Q2 2023 Ashford Inc Earnings Call
Participants
Deric S. Eubanks; CFO & Treasurer; Ashford Inc.
Eric Batis; SVP of Portfolio Management; Ashford Inc.
Jordan Jennings; Manager of IR; Ashford Inc.
Jonathan David Jenkins; Research Analyst; Oppenheimer & Co. Inc., Research Division
Presentation
Operator
Greetings, and welcome to Ashford Second Quarter 2023 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Jordan Jennings, Manager of Investor Relations. Thank you. You may begin.
Jordan Jennings
Good day, and welcome to today's conference call to review results for Ashford for the second quarter of 2023 and to update you on recent developments. On the call today will be Deric Eubanks, Chief Financial Officer; and Eric Batis, Executive Vice President of Operations. The results as well as notice of accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday in a press release.
At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the Federal Securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks which could cause actual results to differ materially from those anticipated. These factors are more fully discussed in the company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them.
In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with SEC on August 2, 2023, and may also be accessed through the company's website at www.ashfordinc.com. Each listener is encouraged to review this 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 to second quarter ended June 30, 2023, with the second quarter ended June 30, 2022.
I will now turn the call over to Deric.
Deric S. Eubanks
Thanks, Jordan, and welcome, everyone, to our call to discuss our financial results for the second quarter of 2023. I'll start by giving you an overview of our operations, strategy and financial results for the quarter, and then Eric will provide an update regarding our operating businesses. After that, we'll open it up for Q&A.
The key themes we are going to highlight today are: First, we had strong revenue growth in the quarter, but a difficult year-over-year comparison as last year, we reported record results in the second quarter as demand came roaring back to hotels and labor conditions made it difficult to fill open positions.
Second, we continue to see growth in the pace of capital raising through Ashford Securities, and we're pleased to announce the milestone of over $500 million of capital raised through Ashford Securities since its launch in 2021.
And third, Remington had a record quarter in terms of the number of new third-party management agreements signed during the quarter. We continue to be excited about the potential for Remington and all of our portfolio companies to continue to grow their third-party business.
As of June 30, 2023, our 2 publicly traded REIT platforms, Ashford Trust and Braemar, had ownership interests in 118 hotels with approximately 27,000 rooms and approximately $7.9 billion of gross assets. Braemar's resort portfolio has seen some stabilization in both demand and pricing as leisure guests now have more options for travel, while its urban hotels continue to recover nicely as both corporate and group demand continues to strengthen.
Braemar has also been active on the acquisition front and have completed 3 acquisitions this cycle. The iconic 96-room Ritz-Carlton Reserve Dorado Beach in Puerto Rico, the 210-room Four Seasons Resort Scottsdale at Troon North and the 143-room Mr. C Beverly Hills Hotel. We are excited about Braemar's recent announcement regarding the planned conversion of the Mr. C Beverly Hills to Hilton's LXR brand. We believe the strength of the Hilton reservation system will make a big impact at that property.
Ashford Trust continues to focus on deleveraging its balance sheet and extending its debt maturities and ended the quarter with over $344 million of net working capital. To date, Ashford Trust has issued over $50 million of its nontraded preferred stock, and we believe this is an attractive source of capital for that platform.
Further, in early July, Ashford Trust made the strategic decision to not make the required paydown of approximately $255 million for 19 hotels secured by KEYS A,B and F loans. It's important to note that in the event those hotels end up being transferred to the lender, we estimate the annual impact to Ashford Inc. will only be a reduction in annual adjusted EBITDA between $2 million and $3 million.
Our strategy and structure are designed for growth. We have a powerful ecosystem of businesses that all benefit as we grow our assets under management. Our size and scale in the lodging industry also brings benefits to third-party owners and other capital providers as we are one of the largest owners and fee payers for the major hotel brands. We believe we have a superior strategy and structure that is unique within the hospitality space, and we are excited about the potential growth of our platform.
Over the past few years, we have completed numerous bolt-on acquisitions for our operating businesses. And with ample dry powder, we continue to look for attractive opportunities to strategically and accretively grow our business.
I will now turn to our financial results for the quarter. Net loss attributable to common stockholders for the second quarter was $7.5 million. Adjusted EBITDA was $17.8 million for the second quarter. As I previously mentioned, we had difficult comparisons to last year, and our portfolio of companies are working to balance their cost structures while experiencing robust revenue growth.
Adjusted net income for the second quarter was $12.7 million and adjusted net income per diluted share was $1.57. Total advisory fee revenue from Braemar in the second quarter increased 15.1% over the prior year quarter. Our share count currently stands at 8 million fully diluted shares outstanding, which is comprised of 3.1 million common shares outstanding, 0.2 million common shares earmarked for issuance under our deferred compensation plan, 4.2 million common shares associated with our Series D convertible preferred stock, and the remaining 0.5 million shares are for acquisition-related shares and restricted stock.
I'll now turn the call over to Eric to discuss our operating businesses in more detail.
Eric Batis
Thank you, Deric. We are excited to provide updates on our products and services businesses which continued to build momentum during the second quarter. As a reminder, our strategy is to acquire exceptional businesses and create shareholder value by implementing best operating practices, executing accretive add-on acquisitions and utilizing our unique ability to refer these businesses to our advised REITs.
The second quarter was headlined by 2 key themes: Impressive revenue growth and margin pressure. Margins in the second quarter were adversely impacted relative to the prior year quarter by inflation, a return to normalized staffing levels and revenue mix, which I will touch on shortly.
The first business I'd like to discuss is INSPIRE, our leading single-source solution for meeting and event needs with an integrated suite of audiovisual services, including show and event, hospitality and creative services. Continuing its strong growth trajectory, INSPIRE generated $41.3 million of audiovisual revenue in the second quarter, a 14.9% increase over the prior year quarter; and $5.1 million of adjusted EBITDA, representing a 12.3% adjusted EBITDA margin.
Throughout the first half of 2023, INSPIRE has seen impressive top line growth that has required sub rentals and contract labor to execute on this new business, which has resulted in margin pressure. The second quarter of 2022 was the first quarter where revenue significantly accelerated following the pandemic, and its 25% adjusted EBITDA margin at the time was the product of handling large show services events with a very lean team. We target an adjusted EBITDA margin of 15% and expect INSPIRE to achieve this margin on a stabilized basis.
INSPIRE continues to grow its international operations in Mexico and the Dominican Republic, generating $11.8 million of revenue in the second quarter, which represented a 31.4% increase over the prior year quarter. INSPIRE also executed 2 new hospitality contracts during the second quarter which are expected to contribute $815,000 of annual audiovisual revenue.
Remington is a dynamic hotel management company, providing best-in-class management and expertise to hotels across the country. This quarter, we are excited to announce that Remington Hotels has rebranded to Remington Hospitality, which better reflects the company's expanded hospitality offerings and the future direction of the company. This rebrand is emblematic of Remington's commitment to innovation and evolving with industry trends and consumer preferences.
In the second quarter, Remington executed 8 new third-party hotel management agreements representing $1.8 million of expected annual revenue, including its first hotel management agreement with an international hotel, which is located in Costa Rica. This was a record quarter for Remington in terms of the number of new third-party contracts signed and illustrates the momentum we continue to see in growing our third-party business.
Remington also generated second quarter hotel management fee revenue and adjusted EBITDA of $14.9 million and $6.7 million, respectively, representing a 44.8% adjusted EBITDA margin. Remington's margin decreased compared to the prior year quarter due to an increase in lower-margin ancillary revenue and lower incentive management fees, which were elevated in 2022 due to hotels outperforming budget throughout the early days of the recovery.
At the end of the second quarter, Remington managed 120 properties that were open and operating. Remington managed 73 properties for Ashford's advised REITs, Ashford Hospitality Trust and Braemar Hotels & Resorts. Remington also managed 47 third-party properties for 29 different ownership groups, 11 of which have hired Remington to manage 2 or more of their hotels. These ownership groups include real estate funds, family offices, high net worth individuals, private equity groups and developers. Remington's managed portfolio operates in 26 states and Washington, D.C. across 25 brands, including 15 independent and boutique properties.
RED Hospitality & Leisure is a leading provider of watersports activities and destination services in the U.S. Virgin Islands, Puerto Rico, Florida Keys, Turks and Caicos and Hawaii. In the second quarter, RED generated $9.8 million of revenue, representing a 27.5% increase over the prior year quarter and $2.3 million of adjusted EBITDA, representing a 23.7% adjusted EBITDA margin.
RED has seen margin pressure in the last year due to increased salaries as they invest in leadership to support future growth; increased cost for items, such as food and beverage; and slowing demand in the Florida Keys and Turks and Caicos, causing less high-margin incremental passenger revenue to be captured.
RED's recent focus has been on the integration of Alii Nui and Maui Dive shop in Hawaii, which was acquired on March 17. Alii Nui provides luxury sailing and watersports experiences in Maui, offering sunset sails, dinner cruises, snorkeling and whale-watching excursions and is the on-property provider of scuba programming at the Grand Wailea Resort in Maui.
RED recently launched a new website and digital advertising campaign for Alii Nui, and Alii Nui contributed $1.8 million of revenue and $0.4 million of adjusted EBITDA in the second quarter. RED is excited about and actively pursuing additional growth opportunities in Hawaii now that the company has established a strategic foothold in the market.
The next business I'd like to discuss is Premier, which provides comprehensive and cost-effective design, development, architecture, procurement and project management services. Premier generated $7.6 million of design and construction fee revenue in the second quarter, representing 60.5% growth over the prior year quarter. Premier also generated $2.3 million of adjusted EBITDA, resulting in 105.6% growth over the prior year quarter and a 30.4% adjusted EBITDA margin.
During the quarter, Premier also executed 7 new third-party contracts, representing $1 million of expected fee revenue. Premier plans to further grow ground-up development, general contracting, architecture and design project opportunities to diversify its revenue streams.
We are very pleased with the ongoing success of Ashford Securities' fundraising efforts. During the second quarter, Ashford Securities hit an impressive milestone of $500 million of capital raised since 2021. Ashford Securities is currently in the market with a redeemable nontraded preferred stock offering for Ashford Trust and has continued to build momentum by growing our institutional broker-dealer and RIA partners. Ashford Securities has placed over $50 million of Ashford Trust's nontrading preferred stock through its syndicate of 35 broker-dealer and RIA firms.
Ashford Securities is also raising capital for a growth-oriented investment product focused on commercial real estate in the state of Texas. We are very bullish on Texas' commercial real estate market because of the continued migration of people, companies and wealth into the Lone Star state. It continues to be a very attractive place for personal and professional purposes. As of the end of the second quarter, Ashford Securities has raised $2.3 million of capital and signed dealer agreements with 17 firms to distribute this product.
After a strong second quarter, we are optimistic about the opportunities ahead for the remainder of 2023. We continue to maintain a focus on growing our products and services platform through 2 primary initiatives, third-party sales and strategic acquisitions, while we continue to pursue opportunities to meaningfully scale across all our portfolio companies.
That concludes our prepared remarks, and we'll now open up the call for Q&A.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Tyler Batory with Oppenheimer.
Jonathan David Jenkins
This is Jonathan on for Tyler. First one for me is on the expense side. Can you just talk generally about the labor market? Do you feel there's additional positions to fill across your business? And any color on kind of the wage growth you're seeing out there?
Eric Batis
Yes. So as you can see from margin pressure -- this is Eric, by the way, Jonathan. We are continuing to see increased labor cost. We do have some open positions, but in general, we're not seeing a lot more open positions that we need to fill at our portfolio companies. But we are continuing to add staff as these revenue levels climb at the levels that they are. So you're hearing me talk about 20%, 30%, 60% revenue increases. We obviously have to add staff for that, and wages are increasing.
I don't have a great number for you across the portfolio companies as they do blend quite a bit, and we have far fewer instances of hourly labor than we do at our hotels. But it is definitely a continuingly difficult labor market for us, and you're seeing that in our margin.
Jonathan David Jenkins
Okay. I appreciate the color there. And then Premier saw a pretty notable pickup in third-party engagements. Can you provide some color on the drivers of the increase, what types of hotels or other assets were added? And how are you thinking about sizing that opportunity longer term?
Eric Batis
Yes. So it's a lot of hotels. And what's happened is you see this pickup increasing. We started the third-party effort just before the pandemic, kind of have come into recovery from the pandemic. And a lot of these projects are happening 6 months to a year after we get them signed up. So the messages that we've been delivering over the last year about signing contracts for Premier are now starting to show in the projects actually coming to fruition.
We are experiencing projects in both hospitality and multifamily. Primarily, a lot of that is in hospitality. And in terms of sizing the opportunity, it's huge. The renovation market and the newbuild market across particularly those 2, with hospitality, and multifamily in particular, is massive. And so I'd be hesitant to size it. I would say that it has a ton of room for growth from where we are today, and we're very excited about capitalizing on more and more of that.
Jonathan David Jenkins
Okay. Excellent. And then last one for me, if I could. Some modest softness in leisure was noted in the release. And I'm just curious, overall, if you're seeing anything from a demand perspective that maybe gives you pause or is worth calling out. Or does everything still feel generally pretty healthy?
Deric S. Eubanks
This is Deric, I'll take that. I think I would say everything still feels pretty healthy. I think the softness we've seen in demand has been more of a shift in demand than just a decrease in overall demand. Just leisure travelers having more options of whether that's international travel or cruises or just other options. But we think that ultimately, that, that demand will come back to our properties, and feel very well about how our, especially leisure-focused assets, are positioned.
Operator
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
