Ashford Inc. (NYSEMKT:AINC) Q4 2016 Earnings Conference Call February 24, 2017 12:00 PM ET
Joe Calabrese - Investor Relations
Monty Bennett - Chairman and Chief Executive Officer
Deric Eubanks - Chief Financial Officer
Jeremy Welter - Executive Vice President, Asset Management
Rob Hays - Chief Strategy Officer
Ryan Meliker - Canaccord Genuity
Good day, everyone and welcome to the Ashford Inc. Fourth Quarter 2016 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead, sir.
Good day, everyone and welcome to today’s conference call to review results for Ashford Inc. for the fourth quarter of 2016 and to update you on recent developments. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; Jeremy Welter, Executive Vice President of Asset Management; and Rob Hays, Chief Strategy Officer.
The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon in the press release that has been covered by the financial media.
At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks which could cause actual results to differ materially from those anticipated. These risk factors are more fully discussed in the company’s filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them.
In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company’s earnings release and accompanying tables or schedules which have been filed on Form 8-K with the SEC on February 23, 2017 and may also be accessed through the company’s website at www.ashfordinc.com. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release.
This communication does not constitute an offer to buy or solicitation of any offer to sell securities. This communication relates to a proposal which Ashford Trust has made for a business combination transaction with FelCor that is supported by Ashford Inc. In furtherance of this proposal and subject to future developments, Ashford Trust, Ashford Inc. and if a negotiated transaction is agreed, FelCor may file one or more registration statements, prospectuses, proxy statements or other documents with the SEC. This communication is not a substitute for any registration statement, prospectus, proxy statement or other document Ashford Trust, Ashford Inc. or FelCor may file with the SEC in connection with the proposed transaction.
Investors and security holders of Ashford Trust, Ashford Inc. and FelCor are urged to read carefully the registration statements, prospectuses, proxy statements and other documents that maybe filed with the SEC if and when they become available, because they will contain important information about Ashford Trust, Ashford Inc. and FelCor and the proposed transaction. Investors and security holders may obtain free copies of these documents if and when they become available and other related documents filed with the SEC at the SEC’s website at www.sec.gov.
Ashford Trust and Ashford Inc. and their respective directors and executive officers may be deemed participants in the solicitation of proxies in connection with the proposed transaction. You can find more information about the directors and officers of Ashford Trust, Ashford Inc. and FelCor in the definitive proxy statements for their most recent annual meeting filed with the SEC. These documents are available free of charge at the SEC’s website at www.sec.gov. Additional information regarding the interest of such potential participants will be included in one or more registration statements, proxy statements, tender offer statements or other related documents filed with the SEC if and when they become available.
I will now turn the call over to Rob Hays. Please go ahead, sir.
Good morning, everyone and thank you for joining us. Monty unfortunately is feeling under the weather this morning and he asked me to give his prepared remarks. He is on the call, however, but in listen-only mode. We are pleased to present our financial results for the fourth quarter of 2016. I will begin by reviewing our performance highlights. Afterwards, Deric will review our financial results and Jeremy will provide an overview of our investments in OpenKey as well as other initiatives and then we will take questions.
Our strategy is built around our ability to leverage the combined expertise of our management team to both grow our company and the platforms we advised. I believe we have the most highly aligned, stable and effective management team in the hospitality industry. Our track record of success speaks for itself as this the same team that has generated 186% total shareholder returns for Ashford Trust since the company’s IPO in 2003 compared to 108% return for our peers as of yesterday’s close. [indiscernible] shareholders has always distinguished us from others in our industry. We consider it one of our main competitive advantages and a primary reason for our superior performance.
Ashford currently advises two publicly traded REIT platforms; Ashford Trust and Ashford Prime which together have 134 hotels with over 29,000 rooms and over $6.4 billion of assets as of December 31, 2016. During the fourth quarter these platforms achieved RevPAR growth for all hotels not under renovation, a 3.2% and 3.6% at Trust and Prime respectively, which significantly exceeded the chain scale results of the U.S. Luxury and upper upscale chain scales of 1.9% and 0.6% respectively.
Ashford has a high growth fee based business model with a diversified platform of multiple fee generators due to scalable platforms, attractive margins and low capital needs. Additionally, it had a very stable cash flow base and the advisor agreements with the REITs stipulate that the minimum base fee can’t drop by more than 10% from the previous year’s base fee. Currently, our company is focused on three areas of growth. First, we would like to accretively grow our existing REIT platforms. Second, we would like to add additional investment platforms such as launching a platform focused on owning select service hotels. Third, we would like to buy or invest in complementary businesses such as Remington, OpenKey and others.
Along those lines, the proposed transaction with Remington continues to be delayed as we continue to work with the IRS on a private letter ruling. As we discussed last quarter we had been active in exploring opportunities to invest in hospitality related businesses and have seen many attractive opportunities. However, we initially felt we needed to delay some of these potential deals pending the outcome of the Remington transaction. But we believe that we can’t wait any longer in pursuing those opportunities and we will move forward on some of these other potential transactions. And we hope to have more information for those for you soon.
Our goal is that none of these potential transactions will impact the closing of our Remington deal. If we are unable to close the Remington transaction, we will move on and believe that there are still very attractive growth opportunities available to us including potentially buying only Remington’s project management business, which would not require a private letter ruling. We will continue to look for strategic opportunities and additional platforms to grow Ashford’s business and deliver superior returns to our shareholders. Along these lines Ashford Trust recently made a public offer to acquire FelCor Lodging Trust for $9.27 per share. This offer equates to a 28% premium to the share price at FelCor above its then previous day’s closing price.
The Board of Directors of Ashford has authorized the company to participate in a transaction on the terms outlined in Ashford Trust letter to FelCor subject to completion of the due diligence review, the negotiation and execution of definitive transaction agreements. The terms outlined include; 100,000 warrants issued to existing FelCor shareholders to purchase shares of Ashford with a strike price of $100 per share and expiration on its 5 years of the transaction closing date, a 1 year guarantee by Ashford of up to $18 million for sustainable operational and G&A synergies commencing six months following the completion of the transaction which if needed would come in the form of reduced advisory fees paid to Ashford. The opportunity for one FelCor Director to join the Board of Ashford and finally an agreement to negotiate and amend the advisor agreement with Ashford Trust within 1 year of the transaction closing date to reflect similar recent amendments made between Ashford Prime and the company where applicable. Any such amendments to the advisor agreement will be subject to approval by independent committees of both Ashford Trust and Ashford boards. We believe our participation in the proposed combination is in the best interest of the company and our shareholders and that the proposed transaction has compelling strategic operational and financial merit for the shareholders of FelCor and Ashford Trust as well as Ashford.
Turning to new investments, during 2016, we announced our investment in OpenKey and Chairman will provide an update on that investment’s progress momentum in a few minutes. We have a revolutionary fee structure in place for Trust and Prime that incentivizes shareholder value creation with the base fee driven by share price performance and incentive fee based on total shareholder return out-performance versus peers as management team’s primary focus is to maximize returns in our REIT platforms. This was evidenced by Trust 12% total shareholder return out-performance versus its peers in 2016 which resulted in a $5.4 million incentive fees that will be paid to us over 3 years.
In closing 2016 was another solid year for Ashford and our financial results were strong, our competitive position improved and we further diversified our platform with our investments in complementary hospitality businesses. We remain optimistic about the prospects for our two managed REIT platforms and we expect both to continue their solid performance. Additionally, we see great opportunity for this platform to grow by adding additional investment platforms as well as investing in other hospitality related businesses.
I will now turn the call over to Deric to review our financial performance for the fourth quarter.
Thanks Rob. I would like to remind everyone that we have consolidated the financial position and operating results of the private investment firms managed by Ashford Investment Management. The financial impact from this consolidation is adjusted out of our fourth quarter 2016 financials through the non-controlling interest in consolidated entities line items on the company’s income statement and balance sheet. Net income attributable to the company for the fourth quarter of 2016 totaled $0.7 million or $0.36 per share compared with net income of $2.7 million or $1.33 per share for the fourth quarter 2015.
For the fourth quarter ended December 31, 2016, advisory services revenue totaled $19.4 million including $16 million from Trust and $3.4 million from Prime. Adjusted EBITDA for the fourth quarter of 2016 was $4.1 million compared with $4.6 million for the fourth quarter of 2015. And adjusted net income for the fourth quarter of 2016 was $3.8 million or $1.69 per diluted share compared with $4 million or $1.80 per diluted share for the fourth quarter of 2015. At the end of the fourth quarter the company had approximately $6.4 billion of assets and management from its managed companies and $25.3 million in corporate cash. Ashford Inc. has no debt, no preferred equity and a current equity market capitalization of approximately $110 million. Also as on December 31, 2016, the company had 2.2 million fully diluted total shares of common stock in units outstanding.
I will now turn the call over to Jeremy to discuss our investment in OpenKey and other initiatives.
Thanks Deric. We continue to be excited about our investment in the hospitality focused mobile key platform named OpenKey. OpenKey is the universal smartphone app for keyless entry into hotel guest rooms. We believe this product will drive increased adoption among hotel owners and guests alike as consumers have clearly indicated a strong preference for aggregation of app content and universal functionality. OpenKey has secure interfaces with major global lock manufacturers including four of the largest Assa Abloy, Kaba, Salto, and Miwa. While some of the major global hotel brands are in the process of building their own proprietary systems, there is a significant growth potential for OpenKey given there are nearly 18 million hotel rooms globally, many of them in penny hotels that need a mobile key solution. Not only are there millions of rooms globally that need a mobile key solution, but OpenKey currently has little competition in this space.
As a result they are being exciting additional developments regarding OpenKey’s technology recently. OpenKey carried out a major update of its platform in the fourth quarter and a Version 4.0 will be launched in the first quarter of this year. Furthermore, it has a key to a significant uptake in usage at properties by implementing pre-arrival technology. For guests to able to receive their key before they arrive has dramatically increased adoption. Finally, in 2016 OpenKey also launched a white label platform allowing hotels and brands to use their own imagery on top of the OpenKey software. Over time, we expect open key to provide labor cost savings to our hotels. We also expect the platform to offset some of the costs of RFID key cards.
Finally, we believe the direct engagement of the consumer with the OpenKey made lower customer acquisition costs over time. We are also very active in evaluating additional investments in operating companies. We are hopeful to share some more details on that front in the upcoming quarters.
That concludes our prepared remarks. And we will now open the call up to your questions.
Thank you. [Operator Instructions] We do have a question from Ryan Meliker with Canaccord Genuity. Please go ahead sir.
Hi guys. Good morning. Couple of things really to touch on, first of all with regards to the Remington transaction, I am assuming things haven’t progressed anyway since we last spoke in November and you guys are still just awaiting the same private letter ruling you are awaiting before and there is no update on timeline or any expectation, is that a safe assumption or have things changed a little bit since November?
Alright. That’s a safe assumption, we are still on status quo, but I would say we are making it clear that we are going to continue to move forward with some of these acquisitions and we are not going to allow that private letter ruling to delay. What we see are some accretive investment opportunities, but yes, fundamentally we are in similar positions we were last quarter.
And at what point do you decide to just scrap the Remington transaction, saying it’s not going to work?
Well, eventually we will get to a position where we will have to choose between certain transactions in that deal. We are not there yet, but it will tape the decision we make when we get there.
Got it soon. So you have an alternative use you are going to continue to move forward on Remington, obviously given it’s an affiliated party is willing to be patient as well?
Okay, that’s helpful. And the second question I had was with regards to the FelCor transaction, can you just help us understand how you guys came to the Ashford Inc. contribution component, it looks like it’s about 20% of Ashford Inc.’s issued to FelCor or somewhere that ballpark you are pretty substantial value based on where your share price is today, how did you kind of underwrite that and how did you get comfortable with the right amount of equity distribution coupled with the actual value of that equity for the increased fees you are going to get, what types of returns were you targeting, help us understand that dynamic?
Well. Ashford Inc. and their independent directors were involved in the decision of how much equity from Trust would be distributed. And that’s a choice for Ashford Trust and their directors.
I am just trying to get the Ashford Inc. shares.
Well, the Ashford Inc. shares would be distributed from Ashford Trust that’s an Ashford Trust decision.
So those are shares not being paid by Ashford Inc. but paid by Ashford Trust. So your share doesn’t go up...?
Correct, so as of right now Ashford Trust owns 30% of Ashford Inc. and those will be a distribution instead of maintaining those within the platform. It would move Ashford Trust from 30% ownership to 10% and so that’s right.
Okay. I understand now, they are secondary issues not primary shares, I was thinking they were primary shares from you guys. Okay, that’s helpful.
That’s right. But there was a decision from Ashford Inc., the independent directors to be willing to contribute certain warrants that further align the FelCor shareholders with the advisor Ashford Inc. as well as the willingness to accept their one of the Board Members and obviously their willingness to sign up this guarantee, this $18 million operational G&A synergy. So those were decisions agreements that our Board made and I feel very strongly that they help the line of deal and support the transaction.
And the warrants are at $100 strike price if I recall?
Right, $100 stock price and a 5-year term from the closing of the transaction.
I think all the Ashford Inc. shareholders would be very happy if those warrants would be executed so?
And that’s the alignment Ryan and that’s the argument. Anything that we can do to help align FelCor shareholders with the advisor is a good thing, that’s the principle that we have held in Prime and in Trust and it’s something that as we roll in hopefully the FelCor platform it will be the same. And given that post transaction, Trust would still owned directly 10% of Ashford Inc. and FelCor shareholders would own a majority of the pro forma platform, at the end of the day FelCor shareholders would own approximately 25.6% of Ashford Inc. closing the transaction. So we think that is very, very strong alignment in addition to the warrant.
That makes sense. And then the last question I had was obviously talked a lot about OpenKey, you talked about the fact that you are looking in the other opportunities similar to OpenKey, at what point do you guys decide you want to go out and raise capital to fund these acquisitions as opposed to using Ashford Inc. dollars to fund these acquisitions. I think we had always thought that at some point Ashford Inc. would be buying these types of companies in some type of private equity fund as opposed to on balance sheet, are you close to that level, are you not close to that level, are acquisitions too small couples to warrant it, help us understand how we should frame that.
Yes, the acquisition we have actually – one that we are looking at is the east side acquisition, but we still have enough cash on hand to fund it. Some of these we are looking at potentially were the sellers would still retain some equity, a minority position. So, it’s not a full 100% ownership stake and we are willing to put some leverage on some of these investments to lower the cash purchase price that’s required from Ashford Inc., but I think as we kind of evaluate it, I think that if we sign a great deal and it makes sense to fund it with issuing new equity, I think we are always open to that, but we don’t see that with what we are currently looking at today.
And Ryan, I think – and if we find that the flow of deals is one where a private fund structure makes sense, we are definitely open to that. Right now, the deals that we are seeing are relatively small or very accretive small tuck-ins, but as other opportunities grow and we continue to grow the platform that’s always possible.
Alright. That’s helpful. Thanks, guys.
And that concludes the question-and-answer session for today’s conference. I would like to turn the conference back over to management for any additional or closing remarks.
Thank you for joining us on our fourth quarter earnings call and we look forward to speaking to you again on our next call.
And that concludes today’s presentation. Thank you for your participation and you may now disconnect.
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