Ashford Trust: Structure could boost deals
 
Ashford Trust: Structure could boost deals
06 AUGUST 2018 7:56 AM

During the company’s second-quarter earnings call, officials with Ashford Hospitality Trust said that the REIT’s new enhanced-return funding program with Ashford Inc. will make it easier for them to make more money on acquisitions.

DALLAS—Officials at Ashford Hospitality Trust acknowledged that the company’s second-quarter performance was worse than hoped for—some of which they blamed integration issues at legacy Starwood Hotels & Resorts Worldwide hotels—but they said they are feeling confident overall because a new arrangement with Ashford Inc. will open the door to more acquisitions.

Speaking during the company’s Q2 earnings call, President and CEO Douglas Kessler said the two-year enhanced-return funding program with Ashford Inc. will prove to be a significant strategic advantage for the real estate investment trust as it pursues deals. That deal commits Ashford Inc. to covering 10% of the price of acquisitions up to $50 million and it can be increased up to $100 million if both companies deem it to be a success.

“We believe the ERFP program has the potential to improve five-year internal rates of return on hotel acquisitions by 700 to 1,200 basis points,” Kessler said. “We're not aware of any other REIT lodging or non-lodging that has a similar offering.”

Kessler said that change will increase the bandwidth of deals Ashford Trust is able to pursue based on its targeted rate of returns, but the point of the ERFP isn’t just to increase the number of the deals but the overall quality.

He said Ashford has been active in the market, but it hasn’t lowered its standards. He said there were some deals the company probably could’ve won if that was its only goal.

“Our view is let's continue to stay with the same discipline,” he said. “Sure, the returns with the ERFP still may have achieved an adequate return, but we're looking to make good deals great.”

The 252-room Hilton Alexandria Old Town in Alexandria, Virginia, which Ashford bought in Q2 for $111 million, was the first example of a deal utilizing the ERFP, Kessler said.

“With this ERFP funding commitment, the effective trailing 12-month cap rate for this transaction increases to 8.3% from 7.5% assuming the program funding had occurred at closing,” he said.

Starwood issues
Ashford is one of several REITs this quarter to note that integration of Marriott International sales and distribution into legacy Starwood Hotels and Resorts Worldwide-managed properties proved to be far more disruptive than hoped for. Ashford officials said their portfolio of Starwood properties clearly lagged the company’s overall performance.

“Comparable (revenue per available room) for these nine hotels declined 3.1%, a 710-basis point decrease relative to their competitive sets,” said COO Jeremy Welter. “Group performance at these hotels has suffered and group roomnights declined 19.2% during the second quarter.”

But despite the initial issues, Welter said the integration will ultimately be a boon to those properties.

“Marriott does have an incredible distribution system,” he said. “And they’ve got an incredible management team and they’ve got a great sales force. So, as we get this integration done over the next couple of quarters, I'm pretty optimistic on those hotels.”

Q2 performance
Comparable RevPAR increased 2.3% in Q2 for Ashford’s hotels not under renovation but just 1.6% when factoring in those properties, according to the company release.

The company posted a net loss for the quarter of $29 million.

Ashford also refinanced 56 properties during the quarter for a total of $2.3 billion. Kessler said the company will see significant savings from refinancing, but doesn’t have much more capacity for refinancing in the near term.

Ashford Hospitality Trust’s shares closed Friday trading at $6.97, a 3.6% year-to-date increase. The Baird/STR Hotel Stock Index was down 1.1% during the same period.

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