Ashford Hospitality Prime Inc. (NYSE:AHP)
Q2 2016 Earnings Conference Call
August 4, 2016 11:00 AM ET
Marilynn Meek - Vice President, Financial Relations Board
Montgomery Bennett - Chairman and Chief Executive Officer
Deric Eubanks - Chief Financial Officer
Jeremy Welter - Executive Vice President of Asset Management
Douglas Kessler - President
Ryan Meliker - Canaccord Genuity
Dany Asad - Bank of America Merrill Lynch
Bryan Maher - FBR & Co
Good day and welcome everyone to the Ashford Hospitality Prime second quarter 2016 conference call. Today's conference is being recorded.
At this time I would now like to turn the conference over to Marilynn Meek. Please go ahead.
Thanks. Good day, everyone, and welcome to today's conference call to review results for Ashford Hospitality Prime for the second quarter of 2016 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 notice of the accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon in a 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 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 company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them.
In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on Aug 3, 2016, and may also be accessed through the company's Web site at www.ahpreit.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.
Good morning and thank you for joining us. Let me begin today's call by saying that as you all are probably aware, recently Ashford Prime received a revised offer from The Weisman Group to acquire the Company for a net share price of $20.58. We believe that Weisman raised its bid as a direct consequence of the Company's earlier announcement that its initial bid was not adequate. The Ashford Prime Board has concluded that a sale of the Company at this level would be a great result for the shareholders and would like to pursue a transaction at that level or higher. Upon receiving the first offer from the Weisman group, the Board had instructed its financial advisor, Deutsche Bank, to reach out to other potential bidders and as part of the process, a data room is up and open, and we have signed non-disclosure agreements with other unrelated groups.
I'd like to point out that during our recent review of strategic alternatives, we received indications of interest from several groups, but not signed NDAs or set up a data room, as those indications were not at a level where the Board was interested in moving forward on a sale of the Company. This time is different. At a net price of $20.58 per share or higher, the Board finds that value attractive to shareholders and we asked our financial advisor to re-engage with prospective buyers. We are focused on this $20.58 net share price, because the Weisman Group had indicated that while their gross price is higher, they believe they can satisfy Ashford Inc. with a $70 million termination fee.
Our discussions with the independent directors of Ashford Inc. have indicated otherwise, but we will take them up on their offer to address that matter directly with Ashford Inc.’s independents. Ashford Prime will just focus on the $20.58 net price and seek to improve it. We are concerned however that the Weisman Group still refuses to sign a standard non-disclosure agreement with either Ashford Prime or Ashford Inc. Other well-known and well-capitalized suitors have signed NDAs with both parties weeks ago. This clearly shows that press reports about our NDA being too onerous or one-sided are patently false and appear to be attempts to denigrate our process for unknown reasons.
In our experience, when groups are highly interested in completing a transaction, they want to move quickly through the NDA process to get access to non-public information since receiving a financing commitment is typically unachievable otherwise, and that has not been the case with the Weisman Group. The Weisman Group has also incorrectly asserted that the termination fee on our advisory agreement is only calculated on the remaining 7.5 years of initial term of the contract, but didn't take into account that at the end of the term the termination fee would still be owed. Despite these concerns, the Company is willing to engage with the Weisman Group once an NDA is signed, and will continue to discuss a transaction with other potential bidders. In fact, we have instructed our counsel to complete a merger agreement and be ready to distribute it to potential buyers, including the Weisman Group, at the appropriate time.
On the topic of a potential transaction, I'd like to add that at this time, the Board of Ashford Inc. has not expressed any interest in buying Ashford Prime. It is also my understanding that the Board of Ashford Inc. would not have an interest in keeping its advisory agreement with Prime in place upon a privatization of Prime and would instead exercise its right to terminate the agreement upon a change of control transaction. Any ultimate decision by Ashford Inc. on the advisory agreement would be decided upon by a special committee of Ashford Inc., which has been formed, is comprised of independent directors, and has retained counsel for a potential transaction.
Given our active process for a possible sale of the entire Company, the Board is working to harmonize the sale of the other three hotels currently listed for sale that were mentioned at the conclusion of our strategic alternatives review with the larger dialogue for a sale of the Company. Throughout this process, we also will continue to manage the business for long-term shareholder value creation, whether that includes a sale today, or a long-term hold. At the net price proposed in the Weisman bid, we think a sale today is warranted.
Now back to the quarterly results. Prime RevPARs grew 1.6% for the quarter, and we were able to achieve Hotel EBITDA margin gains of 71 basis points and Hotel EBITDA flow-through of 125%. This margin improvement and flow-through on 1.6% RevPAR growth is a great result and helps drive 13% increase in adjusted EBITDA for the quarter. Our two most recent acquisitions, the Bardessono Hotel in Napa Valley and the Ritz-Carlton St. Thomas, continue to produce solid bottom-line operating performance.
Our management team's sole focus is to maximize shareholder value and deliver superior total shareholder return for our investors. With our industry-leading insider ownership, which currently stands at 17% versus a peer average of 2%, we are highly incentivized to outperform and highly aligned with our shareholders. We also have an advisory agreement with Ashford Inc. that creates further alignment through its fee structure by incentivizing this management team to create value and outperform its peers. I believe these factors create a structure that makes us more aligned than most internally managed companies, and our outperformance in 2015 and more recently in 2016 is evidence of that.
This focus on maximizing shareholder value is what led us to undergo a strategic review process that culminated in April when we announced a list of initiatives designed to enhance value for our shareholders. To date, we are making meaningful progress on these initiatives. In early July, we closed on the sale of the Courtyard Seattle at a very attractive valuation for our shareholders. We have liquidated our investment in the investment fund, and since the announcement of the $50 million share repurchase program, we have repurchased approximately 2.9 million shares for an aggregate value of $39 million. This represents approximately 10% of our outstanding common stock prior to the recent initiation of the repurchase program. We also increased the quarterly common dividend by 20%.
While we have been pleased with the progress we are making on our strategic initiatives, we are also announcing that we are moving forward on several governance enhancements based upon direct feedback from you, our investors, and Institutional Shareholder Services. The governance committee and Board in consultation with MacKenzie Partners, ISS Corporate Solutions, and outside counsel, have approved several shareholder friendly policies included but not limited to the following. One, adopting a majority voting standard for the election of directors; two, providing proxy access to shareholders; three, prohibiting share recycling in the Company's stock plan; four, adopting mandatory equity award retention periods for officers and directors; and five, separating the role of Chairman and CEO.
The Board will continue to work on other changes to our advisory agreement with Ashford Inc. that involve some of the main concerns we have heard from shareholders including the size of the termination fee, change of control provisions, and the designated CEO. However, no assurances can be given that progress will be made on these fronts. Through these discussions, the Board will have to balance any potential benefits to our shareholders with the potential costs and shareholders must know that Ashford Inc., in its mind, must receive as much as it gets for these concessions.
I will now turn the call over to Deric to review our second quarter financial performance.
Thanks, Monty. For the second quarter of 2016 Prime reported AFFO per diluted share of $0.60 compared with $0.62 a year ago. Adjusted EBITDA totaled $33 million reflecting a 13% growth rate over the prior year.
At quarter's end, Prime had total assets of $1.3 billion. It had $836 million of mortgage debt, of which $49 million related to its joint venture partner's share of the debt on the Capital Hilton and Hilton La Jolla Torrey Pines.
Prime's total combined debt had a blended average interest rate of 4.7% and is currently 49% fixed rate and 51% floating rate, all of which have interest rate caps in place. Prime ended the quarter with net working capital of $144 million.
As of June 30, 2016, the Prime portfolio consisted of 12 hotels with 3,717 net rooms. Prime's share count currently stands at 30.4 million fully diluted shares outstanding, which is comprised of 25.6 million shares of common stock and 4.8 million OP units. In Prime's financial results we include approximately 3.8 million shares in our fully diluted share count associated with our Series B convertible preferred stock.
With regard to dividends, the Board of Directors declared a second quarter 2016 cash dividend of $0.12 per share or $0.48 per share on an annualized basis. The adoption of a dividend policy does not commit the Company to declare future dividends. The Board will continue to review its dividend policy on a quarter-to-quarter basis.
This concludes our financial review. I'd now like to turn it over to Jeremy, to discuss our asset management activities for the quarter.
Thank you, Deric. As Monty mentioned, RevPAR for our portfolio grew by 1.6% in the second quarter with the Renaissance Tampa growing RevPAR by 13.5% while the Seattle Marriott Waterfront grew RevPAR by 7.1%, which outperformed the Seattle market by 510 basis points.
EBITDA flow-through for the quarter was an impressive 125% with EBITDA margin growth of 71 basis points. Total portfolio occupancies for both the group and business transient segments increased during the second quarter, a positive indicator for our markets.
I would like to highlight the exceptional performance our asset management team has done at a couple of our hotels. First, at the Ritz Carlton St. Thomas, shortly after we closed on the acquisition in December 2015, reports of the Zika virus in the Caribbean began to attract headlines and, on January 15, the CEC issued a travel alert for parts of the Caribbean that included the U.S. Virgin Islands.
Our team responded quickly and proactively to mitigate the risks associated with this and despite RevPAR being down for both the first and second quarters, the property experienced EBITDA and market share growth during those periods. Specifically, while RevPAR was down 6.3% in the second quarter, EBITDA was up 14.3% and EBITDA margin grew 280 basis points. In addition, the property outperformed its competitive set in RevPAR growth by 750 basis points. This is a good example of how our asset management team can work alongside brand-managed hotels to enhance operational results.
Next, at the Bardessono Hotel in Yountville, California, which Prime acquired in the third quarter of 2015 and which our affiliated property manager, Remington, manages, we drove strong performance in the second quarter due to a number of value-add asset management initiatives. First, during the quarter, RevPAR for the Bardessono grew 8.1% due to improved revenue management that enabled increases in transient room nights, occupancy, and rate. The resulting higher ratio of room revenue to total revenue led to greater profitability.
Second, EBITDA flow-through was 308% as a result of the collaborative effort by both Ashford and Remington on identifying and implementing targeted cost reductions at the property. The benefits of this collaboration with Remington were further evidenced by achieving EBITDA flow-through during the second quarter of 335% at the Pier House Resort. In fact, in total, the Remington-managed portion of the Prime portfolio achieved 314% EBITDA flow-through for the quarter and 550% EBITDA flow-through year-to-date.
At the corporate level, our team is also focused on finding ways to reduce our costs of doing business. For example, we recently renewed our property insurance policy and reduced our property insurance premiums, on a comparable basis, by 11% compared to the previous policy year, which contributed to a cumulative decrease of over 30% for the last 3 years. This is an excellent example of the tangible benefits for our structure and being part of the larger Ashford group of companies. Also, during the second quarter, our team was successful in reducing property tax assessments at both the Sofitel Chicago and Capital Hilton creating tax savings of approximately $500,000.
I will now turn the call over to Douglas.
Thank you, Jeremy. As Monty mentioned, as part of the initiatives that resulted from our strategic review process, we announced in April that we were commencing a sales process for up to four assets that do not have the RevPAR level and product quality consistent with Prime's long-term vision of investing in luxury assets in gateway and resort markets.
We quickly had the Courtyard Downtown Seattle under contract to sell at a very attractive valuation and on July 1 we completed that sale. We realized approximately $15 million in net proceeds from the sale and after the pay down of additional debt to reduce the loan balance on the remaining loan pool.
The removal of this hotel, with a trailing 12-month RevPAR of $157, from the overall portfolio, which had a trailing 12-month RevPAR of $200, will increase the average RevPAR of the remaining portfolio. Additionally, the transaction will improve the Company's leverage ratio.
As Monty also mentioned, we are focused on harmonizing the potential sale of the other three hotels that we have listed for sale with the potential sale of the entire portfolio to ensure that we are maximizing value for our shareholders.
Lastly, during the quarter we also completed small public offering of the Series B Convertible Preferred Stock, which was part of our prior obligation related to the initial private placement that occurred back in June of 2015.
That concludes our prepared remarks and we will now open it up for your questions.
[Operator Instructions] Our first question comes from Ryan Meliker with Canaccord.
Hey, Good morning guys. Thanks for taking my question and Monty, really appreciate all the color on the Weisman process. I think it was really helpful and obviously, the stock's reaction during the call is indicative of that. A couple questions I had on it. First of all, I guess if the process that you've reopened doesn't lead to any higher bids, my understanding is that Weisman has made a formal offer and you could accept it regardless of them signing an NDA. Is there any reason why you wouldn't move forward with that, given that you've determined the net pricing is acceptable?
Right now, we are in the process of trying to get them to sign the NDA. There's a number of reasons for that, which I'm sure you're aware of, Ryan, and it's curious to us why someone wouldn't sign an NDA. So at this point in time, we're just focused on getting that NDA signed by them.
But I guess the question I would have is why - I mean help us understand why you feel like an NDA needs to be signed when they've already made a formal offer.
There's all kinds of reasons why you'd want an NDA signed and that's you don't want the negotiations that goes on during a negotiation merger agreement to be made public during that, which can lead to stock manipulation. You also want to make sure that nothing else leaks out to some of the different media sources that are there. We also want to make sure that we are dealing with a buyer that can close on a deal and without an NDA signed, in our experience, and I said this in the script, a financing source will not give a commitment. So there's all kinds of reasons to get that NDA signed.
Got you, so if you and Weisman can't come to terms on an NDA, because obviously it seems like there's been a decent amount of back and forth on that, you guys would be unlikely to accept the offer even though you deem the offer at the appropriate level; is that a fair assessment?
We'd just have to take it back to the Board and the Board and the Board would have to make that call, and that hasn't been presented to the Board because the NDA is standard. Other groups have signed it. Other well-known household name type of groups that you would recognize, negotiated or very, very slightly negotiated, and they were signed weeks ago. So I think the Board would have to assess as to why that wouldn't be signed and would have to think about all the risks and the potential liability in not signing, and try to understand the motivation of why a group wouldn't sign an NDA in assessing what to do going forward.
Okay. That makes sense. And then I guess the second question I had with regards to this. You had mentioned in your prepared remarks that AINC would not be interested in continuing to externally advise Ashford Prime if it were taken private. I guess the question I would have is you guys and Monty, you've been a pretty strong advocate of external management not being a value destroyer. Help us understand how if they wouldn't operate if the Company is private, doesn't that destroy value by the value of the termination fee on sale just by being externally advised in that regard?
There is a termination fee on sale and on sale they - externally managed platform, page one dollar [ph] in the termination fee that's value that an internally managed platform wouldn't have to pay. But on an ongoing basis, in all the analysis that we have done, there is no indication whatsoever that there's a discount applied to externally managed platforms merely for being externally managed or regardless of what that termination fee had. And we've looked at all the RMR platforms and quite a few others.
Okay. So your view is more that the external management structure doesn't destroy value or doesn't limit value on an ongoing basis, not necessarily on a go private transaction. Is that a fair summary?
If there's a termination fee paid or if there's other fixed costs paid, then that would impact the value at that point in time.
Okay. That's helpful and I think that makes sense and we don't necessarily disagree with it. And then I guess just one last thing with regards to that. If private market value needs to be hindered by the termination fee as you've just kind of highlighted, why did you guys put out your - I don't want to call them MABS [ph], but estimated private market values for AHT and AHP last summer? Was it just so that investors could understand what the value is - pre-termination fee for a go private type transaction?
Yes, we had received a number of inquiries from investors about what we thought those assets might be worth just as is, not on a sale transaction, but in their earnings generation capacity. And so I think that we have, if I recall, we didn't say this is what we think its worth. I think we said something like -
At a market cap rate, right.
Yes, at a market cap rate of, say, 6.5% if you think these assets are worth that, this is what it would trade at. So it was in response to investor questions.
Okay. That's helpful. And then one last question I had was with regards to the quarter. Other G&A was really elevated in the quarter. I think it came around $9.6 million versus the 1Q a year ago of under $1 million. Can you just give us some color on what that was? Was that legal fees associated with everything that's been going on between ASESA and Weisman, et cetera? Or was there something else in there?
No, it's mainly legal fees, PR fees, proxy cost fees, et cetera related to all this drama that's been going on. We do think that we have an opportunity to collect some of that for our insurance carrier and we haven't reflected that yet and won't unless and until we can recover it. And also, we think that we can have a chance to recover it from ASESA and that the judge found in his rulings that they did not follow not only our nominating procedure, but proxy rules relating to disclosure of the intent of directors nominated. And because of that, we think we've got merit in recovering a good portion of those. But that is a process that will take quite some time to litigate out unless there's [indiscernible].
Okay. That's helpful. I guess as we think about that going forward then, is it realistic to assume that maybe 3Q's other G&A is going to be similar to 2Q and then it will taper off thereafter if they know there's obviously been more stuff going on in the third quarter as well or do you - was 2Q really the bulk of that expense?
Right now, we see 2Q as the bulk of the expense and we hope it to taper off going forward.
Okay, great. That's it for me. Thanks.
Moving on, our next question comes from Shaun Kelly of Bank of America.
Hi, guys. This is Dany Asad on for Shaun, just a couple of questions from me. I was looking at your second quarter performance and it looks like the Seattle Courtyard [ph] had a pretty solid RevPAR growth for the quarter and since the sale of the asset closed afterwards, would you be able to give us like a RevPAR for the portfolio with RevPAR growth but ex-the Seattle downtown property?
Hey, Dany. It's Deric. We don't have that number handy. I don't believe it impacted the overall portfolio RevPAR that significantly even though that one asset was up pretty strong. It's a relatively small asset in the portfolio.
Got it, okay. And then just touching back a little bit on your comment around Zika and the St. Thomas Ritz, it was pretty impressive EBITDA growth despite the RevPAR decline. But I was wondering if you could give us a bit more color around the specifics of what you've done to drive that margin growth, and maybe how sustainable are those initiatives if the softness persists for a few more quarters?
This is Jeremy. This is standard for us when we take over an asset. We put it in our best in practice cost cut. We were prepared prior to taking over the asset just on a steady state basis. I was personally involved with the underwriting on this hotel, so we were ready to implement cost cuts and then Zika hit and it made it a lot easier to work with the Ritz team on what those are. But it's just it's the standard stuff that we kind of go through in our investor day in terms of just efficiencies that we do on the labor side and the PARs, and consolidating some of the functionality between the property and how they operate. So we get rid of some of the redundancies. And we're able to do that very quickly in this case.
Got you and then touching on one more market and then I'm done. For Chicago, it looks like the setup for the back half of the year is a little bit better given the citywide. Is this a view that you share with some of the other peers or basically, would you be able to give us an outlook for the rest of the year for Chicago.
I think the second half is going to be better than the first half. We don't really give guidance, but I would anticipate it would be stronger than what we've had in the first half hopefully. It's just, I'll tell you one thing is that as we look at 30 day, 60 day, and 90 day forecasts there's just a little bit more volatility than what we've seen historically in terms of the outlook.
Got it, all right. Thank you, that's it for me.
[Operator Instructions] Our next question comes from Bryan Maher of FBR and Company.
Good morning guys, and Monty, thanks for the update on the Weisman situation. Ryan got a lot of my questions on that, but I just want to be clear. When you guys say you're harmonizing the sale of the other three assets, is that to mean that you are kind of taking them off the market for now pending an outcome with Prime as a sale as a whole? And if that does not happen, you'd put those three properties back out on the market?
We have not taken the assets off the market. We just want to get the most value for our shareholders whether it's through a sale of the entire company or sale of the individual assets, and that's what we're evaluating right now.
Okay, and then to be clear on Weisman, you've not officially engaged with them because they haven't signed an NDA, but you have engaged with other parties who have signed an NDA and they are accessing the data room?
We have signed off NDAs with a few other parties and that was done several weeks ago, and the data room is open and operating. I haven't checked to see or I don't even know if I can tell whether they have jumped in or how much they've done. But that is there and that's not been the case with the Weisman Group.
Okay. And then lastly on operations, the kind of one saving grace for lodging in this second quarter has been the continued commentary related to group business remaining robust, but a number of your bigger group houses had some pretty tough year-over-year comps in the second quarter. And thus, RevPAR probably wasn't where we wanted to see it. How is that stacking up for you guys in the back half of this year?
We don't really give guidance. I can tell you that - comment specifically on the second quarter for you for Prime. Our group RevPAR was actually up 5.7%. So we had a good - a decent group quarter, but we did have a handful of hotels, Plano, Torrey Pines, and Courtyard Philly that had some very tough group comparables and their group was down quite a bit. But overall, the group picture of Prime is not really an issue for us.
Okay. Would you characterize it though as, as healthy as what we're hearing from some of the other group houses?
I think the group environment is healthy.
Okay. Thank you.
And we have no further questions at this time. I'd like to turn the conference back over to our presenters for any additional or closing remarks.
Thank you, everyone, for joining us on the call today and we will look forward to talking with you on our next call.
That does conclude today's conference. We thank you all for your participation. You may now disconnect.
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