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Ashford Hospitality Trust, Inc. (NYSE:AHT)

Q4 2011 Earnings Call

February 23, 2012 11:00 am ET

Executives

Scott Eckstein - IR

Monty Bennett - CEO

Douglas Kessler - President

David Kimichik - CFO

Analysts

David Loeb - Robert W. Baird

Patrick Scholes - FBR Capital Markets

Robin Farley - UBS

Smedes Rose - Keefe Bruyette & Woods

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Ashford Hospitality Trust Fourth Quarter Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, February 23rd, 2012.

I would now like to turn the conference over to Scott Eckstein with Financial Relations Board. 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 fourth quarter of 2011.

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 of the accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon in the press release that has been 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 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 or schedules, which have been filed on Form 8-K with the SEC on February 22, 2012, and may also be accessed through the company’s website at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release.

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

Monty Bennett

Thank you, and good morning. I’m pleased to report on our record setting performance. Our AFFO per share of $0.42 was our strongest fourth quarter in our history and our eighth consecutive quarterly AFFO per share increase.

For the full year, AFFO per share of $1.86 was also our highest ever reported and reflects 24% growth over last year. The 2011 AFFO marks seven out of eight years of record AFFO per share performance and demonstrates that our strategies to maximize returns while mitigating risks continued to create shareholder value.

Given our record performance and forecast, in December we increase Ashford’s 2012 dividend guidance by 10%. We expect to distribute a quarterly cash dividend of $0.11 per common share or $0.44 per common share on an annualized basis. Since our last conference call in November, the U.S. economy has continued to show resiliency despite persisting global market concerns.

U.S. hotel demand continues to increase with RevPAR growth well above historical average growth rates. Meanwhile, new room supply remains extremely low for the foreseeable future. Clearly, the fundamentals exist for continued improvement in the performance of the lodging REIT.

Even in moderate U.S. economic growth should result in higher than average RevPAR growth. The recent forecasts from PTF suggest national RevPAR growth for the next couple of years to be 6.1% to 7.3%. These levels are well above the industry’s 1988 to 2010 average RevPAR growth of 2.5%.

On historical basis real RevPAR still remains far below prior peak cycle levels. Given that with each recent cycle, the new real RevPAR peak exceeded the prior peak and it’s expected that the same could occur in this cycle. Since the hotel industry is still in the early stage of this recovery, it remains very good time to invest in lodging REITs.

In particular, we certainly believe that our combined strategic benefits of financial leverage and solid operational performance should position us to outperform our peers over the long run in terms of total shareholder return.

We are pleased with the EBITDA flows of 55% margin improvement of 143 basis points for our legacy portfolio. While the total U.S. hotel market RevPAR grew at 7.9% in the fourth quarter, our legacy portfolio RevPAR grew at 5.4%. The reason for this discrepancy lay in the fact that our MSAs modestly underperformed the national average with 7.2% growth but these particular MSAs are upper upscale comp sets further underperformed. Our assets RevPAR growth matched that of our comp sets though.

Similarly, in the Highland portfolio, we are very pleased with our EBITDA flows of 97% and margin improvement of 114 basis points. Nationwide airport and urban locations underperformed, which is where the Highland assets are concentrated, and accounts for most of the difference in performance.

We do not see this underperformance as a long-term trend. There was also a modest impact due to innovations.

Lastly, the conversion of the Hilton Boston Back Bay and the Hyatt Wind Watch from brand managed assets to franchises had a temporary impact. While these changes created a short-term revenue disruption during the fourth quarter, this management shift as part of the continuing integration of the Highland portfolio. We expect these nearly franchise hotels to generate long-term value creation to enhance revenue realization and additional cost savings.

We believe there is also the added property value created through lower cap rates by having hotels that are unencumbered by long-term brand management contracts that are also terminable upon sale.

Just closing the Highland portfolio acquisition in March 2011, the portfolio has achieved trailing 12 months increases of 8.7% in EBITDA and 10% in NOI. To-date, we are fine with our original underwriting performance for the investment and anticipate that the operational changes and capital expenditures will continue to drive performance. We expect both the revenue and EBITDA performance of the Highland investment to demonstrate continued improvement, as the hotels and the portfolio benefit from Ashford’s proactive asset management practices. We still have work to do to optimize all the value-added opportunities we see from this portfolio, but we are pleased with our progress so far.

Looking ahead, we expect U.S. economic conditions to improve gradually. However, we may seen a very watchful eye on sovereign financial and other event risks. The markets are still responding to global headlines that appear to be decoupled from the strong U.S. lodging fundamentals. The risk on and risk off market titrations are creating volatility. Assuming the ongoing global uncertainties, we believe it’s prudent for Ashford’s to take a very measured approaches to our capital utilization. We should expect this to pursue strategies, seek to balance risk mitigation, and shareholder return maximization.

With that, I’ll now like to turn to call over David Kimichik to review our financial results.

David Kimichik

Thanks Monty. For the fourth quarter, we reported a net loss to common shareholders of $18,332,000, adjusted EBITDA of $71,010,000, and AFFO of $34,930,000 or $0.42 per diluted share.

At quarter’s end, Ashford had total asset of $3.6 billion in continuing operation, and $4.6 billion overall including the Highland portfolio, which is not consolidated. We had $2.4 billion of mortgage debt in continuing operations and $3.2 billion overall including Highland. Our total combined debt has a blended average interest rate of 3.4%, clearly one of the lowest among our peers, with maturing at some of our swap positions, we currently have 52% fixed rate debt, and 38% floating rate. The weighted average maturity is 4.1 years.

Since the length of the swaps is not matched with term of the underlying fixed rate debt, for GAAP purposes the swap is not considered an effective hedge. The result of this is that 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, will be added back for purposes of calculating our AFFO. For the fourth quarter, it was a loss of $17.5 million and for the year it was a loss of $70.3 million.

During the quarter, we converted our 89% interest in a triple-net lease, at the Courtyard in Philadelphia to a 100% ownership position in our long-term management contract. At closed end, our legacy portfolio consists of 96 hotels in continuing operations, containing 20,395 rooms. Additionally we own 71.74% of the 28 Highland hotels, containing 5,800 net rooms in a joint venture. All combined, we currently own a total of 26,195 net rooms.

As of quarter end, we are in a position in just one performing mezzanine loan, the Ritz-Carlton in Key Biscayne, Florida with an outstanding balance of $4 million. Hotel operating profit for all hotels, including Highland, was up by $7.8 million or 9.9% for the quarter.

Our quarter-end adjusted EBITDA fixed charge ratio for our credit facility now stands at 1.70 times versus a required minimum of 1.35 times. Our share count currently stands at 84.3 million fully diluted shares outstanding, which is comprised of 68 million common shares and 16.3 million OP units.

I’d like to turn over the call to Douglas to discuss our capital market strategies.

Douglas Kessler

Thank you, and good morning. We remain cautiously optimistic about the near-term U.S. lodging performance, but there is still risks with the general economy and abroad.

We are closely monitoring trends and drawing comparisons to the outcomes from similar historical events to assist in our strategic decision-making. Therefore, we’re moving forward on parallel paths, taking steps to ensure that we have sufficient capital and liquidity to be prepared for economic uncertainties or simultaneously positioning the company to have the resources to deploy capital strategically for opportunistic investments that arise.

In October, we priced a public offering of 1.3 million shares of our existing 9% Series E cumulative preferred stock at $23.47 per share including accrued dividend. This generated net proceeds of $28.9 million after underwriting fees.

Also, subsequent to the end of the quarter, we upsized our currently undrawn credit facility to $145 million borrowing base for our pre-existing accordion feature. As part of this modification, we also added the option to further expand the facility to an aggregate size of $225 million. There were no other changes to the terms of the loan. In the process, we added Deutsche Bank to our lending group, which already consists of KeyBanc, Credit Suisse, Morgan Stanley, and UBS.

We believe that having this added access to capital is worthwhile, whether for defensive or investment growth purposes. All other Company debt is non-recourse.

Turning to risk mitigation. In December, we successfully restructured our $203.4 million mortgage loan and extended the maturity date from December 2011 to March 2014 with an additional one-year extension option subject to certain conditions. We paid down the loan by $25 million to $178.4 million. Additionally 85% of the excess cash flow after debt service working capital and approved capital expenditures will be used to pay down the debt balance and thereby further deleverage the portfolio.

In 2012, we only have one non-extendable maturity in May, on $167 million dollar loan balance. We are in discussion with lenders to restructure or refinance this loan. We believe that with market conditions improving and the available loan allocations for the start of the year that we will be able to obtain a new or restructured loan on this portfolio.

Well that will rightly require some debt paydown, we believe we have adequate reserves. We will provide updates as available, but typically we would not expect to sharing specific news, until we get closer to the maturity date. Regarding transactions, we’re beginning to see opportunities that meet out investment return criteria. Our financial resources will position us to selectively purse accretive investment opportunities that may arise. Our clear goal of maximizing shareholders returns remains in line with our investors given our high insight of ownership of approximately 19%.

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

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question-and-answer session (Operator Instructions) And our first question is from the line of David Loeb with Robert W. Baird. Please go ahead.

David Loeb - Robert W. Baird

I’ve two. Doug, first kind of a housekeeping. Notes receivable went up just over $8 million this quarter. What was that? What accounted for that increase?

David Kimichik

This is Kimo, I’ll answer that. In the quarter we converted our triple-net lease at the Courtyard Philadelphia to 100% ownership position. And in conjunction with that, Marriott had a tip note receivable that they assigned to us, raised by $1 million and so that’s the -- that accounts for that.

David Loeb - Robert W. Baird

Great. So it’s really just that tip-note nothing no other investment?

David Kimichik

No.

David Loeb - Robert W. Baird

Okay. And Monty just a follow-up on your comments about the Highland portfolio, how much long do you think that disruption goes on, specifically in Boston and on Highland are those hotels now kind of running at a normal rate or is there longer and are there other hotels you expect there would be some disruption aside from the renovation work as the year progresses?

Monty Bennett

Well, we’ve got a disruption potential due or let me backup kind of give a whole Highland story. In the second quarter of this year, which is our first quarter of ownership, we had some RevPAR drops compared to our competitive sets. And a lot of that was due or most of it was due to the change in management, we changed management of 17 hotels.

In the third quarter, we made up much of that difference and same in the fourth quarter. So as far as the RevPAR performance due to that issue hotels are matching their competitive sets. In the fourth quarter, we had some, a little bit of disruption from CapEx not much. But in the first quarter of the coming year, we will have more disruption from CapEx because a number of our renovations that were going to occur in the fourth quarter got pushed out for a number of reasons into the first quarter. So we got more properties in where things going on in the first going quarter than we had originally planned.

As far as that management that changed, those occurred in late November and early December for those two properties, that’s a little bit of disruption. You’re going to see some disruption in those assets for at lest another quarter. We will see if we get it all settled down by the second quarter. Sometimes when you go to these properties and you find the business on the books is not real business on the books, as these management teams that were in place before we got their, knew for sometime that there is a good change but they weren’t going to stay. And so, funky things happened.

So, but I think, you’ll see a disruption in the first quarter and hope that that will be the end of it for those two properties.

David Loeb - Robert W. Baird

Okay. So it sounds like the portfolio overall legacy in Highland, once you get past the first quarter you’re -- you have a smother run rate for potential for growth starting in second quarter is that, am I reading you right on that?

Monty Bennett

The legacy portfolio, we’ve got some more CapEx, a certain CapEx that’s the truth, that’s the case. We will see how CapEx turns out for the Highland portfolio and whether its pushed into the second quarter and whether we can get certainly disruptive or not.

David Loeb - Robert W. Baird

Great. Okay, thank you.

Operator

Thank you. Our next question is from the line of Patrick Scholes with FBR Capital Market. Please go ahead.

Patrick Scholes - FBR Capital Markets

Just a couple of questions on the RevPAR results in the most recent quarter. I wonder if you could give a little more color on the 177 basis point margin increase for the Highland portfolio now under renovation. It seemed very impressive on 3.3% of RevPAR growth. Is it fair to assume a lot of that margin increase was from head count reduction?

Monty Bennett

It was. When we changed the management at a number of these properties, there was a good amount of head count reduction. Also our asset management team working with the brand managed assets, put in place some head count reductions. And you’ve seen very strong flows in Highland portfolio since we took over the portfolio in March of this past year. And so that’s what’s happening and that’s why we’re very happy with those results. We just are looking forward to when our RevPAR results will pickup for those flows mean even more margin improvement.

Patrick Scholes - FBR Capital Markets

Okay, good. And then two more color -- two more questions here. One thing that struck me out in the most recent RevPAR result was your performer RevPAR for hotels and legacy portfolio was up 5.4% but the ones not under renovation only did 4.6%, is that -- it seems a more counterintuitive, is that a reflection of the markets that they’re in?

David Kimichik

That is counterintuitive but let’s explain that. Patrick, I think it’s an anomaly. Historically the Groups of properties total portfolio versus not under renovation have had about $1 to $2 RevPAR discrepancies between the two. It was just unusual that this past year we had that reversed. But I don’t think that will continue going forward.

Douglas Kessler

You know what happens sometimes is when we classify a property as under renovation, generally how we use that is there is a room renovation going on or if there is a pretty significant lobby renovation going on. And so, but sometimes with those lobby renovations, they can affect you tremendously and sometimes they don’t, and that has lot to do with what business you’ve got on the books and the transit nature of the business going on. The room’s renovation obviously affects your likes to get rooms out of service. And so that’s what happened this past quarter but that’s unusual as Kimo said.

Patrick Scholes - FBR Capital Markets

Okay, thank you. And then, excuse me, last question. When I count up the little x’s on your last pages of your releases to get the CapEx, number of properties under CapEx, it looks like for the coming fourth quarter you expected number of properties jump quite a bit from what you had predicted last quarter kind of what -- what’s going into the thinking there of why the large increase?

Monty Bennett

We at the end of this third quarter we made our announcements, we didn’t have our budgets finalized or approved for Highland, and so that’s some of the difference their. And in the interim, we’ve made decisions to up some of the CapEx and some of the assets to better position and to take advantage of them. We think there is some, potentially some great opportunity in some of these assets and instead of letting them trudge water to put more capital into them unless if it’s reflected there, but for example be it Renaissance in Nashville is one where that’s an asset where we took over the portfolio. We were concerned because it’s attached to the existing convention center, which is quite modest, and there is a nice brand new convention center being built on a street with a new omni being built.

But we’re in discussions with the city and we’re becoming more excited about the prospects of being able to takeover the existing convention center, renovating it, and renovating our hotel, and it being a great performing asset at its own kind of mini convention center hotel despite what’s going on over there. So that’s a tactile decision but right now we’re hoping we’ll be able to spend when it comes to the fourth quarter. We see if that actually happen. So there is a number of opportunities that jumped up liked that where we think it makes sense to continue to invest even more than we originally thought.

Patrick Scholes - FBR Capital Markets

Okay. And then one last question, did you provide any guidance as far as expected CapEx spend this year? I think last year was for $131 million. Any rough estimate for this year you can give?

David Kimichik

We haven’t given that but I will give it to you. For the year we plan on spending about $135 million and I’ll break that down for you. $42 million of that is our portion of the Highland properties and that’s all coming out of the reserves that were funded at closing and the reserve since then. And then the balance is coming out of our legacy portfolio and we expect to spend probably $40 million to $45 million of owner funding to supplement those CapEx plans.

Patrick Scholes - FBR Capital Markets

Okay great. I appreciate the color, thank you.

Operator

Thank you. Our next question is form the line of Robin Farley with UBS. Please go ahead.

Robin Farley - UBS

Great thanks. I wonder if you could tell us what the RevPAR change would have been at the Highland portfolio if you exclude the two properties Hilton Boston Back Bay and Hyatt Regency Windwatch. What the RevPAR would have been for the other, the rest of the Highland portfolio?

Douglas Kessler

I don’t have the specific number but let me try to give you a little more color on that. The performance of the Highland portfolio compared to the overall market was a little bit due to renovations, not much maybe 50 bits or so. And then a moderate amount due to what when on in these two assets the Hilton Boston Back Bay and Hyatt Windwatch. Hilton Boston Back Bay is our number one producing EBIDTA property and so those two combined probably accounted for another point or point-and-a-half on average and the balance just happened to be the submarkets that we were in. The overall MSA that we were in are doing fine. But the individual upper, upscale submarkets of urban and airport locations underperformed.

And usually we find, in our portfolio, we’ve got 50% of the properties kind of above the line the average is about 50% below and so it averages out. But we just had a disproportionate this quarter and we’re trying to see if there is any reason why that’s continue or if it’s just a bad roll of the dice and we can’t come up with any reason why we see it as a long-term trend. But the upper upscale segment in urban and airport across the country underperformed and that’s where we had a good amount of exposure.

Robin Farley - UBS

Okay. And so I guess, then as follow-up, have you seen that update so far here in Q1?

David Kimichik

We don’t like to give guidance going forward. So I’ll dodge that question.

Robin Farley - UBS

Okay. I’m trying where I can ask you that, well I assume what given guidance but just what you’ve seen historically kind of year-to-date in the last six or seven weeks if you’re still feeling concerned about those individual upper upscale segments you were talking about?

Monty Bennett

Maybe what I can offer is that throughout much of 2011 that held true, right the upper upscale and the airport and urban markets didn’t do as well as some of the other segments. While our legacy portfolio we had the offset by the outperformance of our upscale and mid scale assets. But in the fourth quarter those segments didn’t outperform, they kind of did average, and so that’s why pulled the whole average down. So I can give you a little color and history but again I’d like to step aside from future guidance.

Robin Farley - UBS

Okay sure. And then just also on the Highland portfolio, are there, it sounds like before you’ve changed 19 -- management of 19 of the hotels from Highland portfolio. Have you made all the management changes that need to be made at this point in the Highland portfolio?

Monty Bennett

No there maybe a couple more this year but they’ll be for select serve properties so it won’t be that significant. Sometime later in the year we think might occur.

Robin Farley - UBS

Okay. All right, great. Thank you very much.

Monty Bennett

Thank you.

Operator

(Operator Instructions) And our next question is from the line of Smedes Rose from Keefe Bruyette & Woods. Please go ahead.

Smedes Rose - Keefe Bruyette & Woods

I was just wondering on the $167 million loan coming due in May, would you expect to have to pay that down at all and is that included in your CapEx guidance, I guess?

Douglas Kessler

Smedes, hi, it’s Doug. We’ve commented in the past on paydowns in the market typically are 10% to 20% of the outstanding loan balance and I think that is a good range here and the midpoint of that seems pretty realistic. We’ve demonstrated in doing that in the past with the $203 million loan that we ended up restructuring.

In terms of capital for that we have sort of $25 million that has been reserved for this already. So we think that we’re in pretty good shape. There is a fair amount of investor lender interest both in discussion with the existing lenders as well as an engagement that we have with [gems] lying out there in the market right now. So we’re in dialogue with lenders regarding this and based on what we know today, we believe that we will have a good outcome on this.

Smedes Rose - Keefe Bruyette & Woods

Thanks. And I just wondering as you think about your portfolio is there -- are there potential dispositions that you might like to make this year or what is the sort of market to look like on that front?

Monty Bennett

Sure. We have two properties listed in the market currently. The Doubletree in Columbus, and the Hilton El Conquistador in Tucson. And we’re in the early stages of that. So if we obtain prices that we deem acceptable then we’ll proceed. If not then we will not sell; so more to come in our next earnings call or thereafter.

Smedes Rose - Keefe Bruyette & Woods

Okay. Thank you.

Operator

Thank you. This does conclude the question-and-answer session. I would now like to turn the call back to Monty Bennett for any closing remarks. Please go ahead, sir.

Monty Bennett

Thank you all for your participation on today’s conference call. By now many of you will have received a save the date notice for our 2012 Investor Day, which we’ll be hosting on Tuesday, May 8th in New York at the Mandarin Oriental.

If there are Institutional Investors that have an interest in attending and have not registered for this event, please contact our Investor Relations team and we’ll be happy to assist you. We look forward to seeing many of you at our Investor Day and speaking with you again on our next quarterly call.

Operator

Ladies and gentlemen, this concludes the Ashford Hospitality Trust fourth quarter conference call. You may now disconnect.

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