Ashford Inc.
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

Good day, and welcome to the Ashford Incorporated First Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joe Calabrese with Financial Relations Board. Please go ahead.

[Joseph Calabrese:]

Good day, everyone, and welcome to today's conference call to review results for the Ashford Inc. for the first quarter of 2018 and to update you on recent developments. On the call today, we have Monty Bennett, Chairman, Chief Executive Officer; Rob Hays, Co-President, Chief Strategy Officer; Deric Eubanks, Chief Financial Officer; Jeremy Welter, Co-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 afternoon in a 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 are based upon forward-looking information, which 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 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 and schedules, which have been filed on Form 8-K with the SEC on May 3, 2018, 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 first quarter of 2018 with the first quarter of 2017. I will now turn the call over to Monty Bennett. Please go ahead, sir.

[Montgomery Bennett:]

Good morning. We're pleased to present our financial results for the first quarter of 2018. I'll begin by giving a brief overview of the company, discuss our performance highlights. And then Rob will discuss the recently announced agreement to acquire Remington's Project Management business. Afterward, Deric will review our financial results, then Jeremy will provide an update regarding our strategic investments in Pure Rooms, OpenKey, J&S, Lismore Capital and RED Hospitality & Leisure as well as other initiatives, and then we'll take your questions. We delivered strong financial and operating performance for the first quarter, driving significant growth in revenues, and we are pleased with the groundwork we are laying for the continued success of our platform. For the first quarter, revenues increased by 270% over the prior year period, and we reported adjusted EBITDA of $5.4 million and adjusted net income of $4.6 million. Looking ahead, we are well positioned for further growth. And as mentioned last quarter, we expect the lower tax rate will have significant positive impact on our earnings in 2018 and future years. 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 advise. I believe we have the most highly aligned, stable and effective management team in the hospitality industry. Acting like 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

[J. Robinson Hays:]

Thanks, Monty. As Monty mentioned, on April 9, we announced that we signed a definitive agreement to acquire Remington's Project Management business for $203 million. The transaction, which does not require private letter ruling from the Internal Revenue Service, is expected to close during the third quarter of 2018. The consideration for the acquisition was convertible preferred stock in Ashford Inc. that is convertible at a stock price of $140 per share, a substantial premium to our current trading level, which illustrates the seller's conviction in future growth prospects for the company. From an operating perspective, Remington's high-margin project management business will immediately add scale, diversification and an enhanced competitive position in the hospitality industry while also expanding the breadth of services we offer our managed REITs. Additionally, with deep industry experience and long-term contracts in place, we believe this transaction represents a compelling opportunity for Ashford to diversify its earnings stream, and moving forward, the potential to expand business to other third-party clients. As background, Remington's Project Management business provides comprehensive and cost-effective design, development and project management services for both Remington-managed hotels as well as our external partners. It provides project oversight, coordination, planning and execution of renovation, capital expenditure or ground-up development projects. Its operations are responsible for managing and implementing substantially all capital improvements at Ashford Trust and Braemar. Additionally, it has extensive experience working with many of the major hotel brands in areas of renovating, converting, developing or repositioning hotels. In 2017, Remington Project Management had revenues of approximately $29 million and adjusted EBITDA of approximately $16.3 million. The transaction is expected to be immediately accretive to Ashford's adjusted net income per share. And in summary, we believe this is a terrific opportunity for Ashford to rapidly build our operating scale, increase the breadth of services provided to our managed REITs and other hospitality companies and increase our earnings potential. I'll now turn the call over to Deric.

[Deric Eubanks:]

Thanks, Rob. Net loss attributable to the company for the quarter was $5.7 million or $2.84 per diluted share compared with a net loss of $2.4 million or $1.34 per diluted share for the prior year period. For the first quarter, total revenues were $48.2 million, reflecting a 270% growth rate over the prior year. Adjusted EBITDA for the quarter was $5.7 million compared with $5.1 million for the prior year period, reflecting a growth rate of 6%. Adjusted net income for the quarter was $4.6 million or $1.71 per diluted share compared with $4.4 million or $1.92 per diluted share for the prior year period. At the end of the first quarter, the company had $30.8 million in corporate cash, and we currently have a fully diluted equity market cap of approximately $250 million. Also as of March 31, 2018, the company had 2.7 million fully diluted shares of common stock and units outstanding. We currently have 2.1 million common shares, 0.2 million common shares earmarked for issuance under our deferred compensation program, and the balance relates to the GAAP treatment for in-the-money stock options and put options associated with the minority interest of our strategic investments. I will now turn the call over to Jeremy to discuss our investments in OpenKey, Pure Rooms, J&S, Lismore Capital, RED Hospitality & Leisure and our other initiatives.

[Jeremy Welter:]

Thank you, Deric. We are excited to provide updates on our hospitality products and services businesses. To explain this strategy more fully, our products and services initiative is a unique investment strategy in the hospitality industry, whereby we strategically invest in operating companies that service the industry, and we act as an accelerator to grow these companies. In doing this, we were able to establish synergies for our hotel platforms, providing attractive pricing and higher levels of service than they would otherwise receive from a third-party vendor. We're also able to quickly grow these companies in which we invest in a number of ways

[Operator:]

Thank you [Operator Instructions] And we'll take our first question from Bryan Maher with B. Riley FBR.

[Bryan Maher:]

Yes. Good afternoon, guys. One kind of housekeeping question, I guess, for Deric. There's an impairment charge in the P&L for the first quarter of like $1.9 million. What was that related to?

[Deric Eubanks:]

Bryan, that relates to some software that we were developing as part of an enterprise-wide software system that actually dates back to before the spinoff of Ashford Inc. from Ashford Trust. We just recently completed that project and put that new system in place, and there was a part of that, that we ended up not using. And so we had to write that off and impair it, but it dates back to well before the spinoff of Ashford Inc.

[Bryan Maher:]

Okay. Thanks. And then we've had a couple of questions regarding the non-cash stock/unit-based compensation, both in the revenue and in the expense lines for the quarter, and it's my understanding that there are some vagaries in there that are unusual items. It's not just like one went up over the other. Can you just walk through for listeners what is going on there?

[Deric Eubanks:]

Sure. This is Deric again. The thing that I would point out is if you look at in revenue section where we have non-cash stock, unit based compensation expense, those amounts that you see up there in the revenue, there's an exact offsetting amount down in the expense line item as well. So those completely offset each other, and there's no impact to Ashford Inc.'s adjusted EBITDA. If you go to the adjusted EBITDA table, you could see where we add back the equity-based compensation expense. And in the first quarter, that was $3.8 million. In the prior year, it was $2.3 million. That expense relates specifically to the non-cash equity-based comp expense at Ashford Inc., and it's the option amortization of the options. So hopefully that clears it up a little. The amount that show up in the revenue and the expense relate to equity grants that are received by the REITs or advisory platforms, and those get mark-to-market. So there's a lot of volatility in those amounts, but they do not impact Ashford Inc.'s earnings at all.

[Bryan Maher:]

And then just kind of lastly, when you look at the pipeline of new business opportunities, especially having just pulled Remington Project Management into the fold or coming soon, how deep is that pipeline? It's starting to be kind of a lot of moving parts here. How should we be thinking about that over the next kind of 6 to 12 months if more businesses kind of come online?

[Montgomery Bennett:]

Sure. This is Monty. What we'd like to do is attack kind of the big fee generators, right. And Ashford Inc. already has the asset management business from these REITs. As project management subject to disclosing, we'd like to roll in property management from Remington if a deal can be worked out. And JSAV is pretty material. These other businesses are a little smaller, although OpenKey has the advantage to be material if it really just goes -- grows like gangbusters like it very well could. I think that these existing businesses all have the potential to grow dramatically, which some of them have already started. But as far as additional businesses, I think they're moving down the continuum of -- on them, and there's probably another, I don't know, half dozen businesses that may be -- will fit well into this. We've looked at potential branding or printing-type companies that can provide all kinds of printed or logoed materials of every kind. We'd look at maybe some type of a linen company and/or glassware-related and supplies-related companies and then a few other services-type businesses such as energy services. But we definitely, especially if and when a property management deal is done, are farther down the continuum. And as far as additional businesses, don't see a whole lot more after that. But the existing businesses that we will require I think we have already started to see and will continue to see rapid growth among those businesses as we plug them into our system.

[Bryan Maher:]

And if -- so the property management component of Remington, is that what's left after you get the project management component? And by doing it in a two-step process, is that more likely to clear the private letter ruling than when you try to do it in its entirety before?

[Montgomery Bennett:]

To answer your first question, yes. That's all that's left in Remington after the project management moves over. There's kind of a family office component that Remington is engaged in for myself, my father and other family members, but that will be gone and will just be held by us privately. And then -- so the operating part of the business for Remington is just the project and property management. And yes, that will provide a cleaner -- a structure for them because we've had to do some kind of adjustments with Ashford Inc. in order to accommodate certain businesses like JSAV that, to a stretch, the IRS could say is operating a hotel, right, because JSAV personnel are in hotels. And so we've already taken some steps in Ashford Inc. to accommodate what would be covered in a private letter ruling. And so by keeping it clean and straight, it should be an easier process.

[Bryan Maher:]

Okay. Thank you, Monty.

[Montgomery Bennett:]

Thank you.

[Operator:]

[Operator Instructions] And we'll take our next question from Stephen Biggar with Argus Research.

[Stephen Biggar:]

Yes. Good afternoon, guys. So just a question on the adjusted EBITDA margin. So last year, it was 39%. This year, it moved down to 11%. Obviously, there was a big acquisition in there, and you're buying businesses with something as big as Remington with 56% margin. So just kind of the trend and adjusted EBITDA margins relative to revenues going forward. Is there any sort of framework or goal that we should keep in mind here?

[Montgomery Bennett:]

This is Monty. I'll jump on it. It's really what you mentioned and that it's dependent upon the deals that are rolled in. In all these businesses, we see margins being maintained or growing. And so from a big-picture standpoint, we see all positive-type results. Some businesses just inherently have lower margins than others. It's just the nature of the beast. So it depends upon which ones are rolled in. Project management is high margin. JSAV is lower margin. And so it's a matter of sitting down with a pencil and paper, and Deric will be happy to do that with you and kind of waiting them all in order to see what kind of combined margin comes in. So overall, it's hard to say. It just depends upon what gets rolled in and when.

[Stephen Biggar:]

Okay. And then apologies if you covered this in another form, but just the highlights on the other platform, Ashford Trust, there was a fairly big mortgage refinancing that went on, saving close to $18 million over a year. So it implies about a little over 1% interest rate savings. So I'm just curious, two things, I guess. What was the mechanics behind that, that [allowed just] in a higher interest rate environment when they were first taken out or is there some improvement in credit quality that brought down that interest rate? And it looks like it's on 30 properties overall. Secondly would be should we expect more of that going forward?

[Montgomery Bennett:]

I'll hit some of it, and Deric can hit the balances. But generally, the interest rate environment has moved up a little bit, but the credit environment has improved and continues to improve. So what's – three years ago, would be L plus 400 loans, say, at 65%, 70% is now plus 250 loan. It's just much more competitive, and you can see that from the high yield markets, which kind of mirrors what's going on here and that those credit spreads have compressed. And so that provides just great savings. And so to the extent that we can in both platforms, we're trying to refinance debt to take advantage of these much more compressed margins and credit spreads, and that's more than offsetting the slight increase in interest rates that's going on. Deric, do you want to...

[Deric Eubanks:]

Yes. I would just add that we focused on floating-rate financing at each of our REIT platforms, and having that floating-rate financing gives us that flexibility to be able to refinance well ahead of maturity dates on an opportunistic basis if spreads and the credit market has improved, and so that's what we've been seeing. And as Monty said, I think we will continue to take advantage of those opportunities as they exist.

[Stephen Biggar:]

Okay. Thanks.

[Operator:]

It appears there are no further questions at this time. I'd like to turn the call back to management for any additional or closing remarks.

[Montgomery Bennett:]

Thank you, guys. Thanks, everyone, for listening to our call today. We look forward to the next call with you.

[Operator:]

And that concludes today's presentation. Thank you for your participation. You may now disconnect.