Ashford Hospitality Trust's (AHP) CEO Monty Bennett on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Ashford Hospitality (AHP)

Ashford Hospitality Trust, Inc. (NYSE:AHP)

Q2 2014 Earnings Conference Call

August 8, 2014 11:00 AM ET

Executives

Scott Eckstein – IR

Monty Bennett – Chairman and CEO

Deric Eubanks – CFO

Jeremy Welter – EVP, Asset Management

Douglas Kessler – President

Analysts

Andrew Didora – Bank of America

Ryan Meliker – MLV & Company

Robin Farley – UBS

Austin Wurschmidt – KeyBanc Capital Markets

Chris Woronka – Deutsche Bank

Weston Bloomer – FBR Capital Markets

Patrick Scholes – SunTrust Research

Operator

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 turn the conference over to your host, Scott Eckstein. Please go ahead, sir.

Scott Eckstein

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 the notice of the accessibility of this conference call on a listen-only basis over the internet were distributed yesterday afternoon, press releases that are being covered by the financial media.

At this time, let me remind you that certain statements and assumptions in this conference call contain 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 and were fully discussed in both companies’ 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 does not obligate 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.

Monty Bennett

Thank you, and good morning. During the second quarter the performance of both Ashford Trust and Ashford Prime demonstrated our continued 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 that these initiatives are adding value for our shareholders.

As a team, we at Ashford have 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 and this management team has achieved a 230% total return to our shareholders since Ashford Trust 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 this 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 net Fort Worth hotel REIT peer has 4% insider ownership. Over the years, collectively we have sold very little of our stock and made material cash purchases of shares. In fact, back in March by about $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 were 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 10 years ago are all 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 10 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, sustained 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 resource located predominantly and domestic and international gateway markets with conservative leverage levels.

It has a well-defined investment strategy and we continue to development-leverage towards 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 study as we continue to build out this portfolio. Ashford Trust on the other hand will continue to be opportunistic and will focus on all segments 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’d like to reiterate that our focus remains on creating accretive growth. When we said accretive, we mean accretive to our expected five-year total shareholder returns.

So, if you see a pursuing investment, you can be assured that in our view, investors would 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 sake, and are only interested in growing if our shareholders would 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 would 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 did 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-term average until at least 2017. This favorable supply 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 underweighted our affiliate manager Remington that I have discussed in detail on previous calls.

During the quarter, Ashford Trust continues to make significant progress from a capital structure perspective. In April, Ashford Trust priced a follow-on public offering of 8,350,000 shares of common stock at $10.70 generating total net proceeds of $85.5 million.

Trust used at proceeds from this 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 of 357-room Fremont Marriott Silicon Valley.

While the Ashton acquisition was a small deal for us, we viewed it as a compelling opportunity giving us high quality and location approximate 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 a nearby Hilton which is also managed by Remington, we felt like this was an attractive investment opportunity.

We’re also extremely pleased with the acquisition of the Fremont Marriott Silicon Valley considering 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 nature’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 product and Remington’s proven ability to improve operating margins.

Additionally, Trust recently refinanced three mortgage loans that had a combined outstanding balance of $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 unencumbered two small hotels that we are in the process of marketing for sale.

As previously announced, earlier this year, Ashford Trust’s Board of Directors unanimously approved a plan to spin-off its asset management business into a separate publicly traded company in the form of a taxable distribution to Ashford Trust shareholders to be comprised of common stock at Ashford Inc., a successor company of Ashford Trust existing advisory subsidiary, Ashford Hospitality Advisors LLC, which currently advices Ashford Prime.

In connection with the spin-off, it is anticipated that Ashford Inc. will insurance a 20-year advisor agreement to externally advice Ashford Trust. In addition, Ashford Inc. will continue to externally advice Ashford Prime.

We’ve planned to file a listing application for Ashford Inc. with a NYSE and KT exchange. We expect this distribution to be declared during the third quarter of 2014. However remain subject to certain conditions. We expect to have more information to share with you about this spin-off in the near future.

Turning to Ashford Prime, during the second quarter, RevPAR for all Ashford Prime hotels increased 4.6%. When excluding assets located in Washington DC, Chicago and the Philadelphia markets, RevPAR increased 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 of, and long-term growth prospects of the Ashford Prime portfolio. Jeremy will provide more insight to 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 HVS Research and where we are seeing similar assets trade in the private market, we estimated a private market trailing 12-month NOI cap rate of around 6.0% is more appropriate. This one 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’ll 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 of 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 on a quarter-to-quarter basis.

I’d 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 towards the hospitality reach 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 @mbennettashford. I hope you will download the app and find it to be useful investment research tool 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 plant spin-off of Ashford Inc.

The same management team responsible for Ashford Trust historical out-performance will 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 were part of Ashford Trust and separated them into different vehicles so that investors can invest with this management team putting a strategy that works best for their objectives.

We continue to believe we are well positioned to tell these 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 career spending over 32 years with the company and as predecessor. His many contributions were a great part of our success over the years. We’re 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 had succeeded Kimo as Chief Financial Officer and Treasurer. Many of you know Deric, who has been with us since Ashford Trust 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 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 review our financial performance for the quarter.

Deric Eubanks

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 had $1.8 billion of mortgage debt and 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 has currently 54% fixed rate and 46% floating rate, all of which have interest rate caps in place.

Including the market value of Ashford Trust OP units of Ashford Prime, and it’s pro rata share of the networking 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 and 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 10 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’d 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 a tenant dispute from 2008 at one of its hotels, where Ashford Trust believes the tenant had violated various lease provisions of a lease agreement and was therefore into fall.

The tenant counterclaim had been asserted multiple claims including that it had been 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’d now like to turn it over to Jeremy to discuss our asset management accomplishments for the quarter.

Jeremy Welter

Thank you, Deric. RevPAR at the 10 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 illustrates 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’d 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 for the Ashford Prime portfolio, among these properties, is 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 expenditures.

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’s 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 property identifying opportunities to improve asset performance. Since the acquisition, we’ve 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 quarters, we’re 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’d like to point out that the second quarter marked the one-year anniversary of Ashford Trust 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’m excited to report that in its full year under Ashford and Remington control, RevPAR increased 14.2% while total revenue increased by $2.2 million.

The aforementioned mentioned 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’re pleased with our asset performance in the second quarter. However, I’d like to bring your attention to couple of headwinds for the market during the past period. The most significant factor is Easter Holiday moving from March last year to April this year, which negatively impacted corporate travel in the quarter. This 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 their gained share during the quarter enabling a portfolio-wide market share increases.

I’m 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, posted a measurable gain in 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 collective grew RevPAR by double digits in the quarter.

Another strong market for Ashford Trust was National, where the 673-room National Renaissance grew RevPAR by 13.2% over the prior year. This performance comes in the first full quarter since we completed a full-rooms renovation in February of this year. The new product mix is mono-design with a distinct influence of Music City, creating a perfect environment for corporate groups and leisure travelers alike.

National has been one of the strongest U.S. markets year-to-date and we believe combining a fresh product with a fast pace growth in national market will enable the asset to deliver exceptional results for the foreseeable future.

I’d like to share with you another renovation we recently completed at the Crowne Plaza Ravinia in the perimeter area of Atlanta, Georgia. The Property features updated rooms, corridors and lobby with access to the stunning Ravinia gardens.

The finished product perfectly united sophisticated contemporary styling of a city hotel with the amenities and spacious feel of a suburban property. We believe this renovation is a timely deployment of capital as a perimeter market in Atlanta is beginning to show signs of strength after a relatively stagnant post-recession activity.

Despite still being under renovation in the quarter, the Crowne Plaza Ravinia grew RevPAR by 10.5%. This trend is likely to continue as this well-positioned hotel is poised to ride the up-cycle in the EMEA market.

In August of last year, Ashford Trust announced the 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 end of the second quarter, we are actively renovating the property in preparation for the conversion. I’m 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 remainder of the rooms 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, asset management worked proactively with Remington project management and our property managers to minimize the displacement and 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 hotels non 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 in the second half of this year is forecasted to have significantly less renovation displacement compared to the same period last year.

I’d like to share another exciting accomplishment for our team this quarter. June 1, 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, amounting to over $1.2 million or 10.8% reduction in cost on both portfolios. This is a great example of our constant focus on adding value to our assets at the ownership level.

I will conclude by emphasizing a commentary on across both portfolios in the quarter and that’s market share growth. In our past few calls, I’ve discussed several active initiatives within Ashford as well as our affiliate manager Remington and to optimizing revenues and growing market share across both Ashford Trust and Ashford Prime.

Some of these initiatives include hiring a new personnel, investment and sophisticated revenue management data and implementation of an enterprise business intelligent system. Year-to-date, we have truly begun 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 believing maximizing revenue growth particularly during this favorable stage of the business cycle would deliver optimal bottom line results for our shareholders.

With that, I will turn the call over to Douglas.

Douglas Kessler

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, also 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 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 10-year 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 cost for distributor partners on a pro rata basis.

Additionally, Ashford Trust recently announced a 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 JPMorgan floater loan, the $101 million UBS 1 loan, and the $89 million Merrill Lynch 3 loan.

The new loans totaled $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 10-year term that bears interest at a fixed rate of 5.2%, a $13 million loan with a 10-year term that bears interest at a fixed rate of 4.85% and a $25 million loan with a 10-year term that bears interest at a fixed rate of 4.9%.

In total the refinancing resulted in excess net proceeds after closing costs and capital expenditure reserves of approximately $104 million and unencumbered two hotels, The Hampton Inn in Terre Haute and Homewood Suites Mobile.

As we do it 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 loans, prepayment terms and the asset makeup of each loan pool.

We’re very pleased with the strategic refinancing and you should expect us to produce, to pursue 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, LTVs are increasing, debt yields are shrinking in 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. And an 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 them to be very compelling investment opportunity for several reasons. It’s the only luxury hotel in downtown Fort Worth, as also look at two blocks from the Hilton Fort Worth which is also owned by Ashford Trust.

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 out.

Subsequent to the closing we financed this hotel with $5.5 million non-recourse mortgage loan with a term of five years. Ashford Trust acquisition to Fremont Marriott Silicon Valley is a great example of the opportunistic nature of its investment strategy.

Ashford Trust was able to acquire 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 were key which was completed in 2013.

We’re 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 of 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 $37.5 million non-recourse mortgage loan that bears 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 quiet 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-month 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 mine 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 expansions 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 to change this. The Ashford Trust pipeline is active. But we have to be very selective from a strategic standpoint.

We’re also seeing an up-tick in portfolio opportunities. This is a common characteristic at this point of the 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’ve 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’s 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.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Andrew Didora with Bank of America.

Andrew Didora – Bank of America

Hi, good morning everyone. Monty, maybe the first one, I just wanted to touch upon the margins at Ashford Trust. Up just 56 basis points on a very good RevPAR number, I was looking at the data you guys disclosed in your Press Release.

And it looks like it was incentive fees and some new franchise fees even to some of the upside. Just looking back at historical performance, it seems like 1Q had some similar headwinds but grew 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 your, of what we should think of in terms of margin growth in sort of a mid-single-digit RevPAR environment?

Monty Bennett

Sure, this margin growth is lower than what we’ve typically achieved. Those in terms of management fees in Trust we primarily paid to our affiliates Remington and that was because of some really strong performance.

In terms of management fees to Remington, our caps though, they’re capped at 1% of gross revenues. So there is certainly a limitation to how many of those fees are paid in the five-property based upon hitting the budget or not.

As far as what the future holds, we don’t get guidance on that but we could offline work with you and help to calculate about how much, many fees were paid so far. And therefore you can now at least have much more on the maximum side could be paid as part of that incentive.

Those franchise fee headwinds was a result of us converting some properties to franchises in the, in May approximately May of 2013 some Marriott managed. Now overall the cost structure of those assets came down even with the franchise fees, but the franchise fees do show up as a variance. And that will go away going forward because of – because we’ve lapped that information.

Andrew Didora – Bank of America

Got it. Okay, okay, that makes sense. And then, kind of a similar question at Prime and I’m sorry you might’ve mentioned this briefly in your prepared remarks but I just wanted to ask you about San Francisco and Seattle both had RevPAR growth over 12% yet negative margins.

What is the driving force here and how long you expect this kind of margin underperformance to continue?

Monty Bennett

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 the big more aggressive booking than this year, really hit our markets starting in the third quarter and fourth quarter, the booking methodology will be same. And so, we don’t anticipate the incentive fee impact margins to be nearly significant going forward.

Andrew Didora – Bank of America

Got it, that’ s helpful. And finally, I mean, 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 out on deals and usually your peers with certainly a little bit of lower cost of capital than you.

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 you really can’t grow it accretively?

Douglas Kessler

We’ll been selling assets, we’ve got two assets for sale right now on the Trust portfolio, maybe three assets for shale in the trust portfolio. So, we’re constantly winning at our portfolio.

So, we look at it all the time. As far as looking at it in a more larger forms, as we rephrase the question – our re-price answer in that. Now we’re committed to strong returns in both of these platforms. And we will purpose whatever strategies it takes in order to get those strong returns.

Now that involves selling a good number of assets and then that’s what we’re going to do. And we’re going to be looking at that continuously. So I don’t know if you’re able to just reach a point on it.

We do think that we’ve got a good bit of running room left again this cycle. And so, there is no reason to do anything too dramatic right now.

Monty Bennett

But we want these platforms to perform well.

Deric Eubanks

And we’re committed to, maybe sure that happens one way or the other, whether it’s selling assets or any other moves that we might consider.

Trust has been I believe the number one performer of all of our REIT peers so far this year. But Prime has not done as well but we really look at Prime’s growth starting from we raise capital in prime, which is at $16.50.

Looking at it’s a starting price of when I was spun-out as many opportunities and so few shares were traded. But we remain significant capital at $16.50. We had a good run-up these past couple of months but are pulled back here a little bit. But we’re very excited about the platform and think that it’s going to do very well.

Monty Bennett

Andrew, if I could just add a couple of points. Obviously, some groups are selling assets because it’s a strategic shift. But we have clearly with the benefit of our multiple platforms is that we created those shifts already and the cost of capital with respect to the opportunities or better align.

Also, we’re sitting on a fair amount of capital within both platforms. So the idea of selling assets just to raise capital to redeploy the time that it’s fairly competitive doesn’t stick strategically well with our CEDAR. 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 room to run in the cycle and that we – in many cases we would be leaving cash on the table of selling into what we view that would still be an investor wide strong RevPAR performance and increased liquidity for hotel transactions. So, from that standpoint we view that our current strategy, certainly make sense.

Andrew Didora – Bank of America

All right. That’s great color guys, appreciate it.

Operator

Thank you. We move on to your next question from Ryan Meliker with MLV & Company:

Ryan Meliker – MLV & Company

Hi guys, I guess one quick follow-up to what Andrew just asked with regards to incentive management fees at AHT. Obviously, it had an impact on margins this quarter. Can you tell us how close you are to bumping up against that 1% max at 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?

Deric Eubanks

We’ll 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. Can you tell us whether we should expect if RevPAR continues at the current pace across the Trust portfolio, whether we should see similar 50 basis point impact to property margins going forward?

Deric Eubanks

That depends on that calculation that I just referenced to. So, we’d have to sit down. But overall, all the – I don’t know other areas and all areas of trust are finally in good shape. So, it’s just that incentive fee that we’ll 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’ll tell you how much we spent I hope so far, what the potential is and then you can make your estimate about how you think that would pack margins going forward.

Ryan Meliker – MLV & Company

Okay, that make sense. 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 is I was wondering if you would give me a little color on the Chicago Sofitel Water Tower? When you 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 were actually growing over NTM basis. But as we look at year-to-date EBIT property EBIT is down 17%, down 10% in the second quarter

Is this, it doesn’t sound like this is what you were underwriting initially given you’re expecting cash flows to be NOI to be growing. What’s missing or is this what you were expecting and are we going to see a pretty sharp up-tick over the next couple of quarters?

Monty Bennett

We do expect the back half of the year to be smaller out in the first half of the year both just in general and because of the conventional calendar so that’s happening.

When we under-wrote this property, we knew that we can mention calendar, what’s going to be weak in the first part of the year and this property’s own bookings. And so that’s not new, what was new was that winter that just absolutely towards up, up there both us and the market. And I think we have lost some shares at that property.

During that period of time but that was a difference, was that winter. And I have to sit down and really look at the numbers and maybe the convention calendar was a little weaker than we expected. I’m not sure here all panned, but it was primarily new to that brutal winter and the fact that we expect that the games to be more back-loaded than front-loaded.

Jeremy Welter

Yes, Ryan, this is Jeremy. I’ll just add a little bit. In the second half of the year, there is two more, citywide in Chicago. So the group outlook definitely it’s more favorable to the city.

And one of the things that I mentioned in the call is we have cut 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?

Jeremy Welter

They were towards the latter part of the second quarter.

Ryan Meliker – MLV & Company

Okay, great.

Jeremy Welter

It’s a process of working with the brand and the management team on-site.

Ryan Meliker – MLV & Company

Great. That’s all from me. Thanks.

Operator

Next question will come from Robin Farley with UBS.

Robin Farley – UBS

Hi, thanks. Just circling back to the incentive fee question again. I wonder if you could quantify for us, what percentage 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 those thresholds?

Monty Bennett

That’s hard to give you here right off the top here so let’s just give you that offline. All of the Remington properties are subject to incentive fees but they’re capped at 1% of gross revenues based upon exceeding budgeted levels, budgeted GOP levels.

The non-Remington managed – the property managed – the brand managed properties, most of them have incentive fees as part of their management contracts, not all of them. And those are based upon certain own priority levels that we’ll just have to spend a little time with you all offline in order to help you with that.

Robin Farley – UBS

I’m 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. So, even though the Remington Properties may be capped that you have similar issues at your other owned properties?

Deric Eubanks

Yes, a lot of the ones that has the bigger shares of splits so to speak about owner’s priority have already kicked in and specifically for the Prime portfolio side of the – about approximately half of the assets are currently plain incentive fees. There just happen to be a little bit higher incentive fees than some of the other non-Remington hotels we have in the Trust portfolio.

Robin Farley – UBS

Thank you.

Operator

Jordan Sandler with KeyBanc Capital Markets has our next question.

Austin Wurschmidt – KeyBanc Capital Markets

Hi guys, its Austin Wurschmidt here with Jordan. Doug, I just have one question related to your comment about on the Trust portfolio about having to remain very strategic on the acquisitions side. I was just curious if you could provide a little color as to what you were referring to?

Douglas Kessler

I think we’re 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’re just being strategic at both platforms looking at mining the market for situations that fit either platform.

Monty Bennett

To add to that a little bit is that when we look at opportunities, we share that our – the way we measure accretion is a five-year total shareholder return based upon raising capital and deploying it in that asset we’re looking at on a leverage neutral basis versus not doing anything.

And are the total shareholder return based upon stock price and dividends, higher or lower to our shareholders. And that is a very strict discipline that we stick to and by our returns are so much higher than our peers.

And so, we get some questions about are we going to sell some of the Right-of-First-Offer properties from Trust to Prime or we can do this to that. And the answer not to be feud 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’ll bring it to both the Trust Boards and the Prime Boards that it’s in their best interest to do so as it would be if it’s accretive to both platforms. And so, when we’re 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, are you seeing more accretive opportunities on the larger portfolios or more where you can go in and mine some of the one-offs?

Monty Bennett

It will evolve to down a couple one-off. So here two to four, 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 pack and go up there and grab a few assets.

To answer it another way is that I think in the future there very well maybe individual asset transactions and our portfolio. I don’t think that you should assume that it should be one or the other.

Austin Wurschmidt – KeyBanc Capital Markets

Thanks for the detail there. And then, just Jeremy, you mentioned some renovation disruption in the second quarter. I’m 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 then similarly, just can you just provide an update on where you guys are in the process of implementing the revenue management initiatives?

Jeremy Welter

Okay. Well, I’m going to take the first part on the renovation. So if you look at the Trust disclosure that we put out in terms of the upcoming renovation schedule, we have about seven hotels I think or so in the third quarter of less renovations and about five 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’m 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 underway?

Do you anticipate some additional tailwinds? We see now RevPAR sort of accelerate into the first half from the back half of last year, and I’m just curious if we should expect that continue as additional initiatives are put in place?

Jeremy Welter

We think that – we know that there is further 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 were optimistic about our revenue performance.

Austin Wurschmidt – KeyBanc Capital Markets

Great. That’s all I’ve got. Thanks guys.

Operator

Our next question will come from Chris Woronka with Deutsche Bank.

Chris Woronka – Deutsche Bank

Hi, good morning guys. I realize you don’t give guidance, but I want to ask about the SG&A more so, on the Trust side. And I see you added $1.2 million of spin-off costs back. Was there anything else unusual that was kind running through SG&A, or what kind of impact, what are some of the things that impacted the timing on that if you can?

Deric Eubanks

Sure, hi Chris, it’s Deric. The other thing that I pointed 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 in 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. I mean, is there, on the stock based comp, is there typically a lot of fluctuation kind of quarter to quarter?

Deric Eubanks

No, not necessarily. The adjustment that I 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 that – 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’m guessing it maybe a little bit too small for that to end up in Prime, but is Fremont something that could potentially end up there either of those?

Monty Bennett

This is Monty. No, the Fort Worth assets is not only small but it’s Fort Worth and that’s not in keeping with our prime strategy. And as far as the Fremont asset, it is – it’s not in the gateway markets, it’s – and it’s also has RevPAR that’s too low. So no, you shouldn’t expect it goes to never go to Prime.

Chris Woronka – Deutsche Bank

Okay, got you. And then just on the – you mentioned two limited-service hotels that were unencumbered with the latest refinancings. Could we read into that that those are sale candidates, is there kind of a direct correlation that we see there?

Monty Bennett

Yes, yes, we’re marketing those for sale of the Homewood Suites Mobile and it’s in Hampton 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 more from me. Just as you think about, we see the two platforms and is there a way to creatively, could you buy, could you use more leverage on the Trust side to compete with some of the buyers for these assets and then flip them over to Prime? Is there an avenue to do that?

Monty Bennett

Yes, there is an avenue to do that. And that’s one of the creative approaches that we’re looking at the Doug, looking at very detailed to see. We want to take advantage of these platforms to help themselves and help the sister platforms as long as it’s neutral or helpful for the first platform. We’re never going to do something with 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.

Douglas Kessler

So, considering what’s going on the market-place were higher leveraged transactions are taking place in order to be price competitive you have to have a little higher leverage. It may make sense to in some formal fashion, warehouse them in Trust, purchase them in Trust, we would help them. It’s been an appropriate time.

I’m having to move over to Prime but we would have spent some time on that because we want to make sure that the Trust shareholders, if we did that get a fear shake. And get compensated for playing that role. And so, as we’re evaluating platform towards looking at any and all different kinds of waste in order to create value.

We’re 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 at least upon the prime platform out. So, hopefully we can apply our creativity to this market that we believe both in values and RevPARs is going to continue to improve for the foreseeable future in order to take advantage of those facts to the benefit of our shareholders.

Chris Woronka – Deutsche Bank

Okay, very good thanks.

Operator

Nikhi Bhalla with FDR markets has – capital markets, I have a next question.

Weston Bloomer – FBR Capital Markets

Hi, this is Weston Bloomer asking on behalf of Nikhil. Most my questions have already been answered but I was wondering if you could give an update on your stance on share buybacks especially given age, piece, share discount to NAV at this point. Is that something you are considering or is it too early in the portfolio’s lifecycle? Any update on that would be great. Thank you.

Deric Eubanks

Sure. That’s not something we’re considering now for Prime, it is early in the Life Cycle of Prime. It is trading we believe at a material discount to net asset value to private market values. But we also have a desire to grow the platform. And grow it by buying back shares. So we are patient with that for now and have no intention on buying back stock.

And I think that generally what you’re going to see from us is not buying back stock, hardly at all during in either platform during these four robust times in the industry. It’s just generally a better use of capital to go out and buy assets. Well, where you’ll see us buying back shares if we do it, it will be during a downturn, almost exclusively all these never-say-never but that’s generally what you’re going to see. So, I’d be hard crushed to say that you’ll see us buying back shares and Prime or trust.

As the confidence boost of the marketplace someone out there personally bought some shares in Prime and although not material as Prime, no, it’s immaterial number at all to me personally. So, we’re going to keep getting on the road with potential investors for Prime and keep us telling this story. And we’ve been getting some great feedback from investors. And we’re 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 the management than all the other internally managed assets. But in a way it’s one of the most, purest ways that one can invest in a real-estate platform and that we’re investing straight in the assets. And we 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.

Weston Bloomer – FBR Capital Markets

Okay, perfect. Thanks for the color. That’s all I had.

Operator

(Operator Instructions). We’ll move on to Patrick Scholes with SunTrust Research.

Patrick Scholes – SunTrust Research

Hi, good morning. Just a quick question here for you. Curious as to your appetite for taking on lengthy turnaround projects given where you think we are at this juncture of the cycle? Thanks.

Monty Bennett

Sure. We’ll take on some turnaround projects. We think that we’ve got multiple years left in the 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, year and half in repositioning and then getting the benefit of the run-up, we still think we have plenty of time for that. So, we’re definitely not counting those out at all in these platforms.

Patrick Scholes – SunTrust Research

Okay. Thank you.

Operator

That is all the questions we have at this time. I turn the conference back over to management for any additional or closing remarks.

Monty Bennett

Thank you all for your participation today. And we look forward to speaking to you again on our next call.

Operator

Ladies and gentlemen, this concludes the Ashford Hospitality Trust and Ashford Hospitality Prime’s second quarter 2014 conference call. If you’d 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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