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Edited Transcript of AHT earnings conference call or presentation 2-Aug-19 3:00pm GMT

Q2 2019 Ashford Hospitality Trust Inc Earnings Call

DALLAS Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Ashford Hospitality Trust Inc earnings conference call or presentation Friday, August 2, 2019 at 3:00:00pm 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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* Brian H. Dobson

Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs

* 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 - Director 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 Second Quarter 2019 Results Conference Call. Today's conference is being recorded.

At this time, I'd 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 second quarter of 2019 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; and 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 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 the SEC on August 1, 2019, 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 second quarter of 2019 with the second quarter of 2018.

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 morning and thank you for joining us to discuss Ashford Hospitality Trust's second quarter results.

I want to begin by providing some comments on the recent performance of our stock. We hope that the information on our second quarter earnings release, along with other topics discussed on this call, will highlight a simple fact: It's business as usual at Ashford Trust. While lodging REIT stocks in general experienced some softness during the quarter, we believe that our dividend announcement led to an overreaction in our stock. Management is entrusted with making the right decisions, ones that oftentimes are about longer-term vision and opportunity. This is exactly what you should expect from us given our significant insider ownership at 17%, the highest among our peer group.

Our goal is to maximize shareholder returns over time. And our team is committed to achieving this via value-added transactions, disciplined capital markets activity and aggressive asset management.

Our approach at Ashford Trust has always focused on how best to capitalize on lodging and financial market opportunities while at the same time being fluid in our strategic efforts. For example, despite the attractive features of our Enhanced Return Funding Program, we currently do not plan to make any acquisitions unless we can do it accretively without increasing our leverage. We strongly believe that ERFP has improved the investment returns on our recent purchases. However, we are prepared to be patient before accessing more ERFP capital for new deals given the current stock price compared to where we traded when we acquired the past 4 hotels that led to ERFP commitments.

Alternatively, we are engaged in some asset sales discussions. When we evaluate asset sales, we take into consideration many factors, such as the impact on EBITDA, leverage, CapEx, RevPAR, et cetera. We've listed a few assets for sale. And if we complete the sales, we plan to use the proceeds mainly to reduce our leverage. We may also consider share buybacks under the right conditions. Also, our portfolio is currently realizing the benefits from our recent CapEx spending, which is evidenced by the outperformance in our operating results. As we stated earlier this year, we anticipate our Capex spending will be more consistent with our long-term historical levels.

As I now turn to our second quarter performance, I would like to remind everyone that we have a very geographically diverse portfolio consisting of high-quality, well-positioned assets across the U.S. We believe that this geographic profile provides some very distinct advantages with respect to operating performance.

Our actual RevPAR for all hotels for the quarter increased 2.8% while comparable RevPAR for all hotels increased 1.4%. Comparable total RevPAR increased 1.9% for all hotels, highlighting our focus on growing ancillary revenues. For the second quarter comparable RevPAR for hotels not under renovation increased 1.6%. Additionally, we reported AFFO per share of $0.47 and adjusted EBITDAre of $132.1 million. We are pleased with our second quarter performance.

Since the ERFP is a unique competitive advantage for us, it is worth highlighting where we stand with the program. Ashford Inc. is committed to provide $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.

Since establishing the ERFP, we have already completed $406 million of high-quality acquisitions that have utilized the program, which equates to approximately 80% committed utilization of the pledged $50 million of ERFP funding. To date, we have received approximately $29.2 million of the $40.6 million that Ashford Inc. has committed to provide us for the 4 acquisitions under the ERFP. Jeremy will provide additional information on the performance of these properties along with other portfolio highlights in a few minutes.

Turning to our balance sheet. We believe in the benefits of an appropriate amount of nonrecourse asset-level financing to enhance equity returns. We have a target range of net debt-to-gross assets of 55% to 60%, and we anticipate returning to that range over time. We would like to remind everyone that our loans are mainly floating rate, which we believe provides a natural hedge to our cash flows.

At the beginning of this year, LIBOR was 2.51%. And currently, it is 2.24%. Every 50 basis point reduction in LIBOR would result in approximately $19 million of annual interest savings based upon our current capital structure. With all our recent refinancing activity, we believe we now have an attractive, well-laddered maturity schedule.

We also seek to maintain a high cash and cash equivalents balance between 25% and 35% of our equity market capitalization for financial flexibility. We know that this excess cash balance can provide a hedge during uncertain economic times as well as requisite funds to capitalize on the attractive investment opportunities as they arise. As of the second quarter of 2019, our net working capital totaled $367 million equating to approximately $2.95 per share, which represents a significant 115% of our current share price as of yesterday's close. I will repeat that. Our net working capital per share was 115% of yesterday's closing price.

We believe our current valuation is significantly below the intrinsic value of the company. With a current market cap less than our net working capital, the market seems to be ascribing negative value to our hotel portfolio, which is financed solely with nonrecourse debt. If you take just 2 of our 121 hotels, the Hilton Boston Back Bay and the Renaissance Nashville, and apply a reasonable value for those hotels, we believe the implied equity value after debt paydown is approximately $200 million. If you add the excess cash on our balance sheet as of the second quarter to the implied equity value of those 2 hotels, we believe the combined value significantly exceeds our market cap. We still would have 119 hotels, the majority of which have been recently refinanced and appraised -- and with appraised value significantly above the loan amounts. We strongly believe the valuation disconnect between our market value and the perceived value of the company is significant. And our management team and Board are focused on this disparity.

We also continue to make progress on our investor outreach efforts, more so now given the recent increase in our average daily trading volume. During the remainder of 2019, we will continue to get out on the road to meet with investors to communicate our strategy and the attractiveness of an investment in Ashford Trust. Once again, we are planning to have our Investor Day in New York City on October 3 and hope to see many of you there.

Looking ahead, we have a high-quality, well-diversified portfolio and remain confident that we are well positioned to outperform. We remain focused on proactive management initiatives across our platform to maximize value for shareholders.

I will now turn the call over to Deric to review our second 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 second quarter of 2019, we reported a net loss attributable to common stockholders of $26.9 million or $0.27 per diluted share. For the quarter, we reported AFFO per diluted share of $0.47. Adjusted EBITDAre totaled $132.1 million for the quarter, which represents a 5.8% increase over the prior year quarter. At the end of the second quarter, we had $4.2 billion of mortgage loans with a blended average interest rate of 5.7%. Our loans were 9% fixed rate and 91% floating rate. We focused on floating rate financing as we believe it has several benefits.

Also, as Douglas mentioned, we believe we have a well-laddered, attractive maturity schedule with a weighted average maturity of 5.3 years, assuming all loans are fully extended. All of our loans are nonrecourse. We have no corporate-level debt. In terms of upcoming maturities, we have 0 final maturities in 2019. When you see loans in our debt table that have extension options, most of those extensions have no tests in order to extend, except that we purchase an interest rate cap and that the loan not to be in default. That's why we include another schedule in our earnings release, which shows our debt maturities assuming all extension options are exercised. I will also point out that we have interest rate caps in place on almost all of our debt to protect us against any sort of spike in rates. Additionally, the current forward LIBOR curve shows LIBOR coming down through the remainder of 2019, which would potentially lower our interest costs even further.

Looking at our cash and net working capital, we ended the second quarter with $237 million of cash and cash equivalents and, including the market value of our equity investment in Ashford Inc., we ended the quarter with net working capital of $367 million. As of June 30, 2019, our portfolio consisted of 121 hotels with 25,552 net rooms. Our share count at quarter end stood at 124.1 million fully diluted shares outstanding, which is comprised of 102.1 million shares of common stock and 21.9 million OP units. With regard to dividends, the Board of Directors declared a second quarter 2019 cash dividend of $0.06 per share or $0.24 on an annualized basis. Based on yesterday's stock price, this represents a 9.4% dividend yield.

On the capital markets front, during the quarter, we closed on the refinancing of the Ashton Hotel. This new loan has an $8.9 million balance, bears interest at a floating rate of LIBOR plus 2% and has a 5-year term. The next hard debt maturity for the company is in June 2020, and we are currently in the market working on a refinancing of that loan. 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. Comparable RevPAR for our portfolio grew 1.4% during the second quarter 2019. Comparable RevPAR for those hotels not under renovation grew 1.6%. This growth represents a 120 basis point gain and a 50 basis point gain relative to the upper upscale class nationally and the total United States, respectively. Year-to-date, comparable RevPAR for the entire portfolio has grown 1.6%. During the second quarter, comparable hotel EBITDA grew $1.7 million or 1.2% while year-to-date, comparable hotel EBITDA grew $4 million or 1.6%. I also want to point out that Easter occurring later in April 2019 hurt April performance this year relative to 2018.

Next I want to update you on the performance of a couple of our most recent acquisitions, which were acquired as part of the Enhanced Return Funding Program with our adviser, Ashford Inc. The La Posada de Santa Fe, which is a hotel in Marriott’s Tribute Portfolio, was acquired in October 2018. During the second quarter, comparable RevPAR grew 12.8% driven by 5.8% rate growth and 6.6% occupancy growth. This RevPAR growth represents 1,380 basis point growth relative to the New Mexico North market. Year-to-date, comparable RevPAR has grown 16.2%. Since the Starwood and Marriott reservation systems' merger during the third quarter of 2018, La Posada has seen significant higher rate of transient growth, allowing the property to more strategically take group business. In addition, Marriott reward redemptions have provided an incremental $50,000 per month in reimbursement revenues. During the second quarter, we were not only able to realize strong revenue growth, but we also saw a 14% increase in hotel EBITDA. Year-to-date, the hotel EBITDA has grown 37.3%.

Another ERFP success story has been the acquisition of our Embassy Suites in New York City, which recently was renamed the Embassy Suites New York Manhattan Times Square, a change that we believe could drive additional demand. Comparable RevPAR during second quarter grew 31.5% driven by 23.4% occupancy growth and 6.6% rate growth. This RevPAR growth represents a 3,370 basis point increase relative to the upper upscale New York market class. Total hotel revenue grew 31.1% while hotel EBITDA grew $803,000 or 41.9%. Year-to-date, hotel EBITDA has grown 86.3%. We plan to continue to build on our success as group pace is strong for the second half of 2019 and '22 -- 2012 (sic) [2020] is strong as well.

During 2019, we will continue to invest in our portfolio to maintain competitiveness. In total, we estimate spending approximately $135 million to $150 million -- $155 million in capital expenditures during the year. This estimate is down significantly from what we spent in 2018. We have completed guestroom renovations at the Embassy Suites Crystal City, Hyatt Regency Coral Gables and 6 select-service hotels. We are currently in process with the guestroom renovation at the Marriott DFW Airport. We've also completed lobby renovations at the Marriott Crystal Gateway and Westin Princeton. Additionally, we continuously identify opportunities to create value throughout the portfolio. The first phase of the Renaissance Nashville redevelopment is complete and the second phase is underway, which includes the build out of additional meeting space and event space. Furthermore, we have identified accretive opportunities to add back additional KEYS within our portfolio. We'll be adding 4 KEYS at the Hilton Boston Back Bay and have added 2 KEYS to the Embassy Suites Crystal City and 1 KEY to the Hyatt Regency Coral Gables.

I want to again highlight that our capital expenditure forecast for 2019 is significantly below our spend in 2018, which ended up over $200 million. Not only has the dollar value of our capital expenditures decreased since last year, but the number of hotels and rooms impacted has also been reduced from 28 to 17 hotels and 7,462 and 5,047 rooms. I'm now excited to discuss the positive performance benefits we have experienced from some of these transformation renovations and how they have positioned us for long-term success.

There were a number of hotels and renovations in 2018 that are delivering strong performances in 2019. Specifically, 7 hotels that completed renovations during 2018 experienced double-digit comparable RevPAR growth during the second quarter of 2019: the Residence Inn Jacksonville, Residence Inn Orlando SeaWorld, Courtyard Denver Airport, Hilton St. Petersburg Bayfront, Hotel Indigo Atlanta Midtown, Sheraton Anchorage and Hilton Tampa Westshore.

I would like to quickly highlight 4 of those hotels. The Courtyard Denver Airport, which completed its guestroom renovation during the first quarter of 2018, continues to see strong comparable RevPAR growth with growth for the second quarter of 2019 equaling 17.5%. Year-to-date, comparable RevPAR growth has been 25.9% with hotel EBITDA growing $488,000 or 30.8%. Last year's main space and fitness center relocation at the Hilton St. Petersburg Bayfront led to comparable RevPAR growth of 17.4% during the second quarter. The Sheraton Anchorage's guestroom and lobby renovation was completed in the first quarter of 2018, and comparable RevPAR growth during the second quarter of 2019 was 16.2%. Year-to-date, comparable RevPAR growth has been 26.2%, and hotel EBITDA has grown $414,000 or 41.2%.

Finally, the Hilton Tampa Westshore, following its guestroom and meeting space renovation, experienced comparable RevPAR growth of 15.2% during the second quarter. Year-to-date, hotel EBITDA has increased $583,000 with hotel EBITDA flow-through of 53%.

In addition to our focus on continuously reinvesting in our assets, I want to highlight a number of other steps we are taking in order to drive hotel EBITDA. First, we have analyzed our hotels' competitors to find opportunities in our restaurant and banquet pricing and are rolling out price increases over the summer. Second, we are also focused on directing e-commerce spending to various digital programs to increase visibility and advertising to the leisure and group segments. To that end, in the group segment, we are working closely with Cvent to increase exposure to group leads. Third, in terms of cost management, we are utilizing efficiency programs to introduce better methodologies to reduce payroll hours. These programs have achieved 5% to 6% payroll savings at various hotels even after taking into account wage rate increases. And lastly, this past month we have completed deep dives at 19 of our properties to further reduce operational expenses. That concludes our prepared remarks.

And we will now open the call up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Tyler Batory with Janney Capital Markets.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - Director of Travel, Lodging and Leisure [2]

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So the first question I had, Douglas, I think it's -- it would be helpful -- we've got a lot of questions from investors just on the dividend and on the reduction and what not. Can you maybe just address that a little bit more, your decision, why you made that decision and then your thoughts on redeploying some of that capital?

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

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Sure, Tyler. So each quarter, we evaluate the dividend. And we determined that we weren't getting credit for what was an outsized dividend. We also realized that we were paying and have been paying well in excess of our required distribution to meet REIT rules. We've always been opportunistic with cash and felt that with that extra cash, we could use it for more opportunistic purposes. So really, everything the same that we highlighted in our statement related to the dividend.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - Director of Travel, Lodging and Leisure [4]

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Okay, got it. That's helpful. And then my second question, probably for Jeremy. Operationally, it looked like a strong quarter here, and we see the outperformance. How did the second quarter, from a RevPAR perspective, come in vers your expectations vers your budgets? Any significant surprises one way or the other?

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

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No, I wouldn't say there's any significant surprises. We've been projecting all year long that we would gain market share. And so during the second quarter, we gained about a 100 basis points. A little bit over 100 basis points, actually. And year-to-date, we're tracking that same level as well. So I think it's pretty consistent. It is challenging. It has been tough, and we've been really focused on costs as well. But we've been doing a good job doing what we can do to increase market share.

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Operator [6]

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We'll take our next question from Bryan Maher with B. Riley FBR.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [7]

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A couple of quick questions, last clarifications. So I guess it's safe to say based upon, Douglas, your comments that you're not really out there meaningfully looking for acquisitions, and that's going to take a backseat now and maybe expanding the ERFP to $100 million is also of lesser importance. Is that correct?

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

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Well, first of all, we're always underwriting transactions because we always want to stay in the flow of transaction activity. The transaction pipeline right now is relatively thin. But more importantly, from our own standpoint, given where our stock is trading and given the desire not to increase leverage, we believe that it's best to stand on the sidelines until we can find transactions that are both accretive and do not negatively impact our leverage. So for those reasons, it all makes sense to not be aggressive on the acquisition pace of things. And we're not actively looking to acquire hotels. That can certainly change given changes in those features, right?

With respect to the ERFP, we still have some capacity on the ERFP. We still have the ability for about $90 million of transactions that could benefit from this current tranche of the ERFP. And I think if we get closer to the point where it makes sense to engage in discussions about a second tranche of the ERFP, then we feel like it's been a real benefit to the Ashford Trust shareholders based upon the returns that we think that the ERFP has contributed to the deals that we have acquired, and we hope the same is true on the Ashford Inc. side. So when that time comes, we hope to have a mutually beneficial discussion on how to expand that program, but we're just not there yet.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [9]

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Okay. And then on the flip side of that, you mentioned having a few assets out there in the marketplace for sale. How would you characterize those assets? Are they -- I would assume more of your select service product?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [10]

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We'll provide color on the sales of those assets to the extent we complete sales. And I would just make a general statement that these sales are financially calibrated. They're not necessarily a strategy to sell a particular type of asset. They're based upon either benefits that we see in selling the property from a price that we're going to get for the asset, a debt paydown, an impact on our portfolio RevPAR because maybe they're lower RevPAR assets or perhaps they're assets that would require an amount of CapEx that we just -- we would not have seen the types of returns that we would like to see. I mean look at the numbers that Jeremy's mentioned with respect to the CapEx that we did spend and the types of performance that we got from many of those assets. So it's not a specific type of asset necessarily. It takes all those factors and others into consideration to make good economic decisions to try to enhance the value of our portfolio for shareholders.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [11]

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And then when we think of use of proceeds, I mean you talked about both delevering and the potential for stock buybacks. It doesn't have to be one or the other, right? You could split the proceeds across both areas. Is that correct?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [12]

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That's correct. Obviously, the assets that we have debt on, any sort of sale is going to require associated paydown and perhaps additional paydown related to extracting that specific asset out of a loan pool. Excess proceeds can be used for general corporate purposes, it could be used for CapEx, it could be used for share buybacks. In any and all of those and others. So to the extent there are excess proceeds, we'll obviously be looking at the appropriate use of those proceeds.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [13]

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And then just lastly from me, and maybe this is a cost for Jeremy -- a question for Jeremy. On labor cost, can you give us an update on how that's trending? Is it still increasing? Has it flattened out? Is it declining? What's going on there?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [14]

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Sure. Yes. It's still increasing. And we're seeing as much as 4% to 5% increases in wages. It's really market-driven. And the other headwind is some of these local ordinances that are being passed that basically implement not only higher wages, but different work rules that apply to hotels that are not subject to a collective bargaining agreement. And we're seeing that more and more in different jurisdictions. So that has been challenging as well, but we just continue to do everything we can to find more opportunities to drive more productivity in our hotels.

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Operator [15]

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We'll take our next question from Michael Bellisario with Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [16]

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Can you please explain the high watermark and how that works for the ERFP program if you do sell assets? And then how the calculation works there for that amount to get kind of, so to speak, backfilled for the asset sales?

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [17]

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Hey, Mike. This is Deric. I'll address that. So if AHT sells assets, the -- a dollar amount of any sold assets goes into what's called the net asset fee adjustment as part of the total advisory fee. So there would still be 70 bps off of the total market capitalization of the company. And then there would also be either 70 bps on the net asset fee adjustment, the amount that's in that, or if it's an ERFP asset, there's a slight premium to that. Obviously, the ERFP assets would have been recently acquired hotels. But -- and then as long as there is a balance in that net asset fee adjustments, the -- if the company then goes and acquires another hotel, if AHT wants ERFP associated with that asset, then that amount would stay in that asset fee adjustment. If the company acquires the hotel and it does not take the ERFPs, then that net asset fee adjustment amount would be reduced by the amount of that acquisition. So any dollars that are associated with asset sales go into the net asset fee adjustment. So that advisory fee wouldn't really change very much during that period where there's an amount in there.

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

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And obviously, Mike, there's logic to that because it wasn't going to be the case where the adviser provided capital to help fund accretive growth and then turning right back around, the company was shrinking the portfolio. So we felt that, that was a fair give and get for both sides to incorporate into the advisory agreement with respect to the ERFP situation.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [19]

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Right. So I guess just high level, if you sell an asset and it's an 8% cap for corporate purposes, it's more like 8.5% or 8.7% cap rate, right? Because the advisory fee will stay unchanged. Is that, plus/minus, the correct math?

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [20]

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I haven't thought through this. The cap rate impact of the sale. And so I can't address it on the call, but it's...

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [21]

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But it's really on the value.

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [22]

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Yes. It's on the value. And I'm not sure how you would back into the impact on the cap rate because the advisory fee will basically stay about the same as it was prior to the sale.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [23]

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Okay, that's helpful. And then just maybe can you provide your latest thoughts on more of disclosure around the termination fee? Kind of similar to what Braemar does? And have you and the Board had any discussions on this topic?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [24]

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So obviously the calculation of the termination fee is disclosed in our advisory agreement. And it's based on numerous inputs as you know, Mike.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [25]

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Right. I guess I was asking more along the lines of the actual net revenues and net earnings to be able to calculate the termination fee using the 12x multiple, the tax gross-up and the 10% percent step-up to actually do the mechanics of it.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [26]

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Yes. So Mike, on the -- you referenced the Braemar, what Braemar does. The Braemar disclosure was something that was negotiated between Ashford Inc. and Braemar as part of the amendments to the advisory agreement. So that does not exist in the current structure with AHT and Ashford Inc.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [27]

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Do you think that would be helpful from a transparency and investor perception perspective though?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [28]

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Look, we believe that investors should view this as a long-term agreement, Mike.

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Operator [29]

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And we'll take our next question from Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [30]

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Douglas, I just want to follow up a little bit on your earlier comments. Understanding you have a lot of options. If you sell assets, there's debt reduction you might have to do. But you also have cash, you have net working capital. What's the trigger -- internally, like what's the trigger point for share repurchase? Because if you decide to do it at a certain point, there would have to be some kind of trigger that made you do it. I think we're just trying to get better understanding of what goes into that calculation.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [31]

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Sure. So just a couple of points regarding this. The company has a share buyback authorization in place and -- a $200 million buyback authorization. Historically, this management team and members of the Board have engaged in buybacks for the company. We think we did it exceptionally well the last time that we did it and created a lot of value for shareholders. It's something that could be a possible use of our cash, but we don't give any particular guidance if or whether we will do that or at what -- or what prices.

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [32]

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Yes. I would add, Chris, as you've said, there's a lot of moving pieces here and a lot of variables. Obviously we look at our leverage. We look at our trading volume, our floats, available cash on hand, where we are in the cycle, et cetera. So there's a lot of factors that are consistently changing that all go into that analysis. But as Douglas mentioned and I would highlight, in our history, we've been very active buyers of our stock at certain periods of time. And so that is something that is constantly on the radar screen for us.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [33]

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Okay. That's helpful. And then probably another question for Deric on the negative advisory. The incentive fee actually I think was a reversal [right] of the first quarter number. Is that -- can you just remind us the mechanics of how that will -- how that gets every quarter? Is that something that will reset again? Or is it something where it's 0 or it's a positive number, but it's not a negative number for the full year rate?

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [34]

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Right. So that's the -- you're referring to the advisory incentive fee calculation. And that's actually done at the end of the year based on a total shareholder return performance versus the peer group. For GAAP purposes, we have to accrue for that fee at the end of each quarter assuming the year ended at the end of that quarter. And so we had a fee that was accrued for at the end of the first quarter that when we looked at it, the second quarter performance, the year-to-date performance would have resulted in a lower incentive fee. So we had to reverse some of that out.

For our reported metrics of adjusted EBITDAre and AFFO, we add that adjustment back in quarters 1 through 3 because of that volatility. And then in Q4, if there's an actual incentive fee for the year, then that would be reported and recognized in our adjusted metrics in the fourth quarter.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [35]

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Okay. Got you. I guess I do have a question for -- probably for Jeremy, which is kind of -- what impact are you guys seeing from some of these -- I'll just use an example of Courtyard or Hampton Inn or something, where a hotel gets renovated, and you guys have been doing a lot of this. So in some ways, it's a good story, but in other markets, maybe you get a renovated hotel drop -- dropped right next to you. It doesn't increase the supply numbers everybody looks at, but essentially is more competitive supply. What do you think the puts and takes are overall for your portfolio top to bottom?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [36]

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I think the actual supply is a lot more meaningful. New supply versus renovated supply within your comp set, if I understand your question correctly. There are situations where -- mainly if you have a big hotel on your comp set that may have been out for extended period of time with a massive renovation, that certainly could have an impact. But a Hampton Inn or a Courtyard in your comp set that was under renovation last year, now it's renovated, it's not a huge factor to us. The bigger issue is supply in general as it comes in, in certain markets and tracks within our comp sets. Did that answer your question?

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [37]

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Yes. That's great. Appreciate it.

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Operator [38]

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We'll take our next question from Robin Farley with UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [39]

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I know you've commented a little bit already on the ERFP and the idea of not increasing that from $50 million to $100 million. Just some -- is that -- is it just a signaling thing that you don't want it to signal that you might be looking to do acquisitions? Or is there -- I guess both sides have to agree to that. And then has there been maybe a change in the approach to whether another $50 million would make sense? Because just authorizing it or agreeing to have additional funds available, it doesn't seem obvious why you wouldn't have that available sort of dry powder. Is it just a signaling issue? Or is there more in terms of the 2 -- being of 2 minds?

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [40]

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Sure. So as I mentioned earlier, we still have capacity under the existing agreement and -- for $90 million of transactions. And there was about $9 million left. And so you apply that 10% to it, and that's how we get to the $90 million. And given our earlier comments said, based upon the current stock price and looking to find accretive opportunities, we're -- while we're underwriting, we're really on the sidelines from new acquisitions standpoint. So it would seems premature for management to spend their time working on a mutual agreement with our adviser when we're not really at the cusp of having to making that call because we still have some excess capacity. From Ashford Trust standpoint, and we believe also from Ashford Inc. standpoint, the ERFP has been successful. And so we'll have to cross that bridge when the time comes if there is a mutual desire to reload by both parties.

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Deric S. Eubanks, Ashford Hospitality Trust, Inc. - CFO & Treasurer [41]

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We hope there will be.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [42]

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Okay. All right. And then just one other clarification. When you were talking about market share in your opening comments, are you -- is that kind of looking at your portfolio versus upper upscale segment in the U.S.? Or are you actually -- was that weighted by the different geographies? Because obviously some of the markets where you are, like Atlanta where there's been stronger results there. So just wondering if the market share is weighted for your geographic exposure as well?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [43]

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Yes. That's a great question. So anytime I quote a market share number on a portfolio-wide basis, it's revenue-weighted for our portfolio. And I'm usually specific on whether or not I'm talking about chain scale or if we're talking about our different tracks within our hotels or if we're talking about our direct competitive set for each individual hotel. So what I mentioned earlier -- in terms of my comments earlier, when I mentioned that we were gaining over 100 basis points in market share, that is relative to the competitive set of each individual hotel in aggregate weighted on a revenue basis -- revenue-weighted basis.

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Operator [44]

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We will take our next question from Brian Dobson with Nomura Instinet.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [45]

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Just a couple of quick questions. So given the disparity between the market value and your perception of asset values, would you consider accelerating asset sales to free up some capital to either pay down debt or repurchase shares?

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

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It's a good question and certainly, a possible strategy. We have some assets for sale in the market currently. Let's see what the reaction is to that. And we'll be fluid in our strategic analysis of next steps.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [47]

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Sure. And then you briefly mentioned increasing your group exposure. That's been a key driver of outperformance for some of your peers. How do you see that ramping over the next, call it 2 years or so? And what kind of early indications have you seen?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [48]

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This is Jeremy. Actually in the second quarter, our group RevPAR growth was essentially flat. And the growth that we have in RevPAR was over 100% for transient. We had a decline in contract, an increase in transient and basically flat in group. But if you will look forward through the balance of the year, we're looking at probably between 2% to 3% growth in group business, what's on the books right now, in terms of forward-looking pace. And then heading out to 2020, our group business is up 2% when you look at it as compared to same time last year.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [49]

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Great. And do you think that will ultimately lead to higher transient rates?

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [50]

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It can help. Yes, it definitely can help because we're selective of where we're filling our group patterns. And so we look at where we need business and then we can press the hotel and then our room inventory is essentially smaller. And then that allows us to push rate more aggressively for transient business.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [51]

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And then just finally, I guess looking through your portfolio, do you see opportunities to press your managers to drive property-level efficiencies to help to increase margins I guess over the next 2 years or so? And if you do, do you think you could elaborate on some of those opportunities? I know it's general and a bunch of little things, but...

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Jeremy J. Welter, Ashford Hospitality Trust, Inc. - COO [52]

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Sure. Yes. You're exactly right. It's -- what I tell my team is small drops of water build mighty oceans. And so we are constantly mining our portfolio for opportunities to drive more margin on our hotels, to drive more rate, to drive more revenue, whatever the case may be. There is an extensive amount of initiatives that we have going on right now. A lot of them I would say are proprietary to our asset management approach. And a few of those I did highlight in our covered -- or our prepared remarks on the script earlier.

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Operator [53]

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That concludes today's question-and-answer session. At this time, I would like to turn the conference back over to management for any additional or closing remarks.

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Douglas A. Kessler, Ashford Hospitality Trust, Inc. - President & CEO [54]

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Well, thank you for joining today's call.

We hope to see you at our Investor Day in New York on October 3 and look forward to speaking with you again next quarter.

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Operator [55]

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This concludes today's call. Thank you for your participation.

You may now disconnect.