Ashford Hospitality Trust, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Greetings, and welcome to the Ashford Hospitality Trust Fourth Quarter 2020 Results Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jordan Jennings, Investor Relations for Ashford Hospitality Trust. Please go ahead Ms. Jennings.

[Jordan Jennings:]

Good day, everyone, and welcome to today's conference call to review the results for Ashford Hospitality Trust for the fourth quarter and full year 2020 and to update you on recent developments. On the call today will be Rob Hays, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, Chief Operating Officer.

[Rob Hays:]

Good morning and welcome to our call. Since our last call in October, our business and the industry have remained pressured due to the pandemic and these remain challenging times for our country, the economy, and of course the hospitality industry. I'll start with the current environment and how Ashford Trust has managed through this pandemic and the early parts of the recovery. After that, Deric will review our financial results, and Jeremy will provide an operational update on the portfolio. I'd like to highlight though some of our accomplishments and we can get into the details later in the call. First, we secured strategic financing with additional future commitments to provide years of runway. Second, we effectively completed our forbearance initiative. Third, we have delevered the balance sheet by close to $0.5 billion since the beginning of the pandemic. Fourth, we have materially grown both the equity value of the company and daily trading volume to provide increased liquidity for our shareholders. Fifth, we have reduced our monthly property cash utilization by approximately 85% since the second quarter. And lastly though we have an attractive loan maturity schedule, we have successfully modified property loan extension tests on two large pools for 23 and 24 tests. This initiative will continue to be a focus for us going forward.

[Deric Eubanks:]

Thanks, Rob. For the fourth quarter of 2020, we reported a net loss attributable to common stockholders of $70.5 million, or $2.29 per diluted share. For the quarter, we reported AFFO per diluted share of negative $1.67. Adjusted EBITDAre totaled negative $23.1 million for the quarter. At the end of the fourth quarter, we had $3.7 billion of mortgage loans with a blended average interest rate of 3.5%. This average interest rate does not take into account any default rates. Our loans were approximately 6% fixed rate and 94% floating rate. Our hotel loans are all non-recourse. As Rob mentioned, we have signed forbearance or other agreements for 97 properties representing approximately 98% of our current outstanding mortgage debt balance. We ended the quarter with cash and cash equivalents of $92.9 million and restricted cash of $74.4 million. The vast majority of that restricted cash is comprised of lender and manager held reserve accounts. At the end of the quarter, we also had $9.4 million in due from third-party hotel managers. This primarily represents cash held by one of our property managers, which is also available to fund hotel operating costs. From a cash utilization standpoint, our hotel EBITDA in the fourth quarter was negative $9.3 million that equates to a shortfall of around $3 million to $4 million per month. Our current monthly run rate for interest expense is approximately $11.4 million and our current monthly run rate for corporate G&A and advisory expense is approximately $4 million. In total, our current monthly cash utilization is approximately $18 million to $20 million, which is down significantly from around $37 million that we disclosed in the second quarter. As of December 31, 2020, our portfolio consisted of 103 hotels with 22,594 net rooms. Our current share count stands at approximately 86.4 million fully diluted shares outstanding, which is comprised of 84.2 million shares of common stock and 2.2 million OP units at yesterday's closing stock price of $3.97 that equates to an equity market cap of approximately $343 million.

[Jeremy Welter:]

Thank you, Deric. Comparable RevPAR for our portfolio decreased 70.1% during the fourth quarter of 2020, while hotel EBITDA flow through was a solid 55.6%. This pandemic has been the most difficult challenge our industry has ever faced, but we're optimistic that the worst is behind us. With the rollout of vaccines accelerating and people's desire to travel again, we are starting to see an acceleration in bookings including corporate demand.

[Operator:]

Thank you. First question is from Tyler Batory of Janney Capital Markets. Please go ahead, sir.

[Tyler Batory:]

Good morning. Thank you. First question, just broadly on liquidity, and congrats on the progress you've made on that front. You mentioned in the prepared remarks the runway to capitalize on the recovery in the industry. So can you expand and talk a little bit more about that? What sort of avenues you're considering and what might be some of the trigger points in terms of making some of those decisions?

[Rob Hays:]

Sure. Thanks, Tyler. I'll start by saying we -- as we sit here now, and I think first, some of Deric's comments, we think that our interest expense is about $11 million a month, our G&A is $4 million, and our property as of the fourth quarter is about $3 million, really close to breakeven on the property level for full year soon. So, we're about $18 million of monthly cash burn. Assuming that and assuming the various liquidity that we have via the Oaktree financing and other cash on our balance sheet, we've got probably two and a half to three years of runway, just if nothing else changes and we don't access any more capital than we sit here today. So, that's a lot of runway, a lot of liquidity, and we feel very good about it. I think for us, the issue is less about having ongoing liquidity and it's more about looking at the long way – long-term balance sheet health, and our need to recapitalize the company in a way that's more consistent with something that is healthy over the long-term. And so, I think for us the focus really has changed from liquidity to what is the balance sheet that we want to have in the next three to five years, and so that's going to be something that's going to take some time, but it's going to be via a combination of strategically selling some of our lower quality assets over time. It's going to be continuing with some of these preferred exchanges that we're doing to grow our equity base. It's going to be opportunistically raising capital, equity capital as appropriate and what we think is the most cost-efficient way. And it's going to be potentially opportunities to go on the offense and buy assets either with lower leverage or no leverage to grow out of it that way as well. So, there is going to be a variety of levers. As we sit here now, some of it's going to really depend upon what happens in the equity markets over the next six months or 12 months or two years and what happens in the transaction markets, and we're putting ourselves in a position where regardless of what that – what the opportunities look like, we're going to be ready to pounce on them when they come.

[Deric Eubanks:]

I'd add one more thing is when Robison joined as the CEO, I think in May of last year, we put together a plan that looking back we've really executed very well across that plan as we recapitalize the balance sheet and the preferred exchanges, all of those things were laid out in May of last year. And as we look – stand here today and look back at how bad things were and how much adversity and challenges this company has been through and our management team and our associates, I think we're very, very proud on what we've accomplished to date. And we're very confident that we will continue to be prudent on executing that plan to continue to add value for our shareholders.

[Tyler Batory:]

Okay. Very helpful. And then shifting gears to trends in the operational environment out there, can you elaborate a little bit more on what you're seeing with corporate demand? I think you'd cited an increase in trends for that business, so interested where that demand is coming from. And then I'm also curious if you can speak to a group business, especially second half of this year as well.

[Rob Hays:]

Sure. So the corporate demand, it's -- we think we hit the trough, and we think that we're now seeing finally some trajectory of growth. Now, it tends to be – it's not a lot, frankly, but as we were actually going through with some of our property managers the other day and looking at the mix of the business, you are seeing again small trends. I don't know Tyler if it's enough to frankly to quantify that much other than we think we've hit the bottom and it's moving up. In terms of – in the second half of the year, pace for us is it's materially better than it is for first two quarters. I mean, obviously the first two quarters are struggle from a pace perspective. Again, one thing to remember is that we aren't a group-focused company. Less than 20% of our business historically is group, so we're much more transient house. But I think what we're seeing right now from a pacing standpoint in the second half of the year is call it down 30%, 25% or 30% from a pace standpoint. But frankly, I don't know how meaningful that is. There is just so much that can happen between now and then. And again, even the groups that we tend to focus on are not large conventions. They're smaller group meetings, weddings, those sorts of things that don't have quite the same kind of lag that a bigger group is. So a little bit of information, but it's not amazing.

[Jeremy Welter:]

I think we're seeing some pent-up demand. I mean, you see it in the leisure side where as soon as some markets open and individuals that want to travel, feel safe to travel, you can see it in our Florida markets that there's a lot of leisure demand, but you're starting to see that a little bit in corporate. And as Rob mentioned, I definitely believe that we see – I believe and hope that we hit the bottom and we're starting to see that upward trajectory, but one of the things that we see in group is that as the pandemic has extended, you've had cancellations. But a lot of that group business just does not want to cancel because they want to meet. They want to have their meetings. They want to have their weddings. And so those cancellations are becoming much more last minute than maybe earlier in the pandemic, and it's just because people are insisted that they want to continue to meet. And so, we'll see as we get through this, you'll see much less cancellations and hopefully a lot more bookings on a short-term basis. Right now, the visibility of our business more than ever has been very, very short term. And so, there is not a lot of long-term trends that we can say other than the hotel – the hotel industry is always resilient in recovery. And every time we've looked at a recovery in the past, I think that the industry experts have underestimated the pace of that recovery. And I believe that's going to be the case for this rebound as well that industry estimates are probably going to underestimate the pace of recovery just because this is not an economic recession and it was pandemic. And so, as we get the vaccine out and you get to herd immunity, there will be people – the American people are resilient, they will travel again, and we'll have people stay in our hotels more and more every day, every month, hopefully going forward.

[Deric Eubanks:]

And Tyler one nugget is that as of right now, approximately 70% of our bookings are for bookings within five days. So it's short-term right now. So it's just hard to get too much – too much color from an outlook standpoint, given the booking windows.

[Tyler Batory:]

Okay, great. Okay. That's all from me. Thank you for the detail.

[Operator:]

We have a question from Michael Bellisario, Robert W. Baird and Company. Please go ahead, sir.

[Michael Bellisario:]

Good morning everyone.

[Rob Hays:]

Good morning.

[Deric Eubanks:]

Good morning.

[Jeremy Welter:]

Good morning.

[Michael Bellisario:]

Rob, the first one for you just on the Oaktree investment, what flexibility do you guys have to sell assets and then eventually repaid the preferred accrual and then kind of how are you thinking about those two options today?

[Rob Hays:]

Sure. So there's a couple of different buckets that we have as part of the Oaktree financing. We do have the ability to sell some amounts, I believe it's $50 million a year of proceeds up to $125 million in total that could go towards operating shortfalls and losses. So there's some flexibility that if we needed to fund liquidity via asset sales. We do have the ability to do that. And then we have the ability to sell assets beyond that, but those proceeds will have to go towards paying them down. It does avoid any sort of call protection that they would have. So there's some benefits to it in that way versus if we're paying them otherwise to have some call protection. So that's a possibility as well as we think about the next couple of years it adds values, continue to recover and as some of our debt pools get closer to maturity, doesn't make sense to sell some of our lesser quality pools in order to help fund the repayment of Oaktree. But again I think we are also looking at the broader strategy, Mike, of how to – again to restructure the balance sheet over time and get us to a place where we are at leveraged levels and liquidity levels that are more sustainable over time.

[Michael Bellisario:]

And then on the preferred?

[Rob Hays:]

Say that again.

[Michael Bellisario:]

Just on being able to repay the preferred accrual.

[Rob Hays:]

Yes. Well, I think, the preferred is obviously we have been continuing to do some of these 3(a)(9) transactions, which we think is a real benefit for our shareholders – for our common shareholders, because we're able to take those accruals out and have been buying – by and large these preferreds at discounts and sometimes substantial discounts to par value. And so we do – we have obviously avoided now taking out 40% of our preferreds at a pretty significant amount of accruals, but yes, I'd like to, at some point in time, be able to address all these preferreds because it is something that we need to do and get the preferreds current in order to eventually get S-3 eligibility back to be able to have all of the tools that we need from a equity standpoint in terms of having an ATM and other things in place.

[Michael Bellisario:]

Got it. That's helpful. And then just kind of turn the clock back to last downturn. You guys created a lot of value with interest rate swaps and and a few other things. Are you guys thinking about anything like that today? Or what options do you have to kind of either bolster cash flow or create value through? I guess I call them kind of non-hotel related investments.

[Rob Hays:]

Right now we're focused on the hotel business and we're focused on simplifying our capital structure. We're focused on simplifying our investment strategy. We've done a lot of the heavy lifting that we've needed to do in order to put the company in a place to thrive and participate in the recovery. And so right now, we're not frankly spending really much time at all looking at hedges and whatnot. We're focused on trying to just put the company in a good place. Though that is the reason why we have floating rate debt. And it is the reason why 94% of our debt is floating because we do think rates are going to stay low for some time. That's something we think it's a better pairing of our assets and our liabilities. And obviously floating rate debt tends to provide more flexibility than long-term fixed rate debt. So I think you're going to continue to see us have floating rate debt exposure because of all the various benefits. But right now we're not spending really any time on complicated hedging or other financial instruments.

[Deric Eubanks:]

Yes, and I would just add Mike that to the point about the interest rate derivatives, I think the big lessons learned from us from the last cycle was that we wanted to have floating rate debt, and we wanted to have a lot of cash on our balance sheet. Both of those we had going into this. Obviously, the pandemic was a much worse of the downturn than anybody ever anticipated happening in our industry, which put us in a tough spot given our leverage. But having said that from here we were very active refinancing a lot of our debt going into this. And as we sit here today have a pretty attractive maturity schedule looking forward. And that will be a pretty decent asset coming out of this. It's a very attractively priced financing, as Rob mentioned. And so, from that perspective, we do feel like we're relatively well positioned.

[Michael Bellisario:]

Understood. Thank you.

[Operator:]

We have a question from Kyle Menges, B. Riley Securities. Please go ahead, sir.

[Kyle Menges:]

Hi. Good morning. This is Kyle on for Bryan. I just had a follow-up on the preferreds. Would you say that investors are still receptive to that 5.5 to 1 exchange ratio? And then also you mentioned that common share count number earlier in your remarks. I just wanted to check does that account for all of the preferred to time and exchanges you've done to date.

[Rob Hays:]

Well, let me start and I'll have Deric jumping in the second. On the preferred exchanges, we obviously had our actual offering that was completed in the fall, which had a set ratio of 5.58x. And with that we traded out about 30% of those preferreds. That offering was complete and done and finished. And so everything subsequent to that is just a private transaction or call it 3(a)(9) transaction of which that's just a private negotiation between us and any of our existing preferred holders. And so that – it's not something that we solicit. It's not something that we – that's a widely distributed offer. I mean that's just something that we negotiate privately with our preferred shareholders. So I can't really comment on their receptiveness or non-receptiveness because it's – these are just one-off transactions within – with different existing preferred holders. Go ahead, Deric.

[Deric Eubanks:]

Yes from our perspective that continue to be attractive because we're able to, as Rob mentioned, exchange the preferred out at a participate discount at par and even more so the accrued preferred dividend then goes away. So there continues to be some benefits there. In terms of the share count that I quoted in my remarks, on the preferred shares that was as of or through February 23rd, so that's as the most recent data we could give in terms of the current share count.

[Kyle Menges:]

Great. Thank you. And then it looks like you have five more hotels that you've yet to sign agreements on. Just curious how the conversations are going with lenders, maybe the key sticking points and if you're also possibly exploring the sales of any of those hotels.

[Rob Hays:]

Sure. As we've got a few hotels left, I think we are in, I'd say, a good place with this servicers. We've in many cases had kind of handshake terms, but they're not yet fully documented. So that's really the process is that – it's just a long process of getting documents and going back and forth with lawyers. But I think we feel pretty good about what's remaining.

[Kyle Menges:]

Thanks. That's all from me.

[Operator:]

We have a question from Chris Woronka, Deutsche Bank. Please go ahead, sir.

[Chris Woronka:]

Hi, good morning guys. Rob, congratulations on the progress to date on getting the preferreds in I think you said 41%. Can you talk a little bit about your pipeline? I know everything is privately negotiated, but, I mean, is it fair to say you're actively working on another chunk of those? Or how would you describe the general process on getting more of those redeemed?

[Rob Hays:]

Yes, Chris, I can't comment on those just because they're private transactions and it's just one that we respond to inquiries from existing preferred shareholders. So I can't really provide color. We're – I can't say is – our goal is to simplify our capital structure and we'd like to over time remove these preferreds in order to remove these accruals and provide greater liquidity to our common shareholders because we do think that's important from a long-term goal perspective. I mean as we were sitting here in the fall, our equity market cap at times was in the very low double digits. And as Deric highlighted in his comments and we're well over $300 million a year, $350 million of equity share – common equity value today, which is a huge step in the right direction for us. And our shareholder liquidity if you look at our trading volume, it has materially improved from I think where – I mean where it was even prior to all this. So that's some good opportunities for our shareholders to be able to take positions, to be able to invest in the company and participate in the upside as we go through the cycle. But it's just difficult to comment on private exchanges because I don't control them. We're – we just listen to people and negotiate them as best we can, but we would like to remove as much of the preferreds these accruals as possible.

[Jeremy Welter:]

One thing I'd add is that I think that Deric and Rob have both been very prudent in terms of what they've negotiated and making sure that it is accretive to our common shareholders. And so, we're not going to do an exchange. It's just doesn't make sense for the common. And just given the relative trading between the preferred and the common, it actually is a situation where we've done the preferred exchanges, where it is a win-win for both sides, the investor and for Ashford Trust as a company and our common shareholders. As long as that exists, we think that there is going to be potentially more demand from investors to continue to pursue 3(a)(9) transactions.

[Chris Woronka:]

Okay, fair enough. Appreciate that. And then looking forward a little bit, you have done a lot of heavy lifting on getting the balance sheet fixed. I know you're not done yet, but since we are supposedly very early in the next lodging cycle, what kind of appetite might you have to look at acquisitions and potentially over equitize them as a way to kind of buy some real-time cash flows? Is that something that's on the table?

[Rob Hays:]

Well, I think, the answer is yes, it's on the table, but doing so in a way that makes sense for our shareholders and the long-term health of the company, that's to be seen, right. It depends on what happens to our share price over the next months to come, what are the opportunities that are out there, but it is one of the levers that we would look to pull. And like I said, I think our goal – as we've learned over the last 12 months in addressing all of the various issues we've had to is we've had to go down three or four or five paths at the same time in order to be able to adjust and pivot, and depending upon what's going on in the circumstance. And I think it's going to be something similar where we're going to have three or four or five or six different ways to help the balance sheet to be able to grow. And depending upon what happens in the market, what happens in the pace and the recovery, we're going to be prepared to jump on whatever is that opportunity. One thing I'd also say that a real silver lining of this crisis is that it did put us in front of and build a lot of relationships with great potential capital partners and capital providers. And so I think we're hopeful – and given we've got our broader platform here at Ashford with where we've got the operating side of the house and not just the ownership side of the house where I think it opens our platform at Ashford Trust open to potentially pairing up with some great capital providers and partners to go out and do deals in addition to just on our balance sheet alone.

[Chris Woronka:]

Okay. Thanks, Rob. Maybe just one quick one for Deric. Deric, as you guys worked through the – some of the forbearance agreements, was there any opportunity to maybe fix in – to fix some of the debt just with what we're seeing now in the market with interest rates and still low historically, but was there an opportunity or what do you look to do something to fix in a little bit of it if we are moving higher on long-term rates?

[Deric Eubanks:]

You know, Chris, it wasn't really something we explored that deeply. As you know our preference has kind of always been to stay at the shorter end of the curve. And we've just always had a preference for being a floating rate borrower. When you lock in stuff, it tends to tie your hands in terms of prepayment – prepayment penalties or flexibility to do something opportunistic. And the debt markets continue to get better. I would say if you kind of rewind the clock six months or so, it's a little unclear on what the debt capital markets for hotels were going to look like as we sort of came out of the pandemic. But as we sit here today, the market seems like it's just getting better every day for property level financing. And thankfully we're in a good spot where we don't have a ton of refinancings that we need to do. But for the few ones that we do need to do where we're going to be a little patience because the market just keeps getting better. There is plenty of capital out there.

[Rob Hays:]

Yes, and I think we're – again, Deric and his team did a great job of building the maturity ladder that we have, because as we look to this year where we've got Crystal Gateway and next year we've got Boston Back Bay, those are both assets that are very, very high quality assets. There is ample equity value in them. And so, we feel very confident about the – there's – we don't really have any material – maturity refinancing risk, which is great. The one thing that we are focused on which is obviously several years in advance and I mentioned a little bit in my comments is as we do have some pools that have extension tests that have debt yield tests that are in 2023 or 2024. And we don't know for certain that that those are going to be issues at all, but we want to be proactive in addressing those, which is why we highlighted that in two of our bigger pools that JP Morgan 8 pool and our MS 17 pools, why we – those forbearance arrangements got delayed a little bit in their closing, because as we finalized and felt certain that we were going to close the transaction with Oaktree. We knew that we now had an opportunity to potentially modify those forbearance arrangements in order to modify those debt yield extension test. And so, we're going to be focused on that on some of our other pools that have extension tests in two years or three years or four years to see if we can work with our lenders and servicers to modify those as needed.

[Chris Woronka:]

Okay, very helpful. Thanks guys.

[Operator:]

Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd like to turn the call back over to management for closing remarks.

[Rob Hays:]

Thank you everybody for joining us on the call, and we will talk to you again next quarter.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.