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Edited Transcript of AHT earnings conference call or presentation 24-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Ashford Hospitality Trust Inc Earnings Call

DALLAS Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Ashford Hospitality Trust Inc earnings conference call or presentation Friday, February 24, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joe Calabrese

Ashford Hospitality Trust, Inc. - Financial Relations Board

* Douglas Kessler

Ashford Hospitality Trust, Inc. - CEO

* Deric Eubanks

Ashford Hospitality Trust, Inc. - CFO

* Jeremy Welter

Ashford Hospitality Trust, Inc. - EVP of Asset Management

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Conference Call Participants

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* Ryan Meliker

Canaccord Genuity - Analyst

* Robin Farley

UBS - Analyst

* Tyler Batory

Janney Montgomery Scott - Analyst

* Michael Bellisario

Robert W. Baird & Company, Inc. - Analyst

* Bryan Maher

Craig-Hallum Capital Group - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Ashford Hospitality Trust fourth-quarter 2016 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead, sir.

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Joe Calabrese, Ashford Hospitality Trust, Inc. - Financial Relations Board [2]

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Thanks, Sheena. Good day, everyone, and welcome to today's conference call to review the results for Ashford Hospitality Trust for the fourth quarter 2016 and to update you on recent developments. On the call today will be Douglas Kessler, 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, was 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 than those anticipated.

These risk factors are more fully disclosed -- or discussed with the Company's filings and the Security Exchange Commission. The forward-looking statements included in this conference call are only made as the date of this call and the Company is not obligated to publicly update or revise them. In addition, certain terms used in this calls 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 February 23, 2017, 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. This communication does not constitute an offer to buy or solicitation of any offer to sell securities. This communication relates to the proposal which Ashford Trust has made for a business combination transaction with FelCor that is supported by Ashford, Inc.

In furtherance of this proposal and subject to future developments, Ashford Trust, Ashford, Inc. and if a negotiated transaction is agreed, FelCor, may file one or more registration statements, prospectuses, proxy statements or other documents with the SEC. This communication is not a substitute for any registration statement, prospectus, proxy statements, or other document, Ashford Trust, Ashford, Inc. or FelCor may file with the SEC in connection with the proposed transaction. Investors and security holders of Ashford Trust, Ashford, Inc. and FelCor are urged to read carefully the registration statements, prospectuses, proxy statements and other documents that may be filed with the SEC.

If and when they become available, they will contain important information about Ashford Trust, Ashford, Inc. and FelCor, and the proposed transaction. Investors and security holders may obtain free copies of these documents if and when they become publicly available, and other related documents filed with the SEC at the SEC's website at www.sec.gov. Ashford Trust and Ashford, Inc., and their respective Directors and Executive Officers, may be deemed participants in the solicitation of proxies in connection with the proposed transaction.

You can find more information about the Directors and Officers of Ashford Trust, Ashford, Inc. and FelCor in the definitive proxy statements for the most recent annual meetings filed with the SEC. These documents are available free of charge at the SEC's website at www.sec.gov.

Additional information regarding the interest of such potential participants will be included in one or more registration statements, proxy statements, tender offer statements or other related documents filed with the SEC, if and when they become available. I will now turn the call over to Douglas Kessler. Please go ahead, sir.

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

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Good morning, everyone, and thank you for joining us. First of all, I'm enthusiastic about my new role as CEO and look forward to Ashford Trust's future. Before I review our results of the fourth quarter, I'd like to spend some time discussing our recent public offer to acquire FelCor Lodging Trust.

We have long thought that a combination of our two companies make great strategic and financial sense. In fact, we first approached FelCor in 2011, but we were met with resistance. It has remained on our radar and after the departure of their CEO last year, we reengaged with FelCor's Board about a possible combination.

Since October, we have pursued in good faith an engagement with FelCor on a friendly basis with a hope that they would reciprocate. We've been disappointed they've not been receptive to a combination that we strongly believe would result in significant value creation for both sets of shareholders.

As a result, we decided to take our proposal directly to shareholders. The highlights of our offer on the announcement date were as follows. A $9.27 per share price, based upon a fixed exchange ratio of 1.192 Ashford Trust shares per FelCor share, which equated to a 28% premium to the FelCor share price.

FelCor shareholders would also receive 20% ownership in our advisor, Ashford, Inc. along with warrants to purchase additional Ashford, Inc. shares to enhance alignment of interests and share on the performance of Ashford, Inc. shares. We believe the meaningful premium, the potential for significant future upside via a stock-for-stock deal, a 138% increase in FelCor's pro forma dividend, coupled with direct ownership in the advisor, delivers compelling value and alignment to FelCor shareholders.

It is also worth noting that there's approximately 67% cross-institutional shareholder ownership in the two companies, which further supports the case for strong shareholder acceptance of this transaction. What makes this an extremely compelling transaction for both sets of shareholders are expected operational and G&A efficiencies estimated at $18 million to $30 million annually with $18 million guaranteed by the advisor, Ashford, Inc.

We have a proven track record supporting what we believe is a better plan for FelCor's assets. Our relative shareholder returns speak volumes. For Ashford Trust shareholders, we expect this transaction to provide the same aforementioned operational and G&A efficiencies.

Our success on operational improvements on prior transformational transactions, such as CNL Hotels and Highland Hospitality, is proof of our capability to create shareholder value. We see this offer to be attractive pricing for high-quality, historically under-managed assets. We anticipate that there could be EBITDA multiple expansion due to higher RevPAR and increased common stock trading liquidity.

We would look forward to applying our asset management team skill set to enhance the value of our portfolio. Given the larger scale of the combined company, we anticipate having greater negotiating leverage with brands and vendors to drive portfolio value, as well as enhanced access to capital markets. All of these mutual benefits raise the question we have heard from several investors and analysts, if the industry doesn't consolidate with these two Dallas-based platforms here and now, then when and where?

I want our shareholders to know that everything that we're doing here in regards to this transaction is focused on creating value. Period. We see that value can be captured by the current shareholders of Ashford Trust and at the same time maximize value for the current shareholders of FelCor. We suspect that over the years there's been significant value leakage at FelCor.

We have seen it at a distance as a peer company in the industry and now feel it directly as one of the top five shareholders of FelCor. We believe this transaction is the best way forward for FelCor. We expect that our proposed transaction stops of value leakage from the historically poor capital allocation and balance sheet management track record in numerous ways. First, we believe that our significant premium of 28% is a highly attractive price and well above historical average premiums for REIT stock-for-stock transactions, which are more typically in the 10% to 15% premium range.

We put our best foot forward right out of the box to communicate to the FelCor Board, and now its shareholders publicly, a full and fair offer that is serious and attractive. We are quantitatively driven here at Ashford Trust and the numbers speak for themselves on this proposed transaction.

We simply do not see what strategic decisions FelCor can make over the next few years as a stand-alone company to exceed the returns associated with this premium alone, not even including the sizable operational synergies and benefits that should come with improved size, scale and liquidity. Second, we believe our stock-for-stock offer maximizes the proceeds that a buyer can provide to FelCor shareholders and removes potential value leakage that could come from a cash offer.

If a cash buyer purchases the company and desires to increase leverage to achieve their return hurdles, we anticipate they could possibly be forced to pay a make-whole provision of approximately $140 million. That is an estimated dollar per share value leakage from FelCor shareholders. Our offer is intended to prevent this from happening.

Third, we believe sub-optimal asset management execution has caused value leakage. Just take a look at the announced full-year 2016 hotel EBITDA multiples -- excuse me, hotel EBITDA numbers. Ashford Trust achieved total EBITDA flow throughs of 56% for the year, while FelCor achieved EBITDA flow throughs of just 16%.

That is 4,000 basis points of flow through difference. As we noted it in our investor presentation from earlier this week, since 2010, our average annual EBITDA flow throughs are approximately 2,000 basis points higher than FelCor. That is significant value leakage that FelCor shareholders seem to be experiencing in those assets and significant potential value creation for a combined company under this Management Team.

It is further worth noting that the data we have seen shows that over 80% of FelCor's institutional shareholders own positions in externally managed lodging REITs with advisors such as Ashford, Inc. and over 90% of them have ownership in an externally managed REIT, which we conclude demonstrates broad acceptance by their shareholders our existing structure. Fourth, we believe we can stop the value leakage that comes from poor capital decisions.

We do not think that FelCor's strategy to redevelop the Knickerbocker and buy other New York City assets several years ago has proven to be successful. We strive to make sure that our capital investment efforts are disciplined. We question their track record of managing their capital structure.

They were unable to pay their preferred dividends for years. They issued large amounts of dilutive equity during the financial crisis. All of these decisions have combined and compounded.

Over the past ten years, our capital allocation decisions have allowed us to be one of the best performing lodging REITs, outperforming FelCor by approximately 184% and our lodging peers by 44%. Decisions matter. How you spend precious investor capital matters.

We believe that our proposed transaction will enhance rather than leak value. Fifth, academic studies and industry data suggests that larger market capitalization companies trade at higher valuations. We anticipate that the combination of the two companies will lead to a stock with materially better liquidity, which we believe could lead to a higher valuation.

Our goal is for the FelCor Board to appropriately consider our proposal and recognize the benefits of this offer for their shareholders. However, given the Board's current unwillingness to engage with us, we have also nominated our own competing slate of highly qualified and independent directors to stand for election. We believe our nominees, if elected, will evaluate all options to maximize value at FelCor and will be prepared to engage with Ashford Trust in a more meaningful fashion in accordance with their fiduciary duties.

Our actions and 4.5% ownership of FelCor demonstrate our strong conviction to advance this combination to create significant shareholder value. We've posted a presentation on our website that addresses the compelling strategic operational and financial merits of this transaction and I encourage you to review it. We are pleased that FelCor sent out their release this morning highlighting their primary concerns with the proposed transaction.

We've heard these concerns several times, have provided solutions to each one of them and have been unable to advance further with their existing transaction committee. We're also pleased that FelCor chose to disclose their primary concerns because we hope investors can now see how solvable these concerns are and why we believe there's an easy path to consummating this transaction. The concerns of their Board seem to be more on form rather than substance.

We believe our 28% premium offer is attractive and above historical premiums for stock-for-stock REIT mergers. So if the issue is not price, then what are their concerns? Let's walk through them one by one, as we have already done with FelCor, and see if we can perhaps make some progress in this transaction by discussing them publicly.

Number one, they seem to argue that the price we're offering is so attractive that it is dilutive to Ashford Trust's own shareholders. As we've explained many times to our own investors as well as to their transaction committee, we look at every transaction fundamentally on a leverage-neutral basis. We believe that is the best way to look at the underlying merits of a deal without being skewed by the impact of leverage.

On that basis, we believe this is accretive to both stock price and AFFO per share for our shareholders. This transaction is a deleveraging transaction for us. It should drop our net debt to EBITDA by over one turn and will reduce our net debt to gross assets

It should put us towards the lower end of our targeted leverage range and we like that. Because of that deleveraging it may be slightly dilutive to AFFO share, but less than they claim. And while we believe that investors care about AFFO per share, we believe they primarily care about total returns, and from a total return perspective, this transaction is highly accretive to everyone involved.

So their first concern is easily answered. Number two, they argue that external management fees will negate synergies. FelCor has a current total G&A run rate of approximately $32 million. We estimate the base management fees paid to Ashford Hospitality Trust, Inc. will be approximately $18 million, an estimated incremental G&A cost of $3 million, a total of approximately $21 million.

That is potential G&A savings of $11 million. When you include potential operational synergies, we believe they're between $18 million and $30 million of total G&A and operational synergies as part of this transaction. Ashford, Inc. believes so strongly that it can achieve at least $18 million of various G&A and operational synergies that it is willing to guarantee them for a year.

These synergies will need to be repeatable savings, not one-time savings as we've told FelCor's transaction committee. Also, they claim Remington, our affiliate property management company, will be taking over management contracts giving Ashford, Inc. additional fees in the future. Our understanding is that nearly all their properties are brand managed and as a result Remington will not be taking over management of those assets.

In the end, we are confident that we can run the FelCor platform for materially less than what their management team can today. Their second concern is easily answered as well. Number three, they argue that Ashford, Inc. profits disproportionately compared to Ashford Trust and FelCor. As we just previously noted, we believe Ashford, Inc. can run the FelCor platform for materially less than they can today.

Not only can we run it for less, but we believe we can run it in a far superior manner, given our historical track records both from a shareholder return perspective and an operational perspective. In the transaction proposal FelCor shareholders would effectively receive 25% ownership in Ashford, Inc. plus additional warrants. So any increase in the value in Ashford, Inc. would directly benefit FelCor shareholders.

For them to say that, quote, neither FelCor nor Ashford Trust shareholders would be compensated, end quote, is both false and disingenuous. We believe strongly that there should be alignment between the REIT and its advisor and our proposed structure accomplishes this quite clearly.

Their third concern is easily answered as well. Number four, they argue that the combined company will have, quote, extremely high leverage, end quote. As I mentioned earlier, this is a deleveraging transaction for us.

We believe that running a lodging REIT in the 55% to 60% net-to-debt to gross asset range makes both strategic and financial sense. Our track record proves this. FelCor says that the leverage of the pro forma company would be contrary to their stated strategy, but we believe our structure will generate better returns.

In the end, we believe that investors care more about producing value and shareholder returns and less about what is your exact leverage level. In addition, if slightly higher leverage is such a problem for REIT investors, why do nearly two-thirds of their institutional shareholders currently own Ashford Trust stock? Their fourth concern is easily answered as well.

Number five, their final concern is that there's disproportionate governance and that the pro forma company will have only three FelCor Board members. Our belief is that three Board spots is quite generous given, one, we are paying a 28% control premium for the company, and, two, the underwhelming track record of FelCor's Board of Directors. Their final concern is easily answered as well.

In sum, we find all five of their concerns easily answered, which is why we felt such a frustration at their refusal to engage further and unwillingness to even share property-level information after signing an NDA or to move forward to create value for both shareholders. We are hopeful that now this debate is in the public, their investors can help the FelCor transaction committee understand there's a very clear path to get a deal done and they should be fully engaged with us to do so.

We also hope Steve Goldman taking over as CEO, that FelCor will be more willing to constructively engage with us. With that said, I will now like to discuss our results with the fourth quarter. Our fourth-quarter RevPAR growth for all hotels not under renovation of 3.2% was in line with the overall industry performance and we delivered solid comparable hotel EBITDA flow throughs of 51%.

We also saw our comparable hotel EBITDA margin expand by 46 basis points. We're very pleased with these results and believe they speak to the quality of our portfolio as well as our asset management capabilities. This Management Team has a long track record, since our IPO, of creating shareholder value and over the years we have worked on various ways to maximize the value of our existing assets while also looking for accretive hotel investment opportunities, and maintaining capital markets discipline.

Shareholders have benefited from our efforts since our IPO, given that Ashford Trust has achieved an estimated 186% total shareholder return, compared to 108% return for our peers as of yesterday's close. Key to that outperformance is the exceptionally high level of alignment that is created by our 18% insider ownership, which is the highest in the hotel REIT space, and more than 8 times the peer average.

Again -- excuse me. Add to the incentives to create shareholder value and outperform our peers that are structured into our advisory agreement with Ashford, Inc. and it is easy to see why we think our management structure and Management Team are competitive advantages for our platform and are key to the shareholder value that we have consistently created for our investors.

Our strategy remains unchanged and in an effort to create shareholder value, we will continue to focus on acquiring upper upscale full-service hotels, opportunistically execute on our sale of our non-core select service properties, continue to target net debt to gross assets of 55% to 60% and targeted cash and cash equivalents balance between 25% to 35% of our equity market capitalization for financial flexibility as we believe this excess cash balance provides a hedge in uncertain economic times as well as providing dry powder to capitalize on attractive investment opportunities as they arise.

As part of our refined investment strategy, Trust previously announced it would opportunistically divest of it's non-core select service assets over time. In the fourth quarter of 2016 we completed the sale of three more non-core select service hotels for an aggregate value of approximately $49 million. In early October, we closed on the sale of the 162-room SpringHill Suites Gaithersburg in Gaithersburg, Maryland, for approximately $13.2 million. The consideration received from the sale was a combination of cash and approximately $2 million class B common units of the Company's operating partnership.

The Company also paid off approximately $10.4 million of debt associated with the property. Also in October, we completed the sale of the two hotel portfolio comprised of the 151-room Courtyard Palm Desert and the 130-room Residence Inn Palm Desert for $36 million. The portfolio had an existing debt balance of approximately $24 million that was assumed by the buyer.

After debt assumption and transaction costs the net proceeds were approximately $11 million. Since the announcement of our disposition strategy, we have closed on the sale of nine non-core select service hotels for approximately $210 million resulting in the pay down of approximately $153 million of associated debt. Operationally, we are pleased with the strong performance we are experiencing at our Hyatt Savannah property, as well as a couple or our more recently required hotels, the W Atlanta downtown, the W Minneapolis and the Le Meridian Minneapolis.

While Jeremy will provide more detail on this in a moment, the performance of these and other assets, as well as the low exposure to high supply markets including New York, Miami, Houston, Seattle, further speaks to the benefits stemming from the quality and diversity of our portfolio. Looking ahead there seems to be anticipated strengthening for US economic fundamentals and a more positive outlook.

Against this backdrop, we're committed to maximizing value for our shareholders as we focus on generating solid operating performance, continuing to be opportunistic on transactions and proactively managing our balance sheet. I'll now turn the call over to Deric to review our fourth-quarter financial performance.

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

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Thanks, Douglas. For the fourth quarter of 2016, we reported a net loss attributable to common stock holders of $57.3 million, or $0.61 per diluted share. For the full year of 2016, we reported a net loss attributable to common stockholders of $88.7 million, or $0.95 per diluted share. For the quarter, we reported AFFO per diluted share of $0.16, and for the full year of 2016 we reported AFFO per diluted share of $1.51, compared with $1.44 for the full year of 2015.

This result reflected a 5% growth rate over the prior year. Adjusted EBITDA totaled $84.1 million for the quarter and adjusted EBITDA for the full year of 2016 was $431.1 million, which reflected a 6% growth rate over 2015. At quarters end, we had total assets of $4.9 billion. We had $3.8 billion of mortgage debt with a blended average interest rate of 5.4%.

At the end of the quarter, our debt was 15% fixed rate and 85% floating rate, all of which have interest rates caps in place. Including the market value of out equity investment in Ashford, Inc. we ended the quarter with net working capital of $525 million.

As of December 31, 2016, our portfolio consisted of 123 hotels with 25,986 net rooms. Our share count currently stands at 115.1 million fully diluted shares outstanding, which is comprised of 96.4 million shares of common stock and 18.7 million OP units. We have 19.4 million OP units, but as a result of the current conversion factor being less than one for one, these units are convertible into approximately 18.7 million shares of common stock.

With regards to dividends, the Board of Directors declared a fourth quarter 2016 cash dividend of $0.12 per share, or $0.48 on an annualized basis. Based on yesterday's stock price, this represents a 6.5% dividend yield, one of the highest in the hotel REIT space. The adoption of a dividend policy does not commit the Company to declare future dividends and the Board will continue to review the dividend policy on a quarter-to-quarter basis.

On the capital markets front, in early October, we refinanced four mortgage loans with existing outstanding balances totaling approximately $415 million. The previous mortgage loans that were refinanced had final maturity dates in April, 2017, and the JPMorgan Chase Marriott Fremont loan with a final maturity date in August of 2019. The mortgage loans were refinanced through a new -- one new mortgage loan totaling $450 million with a two-year initial term and four one-year extension options subject to the satisfaction of certain conditions.

The loan is interest only, provides for a floating interest rate of LIBOR plus 4.55% and contains flexible release provisions for the potential of sale assets. The next non-extendible debt maturity for the Company is a $16 million loan that matures in June of 2017. After that, there are no other non-extendable maturities for 2017, and only $197 million that matures in 2018.

Additionally, in mid-October we completed an underwritten public offering of 6.2 million shares of 7.375% Series G cumulative preferred stock at $25 per share. We are currently holding the proceeds from this capital raise consistent with our higher liquidity strategy. 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 Welter, Ashford Hospitality Trust, Inc. - EVP of Asset Management [5]

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Thank you, Deric. Our RevPAR growth of 3.2% for all hotels not under renovation for the fourth quarter outperformed the upper upscale segment nationally by 260 basis points and our competitors by 210-basis points. RevPAR growth was negatively impacted by the Jewish holidays falling in October of this year, compared to September in 2015.

For the full year, the Company grew RevPAR by 3.2% with EBITDA flow through of 66%. First, I'd like to recognize the outstanding performance of the Hyatt Regency Savannah during 2016. For the year, the property had RevPAR growth of 12.5% with 6.2% occupancy growth and 5.9% rate growth.

Even more impressive was the 1,740 basis point outperformance relative to its competitors. The resulting increase in rooms revenue translated well to the bottom line with the property posting 52% EBITDA flow through for the year. We're also excited to be undergoing major lobby renovation and food and beverage repositioning that will enhance a property uniquely positioned in the market with one of the best locations and some of the most spectacular views overlooking the Savannah River.

In the third and fourth quarters of 2015, we acquired the W Atlanta Downtown Hotel, the W Minneapolis Hotel, The Foshay, and the Le Meridian Chambers Minneapolis. With the change in ownership and with the same property management teams in place, including general managers, these three Marriott-managed properties have experienced a substantial increase in profitability. This Marriott-managed portfolio achieved 174% EBITDA flow through during its first full year under our ownership on 3.3% RevPAR growth.

This RevPAR growth equated to a 190 basis point versus competitors. Additionally, EBITDA margins increased 343 basis points for this group of properties. This outperformance is a direct result of our team's timely implementation of several value-added opportunities at these three hotels.

For example, a representative valued-add opportunity at the W Atlanta was the replacement of the management company for the on-premise digital billboard sign, which resulted in increasing the sign's utilization levels from approximately 25% to nearly 100% in 2016, and more than quadrupling the [2015] revenue with another estimated incremental $200,000 expected in 2017. Another example was renegotiating the parking contracts at W Minneapolis and W Atlanta, which further enhanced EBITDA at these properties.

The performance of these properties further validates the Ashford asset management team's ability to add considerable value following acquisitions, even in situations where the existing brands and managers remain in place. In third quarter of 2015, we completed the conversion and renovation of the Crown Plaza Beverly Hills to the Marriott Beverly Hills. We received an award from Marriott International for renovation excellence.

With more rooms available and the ability to the drive higher rate during the Marriott conversion, the property realized 18.1% occupancy growth, 31.2% rate growth and 54.9% RevPAR growth in its first full year under the Marriott flag. Even with Q3 and Q4, 2015 Marriott comparables in the data, in 2016 we continued to ramp up performance as the property gained an impressive 3,760 basis points in market share versus the tracked scale. Taking into account food and beverage, parking and ancillary revenues, total revenue grew 57.1% and EBITDA increased $4.3 million or 62.3% in 2016.

These impressive achievements highlight the success and overall capabilities of Ashford's industry-leading asset management team and I want to point out that this team has been able to produce RevPAR gains, relative to our competitors, for the Ashford Trust portfolio for three consecutive years. This is a significant achievement considering that during that time frame there had been extensive renovations at numerous properties as well as multiple new acquisitions.

Nearly four years ago, in July, 2013, we created a separate revenue optimization team with dedicated personnel focused on revenue strategies. Not only has the overall portfolio gained market share relative to its competitors for three consecutive years, but also both the Remington managed and brand managed portfolios have gained market share for each of those years. That concludes our prepared remarks and we will now open the call up to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And we will now take our first question from Ryan Meliker from Canaccord Genuity.

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Ryan Meliker, Canaccord Genuity - Analyst [2]

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Hey, good morning guys. Thanks for taking my questions. I had two that I was hoping to touch on. First of all Doug, congratulations on the promotion to CEO. I'm wondering that, with the new title and in the new role, if you are going to take any closer look at the incentive fee structure. Obviously you guys recorded an incentive fee to Ashford Inc this quarter. I think most of us missed it, it is probably our fault that we missed it not realizing how much the stock had run up in the fourth quarter.

But if I look at the stock up 23% in 2016, that's a year after it was down 40% in 2015. And on a two-year basis down 26%, which is largely in line with the group. Are you thinking about any callback opportunities there for AHT? It seems like there might make sense to look at things on more than just a one calendar-year basis. Any thoughts in the new role, Doug?

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

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All right, thanks for the congratulations, I appreciate it. In terms of the agreement that we have with Ashford Inc, you're correct that the calculation is done on an annual basis with no longer term period of view to that calculation. As you also know, over in Ashford Prime, the agreement between Ashford Inc and Ashford Prime pursuant to discussions between the independent directors of those two boards reached some changes to the agreement, which is subject to a forthcoming shareholder vote. If that is passed by the shareholders, then it may be worthwhile for the Ashford Trust board of independent directors to engage with the Ashford Inc independent board of directors and evaluate what types of potential changes may make sense.

Clearly we have structured that concept around the transaction with FelCor. We believe and we've stated that the expectation would be within a year of the transaction closing that we would seek to negotiate some similar changes between Ashford Trust and Ashford Inc that Ashford Prime was able to achieve.

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Ryan Meliker, Canaccord Genuity - Analyst [4]

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Right, but if I recall correctly, the Ashford Prime changes don't include any type of change to the period for the incentive fee calculation or potential callback provisions. Is that something you would look to do at AHT?

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

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That would be something perhaps for our board to take under advisement. We were very open to receiving feedback during the process for Ashford Prime based upon feedback that we received from the research community as well as shareholders. Obviously while Prime and Trust are similar, they are also different. So to the extent we go through that process with the Trust board and the Ashford Inc board, we will take into consideration input from shareholders to come up with-- Go ahead.

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Ryan Meliker, Canaccord Genuity - Analyst [6]

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No, that makes sense. I guess just as a follow up to that. If for one reason or another the FelCor deal does not go through, would the Ashford Trust board still be interested in having those same discussions with the Ashford Inc board or is it 100% contingent on the FelCor deal?

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [7]

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The Ashford Trust board hasn't commented on that. Obviously they'll be looking closely at the outcome of the forthcoming vote between Ashford Inc and Ashford Prime when that shareholder vote takes place. We'll be looking closely at the results of that.

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Ryan Meliker, Canaccord Genuity - Analyst [8]

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Okay, now that makes sense. And then just with regards to the FelCor offer, since you guys have made it public and they're starting to address some of these concerns publicly. I'm not asking for public negotiation, if you will, but is the offer that you've put up there open to some adjustments particularly open to a potential cash component and a reduced stock component? It seems like the stock is the biggest hang up that FelCor has; and obviously, you've highlighted why they shouldn't be so concerned about that, but maybe reducing the exposure of stock might make a big difference.

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [9]

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Well based upon their response today, which seems to have thrown cold water on perhaps our stock's performance and their stock's performance, given that we were both down materially, it didn't seem like it had to do with the amount of the offer. It seemed to have to do with some structural components. And early in our discussions with them, they strongly encouraged us to propose stock and that's what we have done. We are open to engagement and discussions. That's the purpose of what we're trying to accomplish here.

We believe a deal makes great sense for both sets of shareholders. But in order to get to a deal, we have to get past some of the issues that I think we gave very clear, crystal answers to today that really have no bearing on the economics of this opportunity for both sets of shareholders. Once we get past that, then I think we're happy to engage in productive dialogue on the real economics behind this opportunity. But having said that, at a 28% premium, compared to most M&A REIT transactions that average between a 10% to 15% premium, I think it's hard to disagree that this is a full and fair price for the opportunity.

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Ryan Meliker, Canaccord Genuity - Analyst [10]

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No, that makes sense. I guess along those lines, with regards to the FelCor dynamic, one of the points that they address is they claim that the external management fees would be in excess of $25 million. If I'm doing my math correctly, that's nowhere near the value. Am I right?

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [11]

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Yes, you're correct Ryan. That's an extremely high number. I don't know how they're getting that number.

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Ryan Meliker, Canaccord Genuity - Analyst [12]

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Right. I think the base fees would end up closer to $10 million or so. Seems high.

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Deric Eubanks, Ashford Hospitality Trust, Inc. - CFO [13]

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Ryan, the incremental base advisory fees would be about $17 million to $18 million based on the value of the equity, value of the preferred.

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [14]

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And recall that our current structure has a step-down fee arrangement within Ashford Hospitality Trust. Over a certain total enterprise value, the fee drops. So we would cross that initial threshold here. So both platforms stand to benefit effectively from a reduced fee based upon increased scale which, when the agreement was reached between the platforms and Ashford Inc, that was a built-in concession given by Ashford Inc recognizing that the incremental profit margin on scale is sizable and so the fee should be commensurately reduced.

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Ryan Meliker, Canaccord Genuity - Analyst [15]

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Okay, that makes sense. Then just one last thing here on the FelCor opportunity. It sounds to us like the FelCor board and management are not that receptive to this, which is obviously why you guys have gone public. If you guys do end up moving forward with the proxy contest that you started, can you give us an idea of how much that might impact G&A at Ashford Trust?

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [16]

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It's not an excessive amount of money. It just depends what the legal costs are along the way. We can't anticipate that. We think that the small amount of dollars to proceed with this relative to the overall big picture gain here and the hundreds of millions of dollars is absolutely the right thing to do.

You could frame it, sometimes we spend capital chasing after acquisition opportunities. We use that capital judiciously to chase what we think are the right opportunities. So this is the same type of approach. We have to spend some diligence dollars here, some effort dollars here to pursue an acquisition opportunity that we think is very advantageous to our shareholders and their shareholders as well.

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Ryan Meliker, Canaccord Genuity - Analyst [17]

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So does that mean any dollars you spend in terms of deal costs or proxy costs you'd then do an add back into adjusted EBITDA and adjusted FFO?

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [18]

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Yes Ryan, we would view those costs as obviously non-recurring costs that we would adjust in our adjusted EBITDA and adjusted FFO tables.

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Ryan Meliker, Canaccord Genuity - Analyst [19]

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Okay, that's helpful. That's all from me. Thanks, guys.

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [20]

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Thank you, Ryan.

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Operator [21]

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(Operator Instructions)

We will take our next question from Robin Farley from UBS.

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Robin Farley, UBS - Analyst [22]

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Hi, just a question actually about the results in Q4. Just looking at the hotels under renovation versus your comparable hotel set. Obviously the hotels under renovation would underperform their comparable hotel set. But it seems like there was sort of a bigger underperformance in Q4 versus what we saw the first three quarters of the year. I was just wondering if you could give color. Was the extent of the renovation disruption worse in Q4 for some reason or just because the full comparable hotel set didn't outperform the way the hotels not under renovation did?

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Deric Eubanks, Ashford Hospitality Trust, Inc. - CFO [23]

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Yes, Robin, all renovations aren't equal. So when we do the disclosures, you can sometimes have rooms renovations versus lobby renovations. And sometimes we find that the lobby renovations can be more impactful. You're not taking rooms out, but generally rooms do displace more revenue.

I think the bigger overall look here is that, when you don't even adjust for the renovation activity, we still gain market share of 40 basis points against the comp set. And 30 basis points against the track scale. So we did a great job in spite of the renovations and still gained market share just when you don't even account for the renovation activity.

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Robin Farley, UBS - Analyst [24]

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Okay, great, thank you.

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Operator [25]

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And we will take our next question from Tyler Batory from Janney Capital Markets.

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Tyler Batory, Janney Montgomery Scott - Analyst [26]

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Thanks, good morning. Congratulates, Doug on the new role. I appreciate some of the additional commentary you gave on the FelCor transaction. Maybe a big picture question here. I know you guys don't give guidance and obviously we've heard from a lot of your peers this week, but you've been outperforming some of those peers on a RevPAR basis. Doug, I was just wondering if you have any general comments on how you're thinking about RevPAR in 2017.

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [27]

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We won't give guidance, but we certainly can state that we believe that the diversity of our portfolio is advantageous to us at this time relative to the composition of our peer group portfolio. Our footprint is broader, our asset basis is more comprehensive in terms of their chain scale segments and locations. So, at a time where the more consolidated strategies and some of these urban markets may have made sense earlier in this cycle, that's unusually where right now all the new supply seems to be coming in. So our supply impact situation is a bit mitigated by the footprint that we have today. And moreover, I think the key is that our asset management team does a phenomenal job.

We believe they are best in class. They get very granular both at the top line as well as the bottom line to maximize flow throughs on these assets. This is a pennies business. You have to go after every possible scrape that you can get and I think even the example that Jeremy highlighted on our earnings call related to the billboard side and just the W Atlanta is an example of that. That's how we generate this kind of performance and that's what we hope to do going forward.

In my general macro economic comment, I think there's a lot of expected enthusiasm about where the economy is headed, whether it is due to the potential tax law changes or infrastructure growth; whatever it is, I think people have an eye on the potential economic expansion. Obviously as we get deeper into this administration and their economic plan, people will start to want to see proof of that, provided there is proof of that, then our view is that this could be more of an extended cycle. So Jeremy, I think, also has a comment as well.

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Jeremy Welter, Ashford Hospitality Trust, Inc. - EVP of Asset Management [28]

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Just a couple of comments, when you look at our portfolio our mix group can be anywhere from 22% to 25%. Without giving guidance, I can tell you the group outlook for 2017 is very healthy for the trust portfolio. One other dynamic is that when you look at the markets that we're in, as Doug mentioned, our largest market Washington, D.C. I think with the change in administration, and we're already seeing it, it's stimulating a lot of new demand in that market. So I think that bodes well for the trust portfolio.

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Tyler Batory, Janney Montgomery Scott - Analyst [29]

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Okay, great that's very helpful. On the FelCor proposal, sounds like you've made the offer using limited information. How comfortable are you guys with the bid and some of the estimates that you put out?

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [30]

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We're very comfortable based upon the information that we have received. We've looked at their public data. They've given us some limited information as part of the be it signing of the NDA, but it really wasn't what we were looking for. It wasn't typical and customary information like property P&Ls. But you know the benefit that we have here is that our assets are comparable in many ways. We can look at the publicly available information and compare and contrast on market comps and operating comps within our existing portfolio to arrive at our estimates for savings.

Flow throughs are flow throughs and it is pretty easy to evaluate the difference. Even to the point that we have made in our conversations, that if we're only partially right, which we think we won't just be partially right, but even partially right, there's a tremendous amount of value add here. Moreover to the extent they would share property level P&L information with us and engage with us, we may find that there's even more to the upside here. So we believe that based upon the information that we have and this has been done with a thorough amount of diligence going back to October in conjunction with our own internal team, our advisor, UBS, and our law firm Cad Walder, that we're very confident in what we have on the table right now.

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Tyler Batory, Janney Montgomery Scott - Analyst [31]

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Okay, great, that's all from me. Thank you.

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Operator [32]

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And we will take our next question from Michael Bellisario from Robert Baird.

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Michael Bellisario, Robert W. Baird & Company, Inc. - Analyst [33]

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Thanks, good morning everyone. Just had a question on the $18 million of operating synergies. I know you haven't had a chance to look at all of FelCor's property-specific data, but is that number, is that based on a comparable analysis of where your portfolio is currently operating versus where FelCor's is currently operating? That's really just a high-level estimate, correct?

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Jeremy Welter, Ashford Hospitality Trust, Inc. - EVP of Asset Management [34]

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Yes, this is Jeremy. It's a combination of the G&A savings which is fairly easy for Deric and his team to calculate because you can look at their run rates, the G&A costs, and then look at what our incremental costs would be. You can calculate the G&A savings.

On the operational side, it's a myriad of actually quite a bit of things using their public available information, using our benchmarking that we can do with our comparable hotels, using our track record of looking at acquisitions that we've made over the years, including brand managed acquisitions. I think we just quoted that the most recent three brand management acquisitions we delivered 174% EBITDA flow through in the first year. Those were Starwood properties. Our team just does an outstanding job.

But we went over this in the call earlier this week. We went through the different components and the different ranges in which we think those savings will come out. And so I think we feel very confident that we can deliver the savings, especially when you look at the flow throughs that they had of I think somewhere in the range of 16%. Our brand managed full-service hotels at Ashford Trust for the year, was over 70%. I think it was technically 72%, so that's phenomenal flow throughs that we were able to do with all brand-managed assets. So this is a team that has a track record of adding value in any asset that Doug throws our way.

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Michael Bellisario, Robert W. Baird & Company, Inc. - Analyst [35]

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Just to clarify, you brought up G&A, but that's a separate topic, right? This is just the $18 million at the property level right? I want to clarify that.

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Jeremy Welter, Ashford Hospitality Trust, Inc. - EVP of Asset Management [36]

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$18 million to $30 million that is a component of G&A and property-level savings. We think the G&A component is somewhere --.

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Deric Eubanks, Ashford Hospitality Trust, Inc. - CFO [37]

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It's $11 million right out of the gate.

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Jeremy Welter, Ashford Hospitality Trust, Inc. - EVP of Asset Management [38]

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Yes. So then the balance is operational savings.

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Michael Bellisario, Robert W. Baird & Company, Inc. - Analyst [39]

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Got it, that makes sense. Then just one housekeeping item for Deric. On the incentive fee recognition, when Prime recognized their fee a year ago in the fourth quarter, they added back two-thirds of it to be recognized over the next eight quarters. Has something changed on the accounting front that you're not doing that at trust for the fourth quarter?

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Deric Eubanks, Ashford Hospitality Trust, Inc. - CFO [40]

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Yes. When we did that last year, we received a comment from the SEC that they did not like the way we had did that, where we tried to match up the cash payments versus the GAAP recognition. So for GAAP purposes, Trust had to recognize 100% of the expense in the fourth quarter. But you're correct. That will be paid over a three-year period. From a cash standpoint, the payments will go out over three years.

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Michael Bellisario, Robert W. Baird & Company, Inc. - Analyst [41]

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that's helpful, thank you.

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Operator [42]

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Management, given the upcoming conference call for Ashford Inc, we have time for one additional question. Brian, please go ahead with your question.

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Bryan Maher, Craig-Hallum Capital Group - Analyst [43]

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Thanks, glad I made it in. I found your comment that FelCor was kind of steering you towards stock versus cash. That's pretty interesting since cash is basically cleaner. But I wanted to follow up on one of Ryan's seven questions. When it comes to cash, are you not ruling that out? And how I think about this is, if you're truly going to potentially sell the three New York city assets, there's $500 million in cash right there, which would be, close to half of the market cap of FelCor that you can immediately work to delever. Is that something you guys would actually consider?

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [44]

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I think until they start engaging with us, we have come up with what we think is a very attractive proposal for them. If they want to engage in discussions around a deal, then we're already seated at the table. So, happy to discuss things with them. But right now we follow what we believe they suggested we should do. So at this point, we're waiting for them. We're waiting for engagement from them at this point.

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Bryan Maher, Craig-Hallum Capital Group - Analyst [45]

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Right, but if you're going to go hostile on them and you think you might be able to sway more byside to side with you if there was a meaningful cash component, isn't that a way of maybe addressing that without levering up Trust further?

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [46]

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It would be; it potentially could be. I think that until we hear feedback from them, as to any changes to our proposal, this is our offer.

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Bryan Maher, Craig-Hallum Capital Group - Analyst [47]

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Okay, thanks, Doug.

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Douglas Kessler, Ashford Hospitality Trust, Inc. - CEO [48]

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All right, thank you everyone for joining today's call. We look forward to speaking with you again on our next update.

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Operator [49]

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This concludes today's call. Thank you for your participation. You may now disconnect.