Good day, and welcome to the Ashford Hospitality Trust Second Quarter 2018 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Joe Calabrese with Financial Relations Board. Please go ahead, sir..

Good day, everyone, and welcome to today’s conference call to review the results for Ashford Hospitality Trust for the second quarter of 2018 and to update you on recent developments. On the call today will be Douglas Kessler, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; Jeremy Welter, Chief Operating Officer.

The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet, were distributed yesterday afternoon in the press release that has been covered by the financial media.

At this time, I will remind you that certain statements and assumptions in this conference call contained or are based upon forward-looking information they 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 August 2, 2018 and may also be accessed through the company’s website at www.ahtreit.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 to second quarter 2018 with the second quarter of 2017. I will now turn the call over to Douglas Kessler.

Please go ahead, sir..

Good morning and thank you for joining us to discuss Ashford Hospitality Trust’s second quarter results. I’d like to begin by spending a few minutes on our recently announced Enhanced Return Funding Program or ERFP with Ashford, Inc. Our strategies throughout our 15-year history have consistently focused on ways to create shareholder value.

Many of our efforts have been economically transformational over the years. We believe that the ERFP will be another such example and see this program to be a true game-changer, one that we expect to provide us with significant competitive advantage to improve asset level investment returns and hopefully lead to improve stock price performance.

As we’ve discussed, the highlights of this program for our company are clear, simple and impactful. Ashford, Inc. is committed to provide up to $50 million to the company on a programmatic basis, equating to approximately 10% of each new investment acquisition price to be used for the purchase of FF&E.

We believe the ERFP program has the potential to improve five-year internal rates of return on hotel acquisitions by 700 to 1200 basis points. We're not aware of any other REIT lodging or non-lodging that has a similar offering to improve property acquisition IRRs.

Given our approximately 18% insider ownership, we proud of ourselves on thinking and acting like the owners when it comes to evaluating and implementing strategies and we expect the ERFP program to be another significant step to enhance our total shareholder return performance relative to our peers. Let me be clear.

We've been very disciplined in our acquisition efforts over the years, and this program does not at anyway change that level of scrutiny. We will not grow just for growth sake, what this program seeks to accomplish is to return good deals and to great deals.

How does that happen? The ERFP effectively reduces by approximately 33% based on our current corporate capital structure to require equity funding and the new investments thereby improving expected returns.

While these are just some of the economic highlights benefiting Ashford Trust Shareholders, there are miscellaneous terms to the ERFP included in our filings that I encourage you to review.

A highly contested bidding environment for deals today, we see this program providing us with the significant competitive advantage in winning deals at even more accretive returns. We can be more aggressive if needed to win a deal, but then still achieve returns well in excess of what we would have achieved without the ERFP.

Looking ahead, we see this program is very promising, given the strategic and financial alignment between Ashford, Inc. And Ashford Trust, such that in theory it could become even larger dollar value and more evergreen if proven successful and favorably received by our shareholders.

In fact, the ERFP agreement already has in place subject to mutual agreement and increased to $100 million. The existence of this program is also timely given market conditions. More properties have recently become available that fit our focus investment criteria of full service of our upscale hotels.

Furthermore, our conviction on a more positive lodging market direction is stronger given supply demand fundamentals. We also see various key economic data points to support our near-term favorable view. The debt markets remain liquid and attractively priced for hotel financing.

We have excess corporate cash in our balance sheet, which could be available for hotel investments under this program. All these combined factors make this a very opportune time for the program especially considering the competitive advantage the ERFP provides to us. The Hilton Alexandria Old Town is an excellent first deal to benefit from the ERFP.

On June 29, we completed the acquisition for $111 million and consistent with the ERFP, Ashford, Inc. has committed to provide us with approximately $11.1 million of cash via the future purchase of hotel function fixtures and equipment at our properties.

With this ERFP funding commitment, the effective trailing 12-month cap rate for this transaction increases to 8.3% from 7.5% assuming the program funding had occurred at closing. In most cases of with this acquisition, the ERFP is expected to be funded over the first year.

Moreover, based upon the acquisition of an upfront funding, our initial equity contribution for this acquisition is reduced by an estimated 38% as a result the program is projected to meaningful improve the estimated underwritten leveraged IRR of the acquisition from 18.2% to 29.5%, a 62% increase in returns with over 1100 basis points in absolute improvement based upon a capital structure including 66% property level debt, corporate preferred, equity capital and ERFP funding in year one.

We believe these types of returns are compelling. We believe that this acquisition stands on its own. However, with the ERFP, we estimate the returns are underwritten to be among the highest of any deal in our history.

We strongly believe that the ERFP provides us not only with the competitive advantage but is also structured to substantially enhance shareholders value. Let me now turn to our second quarter performance. Our comparable RevPAR for all of hotels increased 1.6%, while our comparable RevPAR for all hotels not under renovation increased 2.3%.

For the quarter, we reported AFFO per share of $0.42 and we’ve reported adjusted EBITDAre of $120.7 million. We will continue to own and acquire predominantly up our upscale full-service hotels at our RevPAR of generally less than 2 times the national average.

We're not purposefully chasing the highest RevPAR hotels, because we see tradeoffs in RevPAR and yield. We will remain disciplined on buying and selling properties as we balanced expected returns, underwritten growth and our cost of capital.

During the quarter, we completed several additional transactions to further our strategy and create additional value at our platform. We sold the 109-room residence at Tampa Downtown for $24 million, equating to $220,000 per key and a trailing 12-month cap rate of 7.6% for select service hotel with a RevPAR below our overall portfolio average.

We also sold the SpringHill Suites Centreville for sales proceeds of $7.5 million. Through these sales of lower RevPAR select service hotels, we believe we have improved the overall quality of the portfolio. We hope these strikes us strategy executions, remind investors of the potential value we can create with assets in our portfolio.

As for our balance sheet, we target net debt to gross assets of 55% to 60%. Although, our current level are slightly above the target. We believe in the benefits of an appropriate amount of nonrecourse debt to enhance equity returns. We've generally run near this leverage level consistently since our IPO 15 years ago through up and down cycles.

I am very pleased to report that we have been extremely active in refinancing our existing debt over the past couple of years. During the second quarter, we refinanced eight different loans comprising 56 hotels for a total of $2.3 billion.

We’ve had great success recently in our proactive efforts to capitalize on the favorable debt markets to significantly lower the loan spreads from what we would have paid under the previous terms. In fact, since the start of 2017 we refinanced the mortgages on 85 hotels with $3.4 billion in new loans or approximately 85% of our total debt.

Deric will provide more detail as well as the many benefits of these financings. We seek to maintain a cash and cash equivalents balance between 25% to 35% of our equity market capitalization for financial flexibility.

We know that this excess cash balance can provide a hedge in the event of uncertain economic times as well as providing dry powder to capitalize on attractive investment opportunities as they arise.

In addition, at the end of the second quarter of 2018, net working capital totaled $527 million equating to approximately $4.42 per share representing a significant 56% of yesterday’s stock price.

Also, we remain focused on our investor outreach efforts in 2018, we will continue to get out on the road to meet with investors to communicate our strategy and the attractiveness of investment in Ashford Trust. We look forward to speaking with many of you during the upcoming events.

Looking ahead we have a high quality well diversified portfolio and remain focused on accretive transactions as well as proactive asset management initiatives. We’re committed to maximizing value for our shareholders as we focus on generating solid operating performance continuing to be opportunistic and proactively managing our balance sheet.

I’ll now turn the call over to Deric to review our second quarter financial performance..

Thanks, Douglas. For the second quarter of 2018, we reported a net loss attributable to common stockholders of $29 million or $0.30 per diluted share. For the quarter, we reported AFFO per diluted share of $0.42 compared with $0.52 for the prior year quarter.

Adjusted EBITDAre totaled a $128.7 million for the quarter compared with a $125.6 million for the prior year quarter. There are a few things that I’d like to point out about our quarterly results. First, the prior year quarter included $2.4 million of hotel EBITDA from hotel that we have said sold.

Second, we have full utilized the NOL in our taxable re-subsidiary and you will see we recorded a higher tax expense in the second quarter compared to last year. Going forward, I would expect that trend to continue.

Third during the quarter we recorded $1.9 million of business interruption income related to loss business at our Crown Plaza Key West associated with the BP Oils deal in the Gulf of Mexico in 2010. We have been working on this plant for several years and finally settled the claim in the second quarter.

Finally, given our strong total shareholder return performance through the second quarter versus our peers, we’ve reported an accrual of $3.3 million for the incentive fee under our advisory agreement. At the end of the second quarter, we had $4 billion of mortgage debt with a blended average interest rate of 5.5%.

Our debt was approximately 9% fixed rate and 91% floating rate. All of our debt is nonrecourse property level debt and we have a well laddered maturity schedule. Interest rate caps are in place of virtually all of our floating rate loans and including the market value of our equity investment at Ashford, Inc.

we ended the quarter with net working capital of $527 million. As of June 30, 2018, our portfolio consisted of 118 hotels, with 24,903 net rooms. Our share count currently stands at a 119.3 million, fully diluted shares outstanding, which is comprised of 98.6 million shares of common stock and 20.7 million OP units.

With regards to dividend, the Board of Directors declared a second quarter 2018 cash dividend of $0.12 per share, or $0.48 on an annualized basis. And based on yesterday’s stock price, which represents a 6.1% dividend yield, should among the highest in the hotel REIT space.

On the capital markets front, we set out at the beginning of the year with a strategy to refinance a significant portion of our debt. We believe that credit spreads would continue to tighten as short-term rates increased, which is exactly what has happened.

Through these financings, we have been able to improve our liquidity, extend our maturities, resize several of our loan pools, and lower our cost of capital compared to the previous loan terms.

During the quarter, we’ve refinanced our Highland mortgage loan, secured by 22 hotels, with an existing outstanding balance totaling approximately $972 million, with the new loan totaling $985 million. The new loan as a two-year initial term with five one-year extension options, subject to the satisfaction of certain conditions.

The loan is interest only, provides for floating interest rate of LIBOR plus 3.2%. This refinancing is expected to result in annual interest savings of approximately $11 million, as compared to the prior loan terms. We also refinanced seven mortgage loans, with existing outstanding balance is totaling approximately $1.07 billion.

The new financing is comprised of six separate mortgage loan pools with an average size of approximately $211.7 million, that together total approximately $1.27 billion and each has a two-year initial term with five one-year extension options, subject to the satisfaction of certain conditions.

The loans bear interest at a combined weighted average rate of LIBOR plus 3.83%, which is 74 basis points lower than the previous mortgage loans. As part of this transaction, and subsequent to the end of the quarter, we purchased $56.3 million of mezzanine debt, on the Pool E loan, to effectively reduce our interest expense on this loan pool.

The total pool E loan amount is $216.3 million, priced at LIBOR plus 4.36%, inclusive of the mezzanine debt that we purchased. However, it effects the net loan amount, will be a $160 million, at a spread of LIBOR plus 2.73%.

This purchase is now meant to suggest that Ashford Trust is reentering the mezzanine lending market, we simply saw attractive opportunity to lower our effective cost to capital and its financing.

After closing of this transaction, the weighted average maturity of our debt is 6.1 years, assuming extension options or exercise, which is the longest it has been in several years and our next hard debt maturity is a $5 million loan that matures in July of 2019.

As you can see, we have benefited from the flexibility of our floating rate debt to efficiently refinance a substantial portion of our existing loans at a time when loan spreads have significantly compressed over the past 12 to 18 months.

These well plan sequential refinancing exemplifier our ongoing strategic efforts, to capitalize on market conditions and constantly seek out ways to enhance shareholder value. That concludes our financial review, and I would now like to turn over to Jeremy to discuss our asset management activities for the quarter..

Thank you, Deric. Comparable RevPAR for our portfolio increased by 1.6% during the second quarter of 2018. As hotels not under renovation, grew comparable RevPAR by 2.3% during the second quarter.

While we experienced a 7.3% increase in non-controllable fixed expenses, such as incentives, management fees, property taxes and insurance, our operating flow through for the quarter was approximately 50%.

We have been disappointed with our portfolio live results, from a RevPAR growth standpoint and several factors have contributed to this performance, which I will briefly outlined.

First and foremost, we have experienced heavy renovation activity year-to-date measured by both number of hotels and number of rooms, and we have also had renovations at some of our largest hotels, namely the Renaissance Nashville, Marriott Crystal Gateway, and Ritz Carlton Atlanta.

In addition to the impact from renovations, our Starwood hotels not under renovation. During the second quarter, we're negatively impacted by the revenue management and sales integration to Marriott. Comparable RevPAR for these nine hotels declined 3.1%, a 710-basis point decrease relative to their competitive sets.

Group performance at these hotels has suffered and group room nights declined 19.2% during the second quarter. Excluding the nine Starwood Hotels, comparable RevPAR for those hotels not under renovation during the second quarter, was 2.9% nearly flat to our competitive set.

I would now like to turn to a property where we have perhaps unlike more value than any other property in our portfolio. The Renaissance Nashville, since we acquired the Renaissance Nashville as for the Highland portfolio acquisition, we have grown NOI from $6.2 million to $20.3 million, more than tripling its profits.

During the second quarter, we completed the meeting space renovation and additions in the Nashville Convention Center space. This space of the renovation was completed in April, including the enlargement of the entirely refreshing Grand Ballroom, expanded pre-function space, the Grand Ballroom canal accommodate 1500 guests for a banquet function.

On completion of the meeting space, we began upgrading the first floor of the hotel by renovating the lobby and restaurant. And we're also adding a signature market providing a grab and go outlet. This work is scheduled to be completed in January 2019.

Despite the disruption inherent in any renovation of the scale, the hotel managed to grow comparable RevPAR 1.8% during the second quarter, and EBITDA flow through was strong at 79%. Impressively, this RevPAR growth surpassed that of the hotels competitive set by 70 basis points.

As we continue to improve the product of one of our top performing hotels, we're excited to add hotels of a similar caliber such as a Hilton Alexandria Old Town to our portfolio. We anticipate that our best-in-class as a management team will unlock value at the Hilton Alexandria, similar to what we have achieved in many of our other properties.

During the remainder of 2018, we will continue to invest in our portfolio to main competitors. For the year, we estimate spending approximately $165 million to $185 million in capital expenditures.

In addition to the extensive work, I just highlighted at the Renaissance Nashville, much of the spend is focused on the recently completed guestrooms renovations at the Renaissance Palm Springs, Sheraton Anchorage, and Marriott Research Triangle Park as well as additional guestrooms renovations at the Hyatt Regency Coral Gables, Westin Princeton, Ritz-Carlton, Atlanta, and the Hotel Indigo, Atlanta.

I mentioned earlier, this heavy renovation activity affected our first quarter results which continued into the second quarter as well. It's been about 2018, we're projecting an average of 5 new hotels on renovation per quarter relative to 2017 with 1,300 or 15.3% fewer rooms out of service during that period.

This reduction renovation activity coupled with the improved product will have once all of this capital spending is completed should provide a tailwind for a portfolio and our results going forward. That concludes our prepared remarks and we'll now open the call for Q&A..

Thank you. [Operator Instructions] We'll take your first question from Tyler Batory from Janney Capital Markets. Please go ahead..

Thank you. Good morning. So, quick follow-up question on the renovation activity obviously number of projects in 2017, number of projects in the first half of this year that are wrapped up.

I mean how were some of those hotels performing versus your expectations, I mean out of the ramp going there?.

It's as expected. I mean, typically what we see is ramp is about 100 basis points of index gain as a hotel comes out of renovation. We had a significant amount of renovation activity in the fourth and first quarter of this year continued on into the second quarter. So, we haven't really had the benefit of some of that ramp.

But we certainly will have that, as you kind of transition into particularly the fourth quarter of this year and on the next year as well. Most of our CapEx is what I would call depends on the nature just to maintain our competitiveness.

And so, we do have a decent amount of ROI CapEx as well, but typically what you see as you see quite a bit of displacement during the renovation and then coming out of the renovation as it ramps up, it’s about a 100 basis points higher than it was before we even started the renovation, if that helps..

I’d also like to just add to that. We’ve at times look at renovations in the path of growth and clearly for example Atlanta is one of those situations with the renovation of our Ritz-Carlton as an example given all the activity that Atlanta is expected to benefit from with athletic events taking place over the next couple of years.

So, and we’re right in thick of that. So, we do have instances where the benefits of that renovation I think are in conjunction with some market timing events that we expect to benefit from in the future..

Okay, great. And then just to follow-up on the Starwood Marriott revenue management and sales integration, I mean you’re being impacted by that and so some of your peers and what’s your best guess as far as the potential impact of that in the second half of this year.

is that some of you’re going to continue, or you think most of the disruption is through at this point?.

Yeah, I think that’s a great question. I appreciate it and before I get into it, I just kind of want to give a kind of a high-level overview of kind of what’s going on. Think about it that Marriott is integrating their sales in the revenue management systems. They’re integrating their direct booking channels.

They’re integrating their rewards program and many other systems.

For us, they’re integrating the personnel and so when you think about it a lot of our legacy Starwood managed hotels are being overseen by current Marriott management and hotel managers, revenue managers and they’re not overly familiar with the legacy systems and they’re not spending the time to really get up to speed of those systems, because the systems are drawn away pretty soon.

The actual key points of the integration are scheduled to be just in a few weeks. My anticipation that could be delayed, but it should be in the third quarter of this year where they combine the rewards program, their direct booking channels and I think that’s going to be put a lot of these issues behind us.

If you look specifically in our quarter it just wasn’t a good picture for our Starwood Hotels. We’re down in repays, our special corporate accounts, we’re down 8% even our brand contribution on Starwood.com was down 300 basis points. The rest of all are other channels we’re up on special corporate.

They’re up on direct booking and we were had a good group pace otherwise. So, I think this is an isolated issue.

It had a pretty big impact to our overall RevPAR index for the quarter and I think that there are a lot of good things to come out of this, because I think that Marriott does have an incredible distribution system, they’ve got an incredible management team and they’ve got a great salesforce.

And so, as we get this integration done over the next couple of quarters, I'm pretty optimistic on those hotels. In fact, specifically for our Starwood Hotels in 2019, group pace is up 18%.

So, I think this is a short-term isolated issue, we happen to have a decent amount of Starwood exposure, but I do anticipate that it to be something that as we get through the integration, this going to be a net positive for our portfolio..

Okay. That’s helpful. And just last question from me on the interest expense.

Deric you went through a number that refinancing, which was great, but just on an annualized basis, how much interest have you guys saved year-to-date and as you look out for those opportunities to do some more refinancings?.

Yeah, so in terms of the first question and this isn't necessarily year-to-date, but in terms of all the financing that we’ve completed since the beginning of 2017. In total, we’ve saved about $30 million in interest of what our interest expense otherwise would have been under the previous loan terms. So that’s significant savings.

As I mentioned, we’ve now pushed out our debt maturity schedule, average maturity of 6.1 years, which I feel very comfortable with. We’ve got just a small loan that's maturing in 2019. We’ve got 200 million in 2020 and then we’ve got nothing in 2021. So, I think from here the opportunities to refinance are probably limited.

We’ve got some fixed rate loans in there that are maturing in 2020 that we’re reluctant to pay the breakage cost or the severance [ph] cost associated with our early refinancings there.

We have some floating rate loans there, but that we could possibly refinance, but we’d probably like to be underlying performance those properties to be able to before we refinance those. So, I expect the refinancing activity to slow down quite a bit.

But we'll continue to be opportunistic and if the market is there, and available we'll capitalize on it..

Okay, great. That's all for me. Thank you..

We'll hear next from Jim Lykins from D. A. Davidson..

Good morning, everyone. Just a couple of things for me. First of all, given the economic data we're seeing right now specifically GDP.

How are you guys thinking about RevPAR growth? And also, is there any color you can provide us with on how that's trending far into the current quarter?.

Jim, you're right. I think that there are some very strong economic fundamentals that are backdropped to the benefit of our industry. You mentioned GDP growth, I think the last quarter report was 4% slightly north of that. We are looking a lot of economic indicators not only that. Obviously, that's one of the most highly correlated to hotel room demand.

But we're also looking at other components that contribute to both transient business and as well as group business, leisure and business et cetera. So, for example, we're tracking non-residential fixed investment, which continues to be healthy. Obviously, we are all aware that the jobs reports are very strong and consumer confidence is very high.

I think that one of the general trends while we don't provide any specific color as you know on our corporate RevPAR, but we are certainly seeing I think across the industry a rotation into improved business transient travel.

That has been the big question I think that all of us in the industry have try to get our arms around which is why that hasn't been strong, why that hasn't accelerated sooner.

And obviously there is a lagged effect that corporations have to feel comfortable that profitability and willingness to spend dollars on business travel which is obviously for many organizations is a variable component of their expense structure.

And we're seeing more business travel but we're seeing a pickup in that and that is important for our platform. Because we view that most of our hotels and the trust portfolio are mainly business transient type hotel. So, hopefully that answers your question..

That's very helpful commentary.

And also, regarding supply, what do you seeing right now, and do you still think that that may crest in 2019 or possibly even sometime later this year?.

Well, we have reported previously that based on the industry data that we have been seeing that the crisp [ph] was expected to be sometime in 2019. And recently, we came across the report from I believe it was lodging economic metrics that actually indicated that that crest may not actually occur until the following year.

That they saw actually a slight uptick in forecast supply. I think this is something that we're digging into more just a better understand that data. Because that is the first report that I have come across that suggested a slight change in the cresting of the new supply coming in.

Nevertheless, when we look at the new supply, I think one of the comments that we have made previously is that the supply setup still for the industry is I think very strong from the standpoint of a lack of new supply.

The last cycle, new supply hit the 2% level in the 54th month we are into the 100th month this cycle and just barely beginning to hit that 2% supply level. In the face of what continues to be fairly strong hotel room demand. So, we like the setup even if the supply cycle is extended just a little bit longer.

I still think the dynamics in terms of the relationship between supply and demand are fairly healthy..

And I'm going to add to that, is when you look at the supply for our markets and tracks for our portfolio over the last two years. And what's actually come in. on the forward-looking basis for the next year, it's pretty commensurate of what we would project of what we've recently experienced.

I don't see anything ticking up necessarily, but it's basically the same type of supply growth we’ve had last couple of years. Now changes dramatically by market obviously..

So, when you mentioned that, you think that, the question now be 2020 – I can’t remember who you said, there is assumptions, or where that came from, but do you know what assumptions might have changed, as construction lending maybe gotten easier or what -- any color on that?.

I think the large percentage of that is just coming from not new construction, but really coming from projected or planned projects, which obviously have the highest potential attrition rate of construction that’s either forecast or planned or under construction et cetera, there is a natural progression of attrition relative to the early stage of a planned project.

So, that’s really where we understand most of that to be coming from as oppose to actual in the ground under construction. But again, this is the report that I think just came out and we’re looking into it as well just to better understand the data..

Okay, great. Thanks guys..

We’ll move next to Chris Morocco [ph] from Deutsche Bank. Please go ahead..

Hey, good morning guys.

I want to follow-up just a little bit on that on the Marriott Starwood issue, it sounds like you think that’s temporary and so my question is, maybe you can just confirm, is there not really a cure, is Marriott providing a cure for owners in the near-term or is this something that just supposed to kind of level out as we move forward?.

In terms of the cure, you mean like make call [ph] or what do you mean, or just a….

Yes, I mean is – I mean obviously it would on anything – I assume anything they manage it could I guess some you reduce their IMF, if they got to a level. But are they doing anything other than essentially trying to fix the problem..

It's more focused on trying to fix the problem. They have been -- spreads within integration and they are moving as quickly as possible. As I mentioned, there is not really a good story on any of the channels that you look with those Starwood legacy hotels in the recent quarter.

But I view this as a temporary issue and I actually would anticipate that as a result of the merger, the Starwood hotel is actually disproportionally benefit from where they were prior to the merger than your core legacy Marriott Hotels.

So, I think it's just kind of a necessary evil, we've got to take some a few steps backwards to take a few steps forward. So - but there is nothing I think anything in particular that they're doing, other than we are getting some synergies, some cost synergies and there is going to be some savings in the rewards program for Starwood Hotels.

But that just part of the integration itself..

Okay. That’s helpful. And just on the CapEx, I saw – I understand, it sounds like the – you start to get more benefits from ramp up in the second half or a recovery, whatever you want to call it.

What was the genesis of the higher CapEx last year and this year, did you guys get off cycle or is it just so happen that a number of hotels kind of wind up for this cycle renovations at same time, is that correct?.

Yes, it’s a ladder, I mean we try to push and differ a renovation as much as possible, because you can quantify that the displacement that we experienced during the quarter when we have heavy renovation activity. So, it just was kind of where the stars were aligned where we had a decent amount of hotels that required renovation.

And then I have also continued to differ even some additional projects that and quite frankly the branch desperately wants to be done, but I am placing those back another year as well. So, it's just -- some years we have a little bit more, some years we have a little bit less.

We had quite a bit more in the fourth quarter 2017 and in the first quarter of 2018. And so, I think that there should be some tailwinds, but less renovation activity in the upcoming quarters..

And then I also want to just highlight the fact that because of the ERFP, we basically now have a source funding for $50 million of potential CapEx depending upon what our acquisition pace is. And again, I think we can’t underestimate the power of this ERFP program to add value to the platform and I am very enthusiastic about it.

It goes right to the core of FF&E type work that's done at the property. And whether it is at a property that we acquire across the portfolio, that's a flexibility that we have with the program. I should highlight that with this program in place. Again, we continue to be extremely disciplined in our acquisition approaches.

We did announce the Hilton Alexander Old Town, a great asset that we're extremely pleased with. The expected returns from that are very attractive. The platform will benefit from the ERFP.

But yet even with that transaction, I think as a clear indication of looking for situations to make good deals great, we've continued to be active in pursuit of transactions. And in fact, we've recently been outbidded on a few deals that just didn't meet our return threshold even with the ERFP.

So again, I think that points to the discipline that we have and finding accretive transactions to really enhance shareholders value..

Okay, fair enough. And Douglas, just a follow-up quick on that comment. So, the ERFP obviously you guys can quantify how it improves your returns. So, do you think it's enough to you said you've been outbid on a few hotels.

In general, is it going to be enough do you think to put you over the finish line against the private equity bidders? Or is the spread is so wide that it's going to be hard to overcome even with that?.

So, I think that the ERFP actually gives us a competitive advantage, but keep in mind that there are on occasion very aggressive buyers that whether it's because of some sort of emotional reason that they want to own that asset or if it's because of some strategic reason that they have to own that asset that -- look we seen some situations where people in my opinion may have overpaid, or certainly paid more than what we are willing to pay to stay consistent with kind of the discipline that we've had on achieving the best possible return.

Look, you have one time to buy, you better buy right. And so, our view is let's continue to stay with the same discipline. Sure, the returns with the ERFP still may have achieved an adequate return, but we're looking to make good deals great. And so, for that reason, we've seen some deals go away from us.

obviously, we've been active in underwriting deals. Obviously, I can't comment on anything that we're currently in the process of underwriting, but we are optimistic. We are optimistic that we will find deals that are consistent with our strategic focus above for upscale full-service hotels.

And that the ERFP will enable us with that competitive advantage of having those funds available to win deals. And when you think about the timing of the announcement of the ERFP, it's really just been a short couple of weeks. And deals have a schedule, brokers are in the market and transactions follow an offer timeframe.

And so, we're in that stream of deals right now and we remain hopeful that the ERFP will put us over the finish line and provide our shareholders with some real value add, economics to what would have already been a good deal along -- and so just like the Hilton Alexandria.

So, I just only highlighted the fact that we've lost couple of deals only to demonstrate that we are staying disciplined Chris in terms of what we're pursuing. So, all in, we are extremely excited about what's in front of us and what the ERFP can do for us. and just to enhance kind of maybe your perspective on the transaction environment.

The transaction environment for the first half of the year in terms of large hotel purchases and again there was a certain tracking about the certain dollar amount of trading. I think there is been about 120 or so transactions that have traded at least according to the report. We were at in a real-estate alert.

And that transaction volume is up 27% through first six month of the year relative to last year. I think the total was just about $10.7 billion. So, we're clearly seeing an increase in transaction availability in the market and we're participating in that. And we believe that the ERFP will enhance our opportunity to win deals..

Okay. Very good. Thanks, guys..

[Operator Instructions] We move to the next caller in the queue Bryan Maher from B. Riley FBR. Please go ahead..

Good morning. Kind of sticking with the ERFP guidelines a little bit more. I don't want to beat a dead horse.

But Doug, how much do you think it expand is your pipeline? So, if you're looking at two properties before that we're realistic is that now 4 or is that now 6 or is that now 8, like how impactful is it to your pipeline?.

Well, there is a couple of components to that. One, the pipeline universally I think is getting larger, there are more deals. But it certainly enhances the bandwidth of our pipeline.

Because deals that maybe on the margin, we weren't going to be able to win, we can slightly increase the price and yet because of the massive benefit when you think about the equity requirements that's reduced by about a third, you think about the impact of the IRR.

You think about the effective elongation of our capital utilization because, we now have capital coming in from Ashford, Inc. That otherwise Trust would have had to spend on FF&E whether for this newly acquired asset or somewhere else in our portfolio.

So, we can do slightly more if needed and still have a materially increased return despite that slight increase in purchase price so hopefully put us over the edge.

And what still quite frankly is a very competitive situation and it's competitive enough to where we're seeing sometimes a third and final round actually end up becoming a fourth round of bidding.

So, it is a significant advantage we believe for us and advantages we're not aware of any other lodging reappear or for that matter any other reason has that type of source of capital to be used in the way that we're using it. So, yes it increases the scope and our team is very busy underwriting perspective acquisitions for Ashford Trust currently..

And can you kind of rank for a first, second and third.

Who you're running into, in these bidding wars is it another REIT? Is it mostly private equity? Is it family offices or rich individuals? How would you rank the competitive set?.

I think it's really all the above, but it sorts of breaks down a little bit differently depending upon assets type and location and when I say it's all the above. There is significant pent up demand for lodging assets today.

I think when you look at the macroeconomic picture of the economy, people want to rotate into lodging assets and have a better understanding of the direction of the economy.

Despite the fact that this cycle has now gone on for 100 months, so I think people are now becoming a little bit more comfortable recognizing that historical cycles in the time that they last, really doesn't necessarily have any correlation to a future cycle. Because the fundamentals dictating the outcome of that cycle can all be very different.

And we all know that most lodging cycles have been more dictated by exogenous events, disrupting events rather than supply demand fundamentals. And as I said earlier, the supply demand fundamentals I think are fairly healthy right now.

So, what would disrupt this cycle and absent knowledge of that I think people with the improved economic picture and GDP growth are more comfortable having lodging as a portion of their portfolio. For the types of assets which I think we have clearly a competitive advantage. And by that, I mean if you look at most of our reappears.

They're either focus on luxury or they're really chasing the highest possible RevPAR and major gateway markets or they're pursuing select service hotels. We have a very broad landscape to work within the first place. Because we will buy in most U.S.

major primary and secondary markets, suburban or urban locations, brand manage, not brand manage, brand encumbered not brand encumbered. We have greater access to the deal pipeline that's available which gives us the ability to be selective. And so, in the urban centers we're still bumping up against some of the reach bidding.

We've seen some international buying activity obviously the Chinese buying activity has slowed down, but we continue to see some activity from foreign buyers that we’ve bumped up against and the private equity funds are obviously active because they sit on a substantial amount of capital.

So, our footprint is large, and we believe that we will be successful in making good deals great and finding attractive opportunities to benefit from this ERFP program..

That was quite an answer Doug.

For Jeremy just quickly obviously you had some weak markets which kind of weighed on your RevPAR results can you kind of talk to kind of the two or three weakest markets you guys are operating in and if you see those environments changing anytime soon?.

Yeah. So, we underperformed pretty significantly in Orlando and that was more of an isolated issue with our residency world been under renovation, it was down over 20% RevPAR for the quarter, so that was a disproportionate impact. So, I view those kinds of non-recurring.

Minneapolis another market that we underperformed, three of four assets are - we have quite a bit of Starwood exposure in that market, so that’s part of the reason and I’ve said I think that we’ll see these Starwood Hotels transition to stronger growth in the upcoming quarters and that’s our expectation.

Houston was another market that we underperformed quite a bit and that was isolated to just a group shortfall for one of our properties pretty significant and what it was kind of a tough comparable as well to the prior year so I don’t see there’s anything that certain markets that are I'm concerned about certainly I'm pretty excited about when you kind of look at our portfolio been heavy exposure in Atlanta, a 29 team Atlanta can be incredibly strong for us, group pace is up significantly obviously receivable San Diego looks to be fairly strong for us San Francisco is going to be a very strong market for us as well.

So, I think we have a lot more markets I think I see more positives versus negatives. Obviously, this is not a great quarter for us we lost a 100 basis points in RevPAR index. But I think there’s brighter days ahead..

Okay. Thank you..

We’ll hear next from Michael Bellisario from Baird..

Good morning, everyone.

Just one to go one more time the ERFP and I understand there’s small sample so far just a few weeks in but how far off have you been on those few deals that you referenced in terms of percentage on the bid?.

Well, in one case we had a real outlier bidder come in on a kind of must have asset that not only blew us away, but we think blew away everyone else which certainly believe to be the cover bid so that was a material order of magnitude, but I can’t say that that has been an economic buyer.

I think most people we have bumped up against have been economic buyers.

We took a look at and have said that was a Southern California property that we felt we could be competitive for but the cap rates started to dip to a level that again we just felt like even though we might have achieved kind of low mid-teen returns that’s not what I'm trying to accomplish with the ERFP money I'm trying to make good deals great.

That would have made a marginal deal good and we are looking to utilize the ERFP to enhance shareholder value not just to get deals done.

And so, but as I said there is other deals that we’re pursuing now and we remain hopeful in a very competitive environment that with our discipline in underwriting and our approach on looking at ads is not just on the purchase price, but how we think we can operate them and enhance the performance that in conjunction with the ERFP that we will be successful in announcing deals that I think shareholders would be pleased with and that’s our objective..

Got it..

There is no rush. We’ve got plenty of time. The ERFP has a two-year timeframe to it and so we’re going to be we’re going to do the right thing with this capital to find great deals..

That all makes sense thanks and then just back to the Starwood commentary because kind of what you said and what you’re seeing is different from what lot of peers have said, and they pointed group specific weakness, but I think few of the things you guys mentioned, kind of more on the transient and they kind of customer booking side of things, is that why – one, is that correct and then two, is that maybe why you are seeing it across our legacy Starwood Hotels, not just legacy Starwood Managed Hotels, like your peers are..

Yes, so it is different. One of the things that impacted the quarter quite a bit was for our Starwood managed hotels, Marriott consolidate a lot of their corporate accounts, and they didn’t extent rates to some of the smaller accounts that, we have some really good business with at our legacy managed Starwood hotels.

And so that’s been impactful to our special corporate or negotiated corporate business for the year. Specifically, for the quarter, our non – or I guess our brand managed legacy Starwood Hotels were down 15% and negotiated corporate business, and volume.

So that was pretty significant right the entire Starwood portfolio down 8%, but we’re actually up and our Remington managed franchise assets. So that, that component was more isolated to the brand managed Starwood hotels, but overall like I said, we also have issues on brand.com.

Eight of our 10 Starwood hotels had declined in bookings based at Starwood.com.

it’s not on the industry, you know all the amount of significant spend that the brands have made, on all the direct booking channels, we’re seeing growth and Hilton.com, we’re seeing growth at Marriott.com, we’re seeing growth in our direct bookings, pretty across the board with the exception of Starwood.

And so, so that impacted both our franchise and our managed hotels. So, I think there is just a lot of moving parts, as part of this integration, and it has brought down both our managed franchise, but in certain components it definitely was a little bit more impact on our managed hotels..

And you just have three managed hotels, is that correct in Atlanta and Minneapolis..

Yes, and we 10 total Starwood Hotels. And the rest are assurance of the exception of Westin and Princeton..

Thank you..

Okay..

Robin Farley from UBS. Your line is now open..

Thanks, this is actually Rina [ph] for Robin. Could you talk a little bit more about flow through for the quarter, and what impacted that, I know you addressed it a bit earlier. But even when you look at comparable hotel metrics, that flows through was a bit softer.

And then how you expect that to play out for the back half are there some cost items that are expected to push just into the back half? Thanks..

Sure. So, as I mentioned on the prepared remarks, our operating flow through were very strong and healthy, especially given the tepid revenue growth that we add to the portfolios, so I was very pleased with our operating flow through, and what we able to bring down to the bottom-line.

What impacted our flow throughs for the quarter, what we call non-controllables or fixed expenses which are property taxes, insurance and incentive management fees. And it’s kind of hard to property incentive management fees is what I am talking about by the way.

It’s hard to believe that we actually had an increase in property management incentive fees, but that was really a component of the mix of hotels that perform really well, with the ones that had some lucrative incentive fees.

So that’s an anomaly for us typically with strong flow throws across the board is when we typically have an increase in the incentive fees. One of the things that I want to highlight, that we were able to do in a quarter.

We made a huge push, we are concerned about heading into the quarter, our group pace positioning, we’re concern about transient pace we had, and so we made a big push on all of our ancillary revenues and there is a lot of strategies that we have behind it.

But one of the positive takeaways was that our other revenue that is not related and not SMB related, it was up 28% for the quarter and I am very proud with the way that our team executed on all of those initiatives. Does that mitigate some of the downside that we would have otherwise had..

That’s helpful. Thank you..

That does conclude, today’s question-and-answer session. I will now turn the call over to management for any closing remarks..

Well, thank you for joining today's call and please be on the lookout for save the day for our Investor Day, that we plan to host in New York City in October. We look forward to speaking with you again next quarter..

That does conclude today's teleconference. We thank you all for your participation..