Ashford Hospitality Trust Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jordan Jennings, Manager, Investor Relations.

Operator

Thank you. You may begin, ma'am.

Speaker 1

Good day, everyone, and welcome to today's conference call to review the results for Ashford Hospitality Trust for the Q2 of 2023 and dedicate you on recent developments. On the call today will be Rob Hafe, President and Chief Executive Officer Derek 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 and approximately. 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.

Speaker 1

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 a solicitation of an offer to buy any securities. Securities will be offered only by means of a 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 ksA with the SEC on August 2, 2023, and may also be accessed through the company's website at www.htreit.com.

Speaker 1

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 Q2 ended June 30, 2023 with the Q2 ended June 30, 2022. I will now turn the call over to Rob Case. Please go ahead, sir.

Speaker 2

Good morning.

Speaker 3

Welcome to our call. After my introductory comments, Derek will review our Q2 financial results And then Chris will provide an operational update on our portfolio. The main themes of our call today are first, we are very pleased that is balanced across leisure, corporate and group demand sources. 2nd, our liquidity and cash position continue to be strong. We ended the quarter with approximately $442,000,000 of net working capital.

Speaker 3

We feel well positioned for our upcoming extension tests. In addition, we have access to an undrawn capital fees via our strategic financing. 3rd, the capital raising for our non traded preferred is ramping up nicely and increased over 148% from the Q1. We continue to be excited about this source of capital for our platform. Now for some additional details on these three themes.

Speaker 3

RevPAR for all hotels in our portfolio increased 6.7% in the 2nd quarter compared to the prior year quarter. This RevPAR growth was led by occupancy, which increased 2.8% over the prior year quarter, and 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.

Speaker 3

We also believe that our relationship with our affiliated property manager Remington really sets us apart. Remington has been able to Managed costs and optimized revenues aggressively, enabling us to outperform the industry from an operations standpoint for many years. During the quarter, we made significant progress on our loan extensions and made the strategic decision not to make required pay downs in our Keyes A, B and F loan pools in order to meet those extension debt yield tests. This was a prudent economic decision that reflected a comprehensive capital management process by the company, which explored and assessed multiple options for these assets, including refinancing, extensions and asset sales. Importantly, the recent amendment to our corporate financing provides us with added flexibility regarding these loan pools and by proactively choosing not to extend 3 of those pools, We will improve our balance sheet by lowering leverage and it materially improves our future cash flows.

Speaker 3

Further, the combination of the pay downs and the ultimate The removal of the debt associated with the pools that we did not extend will lower our debt by approximately $700,000,000 or more than 18%. We have been committed to deleveraging the company over time and this is a significant step towards our long term goals of creating a more sustainable capital structure. Additionally, capital recycling remains an important component of our strategy and we continue to pursue opportunities to sell certain non core assets. We recently sold a small asset in Orlando for nearly $15,000,000 and have 4 other assets that are currently being marketed for sale. We have identified several additional assets that we may bring to market for sale if market conditions warrant.

Speaker 3

We expect any net proceeds from these sales will go towards paying down debt. We also continue to be excited about our non traded preferred capital offering and believe this offering will not only provide an attractive cost of capital, that allow us to accretively grow our portfolio over time subject to future market conditions. We believe access to this growth capital is a significant competitive advantage, particularly given the fact that lodging REITs are currently trading at material discounts to their net asset values. Our preference would be to use this capital for future growth, We may also use some of the capital to pay down debt or other corporate uses as needed. We continue to build a selling syndicate currently have 35 signed dealer agreements representing over 5,027 reps selling the security.

Speaker 3

We are still very early in the capital raising process to date. We've issued approximately $50,600,000 of gross proceeds, including $9,500,000 in July alone. Turning to Investor Relations. We continue to have a robust outreach effort to get in front of investors, communicate our strategy, Explain what we believe to be an attractive investment opportunity at Ashford Trust. We have already attended numerous Industry and Wall Street conferences this year and have several upcoming conferences later this year.

Speaker 3

Look forward to speaking with many of you during those events. We believe we have the right plan in place to move forward and maximize value at Ashford Trust. This plan includes continuing to grow liquidity across the company, optimizing the operating performance of our assets, improving the balance sheet over time and looking for opportunities to invest and grow in our portfolio. We have a track record of success when it comes to property acquisitions, joint ventures and asset sales, and we expect they will continue to be part of our plans moving forward. We ended the 2nd quarter with a substantial amount of cash on our balance sheet and for launch of our non traded preferred stock offering, we are excited about the opportunities we've seen in front of us.

Speaker 3

Now I'd like to turn the call over to Derek to review our Q2 financial performance.

Speaker 2

Thanks, Rob. For the Q2, we reported a net loss We reported AFFO per diluted share of $0.78 Adjusted EBITDAre for the quarter was $104,000,000 which reflected a growth rate of 8% over the prior year quarter. At the end of the second quarter, we had $3,700,000,000 of loans with a blended average interest rate of 7.8% taking into account the 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.

Speaker 2

As part of this extension, we paid down the existing loan balance by $45,000,000 Also during the quarter, we refinanced our mortgage loans for the 100 7 Room La Posada de Santa Fe, in Santa Fe, New Mexico, which had a final maturity date in November of 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 totals $98,500,000 It has a 3 year initial term with 2 1 year extension options subject to the satisfaction of certain conditions. The loan is interest only and provides for a floating rate of SOFR plus 4%. Also during the quarter, we extended our Keyes Pool C loan secured by 5 hotels with a pay down of approximately $62,000,000 Subsequent to quarter end, we extended our Keyes Pool D loan secured by 5 hotels with a pay down of approximately $26,000,000 and our Keyes Pool E loan secured by 5 hotels with a pay down of approximately $41,000,000 As Rob discussed, we also elected not to make the required pay downs to extend our Keyes Pool A, B and F loans, which in total are secured by 19 hotels.

Speaker 2

The required pay downs needed to extend these loans totaled approximately 2 $5,000,000 By not extending these loan pools, we not only saved the $255,000,000 of acquired paydowns, But also approximately $80,000,000 in capital expenditures at these hotels through 2025. Many of the properties in the non extended Keyes pools are in markets that have experienced significant headwinds throughout their post pandemic recoveries. And a number of these markets are not forecasted to reach pre pandemic top line levels until 2025 or 2026. Further, the non extended Kies hotels only generated approximately 10% of our hotel EBITDA Our portfolio RevPAR will increase approximately 3% by removing these lower RevPAR hotels from the portfolio. With the Keyes loan pool extension behind us, our next significant extension test is our Morgan Stanley loan pool secured by 17 hotels, which has an initial maturity in November.

Speaker 2

And we currently believe that loan should be able to be extended until 2024 with no pay down required. We ended the quarter with cash and cash equivalents of $252,000,000 and restricted cash of $150,000,000 The vast majority of average restricted cash is comprised of lender and manager held reserve accounts and $13,300,000 related to trapped cash held by lenders. At the end of the quarter, we also had $19,000,000 in due from 3rd party hotel managers. This primarily represents cash held by one of our property managers, which is also available to fund hotel operating costs. We also ended the quarter with networking capital of approximately $344,000,000 As of June 30, 2023, our consolidated portfolio consisted of 100 hotels with 22,316 rooms.

Speaker 2

Our share count currently stands at approximately 36,600,000 fully diluted shares outstanding, which is comprised of 34,500,000 shares of common stock at 2,100,000 OP units. In the 2nd quarter, our weighted average fully diluted share count used to calculate AFFO per share Included approximately 1,700,000 common shares associated with the exit fee on the strategic financing we completed in January 2021. Assuming yesterday's closing stock price, our equity market cap is approximately $144,000,000 While we are currently paying our preferred dividends quarterly or monthly, we do not anticipate reinstating a common dividend for some time. Our liquidity position is solid, and we are pleased with the progress that we've made on our loan extensions and the pace of our non traded preferred capital raising. While it continues to be a challenging market for hotel debt financing, with the increase in both credit spreads and base rates, Our portfolio is performing well.

Speaker 2

From a capital structure and balance sheet perspective, we will continue to focus on raising capital through our non traded preferred stock, potential asset sales and paying down our corporate financing. This concludes our financial review, and I would now like to turn it over to Chris to discuss our asset management activities for the quarter.

Speaker 4

Thank you, Derek. 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 relentlessly with our hotel managers to maximize the operating performance of our hotels.

Speaker 4

The portfolio saw a number of records set in the 2nd quarter. In fact, 37% of our hotels set all time second quarter records in comparable total revenue. These record breaking 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 Q2 was from Washington DC, New York, New Jersey and Atlanta.

Speaker 4

We have a large concentration of assets in these markets and they collectively increased comparable hotel EBITDA for the quarter by 12% over the prior year quarter. In fact, 4 of our hotels in these markets set all time hotel EBITDA performance records during the Q2. We positioned the airport properties in our portfolio to capitalize on increased airlift and accelerating demand trends seen by the airlines. In the Q2, our airport hotels collectively achieved growth of 15% and 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 increased the number of available rooms earmarked for distressed airline passengers.

Speaker 4

Our Embassy Suites Orlando Airport leveraged a partnership with 2 major airlines to capture long term stays associated with their respective training programs. As those training needs exceeded what was contracted, we were able to provide additional inventory at premium rates to further drive revenue. Another key differentiator and competitive advantage for us is our dedicated revenue optimization team. This team works at a granular level to optimize performance during high demand periods. During the Q2, the portfolio realized 16% more room nights with 95% or higher occupancy than we did in the prior year quarter.

Speaker 4

This is particularly encouraging for our urban and suburban hotels, where the number of peak room nights during the Q2 increased 43% and 21% over the prior year quarter respectively. These peak nights present us with the opportunity to improve profit margins as we are able to drive rate. Our revenue optimization team conducts monthly deep dive calls across our portfolio focused on driving pricing strategy in each segment of top line business, Creating tools to build a strong group base, pushing premiums on club and suite room types and ensuring our properties follow our optimized marketing strategy. We remain encouraged by the continued strength we are seeing in the group segment. In the 2nd quarter, group room revenue increased 14% over the prior year quarter.

Speaker 4

This marks the 9th consecutive quarter with positive year over year quarterly growth in group room revenue. We've had a heavy focus on driving group vacant Catering revenues increased 19% over the prior year quarter. The increase in group revenue and bookings occurred broadly across the portfolio and included gains in many of our large hotels, including Marriott Crystal City Gateway, Renaissance Nashville and Marriott DFW. We remain excited about the continued momentum from the group segment. Moving on to capital expenditures.

Speaker 4

We have noted in previous calls that we have taken a So far in 2023, we've completed the renovation of the lobby and bar at the Ritz Carlton Atlanta, The guest rooms at Hampton in Evansville and Residence Inn Phoenix, the guest rooms and public space at SpringHill Suites Beaufort and the relocation of the concierge lounge at the Renaissance Nashville. Later this year, we plan to start a guest room and public space renovation at the Embassy Suites Dallas, A guestroom renovation at Marriott Sugar Land and a fitness center renovation in key addition at the Renaissance Nashville. For 2023, we anticipate spending between $110,000,000 $130,000,000 in capital expenditures. Looking forward, we are considering several new initiatives across our portfolio, including brand conversions at several hotels, accretive key additions and executing high margin ROI projects. I would like to finish by emphasizing how optimistic we are about the future of this portfolio.

Speaker 4

As mentioned earlier, group business has continued to show growth. We are seeing more markets rebound and many of our assets continue to break comparable hotel EBITDA records. The portfolio is well diversified geographically, allowing us to continue to capitalize on the industry's continued recovery. We have a number of value add and ancillary initiatives we are working on behind the scenes to further add value to the portfolio, which we are excited about. With these new initiatives underway, we are confident that the portfolio will continue to outperform.

Speaker 4

That concludes our prepared remarks, and we will now open up the call for Q and A.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. Thank you. Our first question is from Chris Woronka with Deutsche Bank.

Operator

Please proceed.

Speaker 5

Hey, good morning guys. I guess to start off with, can you maybe give us a little bit of detail on how the mechanics are on the Keyes loans pool that you did extend, I think, the CDEs. Is that Yes, something that's going to be reevaluated again after the extension and 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 have reached a level that you don't have to worry about that anymore?

Speaker 3

Hey, Chris, it's Rob. Matt, 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, what do we think about the markets, the CapEx, now the big factor in a lot of these This 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 key 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 our across the portfolio, but at least what we're seeing right now and numbers continuing to improve, 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

Speaker 5

Okay, very helpful. And then kind of on the operational side, I guess the theme has been that we're continuing to see labor availability improve gradually. And maybe if you guys Could you 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 nonunion markets on wages and You're still using any contract labor or things like that? Thanks.

Speaker 4

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 FTE 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.

Speaker 4

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.

Speaker 4

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 is 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.

Speaker 5

Okay. Super helpful. Thanks, Chris. Maybe just a quick housekeeping one for Derek. Derek, I think you mentioned that your After the keys, the 3 those 3 folds, you're effectively 95% fixed with the I guess with the swaps or caps or whatever.

Speaker 5

Does that mean that when we get to our Q3 interest expense that that is effectively a run rate going forward?

Speaker 2

Assuming live order sofers 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 coterminous 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 run rate.

Speaker 5

Okay, very helpful. Thanks guys.

Speaker 3

Thanks Chris.

Operator

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

Speaker 6

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 in 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 leisure and corporate travel play out?

Speaker 4

Yes. Hi, thanks for the question, Tyler. So I can start with corporate travel. We're continuing to see signs of recovery and strength out of the corporate segment. The 2nd quarter Ashford Trust was up 13% year over year in corporate revenue.

Speaker 4

Now 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.

Speaker 4

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. When we look at our weekend occupancies, we were flat to last year.

Speaker 4

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 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.

Speaker 4

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 weakened occupancy rates Flat to last year.

Speaker 6

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

Speaker 3

to market in the future? Yes. Good question. Thanks, Tyler. We've got, like I said, 4 assets in the market right now.

Speaker 3

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 2nd 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 I'll say to the extent that we have successfully find deals that will 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. 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.

Speaker 3

But I think you will likely see us get a little bit more aggressive here in the next A 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. So you may have some assets that are assets that we like and that are solid assets, but that has 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 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.

Speaker 6

Okay. That's all for me. Thank you.

Speaker 3

Thanks.

Operator

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

Speaker 7

Thank you. Good morning, everyone. Rob, I just want to go back to that last question and your answer there. 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 forwards you need to raise, more preferred or is it maybe just simply being patient and waiting for EBITDA Got it.

Speaker 7

Continue to recover, but any color around sort of the sequencing and timing would be helpful.

Speaker 3

Sure. I mean, as in 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 rates has gone thus far. What we just see what you never know is, is it going to continue to accelerate like we want? Do is it going to stay at comparable levels for a while?

Speaker 3

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 2 like I said, 2 fold 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, and we've got time.

Speaker 3

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 coated 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 on trade preferred and some of these assets sales to pay that down. So you're going to see likely some asset sales like This one where we just sold World Quest that we closed yesterday, those proceeds are going down. The 3 pack of limited service assets that are in the Market right now are likely to generate some proceeds that can pay down and then like some of the other assets we may bring to market may be able to generate some proceeds to help pay that down.

Speaker 3

At the same time, we've got, I'd say, some lower quality non core assets that either have CapEx requirements for the next few years, Maybe our brands that we don't feel strong about, that are just, I'd say, more housekeeping, just assets that we think are not long term holds. And so I think you'll see a mix of those over the next 6 to 12 months come to market From our perspective. So it's I don't know if sequencing is the right word. It's a little bit of we need to We just need to be conservative in how we're in the assumptions of how the properties are going to do, what happens to the industry, how the capital comes in from non trade preferred just make sure that we are prepared regardless of the situation.

Speaker 7

Got it. Fair enough. And then just switching gears a little bit on CapEx. It looks like it 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. Yes.

Speaker 7

And some of those obviously are part of the Keyes 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, are your $110,000,000 to $130,000,000 are projects costing more? Any color around CapEx also would be helpful. Thank you.

Speaker 3

Sure. Yes, absolutely. It's a similar number in that. We also once we began that process some time ago of thinking about where As we're 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 that we have been thinking about ahead of time.

Speaker 3

But we also are going through a process of Pushing projects, putting things into 2024. I don't know if Chris, you had other color. So as Rob said,

Speaker 4

a lot of the AB and F 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 We expect to see the significant savings from those loan pools in terms of CapEx spend is going to be more 2024 2025. And so if we had provided kind of a projection of what we'd spend 24 that would come down without those hotels in the portfolio. But the 23 number was already fairly baked and had included The deferral of a number of those projects.

Speaker 7

Thank you.

Operator

Thank you. Our next question is from Brian Maher with B. Riley Securities. Please proceed.

Speaker 8

Great. Thank you. As I listen to all the questions, it kind of brings forward more questions Related to kind of the strategic plan and maybe Rob you can give a little more color 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 years.

Speaker 3

No, I mean, we've got kind of a plan that we've laid out. I mean, as Matter of fact, as we are talking right now, I mean, we've got kind of what I would say there's a portion of our portfolio 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 also come to Fruition that we obviously don't want to be necessarily a long term holder of limited service assets in this portfolio. And those are still while we handed back Handing 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 Significant rebuy analysis of every asset in our pool, in our company and really looking at What are the anticipated CapEx needs? We've got a wave of PIPs, franchise agreements extensions and whatnot that are coming up over the 5 to 7 years and really looking to see what do we think the CapEx spend is on those?

Speaker 3

Do we think that there's ROI on those that CapEx spend? So It's very deliberate and 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?

Speaker 3

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

Speaker 5

the long term and where we want

Speaker 3

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 raising changes. So I guess it's a little bit of in some ways a little bit of both.

Speaker 8

I can appreciate that. But when we think about The preferreds, if you're issuing non trader 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% preferred and pay off 16 percent of free debt. I mean, it's basically found money.

Speaker 3

No. And if it could If I could get the 8% money to show up in a $200,000,000 chunk tomorrow, I would take it and pay it off tomorrow, right? And so if it were The answer is you're right. And even within the capital structure, I mean, we have pieces of mezz 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 and you've got Through $400,000,000 or $500,000,000 over on 50% or 60% mortgage, that paper is cheaper than that.

Speaker 3

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.

Speaker 8

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 $100,000,000 or with a loan of $100,000,000 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 $67,000,000 or $80,000,000 And you take this $100,000,000 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 2?

Speaker 3

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 mezz or the loans and trying to step into them. And I think those sorts of things are going to happen.

Speaker 3

It's a slow process. I mean, even here on the process of hanging back these 19 assets, I mean, that's not something that happens Overnight, right? There's inter creditor agreements that have to be gone through in different places in the debt stack have different rights and All of these things take time. So we don't know even on our, handing back our 2019 assets whether or not that's something that will be Formally taking place in several weeks, if we deed them over? Or is it something that goes through a longer foreclosure process that could Many months.

Speaker 3

So it's just as my experience now of having gone through obviously a lot of debt restructuring and A lot of issues over the past 3 years through COVID is I've got a story telling these things are way more complicated Yes, than people typically think.

Speaker 8

Right. Which brings up another question that I had that I was holding back on, which is when do we yank these 19 hotels out of our model? I mean, It's kind of important, right? It's not 1 or 2 or 3, who cares? It's $19,700,000,000 worth of debt.

Speaker 8

I mean, Do you or Derek recommend that we all pull these out effective when, beginning of Q4 for a conservative state?

Speaker 2

I mean, it's a good question, Brian. 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

Operator

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

Speaker 3

All right. Thank you everybody for joining us on our Q2 call. We look forward to speaking with you next quarter.

Operator

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

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Earnings Conference Call
Ashford Hospitality Trust Q2 2023
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