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Ashford Hospitality Trust, Inc. (NYSE:AHT)

Q2 2011 Earnings Call

August 4, 2011 11:00 am ET

Executives

Scott Eckstein – Financial Relations Board

Monty J. Bennett – Chief Executive Officer

David J. Kimichik – Chief Financial Officer and Treasurer

Douglas A. Kessler – President

Analysts

Ryan Meliker – Morgan Stanley

C. Patrick Scholes – FBR Capital Markets & Co.

David Loeb – Robert W. Baird

Bryan Maher – Citadel Securities LLC

Paul Frederick Berghaus – Cornerstone Asset Management

Darnel Bentz – KeyBanc Capital Markets

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Ashford Hospitality Trust Second Quarter 2011 Conference Call. During today’s presentation all parties will be placed in a listen-only mode. Following the presentation the conference will be opened for question. (Operator Instructions) This conference is being recorded today Thursday, August 4, 2011.

And I would now like to turn the conference over to Scott Eckstein. Please go ahead, sir.

Scott Eckstein

Good day, everyone, and welcome to Ashford Hospitality Trust conference call to review the company's results for the second quarter of 2011. On the call with me today will be Monty Bennett, Chief Executive Officer; Douglas Kessler, President; and David Kimichik, Chief Financial Officer.

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

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

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company’s earnings release and accompanying tables are scheduled, which has been filed on Form 8-K with the SEC on August 3, 2011, it may also be accessed through the company’s website at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release.

I will now turn the call over to Monty Bennett. Please go ahead, sir.

Monty J. Bennett

Thank you and good morning. Since our IPO in August 3, 2003 through yesterday’s close Ashford has achieved the highest total shareholder returns of all it peers. Performance for the past three, two and one year has also exceed either all or the majority of our peers. Our management team continue to focus on long-term valuation creation rather than short-term trends or fads.

There are several central themes on our call today. First, despite the recent pullback in lodging stocks, we believe it remains a very attractive time to invest in hotel REITs. The industry fundamentals appear to be set for an extended time period of solid performance. Despite modest GDP growth in the first two quarters of this year, gross hotel demand is an all time high, it’s according to Smith Travel Research. It appears that rather than hiring, companies are traveling their people more.

Second, our results clearly reflect the strength of our platform on main levels including our assets management achievements, acquisition capabilities, hedging activities and dividend converge. Additionally, we remain extremely bullish on the Highland transaction and are already witnessing strong results. We’re focused on strategies to improve that to performance, enhance our liquidity, manage our maturities and keep disciplined on the transaction front.

And lastly, our alignment with our shareholders is almost unparallel among our peer group given our high insider ownership and be able to achieve share price and dividend growth

We are pleased to report that the second quarter of 2011 was a record quarter in Ashford’s history with AFFO per share of $0.66 compared with $0.46 per share a year ago. For our Legacy hotel portfolio, our top line performance was strong with a 7.2% increase in pro forma RevPAR to $100.27 for hotels not under renovations, which was derived from a 4.4% in ADR, and 196 basis point increase in occupancy. We also excel in achieving a very healthy operating profit margin increase 260 basis points to 31.8%.

Recently from a stock performance perspective the lodging sector has underperformed compared with other equity REITs. This sell-off by investors is likely fueled by the current macroeconomic sentiment and broader economic uncertainty. Investors remember that our industry has a self-regulating factor of movements in new supply.

Net new supply for the next few years is predicted to be significantly below the long-term average of 2.1%. Market forecast by PKF hospitality research shown extremely low new room supply growth outlook currently at 0.4% versus the past four quarters rate of 1.5%. This low supply growth means that even very modest demand growth will translate into occupancy increases and leverage to increased average daily rate.

We expect investors to rotate back into this sector as soon as this phenomenon is observed. As a result, RevPAR growth forecast also continue to be strong with the industry experts expecting solid gain throughout the reminder of the year. At the recent Americas Lodging Investment Summit summer conference Smith Travel stated 2011 U.S. RevPAR growth outlook of 8%. PKF’s current RevPAR outlook for the next four quarter is 7.2%. Just last weeks for RevPAR data for upper-upscale and upscale hotels increased 7.5%. This is quite impressive considering the economies slow growth and tougher year-over-year cause.

What this demonstrates is that even during these periods of choppy economic growth, overall lodging market fundamentals continue to improve. We believe lodging stocks may offer strong upside potential based on these macro market supply demand factors. Historically investors who have bought lodging stocks at this early stage in a stable recovery had earned very attractive financial returns.

In particular, there remains a wide gap in peak real RevPAR levels compared to where the industry is today. If real RevPAR recovers to prior levels and a portion of the extreme cost cutting measures that were implemented during the downturn remain in place, then the stage is set for outside of EBITDA growth.

Additionally, for those investors concerned about future inflation hotels have historically been a good performer in inflationary periods relative to other real estate asset classes. There has been much discussion about potential outsized growth in group business. While group continues to grow, the real story here is the performance of transient, especially business transient.

Companies are growing their profits by putting their people on the road and without having the large group functions. Our view is that business transient has an even larger rate growth potential based on historical performance and work demand continues to rebound, particularly at upper-upscale and upscale hotels.

Given that 71% of our company’s hotel room demand is transient, with 77% of that coming from corporate. We are optimistic about the top line performance growth opportunities in our portfolio. With these RevPAR and lodging sector trends, hotel rates with high flow through have the potential to experience significant EBITDA growth. As such we remain focused on driving our operating results through cost control and EBITDA flow through.

As approximately 38% of our EBITDA is managed by our affiliate Remington, we continue to believe we are able to excerpt greater control over operating expenses than many of our peers who rely more heavily on unaffiliated managers. In terms of hotel EBITDA flow throughs compared to its peers, Ashford is ranked the highest or among the highest over time.

Regarding capital expenditures, we completed $14.4 million of projects in the second quarter for the legacy portfolio and $28.3 million year-to-date. We have commenced work on the Highland portfolio capital expenditures and are utilizing the funds that are at closing.

Enhancing our balance sheet continues to be a key strategic focus for us, as a result of the disciplined approach to the management of our operating cash-flow and capital structure, including our recent equity offering, we were able to fully repay our outstanding balance under our credit facility leaving us with no recourse debt obligations and a solid liquidity position.

It’s important to note that our capital structure candidly withstood the worst recession for our industry since the Great Depression, while continuing to deliver outsized performance. The strength of our operating cash flow provides us with ample dividend coverage. As previously announced, our board of directors declared a dividend of $0.10 per share for the second quarter 2011. This equates to a dividend coverage of 4.5 times on TTM AFFO based on $0.40 per share per annum. We are extremely pleased with the magnitude of the coverage and the future opportunities it currently upwards us.

Now, I’d like to provide an update on our Highland portfolio. We considered this as a highly attractive transaction from a cap rates and a price per key standpoint. As more transactions are announced at lower cap rates and higher per key prices, we’re even more convinced that our disciplined approached this transactions offers many shareholder benefits. We were able to obtain these 28 luxury upper-upscale and upscale hotels for $158,000, per key, a 44% discounts replacement cost.

This represents a 47% discount to recent peer acquisitions at an average of over $300,000 per key. From an operational standpoint this portfolio continues to demonstrate improved performance for those 11 hotels, the 28 in the portfolio that are brand or third-party managed. We continue to see revenue growth generally consistent with industry RevPAR trends.

Cost control management is directly progressing as expected with these properties. We have already identified and implemented over $2 million of annual operating cost savings for these third party managed properties.

Remington, our affiliated manager has a suite management of the other 17 former Highland assets. Those made notable progress instituting its best practices. Remington has already denitrified and implemented $4 million in operating cost savings.

Topline sales growth has been more gradual on the Remington managed properties as 30% of the sales positions were up on take over and 10% more turned over in the second quarter. These positions have been rapidly filled with only 5% of the positions opened currently. With these actions we expect the Highland assets revenue growth to gain parity with their markets by the 1st of the year and then grow from there. The size of total $6 million in operating cost savings just mentioned. We hope to achieve further substantial cost savings in property taxes, but these will take several quarters to achieve.

We will provide updates on this portfolio and keep you informed on how quickly we expect to drive further operational and cash flow improvement. Let me remind you that pursuant to the terms of the restructured financing, excess cash flow generated by these assets will go through reduced debt on properties and therefore deleverage the portfolio.

Looking ahead, we remained focused on delivering industry leading results through revenue enhancements, cost management, and balance sheet improvement. By keeping a focused, disciplined approach, we are confident that we will continue to provide strong operating and financial performance that should translate into increased shareholder return.

On a final note, coinciding with this year’s NAREIT Annual Convention taking place here in Dallas, we plan to host a property tour on the afternoon of Monday, November 14. We will be sending out more detailed information shortly and hope that you will save this date and join us. This will be an opportunity for us to showcase some of our local assets and discuss our various strategies.

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

David J. Kimichik

Thanks, Monty. The second quarter we reported a net loss to common shareholders of $29,082,000, adjusted EBITDA of $86,454,000 and the FFO of $51,557,000 or $0.66 per diluted share. At quarter’s end, Ashford had total assets of $3.6 billion in continuing operations and $4.6 billion overall including the Highland portfolio, which is not consolidated, made $2.4 billion of mortgage debt in continued operations and $3.2 billion overall including Highland.

Our total combined debt has abundant average interest rate of 3.2% clearly one of the lowest among our peers, including our interest rate swap 97% of our debt is clearly fixed rate debt. The weighted average maturity is 4.3 years. Since the length of the swaps not match a term of the underlying fixed rate debt for GAAP purposes the swap is not considered as an effective hedge. The result of this is the changes in market value of these instruments must run through our P&L each quarter as unrealized gains or losses on derivative.

These are non-cash entries that will affect our net income, it will be added back for the purposes of calculating our AFFO. The second quarter it was a loss of $17.7 million and year-to-date it's a loss of $34.5 million.

At quarter's end our portfolio consists of 96 hotels in continuing operations, containing 20,340 rooms. During the quarter, we moved to Hampton Inn, Jacksonville to discontinued operations, given the sales of property.

Additionally, we own 71.74% of the 28 Highland hotels containing 5,800 net rooms in a joint venture. All combined, we clearly own a total of 26,140 net rooms.

As of the quarter end, we owned a position in just one performing mezzanine loans Ritz Carlton in Key Biscayne, Florida, with an outstanding balance of $4 million. During the quarter, we received a slightly discounted payoff, the $25.7 million mezzanine loans secured by the sales in portfolio.

We realized a gain of $4.2 million in the payoff of the $22 million transaction, since we have previously taken a partial write-down of $7.8 million on this loan. Hotel operating profit for continuing operation was up by $9.5 million or 14.6% for the quarter.

Our quarter end adjusted EBITDA to fixed charge ratio for our credit facility now stands at 1.74 times versus a required minimum of 1.35 times. The preferred dividend number is higher for the quarter on our P&L as it includes non-cash dividends of $17.4 million. This was for the conversation of 1.4 million shares in May of our Series B-1 Preferred Stock in the common shares.

Our share count currently stands at 84.3 million, fully diluted shares outstanding, which were comprised of 68 million common shares and 16.3 million OP units.

Now I’d like to turn it over to Douglas to discuss our capital market strategies.

Douglas A. Kessler

Thanks and during the quarter, we executed well on several capital market strategies. Early in the quarter, we announced repurchase of approximately 5.9 million shares of the Series B-1 Convertible Preferred Stock from Security Capital Preferred growth. The remaining 1.4 million shares of the Series B-1 were converted into the common shares. We anticipate that these share repurchases will provide additional near-term and longer term benefits in our operating reporting metrics.

We funded this repurchase with proceeds from our offering of 3.35 million shares of 9% Series E Cumulative Preferred Stock at $25 per share. More recently, at the end of June, we priced a public offering of 7 million shares of our common stock at $12.50 per share generating gross proceeds of $87.5 million. We used $50 million of these proceeds to fully repay outstanding borrowings under our senior credit facility, leaving us with no other recourse debt obligations. Continuing with our debt strategies, we've been working with various lenders on a new credit facility to replace our existing revolver, debt maturers in April 2012.

We expect to be able to disclose further developments in the very near future on our new line. During the quarter, we completed negotiations with the loan servicer on the Courtyard Manchester and close on a three year extension of the $5.8 million mortgage. Basic terms for the loan, which now matures in May 2014, remained essentially unchanged.

Looking at upcoming debt maturities, the next key date is December 2011, when a $203 million loan comes due followed by May 2012, when $167 million loan matures. We are continuing to negotiate with several lenders and servicers on restructuring solutions and will pursue actions we believe are most accretive to our shareholders.

Lastly on the debt topic; with the heightened concerns in the financial market, we took steps to ensure against short-term interest rate volatility by swapping $1.18 billion of our existing floating-rate debt to a fixed one month LIBOR rate of 0.2675%. The swap is effective from June 13, 2011 and terminates on January 13, 2010. There is no upfront cost to Ashford for entering into the swap other than the customary transaction costs.

On the transaction front subsequent to the end of the quarter, we completed the sale of the Hampton Inn Jacksonville for total gross proceeds of $10 million, the property was unencumbered with debt.

Our decision to sell was based upon increased competition and estimated future CapEx. This sale taken in conjunction with a $152 million in gross proceeds from the sales of our JW Marriott San Francisco, right down and Hampton Inn Houston Galleria assets in the first quarter of this year equates to a 3% trailing 12 months cap rate. These sales have provided us with a stronger balance sheet and liquidity position.

We continue to remain disciplined in our underwriting of new hotel investment opportunities, while the transaction pace has picked up we're unwilling to pay some of the prices we’ve seen unless the asset is accretive to our corporate model. We continue to be disciplined and demonstrate strong operational and financial execution. As we stated in previous calls, management and insiders earn approximately 21% of the company, thereby creating a very strong alignment with shareholder interests.

In summary, we're committed to generating maximum near-term and long-term shareholder value. That concludes our prepared remarks and now we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Ryan Meliker from Morgan Stanley. Please go ahead.

Ryan Meliker – Morgan Stanley

Good morning, guys. Just a couple of quick questions. First of all, I was hoping you could talk to us a little bit about Marriott Sales Force One, it looks like your Marriott properties performed all right for the quarter. I’m wondering if you’re seeing any negative impacts from Sales Force One. I know you’d talked about it a little bit. Over the past few quarters, I’m wondering if things have gotten better for you’re making changes.

Monty J. Bennett

Sure. In looking at Marriott Sales Force One, I think you have to think about it in kind of three categories hotels, they’ve got their huge boxes. They’ve got their kind of a more normal full service hotels of 200 to 300 rooms, kind of suburban type hotels. Then there is the select service type hotels. By and large, we’ve got just one of the really big boxes with Marriott and that’s the gateway asset. Most of our assets that Marriott manages for us are the medium full service type assets or the smaller select serve assets.

Sales Force One have performed fine for us for the medium sized full service hotel assets. It was more of a challenge initially on the select service type side. Now, a number of weeks ago, we had reached an agreement with Marriott to make some changes to the system to help on the select service side. And so those changes are in the process of being put in place. But I think what’s going on in the industry is some struggle with the big boxes among our peers and again we just have the one big box, and not as much exposure as our peers go. So I can’t really speak to that. But it’s been primarily on the select service side and we believe that the new programs that Marriott has put in place regarding select service hotels is going to address our concerns and so we think it’s going to be fine.

Ryan Meliker – Morgan Stanley

That’s helpful, thank you. And then, I’m wondering if maybe the support for key, but if you guys could comment a little bit on the purpose of the equity issuance. Obviously you bought, I mean, paid down the revolver and maybe it helps in terms of being able to negotiate the revolver. It just seemed a little odd to be issuing equity. A little, about a month after you guys had an Investor Day where you showed us how strong the balance sheet was without what seem to be any clear use of the proceeds. So some color on that would be helpful. Thank you.

Monty J. Bennett

Sure, the use of proceeds was very clear. $50 million of it was to pay down our credit facility and the balance was to make sure we had enough cash to address our upcoming debt maturities of $200 million in December and another one of $164 million in the spring. We’ll either pay down and extend those or refinance those. And so we wanted to have enough cash to pay down the credit facility and have no recourse debt, which was very important to us, which we're very happy about, as our platform has no recourse debt. And then again to have enough cash because that’s priced our stock, it made sense in order for us to raise capital nor to address those debt maturities. So we are very happy about it, we're very happy that we raised that cash and we have it. And so from a debt maturities or cash need standpoint, we’re in great shape for the foreseeable future.

Ryan Meliker – Morgan Stanley

Okay. That does help. Thank you. And then, one last final housekeeping question. It looks like you guys had a $4.2 million gain on the Tharaldson portfolio note that you had written down in the fourth quarter. I didn't see that adjusted back out of your adjusted FFO and EBITDA. Was that adjusted out or was it not?

David J. Kimichik

It was adjusted out. It was combined with a $6 million write-down on the Jacksonville sale. It was combined and it’s about $1.4 million adjusted into our FFO.

Ryan Meliker – Morgan Stanley

Wonderful. I had a feeling it wasn’t adjusted. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Patrick Scholes from FBR Capital Markets. Please go ahead.

C. Patrick Scholes – FBR Capital Markets & Co.

Hi, good morning. With the stock down quite a bit today and as I recall, you had stopped your share repurchase program somewhere in the $7 to $9 range, do you think about buying some shares at these levels getting that restarted?

Monty J. Bennett

We had stopped that repurchases about, I think, like we said, in the $8 range or so. And frankly that’s something that we just started talking about to this morning when we saw the downdraft. No plans right now, but it’s certainly starting to enter that territory.

C. Patrick Scholes – FBR Capital Markets & Co.

Okay, thank you. That's it.

Operator

Thank you. Our next question comes from the line of David Loeb from Robert W. Baird. Please go ahead.

David Loeb – Robert W. Baird

Good morning, gentlemen. I apologize if I missed some of these things. A little distracting with stocks down 19%. I guess to follow-up on Ryan’s question, it seems like you had a lot of other alternatives for capital available, I guess the basic question is why did you do the raise? Was it really just that you thought at that price it made sense to not have corporate level recourse debt? Because it seems like you had other opportunities, other ways that you could have dealt with those maturities.

Monty J. Bennett

Such as?

David Loeb – Robert W. Baird

Such as using the line of credit, such as using some of the cash that’s on the balance sheet, such as other assets that perhaps you could have considered more leverage on.

Monty J. Bennett

No, that was really the way to do it. Our credit facility expires in the spring of this coming year. And so we weren’t willing to draw down more on that credit facility.

We are in the discussions for a new credit facility for those discussions have not been concluded yet. And so we didn’t feel comfortable going into where we’ve had to pay down those loans with recourse debt from a credit facility that’s expiring in April. And as far as leveraging of some other properties, and in many cases, that’s expensive because you have fees or what not. So now this was really the best source capital for us. We’re reluctant to raise the equity capital and we don’t like to do it. But that was the best source for what we wanted to do, is to do just that, pay down the credit facility and then to have enough capital to meet these upcoming maturities.

David Loeb – Robert W. Baird

Okay. And might be another, vacancies in the sales positions at the Highland asset, was that something that you knew about at the time or whether it was a surprise when you started getting on the ground with those assets?

Monty J. Bennett

We knew about it, but the trouble is that, this is the transaction, the Highland transaction was in process for sometime and it’s typical in hotel operations since it’s parts of operating business as well as part real estate, people will start to jump ship on the fear of a change over, and so the loan maturity on August of last year, about a year ago and we’ve been in discussions even six months before that about some type of transaction. And so the sales people especially, they are usually the more flighty to jump on a new opportunity or just to get stability to go and take up another opportunity. We have started leaving and then at some point we hope to get the transaction done right beginning of the year and there were few delays and that kind of accelerated the process.

So we win, no was the case, that was why we were able to refill those visions, so very rapidly. And so it turned on revenue on to those properties, but what’s interesting about our business is, each one of those markets is still there and so while we’ve lost some RevPAR yield in those markets. We expect that will stabilize that around the fourth quarter and by the first of the year, we’ll be on an even hard to start to build upon that. So whatever we’ve lost today is baked in upside going forward.

David Loeb – Robert W. Baird

So that’s basically that works off through between now and the end of the year?

Monty J. Bennett

Yes.

David Loeb – Robert W. Baird

Is there anything that you can foresee in either the legacy or the Highland portfolio that might have a similar effect to the third quarter, anything that you’ve not commented on previously?

Monty J. Bennett

No, its just the Highland assets, the Remington management Highland assets ahead of that sales manager turned over and so that’s going to be a bit of a drag, but the brands managed on the Highland portfolio in all the other assets are steady state.

David Loeb – Robert W. Baird

Okay and next topic under the dividend, in the release you talked, in a couple of places about taking place dividend, coverage being very high and given the very high insider ownership I’m sure management is definitely intended to seek the higher payout. What are your thoughts, what are you likely to recommend to the board in terms of looking at kind of dividend to increase.

Monty J. Bennett

We’ve got great coverage. We would like to increase it, I personally would like to increase and I think that the management and board would like to increase it. What we do is we make that decision in December of every year and give guidance for the upcoming year. And so if the economy continues to roll on and the lodging industry continues to do as well as it’s been then we would definitely be recommending to the board an increase the amount, though we haven’t really discussed yet. I know you’d like some more guidance on it, but we’re just not ready to do that. We’re just not sure yet.

Monty J. Bennett

It's a little early given it, this August.

David Loeb – Robert W. Baird

Okay final housekeeping may be this is for Kemo, the stock comp expense to non-cash stock comp expense went up a bit, it looks like about $1.7 million higher than previous quarters, what was that related to?

David J. Kimichik

Just a stock awards, we give our stock awards in March of each year, very, very special award for the Highland transaction this year, which was just normal.

Monty J. Bennett

So that the increase was really related to the normal plus the Highland increase, bonus.

David Loeb – Robert W. Baird

Great that’s all I have. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Bryan Maher from Citadel Securites LLC. Please go ahead.

Bryan Maher – Citadel Securities LLC

Good morning guys. Can you give us some examples of some of the operating efficiencies of Remington, you able to implement with respect to Highland, I think you mentioned something about $4 million on your prepared remarks. Can you tell us kind of what those are, what more do you say?

Monty J. Bennett

Yes, it’s about $4 million for Remington, about $2 million for the brands managed for a total of a $6 million. And these were all above the GOP line, we hope to add some other savings and profit taxes especially going forward. A lot of those changes are position eliminations, we just didn’t see the need for as many positions in the property. Some benefit reductions, benefits had occurred in many of these properties over the years and also our productivity increases, the number of housekeepers in order to clean the rooms.

We go on a system of some people will go on a straight number of rooms per 8-hour shift, we will go on a system of number of rooms per stay over, guest that stays over versus check out, and those productivity changes could have an impact also with the front desk even in food and beverage.

So the changes are primarily on the labor side and kind of sprinkled in between those through a productivity position eliminations and benefits. There are some other savings in some other areas such as elevator maintenance contracts sometimes will rebid, they are just very expensive. Other maintenance type contracts will rebid or eliminate and just take the function in house. But those are some of the best practices that we began to implement.

Bryan Maher – Citadel Securities LLC

Okay. Thanks for that. And also now you’ve been little bit deeper into the properties since you have successfully taken them over, have there been any surprises, positive or negative, with respect to Highland that you did not foresee prior to getting control?

Montgomery J. Bennet

We’ve been pleasantly surprised, in going into the assets we’ve had some limited access in the beginning and we did the best we could. And I was a bit cautious in sharing information with you guys about the assets and what we think we could do there. And so far everything that we thought we could do, we are in the process of doing and maybe even more so. Just from a lot of low hanging fruits on the sales side for example there is great opportunities to build sales there.

The sales effort had started to drop off more than a year ago, and so there is great opportunity to start to rebuild that whole sales efforts which we’re very excited about. Some properties had CapEx issues. We had this beautiful Hyatt in Windwatch, Long Island with a internal water gutter system with water being channeled down in front of the front desk and down into a pail next to the people checking people in, because the CapEx wasn’t put into the assets. Freezers that weren’t working and have been broken and so it was very expensive to store goods offside. I mean just a lot of these types of areas that have been neglected over time, not to mention the entire workforce had been demotivated and demoralized because of the financial situation the portfolio was in.

So we are even more excited about the portfolio and about its opportunities and we’re implementing our CapEx program. We had set aside quite a substantial amount of money for it and those plans are underway. We’ve started about it. We think it’s going to be a great portfolio for us and deliver everything that we’d hope. So far on our underwriting of the portfolio, we are ahead of performance, maybe 20% or 30% ahead of what we internally perform it for it. So we couldn’t be happier.

Bryan Maher – Citadel Securities LLC

Thanks for that color.

Operator

Thank you. Our next question comes from the line of Paul Berghaus from Cornerstone Asset Management. Please go ahead.

Paul Frederick Berghaus – Cornerstone Asset Management

Yes, hi, Monty. I just had a follow-up question on your dividend policy and I understand that you in the board won’t really be commenting further on that until December. But I am wondering if you could explain kind of how the REIT tax laws and rules and regulations work in terms of as it relates to your own situation with AFFO of $1.80 per share, whether you would be able to shield that, in that how many kind of a requirement to pay it out for X period of time going into 2012 or where you would be coming up or when you might be coming up to requirement in order to keep your status, you didn’t have to payout 90% of AFFO or something like that?

David J. Kimichik

This is David Kimichik speaking and generally we have to payout 90% of their net income on a tax basis and not on a GAAP basis, and we are fine from that standpoint and I don’t think the requirement in the near future for us to payout dividends, so whatever dividends we payout will be discretionary.

Paul Frederick Berghaus – Cornerstone Asset Management

And then when you say putting out does that mean well into 2012 or just the end of the year or can you comment on that?

David J. Kimichik

Sure, I think its goes into 2012 as well.

Paul Frederick Berghaus – Cornerstone Asset Management

Okay. I mean through 2012 or any other words are you saying that you don’t really have the requirement or if you see this is going forward the way you’ve kind of indicated that it might that come the end of 2012 you would be bumping up against that requirement?

Monty J. Bennett

This is Monty, through 2012, we don’t see the tax requirements forcing our hand on dividend. Into 2013, I think it’s harder to say, I don’t know if we even modeled or talked about it much, but if there is a requirement in 2013 that forces our hand, we don’t think it will be significant.

Paul Frederick Berghaus – Cornerstone Asset Management

Okay. Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Darnel Bentz from KeyBanc. Please go ahead.

Darnel Bentz – KeyBanc Capital Markets

Thank you. Good morning, just have a quick question on margins, it looks like you had a really strong room margin and a very strong food and beverage margin. Just wanted to see what you’re able to do to get the food and beverage margins, the highest that seen in sometime, just want to get some color on that?

Monty J. Bennett

Sure. Our asset management group has been just phenomenal and what they’ve been able to achieve. We work with our affiliate Remington, a lot of those margin benefits are something that’s Remington is able to achieve, in season and out of season. But when working with brands that’s a shift that’s a little harder to turn, it takes a little longer to turn and what our team has been doing over the past year is having what we call a deep dives with our brand managers and focusing on profitability. And especially in food and beverage, we find that the brands don’t maximize food and beverage as much as they could. So a lot of that’s been focused on labor cut backs within food and beverage.

Also we’re starting to see a mix change going on in food and beverage. The business that we received from room service and restaurants is the low margin, but the business that we received on the catering or banqueting side is much higher margins. And so as that business starts to return, once it is returning, that’s just naturally provides a higher type margin business that affects the overall S&B margin number.

Paul Frederick Berghaus – Cornerstone Asset Management

Okay. Great, thank you.

Operator

Thank you. Another follow-up question comes from the line of Patrick Scholes from FBR Capital Markets. Please go ahead.

C. Patrick Scholes – FBR Capital Markets & Co.

Hi, just a quick follow-up question on my share repurchase question from earlier. Hypothetically, you decided this afternoon you wanted to buy some shares, are you blacked out in any way from doing so. And then how much do you have left, I assume you have an open authorization store?

Monty J. Bennett

I think it’s 48 hours after earnings release of our black out period and then we’re able to, 48 hours and then we’re able to do it. And we do have moneys left on our authorization, that exact amount, we don’t have on hand right now.

C. Patrick Scholes – FBR Capital Markets & Co.

Okay. Thank you.

Operator

And at this time I'm showing now further questions in my queue. I would like to turn the conference back over to management for closing comments.

Monty J. Bennett

Thank you for your participation on today's conference call. And remember to see the afternoon of Monday, November 14 for Ashford’s Dallas NAREIT property tour. Thank you, we look forward to speaking with you again on our next call.

Operator

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to a replay of today’s conference you may do so by dialing 1-800-406-7325 or 303-590-3030 and entering the access code of 4456769#. We thank you for your participation and at this time you many now disconnect.

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