Good day, ladies and gentlemen, and welcome to the Ashford Hospitality Prime Third Quarter 2017 Conference Call. Please note that today's conference is being recorded. At this time, I will turn the conference over to Mr. Joe Calabrese of the Financial Relations Board. Please go ahead, sir..
Richard Stockton, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, Executive Vice President of Asset Management.
The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon in a 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 and 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 the accompanying tables and schedules, which have been filed on Form 8-K with the SEC on November 1, 2017, and may also be accessed through the company's website at www.AHPREIT.com.
Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Richard Stockton. Please go ahead, sir..
Good morning, everyone, and thank you for joining us. I would like to begin my prepared remarks today by addressing some of the natural disaster-related challenges that we have faced recently. Four of our thirteen hotels were significantly impacted by hurricanes in the Caribbean and wildfires in Northern California in the past few months.
On September 6th, Hurricane Irma was the first Category 5 hurricane to ever make landfall on the U.S. Virgin Islands and its impact on that area has been significant. Our Ritz-Carlton St.
Thomas received substantial damage from the storm and our team has been working diligently, along with the Ritz-Carlton property management team, to assess the damage, develop a comprehensive restoration plan, and assist in the recovery effort.
Three of the six guestroom buildings on the property sustained extensive damage, and we currently have 73 of the property's 180 guest rooms available and in service. These rooms are mostly being occupied by those assisting in the recovery effort. We expect that the recovery at this property could take up to two years.
The Florida Keys were also significantly impacted by Hurricane Irma and our Pier House Resort in Key West also sustained some damage. The damage at Pier House was less extensive than at the Ritz-Carlton St. Thomas and currently all of the property's guest rooms are available and in service. We expect Key West to recover much more quickly than St.
Thomas. During the quarter, we booked insurance deductibles for both property and business interruption of $4.6 million related to both Hurricane Irma and Maria that we have added back for purposes of our non-GAAP metrics. During the month of October, we also experienced disruption at two of our properties due to the Napa Valley wildfires.
While none of our guests or associates were injured, and neither of our two Yountville properties suffered direct damage, tourism demand in that market was negatively impacted and we did experience a 24 hour power outage. We will be claiming business interruption losses against our insurance policy due to this event.
Our uninsured losses for this event are not expected to exceed $500,000. I'm very proud of our entire asset management team, led by Jeremy Welter, and our property management teams at the Ritz-Carlton St. Thomas, Pier House Resort, Bardessono and Hotel Yountville.
They have shown tremendous energy, perseverance and of course hospitality, under very difficult circumstances. Our hotels are businesses that never close. They are open 24/7. And these properties stayed open during these events. They served as a refuge for displaced residents and provided lodging for first responders and recovery personnel.
Our risk management team continues to work diligently with our insurance carriers to minimize the P&L impact on the company through advances against our policies. Now I would like to discuss our operating results. For the quarter, our comparable RevPAR for all hotels not under renovation, which excludes the Ritz-Carlton St.
Thomas, the Pier House Resort and the Courtyard San Francisco, decreased 2.9%, and comparable Hotel EBITDA for the same portfolio decreased 7.1%. We reported Adjusted EBITDA of $26 million, which reflected an 18.3% growth rate over the prior year, and AFFO per share of $0.37.
Our results were negatively impacted by the hurricanes, renovation disruption at our Courtyard San Francisco, and a difficult year-over-year comp at our Courtyard Philadelphia, which had the benefit of the Democratic National Convention in July 2016.
Turning to our strategic plan, in January of this year we announced a revised strategy with a focus of investing solely in the luxury segment. Evidence has shown the luxury segment has had the greatest RevPAR growth over the long term, which can translate into superior shareholder returns.
We believe that clearly aligning our platform with this segment will differentiate us relative to our REIT peers. Additionally, as part of our revised strategy, we identified four hotels -- the Courtyard Philadelphia, Courtyard San Francisco, Renaissance Tampa and Marriott Plano -- that were designated as non-core to the portfolio.
We stated that our intent was to either reposition or opportunistically sell these hotels. We've made considerable progress in this area. In June, we entered into an agreement with Marriott to convert the Courtyard Philadelphia Downtown hotel to an Autograph Collection property.
The agreement with Marriott calls for the Courtyard to be converted to an Autograph by June 30, 2019 pursuant to a conversion Product Improvement Plan currently estimated to cost approximately $23 million.
We believe that post-conversion, the new Autograph property should realize a $25 RevPAR premium to the current Courtyard hotel and that its estimated $23 million investment should yield an approximate 19% unlevered internal rate of return.
Last night, we announced plans to also convert the Courtyard San Francisco Downtown hotel to an Autograph Collection hotel.
The plan calls for the Courtyard San Francisco to be converted to an Autograph hotel by December 2019 pursuant to a conversion Product Improvement Plan currently estimated to be approximately $30 million -- incremental to capital projects already underway - including updates to the guestrooms, guest bathrooms, corridors, lobby, restaurant, facade, and meeting space -- which will create a distinctive theme and style for the property that is commensurate with the Autograph product.
We believe that post-conversion, the new Autograph property should realize a $50 RevPAR premium to the current Courtyard hotel and that our estimated $30 million investment should yield an approximate 20% unlevered internal rate of return.
We also announced that we completed the sale of our Marriott Plano Legacy hotel in Plano, Texas for $104 million, which represented an attractive all-in cap rate of 7.7%. Additionally, we have announced that we have begun marketing for sale our Renaissance Tampa hotel, and we hope to have more news for you on that process in the near future.
We are pleased to announce this finalization of our strategy for our non-core hotels. During the quarter, we're also able to refinance the mortgage on our Bardessono property and significantly lower the interest rate, resulting in approximately $1 million expected annual interest savings.
Combined with the refinancing we completed in January of this year, year-to-date, we have achieved approximately $13 million in expected annual interest and principal payment savings. This is another example of our team taking advantage of favorable market conditions to proactively manage our balance sheet and add value to our platform.
Turning to capital expenditures, we expect renovation activity to pick up in the fourth quarter with five of our hotels under renovation, including the two impacted by Hurricane Irma. Additionally, we have rooms renovations at our Sofitel Chicago and Courtyard San Francisco, and meeting space renovations at our Capital Hilton.
While this was a disappointing quarter in some ways, none of the issues that we faced impact the medium to long-term outlook for our portfolio, and we believe we are well-positioned to outperform. In conclusion, we believe that we have made great progress in the first nine months of this year in advancing our revised strategy.
Going forward, our team will continue to focus on enhancing shareholder value by delivering solid operational performance and continuing to execute on all aspects of our business plan. I will now turn the call over to Deric..
Thanks, Richard. For the third quarter of 2017, we reported a net loss attributable to common stockholders of $2.7 million or $0.09 per diluted share. For the quarter, we reported AFFO per diluted share of $0.37 compared with $0.38 for the same quarter last year.
Adjusted EBITDA for the quarter was $26.0 million compared to $22 million in the prior year quarter. For purposes of calculating Adjusted EBITDA and AFFO this quarter, we added back the uninsured costs associated with the hurricanes. Those expenses totaled $4.6 million.
We also booked an insurance receivable of $19 million during the quarter, however, we expect this number to change over time as we continue to work with our insurance carriers to assess the physical damage and business interruption claims. At quarter's end, we had total assets of $1.5 billion.
We had $914 million of mortgage debt, of which $48 million related to our joint venture partner's share of the debt on the Capital Hilton and Hilton La Jolla Torrey Pines. Our total combined debt had a blended average interest rate of 4.0% and was almost entirely floating rate. All of our floating rate debt has interest rate caps in place.
As of the end of the third quarter, we had approximately 45% net debt to gross assets and our trailing 12-month fixed charge coverage ratio was 2.1x. All of our debt is non-recourse, property-level debt, and our next hard debt maturity is not until 2019. We ended the quarter with net working capital of $146 million.
As of September 30, 2017, our portfolio consisted of 13 hotels with 3,743 net rooms. Our share count currently stands at 37.3 million fully diluted shares outstanding, which is comprised of 31.9 million shares of common stock and 5.4 million OP units.
In our financial results, we included approximately 6.6 million shares in our fully diluted share count associated with our Series B convertible preferred stock. With regards to dividends, the Board of Directors declared a third quarter 2017 cash dividend of $0.16 per share, or $0.64 per diluted share on an annualized basis.
This equates to an annual yield of approximately 6.6% based on yesterday's closing price, one of the highest in the lodging REIT space. On the capital markets front, in August, we refinanced the mortgage loan on the Bardessono Hotel & Spa with an existing outstanding balance totaling $40 million.
The new loan totals $40 million and has a five-year term. The loan is interest only and provides for a floating interest rate of LIBOR plus 2.55%.
The new loan is expected to result in annual interest savings of approximately $1 million, and when combined with refinancing that we completed back in January, should result in over $13 million of annual interest savings.
We continue to see attractive debt financing markets for high quality, stabilized hotels such as ours and will continue to assess our portfolio for additional refinancing opportunities. This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our asset management activities for the quarter..
the Tampa Bay Buccaneers and the HBO TV series Hard Knocks. Later during my comments, I will address the impact the hurricanes had at Ritz-Carlton St. Thomas and Pier House; however, Renaissance Tampa benefited from people relocating to west Florida as Hurricane Irma approached.
Not only did we increase the top line, but Hotel EBITDA flow-through was also 317% during the third quarter and margins increased by 28%, resulting in a $293,000, or a 30.8%, increase in Hotel EBITDA. This strong bottom line performance was primarily due to productivity increases related to the long length-of-stay groups.
In addition to the outstanding performance of the Renaissance Tampa, I want to briefly mention that our next best performing asset, Bardessono, grew RevPAR 3.3% during the third quarter on the back of 8.4% rate growth. This RevPAR growth represents a 510 basis point increase in RevPAR relative to the luxury northern California market.
Driving rates aggressively on weekends was the main contributor to the increase in RevPAR relative to the market and competitors. Hotel EBITDA growth of 11.9% during the quarter made this property one of the top performers in our portfolio, with a stellar 210% Hotel EBITDA flow-through.
In addition to tight expense management, some Bardessono's strong bottom line performance can also be attributed to complexing positions with Hotel Yountville, including GM, Director of Sales, Controller, Chief Engineer, Food and Beverage Director, Spa Director, Revenue Director, Executive Chef, and personnel in the Human Resources department.
Since the acquisition of this property in 2015, RevPAR has grown 16%. I would now like to discuss Hotel Yountville's performance during its first quarter under our ownership. We closed the acquisition in the middle of the second quarter, and have experienced some expected disruption due to the management handover.
More specifically, RevPAR declined for the third quarter by 6.7%. We now have our sales team and revenue processes in place and are in position to maximize future revenues and profits. Excluding property taxes, which increased due to a reassessment upon sale, expense management during the quarter would have led to healthy EBITDA flow-through.
We are now able to work cooperatively with certain groups that might desire to utilize both of our properties in the market. As Richard discussed, Hurricane Irma significantly impacted both the Ritz-Carlton St. Thomas as well as Pier House. Third quarter RevPAR at the properties declined by 10.8% and 23.9%, respectively.
These two properties lowered our portfolio's RevPAR for the quarter by 140 basis points. Despite the challenging top line performance, both properties were able to maintain profitability. Pier House managed to mitigate losses and recorded 55% Hotel EBITDA flow-through for the third quarter while the Ritz-Carlton St.
Thomas grew Hotel EBITDA by $617,000, or 575%, with Hotel EBITDA flow-through of 174%. Most of the damage sustained by Pier House was landscaping while water did get into the building down to the 3rd floor and a dozen or so rooms were initially out of order -- including a number of suites.
The new landscaping should be completed during the fourth quarter and all rooms came back online during October. The damage at Ritz-Carlton St. Thomas was much more extensive. Three of the guestroom buildings sustained significant roof damage, resulting in substantial water intrusion. Currently, there are only 73 rooms in service.
This number is not expected to materially increase until the completion of an extensive rebuild of the damaged guestrooms over the course of 2018 and 2019.
Reservations for typical guests are currently closed until January 2019, but we are hosting recovery-related business, such as government employees and insurance adjusters; however, it is important to note that we have sufficient property and business interruption insurance over reasonable deductibles that will help make us whole.
Additionally, the performance of the Courtyard San Francisco Downtown continues to be impacted by the ongoing rooms renovation at the property and the renovation of the Moscone Convention Center. Citywide room nights were down 43% compared with last year, but the hotel managed to increase its citywide consumption by 11%.
During the quarter, RevPAR decreased 10.5% resulting in a revenue decrease of $896,000, or 8.3%. Despite these top line challenges, Hotel EBITDA grew $472,000 with 153% Hotel EBITDA flow-through.
In addition to the convention center renovation, the property's guestroom renovation began early in the first quarter of 2017 and will continue into the second quarter of 2018, with approximately 52 rooms out of order every day during the third quarter of 2017; however, we are very excited about the upcoming conversion of the Courtyard San Francisco Downtown to an Autograph Collection hotel by December 31, 2019.
While this hotel increased EBITDA margins 22.6% during the quarter, its conversion is anticipated to boost RevPAR significantly and more closely align the property with our corporate strategic vision.
We anticipate spending approximately $70,000 per key in incremental capital expenditures on repositioning the guestrooms, guest baths, lobby, restaurant and bar, and facade; and Marriott will continue to manage the property following its conversion.
We are thrilled and excited to be able to participate in this compelling investment opportunity to better position our hotel both within our portfolio as well as in the downtown San Francisco area. I would also like to call attention to Sofitel Chicago, where hotel RevPAR declined by 11.3% during the third quarter.
Group room nights declined by 1,800 compared with the third quarter of 2016, leading the hotel to offset the lost business with lower-rated airline crews and discount business. In addition, the Chicago market continues to see a significant increase in luxury supply.
Hotel EBITDA was also negatively impacted by the lower rates and reduction in banquet volume from the core -- group shortfall.
We are heavily engaged at the highest levels of the North American operations team at Accor Hotels in order to optimize the performance of the property and sustain success, and 2018 group rooms revenue pace relative to the same time last year is up 15%.
Lastly, the Courtyard Philadelphia Downtown's top line results for the third quarter were an aberration driven largely by the city hosting the Democratic National Convention in 2016. RevPAR during the third quarter declined by 22.8%. Group room night impact due to citywide shifts was 3,300 and the group rate impact was -27%.
Due to the lack of group base, transient rate also declined 18% during the third quarter. In total, the Democratic National Convention negatively impacted revenues by $1.1 million. This one-off year-over-year comparable does nothing to dampen our excitement regarding the future conversion of this hotel to the Autograph Collection.
During the remainder of 2017, we will continue to invest in our portfolio to maintain competitiveness.
In total, excluding renovation work associated with covered events, we estimate spending approximately $40-$50 million in capital expenditures during the year, which primarily will be comprised of the guestroom renovations to the Courtyard San Francisco and Sofitel Chicago. We also plan to renovate the meeting space at the Capital Hilton.
Additionally, we have identified several highly accretive opportunities to add additional keys within our portfolio. Specifically, we added three guestrooms at the Marriott Seattle Waterfront during the quarter. During 2018, we also -- we plan to add three guestrooms at Bardessono Hotel and five guestrooms at Courtyard San Francisco.
On a final note, we are expecting supply growth in our markets to be approximately 2.8% over the next twelve months and approximately 2.5% over the following twelve months. This concludes our prepared remarks, and we will now open the call up to your questions..
[Operator Instructions] Our first question will come from Tyler Batory with Janney Capital Markets..
Maybe why don't we get started on the asset sale side things. One of you maybe discuss the depth of the buyer pool out there generally.
And then also how did -- Marriott Plano will come in on your expectations just from a valuation perspective?.
Sure, Tyler. So in terms of the depth of the buyer pool, I'd say it's very deep. We had dozens of confidentiality agreements signed by buyers looking at that asset. We had a number of bids come in. We ultimately awarded exclusivity to bid -- the top bid on that asset. So we feel like we definitely got market pricing on that asset.
It was very thoroughly vetted by a number of buyers. The buyers that we saw were private companies. There were some private equity. Clearly, the investment sales market is being fueled by low cost of capital on the debt side, and I think that's really greasing the wheels of that market.
The pricing expectation was in line with what we expected and we were absolutely happy to contract on that basis..
Okay, great, appreciate that. And then just as a follow up a few questions on Napa Valley. Obviously, the wildfire has certainly -- I imagine, it had an impact on result in October.
Are you seeing any cancellations in November and December? And also just on Yountville, I mean, I know there are some issues there with a management transition, what's your thought on when that starts to improve? Is that going to be a lingering issue into 2018? Or do you think you're kind of past that at this point?.
Sure, this is Jeremy. We expect Napa to recover. So we're not worried about it. But specifically at Hotel Yountville, the issue there is that during the sale, the -- most of the team -- neither hotel is for sale and the executive team left the asset.
So the General Manager actually went to a competitive group of properties in the market and there's no Director of Sales, no Revenue management. And we actually tried to work with the seller to try to get Remington in a little bit earlier.
Unfortunately, if you recall, we had to get a variance towards some of the zoning to be able to rebuild some of the keys and so that even extended the sale even further. And so during that process, there just wasn't anyone, there was so many group business. So what we're experiencing today is really a lack of mainly weekday group business.
And so there's a lot of holes that we've had. We expected this by the way, and it's just part of the transition of the sale process. Going forward, we've got teams in place. We're selling the group of properties between Bardessono and Yountville together. We're able to get a little bit more attractive groups.
There's still a little bit of transition I think during Q4, but I think that we've got a position to have a relatively strong 2019..
Our next question will come from Bryan Maher with B. Riley..
Couple of questions. Can you elaborate a little bit more, I know you did talk about it, on Chicago and the RevPAR at the Sofitel being down 11%. But I didn't get the sense from your prepared comments that, that situation is going to necessarily improve materially anytime soon other than the group nights issue.
Can you elaborate a little bit more on that?.
Sure, this is Jeremy. We quoted the group nights statistic, which is partially up 15% for next year. So that's a good trend -- first good trend that we're seeing in quite some time, but I've been extremely disappointed with the performance of this property. It's our worst-performing asset in our collective portfolio that I oversee.
And we've been very direct and candid with the core team, which is really now the prior leadership of Fairmont. And so there's been a temp transition of property.
I can tell you that they have been extremely engaged or dedicating a lot of resources, even coming out-of-pocket to help contribute towards some marketing funds, to get additional business into that asset. But right now, we're having some transition, where we are changing out some very key positions.
So I think that the transition is probably going to go through the renovation, which is going to be the fourth quarter, first quarter and then, of course, we're going to have some easing comparables, I mean year-over-year basis because the property, quite frankly, has underperformed.
So I think the next year, there's a lot of positive trends on the year-over-year basis. But it's not anywhere near where I think the property should be and where we plan it to be. So I think it's going to take a little bit of time. But I won't expect it to be an underperformer for next year. I'm sorry, I think I said 2019, but I meant 2018..
And then on the Renaissance Tampa; I mean, that's been a pretty solid performer for you as I look back over the last quite a few quarters. And I get it that you had some too long group stays in there and the people relocating.
Can you tell me about the thought process of deciding to actually sell that property versus doing something else with it? Because that asset seems to have been doing fairly decently..
Yes. We're very pleased with the performance of the Tampa Renaissance. And it will make a great acquisition for somebody else.
I think the rationale as we've explained is purely related to the overall strategy for our company and positioning us as the highest-quality lodging REIT in the sector, which we've already achieved that position when you look at RevPAR, but selling Tampa Renaissance and investing into a luxury hotel in its place will further put us into that position.
So -- you're right, it's a great performer. We expect it to continue to be a great performer. I think it'll be a very attractive acquisition opportunity for a number of potential buyers out there. And we wish them well with it. But for our portfolio, we're looking to the overall strategy..
And then just lastly, as we think about modeling the company with kind of the issues in the U.S. with not being so sure how quickly full visitation comes back there in St.
Thomas, should we be thinking about modeling these companies more steady-state with the expectation that business interruption insurance will pick up that slack, I mean how should we think about that?.
Hey, Bryan. It's Deric. I think from a business interruption standpoint, there's really kind of two components with that. One is when we get the cash from the carriers, the other is when we can book that as income in our financial statements.
And we are aggressively working with our carriers to make sure we get what we otherwise would've made, if these events hadn't happened. But I would expect that to run at a probably about a quarter lag.
So in terms of timing, I would expect that to be about a quarter lagged where we can actually book that as income versus what we otherwise would have received..
Yes. The only thing that I would add on that is from a cash perspective, we would get that sooner than actually booking the income. So we don't plan to front a lot of cash to fund the renovation. Regarding specifically though, Key West, that's a totally different situation.
It's not nearly the damage we've actually -- we've got the rooms back, as we told you, in service. And last week it ran 80% occupancy. So I think that market is going to come back very strong and very quickly, but time will tell..
[Operator Instructions] Our next question will come from Chris Woronka with Deutsche Bank..
I want to ask you on the Autograph Collection conversions in Philly and San Fran. Can you talk a little bit about what kind of, I guess, protections Marriott is going to give you on territorial? I know some of these soft brands, then a new one comes up and they kind of -- it doesn't count towards the original territorial protection.
So could you just walk us through that?.
Yes, this is Jeremy. I don't know if we can disclose what we were able to negotiate. It could be under confidentiality. But I can tell you that we didn't have a lot of leverage to negotiate in area of protection. I mean, this is an existing Marriott product that we had, Courtyard. And their preference was to keep it as a Courtyard.
We really had to sell them on the up-branding, Philly was very easy for them to accept. San Francisco was one that required a lot of negotiations and request. And really leveraging the relationship we have with Marriott. And so we really kind of had to sell them on the story and the vision.
And the reason is not because they didn't want to be an Autograph. They just had a really profitable Courtyard that they're marking a lot of fees on with the existing structure. And then, I think it's probably easier for them to maybe convert some other hotels in the market to Autograph.
And so those run through their same impact process that they have. But as far as really strong rights to restrict anything, we don't have anything that's really significant. But that market is vibrant, San Francisco is a very strong market. There's not a lot of supply specifically around our hotel.
We are very uniquely positioned and so, I see the trend's been upside with all the technology companies that are relocating down to our neck of the woods, especially with the Salesforce 1 Tower..
And I would add to that you mentioned the characterization as a soft branding. That's really important in this context in that each of these hotels will have its own identity. We're working with branding firms now to come up with an independent name, theme, style and ultimately customer base.
And that's what will really differentiate these hotel products from the competitors in those markets..
Okay, great. And I just want to ask also as we think about when you sell Tampa and redeploying proceeds. I think the last 3 or 4 properties you guys have acquired have been resorts.
Is that a general theme? I mean should we kind of think about that as you look at replacements for Tampa?.
Yes. I would say as we look at what's available in the market where we're seeing the most attractive returns. It is disproportionately weighted towards resort properties at the moment.
I think the CBD opportunities that we're seeing don't seem to have the same return potential, and -- so therefore it wouldn't surprise me if that's where we ended up deploying capital.
That said, we're looking into those markets that have a high enough RevPAR to support our strategy, and we're hopeful that we can find opportunities in gateway markets as well. It's just really a matter to what the market pricing is dictating at the moment..
Ladies and gentlemen, 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..
Well, thank you all for joining us on our third quarter earnings call, and we look forward to speaking with you again on our next call. Have a good day..
Thank you. And again, ladies and gentlemen, that does conclude our conference for today. We thank you for your participation..