Ashford Inc.
Q3 2018 Earnings Call Transcript

Published: 2 Nov 2018

[Operator:]

Good day and welcome to the Ashford Inc. Third Quarter 2018 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jordan Jennings. Please go ahead.

[Jordan Jennings:]

Good day, everyone and welcome to today’s conference call to review results for Ashford for the third quarter of 2018 and to update you on recent developments. On the call today will be Robison Hays, Co-President and Chief Strategy Officer; Deric Eubanks, Chief Financial Officer; and 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 and are being made pursuant to the Safe Harbor provisions of the federal securities regulation. 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 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 November 1, 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 third quarter of 2018 with the third quarter of 2017. I will now turn the call over to Robison Hays. Please go ahead, sir.

[Robison Hays:]

Good morning and welcome to our call to discuss our financial results for the third quarter of 2018. Monty is feeling under the weather today and will not be joining today's call. I will begin by giving a brief overview of our quarterly results and then we'll discuss in more detail our enhanced return funding program with Ashford Trust as well as our investor outreach efforts. Afterward, Deric will review our financial results and Jeremy will provide an update regarding our strategic investments as well as other initiatives and then we will open it up for Q&A. We delivered strong performance in the third quarter and are pleased with the groundwork we're laying for the continued success of our platform. For the quarter, revenues increased by 116%, adjusted EBITDA was 4.1 million and adjusted net income per share was $0.75. We are very pleased with these results and believe they highlight the benefits of our strategy. It’s important to note that the prior results did not include the results from J&S Audio Visual, given we closed the transaction in November of 2017. Historically, the third quarter is the most seasonal quarter for J&S, which skews the over – year-over-year comparisons and impacted our third quarter adjusted EBITDA by $1.4 million. Before discussing our growth strategy in more detail, I'd like to mention how excited we are about the new enhanced return funding program or ERFP agreement with trust. The ERFP is a $50 million funding commitment, designed to produce strong returns on hotel investment at trust and strong fee growth at Ashford. So far, we are pleased to have completed two deals with trust, where we have committed to ERFP funding and Trust has another acquisition in process that will also utilize ERFP. Trust is actually looking for additional deals that would use ERFP and we are very bullish about the future prospects of this program and its positive benefits for both Ashford, Inc and Trust. Our strategy is built around our ability to leverage the combined expertise of our management team to grow both our company and the platforms we advise. We believe we have one of the most highly aligned, stable and effective management teams in the hospitality industry and acting like shareholders has distinguished us from others in the industry. We consider it one of our main competitive advantages. Ashford currently advises two publicly traded REIT platforms, trust and Braemar Hotels and Resorts, which together own 130 hotels with approximately 28,000 rooms and $7.7 billion of assets as of September 30, 2018. Ashford has a high growth, fee based business model with a diversified platform of multiple fee generators. We believe it to be scalable with attractive margins. Additionally, it has a very stable cash flow base as the advisory agreements with the REIT stipulate that the base fee is maintained at the level of at least 90% from the previous year's base fee. We have a fee structure in place that incentivizes Ashford to create shareholder value at its advisory platforms. With our base fee driven by their share price performance and our incentive fee based on total shareholder return outperformance versus their REIT peers, our management team’s primary focus is maximizing returns. Clearly, our company is focused on three areas of growth. First, we 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 Premier, OpenKey, PURE Rooms, J&S Audio Visual, Lismore Capital, RED Hospitality and Leisure. Then through our connections and our relationships with our advisory platforms and leveraging our asset management expertise, we can accelerate the growth dramatically. We continue to be excited about the investments I just mentioned and Jeremy will be providing more detailed update on all of these investments in just a few minutes. And looking ahead, we're very excited about the prospects for our strategic investments and we are very optimistic about the prospects for our two advised REIT platforms. Additionally, we see great opportunity for these platforms to grow and deliver superior returns to our shareholders by adding additional investment platforms as well as investing in or incubating other hospitality related businesses. We are very excited about the new enhanced return funding program or ERFP that we have in place with Ashford Trust. The ERFP is a $50 million funding commitment, designed to produce strong returns on hotel investments and trust and strong fee growth in Ashford. It does this in a very simple way. Ashford provides capital to trust in order to reduce the amount of equity that trust has to put into a hotel investment. That reduction of equity materially improves the accurate returns to trust and in return, Ashford has paid incremental fees it customarily receives from trust and its assets. Capital from this program will be sized to equal 10% of the total acquisition price of new -- of each new trust hotel acquisition and we expect that ERFP funding will be available for each hotel investment that trust makes for a total of $500 million of acquisitions. Today, trust is closed on or announced $211 million of acquisitions. Similar to our previous key money program, the funding takes the form of furniture fixtures and equipment purchased by Ashford for use at Trust hotels. This allows us to get the benefit of the deduction for tax purposes, which significantly enhances our returns. This program is designed to create a virtuous cycle. Ashford provides capital to trust, trust and by the assets, which should result in higher equity returns, higher equity returns at trust are expected to lead to potentially higher stock prices, higher stock prices at trust lead to more accretive growth and more accretive growth leads to more fee streams to Ashford and more fee streams at Ashford lead to an increase in available cash provide capital to trust. The process then repeats and builds upon itself, creating this virtuous cycle. Trust has already completed two acquisitions, utilizing ERFP, the Hilton Old Town Alexandria and La Posada Santa Fe, but the competitive benefits and strong returns of this program provides the trust with underwriting deals, they will continue to be active in identifying strong and accretive acquisitions to pursue that are not only expected to benefit their bottom line in shareholders, but also do the same thing for us at Ashford through our ERFP contribution for the reasons I just mentioned. Turning to investor initiatives, one of our main goals of the company is to increase and broaden our investor base. One of the most effective ways to do this is by increasing our equity float. To that end, during the third quarter and subsequent to the end of the quarter, we completed an underwritten public offering of 280,000 shares of our common stock, which increased our float by approximately 31% and broadened our investor base. Given the volatility in our stock associated with the publicly marketed equity raise, we do have a preference going forward of raising equity capital via overnights, BOT deals and private marketed raises. However given the $16 million estimated of cash on our balance sheet and available debt capacity on the platform, we currently do not have any intention to raise additional equity capital. Additionally, investor outreach remains a top priority for us. And last month, we held our Annual Ashford Investor Day in New York that was very well attended and gave us the opportunity to share the Ashford story and strategy with a number of existing and potential investors. Over the coming months, we also 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 family offices and retail holders. These include the IPI fall conferences in New York and Dallas, the Southwest Ideas Conference in Dallas in November, the LD Micro-cap Conference in Los Angeles in December and the Spring IPI Forum in San Francisco in February 2019. We believe exposure to these conferences will provide further opportunity to tell our story and provide meaningful dialog with potential investors. I will now turn the call over to Deric.

[Deric Eubanks:]

Thanks, Robison. Net income attributable to common stockholders for the quarter was $1.4 million or $0.18 per diluted share compared with a net loss of $1.9 million or $1.05 per diluted share for the prior year period. For the third quarter, total revenues were $41.6 million, reflecting a 116% growth rate over the prior year. Adjusted EBITDA for the quarter was $4.1 million and adjusted net income for the quarter was $2.6 million or $0.75 per diluted share. On the capital markets front, during the quarter and subsequent to the end of the quarter, we completed an underwritten public offering of 280,000 shares of common stock at a price to the public of $74.50 per share. Total net proceeds from the offering after deducting the underwriters’ discounts, commissions and operating expenses were approximately $19.6 million. At the end of the third quarter, the company had $61.8 million in corporate cash and we currently have a fully diluted equity market capitalization of approximately $182 million. Also, as of September 30, 2018, the company had 2.9 million fully diluted total shares of common stock in units outstanding. We currently have 2.4 million common shares issued in outstanding, 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, put options associated with the minority interest of our strategic investments and some restricted stock. In our financial results, we also include 1.45 million shares from our Series B convertible preferred. I will now turn the call over to Jeremy to discuss our strategic investments and other initiatives.

[Jeremy Welter:]

Thank you, Deric. We are excited to provide updates on our hospitality products and services businesses and their strong results and initiatives during the third quarter. To explain the 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're also able to grow our portfolio companies in a number of ways. By referring them to the hotels in our REIT, by leveraging our vast industry relationships and by consulting on best operating practices. We remain very excited about the acquisition of Premier Project Management and see significant opportunities going forward for that business. As mentioned at our Investor Day presentation in October, we have a number of initiatives and branding exercises we are focused on to accelerate growth and profitability in the long term. We see tremendous opportunities from Premier Project Management to add significant value by diversifying our platform and growing the services that we can provide to hotels and hotel owners. Moving on to our other products and services businesses, J&S Audio Visual is a leading single source solution for meeting and event needs with an integrated suite of audio visual services, including show and event services, hospitality services, creative services and design and integration. Our share of third quarter adjusted EBITDA from J&S was negative 1.4 million and since we closed the J&S acquisition in November by a share, our prior year third quarter results did not include anything from J&S. We had previously filed an 8-K in December 2017, with J&S historical financials that showed the seasonality of the business. Our third quarter results this year are generally consistent with historical third quarters for J&S as shown in that 8-K. If we compare J&S’s results year-over-year using the previous owners’ unaudited financial information, we continue to see outstanding growth at the company with revenue growth of 22% in the third quarter compared to the prior year. Year-to-date, through the third quarter, revenue growth was 22% and adjusted EBITDA growth was 36% compared to the prior year period. Additionally, since our investment in November 2017, through the end of the third quarter, revenues increased 22% or $12.6 million and adjusted EBITDA increased 62% or $2.2 million over the prior year period. Results from integrating J&S into Ashford asset managed hotels have been positive with the average revenue per group room night up 10% and average customer satisfaction scores up 19% since the transition occurred from the prior AV provider, highlighting the company's incredible service level. These impressive results are due to the strong operational -- management and operational team at J&S, supported by our commitment to the implementation of the many value-add initiatives we have identified this year. In the third quarter, the company executed a new non-Ashford contract with the Jacquard Hotel in Denver, increasing the company’s multi-year contracts in place with hotels and convention centers to 73 in addition to regular business representing over 2,500 annual events and productions and 500 venue locations. For the trailing 12-month period ending September 30 2018, revenue attributable to Ashford asset-managed hotels represented only 7% of total business for J&S, highlighting the exceptional opportunity remaining to accelerate growth at the company even further. We see a tremendous opportunity for integrating J&S into more hotels in the US and internationally given the company’s outstanding reputation as a leading service provider in the industry. Lismore Capital has been providing debt placement services to our advised REIT platforms since the third quarter of 2017. These are services, which otherwise would have been provided by third parties, for Trust and Braemar on competitive pricing terms related to property-level debt financings. To that end, Lismore Capital generated $350,000 of revenue in placement fees in the third quarter resulting in $7.1 million in total placement fees since the third quarter of 2017 when services began. Trust and Braemar continue to benefit from Lismore’s high quality service and efficient execution of debt placement transactions. These benefits include running a competitive process that expects to achieve the most competitive terms in the market, achieving lower spreads on new debt, and increased annual interest savings. RED Hospitality & Leisure is a leading provider of watersports activities and other travel & transportation services in the U.S. Virgin Islands. We remain excited for the future growth prospects of the company, including

[Operator:]

[Operator Instructions] And we’ll move to our first question from the line of Bryan Maher of B. Riley FBR.

[Bryan Maher:]

Couple of quick questions. Regarding the ERFP program and the capital contributions related to the Hilton Alexandria Old Town, has anything been deployed yet and if not, when do you think that that starts to get deployed?

[Deric Eubanks:]

Hey, Bryan. It’s Deric. There was a small amount that got deployed in the third quarter. The vast majority of it's going to be in the fourth quarter this year for the Alexandria acquisition.

[Bryan Maher:]

Okay. And then as it comes to the new project -- new properties coming into the program, I believe, there's one extra one and one that's being contemplated. Should we consider something like that as timing as well, so maybe not the first quarter of the acquisition, but the second, you have a little bit and then the bulk comes out? I guess it would be quarter three or is it just truly going to be kind of opportunistic as you see that it should be put out?

[Deric Eubanks:]

Well, Ashford Inc. has two years from the acquisition to fund the FF&E. I think it's appropriate to probably have a one quarter delay when trust closes on the acquisition to at least have Inc. the time to start splitting the money. So I think the right assumption is wait a quarter post acquisition and then maybe taken a substance sort of straight lining, whatever that dollar amount is over the next several quarters.

[Bryan Maher:]

Okay. And then as it relates to the ERFP and Braemar, and we touched upon this yesterday on the Braemar call and I was kind of hoping Monte would be on this call. How are you thinking about, from an Ashford Inc standpoint, moving forward with Braemar, similar to Ashford Trust?

[Robison Hays:]

Hey, Bryan. It’s Rob. I mean I think we definitely see the strategic rationale behind it and I think my impression from the Braemar board and from Richard is that there is interest from the Braemar side as well, but as someone who was involved in the negotiations between Ashford Trust and Ashford Inc. to create the ERFP program in the first place, it is complex and it is -- and they're dealing with the independent directors on both sides and those are just always very thorough, very rigorous with outside third party advisors and law firms. And so it's a somewhat cumbersome, but kind of healthy deliberative process. And I think there's kind of agreement, I would think from both sides, it would seem to make sense for Braemar. It's just the execution is more difficult than just saying, hey, let's just agree to do it. There's a lot of details and whatnot that have to go into that. So, I think, we're hopeful that at some point in time, we can come to an agreement that works for both sides, but we’re obviously not at that point as we sit here today.

[Bryan Maher:]

Maybe asked in a slightly different way, are there any unique obstacles to doing it with Braemar that you didn't or wouldn't have encountered with trust?

[Robison Hays:]

No, not really. I mean, each company again has its own sets of directors that have their own views on relative importance of items on give and takes that come. So -- but no, there's no kind of specific issue that makes it more or less difficult or likely than trust. It's just that each process has its own, takes on a life of its own and we're hopeful to have something at some point in time.

[Bryan Maher:]

Okay. And just shifting gears, my last question is the integration of Remington Project Management, which I would assume would be fairly seamless, given the close working relationship before and I guess is now called Premier. Can you talk a little bit about the external opportunities for that division within Ashford Inc. How big is that pool of opportunities realistically over the next couple of years, kind of outside the core Ashford REITs?

[Jeremy Welter:]

Yeah. This is Jeremy, Bryan. We think that there's a pretty significant opportunity to grow the third party business. We have so much that came from peers or other ownership groups and they see tremendous value in what we have here at Premier and just kind of a one stop shop of renovation excellence program that they offer to provide a suite a services, bundled services. We think it's a pretty compelling offering. We're actually getting some inbound calls from general contractors we work with that say, hey, we've got some other groups that would love to do business with you guys, but what we're doing right now is we're trying to create that -- the business development effort itself, so we have folks that actually can call on third parties, manage that relationship and then we have plenty of people that can execute once we get the business and so we're really focused on building out a business development team and infrastructure for that and I think that once we do that, we'll see a decent amount of growth over time. We also see an opportunity to grow an architectural services platform. There is a decent amount of business that we can do with our existing REIT platforms as well as on a third-party basis as well.

[Robison Hays:]

And Bryan to kind of jump on top of that as is just the fact that, as we look at buying these various businesses and whether it's Premier or as we look at say OpenKey or pure, part of our process is really determining what are the growth engines and many times that means needing to add some additional debt -- additional executives or personnel to help drive that growth and we announced several weeks ago, a couple of hirings. One at J&S and another at Pure and at some point in time, we’ll likely have one at Premier that as we look to really accelerate the growth of these companies, they do need additional either kind of sales or sometimes kind of strategic horsepower in order to be able to do what we think they're capable of doing. So we're very excited about those opportunities, but it does take a little bit of time to find those people at times to really drive growth.

[Jeremy Welter:]

And there's no question that renovations are the toughest part of our business and we have a great team that can execute renovations very efficiently and isolate as much of the disruption from the guest, because obviously we're operating the hotels at the same time. And so I think, like I mentioned, I think there's a great compelling offering that we have for folks that are seeking to take that burden and headache off their hands

[Operator:]

[Operator Instructions] And we'll take our next question from the line of Peter Toeman of Edison.

[Peter Toeman:]

I wanted to just touch base with -- about the premier business or Remington because I think you reported contributed to adjusted income of a bit over 1 billion and in previous -- for the quarter, in previous quarters, it's been between sort of 3 and 4. I know it’s only in sort of two months, but I wondered if there are any extraordinary factors in the quarter that we've just had that depressed Premier’s contribution.

[Deric Eubanks:]

Hi, Peter. It’s Deric. I would say, just given the closing of the transaction in the middle of the quarter that the partial quarter's probably not a good run rate to look at. We did file an 8-K right after the closing of the acquisition where we had the historical quarterly financials in that 8-K. And I would point you to that is probably a better run rate.

[Peter Toeman:]

So in fact, this is -- we should still be looking for that sort of 3 million to 4 million a quarter of adjusted net income going forward.

[Deric Eubanks:]

Yeah. I mean, we're not prepared here to give forward guidance, but I would just point you to the 8-K that we filed.

[Operator:]

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

[Robison Hays:]

Thank you for joining us on our third quarter earnings call and we look forward to speaking with you again on the next call in early 2019.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.