Ashford Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day, ladies and gentlemen, welcome to the Ashford Inc. First Quarter 2017 Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference 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 Inc. for the first quarter of 2017 and to update you on recent developments. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Deric Eubanks, Chief Financial Officer and Jeremy Welter, Executive Vice President of Asset Management. 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 the 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 or are based upon forward-looking information that 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 disclosed in the Company’s filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call and the company is not obligated to publicly update or revise them. In addition, [certain terms] used in this call are non-GAAP financial measures, reconciliations of which are provided in the company’s earnings release and accompanying tables or schedules which have been filed on Form 8-K with the SEC on May 04, 2017 and may also be accessed through the company’s website at ashfordinc.com. Each listener is encouraged to review those reconciliations provided in the earnings release, together with all other information provided in the release. I will now turn the call over to Monty Bennett. Please go ahead, sir.

[Monty Bennett:]

Good morning. We are pleased to present our financial results for the first quarter of 2017. I will begin by reviewing our performance highlights. Afterwards, Deric will review our financial results, then Jeremy will provide an overview of our investment in Pure Rooms, OpenKey as well as other initiatives and then we will take your questions. 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. Our track record of success speaks for itself as this is the same team that has generated 140% total shareholder returns for Ashford Trust since the company’s IPO in 2003 compared to 108% total return for our peers as of yesterday’s close. [indiscernible] 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; Ashford Trust and Ashford Prime which together have 133 hotels with over 29,000 rooms and over $6 billion of assets as of March 31, 2017. During the quarter, these platforms achieved RevPAR growth for all hotels of 3.4% and 2.5% at Trust and Prime respectively, which exceeded the industry wide chain scale results for the upper upscale scale and luxury chain scales of 3% and 2.1% respectively. Ashford has a high growth fee based business model with a diversified platform of multiple fee generators. It is a scalable platform with attractive margins and low capital needs. Additionally, it had a very stable cash flow base as the advisor 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. To the sense Ashford Prime made significant progress in the strategy of owning luxury hotels and resorts with its acquisition of the award winning Park Hyatt Beaver Creek Resort & Spa in Beaver Creek, Colorado. With its premier location, luxury brand affiliation and world class amenities, the Park Hyatt is positioned as the leading resort in one of North America’s most renowned luxury resort destinations. Additionally, Prime announced it has signed a definitive agreement to acquire the hotel Yountville in Yountville, California. This is Prime’s second acquisition in the Yountville market and is down the street Bardessono Hotel and Spa. We anticipate that our asset management team working together with the hotel property manager will be able to drive bottom line growth at these two properties which will create significant additional value resulting in incremental fees for the company. During the quarter Ashford Trust made a public offer to merge with FelCor Trust, another publicly traded Lodging [REIT] in an all stock merger. FelCor ultimately announced a merger with another Lodging REIT and Ashford Trust has announced that it is no longer pursing the transaction. Second, as part of our growth strategy we would like to add additional investment platforms and third we would like to buy or invest in complementary businesses such as Remington, OpenKey and Pure Rooms. Now turning to proposed Remington transaction, in March we announced we were unsuccessful in receiving an acceptable private letter ruling from the IRS that decided to seize our efforts in completing the proposed transactions originally contemplated. While this appointment we are extremely enthusiastic that with this behind us we can now aggressively move forward with our strategy to invest in other hospitality services businesses and we have begun the process we valued in the purchase of just Remington’s project management business, which would not require a private letter ruling. We believe Remington’s project management business would be an attractive and accretive addition to our platform. A Special Committee of our Board has been formed to evaluate a possible transaction, but neither the Special Committee nor the Board has set a definitive timetable for the completion of its evaluation of the proposed transaction. Additionally, there is no assurance that a transaction involving Remington's project management business will materialize. Subsequent to quarter end, on April 13, 2017, we announced the acquisition of a controlling interest in a privately held company Pure Rooms which is the leading provider of hypo-allergenic rooms in the hospitality space. There is growing demand for health and wellness offerings in the hospitality industry and we are excited to integrate our deep operating experience with innovation of Pure Rooms. Also, we continue to be excited by the investment in OpenKey which has grown total subscriber base by over 300% year-over-year and Jeremy will provide an updates on both of those investments in a few minutes. We have a highly aligned fee structure in place for Trust and Prime that incentivizes shareholder value creation with the base fee driven by share price performance and the incentive fee based on total shareholder return out-performance versus peers as management team’s primary focus is to maximize returns in our REIT platforms. In closing, we are optimistic about the prospects for our two managed REIT platforms and expect both to continue to sell performance in 2017. Additionally, we see great opportunity for this platform to grow and deliver superior returns for our shareholders, by both adding additional investment platforms as well as investing in or incubating other hospitality related businesses. I’ll now turn the call over to Deric to review our financial performance for the first quarter.

[Deric Eubanks:]

Thanks, Monty. I would like to remind everyone that we have consolidated the financial position and operating results of the private investment firms managed by Ashford Investment Management. The financial impact from this consolidation is adjusted out of our first quarter 2017 financials through the non-controlling interest in consolidated entities line items on the company’s income statement and balance sheet. These funds were wound down in mid-March that going forward we will no longer consolidate these financials in our results. Net income attributable to the company for the first quarter of 2017 was $2.4 million or $1.18 per share compared with a net loss $1.7 million or $0.86 per share for the first quarter of 2016. For the first quarter ended March 31, 2017, base advisory fee revenue was $11.0 million, including $8.9 million from Trust and $2.1 million from Prime. Adjusted EBITDA for the first quarter of 2017 was $5.1 million compared with $3 million for the first quarter of 2016 reflecting a growth rate of almost 70%. Adjusted net income for the first quarter of 2017 was $4.4 million or $1.92 per diluted share compared with $2.4 million or $1.05 per diluted share for the first quarter of 2016 reflecting a growth rate of 83%. At the end of the first quarter 2017, the company had approximately $6.3 billion of assets under management from its managed companies and $35.4 million in corporate cash. At the end of the first quarter 2017 Ashford Inc. has no debt, no preferred equity and has a current fully diluted equity market capitalization of approximately $118 million. Also, as of March 31, 2017, the company had 2.2 million fully diluted total shares of common stock in units outstanding. I will now turn the call over to Jeremy to discuss our investment in OpenKey, Pure Rooms and other initiatives. Jeremy Welter Thank you Deric. We continue to be excited about our investment in the hospitality focused mobile key platform named OpenKey. OpenKey is the universal smartphone app for keyless entry into hotel guest rooms. We believe this product will drive increased adoption among hotel owners and guests alike as consumers have clearly indicated a strong preference for aggregation of app content and universal functionality. OpenKey has secure interfaces with major global lock manufacturers including four of the largest Assa Abloy, Kaba, Salto, and Miwa. There is a significant growth potential for OpenKey given there are nearly 18 million hotel rooms globally, many of them independent hotels that need a mobile key solution. Not only are there millions of rooms globally that need a mobile key solution, but OpenKey currently has little to no competition in this space. As a result they have been exciting recent developments regarding OpenKey’s progress. First, deployment of their technology were up 300% year-over-year. Second, OpenKey signed an exclusive deal with Preferred Hotel, the world’s largest independent hotel brand making OpenKey the preferred mobile key provider to over 650 hotels worldwide. Third, the platform is gaining traction internationally by opening an office in Mexico, launching in hotels in Australia and Canada and working on setting up offices and partnerships in China and the Middle East. Fourth, sales demonstrations and signed contracts are an all time high as the first quarter of 2017 has already surpassed all of 2016. Also, as Monty mentioned we recently announced that we have made investment in Pure Rooms, a leading provider of hypo-allergenic rooms in the hospitality space. We have seen that there is a growing demand for health and [wellness offering] in the hospitality industry and we believe that the investment in Pure Rooms will allow us to bring our expertise in the hospitality industry as well as our managed asset base to drive the growth of the company in a more expeditious way. Pure Rooms currently has contracts in place with approximately 160 hotels representing approximately 2,400 throughout the United States. We anticipate that we will be able to drive significant growth in value creation at Pure Rooms by integrating the product into the Ashford Trust in Ashford Prime hotels that we ask to manage. Hotel rooms participating in this program typically achieve between $20 to $30 premium per night. Based on historical performance, the initial hotels that have been included in the Pure Rooms program have experienced an internal rate of return of between 50% and 70% on a Pure Room’s investment. After inclusion of all planned Trust and Prime hotels, in the Pure Rooms program over the next 24 months and without any additional growth, Net Income and Adjusted EBITDA are expected to increase by approximately $434,000 and $257,000, respectively. Ashford expects Pure Rooms to initially contribute approximately $0.07 to its Adjusted Net Income per share and eventually add approximately $0.15 to the Company's Adjusted Net Income per share after all planned Ashford Trust and Ashford Prime hotels are included in the Pure Rooms program. We are also very excited in evaluating additional investments in operating companies. We are hopeful to share some more details on that front in the upcoming quarters. That concludes our prepared remarks and we will now open the call to your questions.

[Operator:]

Thank you. [Operator Instructions] We’ll go to Michael Kodesch with Canaccord Genuity.

[Michael Kodesch:]

Hey guys thanks for taking my question. Just a couple from me. I guess first starting with the project management business at Remington. Can you help us like frame that in terms of size, scalability and maybe some of the feeds that it could potentially generate for Ashford Inc.?

[Monty Bennett:]

I don’t know if we are ready to share that information at this point. Let us back and get back to you if we can, because those negotiations have just begun and again we think that what can be sold from one platform to the other is just a project manner business and not the property management business, but let me just check about what’s public and what’s not and make sure I follow all that. So if I can get back to you on that, we will get back to you regardless and we’ll share with you what information we can.

[Michael Kodesch:]

Moving onto Pure Rooms, just kind of looking at that opportunity, you guys have about $0.07 I guess from the initial $1.60 moving up to $0.15 from adding Ashford Prime and [Indiscernible] what’s the scalability there, what do you think the growth opportunity is for Pure Rooms?

[Jeremy Welter:]

What we recorded in terms of growth is just within our existing portfolio but we think that there is tremendous opportunity for the mixed band globally or domestically within the hotel space. We are trying to use it, leverage our relationships with the brands and demonstrate the great returns that it has for hotel owners.

[Monty Bennett:]

This is Monty. Let me comment on as well. In these two platforms that we’ve bought in too so far we believe are on the cost of a tremendous growth in the hospitality industry over the next few years. OpenKey is one where it’s a digital entry into the rooms with your mobile device which we think ultimately will be the standard and OpenKey is by far the leader in this space and doesn’t have any competition in that space whatsoever and that’s growing and we think is ultimately going to be used by every hotel in the country and the world overtime. Pure Rooms had this focus on hypo-allergenic rooms and as you very well know over the years customers demand more and more out of hotels and we have – more and more into the rooms whether it be better to core, whether it be bigger TV screen, more movie offerings, Wi-Fi etcetera, etcetera. And unfortunately so many more people in this country have allergies and hypo-allergenic rooms are something not only that we think guests are demanding and we see guest demanding it, but it also is a way for us to charge $20 to $40 more for that room and to work around the last room availability requirements that are in some contracts with some of the preferred customers. For example, if we have a deal with IBM and we had to give them a rate of $150 and they have last room availability which means they get that [$100] rate even if there is only one room left in the house, that’s what we have to honor, however the hypo-allergenic room is one that is accepted from that requirement and we can charge a premium on so that hypo-allergenic room we don’t have to honor that $160 rates to [IBNR], so it’s a way for us to maximize revenue more than we could before. So both with the customer trends of wellness in general and allergies particularly and the ability to drive higher rates for the hotels that we’ve already Ashford portfolio of the body put this in, we’ve seen IRRs in the 50% to 70% 80% range on these things. So, we think it’s just absolutely tremendous benefit and it’s only in a 160 hotels across the country right now. We think ultimately I believe that for the next number of years it will be a requirement for quite a number of the brands. And so we think their growth potential could be off the charts.

[Michael Kodesch:]

Thanks, that’s helpful color. And then I guess just one last one from me, more of a house-keeping item, but on the modeling front, can you give us a little detail on the non-cash based comp this quarter what was going on there and then just maybe provide more run rate figure as to what you expect for the rest of the year?

[Deric Eubanks:]

Yes, hey Michael, it’s Deric. Unfortunately I can’t give you a run rate because the non-cash stock comp is really three components to it. One is the grants that are issued by the REITs to employ with Ashford Inc. those show up as an expense on Ashford Inc’s financials but they also show up as a revenue item. And as you can see that was actually a negative number because they got mark-to-market, mark-to-market every quarter and there is an adjustment to the amortization schedule that goes forward. There is also a component that is based on the grants from Ashford Trust prior to the spin-off of Ashford Inc. and this is the last quarter that we will actually have an expense associated with those grants that will burn off after this and then what will remain are the expense associated with options that are granted to Ashford Inc. employees by Ashford Inc. So that will all be spelled out in the queue once it gets filed but because of all that those moving pieces there is not really a good run rate I can give you unfortunately.

[Michael Kodesch:]

All right, yes I appreciate it anyway. Thanks for the color.

[Operator:]

[Operator Instructions] We’ll go to Ryan Meliker with Canaccord Genuity

[Ryan Meliker:]

Hey guys, good morning Monty. Just a kind of a big picture item for you guys, I was hoping you might be able to add some for us. So AHT failed an attempted bid acquired FelCor even though AHT put out well look to us as the more attractive offer. Ashford Prime brought a couple of assets, raised some equity and has since traded off 20%. It seems like these two platforms are in a difficult position to grow right now, is there anything that you think you can do from the external advisor perspective to drive more growth out of the two REITs or is it one of these things we are just going to take time from the market to realize the underlying value of the real estate?

[Monty Bennett:]

We’re taking a look on that. On the Ashford Trust side, our attempt there for FelCor as you very well know using when you are the [hostile] bidder you do not end up with the company. And but we thought we were in a unique position in order to be successful with FelCor and that’s one of our competitors. And that we felt like we could pay more than any cash buyer and that’s any one of our competitors would have to substantially break strategy in order to bid, and that’s what happened with [Indiscernible] and so that wasn’t expected. But if you don’t try, if you don’t step up there and attempt things, you’ll never get it. So, as far as Ashford Trust’s ability to grow we tried something it didn’t work, but otherwise we are still on a path to figure how we could grow there period. Ashford Prime has been a little more challenging with that equity raise and been trading often there. So, yes we think waiting will help, but we never sit still as you will know. And so we are sitting here thinking through just what you mentioned about how can we accelerate growth in these platforms, how can we grow accretively and in what ways can Ashford Inc. step up and help that growth. And so we are actively churning through those ideas right now, of course nothing we can share right now but we want to do right by our shareholders as you know we are in most of these platforms the largest shareholders and we want to grow and to make money. So we are considering anything and everything.

[Ryan Meliker:]

All right. I was hoping for some more detail, but I guess I’ll have to wait. Thanks, Monty.

[Monty Bennett:]

When we have it, we’ll share with you, Ryan.

[Ryan Meliker:]

Sounds good.

[Operator:]

Thank you. And I would like to turn the floor back over to management for any additional or closing remark.

[Monty Bennett:]

This is Monty. Thank you again for joining us on our first quarter earnings call and we look forward to speaking with you again on our next call.

[Operator:]

Thank you. And again ladies and gentlemen, that does conclude today’s conference. Thank you all again for your participation