Investor & Analyst Day Conference Transcript

May 21, 2013 9:00 AM ET

Executives

Deric Eubanks - Senior Vice President, Finance

Monty Bennett - Chairman and CEO

Douglas Kessler - President

David Brooks - Chief Operating Officer and General Counsel

David Kimichik - Chief Financial Officer

Jeremy Welter - Executive Vice President, Asset Management

Rob Hays - Senior Vice President, Corporate Finance and Strategy

Elise Chittick - Investor Relations

[Kari Blanney] - Investor Relations

Analysts

Presentation

Deric Eubanks

Let’s go ahead and get started. Good morning. Welcome to the Ashford Hospitality Trust Investor and Analyst Day. I’m Deric Eubanks, Senior Vice President of Finance for Ashford, and I’d also like to welcome all those that are joining us online. The presentation is being video archived and will be available on our website at the conclusion of the presentation and our website is www.ahtreit.com.

Let me

I read with interest two articles by Dane Bowler (I,II) and another by Brad Thomas over the past week that examined REIT valuation, specifically that of triple-net kingpin Realty Income (O). Bowler recommended a swap out of O and into small-cap Gladstone Commercial (GOOD), while Thomas opposed the idea calling Gladstone the "waterboy" of his football team, but admitted that Realty Income's valuation is somewhat

on the high side.

Despite their difference of opinion, I think the discussion is a healthy one that I'd like to further, not just pertaining to Realty Income's valuation but the entire space. I've been a selective supporter of REIT investment over the past year and though a healthy, expansionary environment continues to exist in the sector, I do think the glaring value opportunities are starting to wane, as income and total return investors flock to the space. As such,

Since its IPO in 2003, Ashford Hospitality Trust (AHT) has outperformed by any definition of the word. Its hotel operations, shareholder returns, dividends and alignment have all been vastly superior to its competitors. After showing AHT's supreme historical performance, this article will demonstrate it to be well positioned to outperform in the future. AHT is a phenomenal buy and I will provide the evidence to justify this claim.

Historical Outperformance

In the end, the most important thing is for a company to make money for its shareholders. Ashford has done that far better than its competitors for the entirety of its history.

(click to enlarge)

How has it been able to achieve such results? Well, it comes down to 3 aspects

1. Superior hotel operations
2. Superior knowledge of the industry
3. Superior alignment

Let us explore each of these in more depth.

Superior hotel operations: Ashford's hotels are run under the

Q1 2013 Earnings Call

May 9, 2013 11:00 AM ET

Executives

Scott Eckstein – IR

Doug Kessler – President

David Kimichik – CFO and Treasurer

Jeremy Welter – EVP, Asset Management

Analysts

Ryan Meliker – MLV & Company

Arpine Kocharyan – UBS

Will Marks – JMP Securities

Austin Wurschmidt – KeyBanc Capital Markets

Nikhil Bhalla – FBR

Bryan Maher – Craig-Hallum Capital Group

David Auerbach – Esposito Securities

Presentation

Operator

Welcome to the Ashford Hospitality Trust First Quarter 2013 Conference Call. (Operator Instructions). I would now like to turn the conference over to Mr. Scott Eckstein. Please go ahead, sir.

Scott Eckstein

Thank you, operator. Good day, everyone, and welcome to Ashford Hospitality Trust Conference Call to review the company’s results for the first quarter of 2013. On the call today will be Douglas Kessler, Ashford’s President; David Kimichik, Chief Financial Officer; and Jeremy Welter,

It is that time of year again when we get fresh data with which to work. Earnings season tends to come with increased volatility, which translates to opportunity for those ahead of the market. This article will detail my predictions and reasoning as to which REITs will beat and which will miss estimates. Let us begin with a table of incoming earnings reports:

Data from SNL Financial

Why these REITs?

Clearly the list above is not all inclusive, so why have I picked these

Last week I felt compelled to write an article on 3 Health REITs with Mispriced Risk. It seems that the durable shares of the necessity-driven healthcare REITs have moved up extraordinarily fast, and as a result, many yield-hungry investors have jumped on the gravy train. Some of my favored mid-caps, notably Omega Healthcare Investors (OHI) and Medical Properties Trust (MPW) - have been on an explosive roll, thanks to the support of Mr. Market. As I explained

It's clear to see that these "higher risk" assets are also driving the returns, and it's important for investors to understand the risks and the value proposition of investing in lower quality vs. higher quality assets. Simply said, OHI, MPW, and AVIV have all turned in outstanding total returns in recent months; however, there is reason to believe there is a lower margin of safety when there is mispriced

Back at the start of 2013 I wrote an article disclosing the entirety of my investment portfolio. The environment has changed materially since that time and my portfolio along with it. The start of the 2nd quarter marks an excellent time to provide an update, but first, let us review my performance.

Q1 Performance

In the first quarter of 2013 my portfolio delivered 17.63% total returns. Since I declared that it was designed for outperformance, rather than absolute returns, this number means nothing without comparison.

As a mostly REIT portfolio the most relevant comparison would be the MSCI REIT index. The table below compares it to this as well as prevalent funds and indexes.

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Tuesday March 26.

Dell (DELL)

Dell (DELL) is a company in secular decline, and yet it is attracting suitors. CEO Michael Dell discussed taking the company private, but Dell is attracting bids. Cramer wonders why anyone would want to buy Dell. Its acquisitions to expand into consulting have not met with success, it is seeing declines in earnings, margins and revenue. Dell has no mobile, social or cloud exposure; it looks like a tech company from the 90s. Cramer wonders what kind of magic Michael Dell can work privately that he hasn't been able to publicly. Why is the company valued at $14 billion publicly, but some seem to think it is worth $26 billion. Ultimately, the winner will be the one who doesn't end up with Dell. Cramer thinks Michael Dell should sell Dell to

Nearly every day there are market analysts suggesting an impending crash. An equal number seem to think the market will go up forever. Each side cites various forms of evidence to make their points, but the truth is, nobody really knows what will happen. Investors need to be prepared for either outcome. Ideally, we can use a portfolio strategy that provides protection against downside while maintaining upside in the event of a bull market. The portfolio we will present below does just that.

First, let us explore some of the most prevalent strategies portfolio managers have suggested for dealing with an uncertain market. We will detail why each of the methods presented below fails to simultaneously protect potential gains and reduce potential losses. I believe, however, that the portfolio presented herein succeeds in doing both.

Puts/calls

A common way to hedge long positions is to buy puts of the same

Q4 2012 Earnings Call

February 28, 2013 11:00 AM ET

Executives

Scott Eckstein – IR

Monty Bennett – Chairman and CEO

David Kimichik – CFO and Treasurer

Jeremy Welter – EVP, Asset Management

Douglas Kessler – President

Analysts

Austin Wurschmidt – KeyBanc Capital Markets

Ryan Meliker – MLV & Company

Patrick Scholes – SunTrust

James Milam – Sandler O’Neill

Dave Loeb – Baird

Will Marks – JMP Securities

Robin Farley – UBS

Bryan Maher – Craig-Hallum Capital Group

Nikhil Bhalla – FBR

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ashford Hospitality Trust Fourth Quarter 2012 Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions.

(Operator Instructions) Today’s conference is being recorded, February 28, 2013.

I would now like to turn the conference over

The buy thesis for MHI Hospitality (MDH) is both simple and powerful: if it can meet or beat its guidance for 2013, it will massively outperform the market. Guided FFO per share of $0.55-$0.72 would represent a price/FFO of 5.10-6.67. As such, for every dollar invested capital would earn in the market's average stock, MHI Hospitality would produce nearly $3. In this article, we will delve deep into its fundamentals to demonstrate the likelihood of such earning actually manifesting. Here is MDH's full guidance for 2013.

(click to enlarge)

Discussed below is how it is going to meet or exceed that guidance.

Earnings catalyst # 1: lodging sector fundamentals

Lodging demand is most accurately measured as RevPAR, which is the product of ADR and occupancy. Ordinarily these metrics move together, but in this particular cycle, occupancy growth has plateaued while ADR is expected to continue to rise.

(click to

The long-term success of an investor is largely consequent to his/her decision making process. Developing a strong process is no easy task and even the best minds cannot perfect it a priori. It requires countless iterations with brutally honest reflection. As I am on a 14 hour flight to Beijing, China, this is the perfect time for me to update my process. I will begin by sharing my process improving methodology and show it at work through analysis of mistakes I have made in my investments. Along the way we will uncover some ubiquitous errors and provide insight into an effective method for improving one's investment process.

Process improving methodology

Regardless of an investor's skill or success there is always room to improve. The method detailed below is a step-by-step guide for improving one's process.

1. Honest reflection: Includes determining what worked what didn't and whether or not it SHOULD

I find it interesting that two of my favorite financial legends are on opposite sides of the diversification argument. What makes it harder is that I respect them both and I always find myself battling the question: too much or too little diversification?

Let's start with the pro-diversification argument. Sir John Templeton (knighted by Queen Elizabeth in 1987), deemed one of the greatest global stock pickers of the century (Money Magazine, Jan, 1999), was a die-hard value investor as he once said:

Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.

Sir John, who lived to be 95 years-old, seemed to be a product of the Grahamian-era where he continually taught that "wise investors must recognize that success is a process of continually seeking answers to new questions". Accordingly, Sir John

In this article we show that hotels are positioned for outperformance, catalyzed by tremendous fundamentals and the removal of negative stimuli. Understanding its outlook requires us to first look at where the sector is now, and how it got here.

All time low interest rates have created a frenzied search for yield in which REITs have become the darling of income investors. Some have turned to mortgage REITs for the double digit yield, while others, who wanted the security of income derived from a tangible source, turned to equity REITs. Fears of the fiscal cliff and now the lack of resolve to the debt ceiling (and the budget) instill apprehension which has led investors to locked-in revenue such as triple net REITs. In this frenzy, only the hotel sector remains untouched as investors do not want day to day revenue which could disappear at the first sign of crisis. Consequently,

Last year I wrote an article (Balancing Risk: REITs That Outperform in Good Times and Bad) in which I explained the use of leverage and its correlation with the higher risk REIT alternatives known as mortgage REITs:

As in any form of investment, the more debt you use, the greater the potential for gain or loss. When we buy stocks on margin, we are leveraging investment returns with debt. And any asset carried on high margin involves substantial risk, since a decline in the asset's value will cause a much larger decline in the original investment (principal).

Likewise, REITs that use excessive leverage to increase returns do not provide long-term value (except during extraordinary periods when commercial real estate is acquired at abnormally cheap prices) and those REITs that generate the most consistency are distinguished by modest debt and conservative balance sheet fundamentals.

It is well known that

It's time to clarify how quantitative easing affects the market. QE critics say it artificially props up the market, that it will cause inflation, and that it has killed fixed income investing. There is some truth to these criticisms, so here's what to watch for with stocks, why bond yields have cratered, and how to find other fixed income investments.

Demand Side

Normally, the US might see 1.8 - 2% real productivity growth and about 1% population growth. Consequently, real GDP growth should be around 2.8 - 3% annually. Instead, we're stuck in the 1-2% range.

The root cause for this slow growth goes back twenty years. The American consumer and government borrowed trillions against the future's GDP. Now, the American consumer is paying off that debt and it will take just as long to pay off as it did to accumulate, if not longer. Thus, the economy won't grow

Yesterday I wrote an article (4 Intelligent REITs I Adore, But Can't Buy Right Now) in which I utilized F.A.S.T. Graphs to determine whether there is an adequate "margin of safety" in valuing four very popular blue-chip REITs. As I suspected, all four prospects have exceptionally well-managed platforms and it seems that Mr. Market just thinks more of the share prices than I do today.

As you all know, REIT dividends are a big part of the total return formula and it seems that many of the "dividend champions" - with a long track record of dividend sustainability - are equally adored by Mr. Market. So where in REIT-dom can we find a favorable security that has a better value (pricing) proposition but is not intolerably more risky than the ones Mr. Market also adores?

Remember that "intelligent REIT investors" have two things to consider: (1)

Oh man, do bond yields stink. That's what happens when the Fed becomes the buyer of every last little bond on the market. So folks looking for fixed income have had to look elsewhere and those with limited risk tolerance probably are concerned about introducing too much risk into their portfolio. With that in mind, retirees and others looking for stable fixed income should examine these three selections for 2013.

But first, a quick look back at my picks for 2012. Ashford Hospitality Trust (AHT) was up 52%. The iShares S&P U.S. Preferred Stock Index (PFF) was up 10.2%. Finally, Kinder Morgan Energy Partners, L.P. (KMP) was essentially flat…but you did earn 5.6% in dividends (plus dividends on the other two stocks mentioned).

Business Development Companies are great resources for dividends, but they come with an extra net of safety. The managers of these companies do

As fears of the fiscal cliff subside, the REIT market continues to appreciate. It is approaching the historically high levels preceding the Great Recession.

(Click to enlarge)

While REITs earnings have also been strong, price appreciation has outpaced legitimate growth and REITs have become overvalued. An average price to FFO of 15.77 for U.S. Equity REITs really limits the earnings return on investment for the general REIT investor. However, if we look at individual securities, many opportunities remain which have a strong chance to outperform the market. Presented below is my personal diversified REIT portfolio.

This morning I was watching an interview on C-SPAN with Steve Forbes, President and CEO of Forbes Media. Towards the end of the segment, Mr. Forbes offered the following advice for stock investors:

Don't try to be a timer, especially with your retirement money. Timing is a loser's game. Consistency wins. Emotions are your enemy. People too often leave the market when things get bad. (They) get in when things are good and then they get whip-sawed and they end up under-performing the market. Steadfastness is the key.

Well Mr. Forbes, your comments are spot-on (exactly correct)!. As most of my readers know, I am a disciple of Benjamin Graham and like Mr. Graham (and Mr. Forbes) I am always looking for a "margin-of-safety" in which I can wait patiently for storms to subside, knowing that a sunnier and more plentiful time is bound, as a law of