Ashford Hospitality Trust CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: Ashford Hospitality (AHT)

Ashford Hospitality Trust, Inc. (NYSE:AHT)

Q4 2010 Earnings Conference Call

February 25, 2011, 11:00 am ET


Tripp Sullivan - Corporate Communications

Monty Bennett - CEO

David Kimichik – CFO

Douglas Kessler - President


Patrick Scholes - FBR Capital Markets

Ryan Meliker - Morgan Stanley

Bryan Maher - Citadel Securities

David Loeb - Robert W. Baird


Good day ladies and gentlemen, thank you for standing by, welcome to the Ashford Hospitality fourth quarter 2010 conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question-and-answer session. (Operator instructions) As a reminder this conference is being recorded Friday, February 25, 2011.

It is now my pleasure to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead sir.

Tripp Sullivan

Thank you, welcome to the Ashford Hospitality Trust conference call to review the Company’s results for the fourth quarter of 2010. On the call today will be Monty Bennett, Chief Executive Officer, Douglas Kessler President and David Kimichik, Chief Financial Officer.

The results as well as notice to the accessibility of this conference call are on a listen only basis over the internet were released yesterday afternoon in a press release that has been covered by the financial media. As we start, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information are being made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to numerous assumptions, uncertainties and known or un-known risks which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the section entitled risk factors and ask for the registration statement on form F-3 and other filings with the Securities and Exchange Commission. The forward looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them.

In addition certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company’s earnings release and the company tables are scheduled which has been filed on form 8-K with the SEC on February 24, 2011 and may also be accessed through the company’s website at

Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Monty Bennett, please go ahead.

Monty Bennett

Thank you and good morning. Even though the industry is accelerating into recovery, let’s not forget that the most recent lodging downturn has been in unprecedented. In the midst of the great recession, it is worth noting how lodging REITs reacted differently. Some issue to equity of historically low prices, we however bought that half of the company shares. Some companies inadequately managed debt and interest expense, where since the beginning of 2008, we refinanced $671 million and carefully constructed various interest rate strategies that saved $126 million since inception.

Some companies appeared grid locked with regards to operating margins whereas we excelled at minimizing the impact. We did suffer losses associated with our mezzanine investment portfolio, but as a percentage of our gross assets; the total amount of the impairments equaled to a relatively small amount of 4.7%. But looking at our total investment in our mezzanine lending platform of $356 million, we anticipate that after all cash flow and return to principle is considered, we will have recovered approximately all of our initial investments, which is quite an accomplishment considering the debts of the downturn.

Our involvement in the mezz lending business has also led us to opportunities that we otherwise would not have been involved in. Our mezzanine team recognizes the inter-twines in complex relations among lodging debt and capital market variables. With this expertise, we will constantly strive to excel at minimizing losses in the downturn and maximizing the benefits of an upturn.

We believe the steps we took and will continue to take separating us from our peers and will continue to contribute to substantial shareholder value creation. We continue to demonstrate that our platform is adept at transacting across all segments in equity and debt both directly and via securities. These strategies have allowed us to outperform the peer average in terms of total shareholder returns since our IPO for the past seven, six, five, four, three, two and one years.

Our results for the fourth quarter of 2010 were strong, we finished with this record AFFO of $0.40 per share in the quarter and a record of $1.50 for the year reflecting for the year one of the best year-over-year growth rates of 34% to our lodging peer group. We have spoken before of our differentiated capital market and asset management techniques. Contributing to this performance were our operating performance, share buyback and interest rate strategy.

The fourth quarter was another good example of these strategies that worked on our hotel portfolio. We reported a 7.5% increase in RevPAR of the hotels not under renovation in the quarter. ADR was up 0.5% and occupancy was up 429 basis points. The industry is heading in the right direction now with the opportunity to drive ADR as an increasing component of RevPAR growth.

As in most cycles, some markets accelerate faster as the downturn and this recovery is no exception. Although, we see our portfolio diversity as an advantage; to date our RevPAR trend has lagged some of the growth in certain cities such as New York, Denver, New Orleans and Detroit where we have little exposure. As the lodging industry continues to improve broadly across the US, we would expect to see more of that pricing power come our way.

Until then, we remain keenly focused on driving operating results through cost control and flow through. That focus was evidence once again in the fourth quarter results. For the hotels not under renovation, EBITDA margin increased 384 basis points from a year ago to 27.2% while for all hotels EBITDA margin increased 256 basis points to 26.9%.

Our affiliated manager Remington significantly contributed to these results and the brand managers performed well as we continue to work very closely with them to keep costs under control. As ADR growth gains momentum, we anticipate that our operating margin improvement will remain strong. Regarding capital expenditures, we completed $15.7 million of projects in the quarter bringing us to $62.2 million [ph] for the year.

Our goal even though in the downturn will stay ahead of CapEx and maintain high quality assets. During 2011, we will continue to selectively upgrade hotels to improve their competitive position in the market. Our other priorities for us, has been with our capital structure mainly creating liquidity, extending our maturities and reducing overall leverage.

We were successful on this front with our leveraged ratio finishing at 55.0% compared with 59.0% at the end of 2009. We also eliminated the 2012 maturity with a more attractive fixed-rate loan that provided excess proceeds to pay down our credit facility. As of year-end, we had $135 million of remaining borrowing capacity on a revolving credit line with only 115 million drawn.

Looking ahead to our maturities, we have 209 million in hard maturities in 2011, most of which occurs in December and 167 million in 2012 in addition to our credit facility. Our strategy to restructure or refinanced these loans should benefit from accruing operating fundamentals and greater debt availability. We also demonstrated our discipline in the capital markets; we succeeded our goal not to issue equity during the worst recession in the industry while virtually all of our peers completed follow on offerings and diluted their shareholders.

Instead, we repurchased during that same time approximately 73.6 million common shares at an average price of $3.26 per share, the benefits of cutting our share account in half should enhance the appreciation of our shares for some time. The hard work earlier in the year to improve our balance sheet and enhance liquidity positioned us to take advantage of the improving fundamentals in the lodging Sector.

Near the end of the fourth quarter, we completed a small equity raise. Based on the $9.65 per share price from our December common share offering and subsequent over allotment exercise, we created 50 million in shareholder value to that offering alone. Our board has declared a dividend of $0.10 per share for the first quarter of 2011; we have provided guidance that we intend to pay at least this amount in subsequent quarters as well.

However, each quarter specific dividends if any will be announced towards the end of each quarter. Coming of a record year with $1.50 per share AFFO, we believe the dividend will be well covered and has the potential to grow in the future. The record date of the dividends will be March 31, payable on April 15. Looking ahead to 2011, we will remain focused on what we, on what has worked so far for us, improving our balance sheet and liquidity, controlling costs and generating improved operating results, also pursuing selectively opportunistic to capital market and investment opportunities.

All of these, we will of course execute with commitment to outpacing our peers to improve shareholder returns. Lastly, we plan to host an analyst and institutional investor conference in New York at the Palace Hotel on May 11. This will be an opportunity for us to provide more details on our industry views as well as our comparable advantages in the lodging and REIT sector. We will be sending out more detailed information in the near future and hope that you will save this date and plan to attend.

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

David Kimichik

Thanks Monty. Through the fourth quarter, we reported a net loss to common shareholders of $111,489,000, adjusted EBITDA of $53,630,000 and AFFO of $29,462,000 or $0.40 per diluted share. At quarter-end Ashford had total assets of $3.7 billion, where $2.5 billion or mortgage debt in continuing operations were blended average interest rate of 3.02% clearly one of the lowest among some of our peers.

Including our interest rate swap, 74% of our debt is now fixed-rate debt, the weighted average maturity is 4.8 years. Since the length of the swap did not match the term of the underlying fixed rate debt for GAAP purposes the swap is not considered an effective hedge. Result of this was that the changes in market value of these instruments must be run through our P&L each quarter as unrealized gains or losses on derivatives. These are non-cash entries that will affect our net income, but will be added back for purposes of calculating our AFFO.

Through the fourth quarter, it was a loss of $18,540,000, in year-to-date it was a gain of $12284, 000. At quarters-end; our portfolio consisted of 97 hotels in continuing operations containing 20458 rooms. We will free assets to discontinue the operations in anticipation of sales and we wrote down the Hilton Rye, New York by $23.6 million and the Hilton Tucson, Arizona by $39.9 million.

Additionally, as of year-end, we owned a position in three mezzanine loans with total book value of principle outstanding of $35.9 million with average annual un-leveraged yields of 4.6%. In the quarter, we took a full write down of $21.6 million on our JER Highland mezz loan six, a partial write down of $7.8 million of our Tharaldson portfolio mezz loan as it is coming due in April but no clear resolution.

Please note that we can no longer capitalize transaction costs and mezz expense in the period. Since these costs as well as contract termination costs are onetime costs, we have elected to add them back for purposes of calculating our AFFO and our adjusted EBITDA; for the fourth quarter, they were $7 million.

Hotel operating profit for the entire portfolio was up by $7.8 million or 14.7% for the quarter. Our quarter-end adjusted EBITDA after fixed charge ratio now stands at 1.70 times versus a required minimum of 1.25 times. Ashford’s net debt to gross assets is at 55.0% versus not to exceed lower of 65% through our credit facility covenants.

Our share count now stands at 80.8 million fully diluted shares outstanding which is comprised of 59.3 million common shares, 14.2 million OP units and 7.2 million shares of our Series B Convertible Preferred.

I would now like to turn it over to Douglas to discuss our capital market strategies.

Douglas Kessler

The transaction environment is clearly heating up as additional hotel assets come to market and financing is more readily available on better terms and during the past couple of years. REIT peers who raised equity are motivated to deploy capital and are competing against well capitalized funds that also see upside in our lodging market fundamentals.

As a result, bidding is very competitive. However, our strong preferences to be selective and disciplined by avoiding the widely market transactions and utilizing whatever competitive advantages we have to succeed in achieving substantial EBITDA and FFO growth. We have two full service hotels currently on the market; Hilton Rye Town and Hilton El Conquistador and two select service assets.

We continued to make progress on our sales efforts. The JW Marriott closed yesterday and resulted in net cash proceeds of $43.6 million based upon the sales price of $96 million equating to a TTM cap rate of 3.7% and $285,000 per key. We will report on other sales as they follow. We intend to use the proceeds to pay off property level debt and pay down the credit facility.

During the fourth quarter, we received a discounted payoff of a $4.4 million on our La Jolla mezz loan resulting in an 87.5% of part payoff in total from all payments received from the borrower. Lastly, we described on the prior call a couple of transactions we completed during the fourth quarter that highlighted our ability to create value in this improving environment.

Most notably the conversion of a $1.8 billion interest rate swap to a fixed rate that locked in approximately $32 million of interest rate savings at no cost to us through the term of the original swap and the refinancing of the Marriott Crystal Gateway that generated $44 million of excess proceeds.

Clearly, 2010 was an eventful year for Ashford. By implementing several unique but very well thought out strategies, we navigated the downturn and our shareholders have benefited. Given the substantial ownership position of insiders equating to 18.2%, we are significantly aligned with our share holders in creating near-term and long-term value and dividends.

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

Question- and- Answer Session


(Operator instructions) One moment please for that first question. And our question comes from the line of Patrick Scholes from FBR Capital management, please proceed.

Patrick Scholes - FBR Capital Markets

Good morning gentlemen. Just - I got three questions here. I'll go with the first one here. What are your CapEx plans for this year roughly, can you tell us roughly dollar amount and with any CapEx, can we expect any types of disruption?

Monty Bennett

Sure, Kimichik, why don’t you address that?

David Kimichik

Sure. Hey Patrick, we plan to spend approximately $86 million in 2011 and there is $50 million that are escrow funded and the balance will be order funded.

Monty Bennett

And just to make a note on that Patrick is that, those are on our capital plans. Many times the capital plans will overlap over into next year, so usually a bet number, we get about 75% to 80% of it spent actually in the year and the rest of it hanging over. As far as disruption, probably the best guide is that last page on our earnings release that talks about where we think there will be significant renovations to individual properties, how much each quarter and we will update that quarterly.

Patrick Scholes - FBR Capital Markets

Okay. Thank you. My next question just concerns property taxes which look similar to a couple other REITs that reported your property taxes were down year-over-year. How should we think about those going forward?

David Kimichik

We continued to have success with our property taxes. Our methodology for booking as soon as we get a bill in from the property tax authority whatever that amount says, that is what we put on our books and that is what we record until we actually receive dollars back based upon whatever we have appealed or the lower rate.

And so you will get these surges that come in and a number of those come in this past year and right now we have a quite a number of 2010 property tax appeals that are outstanding that we still could get rebates back from and may be even some from 2009 that are still out there, so it is always hard to predict, but we were hopeful that we will get some others additional significant savings this coming year.

Patrick Scholes

Great. Thank you and then, just I am curious on the demand for the hotel you sold in San Francisco. About how many bidders were there on that?

Monty Bennett

It was fascinating. This is something we took to market last November, I think about and we think we had 99 CAs signed to look at that asset. So it was quite an asset that got a lot of interest. What is interesting though is that towards the end, probably [ph] at the beginning not too many of our repeaters were involved and I think that is just because of the market perception of a REIT selling to a REIT, lots of our analyst friends if you buy from other leads will try to figure out who got a good deal and who got a bad deal and so it is just something that people don’t need, so but we are very happy we got to sell them and got a lot of interest.

Patrick Scholes

Great. Thank you for the color on the questions.

Monty Bennett

Sure, thank you Patrick.


Our next question comes from the line of Ryan Meliker from Morgan Stanley, please proceed.

Ryan Meliker - Morgan Stanley

Good morning guys and congratulations on a solid quarter. I just have couple of quick questions. I think the first one is, can you give us some color on kind of where you guys are in the mezz tax for the Highland portfolio with JER and obviously there has been a lot of media sources speculating on your involvement in that portfolio going forward. Is there any color you can give us in terms of where your expectations are in terms of how those investments might play out and then the second thing was obviously you guys announced dividend of $0.10 a share. Can you give us some idea on how the board came to that price point for the dividend, obviously it looks to be on an annual basis materially above taxable income, but on an FFO basis it seems to be a great deal of coverage. Just some color on how that number came about, that would be helpful. Thank you.

David Kimichik

Sure, look Highlands on the mezz positions; we got a position in mezz four and mezz six. The mezz six position is one that we just recently written down for this past quarter We still have our position in mezz four not written down and then its original value. Regarding the Highland transaction, we continued to work with the borrower and the lenders on a restructure. As soon as something is worth announcing, we will announce it. But, it's really not much to say until then.

On the dividend, we did have a lot of discussion on the dividend. This is the first time that we started up since the crisis. We are in a unique position that we have a lot of potential coverage; we got a lot of cash flow per share. Especially compared to our REITs - other REITs we got a lot of capacity to pay dividends and so the discussion back and forth was how much do we have ability to pay which is a lot more versus how much should we pay considering that there we’re only two or three quarters out of this new terrible downturn. And so it was just a discussion between those two ends of the spectrum that we came to the dividend announcement that we did.

Ryan Meliker - Morgan Stanley

Okay, Thank you.


Our next question comes from the line of Bryan Maher from Citadel Securities, please proceed. Please go ahead sir, your line is open.

Bryan Maher - Citadel Securities

Good morning, can hear me?

Monty Bennett


Bryan Maher - Citadel Securities

Hi, quick question regarding acquisitions and dispositions. Would it be safe to say that you are in this current market more of a seller than a buyer. And if not or in conjunction with that what target markets are you looking at where you feel you're under represented?

Monty Bennett

I’d say that we are probably -that we had been more of a seller than a buyer. That will probably start to move the other way. But I think as we share with you Brian is that we view our cost to capital is pretty expensive and if you pitch - if you take our existing portfolio and assume certain performance that mostly experts in the industry assume, then that means incredible of stock appreciation of the next number of years. So when you're buying asset you got to raise equity at current prices in order to - and achieve incredible returns to make it accretive.

So that is just hard formula to make, so when it comes to acquisition right now; we are looking to find acquisitions that can beat that, that can outperform what we’ve already have. And if it cannot perform the assets we already have, then we're just trading water by raising equity and going and buying it. So that's the kind of asset were looking for.

As far as markets, we would love some exposure to some of these other bigger markets such as in New York and Boston and Washington DC. But assets are priced pretty strongly in those markets place. So we continue to seek opportunities where we have some kind of edge in order to make an acquisition.

Bryan Maher - Citadel Securities

Okay, thanks.


(Operator instruction) And our next question comes from the line of David Loeb from Baird please proceed.

David Loeb - Robert W. Baird

Hi Monty. I fear I know what you are going to say about this. But can you give us some idea about when you think the Highland process will be completed?

Monty Bennett

I really can't. We've been working on that for quite some time, as you know and if I'd given a prediction before. Then I would have been wrong every single time because this continues to take more time than we would like just to get it done. And the reason is that we have quite a few players involved and very sophisticated players involved. And it is just taking more time than we hoped.

So, like I said whatever time I give you I'm sure it's not going to be a rush because it will get pushed back farther. But, we're working internally on trying to come to some resolution as soon as we can.

David Loeb - Robert W. Baird

No, at least you didn’t say no comments. So I appreciate that.

Monty Bennett

I don’t know if I said anything worth more than no comment, but.

David Loeb - Robert W. Baird

No, but you didn't say no comment so I appreciate that. One other - who is operating those hotels today, are those still operated by Crestline?

Monty Bennett

A number of them operated by Crestline. Most of them are operated by Crestline. Davidson operates one or two, McKibbon operates one or two, Marriot operates, I think seven, eight. Hyatt operates a couple and then Hilton operates one.

David Loeb - Robert W. Baird

And that’s - the management contracts are staying in place until this is resolved?

Monty Bennett

No comment.

David Loeb

Thank you. I was waiting for that one. Okay. Thank you very much.

Monty Bennett

You bet.


(Operator instruction). And there appear to be no further questions at this time. Mr. Bennett, please continue with your presentation of closing remarks.

Monty Bennett

Thank you for your participation on today's call. And don't forget to mark your calendar for the morning of May 11 in New York for our institutional investor day and analyst day. We look forward to speaking with you again on our next call.


Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect the line, have a great day everyone.

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