Ashford Inc.
Q1 2020 Earnings Call Transcript

Published: 18 Jun 2020

[Operator:]

Greetings, and welcome to Ashford Inc. First Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jordan Jennings, Manager of Investor Relations. Thank you. You may begin.

[Jordan Jennings:]

Good day, everyone, and welcome to today's conference call to review results for Ashford for the first quarter of 2020, 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; and Jeremy Welter, President and Chief Operating 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 in a press release. At this time, I’d 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 Federal Securities Regulations. 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 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 June 17 2020, and may also be accessed through the company's Web site 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. Also, unless otherwise stated, all reported results discussed in this call compare the first quarter of 2020 with the first quarter of 2019. I will now turn the call over to Monty.

[Monty Bennett:]

Good morning, and welcome to our call to discuss our financial results for the first quarter of 2020. I will begin by discussing Ashford’s operations, strategy and response in light of the COVID-19 pandemic. Afterward, Deric will review our financial results, then Jeremy will provide an update regarding our hospitality products and services businesses. And then we will open it up for Q&A. As you’re aware, COVID-19 is having an unprecedented economic impact on the hospitality industry. Due to the pandemic, we have adjusted the way we operate and how we manage the company, its existing advisory platforms as well as our portfolio of products and services businesses. Our top priority has been to protect the health and safety of our associates and guests while at the same time mitigating the impact of our business. At Ashford, we successfully transitioned to a remote work structure thereby ensuring seamless business continuity. We remain diligently focused on our priorities and have been managing our decisions and coordination with our responsibility to all of our stakeholders. This includes an unwavering commitment to protect value for our shareholders. Reflecting that commitment, we have taken steps to maintain our financial flexibility and have implemented meaningful cost saving measures, which we estimate will reduce our annual corporate run rate G&A by approximately 25%. I’ve also agreed to take my salary from the balance of the year and common shares instead of cash to conserve additional liquidity. Of the cost saving steps we have taken, none have been more difficult on the decision to furlough a significant number of our associate as well as eliminating a significant number of positions within our company and our subsidiaries. We have also reduced the compensation for our Board of Directors and senior executives. At the same time, we strengthened our liquidity position by converting our 35 million credit facility into a four-year loan in late March. The hotels that we asset and manage in our products and service businesses have experienced widespread disruption during this pandemic. We have implemented significant cost-cutting measures at our hotels and our products and service businesses have been committed to more actions designed to ensure the respective financial flexibility of remaining focused on their long-term growth and competitive position. Ashford advises two publicly traded REIT platforms; Ashford Trust and Braemar which together own 129 hotels with approximately 20,000 rooms and approximately $8 billion of gross assets as of March 31, 2020. While we suspended operations at some properties during the peak of the pandemic, we are working diligently to get our hotels back up and running. Currently 105 of our 129 hotels are open and operating and we have plans to reopen the remaining hotels in the coming weeks. Our advised REITs have also partnered with local government agencies, medical staffing organizations and hotel brands to support COVID-19 response efforts. To date, through various initiatives, close to 70 hotels have provided temporary lodging for first responders, healthcare professionals and other community residents impacted by the crisis --

[Operator:]

One moment ladies and gentlemen. We lost Mr. Bennett’s line. I’m going to try and reconnect him. Rejoining Mr. Bennett.

[Monty Bennett:]

Thank you. Apologies. Periods of dislocation and volatility often create new opportunities for growth. For example, as the hospitality industry strives to implement measures to provide a clean and safe environment for their guests, many hotels and guests will be seeking automated check-in allowing them to bypass the front desk with keyless entry and secure digital key capabilities. They will also be seeking enhanced sanitation and air purification standards within the guestroom. We believe the benefits that OpenKey and Pure Wellness offer will position them well to gain accelerated adoption and growth at hotels nationwide. In fact, we are already seeing strong growth and demand for OpenKey digital key product which Jeremy will discuss in more detail. These are uncertain times and our people and businesses are being impacted in unprecedented ways. Despite these near-term challenges, our management team has the talent that has operated in numerous economic downturns and periods of meaningful industry disruption, including the Great Recession and 9/11. We remain optimistic about the long-term prospects for our company and believe we are making the right strategic decisions to position our business to be even more successful once we emerge on the other side of this pandemic. I’ll now turn the call over to Deric.

[Deric Eubanks:]

Thanks, Monty. Net loss attributable to common stockholders for the quarter was $186.3 million, including an impairment charge of $178.2 million primarily related to the goodwill and intangible assets associated with the acquisitions of Remington, Premier and JSAV. GAAP requires us to test Goodwill for impairment annually which we typically perform in October of each year or more frequently if there are indicators of impairment and impairment must be recorded if the current fair value of the underlying business is less than its carrying value. Given the negative impact of the pandemic on Remington, Premier and JSAV, the impairment was necessary. For the first quarter, total revenues were $133.8 million reflecting a 111% growth rate over the prior-year quarter. Adjusted EBITDA for the first quarter was $12 million reflecting a 5.8% growth rate over the prior-year quarter. Adjusted net income for the first quarter was $9.3 million. As of March 31, 2020, we had 6.9 million fully diluted total shares of common stock and units which included 4.1 million common shares associated with our series B convertible preferred stock. We had 2.2 million common shares issued and outstanding, 0.2 million common shares earmarked for issuance under our deferred compensation program and the balance relates to put options associated with the minority interest of our strategic investments, acquisition-related shares and some restricted stock. During the quarter, we converted our $35 million credit facility into a new $35 million term loan with a four-year term. As Monty mentioned, we have taken significant steps to improve our liquidity and cash position and have reduced our annual run rate corporate G&A by approximately 25%. Despite the negative impact of the pandemic on our businesses, we believe we have ample liquidity. I will now turn the call over to Jeremy.

[Jeremy Welter:]

Thank you, Deric. We are pleased to provide updates on our hospitality products and services businesses and how we have responded with significant measures during the first quarter in the face of the COVID-19 pandemic. As was the case across the hospitality sector, our hospitality products and services businesses were among the hardest hit industries from the global pandemic. We have based headwinds from sharp declines in occupancy and group business at our affiliated hotels. Before I get into more details on our operations, I want to say how proud I am of all of our associates and leadership across our entire platform for their hard work, dedication and perseverance during these very tough and challenging times. As the seriousness of the pandemic became more apparent in early March, our hospitality products and services executive leadership and I began an extensive review of over G&A expenses and policies around each business. We implemented broad furloughs at that time and in total at the peak of the crisis, 70% of our associates were furloughed or termed. The hospitality products and services businesses also instituted stringent spending controls to preserve cash and reduce noncritical spending. In fact, several of our hospitality products and services businesses have pivoted their operations to launch new offerings that are focused on the safety of our guests and associates. Our core strategy for hospitality products and services remains, but to explain more fully this strategy, our products and services initiative is a unique investment strategy in the hospitality industry where we strategically invest in operating companies that service the industry and we act as an accelerator to grow these companies. In doing so, we believe we are able to establish synergies for hotel platforms providing attractive pricing and higher levels of service than they would receive from a third-party vendor. We also are able to grow our portfolio companies in a number of ways; by referring them to the hotels owned by our advised REITs, by leveraging our vast industry relationships and by consulting on best operating practices. The business where we are seeing the strongest growth at the moment is OpenKey. OpenKey provides a Bluetooth-enabled lock module that can interface onto any lock at a fraction of the cost of replacing the entire lock system, making this a very attractive option for hotels as it reopen the doors to guests following closures from COVID-19. OpenKey is well positioned to capitalize on guest desires for contactless digital check-in experience. OpenKey saw revenues increase 103% in the first quarter and ended the quarter with 165 hotels under contract, which represented growth of 57% over the prior-year quarter. That growth has continued into the second quarter as OpenKey currently has 201 hotels under contract, representing growth of 22% over the end of the first quarter. We’re also seeing a strong increase in requests for product demonstrations. The number of demonstration request in April was 152% higher than what we experienced in January. We’re also seeing more guests use OpenKey with utilization up 270% from 2019. OpenKey is currently integrated with over 35 property management systems and we continue to be excited about the future growth prospects for OpenKey. The first quarter marked the first full quarter since Remington’s integration into our hospitality products and services platform. Remington is a dynamic and growing hotel management company providing top quality service and expertise in hotel management. Credit must be given to Remington’s CEO Sloan Dean and his team who navigated challenging situations, including numerous hotel closures over the last couple of months. At the beginning of the crisis, Remington furloughed or termed approximately 93% of its workforce. However, as hotels reopen and people begin traveling again, Remington is in great shape financially to ramp up its operations at its 87 hotels in 27 states across 17 brands, including 12 independent and boutique properties. We find this current moment in the industry is aiding our growth and development which is focused on growing Remington’s third-party business. To that end, during the quarter, Remington signed three new third-party contracts and is actively seeking more deals. Additionally, Remington prioritizes the safety of its guest and associates as it recently launched the Ultra Touch program that ensures the highest cleanliness standards in rooms and public spaces for our guests. On the financial front, the first quarter, Remington realized hotel management fee revenue of 6.1 million and adjusted EBITDA of 2.4 million. Premier Project Management provides comprehensive and cost-effective design, development, architecture, procurement and project management services to the hospitality industry. Premier will be impacted greatly by hotel owners cutting back on CapEx spend during the last several months, approximately 53% of its workforce, furloughed or termed. With that said, Premier has done a great job pivoting to incorporate multifamily business opportunities into their marketing efforts and has signed up several multifamily projects during this year, in addition to six third-party hotel project management deals signed. We expect CapEx spend to rebound next year and we expect Premier to be in great position capitalized when that occurs. For the first quarter, Premier had Project Management fee revenue of 3.9 million and adjusted EBITDA of 1.2 million. JSAV is a leading single source solution for meeting and event needs with an integrated suite of audiovisual services, including show and event services, hospitality services, creative services and design and integration. Prior to the pandemic, JSAV started the year with incredible results with year-to-date revenue and adjusted EBITDA through February up 12% and 71% over the same prior-year period, respectively. However, with the elimination of group travel and bookings due to the pandemic, JSAV was significantly impacted and had to furlough or term 94% of its workforce due to the lack of demand. Due to decisive leadership by JSAV's executives, they’re very well positioned to emerge from the pandemic and capitalize on opportunities that will inevitably come as groups reconvene. JSAV was proactive and quick to retool its strategy to focus on virtual meetings in lieu of in-person meetings. They have established numerous virtual showrooms and locations around the country and these services result in higher margins as they require less labor. Financial results for the first quarter included revenue of 29.7 million and adjusted EBITDA of 5 million. RED Hospitality and Leisure is a leading provider of watersports activities and other travel and transportation services in the U.S. Virgin Islands and Key West, Florida. RED also faced reductions in booking and trips from both markets and took actions to furlough or term 85% of its workforce during this pandemic. Nonetheless, we believe Key West will emerge faster than most markets. And as a drive market, we expect leisure business to pickup from guests driving into Key West more quickly compared to the USVI. The ability for the USVI to rebound is somewhat limited given the airlift requirement, but we see it benefiting from strong business and we anticipate at the Westin’s timeshare property. Taken together, we are optimistic about RED’s ability to navigate the pandemic. Further, Chris Batchelor, our CEO of RED is working on some exciting business development opportunities in Florida and the USVI and we hope to be able to discuss those on future calls. Financial results for the first quarter included revenue of 3 million and adjusted EBITDA of 0.6 million. Pure Wellness has also seen strong opportunities from its products in this pandemic environment. Pure Wellness is the industry leader in wellness applications and is shifting its focus from hypoallergenic rooms to a suite of services designed to eliminate viruses, bacteria and other harmful contaminants within guest rooms and public spaces. While Pure Wellness will still offer its signature Pure Room for hotels, which includes the medical grade virus killing air purification system, it has designed cleaning protocols that can be rolled out to hotels, remediation cleaning service for areas infected by the virus and a proactive electrostatic spray protocol that provides a growth inhibiting protective layer. Pure Wellness uses only chemical sprays that are EPA registered and CDC approved for use against COVID-19. Lastly, during the quarter, Ashford Trust and Braemar entered into agreements with Lismore Capital for Lismore to seek modifications, forbearances or refinancings of the REITs’ debt totaling approximately $5.1 billion across over 40 different loans. We have reallocated significant corporate resources to this effort and have already completed several forbearance agreements giving the REITs much-needed flexibility in order to meet requirements under the respective loans. We will continue to have significant corporate resources focused on this effort going forward. That concludes our prepared remarks. And we will now open the call up for Q&A.

[Operator:]

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Bryan Maher with B. Riley FBR. Please proceed with your question.

[Bryan Maher:]

Good morning. A few questions, but let’s start with OpenKey. And specifically, as it relates to the capacity to grow that division, whether that’s hardware, software, customer service with 200 or so now under contract to be onboarded, how long does that take to really accomplish?

[Monty Bennett:]

This is Monty. Can you hear me?

[Bryan Maher:]

Yes.

[Monty Bennett:]

Perfect. I’ve got a statically [ph] line here, so I apologize. In order to bring a property up to speed and bring them online, it’s a pretty straightforward process where a module is installed in the lock, and that’s about it. And so right now the timeframe to bringing someone on board is about four weeks to six weeks to get the module out there and to get it scheduled. And it’s a pretty easy process. So it can be scaled up fairly easily.

[Bryan Maher:]

Okay. And do those clients, do they sign an annual service, a multiyear? How does the company pay for that? Is it a monthly fee that you get?

[Monty Bennett:]

It’s a monthly fee and it’s usually a fee per door per month. And the contracts themselves have typically been month to month, although the company is considering moving towards maybe annual renewable contracts.

[Bryan Maher:]

And since you have to actually go out and install a module, do they have to absorb that cost if they were to cancel within a certain period of time?

[Monty Bennett:]

They’ll pay for the module. And so the upfront cost for the module is approximately $49. And so that covers the company’s cost of doing anything. And there’s also some smaller installation charges that are assessed as well. So even selling the module without the SaaS service attached to it is a profitable endeavor, and so there’s losses if they subsequently cancel.

[Bryan Maher:]

Okay, great. And then shifting gears, can we talk – and maybe this is a question for Deric, I don’t know, about the write-down and the magnitude of the write-down, which kind of caught us off guard and how that was derived?

[Deric Eubanks:]

Yes. Hi, Bryan, it’s Deric. So as I mentioned in my comments, goodwill is based on a fair value which is a current market value as opposed to other impairments in GAAP that allow you to take a more long-term view of the hold period of the asset. It’s based on the fair value at that moment. And just given the extreme drop in revenues for those properties, we had to reassess the value in today’s market for those assets and doing that with outside advisors and our auditors landed on that impairment, and it was associated with the goodwill for Remington, the goodwill for Premier and then a small amount related to trademarks as well.

[Bryan Maher:]

Okay. And then to kind of help us with our model, given that the facility was converted to a term loan, can you share with us what the interest rate is on that term loan?

[Deric Eubanks:]

Yes, the interest rate stayed the same and there is some amortization that kicks in. But we’re very happy to get that done when we got it done and it gives us a lot of flexibility. And so we’re very pleased to get that done in the time that we were able to do it.

[Bryan Maher:]

Okay. And then just two last ones for me. As it relates to the furloughs, and you guys like most of the people in the industry, furloughed an awful lot of people. But you have it under a couple of different buckets. You have the Remington employees, the Premier employees and now JSAV employees. What are your thoughts on a kind of a longer-term organizational view of being able to bring all those people back? I know you’re not going to bring them all back at once. You’ll bring them back as the business recovers. But if the business recovers over the next two to four quarters, you may lose some of those. What are the thoughts of the firm as it relates to being able to staff with demand?

[Jeremy Welter:]

Yes, this is Jeremy. I can answer that question. With all the folks that we have left, it’s all our A-plus talent across the board. And so we’ve got a really good core group of associates at each one of these respective businesses. And in terms of bringing people back, that’s our goal. We want to bring as many people back as quickly as possible. But it varies by business unit. So you’ve got to look at – and you did describe that well. So when you look at the case of Remington, we’re seeing increased demand at our properties on a daily basis and the accelerated – that demand is accelerating each day. And so we have brought back some folks in June 1st at Remington already and that’s in the field and at corporate. But we will still only bring them back as business demand warrants. When you look at RED, RED is – when Key West opened, we’ve had some great demand on a lot of our boating trips. In fact, we’ve had sunset sails that have 70 folks on a board and so the demand has been very strong. And so you’ll see that business probably being the quickest to rebound in terms of associate headcount. And the good part of that model is that most of our labor at RED is variable. If we run a trip, then the captain gets paid. If we don’t, then unfortunately we don’t pay. But we only run trips if it has a certain level of occupancy that minimally assures that we breakeven on that trip, and so we will cancel if we don’t have enough demand for a scheduled outing. When it goes to JSAV, that’s going to be probably the most difficult I think for us to bring associates back, but we will do that as group business recovers. We don’t need a lot of labor through a virtual meeting. In fact, as I mentioned, the margins are significantly higher, albeit the revenues are lower, but we do expect to have positive cash flow at JSAV in Q3 and Q4. And if you would have asked me six weeks ago, I would have thought we ran negative cash flow at that platform for the foreseeable future. But because of our ability to reshift our business strategy to virtual meetings very, very quickly and our aggressive sales effort, we have booked a lot of meetings just over the course of the last three or four weeks, which is great. And then just OpenKey, we didn’t really have to furlough very many people at all. I think we just did one. And so that business is growing and we’re very excited about it. So it really depends on each one of the business units. And then as I mentioned Premier in the prepared remarks, we are getting a decent amount of demand outside of hospitality and in some cases within hospitality for some owners that want to take advantage of the slower times and they have excess capital to renovate their hotels. So that continues to be kind of an area that we think is probably going to be somewhere between Remington and JSAV in terms of bringing back staff. But the folks we have today are top notch players.

[Bryan Maher:]

So just last for me, and I don’t know if this is a Monty question or Jeremy. As we look at the Smith Travel numbers each week and we see the recovery, how would you characterize Ashford Inc. and maybe more granularly, Ashford Trust and Braemar’s recovery relative to what we’re seeing in the Smith Travel numbers?

[Monty Bennett:]

How our occupancy is recovering as compared to how Smith Travel or the general industry is recovering?

[Bryan Maher:]

Correct. Is your RevPAR improving at a faster rate than what we’re seeing in Smith Travel or is it slower? We know that Ashford Trust is pretty broadly diversified, but there is a chunk of select service properties in that portfolio which seem to be doing better than the full service urban properties. And so when we look at that and we look at Braemar, and Braemar has some higher end kind of resort-y [ph] hotels, whether it’s Key West or Lake Tahoe, et cetera, which might benefit from the drive to summer vacation or how are you seeing business unfold relative to the kind of macro numbers we’re seeing?

[Monty Bennett:]

That’s a great question. I can tell you that I for one can’t say that I’ve compared our recoveries as compared to the average recoveries, but you’re right. We’re definitely seeing more demand picking up in select service, we see demand picking up in non-group houses and demand picking up in resort leisure-type locations and then less so in the opposites, right, city center, urban group, these kinds. But I can’t say that I’ve compared it to the industry. Maybe Jeremy has.

[Jeremy Welter:]

Yes, I can take that. Bryan, we got to be sensitive because I don’t want to share information we haven’t released publicly at either Trust or Braemar’s platforms. But it’s very consistent with what we described on the Braemar’s earnings call where the drive-to resort locations have rebounded pretty favorably and we’re holding rate in our luxury hotels. Not saying year-over-year but we’re doing a very good job selling on attractive rates. And so those breakeven levels are much lower than we would have anticipated at some of those properties. But you’re right. Urban locations are going to be much slower to rebound especially with some of the demonstrations we’ve had in some of the cities and what have you, it has impacted travel I think nationally. But I think you’d see that it’s fairly consistent with industry numbers. Economy is definitely the segment that’s rebounding the fastest, and we don’t have economy hotels.

[Bryan Maher:]

Okay. Thank you. That’s all from me.

[Operator:]

Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

[Tyler Batory:]

Hi. Good morning. Thanks for taking my questions. First one from me is probably more housekeeping question. In terms of the base fee from the REITs, can you just remind us in theory how far that could fall year-over-year just given some of the movements in share prices?

[Deric Eubanks:]

Yes. Hi, Tyler. It’s Deric. I’ll take that. So the base advisory fee is 70 basis points times of the total market capitalization of the company which includes the debt, the preferred and liquidation preference and the current equity market cap of the company. There is a component to that that has a floor where the fee cannot draw more than 10% from the prior year. And then there’s also a component that when the REIT sell assets, it continues to be part of that calculation called the net asset fee adjustment that continues to be part of that calculation if the REITs were to sell assets in a significant amount. But the answer to your question is that it cannot draw by more than 10% from the previous year’s fee.

[Tyler Batory:]

Okay, perfect. And then when you look broadly at the Ashford Inc. strategy, is it possible you could look to get into new businesses adjacent to hospitality? You mentioned Premier I believe getting involved with multifamily, but do you have any other segments within the hotel product and services businesses where you could look at other opportunities adjacent to the hospitality industry just to drive some incremental revenue? And then kind of following alone with that, there’s certainly a lot of disruption in the market. Do you think there could be some distressed opportunities potentially on the acquisition front maybe a year or two years from now that could be appealing?

[Jeremy Welter:]

Yes, this is Jeremy.

[Monty Bennett:]

This is Monty. Let me address this. As far as jumping into kind of corollary businesses or other product lines, there’s definitely that opportunity. You mentioned Premier and going into multifamily and then over at OpenKey, there’s the ability to provide that digital key product to multifamily, I think we’re even installed in one multifamily location and there’s been a request about that. And so all these businesses have that ability. Pure has also talked to some non-hospitality customers about doing some work for them. And we’ve also even thought about from a capital standpoint of not only acquiring hotels but other property types. So it’s something that we’ve looked at, but it’s not an area that will provide any material amount of revenue for us in the near term. But it will slowly I think start to grow over time. So I think that that’s probably where we will be going with that.

[Jeremy Welter:]

Yes, one thing if I might add, Tyler, as you’re familiar, we didn’t really talk about on this script, but we have our own broker-dealer now in Ashford Securities. And we were prepared to launch our offering at Braemar as early as April of this year. Obviously that was put on hold given the pandemic, but we were able to get that broker-dealer up and running in very, very quick timing ahead of our internal projections and under our internal costs. But it is a great asset for us to launch other new capital-raising efforts within hospitality as well as maybe then within mortgage debt securities and then also, as Monty mentioned, other asset classes outside of hospitality. So I think that that’s a good long-term part of our strategy.

[Tyler Batory:]

Okay. I think that’s all from me. Thank you.

[Operator:]

This does conclude our Q&A session and this does conclude our call for today. Thank you for participating. You may disconnect your lines at this time and have a wonderful day.