Ashford Inc.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

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

[Joe Calabrese:]

Good day, everyone and welcome to today’s conference call to review results for Ashford for the second quarter 2018 and to update you on recent developments. On the call today, we have Monty Bennett, Chairman and 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 August 9, 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 second quarter of 2018 with the second quarter of 2017. I will now turn the call over to Monty Bennett. Please go ahead, sir.

[Monty Bennett:]

Good morning and welcome to our call to discuss our financial results for the second quarter of 2018. I will begin by giving a brief overview of our quarterly results and then discuss our recently announced Enhanced Return Funding program with Trust. Rob will discuss our acquisition of Remington’s Project Management business and our investor outreach efforts. Afterwards, Deric will review our financial results. 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 will take your questions. We delivered very strong growth in the second quarter and are pleased with the groundwork we are linked for the continued success of our platform. For the next quarter – for this quarter, revenues increased by 179%, adjusted EBITDA increased by 167%, and adjusted net income increased by 137% over the prior year period. We are very pleased with these results and believe they highlight the benefits of our strategy. Before discussing our growth strategy in more detail, I would like to spend a few minutes discussing how excited we are about the new Enhanced Return Funding program or the RFP agreement with Trust. The ERP is a $50 million funding commitment designed to produce strong returns on hotel investments at Trust and strong fee growth at Ashford. It does this in a very simple way. Ashford provides capital trust in order to lower the amount of equity that Trust has to put into a hotel investment. That reduction of equity materially improves equity returns to Trust and in return, Ashford just paid the incremental fees, it customarily receives from Trust and its assets. Capital from the program will be sized equal 10% of the total acquisition price of each new Trust hotel acquisition and we expect that the European funding will be available for each hotel investment that Trust makes for at least the next $500 million of acquisitions. Similar to our previous program, the funding takes the form of purchased furniture, fixtures and equipment by Ashford for use at Trust hotels. This allows Ashford to get the benefit of the immediate deduction for tax purposes, which significantly enhances our returns. This program is designed to create a virtuous cycle. Ashford provides capital to Trust, Trust then buys assets, which should result in higher equity returns, higher equity returns in Trust is expect to lead to potentially higher stock prices, higher stock prices at Trust lead to more accretive growth, more accretive growth leads to more fee streams to Ashford and more fee streams to Ashford would lead to an increase in available cash to provide capital to Trust. The process then repeats itself and builds upon itself creating this virtuous cycle. Trust has already closed on the first acquisition to utilize the ERFP, the Hilton Old Town Alexandria. And Trust is actively looking for additional acquisition opportunities. 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 one of the most highly aligned stable and effective management teams in the hospitality industry and acting like shareholders that distinguished us from others in our industry. We consider it one of our main competitive advantages. Ashford currently advises two publicly traded platforms Trust and Braemar Hotels & Resorts which together own 130 hotels with approximately 29,000 rooms and approximately $7.8 billion of gross assets as of June 30, 2018. Ashford has the high growth fee based business model with the diversified platform of multiple fee generators. We believe it to be a scalable platform with attractive margins. Additionally, it has a very stable cash flow base as the advisory agreements with the REITs stipulate that the minimum base fee can’t drop by more than 10% from the previous year’s base fee. Currently, our company is focused on three areas of growth. First, we would like to accretively grow our existing REIT platforms. Second, as part of our growth strategy we would like to add additional investment platforms. And third, through our service business initiatives we are working diligently on opportunities to buy, invest in or incubate businesses related to the hospitality industry such as OpenKey, Pure Rooms, J&S, Lismore Capital and RED Hospitality & Leisure. Then through our connections and our relationships with our advisory platforms and leveraging our asset management expertise, we can accelerate our growth dramatically. We continued to be excited about the investments I just mentioned and Jeremy will be providing a more detailed update on all of these investments in a few minutes. We have a fee structure in place that incents Ashford to create shareholder value and to buy REIT platforms. With our base fee driven by the share price performance and our incentive fee based on total shareholder return out-performance versus their REIT peers, our management team’s primary focus is maximizing returns. Looking ahead, we are very excited about the prospects of our recently acquired Project Management business of Remington which I will speak to momentarily and we are optimistic about the prospects for our two advisory platforms. Additionally, we see great opportunity for this platform to grow and deliver superior returns to our shareholders by both adding additional investment platforms as well as investing in or incubating other hospitality related businesses. I will now turn the call over to Rob.

[Rob Hays:]

Thanks Mike. I would like to start by discussing our recent acquisition of the Remington Project Management business. On Wednesday, we announced that we closed the acquisition of Remington’s Project Management business for $203 million. The consideration of the acquisition was preferred stock in Ashford that is convertible at a stock price of $140 per share, a substantial premium to our current trading level. From an operating perspective, we believe Remington’s high margin Project Management business will add scale, diversification and enhance competitive position in the hospitality industry, also expanding the breadth of services we offer to our advised 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 streams and moving forward to potentially expand business to other third-party clients. As background, our Project Management business provides comprehensive and cost effective design, development and project management services. We provide project oversight, coordination, planning and the execution of renovation, capital expenditure or ground of development projects. Its operations are responsible for managing, implementing substantially all the capital improvements at Trust and Braemar. Additionally, we have extensive experience working with many of the major hotel brands in areas of renovating, converting, developing and repositioning hotels. This transaction received overwhelming approval from our shareholders with holders of over 87% of Ashford shares present in voting and representing over 78% of outstanding shares voting in favor of the transaction. It’s also worth noting a majority of shares excluding shares owned by Trust, Braemar and insiders and related parties present in voting at the meeting, voted in favor of the proposal. In other words, a majority of the minority approved the transaction. 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. In summary, we believe this is a terrific opportunity for Ashford to build operating scale, increase the breadth of our services provided to our advised REITs and other hospitality companies and increase our earnings potential. I want to point out that one of the key advantages of this acquisition is that the company will get the benefit of the mutual exclusivity agreement with both Trust and Braemar. This means as Trust and Braemar add hotels to their portfolios, we have the exclusive right to provide project management services at these hotels. We are very excited about this transaction and believe the prospects are strong going forward with the new project management business. I also like to add that we are pleased to have become a member of the Russell 2000 and Russell 3000 indices. As of June 22, 2018, the Russell 2000 index is one of the most widely used performance benchmarks for small cap companies and we believe our inclusion will provide increased visibility within the investment community and improve the liquidity of our stock for shareholders. Investor outreach remains a top priority for us and over the coming months we plan to attend a number of investor conferences targeting a wide range of investors from small and mid-cap focused funds to industry dedicated investors as well as to family offices and retail holders. These conferences include the Midwest IDEAS Conference in Chicago during late August, the Gateway Microcap Conference in San Francisco in early September, Sidoti’s Microcap Fall Conference in New York in late September as well as the IPI Fall Conferences in both New York and Dallas in November. We believe exposure of these conferences will provide further opportunity to tell our story to provide meaningful dialogue with potential investors. I will now turn the call over to Deric.

[Deric Eubanks:]

Thanks, Rob. Net income attributable to the company for the quarter was $9 million or $0.93 per diluted share compared with a net loss of $6.7 million or $3.85 per diluted share for the prior year period. For the second quarter, total revenues were $54.8 million, reflecting a 179% growth rate over the prior year. Adjusted EBITDA for the quarter was $11.3 million compared with $4.2 million for the prior year period reflecting a growth rate of 167%. Adjusted net income for the quarter was $9.5 million or $3.60 per diluted share compared with $4 million or $1.73 per diluted share for the prior year period. At the end of the second quarter, the company had $37.7 million in corporate cash and we currently have a fully diluted equity market capitalization of approximately $230 million. Also as of June 30, 2018, the company had 2.6 million fully diluted total shares of common stock and units outstanding. We currently have 2.1 million common shares issued and outstanding and 0.2 million common shares earmarked for issuance under our deferred compensation program. The balance relates to the GAAP treatment for in-the-money stock options, put options associated with the minority interest of our strategic investments, and some restricted stock. 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 other initiatives.

[Jeremy Welter:]

Thank you, Deric. We are excited to provide updates in our hospitality products and services businesses and their strong results and initiatives during the second quarter. To explain this strategy more fully, 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 this, we believe we are 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 are also able to grow the companies in which we invest in a number of ways by referring them to the hotels in our REITs by leveraging our vast industry relationships and by consulting on best practices opportunities. As Rob mentioned earlier, we are very excited about the acquisition of Remington’s Project Management business and see significant opportunity going forward for that business. We believe it will fit in very well with the strategy of our hospitality products and services businesses and expect it to be very impactful to our operations by diversifying our platform and growing the services that we can provide to hotels and hotel owners. We look forward to updating you on the progress of our Project Management business in the future. Moving on to our products and services businesses, J&S audiovisual 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. In the second quarter, revenue growth was 23% and adjusted EBITDA growth was 50% compared to prior year. Since our investment in November 2017 through the end of the second quarter, revenues increased 22% for $10.1 million and adjusted EBITDA increased 55% or $2.7 million over the prior year period. Additionally, results from integrating J&S into Ashford asset managed hotels, have been positive with average revenue group, room night up 10% and average customer satisfaction scores up 19% since the respective transition occurred from the prior AV provider highlighting the company’s incredible service level. These impressive results are due to the strong management and operational team at J&S along with our ability to provide additional value related to best practices initiatives, analytics and leveraging industry relationships. These results also highlight the benefits of our strategy as we seek to drive profitability at the hotels in our advisory platforms. Since making our investment in J&S we have increased significant time undertaken a comprehensive review of its operations. This has resulted in many value add initiatives including a deep dive analysis and action plan to optimize revenue and organizational structure, the creation of dedicated sales positions in pipeline reports and increasing the company’s analytics horsepower to improve decision making. Moreover J&S executed five new hotel contracts during the second quarter, highlighted by the one and only familiar, Los Cabos and the montage managed Los Cabos, underscoring the quality of resorts and hotels accompanied able to build relationships with. As of the second quarter J&S had multi-year contracts in place with 72 hotels and convention centers in addition to regular business representing over 2,500 annual events and productions, 500 venue locations and 650 clients. For the trailing 12 months period ending June 30, revenue attributable to Ashford asset managed hotels represented only 4% of total business for J&S, highlighting the exceptional opportunity remaining accelerate growth of the company even further. Going forward, we see a tremendous opportunity for integrating J&S into more hotels in the U.S. and internationally given the company’s outstanding reputation as a leading service provider relative to similar competitors in the industry. We will continue to leverage the know-how and deep relationships of the J&S management team acquired over years of experience along with our extensive knowledge and context in the hospitality industry to hopefully accelerate and fuel long-term growth at J&S. One final note, I would like to remind you that J&S is a seasonal business and we have previously filed an 8-K detailing historical seasonality by quarter. Lismore Capital has been providing debt placement services to our advisory platform since the third quarter of 2017. These are services which otherwise would have been provided by third-parties for Trust and Braemar and competitive pricing terms related to property level debt financings. To that end Lismore Capital generated $5 million of revenue and placement fees in the second quarter resulting in $6.7 million in total placement fees generated in the past four quarters. Over the past four quarters Trust and Braemar have benefited from Lismore’s high quality service and efficient execution of debt placement transactions. These benefits include running a competitive process to achieve the best available terms of the market, achieving lower spreads on the debt and significant expected annual interest savings. As an example the refinancing that Lismore’s have sourced the Trust over the past 2 years had resulted in approximately $30 million in annual interest expense savings from what it would have expected to be under the previous loan terms. RED Hospitality & Leisure is a leading provider of water sports activities and other travel and transportation services in the U.S. Virgin Islands. Through the first half of the year RED Hospitality provided limited ferry operations between St. Thomas and St. John and expect to capitalize our new contracts in charter business as resorts in the Virgin Islands began to reopen in the second half of this year and into early 2019. To that end, in the second quarter RED Hospitality executed a long-term agreement with the West and St. John to provide ferry services for guests and employees when the resort reopens in early 2019 which is expected to generate adjusted EBITDA of approximately $700,000 to $800,000 annually at the company level. This contract represents meaningful performance outside the RED Hospitality and Ashford. We have also completed an introductory analysis of the Key West market and expect to execute on a business development plan to establish RED Hospitality in this market by year end with significant vertical growth avenues thereafter. Additionally, the company generated $309,000 of revenue and $72,000 of adjusted EBITDA in the second quarter and $645,000 of revenue and $158,000 of adjusted EBITDA year-to-date. We remain excited for the future prospects of RED Hospitality as we see many opportunities expand this business into several other hotels and our advisory platforms. OpenKey is the hospitality focused mobile key platform leading the industry and interfaces with major lock manufacturers with access to thousands of hotels worldwide. The company continues to expand the platform with approximately 10,000 rooms under contract with access to 15 hotel brands and portfolios across its current customer base. The company also continues to be supported by its office in Guadalajara, Mexico which has been instrumental for growth in Mexico, Costa Rica and Columbia as well as independent resellers currently serving in 14 different countries. In the second quarter revenue growth was 256% compared to the prior year and year-to-date revenue growth was 594% compared to prior year. We remain optimistic for the growth outlook of OpenKey. Pure Rooms is the leading provider of hypoallergenic rooms in the hospitality space. We have seen a growing demand for health and wellness offerings in the hospitality industry and we believe that the investment in Pure Rooms will allow us to bring our industry knowledge and expertise as well as our managed asset base to the company in order to optimize growth synergistically. In the second quarter revenue growth was 16% compared to prior year, the company currently has contracts in place with 178 hotels representing approximately 2,700 rooms throughout the United States including 64 Ashford asset managed hotels. Going forward we anticipate that we will be able to drive significant growth and value creation at Pure Rooms by integrating the product into additional Ashford asset managed hotels and third-party hotels because we believe the value proposition for adding Pure Rooms to our property is very compelling. We found that hotel rooms participate in this program typically achieve a significant rate premium per night and typically experience returns of between 50% and 70% on our investment. We have invested a significant amount of time and resources into the company including implementing many new initiatives through the first half of the year including a revamped website, new in-room amenities program and creation of the dedicated sales business development position. With these initiatives in place from recent growth, we remain very excited about the future prospects for Pure Rooms. We continue to remain active in evaluating additional investments in operating company and we hope to share more details on that front in the upcoming quarters. That concludes our prepared remarks and we will now open the call up to your questions.

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Bryan Maher with B. Riley FBR.

[Bryan Maher:]

Good morning, maybe this is best for Deric, I don’t know, regarding Remington Project Management, how should we think about the seasonality of that business and what you guys project to be the growth of that business over the next couple of years?

[Monty Bennett:]

This is Monty. I think if that makes sense for us to in an 8-K to release some seasonality of that business historically to help you there, so we will talk internally about doing that. As far as going forward, we don’t give guidance as you know. I think to think about it is that unlike some of the other businesses that we bought we can immediately plug them into Ashford hotels. They have got a lot of third-party business, they don’t have Ashford business. This is just the opposite, it has all the Ashford business already, but it doesn’t have any third-party business. So its growth opportunities are for third-party business not for plugging into Ashford business.

[Bryan Maher:]

Okay. And then you guys made a comment on the call on your prepared remarks about Remington Project Management having now exclusive rights to Ashford Trust and Braemar, previously didn’t they already do that or was that bid out and Remington won those bids, how did that work before?

[Monty Bennett:]

I think it might be in just a mishmash of words and that Remington had that right in the past, but now Ashford Inc. has that right, it effectively bought that right with this business.

[Bryan Maher:]

Okay, I understand. And then and maybe this one is for Deric, it’s my understanding that a lot of the upside in the second quarter just reported came from refinancing activity, it’s particularly at Ashford Trust, how should we think about the level of that impact in 2Q and how should we think about it on a go forward basis?

[Deric Eubanks:]

Yes. Bryan, it’s Deric. So in the second quarter the debt placement fees resulted in about $5 million of revenue to Ashford Inc. And obviously not as Ashford Trust, but Braemar was also active refinancing in the second quarter, I mean that’s going to be a case by case situation in terms of when the REITs either refinance debt or when they get new debt for acquisitions. So as the REITs buy asset and put debt on those new assets, we would expect Lismore to get the fees associated with that. But as you know Ashford Trust has really refinanced a significant portion of its existing debt. So a lot of that has been spoken for. But again it will just be opportunistic as we go forward in terms of with their acquisitions and if we see other opportunities to refinance some of the other debt that we haven’t already in our refinanced.

[Bryan Maher:]

Okay. So to be clear and I know you guys don’t give guidance, it’s not something recurring that we should be modelling for?

[Deric Eubanks:]

I think I will just stick with the answer that I previously gave.

[Bryan Maher:]

That’s all I have. Thanks.

[Operator:]

We will take our next question from Stephen Biggar with Argus Research.

[Stephen Biggar:]

Good morning. Thanks. First, I appreciate the color on J&S in particular, I mean given the contributions now to revenues and EBITDA, that’s very helpful, but a question just on the enhanced programs if the $50 million is already I guess 20% subscribed here with one acquisition, so it seems like that could run out fairly soon, so two parts, I guess one is how easily can that $50 million go to $100 million, let’s say if it’s if the program is successful and secondly does it say anything about the pipeline now for acquisitions if you can this is their reason to believe that there is going to be an acceleration?

[Monty Bennett:]

Sure. This is Monty. Yes. So the $50 million of the first tranche of the ERP program between Ashford Inc. and Ashford Trust about $11 million has already been spoken for and already been done with the acquisition of Hilton Alexandria. We had given the guidance that we would like to have the full $500 million deployed within 12 months and we are about a month or so into it, that’s our guidance. On that right now sure, it could be faster, it could be slower. And certainly if the deals said Ashford Trust has $100 million that wouldn’t take [indiscernible] to do it. As far as sustaining the program there is interest on both parties side to expand it. It has been an expansion, potential has been baked into the agreement, It does require agreement by both side, but there is that time, at this time and it’s the time of signing the agreement the desire to expand it further, but the thoughts were just to start with $50 million and then kind of go from there. So that’s where we are, very excited about it, we think it’s got great potential. We do see opportunities out in the marketplace, but it’s very active marketplace. Ashford Trust is looking at it and bidding on opportunities as we speak, so hopefully it will have no problem in fulfilling that obligation of deploying the capital within a year.

[Stephen Biggar:]

Okay. Thanks.

[Monty Bennett:]

Are there any other questions? Alright. We are hearing none. I want to end this call by thanking the management team here for an outstanding quarter, you guys all worked very, very hard and have just tremendous success. And thanks to our shareholders for your continued support and we look forward to talking with everyone on our next quarterly conference call. Thank you.

[Operator:]

This does conclude today’s conference. I thank you for your participation. You may now disconnect.