Ashford Inc.
Q4 2017 Earnings Call Transcript

Published: 2 Mar 2018

[Operator:]

Good day and welcome to the Ashford Inc. Fourth Quarter 2017 Conference Call. Today's conference 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, Sir.

[Joe Calabrese:]

Good day everyone and welcome to today's conference call to review results for Ashford Inc. for the fourth quarter of 2017 and to update you on recent developments. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Rob Hays, Chief Strategy 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 discussed 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 March 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 fourth quarter 2017 with the fourth quarter of 2016. I will now turn the call over to Monty Bennett. Please go ahead, sir.

[Monty Bennett:]

Good morning. Ashford, Inc. is growth platform and we are pleased to present our net results for the fourth quarter of 2017. I will begin by reviewing our performance highlights and Rob will provide an update on our investor outreach initiative. Afterwards, Deric will review our financial results then Jeremy will provide an update regarding our strategic investments in Pure Rooms, OpenKey, J&S, RED Hospitality & Leisure, as well as other initiatives, and then we will take your questions. We delivered very strong financial and operating performance for the fourth quarter, driving significant growth in revenue and earnings and we are pleased with the ground work we are laying for the continued success of our platform. During the fourth quarter, revenues increased by 52% over the prior year period and adjusted EBITDA increased by 19%, also during the quarter adjusted net income and adjusted net income per share increased 28% and 12% respectively. For the full year, we've adjusted EBITDA growth of 27% and adjusted net income per share growth of 19%. We in 2018 well positioned for further growth and as Deric will discuss in a few minutes, we expect the lower effective tax rate will have a significant positive impact on our earnings for 2018 in the future years. 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. Acting like 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 132 hotels with approximately 29,000 rooms and approximately $7.4 billion of gross assets as of December 31, 2017. 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 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 level. Currently, our company is focused on three areas of growth. First, we would like to accretively grow our existing REIT platforms. Second, as part of our growth strategy, we would like to add additional investment platforms. And third, through our service business initiatives, we are working diligently on opportunities to buy invest in our businesses related to the hospitality industry such as OpenKey, Pure Rooms and J&S or there is more capital in our newest acquisition RED Hospitality & Leisure. Then through our connections and our relationships for the Trust and Prime platforms and leveraging our asset management expertise, we can accelerate their growth dramatically. To that end, during the fourth quarter, we completed the acquisition of 85% stake in J&S Audio Visual, a leading integrated single source audio visual service provider with a well-diversified geographical presence and customer base for approximately 9.2 million in cash, 4.3 million of Ashford common stock and 9.5 million assumes debt. J&S currently has multi-year contracts in place with approximately 64 hotels and convention centers in addition to regular business representing over 2,500 annual events and productions, 500 venue locations, and 650 clients. J&S currently has contract replace at only 9 hotels owned by Trust and Prime. Going forward we expect significant revenue and operational cost synergies not only through further growing the business through J&S’s current sales channels, but also with the addition of contracts between J&S and Ashford asset-managed hotels. Additionally, subsequent to the end of the quarter, we acquired 80.75% stake in RED Hospitality & Leisure, a leading provider in water sports activities and other travel and transportation services in U.S. Virgin Islands and beyond for approximately 1 million in cash. We see a tremendous opportunity for growth in this business as we expand the breadth of services they offer and bring these services to other hotels. We also continue to be excited about our investments and OpenKey and Pure Rooms. Both of these businesses saw significant growth in 2017 and Jeremy will be providing a more detailed update in all of 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 fee driven by share price performance and incentive fee based on total shareholder return outperformance versus peers, this management teams primary focus is to maximize returns in our REIT platforms. Looking forward, we are optimistic about the prospects of our two managed REIT platforms. Additionally, we see great opportunity for this platform to grow and deliver superior returns to our shareholders by adding additional invested platforms as well as investing in or incubating other hospitality related businesses. I will now turn the call over to Rob to discuss our investor outreach effort.

[Rob Hays:]

Thanks, Monty. Investor outreach remains a tough priority for us at Ashford. Throughout 2017, we communicate to investors that we understood the importance of building a strong platform of confidence that to rely upon. We stated that we would accomplish this not only by investing in the multiple initiatives that are accretive to long-term shareholder value, but also by creating a targeted investor outreach program with the goal of increasing awareness, liquidity and trading volume of our stock. As a core component of this program, we attended multiple conferences over the past year targeting a wide range of investors from small and mid-cap focus funds, the industry dedicated investors as well as the family offices and retail holders. Any these conferences, we focused on reiterating our strategy, answering investor questions and striving to provide clarity. Ultimately, we ended up presenting active strategy to over 400 potential investors into 2017. As a result in the third and fourth quarters of 2017, we experienced materially higher trading volume and greater investor interest in our shares. In the end, Ashford’s share price rose by approximately 150% for the year. We believe this directly reflects our success in helping investors to understand how we plan to create long-term shareholder value over time. Additionally, we recently added an interactive modeling session to our website where analysts and investors can easily download our historical financial statements to assist them in building financial models on our company. Given our success with this initiative in 2017, we are very optimistic about 2018 and plan to continue and even accelerate the building of awareness of our company and our strategic initiatives. We have targeted nearly double in number of investor conferences in 2018 versus what we've attended in 2017 and believe the exposure of these converses will provide further opportunity to tell our story and provide meaningful dialog with potential investors. I'll now turn the call over to Deric to review our financial performance for the fourth quarter.

[Deric Eubanks:]

Thanks, Rob. Net loss attributable to the Company for the fourth quarter of 2017 was $7.4 million or $3.58 per share compared with a net income of $0.7 million or $0.36 per share for the fourth quarter of 2016. For the fourth quarter ended December 31, 2017, base advisory fee revenue and reimbursable expenses, were $13.2 million including $10.4 million from Trust and $2.8 million from Prime. Adjusted EBITDA for the fourth quarter was $4.8 million compared with $4.1 million for the fourth quarter of 2016 reflecting a growth rate of 19%. Adjusted net income for the fourth quarter was $4.9 million or a $1.90 per diluted share compared with $3.8 million or a $1.69 per diluted share for the fourth quarter of 2016, reflecting a growth rate of 28% and 12% respectively. At the end of the fourth quarter, the Company had $35.4 million in corporate cash. We had no corporate level debt, no preferred equity, and we currently have a fully diluted equity market capitalization of approximately $240 million. Also as of December 31, 2017, the Company had $2.6 million fully diluted total shares of common stock and units outstanding. We currently have 2.1 million common shares, 0.2 million common shares year marked for issuance under our deferred compensation program and the balance related to the GAAP treatment or in the money stock options and put options associated with the minority interest of our strategic investments. Lastly, regarding the financial impact of the recent tax reform, we currently expect our 2018 income tax rate will be approximately 24%. I will now turn the call over to Jeremy to discuss our investment in OpenKey, Pure Rooms, J&S, Lismore Capital, Red Hospitality & Leader and other initiatives.

[Jeremy Welter:]

Thank you, Deric. As Monty mentioned earlier, growing our hospitality products and services businesses is one of our three strategies for growth. To explain this strategy more fully, our products and 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. In doing this, we are able to establish synergies between 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 quickly grow the companies in which we invest in a number of ways; by referring them to the hotels in our REITs, by leveraging our vast industry relationships, and by consulting on best practices. To that end, we're excited to announce the acquisition of the controlling interest in RED Hospitality & Leisure, a leading provider of water sports activities in other travel and transportation services in U.S. Virgin Islands. RED Hospitality has already begun limited ferry operations between St. Thomas and St. John, and expects to capitalize on new contracts into our businesses as the U.S. Virgin Islands resorts began to reopen in the second half of this year and into early 2019. We were entered into this business through our rich cult in St. Thomas and have been impressed with their team and operations. We also see a lot of opportunities to expand this business into several other hotels at our advisory platforms. Additionally, we are pleased to introduce Lismore Capital, which has been providing debt placement services to our advisory platforms. Beginning in the third quarter, Lismore Capital began placing debt which otherwise would have been provided by third parties for Ashford Trust and Ashford Prime on competitive pricing terms related to property level debt financings. Lismore Capital generated $1.1 million of revenue in placement fees for the full year 2017 and fourth quarter revenue growth was over 300% compared to the prior quarter. We are excited about the prospects for future growth of Lismore Capital. We are also very excited about our recent investment in J&S Audio Visual, a leaning single source solution for meeting and event needs within integrated suite of audio visual services, including show and events services, hospitality services, greater services and design and integration. This certain investment in November through the end of the year, revenues increased 22% and adjusted EBITDA increased by approximately $690,000 over the prior year period. Additionally on a pro forma basis, J&S would have increased our reported revenue by over 90% for full year 2017, highlighting the scale we expect J&S provides to platform. Also J&S executed 18-year hotel contracts during 2017, with half of the growth coming from non-Ashford hotels, as we continue to remain focus on increasing market share outside of Ashford asset managed hotels. J&S currently has multiyear contracts in place with approximately 64 hotels and convention centers, in addition to regular business, representing over 2,500 annual events in productions, 500 venue locations and 650 clients. Going forward we see a tremendous opportunity for integrating J&S into more hotels in the U.S. and internationally given the Company's outstanding reputation as a premium service provider relative to similar competitors in the industry. We expect to leverage the knowhow and deep relationships of the J&S management team acquired over years of experience along with our extensive knowledge and context in the hospitality industry to accelerate and fuel long-term growth. We also continue to be enthusiastic about our investment in hospitality focus mobile key platform, OpenKey. We believe this product will drive increased adoption among hotel owners and guests will like as consumers have clearly indicated a strong preference for aggregation of ad content and universal functionality. OpenKey expanded its exclusive deals to include not only preferred hotels, but also world hotels, which will provide access 350 luxury hotels worldwide and in integration with InnDependent Boutique Collection, which is a hotel technology platform using thousands of hotels worldwide. In addition, OpenKey had recently added secured interfaces with global lock manufacturers Entrava and Hafele giving OpenKey the most interfaces with major lock manufacturers of any mobile key platform in the industry. OpenKey is also rolling out the ability to directly commence connect with RMS and Springer-Miller Systems, two large property management software companies used in over 2,000 hotels worldwide. Furthermore, we are pleased to update you regarding OpenKey's 2017 performance. First, deployments are quickly scaling and we expect to reach an estimated 20,000 rooms deployed, an estimated 35,000 rooms under contract over the next 12 to 18 months. To that end, we have already secured asset level contract with 14 hotel brands and portfolios including destination and hotel resorts, Cachet Hotel Group and Hersha Independent Collection. Secondly, the platform has gained further traction internationally with the creation of OpenKey China, a JV agreement with startup accelerator Plug and Play. OpenKey China is headquartered in Shanghai and we expect significant expansion and rapid growth from that venture. Also, the office in Guadalajara, Mexico has been instrumental for growth in Mexico, Costa Rica, and Colombia. Additionally, independent resellers currently serve the United States, United Kingdom, Singapore, Indonesia, Australia, and Canada along with the recent additions of Belgium, the Netherlands, Luxembourg, India, Sri Lanka, the Maldives, Bangladesh, and Brazil. Finally, OpenKey achieved four consecutive quarters of revenue growth in 2017 with Q4 at all time high of 153% relative to the prior quarter and 1,054% year-over-year growth. For the full year, OpenKey achieved 647% revenue growth. We remain optimistic for the growth outlets of OpenKey. I would also like to provide an update on our investment and Pure Rooms, a leading provider of hypoallergenic rooms in hospitality space. We’ve seen a growing demand for health and wellness offerings in hospitality industry and we believe the investment in Pure Rooms will allow us to bring our industry knowledge and expertise, as well as our managed asset based to the Company in order to optimize growth synergistically. The Company currently has contracts in place with 177 hotels representing approximately 2,600 rooms throughout the United States including 52 Ashford asset managed hotels. Furthermore pro forma basis for full year 2017, Pure Rooms achieve revenue growth of 31% and adjusted EBIT growth of 60% over the prior year. Going forward, we anticipate that we will be able to drive significant growth and creation of Pure Rooms, but not only integrate and product into additional Ashford Trust and Ashford Prime hotels that we asset manage, but also by gaining traction and to additional non-Ashford hotels instead we believe the value proposition for adding Pure Rooms to property is very compelling. We have found the hotel rooms participating in this program simply achieve a significant rate premium per night and typically experience returns of between 50% and 70% in the investment. We remain very excited about the future prospects for Pure Rooms. We continue remain active and evaluating additional investments in operating companies and we hope to share more details on that front in the upcoming quarters. That concludes our prepared remarks and we will now open the call up to your questions.

[Operator:]

[Operator Instructions] We’ll take our first question from Bryan Maher from B. Riley.

[Bryan Maher:]

I just kind of had a question related to booking up. I know that you’re making these investments in the smaller companies that will be growing. But did the tax law changes give you any thought to pursuing again the Remington deal or no?

[Monty Bennett:]

Bryan, this is Monty. Yes, well, I'd say yes or no, and that's presuming the Remington deal is something that we’re very interested in doing, and they have been talking about trying to move over just a project management business and set both the property management and project management. And the reason is that the property management business is more complicated. That’s where probably a little bit ruling is required from the IRS and on-and-on while just for the project management business it’s not. So we have been talking about doing something like that, want to do something like that the tax law changes just further help that, but that’s something that we would very much like to do.

[Bryan Maher:]

And then as far as kind of growing the flow of the shares out there and the market capitalization of the company and I know that the shares had a great 2017. Have you guys given any thought to stocks split or stocks raising capital to pursue these opportunities? Today, they seem a little bit small but you think maybe going forward like on J&S your issue shares as it relates to some of these acquisitions instead of cash.

[Deric Eubanks:]

Hey Bryan, it’s Deric. I think I'd point you to the cash as on our balance sheet, we got $35 million of cash on our balance sheet. We also this morning I am not sure if you saw it or not, announced a new credit facility, $35 million credit facility that has the ability to be upsized to $75 million. So, we feel like from an access to capital standpoint, we got plenty of dry powder.

[Bryan Maher:]

Yes, I was just thinking from the standpoint of the valuation on the shares and using stock is currently keeping the cash as dry powder. But as it relates to kind of these growth vehicles, I mean clearly you’re seeing a lot of these kind of smallest opportunities that you have the ability to uniquely grow in something much bigger. How should we think about those lairing on over the course of 2018 and 2019? One quarter, one half, what's the run rate you’re seeing on the pipeline that you have?

[Monty Bennett:]

It’s just really hard to say, Bryan. We would give you an idea if we feel like we could, but there also individualistic and there are some deals that we’ve been talking about and try to negotiate with a principal seller for a year or two, but that never happens and sometimes we talk to year or two when it happens. So to give any guidance on that would just be a service that it is just hard to say. We’ve had some great success here in the past number of quarters thanks to Jeremy’s fantastic efforts on it. I think the most important part is what you mentioned that how these platforms just have incredible growth potential to them because of not only doing business with the assets that we oversee, but because of our relationships in the industry and our contacts there. The growth numbers on all these have just been phenomenal both revenues and bottom line and the like.

[Bryan Maher:]

And just lastly, when you guys are trying to strike the deals on the Company, are you pretty much insisting that the founder of the Company or the key man or key woman at the company stay on for some period of time when you’re trying to negotiate these things?

[Monty Bennett:]

That’s our preference, but it’s not a requirement. We like to see our sales as instead of acquiring these companies but rather investing in them. And investing in them and then providing them all kinds of extra business for access to the hotels that we manage at competitive prices. So we try to find good solid organizations with good solid management teams that want to monetize part of their holdings that they didn't want to participate in growth going forward as well.

[Operator:]

[Operator Instructions] We will now take our next question from Steven Vigor from Argus Research.

[Steven Vigor:]

Yes, hi guys. Just related to J&S one question on timing of the integration for the current properties to transition to J&S, which I assume depends on mostly on the timing of the contracts right with the vendors, other vendors rolling off. I'm just wondering how linear that the revenue benefit is through 2020, if there's any reason to expect it to be more backend or front end loaded?

[Monty Bennett:]

Actually, our problem is too much business. J&S has had a decent growth trajectory here over the past number of years. I think if my numbers strike you guys 15% or more a year, which is decent growth. And Ashford business alone over the next five years would duplicate that, if they never grew again with any outside vendor. And we want to continue to encourage the platform to pursue outside business. So, the Ashford business that we put into J&S is going to be kind of a sprinkled in as we go because we don't want to turn away third-party business. So it really just depends upon how much third-party business that we've got going on, but we want to keep their growth rates up pretty strongly. My personal preference and no promises here, no guidance, is growth in the 15% to 20% range is what I'd like to see. So that's a combination of outside Ashford business, so we'll try to time the Ashford business coming in to maintain those growth rates at least for the next year or two, three.

[Steven Vigor:]

And then just a macro question. So, the CBRE had hotel demand in the fourth quarter growing 3.7 nationally that was up you know quite a bit from the 2.4 in Q3 and you know helped obviously by hurricanes -- but they also mentioned rising incomes of course. So, I'm just wondering here from a macro standpoint. How that compares you think with your footprint relative to the national average? And are you seeing or expect to see any boost related to the tax cuts and will higher rates remove some of that benefit you think?

[Monty Bennett:]

We don't give guidance on our particular platform, but we are bullish about the overall economy. All the wins we are back at surge in stock market. Consumer confidence is very high. The group pace at least that we're looking at. The other industries that’s kind of tracks the industry and demand growth GDP on and on, so it seems to be very, very positive; and as far as rates keeping that’s down rates just start growing now that robustly, we will receive more, so we think demand is going to grow pretty strongly.

[Operator:]

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

[Monty Bennett:]

Thanks everyone for participating in today's call and we look forward to talking to you on our next one. Thanks again.