Ashford Inc.
Q4 2018 Earnings Call Transcript

Published: 1 Mar 2019

[Operator:]

Good day, everyone. Thank you for standing by. Welcome to the Ashford Inc. Fourth Quarter 2018 Year-End Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Jordan Jennings. Please go ahead.

[Jordan Jennings:]

Good day, everyone. And welcome to today’s conference call to review results for Ashford for the fourth quarter and full year of 2018, and to update you on recent developments. 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 SEC on February 28, 2019, and may also be accessed through the company’s Web site at www.ashfordinc.com. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release. Also, unless otherwise stated, all reported results discussed in this call compared to fourth quarter of 2018 with the fourth 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 fourth quarter and full year 2018. I'll begin by giving a brief overview of our quarterly results and then we'll discuss in more detail our recently announced enhanced return funding program or ERFP with Braemar Hotels & Resorts, as well as provide an update on our ERFP with Ashford Trust. I will then provide an update on 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 fourth quarter and are pleased with the groundwork we're laying with the continued success of the platform. For the quarter, revenues increased by 72%, adjusted EBITDA grew 65% to $8 million and adjusted net income per share grew 15% to $2.20. Our full year 2018 results were equally impressive with revenue and adjusted EBITDA growth of 140% and 65% respectively. Ashford Inc is a growth platform and we are very pleased that these results demonstrate the benefits of our strategy. Let me now turn to our enhanced return funding program. We are excited about our new ERFP agreement with Braemar that was announced in January of this year. ERFP is a $50 million funding commitment from Ashford, designed to produce strong returns on hotel investments at Braemar and strong fee growth at Ashford. Similar to our agreement with Trust, it does this in a very simple way. Ashford effectively provides capital to Braemar in order to lower the amount of equity that Braemar has to put into the hotel investments. That reduction of equity come in truly improved equity returns of Braemar, and in return Ashford has paid incremental fees it customarily receives from Braemar and its assets. These incremental fees can lead to attractive 35% plus five year levered IRRs and 50% plus year-one cash-on-cash yields to Ashoford. Ashoford also estimated incremental accretion to adjusted net income per share from each $10 million ERFP investment is potentially between $0.55 and $0.65. Looking now at the program structure in terms, ERFP provides for a $50 million commitment of capital from Ashford Inc. for two year term with one year renewals, as well as the ability to be upsized to $100 million based upon mutual agreement. This is a sizable program and we can materially help grow both platforms. Capital for the program will be sized to equal 10% of the acquisition price of each 10 Braemar hotel acquisitions, and we believe the predictability of sizing should help investors to underwrite the impact of the ERFP to both companies. We expect ERFP funding will be available for up to $500 million of acquisitions by Braemar. And similar to our previous key money program, the funding takes the form purchase furniture, fixture and equipment by Ashford for use at Braemar hotels. In connection with the announcement, we were excited for the opportunity to utilize our enhanced return funding program to part with Braemar on its recent acquisition of the 170 room Ritz-Carlton Lake Tahoe. We also continued to make progress with ERFP that we have in place with Trust. Today, Trust disclosed on $406 million of acquisitions, including a Hilton Alexandria Old Town, La Posada Santa Fe, The Embassy Suites, New York, Midtown Manhattan and most recently, the Hilton Santa Cruz Scotts Valley. These acquisitions bring utilization of ERFP funds with trust to approximately 80% of the original $50 million commitment. Moving forward, we are bullish about the future prospects of these programs and there are positive benefits for Ashford, as well as for Trust and Braemar. Bottom line is we believe ERFP is sizable predictable and repeatable. It's an innovative structure that we believe can drive strong returns to all the companies involved. 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 industry, and acting like shareholders has distinguished us from others in our industry. We consider it one of our main competitive advantages. Ashford currently advises two publicly traded REIT platforms Trust and Braemar, which together own 131 hotels with approximately 29,000 rooms and approximately $7.8 billion of assets as of December 31, 2018. Ashford is 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 REITs took place at base or maintained at level of at least 90% of the previous year's base fee. We have fee a structure in place that incentivizes Ashford to create shareholder value at its advisory platforms. And are base fee driven by the share price performance, and our incentive fee base on total shareholder return outperformance versus their REIT peers, our management teams primary focus is maximizing returns. Currently, our company is focused on the three areas of growth. First, we would like to accretively grew our existing REIT platforms. Second, 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 intimate businesses related to the hospitality industry, such as Premier Project Management, OpenKey, Pure Wellness, J&S, Lismore Capital and RED Hospitality & Leisure. Thanks to our connections and relationships with our advisory platforms and leveraging our asset management expertise, we can accelerate their growth dramatically. We continue to be excited about these investments that I just mentioned. And Jeremy will provide some more detail on all of these investments in few minutes. Looking ahead, we are very excited about the prospects for our strategic investments, and we are optimistic about the prospects for our two advised advisory platforms. Additionally, we see great opportunity for this platform to grow and deliver superior returns to our shareholders by adding additional investment platforms, as well as investing and incubating other hospitality related businesses. Now, turning to our Investor Relations initiatives. One of our main goals is to increase and broaden our investor base. As a result in 2018, we held over 3,000 meetings with sell-side analysts, existing shareholders and potential shareholders. In October, we held our annual Ashford Investor Day in New York. It was very well attended and gave us the opportunity to share the Ashford story and strategy in greater depth and breadth than in typical meetings. And during the quarter, we attended a number of investor conferences, including two IPI conferences and the Southwest Ideas conference. 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. And we believe exposure to these conferences will provide further opportunity to tell our story and provide meaningful dialogue with potential investors. We believe that one of the effective ways to broaden our industry base is by increasing our equity flow. And we made some significant headway on this initiative in 2018. The total number of Ashford shares traded in the public markets in 2017 was approximately 350,000 shares. While in 2018, that number was approximately 2.3 million, a remarkable increase of over 6 times. In terms of dollar volume, Ashford traded approximately $23 million in 2017, while 2018 it traded over $172 million worth of shares, a 7.4 times increase. In the fall of 2018, we completed an underwritten public offering of 280,000 shares of common stock, which increased our flow by approximately 31% and brought in several large new institutional investor groups. With that, I'll turn the call over to Deric.

[Deric Eubanks:]

Thanks, Robison. Net income attributable to common stockholders for the quarter was $0.3 million or $0.14 per share, compared with a net loss of $7.4 million or $3.58 per share for the prior-year quarter. Net income attributable to common stockholders for the full year of 2018 was $5 million, or $2.29 per share compared with a net loss of $18.4 million or $9.04 per share for the prior year. For the fourth quarter, total revenues were $51 million, reflecting a 72% growth rate over the prior year quarter. For the full year of 2018, total revenues were $195.5 million, reflecting a 140% growth rate over the prior year. Adjusted EBITDA for the quarter was $8 million compared with $4.8 million for the fourth quarter of 2017, reflecting a growth rate of 55%. Adjusted net income for the fourth quarter was $9.3 million, or $2.20 per diluted share compared with $4.9 million or $1.91 per diluted share for the fourth quarter of 2017. For the full year of 2018, adjusted EBITDA was $28.8 million, reflecting a 65% growth rate over the prior year. And adjusted net income was $26.1 million or $8.01 per diluted share. For 2018, we earned $2 million incentive fee from Braemar. The incentive fee will be paid and recognized as revenue over three years subject to the FCC, our condition is outlined in the advisory agreement. On the capital markets front during 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 offering expenses were approximately $19 million. At the end of the fourth quarter, the company had $50.4 million in corporate cash and we currently have a fully diluted equity market capitalization of approximately $165 million. Also as of December 31, 2018, the company had 2.8 million fully diluted total shares of common stock in units outstanding; we currently have 2.4 million common shares issued and 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 common shares from our Series B convertible preferred stock. I'll now turn the call over to Jeremy to discuss our strategic investments and other initiates.

[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 fourth 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 receive from a third party vendor. We are also able to grow our portfolio companies in the number of ways by referring them to the hotels in our REITs 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 2018, 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. To that end Premier Project Management has launched its new architecture service and completed its new logo and branding initiative. In the fourth quarter, Premier Project Management generated $7 million of revenue and $2.7 million of adjusted EBITDA. Moving onto 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 audiovisual services, including show and event services, hospitality services, creative services and design and integration. Our share of fourth quarter adjusted EBITDA from J&S was $276,000. And since we closed the J&S acquisition in November of 2017, our prior year fourth quarter results did not include October 2017. However, our share of fourth quarter adjusted EBITDA from the prior year was $52,000. We have filed an 8-K in December 2017 with J&S's historical financials that show the seasonality of the business. Our fourth quarter results this year are generally consistent with historical fourth 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 in the company with revenue growth of 29% in the fourth quarter compared to the prior year. Year-to-date through the fourth quarter, revenue growth was 23% and adjusted EBITDA growth was 22% compared to the prior year period. Additionally, since our investment in November 2017, through the end of the fourth quarter, revenues increased 22% or $17.1 million and adjusted EBITDA increased 40% or $1.7 million over the prior year period. Results from integrating J&S into Ashford asset managed hotels have been positive with average revenue per group room night up 21% and average customer satisfaction scores up 15% since 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 supported by our commitment to the implementation of the many value-add initiatives we have identified this year. In the fourth quarter, the company executed two new non-Ashford contracts with the Sheraton Detroit Metro Airport and Marriott Detroit Metro Airport, increasing the company's multiyear contracts in place with hotels and convention centers to 74, in addition regular business representing over 2,500 annual events and production and 500 venue locations. Additionally, for the full year hotel contracts have increased 25% from 59% to 74%, including 250% growth in Ashford asset managed hotel contracts and 9% growth in non-Ashford asset managed hotel contracts. For the year ended December 31, 2018, revenue attributable to Ashford asset managed hotels represented only 10% of the total business for J&S, highlighting the sensational opportunity remains to accelerate growth at the company even further, including the opportunity to ramp existing revenue up to normalized levels of operations. 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 in the industry. RED Hospitality & Leisure is a leading provider of watersports activities and other travel and transportation services in the U.S. Virgin Islands. We remain excited for the future growth prospects of the company, including opportunities to expand into several other hotels at our advisory platforms, expansion in the USVIs, and expansion elsewhere in the Caribbean market. To that end, in the second quarter the company executed a long-term agreement with the Westin St. John to provide ferry services for guests and employees, which is expected to generate adjusted EBITDA of approximately $700,000 to $800,000 annually at the company level. RED Hospitality began providing these services in January 2019. Additionally, in the fourth quarter, RED Hospitality began providing beach and watersports services to the Ritz-Carlton St. Thomas Club, the time share and rental property adjacent to the Ritz-Carlton St. Thomas hotel. The company generated $1.4 million of revenue and $201,000 of adjusted EBITDA for the year ended December 31, 2018, and we remain optimistic on the growth outlook for RED Hospitality going forward. We continue to be excited about the growth opportunities for Pure Wellness, the leading provider of hypoallergenic and wellness rooms in our hospitality space. Pure Wellness revenue growth for the year was 21% with approximately 3000 rooms under contract, representing 213 hotels. We remain excited about the opportunistic returns the Pure Wellness program can bring to hotels and hotel owners supported by the many new initiatives that they have implemented throughout the year. We continue to remain active in evaluating additional investment operating companies and we hope to share some more details on that front in the upcoming quarters. That concludes our prepared remarks. And we will now open the call up for Q&A.

[Operator:]

[Operator Instructions] And we will go first Tyler Batory with Janney Capital Markets.

[Tyler Batory:]

Just a couple of quick ones for me. First on the ERFP, obviously, Ashford Trust that use up about 80% of that commitment. Have you guys had any formulary discussions about potentially upsizing that? And are there any hurdles to increasing the amount?

[Robison Hays:]

This is Rob, Tyler. There have not been any discussion formally yet and again that will be something that will have to be negotiated between the independent directors of Ashford Trust and Ashford Inc. that’s part of that. But there is still almost $10 million to go. And I think both companies are trying to determine what has worked well or what hasn’t worked well. And see if there is any ways to potentially approve the agreement. But no, nothing is happened yet but also there is hope that to the extent that Trust finds some acquisitions that fit its goals of the company that will continue the program. But no discussions have happened on that front yet.

[Tyler Batory:]

And then Jeremy on the J&S business, I appreciate all the color that you gave there. And you talk about the growth as far as Ashford Trust, or Ashford Hotels linking up with J&S. But this stands right now, how many Ashford Hotels are currently using J&S? And can you talk maybe about how many more hotels potentially could be added in 2019?

[Robison Hays:]

So as of 12/31/2018, we had 14 hotels that were under contract with Ashford and J&S, and I think that’s 13 Trust I believe and maybe one Braemar hotel. But keep in mind that a lot of those were put in throughout the course of 2018, and therefore from fully ramping up. And so, we would expect that those hotels will continue to ramp-up and have great growth just from that group of 14. Then in terms of what we're looking for within our existing platform. And this takes in account where hotels maybe making most sense based on the geographic location when contracts are available, because some hotels are already under the existing AV contract. We are looking at probably first 13 to 15 that I would expect in 2019 and then in 2020 another 15 or so hotels. And then in terms of -- we talked a little bit about the profitability in the fourth quarter. We added -- so some of these hotels are still ramping, and we have added some infrastructure to right size this company so we can take over and continue to grow. We are getting a lot of good opportunities, not only within our existing platform but then also on the third party base as well. So I'm very, very excited about the prospects of J&S. And it's done a great job. I guess, tons of folks said that we put J&S in our hotels or other hotels and the feedback is phenomenal.

[Operator:]

We will go next to Bryan Maher with B. Riley FBR.

[Bryan Maher:]

So following up on Tyler's questions, but in slightly different way and drilling down a little bit. On the ERFP, I just have a question on that. I'm pretty familiar with it. But does Ashford Trust and Braemar check with you first before doing a hotel that they want to buy into the ERFP? And do you guys have any detailed power over that?

[Robison Hays:]

No, there is no technical, I mean, I guess the way to process works is one, it really comes down to the ESB assets eligible for ERFP. For an asset to be eligible for ERFP; one, it can't be a joint venture; two, it's got to be an asset where all of the typical fees aren’t eligible to be received. It doesn’t mean that Ashford Inc. can get every single fee, but at this pace it means that there's a subs in a number of fees that can't be received, and so therefore the economics don’t work for Inc then that is an ineligible asset; and then three, obviously, Inc. has to have the available capital and maintain ample liquidity, so there's a couple of hurdles. And then on top of that Ashford Inc. does have to recommend in a sense the asset. So it's not a technical [vito] power, I mean because in some sense the people that are recommending the asset to the Ashford Trust board is Ashford Inc., it's us just the management team here. So it all works I would say very seamlessly together. So it's not Ashford Trust comes and or Ashford Trust comes to Ashford Inc. and Ashford Inc. vetoes or not vetoes, it's works together as one.

[Bryan Maher:]

And to the earlier point and we heard this on the Trust call just now too. With the high utilization rate of ERFP at Trust, I heard your answer that there is no discussion yet. Wouldn’t you anticipate discussions to upsize that fairly soon, or between the two entities and 50 million committed to each, you want to hold off a little bit and not over-commit Inc. capital to ERFP just because we're starting to talk real money here?

[Robison Hays:]

I think we are just trying to be prudent, these agreements do take time and focus to do. And I think we are in the process of trying to just again measure how things going, is it something where all the parties are pleased with how it's gone so far. And you are right it is a sizable amount of capital. So I think both sides are just trying to be prudent and cautious in making sure that as we continue to expand on this program that it's done in the right way, structured appropriately that potential tweaks could be made in order to meet the needs of both parties. So I think as we get closer to seeing a fulfillment of that then yes, that’s that we will all have. And before we spend lots of time and energy and focus on going to version 2.0, we just want to make sure we are fully understanding how the existing program is going.

[Bryan Maher:]

And then just shifting gears to J&S, asking the growth question a different way. We were really impressed with new revenue growth. I mean [indiscernible] and it’s in number of hotels that it's in the Trust and Braemar portfolio. But when you look at J&S holistically, not just your hotel, other hotel, concert and conference growth. What are you internally thinking J&S revenue could grow on a year-over-year basis? And I'm not asking really for guidance, I'm trying to get my hands around the zip code. Is that growth rate 10% to 20%? Is it 40% to 50%? Folded into Inc., how can that grow to what level?

[Robison Hays:]

Yes, I don’t know what you necessarily want to figure out, because it is giving guidance. We are not giving you guidance. But what I can say is that, I remain very optimistic on the revenue growth at J&S and I don’t see it slowing down. So, I think that you could probably look at what we have done in the first year. And my goal is to continue to grow the top line, but then also improve the margins from where they are. And we have got a lot of initiatives in place to do that. As I mentioned, we strategically added some costs to get that infrastructure set, so that we can absorb the growth. Because in some cases, we have been delaying some implementations just because we want to make sure that we have the right infrastructure in place to be able to absorb it, we are still in that process. But I think that you will continue to see great growth and improvement of margins throughout this year and then overtime as well.

[Bryan Maher:]

And then just last from me. It really seems like J&S was probably home run acquisition for you, and it was certainly one of the bigger things that Inc. has done relative to the smaller, all the still interesting Red and Pure. When management looking at further acquisitions or incubating, how much time are you spending on the smaller needs, little things versus trying to find another J&S where it really seems like took you to another level?

[Robison Hays:]

I think that J&S was unique, and there are some other unique opportunities that are out there, but there are not a lot of them. And so we have to continually be creative on what we are pursuing. There are plenty of smaller acquisitions that we can make. And like a Red or a Pure, maybe even little bit more sizable than those acquisitions. But I would say that J&S is somewhat unique. And so I wouldn’t say that there is a ton that we have identified, probably just a handful of areas that we would like to add our portfolio. But then you also have to have a willing seller, a company that makes sense strategically for us within our culture. We would like to retain someone that has some skin in the game like what we did with J&S, because we don’t want to necessarily run these companies. We just want to optimize them. And so when you look through that, there is a lot of work that goes through on trying to find the right opportunity and the right deal. But we have been successful, and we do see some opportunities. And we see some opportunities potentially to bolt on to some of our platform companies to continue to get scale, because there's some strength and scale in some of these areas as well. So I think we will continue to be opportunistic, as well as you will see some potentially some smaller one-off acquisitions that are unrelated and maybe potentially some bolt-on acquisitions within investments we have made. One thing I would say is that I think the project management is a great business, we just recently acquired. There is a lot of good fees associated with that business, it's very profitable. We added this architecture platform, which I think it's going to be great. And we are just starting the third party efforts. We have completed the whole branding exercise. So, I think that we have got a unique service that we can provide as a one stop shop that really provides high quality renovation. And we look what's the most difficult thing in our industry I would argue that it is hotel renovations. I mean you are open for business, your guests checking in, and you’ve got to a very disruptive renovation during that. And we have a super sauce that can minimize displace into our renovation. And we've got a suite of services that we can do, see it go out and independently contract all those, so we are pretty excited about that as well. One other potential silver bullet that’s out there, we have talked about in past we would like to is certainly property management would be very strategic great fee base business. And then it makes the ERFP returns that much more lucrative. So, those are some of the other opportunities that we have.

[Operator:]

[Operator Instructions] We will go next to Stephen Biggar with Argus Research.

[Stephen Biggar:]

I'll echo the sentiments on the J&S. It's been great to see the strong revenue growth there, but if I can ask the question a different way. Last year, you mentioned 64 hotels and conference centers with multiyear contracts. This is up to 74 now so an additional 10, which is about 16% growth and yet revenues were up 29%. So I'm just wondering any flavor you can give on? Are the new hotels that are coming on much higher base revenues than the prior base? Or what's the organic growth rate I guess versus the additional hotels?

[Robison Hays:]

Actually, it’s a little more complicated than that. We have got business in Mexico. We have got a business in the Dominican. We have got the U.S. operations. And then within, particularly in Mexico and the U.S., not only do we have a hotel platform but we have a services platform that I think is the real gem that we got with this company, because it uniquely positions us versus a lot of other typical AV companies. And what I mean by that is that we can travel anywhere, do high quality of that, high quality shows, major productions. And what that does is it makes our hotel operations and capabilities that much stronger. And so when you see in the growth, the growth is coming from multiple areas. You are right. There is some organic growth from some of the hotels that we have, group business continues to grow on our hotels on a year-over-year basis. J&S has done a good job increasing the AV revenue per group room night. And then there has been growth from new hotel contracts, as well as growth in our sure services business and then there is international growth as well. So it's difficult to pinpoint exactly which area is going to provide growth as you look at it. So I think the best way to do is take more of a higher level look at it, which is what I encouraged Bryan to do is to -- and maybe it was Tyler, but to look at it on a basis of what we have done historically within the last year. And I think that’s a good assumption for growth on a go forward basis. But there is multiple parts of growth that I think that’s what makes it so interesting. And we have got an incredible business, incredible associates. And I'm very confident that when you put them in any hotel they are going to do an exceptional job. And I have gotten so many calls from folks that just are very pleased with their service.

[Operator:]

And that concludes today's question-and-answer session. I would like to turn it back over to today's management for any additional or closing remarks.

[Robison Hays:]

Thank you for joining us on our fourth quarter earnings call. And we look forward to speaking with you again on our next call.

[Operator:]

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