Greetings, and welcome to the Ashford Hospitality Trust Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jordan Jennings, Manager, Investor Relations. Thank you. You may begin, ma'am.

Good day, everyone, and welcome to today's conference call to review the results for Ashford Hospitality Trust for the second quarter of 2023 and to update you on recent developments. On the call today will be Rob Hays, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Chris Nixon, Executive Vice President and Head of Asset Management. The results as well as notice of accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon 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. Statements made during this call do not constitute an offer to sell or solicitation of an offer to buy any securities. Securities will be offered only by means of our registration statement and prospectus, which can be found at www.sec.gov. 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 filed today with the SEC on August 2, 2023, and may also be accessed through the company's website at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. Also, unless otherwise stated, all reported results discussed in this call compare the second quarter ended June 30, 2023, with the second quarter ended June 30, 2022. I will now turn the call over to Rob Hays. Please go ahead, sir.

Good morning. Welcome to our call. After my introductory comments, Deric will review our second quarter financial results and then Chris will provide an operational update on our portfolio. The main themes for our call today are: first, we are very pleased with the strong RevPAR growth we achieved in the second quarter. Our portfolio continues to ramp up nicely. We are clearly seeing the benefit of a broadly diversified high quality portfolio that is balanced across leisure, corporate, and group demand sources. Second, our liquidity and cash position continue to be strong. We ended the quarter with approximately $442 million of net working capital. We feel well-positioned for our upcoming extension tests. In addition, we have to -- we have access to an undrawn capital, if needed, via our strategic financing. Third, the capital raising for our non-traded preferred is ramping up nicely and increased over 148% from the first quarter. We continue to be excited about this source of capital for our platform. Now for some additional details on these three themes. RevPAR for all hotels in our portfolio increased 6.7% in the second quarter compared to the prior year quarter. This RevPAR growth was led by occupancy, which increased 2.8% over the prior year quarter. We also saw strong growth in average rates, which increased 3.8% over the prior year quarter. In addition to our solid hotel performance, the vast majority of our hotels are now out of their respective cash traps. This is an important step for our company as it allows us full flexibility to use our cash to optimize our capital structure pay down debt or invest in growth opportunities. Looking ahead, we believe our geographically diverse portfolio consisting of high quality assets with best-in-class brands and management companies is well-positioned. We also believe…

Thanks, Rob. For the second quarter, we reported a net loss attributable to common stockholders of $30.3 million or $0.88 per diluted share. For the quarter, we reported AFFO per diluted share of $0.78. Adjusted EBITDAre for the quarter was $104 million, which reflected a growth rate of 8% over the prior year quarter. At the end of the second quarter, we had $3.7 billion of loans with a blended average interest rate of 7.8%, taking into account in the money interest rate caps. Considering the current levels of LIBOR and SOFR and the corresponding interest rate caps, 96% of our debt is now effectively fixed as almost all of our interest rate caps are now in the money. During the quarter, we extended our BAML Highland loan pool until April 2024. As part of this extension, we paid down the existing loan balance by $45 million. Also, during the quarter, we refinanced our mortgage loans for the 157-room La Posada de Santa Fe, New Mexico, which had a final maturity date in November 2023 and the 252-room Hilton Alexandria, in Alexandria, Virginia, which had a final maturity date in June 2023. These two loans were our only final debt maturities in 2023. The new non-recourse loan totaled $98.5 million and has a three-year initial term with two one year extension options subject to the satisfaction of certain conditions. The loan is interest-only and provides for a floating interest rate of SOFR plus 4%. Also, during the quarter, we extended our KEYS Pool C loans secured by five hotels with a pay down of approximately $62 million. Subsequent to quarter end, we extended our KEYS Pool D loan secured by five hotels with a pay down of approximately $26 million and our KEYS Pool E loans secured by five hotels…

Thank you, Deric. For the quarter, comparable RevPAR for our portfolio increased approximately 7% over the prior year quarter. This RevPAR growth compared favorably to the national averages for both the upscale and upper upscale chain scales. Despite significant cost pressures, we were also able to generate approximately 5% growth in comparable hotel EBITDA. This is a testament to our talented team of asset managers that work relentlessly with our hotel managers to maximize the operating performance of our hotels. The portfolio saw a number of records set in the second quarter. In fact, 37% of our hotels set all time second quarter records in comparable total revenue. These record breaking performances were spread across various markets, ranging from Florida to Alaska and among different hotel classes, which included resort, urban, suburban, and airport locations. We remain encouraged by the continuing recovery that we are seeing in our urban markets, a large portion of the year-over-year comparable hotel EBITDA success during the second quarter was from Washington, D.C., New York, New Jersey, and Atlanta. We have a large concentration of assets in these markets and they collectively increase comparable hotel EBITDA for the quarter by 12% over the prior year quarter. In fact, four of our hotels in these markets set all-time hotel EBITDA performance records during the second quarter. We positioned the airport properties and our portfolio to capitalize on increased airlift and accelerating demand trends seen by the airlines. In the second quarter, our airport hotels collectively achieved growth of 15% in comparable hotel EBITDA over the prior year quarter. Our Courtyard Crystal City located by Reagan International Airport capitalized on increased parking demand by revamping its parking rates and offerings for both hotel guests and other customers utilizing the airport and increase the number of available rooms…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question is from Chris Woronka with Deutsche Bank. Please proceed.

Hey, good morning, guys. I guess to start off with, can you give -- maybe give us a little bit of detail on how, what the mechanics are on the KEYS loans pool that you did extend. I think the C, D, Es is that something that's going to be reevaluated again after the extension and what -- what are the possibilities there? What would cause you to maybe not make payments at a later date on those? Or do you think they're reached a level that you don't have to worry about that anymore?

Hey Chris, it's Rob. In that, we obviously went through a pretty rigorous process of going through all of these loan pools this past year in terms of determining where we thought equity was, where do we think value was, where do we think about the markets, the CapEx, now that big factor in a lot of these decisions is kind of future CapEx where we thought we maybe would get or wouldn't get returns on that capital. In terms of the pools, we did extend, we obviously paid those down to debt yields. They were typically around 10% or so were the KEYS pools where we feel pretty good about where those are from a value standpoint and where from a refinancing standpoint, even in a pretty difficult market these days on refinancing side. So unless we have I mean all things could change if we had a significant recession or something where we have numbers pull back significantly in across the portfolio, but at least what we're seeing right now in numbers continuing to approve, we feel pretty good about the portfolios we chose to keep and don't as of right now foresee any issues with them or on their future extension tests or refinancings in the future.

Okay. Very helpful. And then kind of on the operational side, you -- I guess the theme has been that we're continuing to see labor availability improve gradually. And maybe you could -- guys could just give us an update on where you're at in terms of staffing and what you're seeing on any of the union versus non-union markets on wages and if you're still using any contract labor or things like that. Thanks.

Yes. Thanks for the question, Chris. I think you phrased it well. We're seeing slow and steady improvements. When we look at our total FDA equivalent labor count to last year we're actually flat to last year, which is pretty remarkable given for the portfolio, occupancy has increased 2 percentage points. And when you equate that to increased number of sold rooms, it's just over 40,000 rooms. And so we've been laser-focused on managing labor. We've been able to keep it flat year-over-year with servicing additional rooms, which has been great. We're starting to see a pullback in contract labor. To your point, our contract utilization rate decreased about 14% to last year for the quarter. And that's kind of the start of the pullback. So we were expecting that coming into this year, we didn't see as much of a pullback in Q1. And then in Q2 we're becoming less reliant on contract labor, which is great because contract labor's obviously much more expensive than in-house labor. And so I think you kind of phrased it well. We're seeing slow and steady improvements in terms of the labor market.

Okay. Super helpful. Thanks, Chris. Maybe just a quick housekeeping one for Deric. Deric, I think you mentioned that you're -- after the -- with the KEYS, the three -- those three pools, you're effectively 95% fixed with the, I guess with the swaps or caps or whatever. Does that mean that when we get to our Q3 interest expense, that that is effectively a run rate going forward?

Assuming LIBOR or SOFR stay where they are and that the caps stay in place, yes. Unfortunately, we have an array of caps that all expire at different times, and typically the caps are structured to expire co-terminus with the initial maturity dates or maturity dates of the underlying loans. And so they'll kind of match up with the maturities of the underlying loans. But I think for all intents and purposes for the next quarter, it's probably a pretty good runway.

Thank you. Our next question is from Tyler Batory with Oppenheimer and Company. Please proceed.

Thank you. Good morning. First question for me is on trends in the portfolio, I think there's a view out there that leisure travel is slowing industry wide, there's less pricing power that corporate travel has peaked. I mean, your RevPAR on the quarter is really quite strong, so are you seeing any sort of evidence of those trends playing out in your portfolio and kind of how are you thinking about the rest of the year in terms of how these in corporate travel play out?

Yes. Hey, thanks for that question, Tyler. So I can start with corporate travel. We're continuing to see signs of recovery and strength out of the corporate segment. In the second quarter, Ashford Trust was up 13% year-over-year in corporate revenue. Now I -- that's broadly a lot of that is driven by ADR, ADR was up 8% and room nights were up just over 5%. And so broadly, we're seeing continued strength out of corporate. Now within that, there are kind of market specific nuances. A lot of our markets that have significant exposure to tech companies and we're down in year-over-year revenue. So we're seeing softness from corporate in Austin, Santa Clara, and markets like Portland that rely on a lot of tech business. But on the whole, we're seeing continued recovery and signs of strength out of corporate. On the leisure side, I wouldn't say that things are softening broadly in leisure. We're seeing more of a stabilization within this portfolio. But we look at our weekend occupancies we were flat to last year. And within that, within urban markets, we're continuing to see growth. It's really where I wouldn't say it's necessarily resorts. It's really more markets where you're seeing leisure customers go. So we're starting to see a little bit of softness in Nashville. We're starting to see some short-term demand that's not as strong as we've seen in recent months, but it's more of a stabilizing in leisure. But I think in terms of when we look ahead for this portfolio, we expect to see continued growth, group pace remains strong. We're up significantly in group pace high-single-digits for Q3 and Q4. The corporate segment continues to increase quarter-over-quarter. And then from a leisure side, we're seeing kind of stabilization with weekend occupancy rates flat to last year.

Okay. That's very helpful. Question on the asset sales, any kind of update there in terms of how that process is going? I mean, you mentioned perhaps bringing some more assets to market. Just kind of what's the interest spend on what you have out there right now and kind of how are you thinking and deciding when and what you might bring to market in the future?

Yes. Good question. Thanks, Tyler. We've got like I said, four assets in the market right now. We've got a three pack of limited service assets and a kind of a full service asset that are kind of in the process of I'd say they're kind of in the second round or getting towards the end of those processes. So we should have some more color on those in the next month or so. At least here internally and then obviously to the extent that we have had successfully fine deals, it'll be in a couple of months before those probably close. I think for us it's really looking at what do we think is the best path to pay off our strategic financing. Like I said, we've had great partners with them, but we do want to pay off that loan. We do have the proceeds that are coming in from the non-trade preferred, which is going towards some of that as well. But I think you'll likely see us get a little bit more aggressive here in the next few quarters on some asset sales both in order to clean up the portfolio. So you'll see potentially some additional assets coming to market that are non-core. But you may have some assets that are assets that we like and that are solid assets, but that have some equity value in them in order to generate some proceeds. Those are still decisions we're looking at internally in terms of the right way to move forward on those. But we do see asset sales as a kind of a crucial part of what we're doing over the next couple of years in order to get the portfolio and the capital structure where we want it.

Thank you. Our next question is from Michael Bellisario with Baird. Please proceed.

Thank you. Good morning, everyone. Rob, I just want to go back to that last question and your answer there, and maybe just talk about the sequencing that you think needs to occur to be able to pay Oaktree and also maybe sort of the timeline that you're thinking about today. Do you need to sell more hotels beyond these four? Do you need to raise more preferred or is it maybe just simply being patient and waiting for EBITDA to continue to recover? But any color around sort of the sequencing and timing would be helpful?

Sure. I mean, as it all these things, Michael, it's a little bit of everything and it depends on how one versus the other goes. We've been very happy with the way that the non-traded preferred REIT has gone thus far. But what we just -- what you never know is it going to continue to accelerate like we want do is it going to stay at comparable levels for a while. It's just -- it's hard to know exactly what that trajectory looks like. And so for us, for internal planning purposes, have to assume somewhat conservative numbers on those fronts in order to make sure that we've got the capital we need and the cash we need in order to grow as we want, and to pay off the strategic financing as we want. So I think what we're focused on is really two -- like I said, twofold on the asset sales. I mean, one is generating proceeds in order to make sure we've got the available cash to pay off the strategic financing. I mean, we still have 2.5 years left on it. We've got time. But I think from our perspective, it's an important I don't know symbol to the Street, the market that we're moving out of our kind of post our COVID phase of this company and moving on towards growth and like I said, a more sustainable capital structure. And so that's why it's important to us right now to really focus on taking that out. And so I think we're going to be a little bit more aggressive in how we're using proceeds of an non-traded preferred and some of these asset sales to pay that down. So you're going to see likely some asset sales like this one where we…

Got it. Fair enough. And then just switching gears a little bit on CapEx looks like, or sounds like it's the same dollars you expect to spend this year, but you've significantly reduced the number of hotels that are at least under significant renovation in your press release schedule. And are -- some of those obviously are part of the KEYS portfolio that you're not going to renovate because you're handing them back, but are some of those falling to 2024? Are you deciding not to renovate a handful of properties and then presumably if the costs are the same or your $110 million, $130 million are projects costing more? Any color around CapEx also would be helpful. Thank you.

Sure. Yes, absolutely. It's a similar number in that we also at once we began that process some time ago of thinking about where as we were analyzing these pools, that also led us to put a lot of the projects on hold in terms of that were in that, those portfolios anyway. So some of it we have been thinking about ahead of time, but we also are going through a process of pushing projects, of putting things into 2024. I don't know if Chris, you had other colors.

So as Rob said, a lot of the AVNF projects, Michael, we had already deferred once we kind of were determined -- had determined the path that we were going to go with those hotels. I think where we expect to see the significant savings from those loan pools in terms of CapEx spend is going to be more 2024 and 2025. And so if we had provided kind of a projection of what we'd spend for 2024, that would come down without those hotels in the portfolio. But the 2023 number was already fairly baked and had included the deferral of a number of those projects.

Thank you. [Operator Instructions]. Our next question is from Bryan Maher with B. Riley Securities. Please proceed.

Great. Thank you. As I listen to all the questions, kind of bring forward more questions related to kind of the strategic plan and maybe Rob, you can give a little more color on, is there a big macro plan as it relates to the portfolio as in you can see several quarters out, which hotels you'll probably sell and/or hand back, or is it more like you're going quarter-to-quarter and depending upon fundamentals and interest rates and cost of hedges the ability to sell assets are you -- I don't want to say winging it, but being a lot more fluid in how you approach the next couple of quarters and years?

No, I mean, we've got kind of a plan that we've laid out. I mean, as a matter of fact, as we are talking right now, I mean we've got a -- we've got kind of what I would say there's a portion of our portfolio that, that we've identified that, we don't think are long-term hold assets, as we've talked about historically, but hopefully at some point in time it'll also come to fruition that, we obviously don't want to be necessarily a long-term holder limit service assets in this portfolio. And those are still while we handed back or handed back some of those here we still have a decent number that are still in our portfolio in Highland and in our MS 17 pools, which are great assets, but I don't think our long-term holds within this portfolio. And so we're actually in the process right now as well of going through a pretty significant rebuy analysis of every asset in our pool, in our company and really looking at what are the anticipated CapEx needs. And we've got a wave of pips and franchise agreements, extensions and whatnot that are coming up over the next five years to seven years and really looking to see what do we think the CapEx spend is on those, do we think that there's ROI on those that CapEx spend? So it's very deliberate, honestly isn't say call it winging it. However, at the same time, you always have to be flexible, right? And for us it's a combination of what's going on in the economy because that could cause you to either accelerate or decelerate certain initiatives that you have depending upon what's going on. Same thing with our non-trade preferred, right? If we really see that accelerate and we see opportunities in front of us, we may be going on the offense a little bit sooner than we would if it's a little bit slower. So in some ways, we've got a I'd say a plan that we're working through in order to get the portfolio where it is, where we want it to be over the long-term and where we want the capital structure to be. At the same time, you got to be flexible enough to you can jive when the economy changes or capital rate seem changes. So I guess it's a little bit of -- in some ways a little bit of both.

I can appreciate that, but when we think about the preferreds, if you're issuing non-treated preferreds at 8% and you've got this 16% Oaktree debt outstanding to your point on wanting to get that taken out or cleaned up or whatever, why wouldn't you all day long issue 8% preferreds and pay off 16% out trade debt? I mean, it's basically found money.

No. And if it could -- if I could get the 8% money to show up and a $200 million chunk tomorrow, I would take it and pay it off tomorrow, right? So if it were -- the answer is you're right. And even within the capital structure, I mean, we have pieces of mez that are on some of our pools that are more expensive than that and heck even mortgages -- new mortgages that people are putting out now when you've got 400 or 500 over on a 50% or 60% mortgage this -- that paper is cheaper than that. So we're in an age right now of very expensive debt financing. And so the 8% money is coming from the Ashford Securities platform is very attractive to us on a variety of fronts. So we've got plenty of, I'd say accretive uses. It's just a question of building up the demand on that side.

Yes. And just last for me, why wouldn't we expect to see for lack of a better word some kind of shell game here where you've got a couple of hotels worth $100 million or with a loan of $100 million that are really worth 60, 70, 80, and you turn around and hand those back to the lender, but your peer also has the same situation and he's handing them back at 67 or 80 and you take this $100 million worth of debt, you now don't have to pay and redeploy that capacity into taking that bank's assets that they just took those hotels at 67 or 80 and generate growth in that way. Is that something we could see unfold over the next year or two?

I don't know. I mean it's -- it tends to be more complicated, right? I mean because there's certain processes and there's fiduciary statuses of some of these the servicers and the lenders. I don't know if it's that simple, but I mean, I think you could have the situation where loan pools are going back and you have other peers buying the debt on other assets, whether it's mez or the loans and trying to step into them I mean, I think those sorts of things are going to happen, but it's a slow process. I mean, even here on the process of hanging back these 19 assets, and that's not something that happens overnight, right? There's intercreditor agreement that have to be gone through in different places in the debt stack of different rights. And all of these things take time. And so we don't know even on our handing back our 19 assets, whether or not that's something that will be formally taking place in several weeks. Do you know if we deeded them over? Or is it something that goes through a longer foreclosure process that could be many months? So it's just as my experience now of having gone through, obviously a lot of debt restructuring and a lot of issues of the past three years through COVID is I've just always telling these things are way more complicated than people typically think.

Right. Which brings up another question that I had that I was holding back on, which is, when do we hand these 19 hotels out of our model? I mean, it's kind of important, right? It's not one or two or three, who cares? It's 19 and $700 million worth of debt. I mean, do you or Deric recommend that we all pull these out effective when beginning of the fourth quarter for conservative state?

I mean, it's a good question, Bryan. Look, from my perspective, I'd go ahead and take them out of the portfolio now. I mean, that could happen imminently and it could drag on. So from our perspective, we're ready to hand the KEYS over and so from a modeling perspective, I'd go ahead and take them out.

This concludes today's question-and-answer session. I would like to turn the floor back over to the management for closing comments.

All right. Thank you, everybody for joining us on our second quarter call. I look forward to speaking with you next quarter.

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