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Edited Transcript of AINC earnings conference call or presentation 3-Nov-17 4:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Ashford Inc Earnings Call

DALLAS Nov 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Ashford Inc earnings conference call or presentation Friday, November 3, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deric S. Eubanks

Ashford, Inc. - CFO and Treasurer

* J. Robison Hays

Ashford, Inc. - Chief Strategy Officer and Director

* Jeremy J. Welter

Ashford, Inc. - EVP of Asset Management

* Joseph Calabrese

* Montgomery J. Bennett

Ashford, Inc. - Chairman and CEO

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Conference Call Participants

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* Bryan Anthony Maher

FBR Capital Markets & Co., Research Division - Analyst

* Stephen Biggar

Argus Research Company - Director of Financial Institutions Research

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Ashford Inc. Third Quarter 2017 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead, sir.

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Joseph Calabrese, [2]

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Thanks, Tony. Good day, everyone, and welcome to today's conference call to review results for Ashford Inc. for the third quarter 2017 and to update you on recent developments. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Rob Hays, Chief Strategy Officer; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, Executive Vice President of Asset Management.

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

At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These risk factors are more fully disclosed -- 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 and schedules, which have been filed on Form 8-K with the SEC on November 2, 2017, and may also be accessed through the company's website at www.ashfordinc.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 on this call compare the third quarter 2017 with the third quarter 2016.

I will now turn the call over to Monty Bennett. Please go ahead, sir.

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Montgomery J. Bennett, Ashford, Inc. - Chairman and CEO [3]

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Thank you, Joe. Good morning, everyone. We are pleased to present our financial results for the third quarter 2017. I will begin by reviewing our performance highlights, and Rob will provide an update on our investor outreach initiatives. Afterwards, Deric will review our financial results, and then Jeremy will provide an overview of our strategic investments in Pure Rooms, OpenKey and J&S as well as other initiatives. And then we'll take your questions.

Our strategy is built around our ability to leverage the combined expertise of our management team to both grow our company and the platforms we advise. I believe we have the most highly aligned, stable and effective management team in the hospitality industry. Our track record of success speaks for itself as this is the same team that has generated a 192% total shareholder return for Ashford Trust since the company's inception -- company's IPO in 2003 compared to a 150% return for our peers as of yesterday's close.

Acting like shareholders has always distinguished us from others in our industry. We consider it one of our main competitive advantages and a primary reason for our superior performance. Ashford currently advises 2 publicly traded REIT platforms, Ashford Trust and Ashford Prime, which together have 132 hotels with approximately 29,000 rooms and over $7.5 billion of gross assets as of September 30, 2017.

Ashford has a high-growth, fee-based model with a diversified platform of multiple fee generators. It is a scalable platform with attractive margins and low capital needs. Additionally, it has a very stable cash flow base as the advisory agreements with the REITs stipulate that the minimum base fee can't drop by more than 10% from the previous year's base fee.

Currently, our company is focused on 3 areas of growth. First, we would like to accretively grow our existing REIT platforms. Second, as part of our growth strategy, we would like to add additional investment platforms. And third, through our service business initiatives, we are working diligently on opportunities to buy or invest in businesses related to the hospitality industry, such as OpenKey, Pure Rooms and J&S. Then through our connections and our relationships with the Trust and Prime platforms and leveraging our asset management expertise as well as our other relationships in the industry, we can accelerate their growth dramatically.

To that end, recently, we completed the acquisition of an 85% stake in J&S Audio Visual, a leading integrated, single-source audiovisual service provider with a well-diversified geographical presence and customer base, for approximately $9.2 million in cash, $4.3 million of Ashford common stock and $9.5 million assumed debt. J&S currently has multiyear contracts in place with approximately 55 hotels and convention centers in addition to regular business, representing over 2,500 annual events and productions, 500 venue locations and 650 clients. J&S currently is live at only 2 hotels owned by Trust and Prime. Going forward, we expect significant revenue and operational cost synergies, not only through further growing the business through J&S' current sales channels but also with the addition of contracts between J&S and Ashford asset-managed hotels.

Also, we continue to be excited about our investments in OpenKey and Pure Rooms. OpenKey has grown its hotel subscriber base by approximately 120% year-over-year and grew third quarter revenue by 80% compared to the second quarter of this year. Additionally, there is growing demand for health and wellness offerings in the hospitality industry. We are excited to integrate our deep operating experience with the innovation of Pure Rooms. Currently, Pure Rooms has contracts in place with 162 hotels, which is approximately 2,500 rooms, throughout United States, including 42 hotels owned by Trust and Prime. Year-to-date through the third quarter, Pure has achieved revenue growth of 41% compared to the same period last year. We believe the business case for adopting the Pure Rooms product at hotel properties is compelling. And with our resources and expertise, it is poised for substantial growth in the coming years. Jeremy will be providing a more detailed update on all of these investments in a few minutes.

We have a revolutionary fee structure in place for Trust and Prime that incentivizes shareholder value creation. With the base fee driven by share price performance and the incentive fee based on total shareholder return outperformance versus peers, this management team's primary focus is to maximize returns in our REIT platforms.

In closing, we are optimistic about the prospects for our 2 managed REIT platforms. Additionally, we see great opportunity for this platform to grow and deliver superior returns to our shareholders by adding additional investment platforms as well as investing and/or incubating other hospitality-related businesses.

I will now turn the call over to Rob to discuss our investor outreach strategy.

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J. Robison Hays, Ashford, Inc. - Chief Strategy Officer and Director [4]

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Thanks, Monty. We are tremendously excited here at Ashford Inc. with all of the potential investment opportunities we have around our platform. And we believe these investment opportunities should bring strong accretive growth to our shareholders over the long term. However, not all of our value-creating opportunities are investments. One non-investment opportunity that we believe can create significant long-term shareholder value is increasing the liquidity and trading volume of our common stock. Statistical analyses and academic studies show quite clearly that companies with higher trading volumes typically trade at higher valuations, all else being equal. As a result, we are committed to improving liquidity and trading volume of our stock.

To achieve this, we believe it is crucially important to increase investor awareness of our story, building in them a deep understanding of our various strategic growth initiatives and outlining for them how we plan to create shareholder value over time. We believe we've already significantly improved the company's exposure to investors with our recent Investor and Analyst Day in New York City. We received very positive feedback from those that attended, with several investors telling us that the messaging in our updated company presentation is clearly articulated and our growth story is compelling.

Since Ashford Inc.'s investment thesis, growth profile and market cap are significantly different than our REITs, we believe our investor outreach strategy needs to be significantly different as well, a differentiated approach that targets a unique investor base. So instead of targeting larger real estate-focused institutional investors, we've begun building meaningful dialogues with investors who favor small-cap growth companies. These investors include smaller institutions, investment advisers, retail investors and family offices. We have been achieving this dialogue primarily through attending and presenting at industry conferences, such as The MicroCap Conference, the Sidoti small- and micro-cap conference in New York, the IPI Family Office Conferences and various Three Part Advisors IDEAS Conferences. These events have provided us opportunities to visit with investors more suited to our company profile. In the third quarter alone, we had over 75 meetings with investors and analysts interested in learning more about our strategy.

As a result of this proactive investor outreach, we have already experienced measurable results, with an increase in our trading volume in the third quarter by approximately 34% over the second quarter. We plan to continue attending these events for the foreseeable future. And in fact, our next conference will be held in Dallas at the Three Part Advisors Southwest IDEAS Conference on November 16.

We are confident in our story and our strategy and are committed to building investor confidence and exposure. We're going to continue to be proactive in our outreach efforts and believe these efforts will develop relationships that will ultimately increase our base of long-term investors and help maximize our long-term returns.

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

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Deric S. Eubanks, Ashford, Inc. - CFO and Treasurer [5]

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Thanks, Rob. Net loss attributable to the company for the third quarter of 2017 was $1.9 million or $1.05 per diluted share compared with a net loss of $0.3 million or $0.49 per diluted share for the third quarter of 2016.

For purposes of calculating non-GAAP metrics for the quarter, we have added back $1.1 million of compensation expenses relating to the first and second quarter this year. For the third quarter ended September 30, 2017, base advisory fee revenue and reimbursable expenses were $13 million, including $10.2 million from Trust and $2.8 million from Prime. Adjusted EBITDA for the third quarter was $4.5 million compared with $3.2 million for the third quarter of 2016, reflecting a growth rate of 38%.

Adjusted net income for the third quarter was $3.8 million or $1.65 per diluted share compared with $2.7 million or $1.17 per diluted share for the third quarter of 2016, reflecting a growth rate of 44% and 41%, respectively.

At the end of the third quarter, the company had approximately $6.4 billion of assets under management from its managed companies and $43 million in corporate cash. We had no corporate debt, no preferred equity, and we currently have a fully diluted equity market cap of approximately $158 million.

Also, as of September 30, 2017, the company had 2.3 million fully diluted total shares of common stock and units outstanding.

I will now turn the call over to Jeremy to discuss our investments in OpenKey, Pure Rooms, J&S and other initiatives.

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Jeremy J. Welter, Ashford, Inc. - EVP of Asset Management [6]

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Thank you, Deric. As Monty mentioned earlier, growing our service business is one of our 3 strategies for company growth. To explain this strategy more fully, our services initiative is a unique investment strategy in the hospitality industry, whereby we strategically invest in operating companies that service the industry, and we act similar to an accelerator fund to grow these companies. In doing this, we are able to establish synergies for our hotel platforms, providing attractive pricing and higher levels of service than they would otherwise receive from a third-party vendor.

We are also able to quickly grow the companies in which we invest in, in a number of ways: by referring them to hotels in our REITs, by leveraging our vast industry relationships and by consulting on best practices. To that end, we are excited to have recently closed on a previously announced acquisition of a controlling 85% interest in J&S Audio Visual for approximately $9.2 million in cash, $4.3 million of Ashford common stock and $9.5 million in assumed debt. J&S provides an integrated suite of audiovisual services, including show and event services, hospitality services, creative services and design and integration, making J&S a leading single-source solution for their clients' meeting and event needs.

J&S currently has multiyear contracts in place with approximately 55 hotels and convention centers in addition to regular business representing over 2,500 annual events and productions, 500 venue locations and 650 clients, but currently has contracts in place with only 2 Ashford hotels. We're excited to bring J&S into the Ashford family and work with a best-in-class provider of integrated audiovisual services to the hospitality and corporate industries. We expect significant revenue and operational cost synergies with the addition of contracts between J&S and both Ashford asset-managed hotels as well as other hotels.

We also continue to be excited about our investment in the hospitality-focused mobile key platform, OpenKey. We believe this product will drive increased adoption among hotel owners and guests alike as consumers have clearly indicated a strong preference for aggregation of app content and universal functionality. OpenKey has expanded its exclusive deals to include not only Preferred Hotels but also World Hotels, which will provide access to 350 luxury hotels worldwide and an integration with Inndependent Boutique Collection, which is a hotel technology platform used in thousands of hotels worldwide.

In addition, OpenKey has recently added secure interfaces with global lock manufacturers, Entrava and Häfele, giving OpenKey the most interfaces with major lock manufacturers of any mobile key platform in the industry. OpenKey is also rolling out the ability to directly connect with RMS and Springer-Miller Systems, 2 large property management software companies used in over 2,000 hotels worldwide.

There have been exciting recent developments regarding OpenKey's progress. First, deployments of their technology are quickly ramping up and expected to reach an estimated 20,000 rooms deployed and an estimated 35,000 rooms under contract over the next 12 to 18 months.

Next, the platform is gaining traction internationally. Their office in Guadalajara, Mexico has been instrumental for growth in Mexico, Costa Rica and Colombia, while the home office and independent reseller serve the United States, United Kingdom, Singapore, Indonesia, Australia and Canada.

Finally, sales demonstrations and signed contracts are at an all-time high, with the third quarter surpassing the record-setting second quarter, resulting in an 80% revenue growth in the third quarter 2017 compared to the second quarter 2017 and 167% revenue growth in the third quarter of this year compared to the third quarter last year.

I would also like to provide an update of our investment in Pure Rooms, a leading provider of hypoallergenic rooms in the hospitality space. We have seen that there is a growing demand for health and wellness offerings in the hospitality industry, and we believe that the investment in Pure Rooms will allow us to bring our industry knowledge and expertise as well as our managed asset base to the company in order to optimize growth synergistically.

The company currently has contracts in place with 162 hotels, representing approximately 2,500 rooms, throughout the United States, including 42 Ashford asset-managed hotels. Year-to-date through the third quarter, Pure Rooms achieved revenue growth of 41% compared to the same period last year. And since our investment in April, revenues have increased 29% over the prior year.

Going forward, we anticipate that we will be able to drive significant growth and value creation at Pure Rooms by not only integrating the product into additional Ashford Trust and Ashford Prime rooms that we asset manage but also gaining traction into additional non-Ashford hotels as we believe the value proposition for adding Pure Rooms to a property are very compelling. We have found that hotel rooms participating in this program typically achieve a significant rate premium per night. And based on historical performance, the initial hotels that have been included in the Pure Rooms program has typically experienced returns of between 50% and 70% on their investment. As we noted in our Investor Day last month, Prime and Trust hotels that have had Pure Rooms for at least 1 year have realized returns of approximately 40% and 96%, respectively. So we're very excited about the future prospects for Pure Rooms.

We also continue to remain very active in evaluating additional opportunities of the operating company. We're hopeful to share some more details on that front in the upcoming quarters.

That concludes our prepared remarks, and we will now open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Bryan Maher with B. Riley FBR.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [2]

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Two questions. And I'm sorry if I missed this somewhere, but the J&S Audio, are you providing or will you provide or where can we find kind of pro forma quarterly data on that to build into our models?

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Deric S. Eubanks, Ashford, Inc. - CFO and Treasurer [3]

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It's Deric. We will be filing what's called 305 audits for J&S' historical financials. It'll most likely be the full year 2016 and then a step period for the year-to-date for 2017. Those should be filed in the next month or 2. So those will be filed with the SEC, and you'll be able to use that within your modeling. I'd also point out that when we announced the -- initially announced the acquisition, we did put some additional pro forma numbers in that press release that was issued a few months ago.

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Jeremy J. Welter, Ashford, Inc. - EVP of Asset Management [4]

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Yes. That was around...

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Deric S. Eubanks, Ashford, Inc. - CFO and Treasurer [5]

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Back in April, I think or...

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Jeremy J. Welter, Ashford, Inc. - EVP of Asset Management [6]

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Yes.

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Deric S. Eubanks, Ashford, Inc. - CFO and Treasurer [7]

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No, it's June. In the initial release that we issued for J&S, there was a financial table that had some pro forma data in there.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [8]

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Okay. And then on OpenKey, I think most people know and you guys have discussed and we've discussed on the call, Marriott and Hilton's initiative. And we did hear yesterday on the Hyatt call that they have some type of mobile key initiative as well. And I guess my question to you on OpenKey is, have you approached any of the other kind of big lodging management franchise companies out there about using your product instead of developing their own? And if so, what kind of reception have you got from that?

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Montgomery J. Bennett, Ashford, Inc. - Chairman and CEO [9]

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This is Monty. I'll take it. We've talked to just about everyone at one stage or another, some as long as 2 years ago, some as recently as the past few weeks. And so we're in constant dialogue. Hilton was the first one who was kind of they're planning, and then Starwood kind of had a plan, and then it kind of got rolled into Marriott's plan. But a lot of these smaller brands just don't have the resources in order to go develop their own system. And so OpenKey is great for them as a back end for that product. Some of the larger brands are trying to use it to tie their customers into their loyalty. I think you're aware that Hilton and, I believe, Marriott will only let you use it if you're a rewards member and you get the points and all that type of business. So right now, most of OpenKey's traction are with independents, but it's kind of starting to move up the food chain, meaning that there's an arrangement with Preferred Hotels and other kind of independent-type organization hotels. And then some of the other brands that aren't as quite as big as the ones that I just mentioned are also in discussions about a way that the technology can be used because it's quite an endeavor to have a product that's -- will work on all the various models of mobile phones out there and all the different operating systems and all the different locks. And only the biggest brands are -- can have the resources to do that, to keep that up constantly. So anyway, it's a great opportunity for OpenKey, and they're in constant discussions with them.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [10]

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Yes. And I don't know if you...

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Jeremy J. Welter, Ashford, Inc. - EVP of Asset Management [11]

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This is Jeremy. The only thing I want to add real quick is that they do have a white-label app that they've developed. So they are (inaudible), and there's been some interest by some folks. But when you look at Expedia, half their business is independents. And you know how valuable Expedia is in the market cap. So we think there's plenty of traction with independents to grow OpenKey for sure.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [12]

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Yes. And just as a follow-up, and I don't want you to necessarily share with us your pricing model, but how does that work? Is it -- do you get to collect a fee per room that signs up or per sales associated with that sale of the room? How does that work when -- you don't have to get into the specifics as to what you're charging, but how do we think about that conceptually?

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Jeremy J. Welter, Ashford, Inc. - EVP of Asset Management [13]

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I can take that.

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Montgomery J. Bennett, Ashford, Inc. - Chairman and CEO [14]

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Sure. Sure, go ahead, Jeremy.

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Jeremy J. Welter, Ashford, Inc. - EVP of Asset Management [15]

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Okay. There's an upfront installation fee that really is nominal. It essentially covers the cost. But really what it is, is an ongoing -- it's what they call a SaaS licensee fee, which is Software-as-a-Service. And that's a per room, per day charge for the service.

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Bryan Anthony Maher, FBR Capital Markets & Co., Research Division - Analyst [16]

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So it's a few cents per day per room?

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Jeremy J. Welter, Ashford, Inc. - EVP of Asset Management [17]

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Yes. And technology folks, venture capitalists love those type of models because you develop a good recurring revenue base that incrementally is very profitable.

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Operator [18]

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(Operator Instructions) We'll go next to Stephen Biggar with Argus Research.

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Stephen Biggar, Argus Research Company - Director of Financial Institutions Research [19]

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Thanks for the additional revenue detail in the press release. That's extremely helpful. But my question's on the salaries and benefits line. It went up about $4.2 million quarter-over-quarter, and it looks like the acquisitions accounted for about $700,000 of that. But just a question on the balance there and what kind of internal run rate is in that figure.

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Deric S. Eubanks, Ashford, Inc. - CFO and Treasurer [20]

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Yes. It's Deric. So a couple of things to point out that go into that salaries and benefits line item. One is the deferred compensation plan that we have in place, and that has been earmarked with about 200,000 shares of Ashford Inc. stock. And so as the value of that change in each quarter, that change in value flows through that line item. And we add that back in our adjusted EBITDA table, but that was a positive $2 million in the third quarter, and in the third quarter last year, it was a negative $500,000. So that was a significant reason for the increase. The other thing that's in there is $1.1 million related to the compensation adjustment that I mentioned that was related to an increase in salaries that were retro at the beginning of the year. And so because of that catch-up that we had to book in the third quarter, we went ahead and added back the portion that related to the first and second quarter because that would not be a good run rate because it would be overly stated in the third quarter. And that was $1.1 million.

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Stephen Biggar, Argus Research Company - Director of Financial Institutions Research [21]

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Okay. So that looks like that accounts for most of the $7 million movement to the $8.4 million. I got the -- market change in deferred comp is an easy line there, but the $1.1 million takes care of most of the difference. So okay, that's helpful.

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Operator [22]

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That concludes today's question-and-answer session. I would now like to turn the conference over to our management for any closing or additional comments.

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Montgomery J. Bennett, Ashford, Inc. - Chairman and CEO [23]

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This is Monty. Thanks, everyone, for attending the call today, and look forward to your attendance at our next quarterly conference call.

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Operator [24]

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This does conclude today's conference. We do thank you for your participation. You may now disconnect.