Ashford Inc.
Q2 2020 Earnings Call Transcript

Published: 1 Aug 2020

[Operator:]

Greetings, and welcome to the Ashford Inc. Second Quarter 2020 Results Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the conference over to our host, Jordan Jennings, Investor Relations for Ashford. Thank you. You may begin.

[Jordan Jennings:]

Good day, everyone, and welcome to today's conference call to review results for Ashford for the second 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, 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 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 July 30, 2020, 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. Also, unless otherwise stated, all reported results discussed in this call compare the second quarter of 2020 with the second quarter of 2019. I will now turn the call over to Monty.

[Montgomery Bennett:]

Thank you, Jordan. Good morning, and welcome to our call to discuss our financial results for the second quarter of 2020. I'll begin by discussing Ashford's operations strategy and response in light of the ongoing COVID-19 pandemic. Afterwards, 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 we discussed last month on our first quarter call, COVID-19 is having an unprecedented economic impact on the hospitality industry. Due to the pandemic, we 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 yes, while at the same time, mitigating the impact on our business. At Ashford, we successfully transitioned to a remote work structure with near-seamless business continuity. We remain diligently focused on our priorities and have been managing our decisions in 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 run rate corporate G&A by approximately 25%. Additionally, the hotels that we asset manage and our products and services businesses have experienced widespread disruption during this pandemic. We have implemented significant cost-cutting measures at our hotels, and our products and services businesses have implemented similar actions designed to enhance their financial flexibility while remaining focused on their long-term growth and competitive position. Ashford advises 2 publicly traded REIT platforms, Ashford Trust and Braemar, which together own 129 hotels with approximately 28,000 rooms and approximately $7.8 billion of gross assets as of June 30, 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, 123 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, health care professionals and other community residents impacted by the crisis. While Jeremy will discuss our products and services businesses and the steps they have already taken to mitigate the impact of the pandemic, both Remington and Premier Project Management continues to execute on their long-term growth strategies while making the decisions necessary to ensure that at the end of the crisis, they both remain strong vibrant companies. They both have adopted a stringent focus on reducing expenses, which has included instituting pay cuts for executives, furloughing or eliminating a significant number of associates and significantly reducing discretionary spending. In short, those businesses are taking the necessary actions to navigate this pandemic and position themselves for a successful future. We continue to believe that these 2 hospitality service businesses are well positioned to achieve growth through third-party channels. The industry is incredibly fragmented and both Remington and Premier have solid reputations and historically have not focused on third-party business. This effort has really just started, but we have been strong -- I'm sorry, we have seen strong early momentum with this initiative with Remington signing 3 new hotel management contracts with third-party hotel owners and Premier Project Management signing 6 new third-party contracts. Looking ahead, we are extremely excited about the long-term opportunity for third-party growth at both Remington and Premier. Periods of dislocation and volatility often create new opportunities for growth. For example, the American Hotel & Lodging Association recently released its safe stay guidelines for hotel guests. Two of the main components of these guidelines include guests choosing contactless options and requesting enhanced cleaning options. We believe the products offered by OpenKey and Pure Wellness are well positioned to thrive in this environment. 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 capabilities. They will also be seeking enhanced sanitation and air purification standards within the guest room. We believe the benefits that OpenKey and Pure Wellness offer will position them well to gain accelerated adoption and growth at hotels nationwide. We continue to see strong growth in demand for OpenKey's digital key product, which Jeremy will discuss in more detail. In response to COVID-19, JSAV has seamlessly pivoted to offering comprehensive virtual meeting services and is seeing increasing demand for virtual events and webcast. Their integrated suite of audio/visual services includes virtual meetings, live virtual Q&A sessions with presenters, web streaming, webcasts and digital signage. Last September, we announced the formation of Ashford Securities LLC, a dedicated platform to raise retail capital through financial intermediaries and the broker-dealer channel in order to grow our existing and future platforms. Our goal for Ashford Securities is to provide the market with highly differentiated alternative investment products. Types of capital raised may include, but are not limited to, preferred equity, convertible preferred equity, mezzanine debt or nontraded REIT, common equity for future platforms. We believe it's a natural fit for us. Additionally, given Ashford's broad experience and ability to execute on many different types of lodging strategies, we believe we have a unique opportunity for new investors. Also having a dedicated funding platform will provide Ashford and its advised platforms an additional source of capital that is not dependent on the traditional publicly traded capital markets. We are excited to pursue a fresh source of capital that will help us prudently grow all our platforms over the long term and increase shareholder value, and we hope to be in a position to begin raising capital later this year. Looking ahead, these are uncertain times, and our people and businesses are being impacted in unprecedented ways. Despite these near-term challenges, our management team has deep talent and has operated in numerous economic downturns and periods of meaningful industry disruption, including 9/11 and The Great Recession. 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 will now turn the call over to Deric.

[Deric Eubanks:]

Thanks, Monty. Net loss attributable to common stockholders for the second quarter was $16.7 million. Adjusted EBITDA for the second quarter was $3.2 million and adjusted net income for the second quarter was $0.8 million. As of June 30, 2020, we had 7.1 million fully diluted shares of common stock and units which included 4.1 million common shares associated with our Series D convertible preferred stock. We have 2.3 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. That concludes our financial review, and now I'll turn it 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 second 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 from the global pandemic. We have faced headwinds from sharp declines in occupancy in 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 severity of the pandemic became apparent in early March, our hospitality products and services, executive leadership, and I began an extensive review of our 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 laid off. 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 more fully explain 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 our hotel platforms, providing attractive pricing and higher levels of service than they would receive from a third-party vendor. We're also able to grow our portfolio of 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 upgrade module that can be added to the existing locks at a fraction of a cost to replacing the entire lock system. This is a very attractive option for hotels as they balance tighter CapEx budgets while satisfying growing guest demand for a contactless digital check-in experience. OpenKey saw a second quarter increase in revenue of approximately 51% over the prior year quarter and finished the quarter with 209 hotels under contract. This reflects a growth rate of hotels under contract of 74% over the prior year quarter and 27% over the first quarter of this year. While recognition of booked revenue was slowed by hotel closures and travel restrictions, OpenKey added 44 net hotels under contract in the second quarter, which represented growth of 159% over the first quarter and 193% over the prior year quarter in terms of number of net hotels added to their system. The strong sales growth has been supported by a significant shift in guest preferences. Utilization of digital keys increased more than 250% in the second quarter over the prior year quarter with majority of guests from May to June opting to use a digital key when offered. OpenKey works with all major hotel lock manufacturers and property management systems, and we continue to be excited about the future growth prospects for the business. 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 have navigated challenging situations, including numerous hotel closures over the last couple of months. At the beginning of the crisis, Remington furloughed or laid off 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. We find this current moment in the industry is aiding our growth in development, which is focused on growing Remington's third-party business. Remington has established a strong pipeline for new third-party contracts and is actively seeking more deals. Additionally, Remington prioritizes the safety of its guests and associates as it launched the Ultra Touch program that ensures the highest cleanliness standards in rooms and public spaces for our guests. On the financial front, for the second quarter, Remington realized hotel management fee revenue of $3.7 million, net loss attributable to the company of $2.7 million and adjusted EBITDA of $0.6 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. And during the last several months, approximately 53% of its workforce was furloughed or laid off. 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, third-party hotel project management deal signs. We expect CapEx spend to rebound next year, and we expect Premier to be in a great position to capitalize when that occurs. For the second quarter, Premier had project management fee revenue of $2.1 million, net loss attributable to the company of $2.4 million and adjusted EBITDA of $0.4 million. JSAV is a leading single-source solution for media event needs with an integrated suite of audiovisual services, including show and event services, hospitality services, creative services and design and integration. With the elimination of group travel and bookings due to the pandemic, JSAV was significantly impacted and had to furlough or lay off 94% of its workforce during -- due to the lack of demand. Due to decisive leadership by JSAV's executives, they are 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. These have established numerous virtual showrooms at locations around the country, and these services result in higher margins as we require less labor. Additionally, JSAV continues to pursue in-house hotel AV contracts alongside its virtual meetings, and JSAV has created a strong pipeline of opportunities to group business returns. In July, JSAV signed a sizable non-Ashford contract with pre-COVID revenues of $800,000 and 40,000 square feet of meeting space. Red Hospitality & Leisure is a leading provider of water sports activity and other travel and transportation services in the U.S. Virgin Islands and Key West, Florida. Red also faced reductions in bookings in trips from both markets and took actions to furlough or lay off 85% of its workforce during this pandemic. Nevertheless, we believe Key West will emerge faster than most markets, and as a drive-to market, we expect leisure business to pick up from guests driving into Key West more quickly compared to the USVI. The ability for the USVI to rebound is somewhat limited given the airline -- airlift requirement, but we see it benefiting by the strong business we anticipate at the Westin's timeshare property. Taken together, we are optimistic about Red's ability to navigate the pandemic. Further, we have plans to expand into the Sarasota market as early as Q4 of 2020. Additionally, Chris Batchelor, our CEO of Red, is working on some exciting business development opportunities in Florida and the Caribbean, and we hope to be able to discuss those on future calls. Pure Wellness is also seeing strong opportunities for its products in this pandemic environment. Pure Wellness is the industry-leading leader in wellness applications and is shifting its business from hypoallergenic rooms to a suite of services designed to eliminate viruses, bacteria and other harmful contaminants within guestrooms 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, a proactive electrostatic spray protocol that provides a growth-inhibiting protective layer. Pure Wellness uses only products that are EPA-registered and CDC-approved for use against COVID-19. Lastly, thus far this year, Ashford Trust and Braemar entered into agreements with Lismore Capital for Lismore to seek modifications, forbearances or refinancings of the REIT's debt totaling approximately $5.1 billion across 40 different loans. We have reallocated significant corporate resources to this effort and have already completed several forbearance agreements giving the REIT's much needed flexibility in order to meet requirements under the respective loans. During the quarter, we booked $1.3 million in fees associated with these agreements. 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:]

[Operator Instructions]. Our first question comes from Tyler Batory with Janney Capital Markets.

[Tyler Batory:]

First question I have is just on OpenKey and on Pure Rooms as well. I mean, both of those two businesses seem to be doing quite well. They certainly fit in with the current environment. Can you talk a little bit more about the competitive environment in both of those two businesses? And I know they are small right now in terms of revenue contribution, but help us frame and help us think, if you could, the longer-term growth potential of both of these two segments?

[Montgomery Bennett:]

Jeremy, why don't you take that question?

[Jeremy Welter:]

Yes, sure. I'll start with Pure. Pure's main competitor would be just onetime protocols where you go in and you disinfect a room or public space. The competitive advantage that they have that's differentiated is that they have Pure Shield, which is, as we mentioned, it's more of a proactive method that it not only sanitizes the room but also inhibits the ability for bacteria and viruses to grow. And so it's a very attractive product for an ongoing treatment and protective measure for a safe guest stay. As it relates to OpenKey, there's a few others that are out there that have tried with limited success. I think that they are very uniquely positioned because they have this module that just is really just a plug-and-play on top of any lock system and it did take -- I mean, this is us incubating a technology company with really limited technology experience, but we hired an incredible CEO, TJ Person, and we have built, I think, an incredible product and incredible guest experience. I was at Pure House recently, and landed, went straight to my room, didn't go to the front desk, didn't have to check-in in a hotel. And it's just a great experience for the guest, and it's very unique. I think that there are some other folks who have tried other systems, but they just don't seem to work as well as what OpenKey does. And also, in a lot of cases, require a wholesale lock replacement. And so the module just being a very low-cost method for folks to upgrade their system and be able to offer both RFID without having to buying an RFID lock or utilize the OpenKey system, I think, is a really good advantage that we've got. And that tells you, Tyler, if you'd have traveled some of our hotels, go to one of our independents and use it for yourself, and I think you'd be very pleased with the experience.

[Tyler Batory:]

Okay. I will definitely do that. Just to follow up on the Ashford Securities platform. What's the latest update on that? And are current market conditions impacting how you're thinking about utilization of Ashford Securities?

[Jeremy Welter:]

Yes. I can take that, and Monty, if you want to chime in after this. We can't -- unfortunately, just because of the nature of the business, we can't comment on any specific offering. Just there's FINRA rules against that, but I can talk generally about the platform. And what we have built here, I think, is an incredible platform with incredible folks and talent. Our team has raised billions of dollars of capital historically, very successfully in the hospitality sector as well in this alternative investor space. Obviously, the market has been disrupted. And there has been some challenges recently in the market, but the low point for capital raising was April and May has been -- had a decent amount of increase in June. And one of the other companies that is raising a nontraded preferred, which is a type of security that you may be familiar that we'd like to raise for one of our platforms, their capital raise is actually up year-over-year to date. So I think that there's an appetite for our product or potential products. And I think we've got a great team. So in terms of when we would actually be in a market, it's delayed from what we originally wanted, which was going to be April this year. It's probably Q4 or early next year. And the plan is not only to have just one product but multiple products and create new platforms and have, I think, a very attractive investment security that we will be able to sell and deliver quality returns to the investors. And obviously, it fuels growth for all Ashford, all our advisory services, but also our related products and services as well, which I think is great.

[Operator:]

[Operator Instructions]. Our next question comes from Bryan Maher with B. Riley FBR.

[Bryan Maher:]

A couple of questions. But kind of a big one, and if you could address each of kind of the three big components to the layoffs. I think Remington was 93% of the workforce; Premier, I think I heard 53%; and JS Audio Visual, 94%. What are you looking for in the way of triggers out there, data points, et cetera, to start to bring some of those employees back on? How far in advance do you have to start doing that? And what are the prospects that you can get back kind of all of the key level of people that you need that may have gone or maybe going off and doing something else? If you could walk through each of those 3 big divisions.

[Montgomery Bennett:]

Well, this is Monty, I'll hit on them. And Jeremy, if you'd clean up here for the ones that I don't hit. Unsurprisingly, Bryan, it's demand-based. And as we see business coming back, we start to bring people back and try to plan accordingly. We were on a nice trajectory of business coming back with the low month being May, but that comeback trajectory has slowed down with the emergence of these new COVID cases in the second wave, so to speak, that's coming around. And so we just do the best we can to forecast of what business levels are going to be next week and next month and then starting to bring people on accordingly. And the ones that we don't think we'll be able to pull back for quite some time or bring back for quite some time, we have already laid off and let go, so that they know that they can go seek alternatives. We still have quite a few that are furloughed, so we reach out to those that are furloughed and plan on them coming back, and we give them a little notice and have them come. And by and large, the team has been able to do this pretty effectively and to bring them on as that business returns. And so it's -- I think it's a process that anyone would do in trying to bring these people back. In some cases, we do have people that don't respond to the initiative to come back for whatever reason. And in those cases, we moved down our furlough list and bring back the next person. And so, at this point in time, it hasn't been an issue, and it hasn't been a significant number of folks that have -- we've had to pass over, but it does happen. But there hasn't been any problem with us bringing a number of those people back.

[Jeremy Welter:]

Yes. And I'll just add a few points. And it's not only an issue, Bryan, for Remington or JSAV or Red or any of our subsidiary companies. It's also an issue or situation that we have with our brand-managed properties as well. We've done the same thing to brand-managed properties, where we've cut back our staff significantly. And so one of the things that we do at Ashford and is one of our core principles is engaging, and we have a high level of engagement with the furloughed associates. In some of our platforms, we have weekly calls, not only with our employed associates but also our furloughed associates. And we are very matter-of-fact with them and tell them what the situation is and what we are trying to do to do what we can to bring them back. But I do think that, that is something that we've done a fantastic job, honestly staying engaged, not only with our employed associates but also the furloughed associates, so that when we do have opportunities, we can do it very quickly and ramp very quickly as demand continues to come back over time. And so I think it's a fluid situation. And also, it varies a little bit by our businesses. Red is a little bit different because Red has a lot of basically contract employees. And we're moving towards that model more so at JSAV as well, which means that if we don't have the business or we don't run the trip, the boat trip, then the captain doesn't get paid that day. And so it's a little bit more flexible business model as well.

[Bryan Maher:]

Yes. I was thinking a little bit more along the line and not to take anything away from the line hotel employees, but there are literally millions of them, but more along the lines of the project management, maybe more senior project management people, maybe more senior JSAV people. Have those people been kept on the books? Or keeping -- you're keeping very close to them because I'm sure that they are probably going to be very instrumental in ramping those businesses as demand comes back?

[Jeremy Welter:]

Yes. We haven't furloughed any of our senior leadership at any of our businesses. Our team is -- we've built up incredible leadership at all our businesses, something that I think that Monty and I are very, very proud of. And so we've got great leadership across the board, and so we've kept the senior leadership. But in cases like, as you mentioned, for JSAV, a lot of that is going to be more on the property level basis where we might have a property director that we've had to furlough until there's group demand at the hotel. But in terms of the core infrastructure of each one of these businesses, the leadership team is there. And as it relates to Premier, specifically, you asked about project managers, project managers, in a lot of cases, typically tend to be freelance workers in a lot of cases. We work a different model at Premier, where we had them on our staff and have them employed. And unfortunately, just with the lack of volume, we've had to let some of them go or furlough them. But I think that, that's the easy place for us to remobilize once business resumes. We've done this before. We did this during The Great Recession. We had to cut back on our CapEx spend then. And I think that we rebuilt that business back very aggressively and very quickly. One of the things I think that differentiates Premier from other businesses in the spaces that we have, I think, industry-leading, world-class design team, and that design team is still intact, that leadership is still intact. And so I think that we've done a good job making sure that we've kept the very, very top talent across the board at all levels, and that we have the ability to mobilize very quickly as business resumes.

[Bryan Maher:]

Got it. And shifting gears, and maybe this is a question for Deric. But how should we think about, really, not in the case of Braemar because it seems reasonably well positioned and probably not going to lose any hotels in this pandemic, but Ashford Trust is probably going to start losing hotels and maybe as soon as in August. How should we think about the fee payments to Ashford Inc. from Trust as hotels leave the portfolio? And more specifically, if any of the ERFP hotels leave the portfolio?

[Montgomery Bennett:]

This is Monty. You may be aware, Bryan, that there's certain floors and minimums that Ashford Trust must pay to Ashford Inc. as -- even as assets may decline over at Ashford Trust, and that was part of the trade of the ERFP money, and those details are in our filings, and maybe offline, we can give you some further details of those. That being said, that Ashford Inc. is committed to both of these platforms and to helping them survive and thrive. And so to the extent that Ashford Inc. needs to be flexible in any of these situations, then it will be because that's Ashford Inc.'s commitment to these platforms. So I think from a requirement standpoint and a guarantee standpoint, Ashford Inc. is in good shape. But Ashford Inc. intends to support these platforms as best they can with the caveat that all these types of decisions are made by the independent directors and not the folks on the phone here.

[Operator:]

And that concludes today's Ashford Inc. Second Quarter 2020 Results Conference Call. All parties may disconnect. Have a good day.