Braemar Hotels & Resorts Inc. (BHR) Q3 2016 Earnings Report, Transcript and Summary

Good morning and thanks for joining us. We are excited to update you on recent progress we have made on several fronts. Yesterday we announced the appointment of our new CEO. We've recently announced some very well received corporate governance enhancements, we've added a great Independent Director in Ken Fearn to our Board and execution of our strategic initiatives has been successful. We've also had strong performance from our hotel portfolio. Our RevPAR grew 4.3% in the third quarter, which significantly outperformed both the industry and our peers. We believe this performance speaks to the quality of our portfolio and highlights our asset management team's ability to drive results at our properties. Our management team's sole focus is to maximize shareholder value and deliver superior total shareholder return for our investors. With our industry-leading insider ownership, which currently stands at 16% versus a peer average of 2%, we are highly incentivized to outperform and highly aligned with our shareholders. We also have an advisory agreement with Ashford Inc. that creates further alignment through its fee structure by incentivizing its management team to create value and outperform its peers. I believe these factors create a structure that makes us more aligned than all internally managed companies, and our outperformance is evidence of that. As announced on our last conference call, in addition to advancing our strategic initiatives, we are moving forward on several corporate governance enhancements, based upon feedback from our investors. The governance committee and Board, in consultation with outside advisors, have approved several shareholder-friendly policies. These enhancements include, one, adopting a majority voting standard for the election of directors; two, providing proxy access to shareholders; three, prohibiting share recycling in the company's stock plan; four, adopting mandatory equity award retention periods for officers and directors; five, separating the role of Chairman and CEO; and six, adding one or more additional independent directors to the Board. In furtherance of these enhancements, we were pleased to announce that Ken Fearn has joined the Board of Directors, bringing the total number of directors to eight and the total number of independent directors to six. Ken brings over 21 years of real estate and hospitality experience to our Board. Currently, he is the Founder and Managing Partner of Integrated Capital, a private equity real estate firm with a focus on hospitality assets and markets inside the US. Prior to founding Integrated Capital, he was Managing Director and Chief Financial Officer of Maritz, Wolff & Co., a private equity firm engaged in real estate acquisition and development that managed three private equity investment funds totaling $500 million focused on acquiring luxury hotels and resorts. Prior to Maritz, Wolff, he was with McKinsey & Company in Los Angeles, where he worked with Fortune 200 companies to address issues of profitability and develop business strategies. Ken has served on the Marriott International Owner Advisory Board since 2006 and he is an Entrepreneur in Residence at the Pillsbury Institute for Hospitality Entrepreneurship at Cornell University. We believe Ken's extensive contacts in the hospitality and commercial real estate industries will be beneficial in his service on our Board of Directors. The Board has also been evaluating other prospective independent board candidates. We're also very pleased to announce a new CEO for Ashford Prime. Since inception, I have served that function, but going forward, it is going to be a separate individual, Mr. Richard Stockton in that role. Richard brings a wealth of real estate experience and accomplishments to Ashford Prime. He spent over 15 years at Morgan Stanley in real estate investment banking, where he rose from an Associate to Managing Director and regional group head. At Morgan Stanley, he was head of EMEA Real Estate Banking in London, executing business across Europe, the Middle East, and Africa, and as co-head of the Asia Pacific Real Estate Banking Group. He was also responsible for a team of over 20 real estate investment bankers in Hong Kong, Singapore, Sydney and Mumbai. He left Morgan Stanley in 2013 to become President and CEO of Americas for OUE Limited, a publicly-listed Singaporean property company with over $5 billion in assets. Most recently, Richard served as Global Chief Operating Officer, Real Estate at CarVal Investors, a subsidiary of Cargill with approximately $1 billion in real estate investments and operations in the US, Canada, United Kingdom and France. At CarVal, he developed a strategic plan for the real estate business and oversaw real estate capital formation, marketing, and operations, while also serving as a member of the Global Real Estate Investment Committee. Rich will start with us on Monday, November 14, and we are very excited to add someone with Rich’s talent and experience to the Prime management team. A special committee of the Board comprised of independent directors also continues to work on changes to our advisory agreement with the special committee comprised of independent directors of the Ashford Inc. Board. These potential changes involve some of the main concerns we have heard from shareholders, including the size of the termination fee and a change of control provisions. However, no assurances can be given that progress will be made on these fronts. Through these discussions, the independent directors will have to balance any potential benefits to our shareholders with potential costs and our shareholders must know that the Ashford Inc. independent directors will be focused on doing what's best for Ashford Inc. shareholders as it relates to any modifications to the agreement. Looking to the future of our Company, our Board is fully cognizant that we either need to sell the entire Company at an attractive net price or grow our business in order to maximize value for our shareholders. As you are aware and as discussed in depth on our last call, we received an unsolicited offer from the Weisman Group to purchase Ashford Prime for net price of $20.58 per share. The Board finds that value attractive to shareholders and are still interested in pursuing this transaction. At this point with the Weisman Group, we have been unable to sign a non-disclosure agreement similar to what other parties have signed and what we believe to be market. However, we may be willing to engage with Weisman Group or other bidders at prices that we find attractive for our shareholders. In the meantime, we will continue to focus our energies on maximizing shareholder value by executing our business strategy to find accretive opportunities to grow the Company's platform. In conclusion, I would like to point out that since announcing in April, our strategic initiatives designed to enhance stockholder value, and based upon our progress on those initiatives, our stock price has outperformed our peers by nearly 20% as of yesterday's close. Additionally, private market values have continued to come down since last year, which has substantially closed the gap between our private market and public market values. I will now turn the call over to Deric to review our third quarter financial performance.

Thanks, Monty. For the third quarter of 2016, we reported net income attributable to common stockholders of $15.9 million or $0.55 per diluted share. For the quarter, we reported AFFO per diluted share of $0.38 compared with $0.42 for the same quarter last year. Adjusted EBITDA totaled $22 million for the quarter. At quarter's end, we had total assets of $1.3 billion. We had $769 million of mortgage debt of which $48 million related to our joint venture partner's share of the debt on the Capital Hilton and Hilton La Jolla Torrey Pines. Our total combined debt had a blended average interest rate of 4.7% and it's currently 45% fixed rate and 55% floating rate, all of which have interest rate caps in place. We ended the quarter with net working capital of $145 million. As of September 30, 2016, our portfolio consisted of 11 hotels with 3,467 net rooms. Our share count currently stands at 30.4 million fully diluted shares outstanding, which is comprised of 25.7 million shares of common stock and 4.7 million OP units. In our financial results, we included approximately 3.8 million shares in our fully diluted share count associated with our Series B convertible preferred stock. With regard to dividends, the Board of Directors declared a third quarter 2016 cash dividend of $0.12 per share or $0.48 per share on an annualized basis. The adoption of a dividend policy does not commit the Company to declare future dividends. The Board will continue to review its dividend policy on a quarter-to-quarter basis. This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

Thank you, Deric. RevPAR for our portfolio grew by 4.3% in the third quarter, outperforming the luxury segment nationally by 280 basis points and significantly outpacing our peer averages. Year-to-date EBITDA flow through for the portfolio is 62%. The overall portfolio grew RevPAR index by 110 basis points compared to its competitive sets. The Courtyard Philadelphia, Renaissance Tampa, and Bardessono Hotel all grew RevPAR by double digits with 25.6%, 15.8%, and 13.7% growth respectively for the quarter. In doing so, The Courtyard Philadelphia and Renaissance Tampa both outperformed the respective markets by 640 basis points for Philadelphia and 800 basis points for Tampa. At the portfolio level, demand growth was strong with occupancy at 86.9%, an increase of 150 basis points over the prior year quarter. Retail transient room nights saw the largest year-over-year occupancy growth of any segment and group demand growth was healthy. During the quarter, the Courtyard Philadelphia Downtown achieved 23.1% total revenue growth driven by strong group business, which was highlighted by the Democratic National Convention. Anticipating elevated compression, the sales and revenue management teams were successful in driving 24.8% rate growth and 25.6% RevPAR growth during the quarter. Additionally, the hotel was able to increase profitability by growing EBITDA margin by 327 basis points. Turning to one of our most – more recent acquisitions, the Bardessono Hotel in Yountville, California, which we acquired in the third quarter of 2015, had strong performance in the quarter due to strategies focused on occupancy growth attracting more group business and cost controls. These strategies led to occupancy and RevPAR growth of 12.7% and 13.7% respectively, which translated into a 700 basis point increase in RevPAR Index relative to its tract scale. In addition to strong RevPAR growth, EBITDA flow through has been an impressive 283% year-to-date and margins have increased 591 basis points during that same time frame. In the first 12 months of ownership of the Bardessono Hotel, RevPAR increased 7.2%, hotel EBITDA increased 33%, hotel EBITDA margin increased 546 basis points and hotel EBITDA flow through was 159%. These are great results that illustrate our ability to significantly and immediately improve operating performance at hotels post acquisition. We are also pleased to announce the expansion of our – extension of our ground lease into a new parcel on the property, which will allow us to construct three new luxury villas. In conjunction with constructing the villas on the new parcel, 10 years were added to the term of the ground lease. On another note, the Bardessono was recently accepted into both American Express Fine Hotels and Virtuoso, two exclusive travel agency websites that focus on the most high-end markets. Lastly, we are pleased with the strong performance in our recently renovated Renaissance Tampa. From June to October 2015, the property underwent a significant renovation. The strong post-renovation performance has validated the capital investment, as in the third quarter, occupancy grew 12.3% and rate increased 3.1%, leading to RevPAR growth of 1,400 basis points relative to its competitors. In addition to the impressive 16.3% total revenue growth, food and beverage revenue increased 6.8%, driven by a large increase in Tampa Bay Buccaneers catering revenue. Additionally, the strong revenue performance of the property has translated to the bottom line with EBITDA margins increasing 152 basis points year-to-date. The impressive performances of these three properties continue to highlight the strength of our best-in-class asset management team. I will now hand the call over to Douglas.

Thank you, Jeremy. As was mentioned on our last call, as part of the initiatives that resulted from our strategic review process, we announced in April that we were commencing a sales process for up to four assets that do not have the RevPAR level and product quality consistent with Prime's long-term vision of investing in luxury assets in gateway and resort markets. On July 1, 2016, we closed on the sale of the Courtyard Downtown Seattle, a very attractive valuation. The sales price for the hotel was $84.5 million, equating to $338,000 per key, which reflected a trailing 12-month cap rate of 6.8% on net operating income. And after debt pay down and other transaction costs, we realized approximately $15 million in net proceeds. The removal of this asset from the portfolio served to both increase the average RevPAR of the portfolio as well as improve the leverage ratio of the Company. While we remain interested in selling the other three assets, at this time valuations have made completing a transaction that would be accretive to shareholders more difficult given the recent drop in private market values. As you've now heard this has been a very proactive quarter by our management team and Board. We're focused on maximizing value and being responsive to our shareholders. With the recent governance changes, appointment of a new CEO and independent director along with our strong operating performance, we believe we are well on our way of accomplishing our goal of enhancing value. This concludes our remarks. We'll now open up the call for your questions.

[Operator Instructions] And first we will hear from Ryan Meliker with Canaccord Genuity.

Hi guys. Thanks for taking my question. First of all, congratulations on having a pretty solid quarter with RevPAR up so much, over 4%, and congratulations on finding a new CEO. I think the market is probably happy to see that you guys move forward with that and were able to find somebody external as well. Couple of questions I had, first of all, with regards to operating fundamentals, looks like RevPAR was up 4.3%, it looks like, and Jeremy, correct me if I'm wrong, somewhere around 2.5% excluding Philadelphia, which obviously had the nice tailwinds from the Democratic National Convention. As we think about things going forward, is that, I know I'm not looking for guidance here, but with that 2.5%, I'm assuming you had some benefits from the calendar shifts in the quarter, so maybe trend lines will be a little bit softer than that in 4Q, is that a fair assumption?

This is Monty. It's just hard to make too many assumptions on those items because every week we sit down and we look at the group and transient business on the books, it can kind of move up or down. So, I think it's hard to just extrapolate that easily on those numbers, Ryan. And thanks for the comments about the new CEO. We had some absolutely outstanding candidates to choose from. And in the end, it was a very difficult decision because of our candidates we had were absolutely fantastic, but we hope we made the right choice, certainly seem to have. My interactions with Rich have been fantastic, very impressed with him and so far looks like the market has responded favorably. So, all good on that front.

Great. As we move forward to some of the other strategic initiatives you guys have outlined, you addressed some of the asset sales, which I understand, about share buybacks, I think your initial review was to repurchase $50 million in stock, has that been exhausted or is that not in play right now?

We've used up most of that authority and not – it's not been completely exhausted. And so we're just – it's not off the table at all, but we're just trying to hang tight to see to see what's best going forward. What's happened here is a couple of factors that has made the whole process a little challenging and that our stock price has moved around a bit more than our competitors because of the Weisman offer, and some of these other factors. At the same time, we've had a strong movement in the private market value hotels, which we look at a lot in deciding whether to buy back or not. And those values have come down pretty substantially over the past six months and maybe even four, five months before that. So, the authority is still there, we're just being cautious at this point in time.

Okay. That's helpful. And then as we think about kind of the Weisman offer in there, I guess unwillingness to sign your non-disclosure, it's been a few months since the parties that did sign the non-disclosure agreement, actually signed at least last time I heard from you guys, any updates? Is anybody anywhere near the headline number of that Weisman offer that you had probably stated was attractive or is this a dynamic where we don't – we're not really looking at any of those really materializing and anything substantial?

Well, it's hard to say what other parties will do in the future. We're very attracted to that number that was put out there and we and the Board at the time thought it would be a good number and I said at that time, I don't know if that's changed. We just haven't spoken about it recently. As far as these other parties, they were not with that number and so they're still out there, but just not competitive to that or to values that we think are full value for our shareholders. So, we're for sale, we're always for sale, we'd love to sell at a price that works for everyone. But at this point that hasn't materialized, but maybe will very soon.

Great. Now, that's really good color. Thanks. Last quick one from me is, you mentioned a couple of times that you feel like private market values have come down, stock price has gone up, do you feel that the stock price is now at a level where you might be able to find accretive acquisition opportunities, given the lower values of assets that could warrant raising capital to deploy that accretively? Number one. Number two, you've also highlighted that liquidity is a challenge for Ashford Prime and it's one of the things that you've always thought – that you think is a big factor limiting the valuation that could not only grow the Company and be accretive, but also address that liquidity, how are you guys thinking about that given the environment where you got a lot of investors that are in the stock for sale of the Company, not necessarily capital raise and growth of the Company right now?

Well, it's – I think you laid all the factors that make everything a challenge, Ryan, because there's investors that are in the stock for one reason and investors that are in the stock for different reasons. And so that's why we continue to remain open to either a sale or from the platform and from our standpoint, we'll do either. In fact, even with asking Richard to come on, we have put some provisions in there where if a sale occurs here in the short-term, then he can do well for himself and continue his career. So, as far as the exact metrics that you mentioned, the numbers have gotten better as far as underwriting a potential deal because of that discount drop in private market values. As far as specific some more details on those numbers, just too difficult for me to go into right now.

Okay. That's helpful. And then just one last thing for me, because it might be helpful for listeners to understand, so you hired a new CEO, that CEO is employed by Ashford Inc. similar to what we see with other external managers, but does the CEO get reviewed by the Ashford Prime Board, how independent is the CEO from Ashford Inc. I guess in terms of working for shareholders here?

Richard will be when he starts with us an officer of Ashford Prime, and he is the CEO of Ashford Prime, and he has a fiduciary responsibility to the Ashford Prime Board. I think that makes things pretty clear.

Wonderful. Thanks, Monty, I appreciate all the follow-up.

Thank you, Ryan.

[Operator Instructions] Next from FBR we will hear from Bryan Maher.

Good morning, guys. Ryan asked about 20 questions, so he hit upon several of mine, but Monty you made a response to one of his questions about a potential sale of the company and you said, maybe soon. Did the other parties that signed NDAs and you say that their price isn't where it needs to be, do you get the sense or are they moving as they do due diligence closer to a price where you need them to be?

Good question, Bryan. But I think it's just hard for me to go into too much detail in all that, because I think that's too much can be taken from slight hints that someone might proceed from my comments or not. I think it's just better for us to stick with what I mentioned earlier, which is look, we've been very clear about the fact that we are for sale, we're always for sale, we didn't give an indication as far as what price would be very interested in selling it. So, other than that, to get into all the detail, I think it might not serve the public and our shareholders very well, because this will all be speculative at this point.

Okay. And then back to Weisman, you say that they have not signed an NDA and I think a lot of us saw kind of the back and forth a few months ago with them filing their comments, but can you answer, is there a dialogue between you guys and Weisman. I mean, are you actually having conversations other than them having not signed the NDA?

They're one of our largest shareholders, so as you'd expect, there's dialogue with them.

Okay. And then on the termination fees discussion, is there any type of timing thought about on that? Should we expect something in a quarter or two?

It's hard to say. From a management standpoint and from the Ashford Prime's Board standpoint, the independent directors, they'd like to conclude something just as soon as possible. So, there is a sense of urgency and frankly from Ashford Inc.'s independents as well, because this is a platform that they advise and they wanted to do well and be successful. That being said, because it is two independent committees and they have their own council, and some of the committee members are out of town, it's just a whole process that is somewhat cumbersome and time consuming and so it just takes time to do. In fact, I think it was only just a month ago or so or two months ago before negotiations started in earnest because everybody had to get council spun up and the like. So, the negotiations are ongoing. They're very active. And they – both sides and management wants them to be concluded soon, the sooner the better. It's just tough to jump out there and to say when it might be done. If we're up to me, it'd be done yesterday, but it just takes time. So, I don't want to mislead you and the public about exactly when it will be done, but it is probably the highest priority in front of the Board right now.

And then just lastly, with your comment that either sell or grow and with private pricing coming down, are you seeing a noticeable uptick in the potential acquisitions you guys are looking at in the past few months?

As you probably know, the volume of sales has come down in the marketplace substantially, private market sales, maybe 50%, 60% something like that. That typically occurs when – what buyers are willing to pay for assets drops, but sellers aren't willing to drop their expectations. And so the market kind of freezes for a little bit, it's not frozen. There is still [plenty of] actions, but they're a lot lower. So, what's happening is those sellers, potential sellers are deciding do they still want to move forward with the transaction at prices that are less than what they originally hoped for and some sellers decide, yes and some sellers decide, no. To answer your questions, that makes the economics easier for us, of course, it does. It's lower price and it makes things better for us. What that means, what we will do and when, it's just too hard to say. It depends upon specific opportunities that are out there in the marketplace.

All right. Thanks Monty.

Thank you.

[Operator Instructions] All right. And it looks like we have nothing further from the audience at this time. I'd like to turn the floor back to management for any additional or closing remarks.

No additional closing remarks. We appreciate your attendance on the call today and look forward to speaking with you at the upcoming various conferences in our next call. Thank you very much.

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation and you may now disconnect.