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Edited Transcript of AHT earnings conference call or presentation 2-Nov-18 5:00pm GMT

Q3 2018 Ashford Hospitality Trust Inc Earnings Call

DALLAS Nov 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Ashford Hospitality Trust Inc earnings conference call or presentation Friday, November 2, 2018 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deric S. Eubanks

Ashford Hospitality Trust, Inc. - CFO & Treasurer

* Douglas A. Kessler

Ashford Hospitality Trust, Inc. - President & CEO

* Jeremy J. Welter

Ashford Hospitality Trust, Inc. - COO

* Jordan Jennings

Ashford Hospitality Trust, Inc. - Manager of IR

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Conference Call Participants

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* Bryan Anthony Maher

B. Riley FBR, Inc., Research Division - Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Tyler Anton Batory

Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure

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Presentation

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Operator [1]

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Good day, and welcome to the Ashford Hospitality Trust Third Quarter 2018 Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Jordan Jennings. Please go ahead.

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Jordan Jennings, Ashford Hospitality Trust, Inc. - Manager of IR [2]

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Good day, everyone, and welcome to today’s conference call to review the results for Ashford Hospitality Trust for the third 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 the 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 federal securities regulation. 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 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 SEC on November 1, 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 the third quarter of 2018 to the third quarter of 2017.

I will now turn the call over to Douglas Kessler. Please go ahead, sir.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [3]

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Good day, and thank you for joining us to discuss Ashford Hospitality Trust's third quarter progress. I want to begin by discussing our Enhanced Return Funding Program, or ERFP, with Ashford Inc., and providing an update on our success with this highly favorable initiative. Then I will share our quarterly results and other items.

Under the ERFP initiative, Ashford Inc. has committed to provide a meaningful $50 million to the company on a programmatic basis, equating to approximately 10% of each new investment's acquisition price, to be used for the purchase of FF&E of properties owned by the company. We believe the ERFP program has the opportunity to significantly improve returns on hotel acquisitions and benefit us by effectively expanding cash available for future investment. The attractiveness of the ERFP is to make good deals great deals. The existence of this program is also advantageous given improvement in deal flow for properties that fit our focused investment criteria of upper upscale full-service assets. Furthermore, we also see certain key economic data points that continue to be attractive. Progress will depend upon continued strong demand growth and supply stabilization within the context of wage increases.

The financing markets remain favorable and attractive. We have excess corporate cash on our balance sheet, which could be available for opportunistic uses including additional value-added hotel investments. In a very competitive bidding environment for acquisitions today, we see this program providing us with a significant advantage to win deals with accretive returns. We will continue to be opportunistic with our asset base of predominantly upper upscale full-service hotels. We believe in the strategic advantages of a balance between the effective trade-offs of high yields versus high RevPAR for hotel assets. We intend to be successful in our efforts as we balance expected returns, underwritten growth and our cost of capital. To that end, we recently expanded our portfolio with our second transaction that will benefit from the ERFP, the acquisition of the La Posada de Santa Fe in Santa Fe, New Mexico for $50 million. La Posada with its strong Marriot brand affiliation and exceptional amenities is positioned as one of the leading properties in an attractive lodging market with excellent demand and supply characteristics. Consistent with the ERFP, Ashford Inc. is committed to provide us with approximately $5 million of cash for the future purchase of hotel furniture, fixtures and equipment at our properties. Inclusive of the funds provided by Ashford Inc. under the ERFP, we forecast the 5-year leverage neutral IRR on this investment to be an outstanding 24%, based upon various underwriting pricing and timing assumptions, which are subject to change and include, among other factors, property-level mortgage financing, equity investment, corporate-preferred and ERFP funding by Ashford Inc.

Additionally, during October, we announced a committed agreement to purchase the Hilton Santa Cruz Scotts Valley in Scotts Valley, California for $50 million, which we expect will become our third acquisition to take advantage of the ERFP. We find this asset to be very attractive given its location south of the expanding tech market in San Jose and just minutes from Santa Cruz, one of Northern California's most desirable beach communities. We're particularly pleased that this property has attractive amenities and is currently well positioned as the exclusive full-service Hilton-branded asset in the Santa Cruz market. Our asset management team is excited to add these 2 additions to the portfolio, and Jeremy will share more comments on these later.

We believe that these acquisitions are highly favorable investments on their own. However, with the ERFP the returns are even greater. I can assure you that our underwriting efforts continue to be focused, diligent and with the same high standards to improve our portfolio with the best assets for the best value. We strongly believe that the ERFP provides us not only with a competitive advantage but is also structured to substantially enhance shareholder value. Given our approximately 17% insider ownership of Ashford Trust, we believe we have tremendous alignment with shareholders, which encourages us to think and act like owners. Our strategies throughout our 15-year history have consistently focused on ways to create shareholder value. Many of our diligent efforts have been economically transformational and successful over the years. We believe that the ERFP will provide meaningful benefits to better our competitive position and may lead to positive stock price performance growth.

Let me now turn to our third quarter performance, which we are focused to improve upon and drive better results. Our actual RevPAR for all hotels not under renovation increased 0.5%, while comparable RevPAR for all hotels not under renovation decreased 0.4%. Actual RevPAR for all hotels increased 0.2%, while comparable RevPAR for all hotels decreased 6% -- excuse me, 0.6%. For the quarter, we reported AFFO per share of $0.30, and we reported adjusted EBITDAre of $101.7 million. As for our balance sheet, we believe in the benefits of an appropriate amount of nonrecourse leverage to enhance equity returns. Over the past couple of years, we have been very active in refinancing majority of our existing loans to both better the spreads, compared to prior loan terms and extend maturities. We seek to maintain a high cash and cash equivalence balance of between 25% to 35% of our equity market capitalization for financial flexibility. We note that this excess cash balance can provide a hedge during uncertain economic times as well as the requisite funds to capitalize on attractive investment opportunities as they arise.

In addition, as of the third quarter of 2018, net working capital totaled $460 million, equating to approximately $3.78 per share, representing a significant 74% of our current share price as of yesterday's close. During the quarter, we enhanced our financial flexibility and liquidity with a new $100 million revolving credit facility that could be of benefit under certain conditions in our value-added pursuit of assets given the positive impact of ERFP. Also, we recently strengthened our balance sheet by raising approximately $15 million in gross proceeds by advantageously and efficiently issuing shares of common stock pursuant to our at-the-market, or ATM, offering. We continue to make progress on our investor outreach efforts and held a well-attended Investor Day last month in New York. For the remainder of the year and into 2019, 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 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 efficiently managing our balance sheet.

I'll now turn the call over to Deric, to review our third quarter financial performance.

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [4]

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Thanks, Douglas. For the third quarter of 2018, we reported a net loss attributable to common stockholders of $38.2 million or $0.40 per diluted share. For the quarter, we reported AFFO per diluted share of $0.30. Adjusted EBITDAre totaled $101.7 million for the quarter.

Beginning this quarter, we have made some changes to how we report our non-GAAP metrics to be consistent with how our peers report these items. You can see the details in the tables of our earnings release. At the end of the third quarter, we had $3.9 billion of mortgage loans, with a blended average interest rate of 5.5%. Our loans were approximately 9% fixed rate and 91% floating rate. All of our loans are nonrecourse, and we have a well-laddered maturity schedule. Interest rate caps are in place for virtually all of our floating rate loans, including the market value of our equity investment at Ashford Inc. We ended the quarter with net working capital of $460 million. As of September 30, 2018, our portfolio consisted of 118 hotels with 24,903 net rooms. Our share count currently stands at 121.7 million fully diluted shares outstanding, which is comprised of 101 million shares of common stock and 20.7 million OP units.

With regards to dividends, the Board of Directors declared a third quarter 2018 cash dividend of $0.12 per share or $0.48 on an annualized basis. Based on yesterday's stock price, this represents a 9.3% dividend yield, which is among the highest in the hotel REIT space. On the capital markets front, during the quarter, we entered into a new $100 million revolving credit facility. The facility provides for a 1-year revolving line of credit and bears interest at a rate of LIBOR plus 2.65% and can be used for potential acquisitions. Additionally, during the quarter, under our at-the-market equity offering program, we issued an aggregate of 2.4 million shares of common stock. The shares were issued at a weighted average price of $6.38 per share, which we believe is an attractive level relative to our share price yesterday at $5.14, resulting in gross proceeds of approximately $15.5 million.

This concludes our financial review, and I would now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [5]

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Thank you, Deric. Our third quarter performance was affected, in part, by holiday shifts. For example, Rosh Hashanah starting on Sunday and running through Tuesday this year had a greater impact on business travel than Wednesday through Friday pattern last year. Also, Fourth of July occurring on Wednesday in 2018 relative to Tuesday in 2017 had an impact, especially to group business.

Also, I'd like to provide more color on the impact of hurricanes. Last year, our portfolio saw tailwinds in September from the hurricanes affecting Houston, Key West and the surrounding regions. This year, while we may see some positive results during the fourth quarter, the third quarter faced headwinds from Hurricane Florence. And in aggregate, our hotels reported an impact totaling approximately $1 million.

We recently announced 2 acquisitions, La Posada de Santa Fe and the Hilton Santa Cruz Scotts Valley. We just completed the acquisition of La Posada earlier this week. This 157-room hotel with 7,810 square feet of meeting space in Santa Fe, New Mexico is part of Marriott's Tribute portfolio. This distinctively southwestern asset is located in the historic district of Santa Fe. This city is a world-class leisure and art market as well as New Mexico's State capital. Nearby demand generators range from art galleries, retail, restaurants and cultural attractions, including Fiestas de Santa Fe, the International Folk Art Market, the Santa Fe Wine & Chile Fiesta and the Santa Fe Film Festival. The hotel's spa, Sage, was ranked fourth in USA TODAY's best hotel spa rankings. This market has significant hurdles to entry with limited competitive hotels in the pipeline. La Posada is the only full-service Marriott property in the market, and we strongly believe there is an opportunity for Ashford's best-in-class asset management team to add value. Finally, Remington will have the ability to cluster property management with our nearby Hilton hotel, allowing both hotels to benefit from the synergies.

Also, we eagerly await the planned addition of the 178-room Hilton Scotts Valley to our portfolio. The property contains 7,900 square feet of meeting space and is the only full-service Hilton hotel in this submarket. Nearby business generators include Bay Area technology companies, San Jose corporate business and summer tourism to the beautiful Pacific Coast. Leisure business is driven by the famous Santa Cruz Beach Boardwalk, Santa Cruz Wharf, and Monterey Bay National Marine Sanctuary, while the University of California, Santa Cruz and California Certified Organic Farmers' headquarters are also nearby. This asset is positioned in a historically high RevPAR growth market. The competitive set's 8-year RevPAR CAGR has been 9.5%. We believe the hotel is in great condition and has had most major mechanical systems replaced in the last 5 years.

As a final point, the vast Santa Cruz, San Jose submarket which stretches from south of San Jose to Santa Cruz and all the way to Watsonville and Gilroy has 0 competitive full-service hotels in the construction pipeline.

During the last 2 quarters, I have discussed how we have had a large number of hotels under renovation. While this affected our results, we believe the reduced number of upcoming renovations positions us well for the future. I would like to highlight some of the recently completed renovations as well as some other renovations that will be completed soon. During the third quarter, we completed a guest room's renovation at the Hampton Inn & Suites, Phoenix Airport, which began in May. Meeting space renovations at the Hilton St. Petersburg Bayfront, Le Pavillon Hotel and Marriott Omaha. And both the guestrooms and public space renovation at Residence Inn, Jacksonville. Ongoing renovations that are scheduled to be completed in the fourth quarter include: guestrooms renovation at Ritz-Carlton Atlanta, Hilton Tampa Westshore and Hotel Indigo Atlanta Midtown, which includes adding an additional guestroom; Phase 2 of the meeting space renovation at Marriott Crystal Gateway; and both the guestrooms and public space renovation at Residence Inn Orlando, Sea World. This year, we have also completed guestrooms renovation at Renaissance Palm Springs, Shearing Anchorage, Westin Princeton and Marriott Research Triangle Park. We expect both to reduce number of renovations and the improved product we have to offer going forward should have a positive impact on our portfolio.

I'm very pleased to report that, since completing renovations earlier this year, the Marriott Durham Research Triangle Park and Renaissance Palm Springs hotels have exceeded our expectations. During the third quarter, Marriott RTP grew comparable RevPAR 14.1%, with 57% hotel EBITDA flow through. Hotel EBITDA grew 30.2%, which is a rate of return we like to see following our investment. The 14.1% RevPAR growth represents growth of 7.4 and 7.2 percentage points, relative to the Research Triangle Park, Airport, upscale and above change, and the Raleigh-Durham Chapel Hill upper upscale market class, respectively. Similarly, the Renaissance Palm Springs grew comparable RevPAR 24.2% during the third quarter, total hotel revenue grew 32.4% and hotel EBITDA grew $563,000, resulting in outstanding EBITDA margin growth of 877.2%. This 24.2% RevPAR growth represents significant 25.3 and 24 percentage point increases relative to the Riverside and San Bernardino upper upscale market class and the Palm Springs upscale and above change, respectively.

We're also anticipating strong performance results from all the work we continue to update you on regarding our Renaissance Nashville. The first phase of the Renaissance Nashville redevelopment is complete, which returned the grand ballroom and junior ballroom back to the hotel, together with a stunning new conference center lobby. In addition, we are remodeling the lobby and have added a beautiful newly branded restaurant as well as a new 30-seat full-service bar. We're excited about the ongoing urban revitalization of the city block surrounding this hotel. For the remainder of 2018 and into 2019, we will continue to invest in our portfolio to maintain our competitive position among our peers as well as identify areas to create value, whether through revenue and cost initiatives, energy conservation and brand negotiations. In total, we estimate spending approximately $185 million in capital expenditures during this year.

Finally, I would like to address industry trends on which we are currently focused through the remainder of the year in our portfolio. While we're seeing some pickup in group ADR, this represents just a small portion of our portfolio. Transit demand remains the key driver to our performance and looking at the fourth quarter for the entire portfolio, we see data points leading to similar performance to the third quarter.

That concludes our prepared remarks, and we'll now open the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Chris Woronka at Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [2]

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I want to ask on the ERFP, you've done a few deals with that now. And the question is, if you continue to look at other acquisition opportunities, and I'm sure you screen a lot, what's the -- where is the line where -- is there a way to quantify maybe what percentage of deals you look at -- the ERFP kind of gets you over the top?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [3]

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Chris, it's Douglas. So we're obviously looking at deals in the pipeline today. We see the pipeline to be a more fluid pipeline at this period of time in the quarter and heading into the end of the year than we have, let's say, earlier in the year. I think deal flow is a little bit more available. We're obviously looking at every deal currently applying the ERFP, if I get your question right, in terms of what percentage of the deals are we looking to apply the ERFP.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [4]

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Yes, well -- I'm sure. Yes, I think the question was just kind of, is the ERFP going to help you get to the finish line on 1 out of 10 deals or 1 out of 20 or 1 out of 5. Is it -- I'm trying to get a sense as to how much it can bridge the gap and make it -- make a deal you're looking at something that you move forward with.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [5]

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Well, clearly, the ERFP, we feel gives us a competitive advantage in bidding. And it's a very competitive environment today for hotel transactions. I don't think you'll see us change anything that we do in terms of the amount of focus and diligence that we apply to transactions. The 3 that we've announced, 2 that we've closed on, the Hilton Alexandria and the Hilton Santa Cruz, I think are prime examples of making good deals great deals and the advantage that this program provides. Also, I believe that the Hilton Santa Cruz property falls into that same category that we expect to close on shortly. I can't really calibrate for you what incremental percentage the ERFP provides us to win a deal versus another deal. But I can tell you this, we are mining the market, we're looking for accretive value-added opportunities to enhance the performance of our portfolio.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay. Yes, that's helpful. And a question probably for Jeremy. I know you guys have been -- had a rolling CapEx program for a long time and try to stay ahead of the curve. But we've heard from more than one of your peers that there are -- there is more CapEx coming up and some of the brand requirements are moving up. Can you kind of give us a general sense, and maybe if you need to break it down between full service and select service, because it seems like more of the work is starting to come on the -- maybe more on the select side. Is there anything you can comment on there?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [7]

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Yes, sure. I think that we've done a good job of investing in our portfolio over the last several years. We've done a lot of the shower upgrades that were -- have been required by the full-service brands. And so a lot of that work is behind us. We still have some hotels that we need to continue to kind of do that and make that investment. On the select-service side, it's not a huge number. We know that there are some things that are talked about on some of the committees that we're hearing from the brands of new signage requirements and some exterior work that is being required as well. But we do that as part of our extension process. So if we have a franchise that needs to be extended, then that's where we might be kind of early adopters in some of that stuff. But most of our franchise agreements were 5 years out minimum. And so what we would like to do is wait until the last point in time that we actually have to make those investments. So as far as looking from -- where we look on a go-forward basis, I would expect our CapEx requirements to go down next year and for the foreseeable future, from what we spent this year and in previous years, if that helps.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [8]

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And Chris, it's Douglas, just to add a couple of comments to that. Obviously, we have been spending capital on our assets to maintain and enhance their competitive position. And when you look at the trend, just going back to 2017, because it takes time to complete these renovations, it takes time to ramp them back up and capture more market share. I'll make the point that in spite of all the renovation activity that we've had going on, we've basically maintained the same market share this quarter, which I think is a very strong positive indication of our capabilities of managing the renovation process and making it as least disruptive as possible. But when you look at just the order of magnitude, we have 10 fewer hotels under renovation going into the fourth quarter than we had a year ago. And when you look at where we started 2018 versus the fourth quarter projected for this year, we have 7 fewer hotels expected to be under renovation and a 35% reduction in the rooms that would be under renovation targeted. So again, to Jeremy's point, we've had a heavy renovation schedule. We think it will provide tailwinds for us. But there has been some disruption in terms of the impact but we've tried to mitigate it relative to our RevPAR penetration index to the market share.

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Operator [9]

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We'll go next to Bryan Maher at B. Riley FBR.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [10]

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Kind of following on that line of questioning from Chris. What roughly -- and sorry if I've missed this, what's roughly with the breakdown for the 28 CapEx between project and maintenance? Maybe as a percentage or as a dollar, however you want to show it.

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [11]

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When you say project to maintenance, you're saying like a ROI versus maintenance CapEx?

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [12]

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Correct.

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [13]

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Okay. A decent amount. I mean I would say the vast majority of it is going to be just the necessary evil of being in the hotel real estate space, and I would say that's probably 90% plus of what we've invested in our portfolio. And then maybe the next 10% roughly would be either ROI projects, energy conservation initiatives. We haven't done many repositionings just recently, and so there's a few that we're looking at on a go-forward basis. But I would say at least 90% is really just maintenance CapEx, required CapEx by the brands and so that's probably the best answer I can give you.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [14]

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And then for 2019, are there any projects out there, ROI projects, upscale? Anything even close to what you did with Nashville this past year?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [15]

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Not really for 2019. There's one potential repositioning we're looking at, and it's something that we are pretty far down the road on, that could be a good project for us. But we haven't necessarily pulled the trigger on that yet.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [16]

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Okay. And then kind of shifting gears to capital recycling. It seems like your acquisitions have been skewing, full-service, upper upscale, upscale type properties, not so much select serve. Douglas, is there any update with respect to your outlook for select-service sales? I mean, a number of your competitors, who own a lot of select service, continue to talk on their conference calls about the wide bid-ask spreads, not being able to mix the pencil. Any thoughts on like dropping your ask a little bit to kind of facilitate some capital recycling there?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [17]

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Great question. First of all, as to our recent acquisition activity is precisely consistent with our focused approach of predominantly focusing on upper upscale full-service hotels. So you should not expect us to be acquiring select-service hotels. So what you've seen us do is consistent with what we expect to be doing going forward. As for the bid-ask spread on select-service properties and any comments made by our peers, the question is to whether we would consider dropping our ask would imply are we actively marketing something currently. And so I think what we've been telling folks is that we are financially calibrated with our sales efforts, which means that we look at the sort of 360-degree view of the positives and negatives of selling assets. So for example, we have to evaluate what's the price that we can get, how are we going to redeploy those net proceeds, what's the impact on our cash flow, what's the opportunity cost that we have in selling an asset and what's the opportunity that we can use to redeploy those proceeds. So I think we're very financially driven in terms of the sales efforts when we engage in them, whether it's for a full-service hotel or a select-serve hotel. And so at this point, I think we're still trying to be opportunistic with either holding the portfolio, selling individual one-off properties or looking at portfolio trades. And it's a pretty dynamic market still for select service. So I'm not sure what the experience many of our peers have had with respect to their sales efforts or what their pricing expectations are. But it's a fairly liquid market out there and we continue to be monitoring the opportunities within our portfolio.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [18]

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And given the decline in the share price over the past just few months really, at what point do you seriously consider, and I know you just did some ATM issuances higher, but moving back towards the share repurchase mode?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [19]

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I don't think there's a board or management team out there that gets the share repurchase opportunity more than we do. We clearly exhibited more strength in the strategy that we implemented during the financial crisis to capitalize on share buybacks. And so we clearly have a view as to the benefits that share buybacks can provide. But we also know that research has shown that not all buybacks are in the shareholders' best interest. And I think there is a report that McKinsey put out there that analyzed this thoroughly. The good can be like what we experienced when we bought back shares during the financial crisis. We bought back half of the company's shares and the outcome of that for our shareholders was a meaningful return when the recovery happened. The flip side of that for a portfolio of our size is that it reduces our liquidity, and the size of our platform, we think, could benefit by being larger. Scale matters in the market today. So I think you'll see us look at share buybacks when the benefits can outweigh the cost, and it would be something meaningful that would happen. And presumably, one good example of that could be when and if the next recession hits. But just for us to sort of dribble out a share buyback to indicate to the market that we think that our shares are undervalued, I think that the research would indicate that the benefits to shareholders of doing that are unproven.

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Operator [20]

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(Operator Instructions) We'll go next to Tyler Batory at Janney Capital Markets.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [21]

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So I'm wondering if you guys can elaborate a little bit more on the comments you made at the end here on the transient demand trends into fourth quarter? And certainly, a lot of investors concerned out there about slowing economy potentially, cycle getting a little bit long in the tooth. I mean, are you seeing anything that indicates that maybe the third quarter compared to the second quarter was a little bit slower? And then I guess, I'm wondering if you can maybe talk a little bit more about what you're seeing into the fourth quarter?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [22]

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Sure, this is Jeremy. If you looked just right in the fourth quarter, I think that we're seeing something very similar to what we experienced in the third quarter. That's what we discussed in the prepared remarks. But going into 2019, the group positioning that we have at -- within the portfolio is strong. The ERFP process that we're going through right now with special corporate negotiated rates is strong. We expect to have some decent ADR increases. We are seeing growth in business transient. So when you're looking specifically, and what we've seen in the third quarter, we had growth in our business transient segment as well as our retail segment. And so some of the declines have been in some of the discount and lower pricing segments. So I think those trends are good. We just did have a little bit of tough comparisons, when you look at what we had in the previous quarter last year in 2017. We did get a lot of short-term pickup in -- from disaster-recovery efforts associated with Irma and Hurricane Harvey. And if you look at the markets that really underperformed during the quarter for us, those were the ones that benefited disproportionately last year, and they will continue to provide tough comparables for us, October and November time frame. But specifically, when you look at where we want to see strength, we want to see it in the business transient segment, we want to see it in the high-rated retail segment and we went to see it in group, which is what we are seeing.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [23]

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Okay, great. That's helpful. And then can you also provide an update on the Marriott, Starwood integration, any issues that are going on there?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [24]

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Sure, I can do that. Most of that is going to be behind us by the end of the year. They did have a big consolidation, I think the day was August 18, where for the first time, you could go online and book directly Starwood Hotels on Marriott.com. It still has been a challenging integration. I do want to commend Marriott on handling the integration, I think they've done a fantastic job. You're merging and consolidating so many different systems, so many different hotels, so many different technologies. And so anytime you do that, there's going to be a lot of challenges associated with it. We did have some headwinds during the quarter if you look specifically at our legacy Starwood Hotels, 8 out of those 10 hotels did lose RevPAR index. The decline was over 500 basis points. So they did a little bit better maybe than the previous quarter. And that's because for part of the quarter, we at least had the benefits of Marriott's system, and we have seen a good amount of increase in brand.com bookings for our Starwood Hotels. The challenge is, is that for this quarter most of those bookings are going to be for the -- benefit for the fourth quarter, and we didn't experience the actual hotel stay necessarily in the third quarter, because the average booking window is about 3 weeks. So anyway, we are very optimistic. We are -- most of the challenges we think are behind us, there'll be a little bit of headwinds in the fourth quarter. And then 2019 and beyond, we think that our Starwood Hotels will disproportionately benefit from the integration.

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Operator [25]

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We'll go next to Robin Farley at UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [26]

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Actually, that covered my question as well.

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Operator [27]

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And we'll move next to Michael Bellisario at Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [28]

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Can you guys help me understand the ATM issuance, maybe why you issued stock. And I guess I'm coming from, at the angle of -- I presume you think the stock's worth a lot more than mid-$6 per share. We certainly think so. Kind of maybe a bit more on your motivation to sell stock at these levels would be helpful.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [29]

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Sure, I'll comment and then I'll have Deric add to it. I think that when you look at the benefits of the ERFP, it enables us to accretively deploy capital at that share price. And I think that we're looking to enhance the returns of the portfolio by buying high-quality, strong RevPAR, strong returning assets. And that ERFP additional capital really sort of changes the economic model for us. And when we run those share prices through that model, it's -- it has a positive outcome. So it's really just kind of a relative cost of capital with the benefit of the ERFP structure.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [30]

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So it is kind of fair to assume then, let's just say, if those deals are 20% higher returns, all else equal, you're fine selling stock maybe 20% below where you otherwise would have considered selling it. Is that a fair way to think about it?

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [31]

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Well, I think your comment about, are the returns higher, I think when we rolled out the ERFP program, we certainly outlined what the potential numerical benefits are of the change in the return structure, and they're substantial. So because of that it gives us more leeway to evaluate deals at slightly different stock prices than what we otherwise would have been able to do without the ERFP. So it's not necessarily a direct correlation between if we think the returns are 20% better, are we going to issue stock 20% lower than where we otherwise would have. But that type of thought process certainly factors into our model applications.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [32]

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Yes, and I would just add Mike. As you know, we focus on total return accretion when we think about capital allocation. And as we looked at raising capital at that price, we look at, if we felt like our shareholders were going to better off if we had raised capital at that level and utilized it for the return opportunities that we're seeing with these ERFP deals, so that's the way we analyze it. We look at them on a total return basis. And if we're raising capital and deploying it, at that basis we think our shareholders will ultimately be better off because of it.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [33]

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That's helpful. And then can you just remind me where your leverage stands today relative to the 55% to 60% target you have?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [34]

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Yes, so we look at on a net-debt-to-gross-assets basis. And at the end of the quarter, we were a little bit above the high end of that target, so we were around 64%, 65%. So we are above the targeted range, which is something that we are paying close attention to as we manage the capital structure.

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Operator [35]

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And that does conclude the question-and-answer session. At this time I would like to turn the conference back over to management for any closing remarks.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [36]

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Sure. Well, thank you for joining today's call, and we look forward to speaking with you again next quarter as well as seeing those of you who may be attending NAREIT next week. Thank you.

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Operator [37]

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And that does conclude today's conference. Again, thank you for your participation.