about, San Francisco and Seattle both had RevPAR growth of over 12% yet negative margins. What was the driving force here and how long do you expect this kind of margin underperformance to continue?
Sure. The brand incentive fees hit us pretty good in the Prime portfolio. And while some of that is due -- a lot of that is due just to improving performance, a lot of it has to do with how we booked them last year. We weren't as aggressive in booking the incentive fees in the first and second quarter of last year and therefore being more aggressive booking them this year, really hit our margins. Starting in the third quarter and fourth quarter, the booking methodology will be same. And so we don’t anticipate the incentive fee impact to margins to be nearly as significant going forward.
Andrew Didora - Bank of America
Got it. That’s helpful. And then finally, this is for Doug. Obviously competition for high quality hotels in top markets continues to be high. A lot of your peers this earnings season have mentioned on their calls that they are losing add-on deals and these are peers with probably, presumably a little bit of a lower cost of capital than you guys. At what point in the cycle, do you kind of make the decision that you may look to sell part of the Prime portfolio or the entire portfolio if you decide that you really can't grow accretively?
We have been selling assets. We have got two assets for sale right now in the Trust portfolio, or maybe three assets for sale in the Trust portfolio. So we are constantly renewing on our portfolio. So we look at that all the time. You know as far as looking at it in a more larger forms, I would rephrase the question and that I will rephrase your answer in that. We are committed to strong returns in both of these platforms and we will pursue whatever strategies it takes in order to get those strong returns. Now if that involves selling a good number of assets, then that’s what we are going to do. And we are going to be looking at that continuously. So I don’t if we will just reach a point on it.
We do think that we have got a good bit of running room left in this cycle. And so there is no reason to do anything to dramatic right now. But we want these platforms to perform well and we are committed to making sure that happens one way or the other. Whether it's selling assets or any other moves we might consider. Trust has been, I believe, the number one performer of all of our REIT peer so far this year. But Prime has not done as well. But we really look at Prime's growth starting from when we raised the capital in Prime which is at $16.50. Looking at its starting price of -- when it was spun out at (indiscernible), so few shares were traded. But we raised significant capital at $16.50. We had a good run up these past couple of months but have pulled back here a little bit. But we are very excited about the platform and think that it's going to do very well.
And if I could just add a couple of points. Obviously, some groups are selling assets because it's a strategic shift. What we have clearly with the benefit of our multiple platforms is that we have created those shifts already. And the cost of capital with respect to the opportunities are better aligned. Also, we are sitting on a fair amount of capital within both platforms, so the idea of selling assets just to raise capital, to redeploy at a time that it's fairly competitive doesn’t sit strategically well with our seating. We don’t think that’s in the best interest of the shareholders.
I think some industry experts are forecasting that the peak transaction period won't even be until sometime in 2018. So our view is that there is plenty of run, room to run in the cycle and that we in many cases would be leaving cash on the table of selling into what we view to still be an industry wide strong RevPAR performance and increased liquidity for hotel transactions. So from that standpoint we view that our current strategy certainly makes sense.
Thank you. We will move on to our next question from Ryan Meliker with MLV & Company.
Ryan Meliker - MLV & Company
I guess one quick follow up to what Andrew just asked with regard to incentive management fees at AHT. Obviously, you know it had an impact on margins this quarter. Can you tell us how close you guys are to bumping up against that 1% max, Remington. Should we expect incentive fees to be elevated and have this type of impact over the next few quarters, if RevPAR continues to hold up at the current pace?
We will have to work on that calculation offline. We don’t have it right here with us, Ryan, about how much of that potential has been booked already as far as the Remington incentive fees.
Ryan Meliker - MLV & Company
Okay. Well, can you tell us whether we should expect if RevPAR continues at the current pace across Trust's portfolio, whether we should see similar 50 basis point impact to property margins going forward.
That depends on the that calculation that I just referenced to. So we will have to sit down. But, overall, all the -- I don’t know -- other areas and all areas of Trust are fine and in good shape. So it's just that incentive fee that we will have to take a closer look at to see how much it might impact over the next few quarters. But again, since we don’t give guidance, we will tell you how much has been booked so far, what the potential is and then you can make your estimates about how you think that looked at margins going forward.
Ryan Meliker - MLV & Company
Okay. That’s makes sense. And obviously when incentive fees are being booked it's because the properties are doing better than expected. So that’s usually a positive. Second question I have, I was wondering if you could give me a little color on the Chicago Sofitel Water Tower. When you guys announced the deal back in February, you indicated that it was a trailing 6% cap rate and a forward 6.8% cap rate implying that cash flows are actually growing over on an NTM basis. But as we look at year-to-date property EBIT is down 17%, down 10% in the second quarter. You know is this -- it doesn’t sound like this is what you are underwriting initially given you are expecting cash flows to be, or NOI to be growing. What's missing or is this what you were expecting and now are you going to see a pretty sharp uptick over the next couple of quarters?
We do expect the back half of the year to be stronger then the first half of the year. Both just in general and because of the convention calendar. So that’s happening. When we underwrote this property, we knew that the convention calendar was going to be weak in the first part of the year and this properties own bookings. And so that’s not new. What was new was that winter that just absolutely tore us up there, but that’s in the market. And I think we even lost some share at that property during that period of time. But that was a difference, was that winter. And I would have to sit down and really look at the numbers and maybe the convention calendar was a little weaker than we expected. I am not sure here off hand but it was primarily due to that brutal winter and the fact that we expected the games to be more back-loaded than frontloaded.
Yes, Ryan, this is Jerry. I will just add a little bit. In the second half of the year, there is two more citywides in Chicago. So the group outlook definitely is more favorable for the city. And one of the things that I mentioned in the call, is we have cut a decent amount of cost at the hotel already that will help offset some of the revenue drops.
Ryan Meliker - MLV & Company
Were those cost cuts implemented after the end of the second quarter?
They were towards the latter part of the second quarter. It's a process of working with the brand and the management team onsite.
Next question will come from Robin Farley with UBS.
Robin Farley - UBS
Just circling back to the incentive fee question, again. I wonder if you could quantify for us, what percent of your properties are incentive fee payers -- were incentive fee payers in Q2 versus the prior year. Just to get a sense of the number of properties that are reaching that threshold.
That’s hard to give you here right off the top here. So let us give you that offline. All of the Remington properties are subject to incentive fees but they are capped at 1% of gross revenues based upon exceeding budgeted levels, budget GOP levels. The non-Remington managed, the property managed, the brand managed properties, most of them have incentive fees as part of the management contracts, not all of them. And those are based upon a certain owner priority levels that we will just have to spend a little time with you all offline in order to help you with that.
Robin Farley - UBS
Actually I am trying to get a sense, I guess, of whether even if the Remington properties are capped, do the non-Remington properties start to kick in here with RevPAR growing, even though the Remington properties may be capped that you have similar issues at your other owned properties?
Yes. A lot of the ones that have the bigger shares of splits so to speak, above owner's priority, have already kicked in. And specifically for the prime portfolio, five of the -- approximately half of the assets are currently paying incentive fees. They just happened to be a little bit higher incentive than some of the non-Remington hotels we have in the Trust portfolio.
Jordan Sadler with KeyBanc Capital Markets has our next question.
Austin Wurschmidt - KeyBanc Capital Markets
It's Austin Wurschmidt with Jordan. Doug, I just had one question related to your comment on the Trust portfolio about having to remain very strategic on the acquisition side. I was just curious if you could provide a little color as to what you were referring to?
I think we were just strategic with respect to both platforms. Nothing specific in that comment. I think the opportunities in the market today are broad based, single assets portfolio opportunities as well. And I think we are just being strategic at both platforms looking at minding the market for situations that fit either platform.
To add to that a little bit. When we look at opportunities, we share the -- the way we measure accretion is a five-year total shareholder return based upon raising capital and deploying it in that asset we are looking at on a leverage-neutral basis versus not doing anything. And all the total shareholder return is based upon stock price and dividends, higher or lower, to our shareholders. And that is a very strict discipline that we stick to and that’s why our returns are so much higher than our peers. And so we get some questions about, are we going to sell some of the -- [write first] (ph) off our properties from Trust to Prime or would we do this or that. And the answer is, not to be (indiscernible) about it, but the answer truly is, we will conduct some of those transactions when it's accretive to both platforms. And at that time we will bring it to both the Trust forward's and the Prime board that it's in their best interest to do so, as it would be if it's accretive to both platform. So when we are strategic in our pursuits, everything has to pass through that filter. And that’s a discipline we will continue to keep.
Austin Wurschmidt - KeyBanc Capital Markets
So then just looking at the opportunities, both on a one-off versus portfolio basis. I mean are you seeing more accretive opportunities, I guess on the larger portfolios or moreover you can go in and mind some of the one offs.
We have obviously done a couple one-offs. So here in 2014 that’s been on the smaller individual assets. But I don’t know if that’s necessarily a rule. I think that’s just how we happen to go out there and grab a few assets. Answered in another way, is that I think in the future there very well maybe individual asset transactions and our portfolio transactions. So I don’t think that you should assume that it should be one of the other.
Austin Wurschmidt - KeyBanc Capital Markets
Thanks for the detail there. And then, Jeremy, you mentioned some renovation disruption in the second quarter, I am just curious, what the expectation is going forward and do you expect that to provide a little bit of a tailwind in the second half of the year. And the similarly, can you provide an update on where you guys are in the process of implementing the revenue management initiatives?
Okay. I am going to take the first part on the renovation. So if you look at the Trust disclosure that we have put out in terms of upcoming renovation schedule. We have about 7 hotels, I think or so in the third quarter, or less renovations and about 5 in the fourth quarter. So on a year-over-year basis the second half has significantly less renovation activity than what we had in 2013. As for Prime, there is really not a lot of renovation going on in that portfolio. So that looks pretty good, especially in the fourth quarter. And then -- what was the second question, I am sorry?
Austin Wurschmidt - KeyBanc Capital Markets
Just where you guys are in the process of implementing the revenue management initiatives? I mean are there still initiatives under way? Do you anticipate some additional tailwinds? We have seen now RevPAR sort of accelerate into the first half from the back half of last year and just curious if we should expect that to continue as additional initiatives are put in place.
We think, we know that there is, for the initiatives that, some that have just been put in place and some that have not even been put in place yet. And those initiatives will continue to be put in place through the end of the year and even the first part of next year and then we should be getting some of the benefits from those. So we are optimistic about our revenue performance.
Our next question will come from Chris Woronka with Deutsche Bank.
Chris Woronka - Deutsche Bank
I realize you don’t give guidance but wanted to ask you about the SG&A, more so on the Trust side. And I see we added, I think $1.2 million of spin-off costs back. But is there anything else that is unusual that was kind of running through SG&A or what kind of impact -- what are some of the things that impacted timing on that if you can?
Sure, Chris. It's Deric. The other thing that I would point out that was in the Trust G&A was the compensation adjustment related to the modified employment terms. There was nothing else that was in there that we adjusted for. But other than that, there is nothing really -- and the transaction cost like you mentioned, there is nothing else that I would point out as different than what we typically have.
Chris Woronka - Deutsche Bank
Okay. On the stock-based comp, is there typically a lot of fluctuation, kind of quarter-to-quarter?
No, not necessarily. The adjustment that I have mentioned, the compensation adjustment, part of that was in stock comp and then part of that was in the G&A. So the movement in the stock comp amount was partly related to that adjustment.
Chris Woronka - Deutsche Bank
Okay. Got you. And then on the Ashton acquisition, I am guessing it maybe a little bit too small for that too end up in Prime. But is Fremont something that could potentially end up there, either of those?
This is Monty. No, the Fort Worth asset is not only small but it's in Forth Worth and that’s not in keeping with our Prime strategy. And as far as the Fremont asset, it's not in a gateway market and it's also has a RevPAR that’s too low. So, no, you shouldn’t expect those two to ever go to Prime.
Chris Woronka - Deutsche Bank
Okay. Got you. And then, you mentioned two limited service hotels that were unencumbered with the latest refinancing. Could we read into that those are sales candidates? Is there kind of a direct correlation that we see there?
Yes. Yes. We are marketing those for sale as the Homewood Suites in Mobile and it’s the Hampton Inn in Terre Haute. Those are two assets that are being marketed for sale.
Chris Woronka - Deutsche Bank
Okay. Great. Just one more from me. Just as you think about, we see the two platforms and is there a way, I guess to kind of creatively, could you buy -- could you use more leverage on the Trust side to kind of compete with some of the buyers for these assets and then flip them over to Prime. Is there avenue to do that?
Yes, there is an avenue to do that. And that’s one of the creative approaches that we are looking at, that Doug's looking at in very detail, let's say. We want to take advantage of these platforms to help them sell and help the sister platforms as long as its neutral or helpful to the first platform. We are never going to do something for the benefit of one if it's at the expense of the other. But if there is an opportunity to help each other, then that's what's going to happen. So considering what's going on in the marketplace where higher leveraged transactions are taking place and in order to be price competitive you have to have a little higher leverage, it may make sense to, in some form or fashion, warehouse them in the Trust. To perch them in Trust, warehouse them. And then at the appropriate time have them move over to Prime. But we would have to spend some time on that because we want to make sure that the Trust's shareholders, if did that, get a fair shake and get compensated for playing that role. And so as we are evaluating platforms, we are looking at any and all different kinds of ways in order to create value. We are also more open than before over on the Trust side to get into some joint ventures and do a little more creative type things, now that we have spun the Prime platform. So hopefully, we can apply our creativity to this market that we believe both in values and RevPARs is going to continue to improve in the foreseeable future in order to take advantage of those facts to the benefit of our shareholders.
Nikhil Bhalla with FBR Capital Markets has our next question.
Hi. This is [Westin Blomer] asking behalf of Nikhil. Most of my questions have already been answered but I was wondering if you guys could give an update on your stance on the share buybacks. Especially, given AHP's share discount to NAV at this point. Is that something you guys are considering or is it too early in the portfolios lifecycle. Any update on that would be great. Thank you.
Sure. That’s not something we are considering now for Prime. It is early in the lifecycle of Prime. It is trading, we believe, at a material discount net asset value to private market value. But we also have a desire to growth the platform and you don’t grow it by buying back shares. So we (indiscernible) with that for now and have no intention on buying back stock. And I think that generally what you are going to see from us is not buying back stock, hardly at all during, in either platform, during these more robust times in the industry. It's just a better use of capital to go out and buy assets. Where you will see us buying back shares, if we do it, will be during a downturn. Almost exclusively albeit never say never, but that’s generally what you are going to see. So I would be hard pressed to say that you will see us buying back shares in Prime or Trust. As a confidence boost to the marketplace, I went out there personally and bought some shares in Prime and although it's not material in the size of Prime, it's not an immaterial number at all to me personally. So we are going to keep getting on the road with potential investors for Prime and keep selling the story. And we have been getting some great feedback from investors and we are going to keep up those efforts to educate the market on Prime.
Something that I think is very important is not only is that Prime structure more highly aligned with management than all the internally managed assets. But in a way it's one of the most purest ways that once can invest in a real estate platform, in that you are investing straight in the assets and they don’t have a management team that maybe embarking on other initiatives. So we think it's a great structure and a great platform and we think over time the returns will prove that out.
(Operator Instructions) We will move on to Patrick Scholes with Suntrust Research.
Patrick Scholes - Suntrust Robinson Humphrey
Just a quick question here for you. Curious as to your appetite for taking [lengthy] (ph) turnaround projects given where you think we are at this juncture of this cycle. Thanks.
Sure. We will take on some turnaround projects. We think that we have got multiple years left in this cycle. So unless it's a new development which we typically don’t like to get involved in, a turnaround where you spend a year, a year and a half, in getting repositioning and then getting the benefit of the run up, we still think we have plenty of time for that. So we are definitely not counting those out at all in these platforms.
And those are all the questions we have at this time. I will turn the conference back over to management for any additional or closing remarks.
Thank you all for your participation today and we look forward to speaking with you again on our next call.
Ladies and gentlemen this Ashford Hospitality Trust and Ashford Hospitality Prime second quarter 2014 conference call. If you would like to listen to a replay of today's conference, please dial, 888-203-1112 or 719-457-0820 with access number 7335033 followed by the pound sign. Thank you for your participation in today's conference. You may now disconnect.
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