Ashford Inc.
Q2 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good day and welcome to the Ashford Inc. Second 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 second quarter of 2017 and to update you on recent developments. On the call today will be Monty Bennett, Chairman, 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 August 03, 2017 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 or reported results discussed in this call compare the second quarter 2017 with the second quarter of 2016. I will now turn the call over to Monty Bennett. Please go ahead, sir.

[Monty Bennett:]

Thank you, Joe. We are pleased to present our financial results for the second 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 clearly 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 147% total shareholder returns for Ashford Trust since the company's IPO in 2003 compared to 107% total return for our peers as of yesterday's close. Acting my 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 123 hotels with approximately 29,000 rooms and over $6 billion of assets as of June 30, 2017. With 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 has 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 during the quarter Ashford Prime made significant progress in the strategy of owning luxury hotels and resorts with this acquisition of the Hotel Yountville in Yountville, California. This is Prime's second acquisition in the Yountville market and is down the street from Bardessono Hotel and Spa that Prime acquired in 2015. 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. Second, as part of our growth strategy, we would like to add additional investment platforms, and third through our hub tele services and products business initiatives we are working diligently on opportunities to buy and invest complementary businesses such as OpenKey and Pure Rooms and the recently acquisition of J&S. Through which we leverage our hospitality and asset management expertise to act as an accelerator up source and position these businesses to quickly generate meaningful growth. To that end subsequent to the end of the quarter in July, we announced an agreement to acquire a majority stake in J&S audio visual, a leading integrated single source audio visual service provider with a well-diversified geographical presence in customer base for total consideration of approximately $26.1 million including $4.3 million of Ashford common stock approximately 700,000 of debt, $10.2 million in term debt financing and approximately $11 million of cash. J&S currently has multi-year contracts in place with approximately 55 hotels and convention centers in addition to regular business representing over 2,500 annual events and productions, 500 venue locations, and 650 clients. Going forward we expect significant revenue and operational cost synergies not only through further growing the business through J&S' current sales channels, but also with the addition of contracts between J&S and Ashford asset-managed hotels. During the second quarter we also announced the acquisition of a controlling interest in a privately held company, Pure Rooms, which is a leading provider of hypo-allergenic rooms to the hospitality space. There is growing demand for health and wellness offerings to the hospitality industry and we are excited to integrate our deep operating experience with innovation of Pure Rooms. We believe the business cases were adopting the Pure Rooms products and a hotel property is compelling and with our resources and expertise it is poised for substantial growth in the coming years. Also we continue to be excited about our investment OpenKey, which has grown as hotel subscriber base by approximately 300% year-over-year and grew second quarter revenue by 55% compared to the first quarter of the year. Jeremy will be providing in more detail update in all these investments in a few minutes. We have a revolutionary fee structure in place for Trust and Prime that incentivizes shareholder value creation. With the base be driven by share price performance and incentive fee based on total shareholder return out performance versus peers this management teams primary focus is to maximize returns in our REIT platforms. In June stockholders of Prime approved an amendment and restatement of our advisory agreement with Prime pursuant to which we received $5 million. In closing, we are optimistic about the prospects for our two managed REIT 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. Before turning the call over to Deric, I would like to mention that we have an upcoming Investor Day in New York on October 3, details for the event will be distributed shortly and we look forward to seeing you there. I'll now turn the call over to Deric to review our financial performance for the second quarter.

[Deric Eubanks:]

Thanks Monty. I'd like to point out a few things regarding our second quarter results. Due to a legal restructuring of our organizational structure during the second quarter, we had to write off our deferred tax asset in the quarter. This was a non-cash item related to a onetime event, so we have added back this item in calculating are adjusted net income metrics. We do not expect this restructuring to have any effect on our actual cash taxes paid. Also the receipt of the $5 million payment from Ashford Prime in connection with the amendment to the advisory agreement will be reflected on our income statement in at the advisory fee revenue line item and will be recognized over the remaining initial term of the advisory agreement. Net loss attributable to the company for the second quarter 2017 was $6.7 million or $3.85 per diluted share compared with a net loss of $1.1 million or $0.71 per diluted share for the second quarter of 2016. For the second quarter base advisory fee revenue and reimbursable expenses were $14.1 million including an $11.3 million from Trust and $2.8 million from Prime. Adjusted EBITDA for the second quarter was $4.2 million compared with $3.2 million for the second quarter of 2016 reflecting a growth rate of 32%. Adjusted net income for the second quarter was $4 million or a $1.73 per diluted share compared with $3.9 million or a $1.69 per diluted share for the second quarter of 2016. At the end of the second quarter the company had approximately $6.3 billion of assets under management from its managed companies and $32 million in corporate cash. We had no corporate level debt, no preferred equity, and a fully diluted equity market capitalization of approximately $109 million. As of June 30, 2017 the company had $2.2 million fully diluted total shares of common stock and units outstanding. I will now turn the call over to Jeremy to discuss our investment and OpenKey, Pure Rooms, J&S and other initiatives.

[Jeremy Welter:]

Thank you, Deric. As Monty mentioned earlier growing our services business is one of our three strategies for company growth. To explain this strategy more fully, our services initiative is a unique investment strategy in the hospitality industry, whereby we strategically invest in operating companies that service fee industry and we act similar to an accelerator to grow these companies. And doing this we are able to establish synergies for our hotel platforms providing attractive pricing and higher levels of service than they would have otherwise received from a third party vendor. We're also able to quickly grow the companies and which we invest in number of ways by referring them to hotels in our home REITs by leveraging our vast industry relationships and by consulting our best practices. As part of this effort subsequent to the end of the second quarter in late July, we announced that we had agreed to acquire an 85% controlling interest and a privately company J&S audio visual were total consideration of approximately $26.1 million. The consideration will include $4.3 million of Ashford common stock approximately $700,000 of assume debt, $10.2 million in term debt financing, and approximately $11 million of cash. The transaction is expected to close in the third quarter. J&S is a leading provider of an integrated suite of audio visual services including show and event services, hospitality services, creative services and design and integration making the company a leading single source solution for the clients meeting and event needs. J&S currently conducts its business in the United States, Mexico and the Dominican Republic and has multi-year contracts in place with approximately 55 hotels and convention centers in addition to regular business representing over 2500 annual events and productions 500 venue locations and 650 clients. With over 30 years of operating history J&S has grown into a leading integrated single source audio visual service provider with a well-diversified geographical presence and customer base. The company estimates its customer retention rate to be approximately 90%, which highlights a high level of quality customer service, professional production quality, and unique tailored solutions they provide. Ashford expects significant revenue and operational cost synergy with the addition of contracts between J&S and Ashford asset-managed hotels. Currently J&S has two contracts in place with Ashford asset-managed hotels and further rollout of J&S services into Ashford asset-managed hotels to create significant upside potential. After giving effect to the transaction Ashford will own approximately an 85% interest in the common equity of J&S. During the 12 months ended April 30, 2017 J&S had net income of approximately $1.2 million and adjusted EBITDA of approximately $5.4 million, to imply total purchase price represents a trailing 12 month adjusted EBITDA a multiple of 5.7 times according to the Company's preliminary estimates. Ashford believes that the implied total valuation 5.7 times adjusted EBITDA represents a highly attractive potential return on investment relative to prior comparable transactions with publicly disclosed information. After J&S becomes the preferred audio visual service provider and most of the plan Ashford Trust and Ashford Prime hotels over the next two to three years net income and adjusted EBITDA are expected to increase by approximately $2.5 million and $5.2 million respectively. Ashford expects J&S to initially contribute approximately $1.77 this adjusted net income per diluted share and J&S should at approximately $2.83 to the Company's adjusted net income per diluted share assuming conservative growth in non-Ashford hotels after they become the preferred audio visual service provider and most of the plan Ashford Trust and Ashford Prime hotels. I'd also like to provide a performance update on our investment in Pure Rooms, as leading provider of hypoallergenic rooms in the hospitality space. Our investment in Pure Rooms was made at a very attractive 2.9 times trailing 12 month adjusted EBITDA multiple and that's often EBITDA number that we expect to grow significantly overtime. We've seen that there is a growing demand for health and wellness offerings in the hospitality industry 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. The company currently has contracts in place with approximately 160 hotels representing approximately 2,400 rooms throughout the United States including 29 Ashford asset-managed hotels. We anticipate that we will be able to drive significant growth in value creation at Pure Rooms by integrating the product into additional Ashford Trust and Ashford Prime hotels that we asset manage. Additionally, we believe our opportunity to leverage both external and internal relationships will improve the performance of Pure Rooms at existing hotels well also enhancing the branding and value proposition. Through strategic partnerships with industry peers, we will look to optimize both guest facing and business facing aspects of the company. Automated reporting will improve operational efficiencies, timeliness and accuracy while removing the current manual process from property management's hands. In addition, uniform reporting standards are expected to provide the benchmarks necessary to achieve a return on investment. We're also helping optimize hotel marketing and awareness through enhanced website layout and descriptions, which need to be standardized across brands and channels. Train properly level revenue management, properly market product with online travel agencies as well as manage inventory in order to for sell the rooms is another initiative, and which we are collaborating. Improving the physical purifier sales in terms of quality, performance and customize ability is currently in process. Finally we are leveraging our relationship with any industry to increase sales deployment with the intention of leveraging our brand relationships to possibly deploy Pure Rooms across entire brands by implementation as brand standard. After inclusion of all planned Ashford Trust and Ashford Prime hotels in the Pure Rooms program over the next 24 months and without any additional growth, adjusted EBITDA net income are expected to increase by approximately $257,000 and $434,000 respectively. Ashford expects Pure Rooms to initially contribute by approximately $0.07 to its adjusted net income per share and Pure Rooms should add approximately $0.15 to the company adjusted net income per share after all planned Ashford Trust and Ashford Prime hotels are included in the Pure Rooms program with that any other group. Finally, we continue to be excited our investment in hospitality focused mobile key platform named OpenKey. OpenKey is universal smartphone app for keyless entry into hotel guest rooms. We believe this product will drive increase adoption among hotel owners and guests alike, as consumers have clearly indicated a strong preference for aggregation of app content and universal functionality. OpenKey signed an exclusive deal with preferred hotels, the world's largest independent hotel brand making OpenKey the preferred mobile key provider to 650 hotels worldwide. In addition, OpenKey has secure interfaces with major global lock manufacturers including four of the largest Assa Abloy, Kaba, Salto, making OpenKey the most universal mobile key platform in terms of interfacing with lock manufactures. There are significant growth potential for OpenKey given the many independent hotels that need a mobile key solution. Not only are there millions of rooms globally they need a mobile key solution, but OpenKey currently has little competition in this space. OpenKey both universal property management software integration and they are also rolling out the ability to directly connect with RMS and Springer-Miller Systems, two large property management software companies. Springer-Miller Systems are currently used in approximately 700 independent hotels. There have been exciting recent developments regarding OpenKey to progress. First deployments other technology are quickly ramping up and are expected to reach an estimated 20,000 rooms deployed in an estimated 35,000 rooms under contract over the next 12 months to 18 months. Next the platform is gaining traction internationally; the office in Guadalajara, Mexico has been instrumental for growth in Mexico, Costa Rica and Colombia while the Home Office and independent serve the United States, United Kingdom, Singapore, Indonesia, Australia and Canada. Finally, sales demonstrations and signed contracts are at an all-time high with the second quarter surpassing the record-setting first quarter resulting in 55% revenue growth in the second quarter compared to the first quarter. We are also very active 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 up to your questions.

[Operator:]

[Operator Instructions] We'll take our first question from Michael Kodesch with Canaccord Genuity.

[Michael Kodesch:]

Hey, thanks taking my question, guys. I got the first one just is kind of general question here on the investing in your incubating operating strategies. It's kind of evolved to bit more of significant strategy over the past few quarters. And I guess I'm just kind of wondering how you guys plan to kind of disclose and show performance of these strategies of the next few quarters, it help investors and get better idea of whether not the meeting your expectations whether they generating IRRs that you expected be it through P&L where IRR, I guess just kind of how are you looking to show that that performance to give investors confident that this is the right way to go?

[Monty Bennett:]

Thank you for your questions. Your question this is Monty. I just like to say that these businesses are just going to be phenomenal for the platform. I mean if you look at something like OpenKey, which is really more of a kind of a brass ring type deal, which could be very, very valuable at some point in future, which is actually costing just cash flow now, but it is the premier provider of this mobile key to guest rooms in the country. And some of this taken it's the market share is bigger than anybody else combined side for what from what helps to Marriott are doing. So it's just a great opportunity, these other two platforms Pure for example and the hypo-allergenic rooms I believe that's coming I believe in a matter of years a number of brands will require that every property have hypo-allergenic rooms as part of the room inventory just like that required a few years ago that they had nonsmoking rooms and of course now, every hotel has all nonsmoking rooms. And in J&S I think we started this process with none of our hotels having doing business with the J&S audio visual, and just the business from our existing REIT is going to be phenomenal. I'm sorry our existing REIT assets is going to be phenomenal. So I think your question is right on focusing on this business, maybe a good way to do it is for after this call or later this week or next week you can do phone with Deric and you tell us what kind of metrics you'd like to see, because there's a lot of ways of showing it for example the Pure platform offers a service to provide its hypo-allergenic rooms. In some of our hotels, we've seen IRRs in the 50% range just fantastic investments for hotels, that just has been marketed well by the prior owners of this platform that we're going to market hell lot of so there's returns to the owners the customers we do business with theirs are our sales projections, they're signing at contracts, that is IRRs growth in EBITDA compared to sale price and Jeremy is in a fantastic job of buying these businesses a very attractive EBITDAs to begin with. So maybe I could spent some time and you tell us what you think you would like to see other investors just like to see because we definitely want to get the story out because this is going to be phenomenal growth part of our platform.

[Michael Kodesch:]

Sure. Yeah that be great be, be happy to do that. I guess just moving on with this restructuring tax in the quarter, as wondering if you could provide a little bit more color Deric on kind of the exactly what that was and kind of how that transpired and if there's anything else related to that going forward?

[Deric Eubanks:]

Yeah. As it is going to say we had to do it in order to accommodate these businesses that were buying and that the reason that it was done.

[Monty Bennett:]

Yeah I get pretty technical, but we did have to do the restructuring in order to be able to make these investments in these service related businesses and we set up a brother, sister structure on our entity level and as a result of that the entity that had the deferred tax asset, now from a perspective of looking at would carry the carry back potential of that the deferred tax asset base we got removed. And so because of that we basically had to write-off that deferred tax asset, now going forward as we have timing differences between the deductions for GAAP and for tax that will build back up. But it's purely a GAAP exercise and it does not in any way affect the actual cash taxes that we paid, but it does create some noise in our income statement and because of that and because of the onetime nature of it we felt like it was appropriate to adjust that out of our metrics.

[Michael Kodesch:]

Great. So just to be clear if you guys are investing in some more of these brother, sister kind of entities we're not expecting to see any else like that correct?

[Monty Bennett:]

No. On the year was a result of the setting up the structure, now that we've got to set up it won't be an issue going forward.

[Michael Kodesch:]

Great. Thanks. That's helpful. And then just two more quick ones kind of some housekeeping items, on cash salaries and benefits first quarter you guys were went about $6.7 million and 2Q back to I think a more normalized $7.8 million might be would that kind of push that down?

[Monty Bennett:]

Yeah in the first quarter we had an adjustment to in an accrual for our bonuses, the executive team did not get the full bonus payment and we had accrued the full bonus so there was an adjustment of that an accrual that hit in the first quarter.

[Michael Kodesch:]

Okay. That shows up in the cash portion?

[Monty Bennett:]

It shows up in the cash portion in our on our income statement, yes.

[Michael Kodesch:]

Okay. Thanks. And then I guess just one last one, I know you guys booked about 770,000 in incentive fees in the second quarter at Ashford Inc. Where exactly was that coming from Prime and Trust it almost exactly showed up in their income statements?

[Monty Bennett:]

Yeah. So on the Prime and Trust income statement the incentive fee is reflected 100% of the time that it's earned and that basically flushes through the income statement Ashford Inc. recognizes that over the three year period when it's paid, and so that's the proportion of the 2016 incentive fee that was earned from Ashford Trust and as a portion of the 2015 incentive fee that was earned from Prime.

[Michael Kodesch:]

Got it. Thanks. That's really helpful. That's all from me, I'll hop back in the queue with anything else. Thanks again.

[Monty Bennett:]

Thank you.

[Operator:]

And we'll take our next question from Bryan Maher with FBR Capital Markets.

[Bryan Maher:]

Yeah. I just following-up on a Canaccord's question for answer, that accrual that $700,000 and the incentive fee is that an annual occasion to Inc. or is that a quarterly component of the three year payout?

[Monty Bennett:]

It's the quarterly component, so we've recognized the annual payment over the year, equally over the year.

[Bryan Maher:]

Got it. So we should expect to see that roughly in each quarter until that particular incentive fee has basically been fully recognized?

[Monty Bennett:]

Yes.

[Bryan Maher:]

Got it. Okay and then going back to the hospitality accelerator platforms. I guess it was easy for us to kind of ignore for simplicity sake some of the earlier investments because they weren't hugely expensive in contributing to the bottom line although I know you expect them too, but it's not going to be that case for J&S just because it's a precisable business that you're acquiring at the outset. My first question is the $26.1 million, is that your cost of 85% or is that the cost assigned to the entirety of the business?

[Monty Bennett:]

That's already 85%, if the total valuation of the company would be $30.7 million so the $26.1 million is our pro rata share there.

[Bryan Maher:]

Okay. And then secondarily when it comes to modeling this and maybe this follows from the earlier question and your response to tell us what you want, will we be able to get some pro forma quarterly data for J&S for let's say a year or two going backwards to help us model and is there seasonality in this business?

[Monty Bennett:]

In terms of the financials that will provide, we will provide historical financials, I don't know if we'll be filing the quarterly results, but as it relates to the seasonality I'll let Jeremy addressed that?

[Jeremy Welter:]

It's heavily tight what you would expect from normal group patterns on quarterly basis. So we can probably break that detail out, I don't have it in front of the right now, but there is some seasonality to it.

[Bryan Maher:]

Okay. And maybe just across each of those three platforms, OpenKey, Pure Rooms and J&S, can you tell us what you're thinking and I know you don't guide, but can you tell us what you think that the growth rate can be over the next kind of one to three years for each of those platforms?

[Monty Bennett:]

Sur, this is Monty. I'm going too specific I will talk about whether we can be more specific. Let me give you an idea, I think the growth for OpenKey is going to be very high, it was 300% so far this year, and I think it's going to continue to be very, very strong as it penetrates in the marketplace where no product exists right now. So we're very, very excited about that. Pure Rooms is going to be stable for a number probably a quarter or two or three as we totally retool the company. They've been losing some business over the past number of years and we have strategies in place to stop the losses and then to ramp everything back up. Now over the next quarter two or three just to be offset by some the Ashford business going in, but it's not going to be that strong growth until towards the end of 2017 - 2018 or so, then I think it really start to take off. J&S AV is being great on their own, and they've had approximately if my numbers right maybe 8% average growth of the past five years or so, and based on our calculations with Ashford hotel business alone that growth can be maintained over the next five years with just the addition of Ashford business or so. Now Jeremy you think it's going to be higher than that?

[Jeremy Welter:]

Yeah, it's higher, yeah.

[Monty Bennett:]

So we're working through is for J&S AV is really how much and how fast they can take on the business, because they've got their normal business, which should be growing at a percent a year and then they've got Ashford businesses is can be coming in, and they've got the benefit of our relationships in the industry to be able to introduce them to of both other hotels owners groups where they have had in rooms and before. And so the challenge there is going to be how fast can they grow since they're a business that is not as rapidly scalable to say OpenKey which is just you know software so you can multiply a lot easier. So we're very, very excited about the growth prospects for all three of these businesses, and we'll see if we can give you one more detail after we go through all this.

[Bryan Maher:]

Thanks, Monty.

[Operator:]

[Operator Instructions] And we'll take our next question from Michael Kodesch with Canaccord Genuity.

[Michael Kodesch:]

Hey thanks again guys. Just one quick follow up, on the income statements in other revenue that $1.5 million or so can you detail what that's comprised of?

[Deric Eubanks:]

Sure and that will be detailed out and we file our 10Q next week. But it's a combination of the key money implied lease revenue that we recognize as part of the key money investment that we made to Trust and Prime, it also includes Pure revenue and OpenKey and it also includes a cost reimbursements that we get for cash management from Ashford Trust.

[Michael Kodesch:]

Perfect. Thank you very much.

[Operator:]

And that does conclude today's question-answer-session. I will now turn the call over to management for closing remarks.

[Monty Bennett:]

Thanks for joining us on our second quarter earnings call, and we look forward to speaking with you again on our next call as well as at our 2017 Investor Day in New York on October 3.

[Operator:]

And that does conclude today's call. Thank you for your participation. You may now disconnect.