Ashford Hospitality Trust's CEO Hosts Analyst/Investor Day (Transcript)

May. 9.12 | About: Ashford Hospitality (AHT)

Ashford Hospitality Trust, Inc. (NYSE:AHT)

Analyst/Investor Day Call

May 08, 2012 09:00 am ET


Rob Hayes - SVP – Corp. Finance & Strategy

Monty Bennett - CEO

Dave Kimichik - CFO & Treasurer

Douglas Kessler - President


Rob Hayes

Hi good morning everybody and welcome to Ashford Hospitality Trust 2012 Analyst Investor Day. My name is Rob Hays, I am Senior Vice President of Corporate Finance & Strategy. I oversee the overall company strategy working with Monty Bennett, our CEO. I also oversee our Investor Relations department. I also want to welcome those who are watching us via the web. The Investor Day will be recorded and will be available over the next year on our website Before I begin I would like to tell you these slides are Safe Harbor slides we put this in all of our presentations. Certain statements made during this presentation could be considered forward-looking statements. And these statements are subject to both known and unknown risks which should cause actual results to differ from those anticipated and I would also like to remind you that historical results are not necessarily indicative of future results and I would also like to note that certain non-GAAP measures will be used in this presentation such as EBITDA, FFO, AFFO reconciliations of which are provided in prior earnings releases and filings with the SEC and this overview is for informational purposes only and not an offer to sell, or solicit any securities affiliated with Ashford Hospitality Trust.

With us today, the management attending is Monty Bennett, our Chief Executive Officer; Douglas Kessler our President; David Brooks, our Chief Operating Officer and General Counsel; David Kimichik our Chief Financial Officer; Jeremy Welter, our Executive Vice President of Asset Management; myself and Deric Eubanks, who is Senior Vice President of Finance. Also I'd like to note that we have two additional members, [Taylor Montessy] who we met at the check in table, she is Monty’s executive Assistant and Andrea Welch who spearheads our Investor Relations department and hopefully you will have a chance to meet her. If not, please introduce yourself, she really is kind of the force behind our investors relations group.

To our timeline today I will walk you through briefly. Following me will be Monty who will be giving a 45 minute overview of the overall US economy, our state of the industry and a company overview. Following him, David Kimichik will give a capital structure and balance sheet overview and summary. And following that we will take a ten minute break to allow you all to catch up on your e-mails, grab a cup of coffee. We also have the ability to, we have some available slots still far one on ones. If you would like to meet with management either this afternoon or tomorrow, we will also be around. So you can see Taylor or Andrea to set those up. In addition during the coffee break as you hopefully saw when you came in we will be having a photo montage, screens of some of the assets that Ashford owns.

Following the coffee break, Douglas Kessler, our President will be giving a little bit perspective on leverage. We get some commentary and questions a lot about how does Ashford view its leverage and because we do tend to be little bit different way than our peers and we are going to kind of walk you through a little bit of how we approach it and why and give you some insight to how we think.

Following that Monty will give an update our Highland Hospitality acquisition and then kind of the next steps for Ashford and that will take us to 11 o'clock. Following that there will be a 30-minute question and answer session all this will be up here. At that time we will have Taylor and Andrea will have handheld mics, we ask that you do ask questions into the mics since this is been recorded and following that we’ll have an optional lunch with management. We also do have a gift for you all, we have a nice bottle of Silver Oak with the Ashford emblem, logo on it and it is under the $100 limit, so a retail value of $99.99.

So we will have those available and they will in the lunch room following the presentations for you to pick up. So now I will introduced Monty. Monty is our Chief Executive Officer, he’s a Founder and Director of Ashford which went public in August of 2003. Monty is a member of the American Hotel and Lodging Association's Real Estate Finance Advisory Counsel IREFAC. He's a member of the Urban Land Institutes Hotel Council, Marriott International's Owner Advisory Council and is a frequent speaker and panelist for various hotel development and investment conferences. Since 1997 Monty also been the Chief Executive Officer of Remington Lodging and Hospitality and its affiliates and an independent hotel management and development company also based in Dallas that has provided property project in asset management services for over 40 years.

He joined Remington in 1992 and prior to be named CEO served in various capacities in the company including Executive Vice President, Director of Information Systems, General Manager and Operations Director. Monty holds a Masters in Business Administration from Cornell's S.C. Johnson Graduate School of Management and receive a Bachelor of Science Degree with distinction from the hotel school at Cornell.

He is a life member of the Cornell Hotel Society. Ladies and gentlemen, Monty Bennett.

Monty Bennett

Thank you Rob and good morning. We have got some folks here that I have known for a decade or more and that are very involved in the hotel industry and very knowledgeable about it. We also have some investors here that I haven’t met and are very new to the industry. So we will try to strike a balance between some very hotel specific terms but also trying to explain it and for those that are involved in the industry I hope I don’t bore with you with covering some territory you already know.

Last year when we had our first Investor Day the positive feedback we received was around the idea of not only the presentation but giving investors and analysts an idea of how we think about the world, how we think about our investments, how we think about our management and that’s what we will try to do with our presentation today as much as delivering information is to try to show you guys how we think about problems and problem solving and so that is one our purposes.

Also as I go through the presentation what I could be doing is talk about the replacement cost of our assets in the industry, valuations that have been achieved on hotel companies and past cycles and along the way I am to be doing the math of that is that if that same valuation occurred, our stock price would we X and I just wanted to mention that because you know sometimes some of them get the wrong idea and think that someone up here saying that our stock price will be X but I am just doing the math along the way and so please keep that in mind when I talk about some potential stock prices that might occur to our stock that is just. It's just extending if what happens in past cycles and the like happens this time around.

So let's get started here. Here's a few main points that I would like you to walk away from this presentation. First is that there's a still a significant upside in this lodging cycle. The lodging cycle goes through very long phases of five to seven to 10 years at a time and we are about a third of the way through this up cycle which means that there is a lot of room left in the cycle for an improvement in the fundamentals and likewise usually an increase in stock prices and valuations as well. So we think that the fundamentals for the industry are very strong and will remain strong for some time.

Our platform has a strong cover dividend. We pay about 5% plus dividend. We think that's very competitive when the highest of our peers and it is covered and we think in this environment there's more and more attention paid to so called hard assets, investing in real estate which of course this is and in assets that produce income. What's the expression SIRP, I think it's Safety Income at a Reasonable Price and we think that Ashford qualifies that and so that's an advantage in this marketplace and has great inflation hedge for those of you that are concerned about inflation and what the Fed might do with this constant easing.

We have the ability to raise prices daily. So it’s a great asset class to be in during inflationary times. We think that we have got the right capital structure for this part of the cycle. Our capital structure is about 55% debt to assets. We are very comfortable with that as a private company before we were public, we routinely ran at 70% to 75% with no problems, most of private equity funds ran much higher than that. We are higher levered than our peers in the public arena, but lower levered than almost anybody else in the industry. But we think that that level is fine. We just went through the financial crisis and came out of it as good or better than all of our peers.

I think everyone of our peers issued massive amounts of equity. We bought back half our stock. So while there's concern about leverage by some people we think our level is perfectly appropriate. In this part of the cycle we think it's great advantage because as EBITDA increases then you get the benefits of that leverage. Another point that I think is very important that we want you to walk away with and it's that all of our debt is non-recourse debt and it's in a variety of pools secured by different pockets of assets and the way to look at is to look at our portfolio as we call it portfolio A and portfolio B.

And portfolio A has about $1.4 billion of non-recourse debt in it and when you buy a share of our stock at say 9 buck where and that where is trading now, about 90% of that value is attributable to this portfolio A. It's lower levered, it's safer, it's good quality assets et cetera. Portfolio B has about $1.7 billion worth of debt on it. When you pay $9 for a share of stock about 10% of that is attributed to this value in this portfolio. All non-recourse debt and the idea is that since when you have non-recourse debt on asset, you can't have negative equity. You have the ability to just hand properties back if times go tough which we did during the great recession. We handed a couple back and you really have to look at our company with these two pools, so the first pool is safer, it's lower leveraged. It's where most of our value is.

The second pool is higher leveraged, but it is non-recourse and it has a small amount of equity value in it. So if we get into tough times we can take that portfolio be so called and push it off and get rid of it and we are lower leveraged. But right now since portfolio be as cash-flow positive, it makes all the sense in the world to hang on to it for its optionality and it has got great optionality and great upside and it has all the benefits of being higher leveraged.

So the point I am trying to make is that we have a unique situation where we had the benefits of all the upside in a higher leverage platform, but also if downside happens in the industry, we can just shove off some of these assets and still be in great shape. So it’s an optionality that I want to emphasize and I think it is important.

And lastly we are going to focus a little bit about our stock price performance over the longer term and/or asset management team and what we have been able to achieve. We have got industry-leading metrics on what our team accomplishes and we are very proud of it and we want you guys to see that and to appreciate what Jeremy Walter and his crew does because they really do just a fantastic job.

Alright. May be you have seen this chart. This is the amount of debt in our economy and our debt ran up in the 1920s and ran down and now has run back up and over the past couple of years, debt has started to come back down in our economy. Our economy is deleveraging primarily in the housing arena, the financial arena and pretty soon here it is going to have to start deleveraging in the federal debt arena. This deleveraging is a damper on growth in the entire economy. A GDP is a measure spending, it is not a measure of prosperity or productivity it’s a measure of spending and as an economy deleverages, it slows activity down, its slows down GDP and that’s what's behind the slower GDP growth that we’ve got right now.

So this is a putting a damper on potential GDP growth but if you look at the background of it you can see that’s the population continues to grow about 1% a year or so. And then if you look at long-term productivity it's been about 2% so productivity is at 2% you’ve got population growth 1%. So about 3% real GDP growth is the long-term average. But what we did for the past 40 years or so is we borrowed against future growth by running up our debt in this economy.

So our GDP prior to a couple of years ago was higher than an average of 3% because we are borrowing against future growth. The reserve is now true is that as we deleverage we are having to pay some of that debt back. So it's going to dampen our growth as a country and we’re going to be in a slow growth mode I think for as much as five years.

So you can see that the GDP here over the past number of years is averaged above this 2.8% to 3% which is productivity growth and population growth because of the debt we've run up and now it's going to have to settle back down. So what this chart also shows is it if you look in at the past the recessions that we’ve had as an industry or at least the overall economy has been Fed induced right. The Fed thinks that the economy is heating up too much, they raise interest rates to slow things down and sometimes they raise them a little too much and that’s what causes a recession or two. If you look in the past that the shocks that the economy has had very rarely push us into a recession whether it be the financial crisis of 1998, whether it be of what happened in Europe in the fall, it just doesn’t affect us as much as just a true Fed-induced recession and the reason I mentioned that is that because of the this deleveraging that's happened in our economy, our Fed chairman has pledged that he is going to do everything he can to continue to accommodate us as a nation as an economy. So the Fed is not going to raising interest rates.

So the Fed is not going to be inducing any recessions any time soon and that is not going to be pushing down on demand for our industry and I don’t think any of these external shocks are going to affect our industry very much because they haven’t in the past. The point B is that [Technical Difficulty] are going to effect our industry very much because they haven’t in the past. The point being is that while our GDP growth is not going to be fantastic it is not going to be bad either and this is a co-relation between hotel demand, demand for new hotel room nights and GDP and not surprisingly the pretty highly co-related as GDP growth so this hotel room demand and vice versa.

[Technical Difficulty] These are PKF's forecast of new supply and you can see that new supply in the industry comes in long cycles and we are getting to a strong low right here about 1.5% net new supply growth this year. So new demand is clearly outstripping supply, increasing occupancies, giving us the ability to increase rates and this is their prediction on net new supply growth over the number of five years. I personally think this is high, I think this is too aggressive because it is so much hard to get financing now. And financing not only for existing hotels but even more so to build new hotels. A lot of the markings that you have to do the rest of markings for construction loans aren't even known yet by the banks because of Basel III and Dodd-Frank. So it can be tough to get construction financing. So I think we are going to have low new supply for quite some time. So the red mark is demand. So the next number of years demand is going to significantly outstrip supply, I believe, creating a great leverage in order to raise rates.

And peak RevPAR is reversing in 2016. I think that's not going to happen, I think demand will still outstrip supply RevPAR out again because we've got a Fed that's very accommodative and while growth won't be spectacular it will still outstrip supply. So I think we've got some great running room in this industry over the next number of years. This is another chart that's interesting and this is total demand for hotel room nights in the industry and you can see that we are at an all time high and continue to grow. So the industry is healthy and growing. Over the past number of years, we just had to absorb some new supply that's coming online, that's been absorbed and I believe we've got some great times ahead of us.

So in summary, I believe we are going to be in a deleveraging low, steady demand growth environment. I think we are going to have low interest rates, thanks to the Fed for the foreseeable future within an accommodative Fed. I think the Fed is going to be unlikely to raise interest rates for quite some time. Ben Bernanke is a student of the Great Depression. That's where he did his PhD work and as he has noted many times as that he thinks the Fed made a terrible mistakes to start to be restrictive in 1937, 1938 is about not to the same thing, not to make the same mistake and I take in those words. So I think we are going to see some a long time with the low rates in this country.

And I think that we’ve got, our growth is going to be fine, GDP growth. We might turn slightly negative of a quarter or so. But I think we are going to just move right along. Even some crisis around the world in the past hadn’t affected our economy much and I think that’s going to be the case going forward as well.

Low hotel supply along with steady real demand will lead to positive real RevPAR growth for several years to come. And that plays into this chart here which is our Real RevPAR cycle. RevPAR’s revenue per available room, the key metric in our industry and you can see how that just runs up and runs down and runs up and runs down. We’ve got this data all the back to 1950. We just on this chart started with the Randy Smith’s Data and with Smith Travel because he has got it more granular. But going back to 1950s, this cycle was the same. We, as an industry, have the right in this range up and down, up and down. And you can see we are about a 40% through this cycle. We’ve got a quite a ways before we get to real RevPAR growth in the past cycles.

As an exercise, we look at the real RevPAR level of some of the past couple of cycles. We have got quite a ways before we get to real RevPAR growth the past cycles. As an exercise we look at the real RevPAR level of some of the past couple of cycles and we are still quite a ways from those peaks of around $73, $73.50. We are at $62 right now. To get to the prior peaks of $73, which we believe will happen in the next five years or so, and if you assume about 2.5% inflation per year, that’s total of 30% nominal RevPAR growth over the next five years and 17% real growth. So we think there is a lot of juice in this recovery.

That’s CAGR of about 6.2% RevPAR growth of the industry over the next five years. Coming out from a different angle, a PKF with a separate methodology has anticipated forecasted and that real RevPAR -- nominal RevPAR for the next five years will be just under 5%. And a number skewed by their 2016 number, which as I express, I think is little light, or essentially no nominal growth in 2016. So PKF is coming at 5% nominal RevPAR growth over the next five years.

Alright. Now this is interesting. If you look at flow, we’ll talk about flow our industry and we’re talking about say, 50% flow and the idea is that if (inaudible) is increased $100,000, if you get 50% flow, that mean your above one increases by your EBITDA increases by $50,000. That’s a 50% flow. So seeing how much you have, both from the ups and the down side is important. We’ve averaged a plus 50%, 55% over the past number of years. But if you assume that RevPAR CAGR over the next five years is somewhere between the 4.8% of what PKF’s forecasting versus the 6.55 or so which is what we see would be typical of another cycle. We put those peer on this chart and those are the columns but the far left is 4.5% CAGR and the far right is 6.5%. We didn’t said it all like if the flows and bringing those dollars to the bottom line, it is somewhere between 40%, which is kind of at the low end and 55% was a little bit higher end. This is the nominal increase in EBITDA for a hotel or a hotel company. So we believe that for our hotels, portfolio of hotels, EBITDA over next five years is going to increase somewhere between 39% and 80%. So say between 40% and 80% increase in EBITDA over the next five years. Our company, our industry is price offered EBITDA and EBITDA multiples and if you look at that and assume that EBITDA multiples don’t change for our industry over that period and is the same, our stock price alone will be priced between $27 and $46 based upon those EBITDA numbers. So that is a substantial difference from where we are priced today and where the industry is priced today. And so we think that there is great upside.

Looking at it in a different way is if you look at prior cycles and outright stock price performance at this point in the cycle, over the next five or six years on average, it’s been about a 26%, 27% CAGR and our stock price and our industry stock price is priced at about the same level where it was at this point in the cycle and past cycles. And if history is in any judge our measure, then we believe that there is 26% CAGR performance for the industry for all hotel rates over the next five years. If that occurs for our company, we think it will be different because we are more leveraged but if that occurs for our company, then that could mean a stock price risk between $27 and $33 over the next five years. So we think there is some great opportunity there. We didn't look at it in another way. HVS puts out a study. They track what they call average room values. This is just for all hotels in the country, not for our portfolio and specific portfolio, and the red is actual. So what happened to hotel values, they fell almost 50% from a high of, an average of about $100,000 in 2006 down to $56,000 in 2009 and have been climbing their way since then. They believe that the next peak, nominal peak is about at $120,000 in 2015. That's about a 20% increase over the prior peak and the prior peak was about 20% above the prior peak above that. Again this is just another way of looking at potential growth. The numbers are about 55% growth in value over the next number of years. If you just put that math and do our stock price and assume that our portfolio isn’t valued that much, that would equal the stock price of about $34 per share five years from now.

So there's just some great metrics as to why this industry will continue to grow and why we believe will perform well over the next number of years. We just hit a great spot in the cycle.

For those of you that aren't into REITs very much or lodging REITs at all, there's some great advantages of lodging REITs including ours. We pay dividends. That's more attractive to investors and our dividend is well covered. There's some tax benefits to dividends in our business and with the expiration of the Bush tax cuts come December, the advantage of dividends from just regular (inaudible) goes away. Right now those dividends are taxed at 15% while REITs dividends, our dividends are taxed at 39% highest rate, look to be all on an even playing field come the end of December this year but there's an additional advantage and that we can pass through losses to our shareholders. So this past year while technically our dividend was 100% taxable, all of our dividend this past year was return of capital which means that there is no dividends, I am sorry no tax to be paid on it, which is an advantage that lodging REITs have, that we have. So its going to flip and its going to be a much stronger benefit for holding dividend paying stocks in the REIT world than it was before hand. So we think that's a capital shift that’s going to happen away from other dividend paying stocks to REIT dividend paying stocks.

Its great inflation hedge. We can change our REITs on a daily basis for those of you that are concerned about the constant increase in the monetary base going on in the economy. These are high quality, real estate assets which is always a nice investment to be in the valuations in our business are very reasonable right now. They are hard assets, not financial assets which is becoming more and more attractive for investors. We've got non-recourse debt, which is very important we believe from a risk return profile. The risk from having various mortgages non-recourse compared to the risk of a firm, whether it’s a REIT or not a REIT that has recourse corporate level debt, we believe, is a huge difference and we are going to be talking a little bit more about that. But all of our debt right now is non-recourse and we intend to keep it that way, maybe a little bit of exception when we pull down our prep facility from time to time but by and large that will be the case. And liquidity in our company and liquidity in our stock, we think, is an advantage over, say, just investing straight in assets.

So summarizing our industry is we believe that real U.S. RevPAR is cyclical and perhaps only third of the way through the next peak. We think that nominal U.S. RevPAR is forecasted to grow at 5% to 6% CAGR over the next five years. This is going to deliver, we believe, somewhere between 40% and 80% EBITDA growth over the next five years. Interesting, PKF also did a study. They took their 4.8% forecast for CAGR and they came at a separate way to predict what they thought was going to happen to industry EBITDA of those five years, and they came up with 40% as well from a different methodology and we just took it straight from what we and our peers report although we do close to 50%-55%. So it is corroborated is the point.

Investing at this point in cycle historically has led to shareholder returns equivalent to 26% CAGRs for the next five to six years, very positive time in our industry. Hotel room values and forecast have grown by more than 50% by 2015 according to HVS. And there is numerous advantages to owning lodging REITs at this point to take advantage of the lodging up cycle and all those other benefits that I numerated EBITDA tax or dividend or the like. So we think that not only for ourselves but for the entire industry. There is great advantage there.

Alright. To talk about our company specifically, Ashford Hospitality Trust, we have 124 hotels with 26,000 rooms across the country. All are owned here in the United States. 85% of those are in East Coast, West Coast and Texas. The breakdown is something like, most of it is on the East Coast, about 10% in Texas and the balance is in California, and then the 15% is in the mid part of the country. So great mix of assets.

Almost 75% of our assets are in the top 25 markets across the country. About 60% are upper upscale type hotels. These are Marriott, Westin, Sheraton type assets, Hiltons are the balance or upscale type hotels which are Residence Inns, Courtyard, Hilton Garden Inns. We’ve got a couple of luxury hotels and a couple of mid-scale hotels. But that’s where we would like to be.

Most of our assets are in the Hilton and Marriott brand families, some very strong brands or some other strong brands as well but this is where we happen to have a portfolio right now. Great producers of revenues, great to brand partners. 72% of businesses is transient. The balance is group, maybe one or two points of contracted business.

And about half of our properties are franchised and operated by our affiliate Remington and the balance are managed by the brands, by and large as a couple of third party managers, other third party managers. When we’re talking about this a little bit, we had affiliates Remington that manages 50% about of the REITs properties and it’s a great advantage to the performance of our REIT and Remington manages only about two other properties, three other properties for some outside third parties. So all of its focus is on Ashford and Ashford’s properties.

We’ve got some great assets. We’ll have the photo montage in a little bit. So you can see them all. That’s just some beautiful, high quality assets around the country. Here is some stats on our assets management we think. The results of our assets management which you will be seeing in a moment is due to a couple of factors. Once the strategic relationship with Remington, our property manager. Most of you know that we cannot manage our own properties because of REITs rules. We have to have a third party do it. We are very happy to have an affiliate manage most of our assets because our affiliate is much more aligned with management. Our affiliate is owned by myself and our Chairman. We care very much about the performance of these assets, more so then our other managers because other managers have other interests. Remington’s interest is 95% servicing the needs of the REIT. And we have got record rapid response with how we can manage assets on a CEO of the affiliate, our President, is (inaudible) from my in office and I run that company every day, just like I do the REITs.

So it gets a whole lot of focus and lot of attention. And as you can see the difference in the results, which I will share with you in a moment. But besides that our asset management group is very strong, and as a very strong analytical rigor that we think is different than our peers and you can see that even when we have some of the brands manage our properties, those results are very strong as well. So we’ve got a great asset management group that I want to brag on little bit.

Just on the box here. This is how Remington outperforms our brands managers over the past number of years. Remington has achieved revenues and growth of 400 bps above our brand managers. RevPAR index improvement which is real measurement of 700 basis points improvement over our brand managers, and a GOP flow of almost 1,900 basis points above our brand managers. Remington gets better revenues growth and gets stronger flow through, and that’s why we want Remington to manage these properties where they can. At the same time, our affiliate Remington’s fees are less than what we pay the brands, so it’s a great advantage for our REIT that our peers do not have.

Best-in-class asset management, these are the results of our peers over the past number of years. This is their EBITDA flows. We pulled from their statements in their releases and you can see how the average of our peers have performed over the past number of years and these are outflows over the past number of years. So we consistently outperform our peers in terms of flow which is so key to getting the results that we've been able to get as far as EBITDA growth.

This is a margin comparison; our peers’ margins and these are our margins which are better than our peers. And clearly with a bit of disadvantage because compared with our peers we have more select service assets which have higher margins and it’s harder to improve the margin on a high margin property already. Our margins aren't averaged higher than our peers, but we still outperform in margin growth.

Not only are we the better performed than our peers, but on average basis we are number one compared to all of our peers on both the EBITDA flow basis and margin improvement basis.

Taking just a little bit of detour, on our call here recently, I talked about our performance in the first quarter and I didn't do a very good job of explaining it; I thought I was just being transparent as to where the sort of problems are; I think I just confused the matter. But this is how we looked at it.

In the first quarter, total demand growth or RevPAR growth in the industry was 7.9% which is very strong for the industry. Our MSAs where our market hotels are, the markets that we are in grew at 6.1%, so about 200 basis points down from the overall United States. About half of that is due to our number two market which is Dallas, Forth Worth and had a tough comparable from the prior year because of the Super Bowl. And the Super Bowl was in Dallas in 2011 and then the other half was in DC. And DC is just a softer market. It’s our number one market. And it’s going to take a couple of years before we get some growth. The years of an election, are usually softer years.

We see the DC market continuing not be a strong as other parts of the country, but there is not reason why Dallas should repeat something like that because of the one time event of Super Bowl. Without those we would have been 8.2%, half of it was DC, half of it was the FW. The part that was a little different was that our individual competitive sets within the markets grew at 4%. And we can’t come up to any conclusion for that other than just the luck of draw, sometimes our competitors outperform in MSAs they are in, some times they outperform and this past quarter they just happen to underperform.

And how we performed within those competitive sets is we were behind them just a little about 90 bps because a good amount of renovation that we’re going through especially with the Highland’s portfolio. So the only thing we see systematic about the first quarter is DC hotel market and we think that’s going to be not as strong as the other markets for the next number of quarters, but we don’t see anything else systematic in all of that.

Another point about our company is how much we put into CapEx for our properties. This is the amount of CapEx we spent on our properties as a percentage of total revenues. It also takes over the long term between 7% and 8% of revenues to keep up your properties; even during the tough time you can see, we are right there at high levels of CapEx spending; we have not let our portfolio run down and because of the Highland we’re now ramping that number back up. So we continue to spend sufficient amount of money in the CapEx department.

Our dividend yield and coverage, we’ve got one of the highest dividend yields in the industry; so it’s very strong and its covered and its coverage is one of the highest in the industry that we’re very prouder.

Looking at the total shareholder return; these are the returns of our peers over the past eight years which is how long we’ve been in the industry since we went public. And you can see our performance compared to our peers has been light over the past year, but has been at or exceeded our peers over the course of our existence.

We’ve also have some data backing up all of this in a separate appendix that can be available for you when you leave the room, so you can check all this number out for yourselves. So please feel to free to pick one up.

This is important statics in that how highly aligned our management team is. Our management team and directors own 21% of our outstanding stock and OP units; far above the average of our peers; we are very, very highly aligned; every single associate in our company own stock, but also significantly as all the senior executives of Remington, our affiliate own material amounts of Ashford stocks.

So we’re the only REIT that we know of where the property manager on half the assets owns material amount of the ownership’s company stock which provides a great alignment of our interest throughout the entire operations.

Replacement costs; we think that this turn has thrown around the industry a little loosely; everyone talks about replacement cost and doesn’t matter what someone buys hotel for the so called replacement cost is always three times or whatever that is. So that’s a number you got to be careful about because people sometimes kind of use it based upon what they want to use it for.

Before we went public we get a lot of hotel development. We have a lot of experience in hotel development and a number of peers don’t and haven’t pulled around that development. And so looking at replacement cost for assets and looking at our existing portfolio of potential acquisitions, we wanted to be able to deliver that statistic to our investors and to grow our assets systematically we started to look at it asset-by-asset. We came across some information that JPMorgan had put out at least starting year ago and I think before for that and they put together analysis about what they thought replacement cost were.

We thought it was pretty spot-on. We thought that it was with our experience pretty close to what replacement costs are. And just to triple check ourselves we had own experience, we have JPMorgan’s we went out and we hired a third party firm and gave them three assets and we paid him $12,000 per asset and we said, when I can give thoughts, when I can tell you what we think, just tell us what you think the replacement costs are for these kind of assets anywhere from a courtyard to I think the high end was Reitz Carlton and something in between different markets. And those numbers came back and they lined in right on top of our internal JPMorgan analysis.

The point being is that we think these numbers are solid from a replacement cost standpoint and the details of that methodology is also in the appendix materials.

Full service, we think averages about $278,000; select service about $142,000, so the average of our portfolio we believe is about $223,000. If you hear our last year presentation, you may know that this number went down by $10,000 per key and that's what our methodology said and that's what we put in. So we try to be very realistic about what that replacement cost is.

If we were priced at replacement cost, today our stock price is priced at about $155,000 a key. If we were priced at replacement costs our stock price would be $30 per share. And if you assume 2.5% growth in replacement costs each of the next five years and in five years we’re priced on replacement cost our stock would be at $39. So there's a big difference between where we are priced today and where replacement cost is.

Alright; our company summary. We see ourselves as very opportunistic. We look at all kinds of assets in the hospitality space, from low end to high end. That being said, if we could pick up the kind of asset that we would like to own, it would be franchise asset that our affiliate could operate instead of the brands, because we have more control and our affiliate outperforms the brands and we can get more juice of these assets, that's what we prefer if we can get it, although we would not eliminate from our acquisition potential any types of assets.

And we would rather have a full service, just because we get some economies of scale, we've got 126 assets, many of them are select service and as we grow it would just be easier to keep the number of assets the same and to trade out the lower end assets for higher end assets. These are on our asset management; we think would be more effective, so that's what we preferred. Although again, we are going to be very opportunistic and depending upon the opportunity we will see what we end up buying going forward.

We've got a best-in-class asset management group. We've got two great metrics that we will put up against anybody else in the industry as far as performance, a very talented group and as part of that we have the advantage of our affiliates which I believe only one of our competitors may have just having affiliate and how to get the performances.

We've had a strong dividend yields and coverage which we think is becoming more and more attractive, being hard assets and also because of what's going to happen to dividends from some other companies or sea corps any advantage of REIT’s dividends going forward; the comparative advantage at the end of the year.

We've got a very highly aligned management team, holding a significant amount of outstanding shares. We are concerned about our dividend, dividend growth and stock price and that is it; that is how we see our own net worth increase and all of us by far the most amount of our net worth is in this company. And our affiliates are executive management team has got significant amounts of net worth tied up in the success of Ashford.

And we believe that we are currently priced at an attractive price per key than the whole industry is. We think we are and we think this is a great entry point into the industry. If you have been in this industry you missed some of the run-up, but we think there is a significant amount left in this cycle.

I am going to turn it over now to Dave Kimichik. He is our Chief Financial Officer. He has served as CFO for Ashford Hospitality Trust since its IPO in 2003. He has been associated with the company's principles for the past 29 years and was President of Ashford Financial Corp. from 1992 until August of 2003 which was the largest buyer of hotel properties from the RTC Goldman’s Whitehall Group was the number two buyer.

Kimo, as he has known, previously served as Executive Vice President of Mariner Hotel Corporation which was a predecessor to Remington, in which capacity he administered all corporate activities including business development, financial management and hotel operations. During his involvement with Ashford Financial, he played an integral role in the acquisition of 160 hotel assets and mortgage loans secured by hotel assets with book values in excess of $800 million. Kimo also currently serves as Head of Underwriting for our company when we review our new opportunities. He earned his Bachelor’s Science Degree in Hotel Administration from Cornell University.

Kimo, please come on in.

Dave Kimichik

Thanks Monty.

Monty Bennett


Dave Kimichik

Before I get going, I would like to introduce Deric Eubanks. He is our Senior Vice President of Finance worked with me in our Accounting and Finance function. He started with the company in 2003; was critical to our IPO process, has been involved in all capital raising activities sense. Previously, he headed up our lending platform making mezzz loans. It’s currently inactive; but he was very busy for several years in that front. He played significant role in the Highland transaction which closed last year. And he is also a resident expert on hedging strategies and as many of you know he has been very busy in that regard over the last several years. He is a CFA chartered holder; Deric Eubanks.

Today, I would like to talk to you about a couple of things and I’ll give you an update on our balance sheet what it look like as of March 31st and then I would like to talk to you specifically about our debt; what we have coming due in what years; what our TTM debt yield is what is the possibility of refinancing that debt.

Ashford is higher levered than our peers, but it’s not an exorbitant amount of leverage; its 58% net debt to gross assets and you want to have more levered during up cycle; you get better returns for your shareholders.

We also, as Monty mentioned have no recourse debt outstanding; you’ll be hearing that point made a lot today and this is very important to us. We have well lot of maturities on our debt; it was no more than few hundred million dollars coming due in any one year prior to 2016 and I’ll walk through a slide on that in a minute. And we have several sources of liquidity available to us, should we need it or want it and I’ll walk through those options in a few minutes as well.

And here is our current capital structure as of March 31st; when speaking about debt today, I’ll be referring to total debt which includes our Highland debt and which is not consolidated due to equal control provisions on major decisions with our joint venture partner.

GAAP says if two partners have equal control on major decisions, neither one can consolidate it, so we can’t consolidate it, but we treated as is consolidated with our quarterly financial reporting all the metrics on Highland we report as well as our legacy portfolio.

So Highland include all of our $3.1 billion of debt is non-recourse. Move on to the asset side this includes Highland as well; we have gross un-appreciated hotel assets of $4.5 billion and total assets of $4.9 billion.

We move on to the equity side; we currently have 68.2 million of common shares outstanding; 17.6 million operating partnership [minutes] outstanding and total fully diluted share count of 85.8 million, fully diluted shares.

We also had as of March 31st $386 million of par value of our perpetual preferred stock. And as of March 31st, we had cash and cash equivalents of $150 million; clearly enough liquidity to handle any up coming cash needs.

Debt maturity schedule; Ashford’s $3.1 billion of total debt is well laddered and was no more than few hundred million dollars coming due in any one of year prior to 2016. In 2016, we have our first big slug of that coming due in the amount of $965 million. I believe all of our debt coming due between now and the end of 2016 is refinance-able in full today. And as a blended TTM debt yield of 10% and if we had to go out and refinance it today I believe we would could.

This debt yield is improving each quarter with our property level EBITDA increases of 10% plus, we have been experiencing over the last several years. And we will clearly be working on this issue well in advance of 2016.

In 2016 and 2017 you see we have quite a bit of debt coming too and 2016 is related to the highland portfolio's five-year debt and closed last year. 2017 those are mainly our CNL assets we purchased in 2007 we put 10-year debt on that portfolio. Okay, we have one-way financing in process. Let's talk about that. The loan is filling in front of us with a May maturity, we call it the Wachovia floater. It’s a floating rate loan that was part of our CNL purchase in 2007. It’s a $167 million loan. It currently has 10 hotels in it.

It has a TTM debt yield of 8.3%. So today it's not fully refinanceable, so we've got to pay it down. So we expect to use $23 million held in our restricted cash accounts to pay down this loan. That is not the $150 million I just mentioned of our free cash. This is restricted cash. This is another category on our balance sheet. We also anticipate unencumbering a small hotel, the Doubletree Columbus is part of this refinance. We will ultimately sell or refinance this asset and as a result we don't expect any other cash needs to come from our balance sheet to refinance this loan.

And this is the only loan that's maturing this year and we hope to announce something hopefully this week on the refinance. Okay. Let's talk about debt coming due in 2013 and 2014. Through 2014, Ashford has $378 million of debt coming due with the exception of the Hilton El Conquistador in Tucson which has a negative NOI, it is a hotel we are currently trying to sell. All of this debt is fully re-financeable today based on TTM debt yields. And I will walk you through those.

So Prudential, we have a long with two hotels in it. Torrey Pines Hilton, Capital Hilton $145 million loan comes due in August of 2013 has a TTM debt yield of 12.7% clearly fully refinanceable today. Moving on to CIGNA we have a loan with three hotels in it, $102 million. That’s our share of the loans in the Highland portfolio. So our share is $102 million, comes due in the first quarter of 2013, has a TTM debt yield of 16.1% clearly re-financeable in full today.

UBS, we have a pool loan that is securitized with eight properties. So $106 million loan comes due in December 2014. We have a TTM debt yield on that pool of 10.2% again clearly refinanceable in full today. We have one small loan lastly. (inaudible) is a small hotel one loan $5.4 million comes due in May of 2014. TTM debt yield of 9%. So through 2014, our debt is clearly refinanceable today and the fundamentals are getting better each quarter with our property level EBITDA improvement.

Okay, as Monty mentioned earlier we look at our company from a portfolio A safety perspective and a portfolio B optionality and upside perspective. Portfolio A has $1.4 billion of debt with a TTM debt yield of 11% plus clearly very safe. Portfolio B has $1.7 billion of debt mostly that’s our Highland purchase and our CNL purchase with a TTM debt yield of 8%. However, portfolio B has a blended cost of debt of 5.7%. So we are currently getting the access cash flow out of the portfolio B of 2.3% on our debt balance. So it's cash flow positive and we have a blended 4.4 years left until the maturity of portfolio B.

On a property level EBITDA is going up currently in excess of 10% last couple of years at least if this continues, I would expect this to be fully refinanceable on about two years. Okay, we have several sources of liquidity available to us should we need to or choose to tap into, I'll walk you through those.

We have a $145 million available on our credit facility, it's undrawn currently but that is available to us. We have a $150 million of cash on our balance sheet as of end of the first quarter obviously that’s available to us. We have a preferred at the market facility currently in place. Last quarter we turned this on and we raised $9 million, it was a pretty good execution for us.

We also have a common at the market facility which we have not used, but we could turn it on at any time should we see a need to raise common equity as well. We have some potential excess refinancing proceeds for the 2013, 2014 refinancings that I just walked you through. They are very high debt yields. We could refinance excess and pull some money out on those refinancings if we choose to do that.

And lastly we have excess cash flow. Last year we had CAD or cash available for distribution of a $110 million. CAD is essentially our AFFO minus our normal FF&E reserves. We spent less than $35 billion on dividend so dividend has come out of that CAD. There is a big GAAP there between a $110 million and $35 million. We do spend or funded CapEx out of that pool, but we have excess cash flow above and beyond that. So these are all the sources of liquidity should we choose to tap into.

So in summary we do have higher leverage than our peers. It's not an exorbitant amount and you want to have higher leverage especially during up cycle to get better returns for your share holders. No recourse debt outstanding enough said. We have well laddered maturities, we work very hard on our maturities. We are constantly maneuvering to push them out and we have no more than a few hundred million dollars coming due in 2016 and something we are working on well in advance to that. We have liquidity available to us should we choose to tap into it and finally through, our debt maturing between now and at the end of 2016 we believe is fully refinanceable today should we have the need to go and refinance that. Okay, that concludes my remarks. Now we are going to take a coffee break or a cellphone break whichever you choose. You can also sign up for one on ones meetings at this time. Like you can see Andrea or Taylor if you would like to sign up for a one on one meeting and the next portion of our presentation will begin in 10 minutes.


Dave Kimichik

Okay. Now I would like to introduce you to Douglas Kessler our President. Doug has been with Ashford since his IPO. In fact he was the one who spearheaded the whole IPO process he has been instrumental in Ashford's growth. He is primarily responsible for Ashford's investments, acquisitions and capital markets activity.

Previously Doug was the managing director of Remington Lodging and hospitality. Prior to joining Remington he was an investment banker for 10 years with Goldman Sachs Whitehall Funds where he oversaw more than $11 million of real estate and served on the board or executive committee of several companies.

Prior to joining Goldman Sachs Doug worked with Trammell Crow Ventures. He has over 25 years of experience in real estate acquisitions, development, sales, finance, asset management, operations and capital raising. Doug has earned his BA and MBA from Stanford University. Douglas Kessler?

Douglas Kessler

Thank you, Kimo and good morning to everyone. You know a topic that's frequently raised in our discussions with the investment community is leverage as Monty has mentioned. A consistent theme that we have is that we’re very comfortable with leverage and believe that if properly managed, leverage can clearly enhance shareholder returns and our view high leverage does not necessarily imply high risk.

Now let me give you just a perspective of the type of leverage that we are talking about. Our target leverage levels are in the range of 50% to 60% net debt to cost and while higher than most of our peers, we view this to be a very manageable level and in fact below many of the leverage levels of firms that use leverage for really the same reasons that we do which is to increase the returns to equity. We have concluded that if leverage is used and is properly managed that you can provide materially better long-term share holder returns really without materially adding to the risk of the company. We clearly believe we have been proactive in managing our debt and have demonstrated a very good skill throughout both up and down cycles in terms of the various strategies that we use with respect to our debt and we are proactive in the following ways.

We focus on non-recourse debt a theme that's been very forcefully stated in this presentation. We have a preference for longer duration debt. We also think about the right mix of fixed rate debt and floating rate debt and this can vary depending upon where we are in the cycle what's taking place with the economy and what's taking place with lodging fundamentals and we ladder the maturities to make sure that we have the right amount of timing when it comes to refinancing our assets.

So let's take a look at where we are in the cycle today. Clearly we believe we are at the point in the cycle where there is upside opportunity and generally there should be capital rotation into the more leveraged platforms and that’s where you can enhance your equity returns by using the benefits of financial leverage. So let's take a look hypothetically two companies; Company A and Company B. Company A and Company B both have a $100 million of EBITDA, both trade at a 12 times EBITDA multiple and both have a total enterprise value of $1.2 billion. Company A, the less leveraged company which could be thought of similarly to our peers has $600 million of debt. Company B on the other hand which is similar to Ashford has $900 million of debt. And I think what's important to see here in this example is that what happens with just a slight 10% increase in EBITDA. Company A that 10% increase in EBITDA leads to an equity return of 20%. Now that's not bad for a low leveraged company but let's take a look at what happens with Company B which is the higher leverage company which maybe akin to Ashford. You can see that Company B's equity return increases by 40% twice that of Company A.

Clearly in a marketplace where you are having EBITDA growth the benefits of financial leverage are straightforward and very prominent in an up cycle. Financial leverage in other words can be a powerful boost to equity returns. In our discussions with the investment community, we've heard frequently mention misperceptions about leverage. I think that at times these criticisms of leverage can lead to inaccurate conclusions about value, about upside and about strategy and here just a few of the misperceptions that we've heard. Leverage increases earnings volatility. Leverage increases stock volatility. Leverage lowers EBITDA multiples. Leverage risks the entire company and leverage leads to lost opportunities. These are some pretty strong statements and like with everything within our company we are very analytical company.

There's an intense analytical rigor within Ashford. We look at all types of data, both within our industry, within the economy and within the entire peer group, what we focus on is trying to figure out the correlations among various variables within lodging, within the economy, and try to figure out how we can apply that data, apply those conclusions to our strategy. My hope is with these next few slides you will gain a better understanding as to whether these myths are real or excuse me theses misperceptions are myths or are they real. And I think you will find that you will gain a much better appreciation of the various approaches we've taken to managing our debt to create shareholder value and actually reduce the risk of our platform despite our higher leverage relative to our peer group.

In our opinion there's very strong evidence to show that the benefits of leverage clearly outweigh the risks. Now one of the first misperceptions is that leverage increases earnings volatility. We don't think this is necessarily true and I think we proved that in fact earnings impact in a severe recession can be mitigated by proactive debt management. Again by studying correlations of various historical data we can use that as a predictive tool, not necessarily relying a 100% on the historical data to be predictive, but certainly using that as a guide and then interpolating within that what we are currently seeing in the economy and within the lodging industry.

One of the simple conclusions that we drew is that interest rates and RevPAR move similarly. Now what this chart shows is what our AFFO would have been without the debt management strategies that we've put in place back in 2008.

Now what this shows you is by implementing the various strategies that we use including various derivatives, various hedges, various capital market activities, look at what it did significantly cushioned our FFO excuse me during one of the worst times in the industry, and without question had we not implemented these strategies in our more leverage platform, we would have performed differently. But the fact that we have this debt creates optionality for us. It gives us the chance to do things differently than our peers and it gives us another tool in which to enhance the value of our platform.

By no means is a leverage a pass as strategy. You need to have an active management team. You need to have a management team that understands debt. Remember back in the days of RTC who were largest buyer of non-performing hotel paper, we understand debt within Ashford. We are very proactive. We are very granular on the long-term. We are very granular in mining for the best possible debt terms and incredibly proactive in managing that debt through cycles. We believe that overtime, we will use the right skills to put in place the right solid debt management strategies in order to manage our platform and increase shareholder return.

Leverage does not explain earnings volatility. Now taking that one example of how we look and what we did and then drawing a comparison to our peer group. I think this slide clearly shows the favorable impact of our debt management and reflects a relative outperformance compared to our peers over the period of time from the second quarter of 2007 through the most current quarter.

What this slide shows once again is that our AFFO per share has been materially less volatile than our peer group. And what appears with less leverage reflected a decline in their AFFO per share of 63%, over that same time period our AFFO per share increased 39% despite being more leveraged.

Now again, during that period of time we used a variety of strategies including share buyback to enhance our AFFO per share. But we also implemented variety of capital market strategies and operational strategies to improve the EBITDA of our company. And as a result we outperformed our peer over the cycle which not only reflected a down cycle but also most the recent up cycle as well.

In other words, in our opinion based upon the data that we’ve analyzed, leverage does not necessary increase the volatility of earnings. We’ve also heard that leverage is not good for stock volatility. Well that maybe true in the short run, but we’re managing Ashford for the long-term capital appreciation and really this data shows no meaningful explanation between higher leverage and stock price volatility across all REITs.

You can see here that the R square is point 0.9 for five year debt to EBITDA in volatility. Again, in other words, over longer periods of time, leverage does not explain the stock’s volatility according to this data. Now one of the greatest misperceptions that we frequently here has to do with the fact that leverage reduces EBITDA multiples. And I think this is one that investors think the most about. Because they’re concerned that if they invest in a higher leverage company then directly it should trade at a lower EBITDA multiple, if it isn’t today than it should over time.

The data just doesn’t show that at all. You can see the R square here is zero. Leverage does not explain EBITDA multiples. There are other factors that explain EBITDA multiples overtime and we think this is a very important consideration when taking into account where we are in the cycle today. The fact that financial leverage can be a benefit in both up-and-down cycles and the fact that when you look at the data, it dispels this myth that leverage reduces EBITDA multiples.

Now looking at this similarly from a standpoint of debt to gross assets and EBITDA multiples, the conclusion is exactly the same. The R square is 0.04 across all REIT property types. So once again our conclusion is pretty clear to dispel this myth that leverage explains EBITDA multiples, which raises an interesting question, which is that if leverage doesn’t impact stock volatility and earnings volatility and doesn't impact multiples than why isn't the case that companies operate at just slightly higher leverage closer to where we are 50% to 60% to truly enhance their shareholder returns.

Again I think it boils down to whether or not the management team is confident in their skill set to actually harness the benefits of debt as we are doing. One of the other misperceptions is that leverage risks the company. We don't think this is necessarily true. There are other risks that put companies in jeopardy. In fact paying too much for assets and then layering in an exorbitant amount of debt. On the other hand we believe that leverage in the 50% to 60% net debt to cost is very reasonable when one purchases assets at the right cap rates relative to replacement costs, right per key value, the right amount of CapEx and the right amount of growth that is forecast. We have been very disciplined in our acquisitions. We have strived to buy assets below replacement costs. We have strived to buy assets that have growth. We have come close to winning on certain bids and we've pulled back. That's not the right accretive investment for our platform. So for us to even in our most recent transaction when we think about where we acquired Highland very, very low per key and very attractive going in yield.

You've got to have the right kind of debt too. You got to have discipline when you are buying and you've got to layer in the right amount of debt. Not all debt is created equal by any stretch and we get very granular on the terms. We think about covenant tests. We think about extension options, we think about the flexibility to have that debt assumable. We think about bringing in preferred partners into that debt at some point in the future. We are thinking about all the various ranges of possibilities and some times go beyond the ranges and ask for things that lenders have never heard of. But we are not bashful. And if we think that that will improve the capital structure then we are going to ask for and see if we can actually obtain it and then when they say no, we actually may ask one more time just to see if we can get it from them.

We try to pair assets with the right liabilities. We obviously believe that non recourse debt is essential and we have a constant focus on pushing up maturities. We engage early in pushing up maturities. Sometimes we are successful in doing it well in advance, sometimes it’s a right thing to do well in advance. We've been known to engage two years before the debts coming due because there's something that we maybe seen taking place from the marketplace that facilitates our desire to change the debt that's existing on our portfolio. So its important to recognize that not all debt is equal and you have to be proactive in how you treat that debt.

As Kimo mentioned, you can think of our company as maybe two portfolios and I think this has to do with how you distinguish the risk related to the debt on these two portfolios. It is almost two investments that one makes when they buy a share of Ashford. A portfolio A which contains essentially the lion share of our equity, about 90% of our equity value has $1.4 billion of debt, positive cash flow, a weighted average maturity of 3.2 years and all the debt is of course non-recourse.

Relative to the outstanding debt, we think we are in a very good position with this portfolio. We think this portfolio is refinanceable today and we think that this portfolio has a good stable growth opportunity. Not too much different than the rest of our peer group.

Portfolio B, we think, offers more of the optionality and upside. This portfolio accounts for about 10% of our equity value and mainly consist of our most recent acquisition, the Highland Hospitality portfolio and most of the CNL hotel assets that we acquired back in 2007. This portfolio has $1.7 billion of debt, slightly lower debt yield than the Portfolio A opportunity. It also has positive cash flow and a weighted average maturity of 4.4 years. We think that this portfolio of course which has non-recourse debt provides us optionality and upside. Within this portfolio, we would expect to see outsized EBITDA growth relative to the portfolio A opportunity. We are spending dollars on CapEx to enhance the growth of this portfolio and plus we have a much longer runway with the 4.4 year weighted average maturity in order to see our plans come to fruition and recognize the value of this optionality and upside of portfolio B.

One of the other misperceptions that I mentioned is that higher leverage leads to lost investment opportunities. (inaudible) will disagree with this. We have been proactively managing our debt and during that period of time, we’ve been one of the most active acquirers when you look at the scale change from where we have come in 2007 to where we are today. We’ve had two very large portfolios, the CNL transaction in 2007 and the most recent, Highland Hospitality transaction in 2011. We don’t feel like you have to grow for growth sake. We believe you have to grow your EBITDA, we believe you have to grow the value of your stock.

So just simply being out there and acquiring just for the sake of acquiring and keeping up with your peers is not what we’re about. We’re about strategic, accretive investment opportunities and during the period of time where we had more leverage than any of our peers, we actually acquired more than any of our peers as well.

So it really hasn’t prevented us at all from generating strong EBITDA strong flows and long-term shareholder returns about performed peer group is as you seen in earlier slide. We’ve obviously look at how to grow and use the capital markets to facilitate that growth. And we’re always looking at the landscape of opportunities. We’re always looking at where can we find the lowest cost of capital if we need capital and we try to be creative and at times come up with fresh approaches and do things differently than our peers.

As [Kimo] mentioned, we have a preferred ATM which is a preferred at the market offering. You’ve probably heard of the same thing in the common equity market. Not a single one of our peers has that strategy. As a matter of fact, I think we’re only the third, maybe the fourth REIT of all REITs to implement that strategy and it has worked quite nicely for us. So once again we try to be creative. We try to do things differently to enhance shareholder returns and I think that our capital market strategies have to coincide with our debt strategies to facilitate the type of growth that we’re seeking.

We would like to think that some of the things we do in the capital markets are much better than our peers and we believe that we’ll continue to try to push the edge of the envelope in terms of idea generation. That doesn’t necessarily mean ideas that aren’t safe and secure; it’s just looking at a different way to accomplish result with a much better outcome.

We also have a unique view on equity. We don’t subscribe to the long-term cap-in model that we think most companies subscribe to. We don’t believe it’s a static situation; we believe that a company’s cost of equity can flow overtime and it changes based upon what’s taking place in the industry and what’s taking place across economic cycle. So our decision to issue equity can also vary.

We prefer to look at the long-term expected returns over three to five years in order to determine our hurdle rates and obviously at the bottom of this, cycle cost of equity is expenses; at the top of the cycle it’s cheaper.

Now during the last downturn, we didn’t issue equity. Our peers issued equity almost every single one them; very dilutive event for them. Our alternative approach was just the opposite. We were the only to buyback stock in our sector. We bought back half the company’s stock.

Now whether that’s luck or not we would disagree; we think that it’s about vision; it’s about understanding when is the right time to issue equity, when is the wrong time. And at times that might be as a result of a strategic transaction as well, but we are watching cycles. We are watching every move both historically and prospectively that we think can increase the value to our shareholders.

We believe that generally our methodology is a little bit different. We recognize that we operate at higher leverage but we also believe that we excel at our capital markets efforts in ways that do create value for shareholders because when you think about a REIT, a REIT is more than just a collection of assets. It’s about managing the capital markets environment around that REIT, particularly in the hotel sector which is a cyclical industry, maybe a little bit different than multi family, maybe a little bit different in other sectors but when it comes to lodging, managing the capital markets activity, you've got to layer that appropriately with buying the right assets and taking care of those assets to create value for shareholders.

So in summary, here's just a couple of highlights regarding our perspective on leverage. We think that we've dispelled hopefully some of the misperceptions about leveraging the marketplace and reinforce support in terms of the strategy that we implement on our assets within our portfolio. We focus on debt that is 50% to 60% net debt to cost. We believe that you can obtain better long-term returns by using leverage without materially adding to the risk and obviously debt is not equal. We think that having non recourse debt is important, longer duration and floating rate debt with lateral maturities is a key to our debt platform. And then to further dispel some of the myths, leverage does not necessarily increase earnings and stock volatility if properly managed, leverage does not affect EBITDA multiples and leverage does not necessarily add material risk to the company nor does it lead to missed investment opportunities.

So with that I hope you had a clear benefits of leverage and our approach to managing our debt and I hope I have dispelled some of the myths that maybe out there in the investment community. So with that I would like to welcome back Monty to continue our presentation with an update on the Highland portfolio.

Monty Bennett

Thank you Doug. Alright we bought Highland about a year and a couple of ago and I would like to give you guys an update on it. Before I do that, I want to introduce a couple of other executives that are here today. First is David Brooks, who is our Chief Operating Officer and General Counsel. Among his many value added roles, David is instrumental in the closing process of all of our transactions and he has been associated with and working with the principles of this organization since the late 80s. I would also like to introduce to Jeremy Welter. He is the Executive Vice President of Asset Management. He has been in that role for almost a year and a half now. The Asset Management department hasn’t missed a beat under his leadership and continues to perform very well.

Previously to that, he was the Chief Financial Officer of our affiliates, Remington. So he has a lot of property management experience and background and prior to that he was an investment banker with Stevenson & Company.

To give you an overview of the Highland transaction that was completed a year ago, it’s a $1.3 billion purchase, 28 hotels, almost 9,000 rooms, with per seat $158,000 per key. This is held in a joint venture with our partner Prudential. We own 72% and Prudential owns the balance. When we underwrote it, we believe it was accretive to FFO and to our stock price both in the short-term and the long term. We still believe that to be the case. When we underwrite any investment long-term stock appreciation is what we are most focused on, but we are also interested in what happens in the short-term both for the stock price and FFO appreciation. And we look at the stock price; we look at EBITDA and measure our stock prices can do there.

It’s primarily upper upscale, urban upscale type of assets in the portfolio. It was assembled by the Highland Hospitality Group REIT and went in public in about ’04, ‘05 and last year and went private in 2007. They have some assets in some key markets, New York, New Jersey, Greater Area, Boston, Chicago and Washington DC. We have got some great brands in this portfolio a lot more of Marriott branded and Hilton branded family brands.

We have got a great proportion of franchise assets in this portfolio which is the kind of assets that we like that we can add value to more so than if there are brands to manage. And we believe that there were some operational upside in these assets because that the prior owner and some debt problems that they had. We were able to improve upon the operating performance. We don’t think the operation has got as much attention as they deserve at that time.

So overall, the opportunities in Highland as we see them, we want to franchise for us; we are looking for opportunities to create long-term value and operational efficiency through Remington management, the management of our affiliate. We have been able to convert two properties thus far to Remington management and two more are in process. So not only we were able to take over a larger percentage of assets that were franchised to begin we have to convert four more to it. Thus we have high percentage of franchised properties which is what we like in our portfolio.

We saw some great operating flow through margins to be able to right size the cost structure and bring best practices to the operations; I’ll show you some steps on the performance on that side we are very, very pleased with.

Our revenue enhancements; we have been able to rebuild the base business on the books, the sales effort in this portfolio stopped about six months prior to our takeover. When we took it over they were 20 open sales positions and many more that were already half way out the door. And so we’ve had to restructure that entire sales operations and we think there are some great opportunity on the revenue side in this portfolio.

And lastly these properties, the CapEx they needed over their tenure. Several of them have been neglected. We’re putting a significant amount of CapEx into these assets, but the nice thing is that the most this capital already sit aside on our balance sheet in a reserve and we’re drawing down that reserve in order to put the CapEx in and revenue should further benefit from that CapEx although. We are currently seeing a little bit of operational disruption because of it.

Our flow-through, the year prior takeover for every increase dollar increase in revenues they brought $0.25 to the bottom-line in the past year for every $1 increasing revenues we brought $1.03 to the bottom-line. So a huge increase in profitability these assets.

Not only we were able to do that with our affiliate Remington’s management, but even on the brands side, our asset management team went to work on this brand managed assets and as you can see how their flow-through prior to takeover were quite low and how the moment we took over the assets the flow-throughs on the brand manage assets have improved significantly over the past number of months.

When we underwrote this investment, we thought that the first year NOI that’s EBITDA minus our 4% CapEx reserve would be about $87 million and you can see that we came in at $91 million.

So we have exceeded our first year NOI by liabilities in material amount and despite the fact that we haven’t seen the juice in the revenue growth yet that we expect to get; we’re very happy with our underwriting and it was an original underwriting which was a part of our goals of FFO accretion and stock price accretion in short-term of and long-term and so we are exceeding those goals.

It’s in this slide that I shared with you guys in the past, if you look at the legacy portfolio compared to Highland portfolio and how its performance dropped off during the tough times and how it’s come back. Our legacy portfolio did not drop off nearly as much in terms of margin and it’s also recovered more.

Well, if you look at Highland, they fell off more, this portfolio prior to our ownership and has come back as much and that difference is 700 basis points in the Highland portfolio. Over this past year, we were able to stop that widening and we will keep it about the same; most of that came through better operational efficiencies and not through greater revenues yet which we hope we’ll continue to close that GAAP in operational upside.

This is an important part of the story of the CapEx that we’re putting in these properties. We’re going to have this CapEx going in throughout this year and a good slug in the third quarter and fourth quarter of this year and maybe a little bit more in the first quarter of next year.

You can see this slide is ordered from those that are completed at the top down to those that are continuing to be under renovation, the status of each and about how much the budget is on each one of these. So we are going through some disruption, but its really doing a lot for the assets and really getting the assets in great shape. Again, the dollars for these renovations have already been set aside.

Overall, in Highland we are achieving our flow-through goals and very, very happy with that part of the equation. We are leaving no stone unturned on improving revenues. We think there are some great opportunities there. We seem to get to these renovations and we’ll start to build on that which is in process. Despite that, our portfolio is exceeding our original underwriting expectations.

We continue to put our strategic capital into these assets and that is underway and we think that will further help our revenues. And because of that, we think significant upsides still exist in this portfolio, it’s a great portfolio. We are very, very happy with the assets and we think that that's going to continue to move forward. So we are very bullish on the potential there in that portfolio.

Next steps for our company; our stock price and that of our peers is based upon expectations of EBITDA and EBITDA growth. That is how the industry prices our stocks. So we have a very strong focus on EBITDA. We are focused on all of our assets on EBITDA. We think the costs are in fantastic shape and we’re very happy about that. We continue to put more and more focus on the revenue side that has been an intense, an extra intense focus of ours since about December and especially on the Highland portfolio on the revenue side.

We think we got a bad roll of the dice with some of our competitive sets, but we think that that is just a temporary phenomenon and we are going to have reversion to the main on how they perform compared to their MSAs. So we are excited about that and growing the EBITDA through revenue growth is very, very important to us.

Something else that’s a little bit longer term is we want to continue to grow our cash balance. We think we’re able to do extraordinary things for our shareholders. During the last downturn, we were able to buyback half of our stock.

Shareholders loved at the time because of return of capital that they received. That many of them were in dire need of liquidity and it was able to accrete our platform long-term and it was much more effective than taking the same amount of capital and going out and buying assets at that time; much more accretive to shareholders.

We think that there is going to be downturn in the at least five years, six years out or so. But we want to start preparing now and just slowly start to built our cash balance overtime, because while we believe very strongly that the fundamentals are great over the next number of years, you just never, never know and so we want to just continue to build that cash also it’s much more expensive to build the cash now than it is going to be later on we believe. So we are just going to slowly build our cash balance and we think that’s important for the long-term interest of shareholders.

We are continuing to scout the markets for growth opportunities. The challenge that our platform has and all of our platforms in this space have is that if you find a great asset and you underwrite it and you go buy it; you are issuing equity by and large at today’s prices.

So you’ve got to think that either the asset you are buying has got growth potential far above your existing portfolio which is always hard to justify, I think or for some reason that the public markets valuation of our stock is not in sync with the private market valuations which is never too far off the mark.

And so we want to just buy assets that move the sideways. I have showed you this slide where we think the 26% potential CAGR return in hospitality stocks over the next five years; well that means you got to believe that’s your leverage return on assets you buy is going to be about 26%. So we think our equity is very expensive.

That being the case, there are still some opportunities out there; we’re looking, we are very active, but we believe that our equity is quite expensive and while we don’t have to issue stock now to make a sizeable acquisition, we always look at it that way as if we would have to issue stock, because we want to replenish that cash at some point.

So we are looking globally at acquisitions; we’re looking over in Europe right now; we don’t have any assets over in Europe. It is pretty dark and dreary over in Europe which is always been the best time for acquisitions in our business; whether was during the RTC times, when you couldn’t get anybody instead buying hotels where we made an absolute meant time whether it was buying back our stock during the downturn that’s the time to buy; that’s the time to buy assets.

We’re being very careful about it and we have a lot of criteria about what we’re looking for over there, but those markets over there are going to be here and doing well 100 years from now, 1000 years from now. So it maybe a great entry point to some markets over there, we’ll see.

A lot of the European players right now can’t buy assets over there, because they get there own financial problems; private equity funds over here can’t buy because they can’t get the debt they need and Middle Eastern buyers are instrumentally in trophy assets and US hotel REITs are buying over there except for host, from time-to-time, so there is really a dearth of buyers which creates great pricing opportunities, so we are looking.

We continue to look at domestic opportunities as well, generally in the franchise full service arena, in the top 25 markets. We are opportunistic, but generally that’s what we’re most interest in.

We continue to diligently work the capital markets. We’ve got a number of refinancings on the way; we want to continue to communicate our activities there to our investor base and to that markets. There is lot of interest and leverage in refinancings; we feel very comfortable about it.

Our team here has done a great job in refinancing time and laid us some great terms; we are not concerned about it all, but we want to continue to communicate that because the investor community is more concerned about it and so we will continue to do that.

And we also want to relatively access the capital markets in all different kind of ways when we think that there is an opportunity to do so in an attractive way.

Overtime, over portfolio is going to naturally de-lever; our Highland portfolio and our so called MIP portfolio. They are both encumbered by debt where all excess cash flow pays down the debt. So whether we want to or not, those portfolios are deleveraging above and beyond that. We’ve got about $30 million a year of amortization. This naturally creates two or three points of deleveraging per year over the next number of years.

We are comfortable with our level of debt right now, but essentially whether we like it or not, deleveraging is going on just because the nature of the beast is in the industry right now.

We want to continue our focus on thorough research and quantitative analysis. We are very data driven company, very analysis driven company. You can see through some of the positions and stances that we’ve taken that while they may not be the most popular among some investors, we think it’s the best strategy to run our platform.

And finally, as a company, we went public in 2003, we've gone through a full cycle, were these strategy have been vindicated and over the long-term we are the best performing lodging REIT, because we pursue strategies that we think are in the long-term best interest of our shareholders, even though sometimes some investors my not particularly like them, such as debt hedges strategies, floating debt, one of high correlation with RevPAR, buying back our stock at the right time, being opportunistic on the kinds of assets that we buy, being higher leveraged at this point in the cycle. This all adds value to our shareholders, creates value for our shareholders.

In summary, we continue to believe that this is a very positive time for the lodging industry compared to the multiples of some of the other sectors in the REIT world we think hospitality is attractively prices. If you look at multi-family for example, they’ve got almost 20 times multiple, maybe 22 times multiple, very, very high.

Like them, hospitality has very strong fundamentals. They've got strong fundamentals, but they’ve also got new supply coming in and you’ve got Fannie & Freddie that will provide financing for. We doesn't exist in our industry, not only is new supply dropping, but there's no government agency to help along with new construction, so we think the new supply picture looks a lot better for our industry.

The differences in the multiples between the industries, if you look at all the other REIT sectors compared to hospitality sectors, usually our sector is about 300 basis points behind the other average of the other sectors; now we are something like 500 basis points behind.

So clearly a lot of capital has been attracted to the other REIT sectors that's been driving the RMZ and we think that there is a great opportunity in our sector because its under appreciated right now for reasons associated with what's going on globally and we think that some investors are missing the boat because some of those other industries are priced for perfection and are fully valued in our opinion.

But we believe our industry is not over value or priced for perfection and so we think there's great opportunity with much, much of the cycle left to be realized in this space, our company being among those. And so I would like to encourage you guys to consider your allocation to this sector and to our company.

That concludes our formal presentation. We are going into Q&A time now for about 30 minutes or so. Taylor Montessi and Andrea Welsh will be bringing around the microphones. This is being recorded. So if I could ask you to wait until you get the microphone so that we can record your question and everybody can hear it and then we will be able to respond.

Also, I want to remind you that we do have the supplemental data packets that are going to be available I think in the back of the room, is it right, ladies, at the end of the presentation that you can take with you, so you can see all the data behind all the presentations on the slides today.

So with that I am going to turn it over to Rob here who is going to moderate the session for us and we will take your questions.

Question-and-Answer Session

Rob Hayes

Alright, first question down here?

Unidentified Analyst

Given that you feel it's very expensive to issue equity right now, and let's say looking at deals in Europe and your equity is probably much more expensive than let's say getting direct institutional money into properties. Is there a way you can leverage small amounts of Ashford’s equity by having direct institutional partners invest in future acquisitions.

Dave Kimichik

There absolutely is and we are looking at potential joint ventures and it kind of lends itself, Europe lends itself to that but it would be more attractive to us if we had some partners over there that had been over there for quite some time and so we are looking at joint venture opportunities and we are talking to potential joint venture partners because our equity is expensive and we would only do something over there if it surpassed our hurdles. And our hurdles are quite high right now. So be the leverage off of somebody else’s cheaper capital would be a great way to do that. It’s harder to do but we haven’t shirked away from more difficult opportunities in past and Doug and his team are very diligently talking to groups. In fact if you know of a few we would appreciate the lead because we are actively looking for potential partners.

Monty Bennett

I think just to add to that though, it’s not just the capital. There is also the benefit of the basis of knowledge that sometimes partners might have over there and since Europe is a very relationship-driven area, each country, each even jurisdictions in countries having capital partners that might also expand our basis of relationships with potential owners of hotels to expand whatever platform we create as well as the capital relations is certainly worth us looking into the joint venture. And bear in mind joint ventures are nothing new to us. We have done here in US. So it shouldn’t surprise anyone that if we ever to do something over there, it could perhaps involve a joint venture.

Unidentified Analyst

Question for Monty, I like you to address the 40% EBITDA growth target in the context of what Ashford has reported as its legacy hotel portfolio. I mean there you have got RevPar already in the mid 90s you’ve got occupancy back in a 70s. You have got EBITDA margin if I remember right comfortably over 30% which is pretty good compared to peers. So do you see that portion of your portfolio able to deliver 40% EBITDA growth or do you have to look to the more opportunistic investments for as much as a third or a half of reaching that goal.

Monty Bennett

That’s a good point is to rephrase it as you know have we squeezed all the juice out of some of the legacy portfolios and not being able to continue to get those kind of flowthroughs. Every year as we’re budgeting we face that question and we are ask ourselves and our board asks us, is this possible and we in fact internally will set some of our marks at the 40% level because especially during the downturn so can we really achieve those levels and you saw from the chart up here that we continue to achieve and have continued to achieve those levels.

So every year I am skeptical about whether we can do it and want to be cautious yet Jeremy and his team continue to do it. There will be more upside in new acquisitions generally Highland this past year. I think you saw the slide where we had about 102% a flowthrough for the past 12 months. And for our legacy portfolio, for first quarter it was something like 46% and -- but even there it was because last year we had a lot of the property tax expense reversals in 2011. So that made it a difficult comp in that area. So legacy assets are more difficult to get the higher ones, but at this important time I don’t see any reason why we can’t hit that 40% and our goal remains to be 50% plus across you know all assets.

Unidentified Analyst

I have a couple of very different questions. One was regarding Europe and the ability to get financing, I presume you would want not take the foreign exchange risk exposure, so would you really looking to do financing in the US and do swaps or would you be able to get financing denominated in euros?

Dave Kimichik

Financing is more difficult over there, but for REITs you know getting 55% financing is not difficult. You don't have as many bidders but you can get it. We would be interested in denominating it in their local currency, that limits your overall risk. We can get into real trouble is if your revenues are in one currency and your debt is another. So getting in the local currency we would be interested in doing. Right now we don't see that as being problematic while those banks are looking to deleverage, they especially in their home countries want to continue to have the appearance of lending and we do a lot of business for some of these big international banks, UBS, DB, Credit Suisse and they are all very active.

And so from a short-term basis, we think it makes sense to hedge our currency exposure. It gets pretty expensive if you try to do it over long term. So from an underwriting standpoint we are trying to evaluate what we think those currencies will do. Over the long term generally currencies will go the route of the inflation rates of the home currency, but in the short term we think it makes sense. So at least right now our idea would be to source it, with the debt with European banks have it in the home country currency and then to hedge those cash flows over the short term being a year or two year out. That's our current thinking. Doug you want to add something to that?

Douglas Kessler

The only other thing I would add to it is debt is available. It is limited in its availability. And I think the key is, is what type of debt and where and for what type of assets. And we could go through each market and analyze it for you but generally speaking if you are in a gateway of international markets, Paris, London, Amsterdam, Munich, debt is available for those types of assets and those markets that have less variability in terms of the local socioeconomic political risks that might be taking place within that specific country, so and those are generally going to be the markets that we would believe the target being out in the provinces is difficult to find debt, it's not an area where we would expect to target our investments unless there's some component of a portfolio that might have some small provincial aspect, but while the yields maybe more attractive in buying those assets there are other issues related to transacting in the prudential markets. So gateway cities, there is still debt available.

Unidentified Analyst

So I will take it from that that you are looking to acquire individual assets, not a portfolio of assets.

Douglas Kessler

Well we would like to have critical mass. If we are going to do something in Europe we don't want to find that we've acquired one or two assets and we spend most of our earnings calls explaining X or Y asset in any given country. So I think our preference would be sufficient scale there in order to make it worth our while to be investing and make it worth the benefit to the shareholders that we foresee. That's not to say that we wouldn't buy single assets, but generally there are portfolio opportunities that are available whether through outright sales of owners who can't refinance, banks maybe taking back assets and beginning to put them on to the market. There could be recap opportunities with existing owners who have arranged some form of restructure with the banks there who seem to operate maybe a little bit more lenient than in some ways the US banks do. So a portfolio transaction is initially preferable. But we are not going to rule out single asset investments.

Dave Kimichik

We would only do single assets if felt like that could be part of a string of assets if there is more opportunity, would be the only reason we would go after single asset.

Unidentified Analyst

With your interest rate hedges burning off in 2013 and Monty made a comment, you expect interest rates to stay low for the foreseeable future, could you and Doug talk about how you are thinking about managing interest rates between now and 2016 as you have these refinancings come due and now a big block of them in 2016-17?

Monty Bennett

Sure, I will comment on it and maybe Kimo and Deric, you guys would want to add to is we think short term rates are going to be low, long term rates are going to be low. The premium for hotel loans is pretty high. So seven years ago, fixed loans were 6% that was because treasuries were at five and it was a 100 bips premium for an 80% hotel mortgage which is incredibly pricing. Now the long term treasuries, 2% but the premium for hospitality is much higher.

Also when you go after loans there are other factors that drive whether it's fixed or floating. If you had a floating rate loan you get more flexibility if you want to sell off some assets and so that goes into thinking. But generally if you had the option, I am more inclined to floating rates over the shorter term. But sometime over the next few years, when I felt like we are calling out this whole nationwide deleveraging scenario.

I do want to swap it into fixed and lock it down for as long as I could because then I think that interest rates will slowly start to come up over the long term. So that’s our current thinking on that process.

Unidentified Company Representative

One other thing I might just add to that is you know we are constantly looking for ways to hedge from the -- you are talking about the interest rate side but we will continue to do to look at other opportunities and other ways to be able protect our downside so that process will continue regardless.

Monty Bennett

Right even with the floating rates we of course have CapEx in the line.

Unidentified Analyst

Can you just help us understand a little bit about how much cash you are able to pull out of this you know portfolio and the Highland portfolio and maybe if it's locked today, if there is some mechanisms that allow you to able to pull out cash between now and the maturities over the next few years.

Unidentified Company Representative

The Highland portfolio the mechanism on the debt is all free cash flow goes to pay down debt. We have the flexibility to escrow access cash flow for FF&E purposes and to fund FF&E purposes for specific projects. So it's all soft contained but all access cash flow goes to pay down debt. The CNL portfolio doesn’t have that, it’s the cash flow comes to our pocket is 2.3% of the debt balance in aggregate that were currently getting each year on that portfolio and that will exist total maturity.

Dave Kimichik

When we refinanced the Highland portfolio then that will be under different terms, we will have the free cash then which probably doing three years or so we’ve got four years left on it and then on those CNL assets the fixed ones, we have got a couple of those portfolios in cash traps, but they are not trapping much cash right now. So there is a little bit trapping going on, but not much.

Unidentified Analyst

You guys used to show a slide that was sort of a time clock in where you brought different assets, whether it is debt equity through the cycle and I am just curious if there is an update on that, you know where we are and if for Europe, since we may be in a different, we are in a different phase, would you consider buying debt over there and maybe you mentioned it and I missed it?

Monty Bennett

Sure what [Bill] is referring to is we have got a slide that's the time clock or somebody will call it the tornado slide and it's -- the concept behind it is just trying to be flexible during different parts of the lodging cycle. These cycles are fairly predictable and the premise, the basic premise is still the same and that is, is that we want to see how to take advantage of that. Originally the idea was to take -- to buy first mortgage loans, to buy mezz loans, originate mezz loans to buy assets, do sale leasebacks at different parts of the cycle. And we did start to do that, we had more of a mezz business. When the tough times came though, we underwrote those mezz loans for 9/11 scenario being about the worst case. Well the worse case scenario was three times worse than that.

Despite that if you look at our entire mezz platform and or investment we got hole on that whole thing. So we are very happy with that. But we still think the risk return was there and so we are not too inclined to do many more mezz loans. We will do them if the opportunity is right, but we don't see that. As far as playing the cycles, we also discovered that instead of selling assets at a certain time and buying assets at certain time, we are much better off buying back our stock at certain times. That has become much more accretive for us since so synthetically buying assets, throwing stock is a much better way of playing that cycle which we did and we plan to again, if times turn tough.

Regarding Europe, what’s attractive about that is that their clock is being reset different than ours. They are in a recession and they are having troubles. I mentioned earlier how in United States, our stock is issued on the NYSE and is denominated in dollars and our assets in the United States, so the only way you can get any advantage from the accretion now, if you buy an asset is somehow if the assets you buy are from a better than just the portfolio and your stock prices mismatch, because you are at the same point in the cycle. Our assets are in the same point as our stock price.

But over in Europe, you've got a mismatch that you can take advantage of. We are 40% of the waste of the cycle yet they maybe coming into the bottom of the cycle. So now we can deploy capital with capital that's priced similar to the way through the cycle or turn away through the cycle into assets that maybe near the bottom of this cycle. And so, that's an advantage that we think Europe potentially holds and why we are looking over there for principle assets.

Unidentified Analyst

You mentioned that Remington is going to pick-up four out of the 28 Island hotels. What additional opportunities do you have there and is Remington reaching its limit in terms of capacity to handle that all?

Dave Kimichik

The Highland portfolio is 28 assets and I think initially Remington had 19. And we will be picking up two more here soon. Remington you know some management companies manage thousands of hotels. Remington manages 70 or so; so its no where near its limit.

That being said, we definitely have economies of scale on full service assets more so than select service and can add more value, we believe so that's our preference.

But as far as reaching the limits of Remington, not even close, but again it’s the amount of where you can add the most value and large full service hotels are part of that.

Rob Hayes

I do have a question from the internet, which say that, it looks like we've mentioned during the presentation, we are potentially selling lower-end assets. Do we have any sort of update on asset sales or any planned asset sales in the future?

Dave Kimichik

We generally like to move away from some of our select service portfolio, especially those that are brand managed into more full service franchise again generally, but we are not in a rush to do it. We think everyday we wait, the assets we sell will get more valuable and also the assets we buy will be more expensive.

But a number of our select service pools are encumbered with pretty high amounts of debt, so if we sold them we wouldn't receive proceeds much above our debt during that so called portfolio be a part of our platform.

So we will be moving in that direction; that will be a slow process and we are in no rush and its for no economic reason, really its just more from a management reason. Its going to be easier for us to focus on fewer larger assets, but its not a huge imperative, but something we are probably doing overtime.

Rob Hayes

Other questions, okay.

Unidentified Analyst

On the comment that your equity is expensive, I think what you are saying or how I am interpreting it, the expected return from the current assets at the current level is impressive, is strong. I would like to know I am interpreting that correctly and then how does that tie into buying back the stock and if you could share any thinking last fall whether or not the price was becoming attractive of your stock?

Dave Kimichik

The price of our stock was dropping on in the sixes in the fall and so that was certainly more attractive. Now we have been probably around nine, a little bit softer there recently. But, when I say, we believe our equity is expensive, I made it from a standpoint of which we think our stock price is going to do over the next five years. That’s generally a horizon and so if you take it what our stock price is today and we think it’s going to be five years from now and look at the return, we think it is pretty sizeable.

And so, when we run on models and compare a new investment into that model, it was going to be accretive to that. And so if we are going to issue equity for new investment, whether we do it actually or do it theoretically because we are using our cash, it’s got to have return that will make our theoretical stock price or anticipated stock price five year from now to be higher than otherwise would be. So that’s a high hurdle.

We want to mention that because investors are rightfully constantly concerned about stock issuance and how much you do, because they want to make sure that capital is allocated well. We believe that we are the best capital allocators in our business. If you look at our track record of when we raise capital, when we buyback stock and how we use it, we’ve got the best track record of our peers.

So we are very sincerest to that. We have got very strong economic interest to that. All being said, if we can find investments that exceed what we think is a healthy potential run-up in our stock, then we will go for it. But there are some high hurdles. Does that answer your question?

Unidentified Analyst

You mentioned in your next steps portion of the presentation that you wanted to drove the cash balance and it seemed like you wanted do that kind of a more tail-ended into the kind of the next five or six years of this cycle.

How does that kind of tie with just the philosophy to grow dividends and kind of where your dividend yield is and should we just interpret that as you guys want to grow your dividends to some degree over the early part of this cycle and then emphasize cash growth; can you just kind of clarify that for us?

Dave Kimichik

Sure. We don’t see those two desires playing into each other at all. When we look at dividends, we want to feel comfortable that that dividends could be covered all the time through current cash flow. And so none of the cash balance we want to raise will be to, in our minds at least, to make sure we can keep paying the dividend, although that’s certainly the case. We want to pay dividends out of current cash flow and be covered with that.

We’ve all had personal desires to see that dividend growth, because of our investments in its; this management team would like to see it, its cash to their own pockets. At the same time, we see that our stock does not move based upon our dividend. We were the highest in the industry and we look to that overtime, stocks just don’t trade based upon dividends.

So when we resell our dividend recently, we set at a level that we thought would be attractive at the high end of our peers, but there really wasn’t much of a reason to go very much higher because capital is expense is now we’ve believe, but we would like to grow it overtime and so ideally we’ll probably modestly grow it overtime to keep investors interested for own benefits to shareholders.

But we want to build that cash reserve to give investor and ourselves confident of the downturn that we can weather the storm to buy our own stock back if it drops off precipitously and we see an advantage opportunity to accrete our long-term holders and file liquidities to our short-term holders and to buy assets if we see an opportunity at that point in time.

Unidentified Analyst

And just to follow-up with that, are there any targets that we should be thinking about in terms of how much cash you would we looking to build or how you would be looking to de-lever the company kind of into what ever the downturn is five years from now?

Dave Kimichik

You know I’ve got internally some thoughts, but I don’t have fully flashed out, so probably should remain cautious about it. But here in the first couple of years we ended with $450 million or so; so right now the increases are going to be modest in these early years and by modest I mean tens of millions of dollars in the range, not hundreds of millions.

And as far as deleveraging, I don’t particularly want to deleverage over the next number of years. We expressed to everyone how we think leverage has got great advantages at this point in the cycle, but we’ll be forced to deleverage by the nature of some of our loans that we’re amortizing.

And so we share that for those investors that like to see some kind of deleveraging in the natural two or three points deleveraging over the next number of years, but it’s not like I’ve got a very strong desire to deleverage.

But take too I think, when your point says is that near (inaudible) what we think is most important five or seven years from now where we might go into a different cycle and just too far out to know when it might be, we think it’s more important to look at not our net debt, but our gross debt plus cash and the market unfortunately just looks at net debt and that’s not the way to look at it when you’ve got non-recourse debt.

It’s better to have higher gross debt levels and just put some cash on hand, because you’ve got a great optionality if you have a portfolio, where you have trouble servicing a loan, lender knows you can give it right back to them, they also know you have the financial wherewithal to carry it.

So you are in fantastic negotiating position than if you preemptively essentially pay down all that debt and just move into stock with lower debt, well now you’re getting the optionality. We like the idea of that optionality and that played well for us in the last cycle. So we looked at some of our portfolios and we looked to potential buying back our stock and we had the cash on hand and we said, well we might have to refinance these portfolios coming up, should we hang on to these cash.

And the economics of it clearly show that we are much better off buying our stock back today at these prices. And potentially given the way the MIP portfolio, if we had two, three years later, but then we also have the opportunity that the markets would come back and we can refinance it, which is what happened.

So that optionality is important to us and we think it’s a great for and been for our investors. So that's how we look at it on kind of a gross and net debt. And in this regard we think gross matters. We think that we need to have a decent amount of cash on hand. You guys are dominating all the answers to your, anything you guys want to add?

Rob Hayes

We just have time for, I guess one more question.

Unidentified Analyst

Yes, you spoke a lot about acquisitions and I am just wondering how competitive the marketplace is because obviously you would like to get some significant cash flow returns like we saw on Highland in such a short period of time. But I am wondering how many people are looking at what you are doing and trying to maybe copy your pricing has to go up, so you won't get as much cash flow leverage as you do with Highland?

Unidentified Company Representative

The market is very competitive right now. I think you have to think of the market as really being two markets, the major gateway cities in the US and then the rest of the country. Clearly, in the rest of the country not as competitive; you just don't have as much buyer interest and despite the higher yields that you can obtain, its harder to finance those assets, there is less demand.

And particularly, when you take into account who are the big buyers today, obviously as REIT share prices have begun to recover, we are seeing more REIT activity off some of the large pension fund, advisors or the private equity funds are engaged in buying assets today as well.

So in those gateway cities the competitive landscape is pretty deep and we are seeing that the number of buyers is increasing overtime. We are seeing the number of bidders that are admitted into the second round is increasing as well. And you are going may be into a third round of bidding, may be in some cases a fourth round of bidding.

So we have been actively looking at assets. We have actually been engaged in bids. We haven’t won anything yet; obviously if we had we would have referred to you by now, but I think it’s fine that we are coming in second, third place, because it’s showing the discipline that we have with respect to our thresholds as to where we cut it off in terms of whether that asset is going to be an accretive transaction for us.

We don’t have to grow for growth sake. We don’t have to be in a market because everyone else is in that market. What we have to do is deliver the best shareholder returns and that means we reach our threshold where we are not going to bid any higher then so be it. We’ll try to be as creative as we can. We do for some interesting ideas for potential sellers. Sometimes they work, sometimes they gets sense to the next round, but sometimes as far as it is right now. We haven’t been the winning bidder.

And in some ways we look at where some of the bids have come out and the only thing we can say is, winner’s curse. You won the hotel that you outbid 30 other bidders; where is the victory in that? Now you could say that when we buy, is that the same case as well. But remember our most recent acquisition, the Highland Hospitality transaction, the way that we got into that transaction about a year ago is that we affectively took a financial strategic approach that froze out almost everyone else that even we have had an opportunity to bid for. So it’s a very competitive market in other words.

Rob Hayes

Okay. Well, thank you all for attending and I have a couple of quick reminders. The first is, we have some spots there for lunch, it’s not a formal lunch so its just about face, so even if you just to want to stay five or 10 minutes and grab something to go, please feel free to do so. We’ll all be available for questions and sit down and talk.

The gifts are in that room as well, which is just here outside to the right, so please feel free to pick up your gift. And outside we have also have copies of the presentation and kind of the any data package they are also available on our website.

So thank you all for attending and we look forward to seeing soon. And finally also, one-on-one’s are also available still, if you want to meet with Andrea or Taylor. Thank you.

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