Ashford Hospitality Trust, Inc. (AHT) Q2 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Ashford Hospitality Trust Second Quarter 2013 Conference Call. (Operator Instructions). This conference is being recorded today, August 1, 2013. I would now like to turn the conference over to Scott Eckstein. Please go ahead, sir.

Thank you, operator. Good day, everyone, and welcome to Ashford Hospitality Trust Conference Call to review the company’s results for the second quarter of 2013 and to discuss our previously announced proposed new platform Ashford Hospitality Prime. On the call today will be Monty Bennett, Chairman and Chief Executive Officer; Douglas Kessler, President; David Kimichik, 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 contained 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 discussed in the section titled Risk Factors in Ashford’s registration statement on Form S-3 and other filings with the Securities and Exchange Commission. Forward-looking statements included in this conference call are only made as of the day 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 July 31, 2013 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. I will now turn the call over to Monty Bennett. Please go ahead, sir.

Thank you and good morning. I’m going to start off the call today talking about our recently announced spinoff of Ashford Hospitality Prime and the rationale behind this transaction. I’ll also provide some detail on the performance of the Ashford Prime portfolio for the second quarter. Then I’ll provide a quarterly update before I turn the call over to Kimo for a financial review of the quarter. This leadership team strives to excel in all aspects of the management of Ashford. In our view the best measurement of leadership is the value we create for our shareholders. Upon this team’s – under this team’s leadership Ashford has experienced tremendous outperformance since our IPO in 2003 generating 114% total return to shareholders compared to the 73% return from our peers over the same time period. In fact we have outperformed our peers in almost every yearly total shareholder return period looking backwards since our IPO. As of yesterday, our one year total return has been 60% compared to the 25% by our peers. Our three year total return is 44% compared to our peers average of 25% and our five year total return is 246% compared to the peer average of only 20%, just to name a few. One of the primary reasons for this outperformance versus our peers, we believe is our superior operational expertise. This is most clearly demonstrated by our strong EBITDA growth and our best in class EBITDA flowthroughs. Our EBITDA growth has been positive for the past 13 quarters and has averaged over 11% per year for this time period. One of the primary drivers of EBITDA growth is EBITDA flowthroughs. We have the highest average EBITDA flowthroughs of all hotel REITs over the past six years. On average, our EBITDA flows have been 62%, about 1.6 times greater than the peers’ average of 39% flows. We also believe our strong return performance is due to our attractive and well covered dividend. Ashford has a long history of offering attractive yields to investors. We are one of the – only a couple of our peers have had both an above average dividend yield and an above average dividend coverage ratio. Our dividend yield is about 4.1% compared to the peer average of about 2.7% while our coverage ratio is 3.5 times compared to the peer average of 2.3 times. Finally one of the most unique and yet one of the most powerful ways we create shareholder value is through the implementation of extraordinary strategies. During the downturn in ’08 we believe, we were the only REIT to implement significant interest rate hedges. Those hedges alongside our common share buyback program, preferred stock buybacks and [forward] strategies have created over $0.5 billion in share value for our shareholders to date. During the downturn, we suspended our dividend as a precaution, yet we would have had the cash to cover our then dividend level easily had we continued it. Although the return we provide to our shareholders is a function of our operational strategic initiatives, we believe Ashford is empowered by an even longer lasting durable competitive advantage due to the high alignment we have with our shareholders interest. Our insider ownership is nearly 19% compared to the peer average of only 3%. No other management team in our sector is more highly aligned with the performance of their company. We are clearly privileged to say that we have enjoyed this growth alongside our shareholders. In our pursuit to continue to provide superior shareholder returns, in June, we announced that our Board of Directors had approved a plan to spin off an 80% interest in a high quality, high RevPAR hotel portfolio that will be called Ashford Hospitality Prime. For those you who did not see our previous announcement, we approved a plan to spinoff this interest in an eight-hotel portfolio totaling 3146 rooms or 2912 owned rooms to holders of Ashford Trust common stock in the form of a taxable special dividend. The dividend is expected to be comprised of common stock in Ashford Hospitality Prime Inc. a newly formed company to which Ashford Trust plans to transfer the portfolio interest. We expect the distributions to take place sometime in late September The history of this transaction dates back to a little over a year ago when we started including in our presentations the concept of looking at our company as two portfolios: Portfolio A and Portfolio B. That illustration was based on a high leveraged portfolio and a lower leveraged portfolio which led us to thinking about our company in terms of the relative imbedded value of each component of our portfolio. We have been constantly searching for ways to maximize shareholder value given our close alignment with shareholders due to our significant insider ownership. The Board analyzed several different options to maximize shareholder value and ultimately determined that a spinoff of Ashford Prime was in the best interest of the company and its shareholders. Ashford Prime will have the focused strategy to invest primarily in high RevPAR hotels and resorts located predominantly in domestic and international gateway markets. The high quality of the Ashford Prime portfolio as well as the focused investment strategy and targeted lower leverage profile have been designed with a goal to make Ashford Prime attractive to a broad range of investors and to capitalize on hotel investment opportunities to further enhance stockholder returns. In our financial tables accompanying our earnings press release, we have provided detailed financial information for the Ashford Prime portfolio. We believe it is paramount that investors have enough information to make informed investment decisions and we provide the same financial information to investors that we find most useful in running our business. Since the Ashford Prime will initially have significantly less hotels than the Ashford Trust portfolio, we believe it makes sense to increase the level of financial disclosure so we have provided property level operating information for the eight Ashford Prime hotels. Our hope is that this additional information will equip our investors and analysts with additional details to help them build their valuation and financial models with even greater position. During the quarter, the Ashford Prime portfolio experienced RevPAR growth of 7.9%, driven by a 5.4% increase in ADR and a 198 basis point increase in occupancy. Hotel EBITDA margin increased 193 basis points and hotel EBITDA flowthrough was 70%. These are impressive results and I believe they speak to the underlying rationale behind the spinoff; that is to unlock the imbedded value in this portfolio. Ashford Prime’s focus will differ significantly from Ashford Trust, focusing on high RevPAR hotels positioned in the domestic and international gateway markets. After the separation is completed, Ashford Prime’s targeted assets will be luxury, upper upscale and upscale hotels and resorts expected to general RevPAR at least twice the national average currently approximately $130 and higher. Ashford Trust on the other hand will continue the focus on all segments of the hospitality industry with RevPAR criteria outside the Ashford Prime investment focus and at all levels of the capital structure. Also, Ashford Prime will have a much more conservative capital structure than Ashford Trust with a target net debt plus preferred equity to EBITDA ratio of 5.0 times or less. We recently completed a follow-on public offering of 12.25 million shares of common stock at a gross price of $12 per share. The proceeds from the equity offering will be contributed to Ashford Prime in connection with the spinoff and will take a big step in getting Ashford Prime to its targeted leverage level of 5.0 times net debt and preferred equity to EBITDA. Pro forma for the cash from the equity raise and assuming we don’t contribute any additional cash to Ashford Prime, we estimate that net debt to EBITDA ratio now to be in the mid 6 times range. From a deal flow perspective Ashford Prime will already have agreements in place with Ashford Trust regarding future acquisition opportunities including options to buy the Pier House Resort and the Crystal Gateway Marriott and, subject to certain conditions, rights to first offer on 12 hotels in the Ashford Trust portfolio that already meet its investment guidelines, should Ashford Trust decide to sell any of those hotels. These agreements can immediately position Ashford Prime for growth and provide a dedicated pipeline of investment opportunities consistent with high RevPAR asset focus. Further, Ashford Prime will be managed by the same Ashford Trust management team under a revolutionary advisory agreement that has been structured to ensure close management alignment with shareholders. The base fee is calculated on market enterprise value as opposed to gross asset value. It’s based on shareholder return outperformance compared to a defined peer set. Also like Ashford Trust, insiders own approximately 19% of Ashford Prime. So while Ashford Prime will be externally advised, it will have a management structure that we believe is materially more shareholder friendly than a typical internally advised company. Most importantly this is the same management team that’s provided shareholders successful long-term shareholder returns. I believe we have the most [caveat] lines based on effective management team in the hotel industry. The same people that took Ashford Trust public a decade ago are also here. We collectively have sold a very little of our stock over the years and have made material additional cash purchases of shares. Our insider ownership is now 19% and is by far the highest in the hotel REIT industry and clearly sets us apart from our peers. The majority of our management team’s net worth is in Ashford stock and as a result, we strive to be good stewards of the capital entrusted to us by our investors since our own personal capital is at risk with yours. Our management team has spent their entire careers working in the lodging industry and real estate industries in a variety of roles including acquisitions and dispositions, asset management, property management, finance, accounting, et cetera. If you look at just the top 10 most senior executives in our company we have well over 200 years of cumulative hotel and real estate experience. We believe that our industry and capital allocation expertise is most clearly reflected and demonstrated in the strong consistent shareholder returns that I quoted earlier. In speaking with many of you over the past few weeks, I would like to address some of the concerns that have been raised. First, let me clarify the dividend for Ashford Trust will not change following this separation and will remain at $0.12 per share per quarter for the balance of this year. In December as is our custom we will provide dividend guidance for 2014. We expect the Ashford Trust dividend for 2014 to stay the same as 2013 and increase just slightly. As I mentioned earlier, our dividend is well covered and our yield is among the highest in the industry Regarding Ashford Prime, while the dividend will ultimately be officially set by its new board, we expect it to start off with a dividend of $0.01 per share per quarter, paying its first dividend in January for the fourth quarter of 2013. Bottom line shareholders who hang on to both Trust shares and Prime shares after the split will have a net increase in dividends. Another concern I have heard about is Ashford Prime’s lower market capitalization post separation and its potential impact on the EBITDA valuation multiple. When evaluating this transaction, we conducted extensive analysis on this very subject before finally deciding upon the strategy. We came to this conclusion that REITs with similar market caps have not traded at a multiple discount. In fact, they have traded at a multiple that is consistent with the RevPAR in their portfolio. For those of you who haven’t already seen it we’ve added a presentation on our website that walks through the spin-off transaction and includes charts showing the high correlation between RevPAR and poor EBITDA multiples. We’ve not found any other metric that has a correlation to EBITDA multiple as is clearly demonstrated on these charts. Even when examining all the other REIT sectors, there is no correlation between the market cap size and the EBITDA multiple at with the exception of multifamily. However in multifamily the largest REITs are also the ones with the highest quality assets. So the correlation appears to be coincidental rather than constant. It is a mystery to us why the belief that EBITDA multiple is influenced by market cap perceived by long term investors and analysts, when we believe the evidence doesn’t give any indication that its relationship exists with the R square of only 0.005. Throughout our history we have always favoured strategy that is aimed at enhancing shareholder value. Our analysis here as always has been methodical and extensive. It was this analysis that brought us to this conclusion that this spin-off will be value enhancing for our stakeholders by creating an exceptional high growth platform with enhanced access to the capital markets. By creating two separate entities that are able to focus on their respective well defined investment strategies, both Ashford Prime and Ashford Trust will be able to capitalize on the attractive lodging industry fundamentals (inaudible) continue for the next several years. Now for the quarterly update, for the second quarter 2013, we reported AFFO per diluted share of $0.55 compared with $0.52 a year ago. The portion note, the prior year quarter included $8 million of derivative income which increased AFFO per share by $0.09. In fact, when you exclude derivative income from prior years, this was a record quarter for us in terms of AFFO per share. Hotel operating profit for all hotels increased 6.0 million or 5.3% driven by continued RevPar and enhanced operational efficiencies. During the second quarter positive supply and demand trends helped fuelled ongoing momentum in the US lodging sector’s recovery. Demand continues to rise steadily while new hotel room supply remains at historically low levels. In fact, since existing credit availability for new hotel construction remains limited, PKF continues to forecast low supply growth of 0.8%, 1.0% and 1.4% for 2013 – ’13, ’14 and ‘15 respectively. PKF also continues to forecast attractive RevPar growth of 6.1% for 2013, 7.7% for 2014 and 8.5% for 2015. As we stated previously these projections are based upon a gradual economic recovery. So any acceleration would offer potential upside to this forecast which clearly reflects Turning to our portfolio performance, RevPar increased 4.1% in our legacy portfolio for all hotels, including Ashford Prime hotels, driven by a 3.8% increase in ADR. Hotel EBITDA margin increased 82 basis points and hotel EBITDA flow-through was 59% for all hotels in the legacy portfolio. During the quarter, we saw continued improvements in our Highland Hospitality portfolio with RevPar growth of 4.5% for all hotels with the 4.7% increase in ADR. Hotel EBITDA margin increased 12 basis points and hotel EBITDA flow-through was 37% as we had significant insurance savings and property tax refunds in the prior year quarter. But the Highland hotels not under renovation, RevPar growth was 6.0% during the quarter. We are very pleased with these results and continue to implement strategies to unlock the value in these assets. As previously announced our Board of Directors declared a dividend of $0.12 per share for the second quarter 2013 which represents an annual rate of $0.48 per share. This covered dividend is well above our peer average. Based upon yesterday’s closing price, the dividend yield is 4.1% which is among the highest of our peer group. With that I will now turn the call over to Kimo to review our financial performance for the quarter.

Thanks Monty. For the second quarter we reported a net loss to common shareholders of $1.385 million, adjusted EBITDA of $108,818,000 and AFFO of $48,147,000 or $0.55 per diluted share. At quarter’s end, Ashford had total assets of $3.6 billion in continuing operations and $4.5 billion overall, including the Highland portfolio which is not consolidated. We had $2.4 billion of mortgage debt in continuing operations and $3.2 billion overall including Highland. Our total combined debt currently has a blended average interest rate of 5.3%. We currently have 57% fixed rate debt and 43% floating rate debt, all of which have interest rate caps in place. Our weighted average maturity is 3.4 years. At quarter’s end, our legacy portfolio consisted of 95 hotels in continuing operations. Additionally, we owned 71.74% for 28 Highland hotels in a joint venture. All combined we currently own a total of 25,715 net rooms. Hotel operating profit for all hotels, including Highland was up by $6 million or 5.3% for the quarter. Our share count currently stands at 99.6 million fully diluted shares outstanding which was comprised of 80.6 million common shares and 19 million operating partnership units. Before I turn the call over to Jeremy I would like to mention a few facts concerning Ashford Prime. When Ashford Prime is spun out, it will begin with a minimum cash balance of $160 million. Net of our joint-ventures Ashford Prime as of June 30 had GTM hotel EBITDA of $70.4 million. If you would have estimated had annual advisory fees and G&A of $9 million, the trailing 12 months EBITDA would be $61.4 million, its net debt to EBITDA ratio would be approximately 6.5 times. We are well on our way to our stated target of 5.0 times. I would now like to turn the call over to Jeremy to discuss our asset management accomplishments for the quarter.

Thank you, Kimo. Looking at our performance in the second quarter, I would like to begin by highlighting the excellent results within the Ashford Prime portfolio. RevPar at the eight properties increased 7.9% in the second quarter driven primarily by REIT which increased 5.4%. Four of the eight hotels experienced RevPAR growth exceeding 12%, led by Courtyard San Francisco which was up 19.4%. This continues the trend from earlier in the year as Ashford Prime’s properties RevPAR is up 6.7% year-to-date, again largely driven by a rate increase of 5.1%. Moving to our legacy portfolio, RevPAR was up 4.1% driven by rates which increased 3.8%. EBITDA margins increased 82 basis points, while EBITDA flowthrough was 59%. In our Highland joint venture, RevPAR increased 4.5%, driven entirely by an ADR increase of 4.7%. If you exclude hotels under renovation, RevPAR for Highland was up 6%. EBITDA margins increased by 12 basis points while EBITDA flowthrough was 37%. It’s important to note that we had significant insurance and property tax savings in the second quarter of last year at both legacy and Highland. Without these increases, margin improvement would have been 162 basis points for legacy and 101 basis points for Highland. Total portfolio RevPAR in the second quarter was up 4.2%. Excluding our Washington DC hotels, total portfolio RevPAR was up 5.2%. I want to give you some broader color today around our asset management initiatives. Starting with the topline, we are actively engaged with all of our properties regarding appropriate revenue management and sales strategies. In the second quarter alone, the asset management team has conducted comprehensive revenue focused, portfolio reviews with our Hilton, Marriott and Remington managers, covering over 97% of our rooms. Recognizing the importance of driving hotel revenues primarily at this point in the cycle, we have recently recruited Sloan Dean to oversee our revenue optimization. Sloan joins us from Interstate and he currently serves as the Chair of Hospitality Sales and Marketing Associate International’s revenue management advisory board. Drilling down to property level examples of these revenue optimization strategies, from two of our Ashford Prime properties the Courtyard Seattle Downtown Lake Union and the Courtyard Downtown San Francisco, we recently worked with the hotels to identify additional premium view rooms. Approximately 36% of total rooms at these two hotels have been removed from the standard inventory. This limits the amount of lower rated contractual last room availability business. Another example of our successful revenue optimization strategies was at the Courtyard Denver Airport, which had an outstanding second quarter with RevPAR up 28.9%. We aggressively reduced lower rated airline business by approximately 50% which allowed us to segment into higher rated groups, retail and special corporate business, increasing ADR profitability and ancillary spend. Staying on the topline and moving to ancillary revenues, we recently initiated a broad parking survey of our portfolio. According to our analysis, we concluded that the demand for parking is relatively price inelastic. And based on market rates, we identified 22 hotels representing 27% of the total rooms in our portfolio that we believe had the ability to increase parking charges. In addition, in certain assets we recently began implementing parking charges for the first time, some of which became the first property to charge for parking in their respective market. Also, as part of this initiative we are in the process of rebidding our third party parking and valet agreements. This process is expected to yield approximately 3 million of additional EBITDA per year. These efforts are emblematic of our broader asset management philosophy in which we aggressively and continually push our hotels to operate more efficiently while seeking new innovative ways to create value. Now let me share some of the results we are seeing in our newest acquisition: the Pier House Resort in Key West. We already knew the property boasts spectacular views with rear beach access and is an irreplaceable location. We recently completed an onsite business review with our manager Remington and I am pleased to say that we are now even more convinced that we can deliver significant operational upside to this asset. In the first year along, Remington’s revised cost structure is anticipated to deliver nearly $1 million of expense savings. In addition, our property insurance program which replaced the former property in general liability insurance coverage resulted in annual savings of approximately $400,000. Above and beyond these items, the property’s largest opportunity resides in increasing revenue. Our team has identified significant cross selling and marketing opportunities targeted for the Pier House and our Crowne Plaza Key West, which we believe will lead to very significant RevPAR increases and improve market share for both hotels going forward. During the quarter, we also converted 8 hotels from brand managed to franchise. Not only will Remington be able to operate these hotels more efficiently than the previous manager, but we also see franchise hotels sell in the marketplace at a premium multiple and lower cap rates. I would also like to share some exciting news related to our Crowne Plaza Beverly Hills. Ashford has just agreed to convert the property to a full service Marriott after the expiration of its current franchise agreement in March of 2015. As part of the new 25 year franchise agreement, an extensive $25 million [PIP] in planned. Remington will continue to manage the newly minted Marriott Beverly Hills. Turning to capital expenditures, we continued to strategically invest in our assets, spending $36.2 million in the second quarter. We know that our capital allocation process yields solid returns through gains in market share. And I want to share a couple of recent examples. First, we recently completed fantastic rooms and lobby renovations at our Marriott San Antonio. In the second quarter, that property’s RevPAR was up over 8% with ADR up almost 11%. Also at our Hilton Santa Fe property we completed a transformational rooms renovation during the second quarter and the results are already showing. For the second quarter, RevPAR increased more than 35% in a relatively flat market as the property increased its market share by 2200 basis points in the quarter. Again it’s our belief that a prudent and rigorous capital expenditure allocation process is effective -- it will be an effective element of our broader asset management philosophy. Thank you. Now I’d like to turn the call over to Douglas.

Thank you Jeremy. During the second quarter, we continued to focus on investment strategies designed to increase our RevPAR performance and EBITDA flows while also continuing to strengthen our capital structure, both to pursue attractive market opportunities and in anticipation of the spinoff of Ashford Prime. Looking at our strategic investment activities during the quarter, in April we announced that along with our joint venture partner, we entered in a series of agreements with the city of Nashville, Davidson County related to the 673-room Renaissance National Hotel. This hotel is part of our Highland hospitality portfolio which Ashford has a 72% ownership. The agreement include converting the joint venture’s leasehold interest in the hotel which was set to expire in 2087 to fee simple ownership, exceeding the current lease term of some of the adjacent facilities in 2112 and entering into a new, 30-year lease for 80,000 square feet of meeting space and pre-function space located at the existing Nashville Convention Center, which is adjacent to the hotel, all at no cost to the joint venture. The new lease provides us with additional meeting space, so the hotel will now be able to offer over 110,000 square feet of self-contained meeting and pre-function space to accommodate larger groups. In May we completed the acquisition of the 142-room Pier House Resort and Spa in Key West, Florida for $90 million in cash or $634,000 per key. Prior to this it had been over two years since we acquired a hotel. With the attractive nature of the Key West market and its high barriers to entry, we are very excited to add this high RevPAR hotel to our portfolio. Also the purchase prices represents a trailing 12-month cap rate of 6.2% on net operating income and an EBITDA multiple of 14.3 times. After completing our operational synergy analysis assuming Remington was managing the hotel for the previous 12 months, we estimate that both net operating income and EBITDA would have been approximately 35% higher than the actual trailing 12 months. This equates to a pro forma trailing 12 month cap rate of 8.4% and a pro forma EBITDA multiple of 10.5 times. In 2012 the hotel achieved RevPAR of $276 with occupancy of 83% and average daily rate of $334. So this acquisition has upgraded our overall portfolio in terms of asset quality, while also providing both short-term and long-term accretion to our corporate model. And with its recent $12 million renovation, the hotel has minimal CapEx needs. As Jeremy outlined, we also anticipate significant revenue enhancement opportunities and cost savings through synergies with Remington’s existing presence in the market. We anticipate this asset will be sold from Ashford Trust to Ashford Prime in the fourth quarter for its cost plus related expenses. We were able to act quickly on this opportunity due to our industry experience and the excess cash balance we have built up over time. We believe it remains an opportune time in the lodging cycle for acquisitions and we are actively pursuing attractive hotel investments. However, any potential acquisition must be accretive to our future anticipated share prices. Along those lines, we also believe our proposed Ashford Prime portfolio will be able to pursue certain attractive opportunities that do not currently fit with the Ashford Trust given the Trust’ higher cost of capital. Turning to our capital structure, in June, our Board approved the plan to spin off an 80% ownership interest in an eight-hotel portfolio to holders of Ashford Trust common stock in the form of a taxable special dividend which is expected to be comprised of common stock in Ashford Prime. This distribution will be made on a pro rata basis to holders of Ashford Trust common stock as of the distribution record date. We expect the record date for this distribution to be determined in mid-September and the distribution to take place in late September. Ashford Prime is expected to qualify as a real estate investment trust for federal income tax purposes and intends to file an application to list its shares of common stock on the New York Stock Exchange under the symbol AHP. Related to this transaction, we recently closed a follow-on public offering of 12.25 million shares of common stock at a gross price of $12 per share. The cash rate from this offering will be contributed to Ashford Prime in connection with the spinoff which will be a big step in getting Ashford Prime closer to its target net debt plus preferred equity to EBITDA ratio target of 5.0 times. By positioning Ashford Prime closer to its targeted leverage level, our hope is that it will result in Ashford Prime receiving a better valuation multiple resulting in net accretion to Ashford Trust shareholders. Keep in mind that during the downturn, we bought back over 70 million shares at an average price around $3 per share. By selling these 12.25 million shares back into the market at $12, we locked in a significant gain on that investment for our shareholders. We are very excited about the prospects for both Ashford Trust and Ashford Prime and are confident that both companies will be well positioned to implement their respective investment strategies. We believe that by unlocking the latent value of these high RevPAR assets; Ashford Prime will be very attractive to a broad range of investors. This combined with its lower leverage profile should afford Ashford Prime greater access to the capital markets which will give us more flexibility to pursue accretive investment opportunities. In August, Ashford Trust will celebrate its 10th year as a public company. We started as a blind pool IPO that raised a little over $200 million and sit here today 10 years later with approximately $5.2 billion in gross assets. The entire management team that took this company public 10 years ago is still here. We have a 10 year proven track record of delivering significant asset growth while achieving superior shareholder returns. We will continue to seek to grow the value of our shareholders investment and keep in mind, as 19% owners of both platforms, this management team is highly aligned with all of you. That concludes our prepared remarks and we will now open it up for your questions.

Thank you sir. We will now begin the question and answer session (Operator Instructions) Our first question comes from Ryan Meliker with MLV & Company. Please go ahead. Ryan Meliker – MLV & Co: Hey guys. I just had one question that I was – one – two questions on the AHP spinoff that I was hoping you guys could answer for me. I think first of all, how did you come to the cash infusion number of $160 million? Obviously AHT has a lot of cash on the balance sheet, $250 million at the end of the quarter and if AHP is going to get a higher valuation, it might make sense to put the capital there and allow the company to grow without needing to tap the capital markets sooner I would imagine from the size of not only the Pier House, but the $90 million acquisition price you paid but then the Crystal Gateway asset, that’s much larger. The majority of that cash would be spoken for with those two assets being acquired in the relatively near term assuming that happens. So that was the first question. I was hoping you could give some color on. And the second question was with a $0.01 dividend on AHP, my back of the envelope just down and dirty analysis is looks like it’s about a 25% AFFO payout ratio. Why was that when you guys determined was appropriate for AHP to come out of the gateway as it seems pretty low and typically speaking, some of these smaller market cap lodging stocks, one of the attractive features is a relatively attractive dividend yield and at a penny a quarter that’s not going to get anybody too excited. So any color on both those would be appreciative. Thanks.

Sure. This is Monty. I’ll answer the first one and Doug will answer the second one. On the cash, first realize that the deal with the Gateway Marriott would be a units deal and so that would not use any cash, although you’re correct that the Pier House would be a user of cash. In our remarks we commented that $160 million is the minimal amount of cash that’s going over and how we calculated that minimum amount is that because of the way the equity raise was done and marketed all of the cash from the equity raise had to go over into the prime platform which is 140 and then we’ve got some working capital cash on top of that. So we essentially have to go ahead and put over the $160 million of cash. So we wanted to go communicate that to the market already. Whether we put additional cash in there or not we’re going to discuss that and we’re still discussing it. But again, we wanted to go ahead and say this will be a minimum of 160 million put in that new platform, and that’s how those – that’s how we arrived at those numbers. Doug?

Sure, Ryan. With respect to the dividend, as you’ll note, if you’re an existing shareholder of Ashford Hospitality Trust and you retained your shares in both platforms that’s about an 8% dividend increase. So we think that that first of all, when you look at the unified hold, that’s a very attractive upside opportunity. Secondly, as you are aware, not all REITs that come out to the marketplace are established with an existing dividend. So we felt that having a dividend would be a favorable component for the platform. And then lastly, as we’ve expressed, we expect to run the platform conservatively and we want to have the benefit for upside for growth, we want to have the benefit of a very well covered dividend. And clearly this is the direction that this Board has established for the platform but obviously it will be up to the new Board of Ashford Hospitality Prime to establish the dividend going forward. But as you noted, it is a very conservative dividend with plenty of coverage and there is the opportunity for upside if the Board so chooses. Ryan Meliker – MLV & Co: Okay, I think that makes sense to me. I guess why establish a $0.01 dividend now at all? I mean I think you’re right, it’d probably see an increase, but I would imagine most investors were expecting that type of modest increase regardless. So I don’t know, that’s an incremental and when I look at AHP specifically, feel like you’re setting an expectation right now of $0.04 a year and that expectation might be disappointing to some investors that may not want to hold that stock for that modest dividend. So why set anything now then given that that modest expectation is what you’ve set?

Sure Ryan, this is Monty. A couple of reasons. First, in December, both platforms are going to evaluate the dividends for the coming year. And that would give the new Board of Prime in order to set their own dividend policy and to move forward. So that’s going to happen, that may mean the range of keeping those dividends same are increasing. And so we’ll take that – look at that then. But as you know, as far as why put out a dividend at all, is that there are some investment funds that will only invest if there is some type of yield, even if it’s just a small yield. Even if they are not really that interested in yield they just need investments that have to have some kind of yield. So we want to make sure we were still attractive to those that needed some yield in order to invest at all. But as Doug said, we just feel more comfortable starting out a little more conservatively and if there is an opportunity to raise it, we’ll raise it. But a lot of the investors that we see to be more typical of Prime aren’t that yield focused. That’s what we see, but again we wanted enough so that those looking for yield would get some. Ryan Meliker – MLV & Co: Fair enough. That’s helpful and then shifting gears just real quickly and then I’ll jump back in queue with anything else. This morning on the Marriott International call, Arnie indicated that they are looking at group paces flat in 3Q but then up nicely in 4Q up 6% but then really deteriorating in 2014 to plus 2%. I know group isn’t a big component of your business but it is close to 30% of your bookings. Can you give us an indication of where you’re group pace is coming out right now for 3Q, 4Q and ’14?

Well, as you know Ryan, we are always reluctant to give any guidance as far as the future holds. But if you look at the past couple of quarters for us and for all of our peers, group has been a laggard. It hasn’t grown anywhere as strongly as transient. And it seems to be a bit of a mystery as to what that’s the case. We’re still doing a lot of internal analysis to try to understand the macro factors going on of why that’s the case. If you look back in history there was a secular downdraft in group business in early part of 2009 and the group just hasn’t recovered from that point. And corporate group fell off more dramatically but it’s come back more dramatically but it’s come back more dramatically. Smart group didn’t fall off very much but then it’s the slowest growth, clearly government group has been impacted but that’s not a huge amount of the group market. So group is a question mark for this industry as to why it is just growing more slowly than transient. Ryan Meliker – MLV & Co: So without giving guidance, are you willing to provide some color on what bookings you have on the books today? Obviously it’s not – in the whole company, nor is that an indication of where you are right now, an indication of where you think RevPar is going to end up that it might give us a good sense of where you stand for the future?

Not at this time Ryan.

Our next question comes from [Babloo Thor] with Cantor Fitzgerald.

Couple related questions, one, Monty, if you could sort of walk us through the – maybe the path and the timetable between sort of 6.5 times leverage right now and 5 times leverage which is the ultimate goal. And then also related to that is, one of the rationales for having such a low dividend payout to have more powder available to grow this company because certainly it seems to me that you are really positioning this for as fairly aggressive growth company as opposed to a more stable traditional REIT platform?

Sure, if we push the Prime out there, without this equity raise that’s $140 million equity raise, it would have come out of the gate at about 9 times net debt to EBITDA, and that is a long, long way from the 5 times that we are trying to ultimate get at. So we haven’t set a specific date on when we want to hit that 5 times, we want to – we’ve thrown out that we want to hit it over the next few years because we want to have time to get there, as you know we give specific dates about things to the market and suspect that we are going to come back to the Ashford equity in the certain period of time and the breadth of stock price but until that time neither we nor investors like that. So we are not going to give a specific time period. But what’s important to note is that, that $140 million that we raised, took us from the 9 times at issue to about 6.5 times or so. So that’s a material jump from 9 times to 5.0 times, we just fell again – as we came out of 9 times investors would just see 5 times it’s so far away that those lower leverage vectors would want to wait and now with coming out of 6.5 times, we don’t think there is any reason for any than the rate because we are right within striking distance. So we wanted to make it more attractive for investors at that way. Also we plan to come out with credit facility and credit facility – in order to get them we will get more favourable terms, you want lower net debt to EBITDA levels. So that’s another reason why coming out with something a little bit lower. That’s the genesis of why we decided to do what we did.

And with the sort of plan in place to purchase the peer outs for the 90 million plus, what does Prime pencil out on a leverage basis post that transaction?

I don’t have those numbers right here. So we will have to pull those but we will just make a note of it. What are you looking for the total leverage?

Yeah I was just wondering what the leverage is going to look like after closing periods?

After closing periods, we don’t have a loan on period out. And so when the process of putting that loan on right now I can give you some color, it looks like the amount of debt that we are going to get on it is around $69 million. So unless something changes, then we can add $69 million to the debt figures that we have already released for Prime.

And what’s pricing looked like on that debt today given the shipments [first rights] recently?

That’s 490.

And last question completely unrelated, can you talk a little bit about the weak flow-through on the Highland portfolio this quarter? I understand some of its related to insurance expenses but how much of that is sort of isolated to this quarter and how much of those are going to linger with the future quarters?

Sure, our flow-through is on the operations side, this has already been, so they are solid from operating perspective that’s where we are right on track. How we book our property tax and I am going to -- approximately on property taxes, whenever we think we might we get a lower value, or we don’t – let me check that. When we get noticed just from the taxing authorities, what the property taxes would be, but basically it should be taxably booked, regardless of what we think it ultimately will be, we don’t – any option there, it will appeal and sometimes those appeals will go for years and then 3 years later we will get a huge refund and then we will get that against – our current quarter property tax. So that’s what happened last year in the second quarter for Highland. And so in preparing this year we just had a difficult time because we didn’t have that big accrual reversal that we had last year. As far as estimating the future we’ve had those coming in for few years now and this one was a bit of surprise that we didn’t have another one because they happened a lot, as far as the future, we’ve got quite a few wonder appeal right now and expect to win on a lot of them. As far as specific items I just can’t – I can’t help you with that but wouldn’t see anything specifically related to Highland, this is going to look to draw – that happened to any of our assets. It happened to happen on a few Highland assets.

Our next question is from Nikhil Bhalla with FBR. Nikhil Bhalla – FBR: Monty, just wanted to get some color on the economics, I think you talked about that last time when you disclosed the AHP transaction. How would – if you can just remind us how the economics worked in terms of management fees and things like that when it comes to AHP portfolio and then I have a follow up question.

Sure, as far as the economics flowing from AHP to AHT, the advisor, there is a AHP, the Prime will be paying a non-salary G&A expenses. As far as fees back to Trust, it’s going to be a calculation of basis points times total enterprise value. And the details of that are in our information statement filed with SEC. Then on top of that – there is a peer group access and Prime will measure its total shareholder return on an annual basis compared to those peers, and 10% of that upside difference will be paid to the advisor as a fee. So what we are really excited about as far as dispute, we call it revolutionary, it’s not based upon the gross assets, it’s based upon total enterprise value. What’s more is that both the management team and trust will have material amount of shares within this new platform together and in fact, 36% we will own on this new platform. So there is extraordinary alignment with this platform. We hear about some externally managed vehicles, well that’s only because they don’t think management aligns, right, what difference does it make external or not. But our structure is materially more aligned than all of our peers internally managed platforms because our peers don’t have that kind of alignment of the advisors/management owning 36% of the platform. So we were very proud of this structure, we forecast with the help of Bank of America and we think it’s the standard for these kind of pretty much going forward. Nikhil Bhalla – FBR: And just when you ran your announcements about – which part of it goes to Prime into the AHP portfolio, how you balance sort of the high RevPar hotels versus hotels located in markets which probably some investors may not consider to be core markets, what’s the thought process there?

We took all hotels in our portfolio that were two times the national average or above and those are the ones that we want to move into this new portfolio. But then we saw that there is a few that we couldn’t move because they were deck pools with a bunch of other assets that weren’t above that. So we couldn’t move those. And then we found that we couldn’t move the gateway because of tax consideration, that’s why we got to make – we got to wait six months. So it was a simple as that, we want to be very even handed which have debts to move over to this new platform and that’s how we did.

Our next question comes from Whitney Stevenson with JMP Securities. Whitney Stevenson – JMP Securities: Hi everyone. I was wondering if you could maybe make some comments on the Washington DC market and sequestration impact in general. Just do you see government demand further deteriorating or do you think we’ve kind of hit a run rate at this point?

Why don’t I let Jeremy talk about it and since that question is pretty broad about government demands, we’re happy to talk about the future – our future thoughts on it.

Sure. Yeah, in the second quarter government room night to our portfolio was down about 25%. And most of that decline was in May and June, so it certainly accelerated May and June and it seems to have maybe stabilized a little bit. But looking forward, kind of from a market base, beat the outlook we expect the impact of sequestration to continue certainly in the third quarter maybe a little bit less in the fourth quarter and little bit less in the first quarter of next year. And then once you get to the second quarter of 2014, on a year-over-year basis, it won’t be nearly as much of an impact. Whitney Stevenson – JMP Securities: Okay. So when you saw you saw acceleration in May and June, do you mean that June was worse than May?

What I mean is year-to-date it wasn’t so bad and April was actually pretty strong and then just all of a sudden May-June that’s when a lot of cancellations hit and a lot of lack of government spend did. So…

He’s not saying that June moved materially worse than May.

That’s right. Whitney Stevenson – JMP Securities: Okay, perfect. Thank you.

Our next question is from Jordan Sadler with KeyBanc Capital Markets. Please go ahead. Austin Wurschmidt – KeyBanc Capital Markets: Hey guys, it’s Austin Wurschmidt here with Jordan. Just a question. Since the AHP spinoff is a departure sort of from the historic more traditional AHP portfolio and strategy, and a little more in tune with some of the smaller cap public peers, have you given any thought to providing guidance for the AHP portfolio?

We have given thoughts to that and at this point in time, we don’t plan on giving guidance for Prime, but we’ve kicked it around. It seems like the only request for guidance comes from analysts and not from investors. But we’re still rolling it around, we are going to be giving ongoing more detailed property by property information in Prime, but haven’t settled that we’ll actually provide guidance though. Austin Wurschmidt – KeyBanc Capital Markets: Thanks. That’s helpful. And then just kind of curious what your thoughts are on what drove the delta between the performance in the AHP portfolio from a RevPAR standpoint versus the overall AHT portfolio.

Well one point of difference is that the Hilton Torrey Pines is an asset that went through an extensive renovation here in the spring. And so some of its year-over-year numbers are really helping out and that’s benefit to that portfolio going forward. And I’d say the only other difference is these are higher end assets and they are experiencing higher growth. Austin Wurschmidt – KeyBanc Capital Markets: That finally makes sense. So then if you remove those eight AHP hotels from the legacy portfolio, what would RevPAR growth have been?

This is Kimo. It would be something just under 4%. I don’t have the exact number though. Austin Wurschmidt – KeyBanc Capital Markets: Okay. Will the AHP results be consolidated in AHT’s financials following the spinoff getting sort of the control within AHT management team?

No it will not. It will be unconsolidated and it will have its own Board guiding it and because of that it will not be consolidated. Austin Wurschmidt – KeyBanc Capital Markets: Great that’s helpful. Thanks, that’s all I have.

Thank you.

There are no further questions at this time. I’d now like to turn the conference back to management for any closing remarks.

Thank you all for your participation today. We look forward to speaking to you again on our next call.