Q4 2021 Ashford Hospitality Trust Inc Earnings Call
Greetings and welcome to Ashford Hospitality Trust fourth quarter 2021 results conference call at.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Jordan Jennings manager of Investor Relations. Thank you you may begin.
Good day, everyone and welcome to today's conference call to review the results for Ashford Hospitality Trust for the fourth quarter and full year of 2021 and to update you on recent developments.
On the call today will be Rob, Hey, President and Chief Executive Officer, Derek Eubanks, Chief Financial Officer, and Chris <unk>, Senior Vice President and head of asset management.
The result, as well as noticed that the 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 provision of the federal Securities regulation.
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.
Before 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.
In addition, certain terms used in this call are non-GAAP financial measures reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on form 8-K with the SEC on February 23, 2022, and May also be accessed through the company's website at www dot.
H T REIT dotcom.
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 fourth quarter of 2021 with the fourth quarter of 2020.
I will now turn the call over to Rob Hey, Please go ahead Sir.
Thank you Jordan.
Good morning, and welcome to our call.
I'll start by providing an overview of the current environment and how Ashford Trust has been navigating the recovery.
After that Derek will review, our financial results and Chris will provide an operational update on our portfolio.
I'd first like to highlight some of our recent accomplishments and the main themes for our call.
First we saw the lodging recovery continues to take hold in the fourth quarter, leading to strong hotel performance and solid earnings.
Our liquidity continues to improve and our cash balances meaningful we ended the quarter with approximately $639 million of net working capital, which equates to approximately $18 per diluted share.
With our current stock price of around $8, we were trading at a meaningful discount to both our net asset value per share and our net working capital per share.
Third we have lowered our leverage and improved our overall financial position since its peak in 2020, we have lowered our net debt plus preferred equity by over $1 billion equating to a decrease in our leverage ratio defined as net debt plus preferred equity to gross assets by approximately 13 percentage points.
During the quarter, we announced an amendment to our strategic financing, which provides us with more flexibility to access the onshore capital if needed even after we get off the current balance.
During the quarter, we paid off the strategic financings pick interest and are now paying the interest current.
While the loan doesn't mature for several years, we are looking for opportunities to pay it off later this year if the industry recovery continues to make progress.
Finally, even with an already attractive loan maturity schedule, we remain proactive in our capital markets activities and balance sheet management during the quarter, we refinanced our mortgage loan for the Marriott Gateway Crystal City and with the completion of that financing our next hard maturity.
Our next hard debt maturity is not until June of 2023.
We are optimistic about the long term outlook for the company and by taking decisive actions to strengthen our balance sheet, we feel well positioned to capitalize on the recovery, we're seeing in the hospitality industry.
Our optimism remains we must also acknowledge some risks to the pace of the recovery due to ongoing variance of COVID-19. In addition, we believe the majority of our loans could continue to being cash traps over the next 12 to 24 months or more and as a result, we are focused on building our liquidity improving our capital structure in the months to come.
In regards to common dividends the company and.
Its board of directors previously announced the suspension of the common stock dividend and therefore, the company did not pay a dividend on its common stock and common units for the fourth quarter or the board will continue to monitor the situation and assess future dividend declarations.
Regarding our preferred dividends during the fourth quarter, we reinstated and caught up all of our accrued preferred dividends and currently plan to pay those quarterly going forward. As we discussed this is an important step for us regarding for several reasons, including it was one of the requirements for Ashford Trust or gain it's S III eligibility.
For 2022 we will increase our capex spending from the previous two years, but we'll still be well below our historical historical run rate for Capex.
Given the sizable strategic capital expenditures, we've made in our properties over the past several years, we believe our hotels are in fantastic condition and are well positioned for the industry rebound.
Let me now turn to the operating environment or hotels.
The lodging industry is clearly showing signs of improvement revpar for all hotels in the portfolio increased approximately 164% in the fourth quarter with only eight of our hotels had a negative hotel EBITDA in the first quarter.
This revpar result, equates to a decrease of approximately 21% versus the fourth quarter of 2019, an improvement from the third quarter of 2021, when Revpar was down 26% from the same period in 2019.
We remain encouraged by the continued strength and weekend leisure demand at our properties and as we enter 2022, we did see some softness in demand, but the omicron variant that was similar to what we saw with the Delta variant in mid August .
That industry softness bottomed out in the last two weeks of January and it's improved since that we.
We believe United States is transitioning from a pandemic to an endemic mentality and we hope to build on the momentum we saw in 2021.
We believe our geographically diverse portfolio consisting of high quality well located assets across the U S is well positioned to capitalize on the acceleration in demand, we expect to see across leisure business and group. We continue to be focused on aggressive cost control initiatives, including working closely with our property managers to minimize cost structures and maximize liquidity at our hotels.
This is where our relationship with our affiliated property manager Remington really sets us apart Remington has been able to manage cost aggressively and <unk>.
Just to the current operating environment. That's important relationship has enabled us to outperform the industry from an operation standpoint for many years.
Turning to Investor relations during the quarter. We attended several small cap lodging investor conferences. We also held a well attended Investor day in New York. If you were not able to join US I'd encourage you to go to a website and watch the webcast for 2022, we will expand our efforts to get on the road to meet with investors communicate our strategy and explain what we believe to be in it.
The investment opportunity in Ashford Trust, we look forward to speaking with many of you. During these upcoming events. We believe we have the right plan in place to capitalize on the recovery as it unfolds. This plan includes continued maximize liquidity across the company optimizing the operating performance of our assets as they recover deleveraging the balance sheet over time and looking for opportunities to invest and grow the portfolio.
We have a track record of success when it comes to proper acquisitions joint ventures asset sales and expect that they will continue to be part of our plans moving forward.
We entered 2022 with a substantial amount of cash on our balance sheet and are looking for ways to go on the offense I will now turn the call over to Derek to review, our fourth quarter like fourth quarter financial performance.
Thanks, Rob for the fourth quarter of 2021, we reported a net loss attributable to common stockholders of $59 $3 million or $1 75 per diluted share.
For the full year of 2021, we reported a net loss attributable to common stockholders of $267 $9 million or $12 43 per diluted share.
For the quarter, we reported <unk> per diluted share of negative nine cents for the full year of 2021, we reported <unk> per diluted share of negative $1 23.
Adjusted EBITDA totaled $47 million for the quarter, while adjusted EBITDA for the full year was $113 $6 million at.
At the end of the fourth quarter, we had $3 9 billion of loans with a blended average interest rate of four 1%.
Our loans were approximately 8% fixed rate and 92% floating rate we.
We utilize floating rate debt as we believe it is a better hedge of our operating cash flows. However, we do utilize caps on those floating rate loans to protect the company against significant interest rate increases.
Our hotel loans are all nonrecourse and currently 93% of our hotels are in cash traps. This is down from 97% last quarter.
The cash Rep means that we are currently unable to utilize property level cash flow corporate related purposes as.
As the properties recover and meet the various debt yield or covers thresholds, we will be able to utilize that cash freely at corporate.
We ended the quarter with cash and cash equivalents of $592 $1 million.
Unrestricted cash of $99 $5 million.
The vast majority of that restricted cash is comprised of lender and manager held reserve accounts at the end of the quarter. We also had $26 $9 million and due from third 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 net working capital of $639 million.
As Rob mentioned I think it's also important to point out that this net working capital amount to $639 million equates to approximately $18 per share.
This compares to our closing stock price from yesterday of $8.31, which is an approximate 55% discount to our net working capital per share.
Our net working capital reflects the value over and above the value of our hotels.
We believe that our current stock price does not reflect the intrinsic value of our high quality hotel portfolio.
From a cash utilization standpoint, our portfolio generated hotel EBITDA of $55 $4 million in the quarter.
Our current quarterly run rate for debt service is approximately $41 million, our quarterly run rate for corporate G&A and advisory expense is approximately $14 million and.
Our quarterly run rate for preferred dividends is approximately $3 million.
As of December 31, 2021, our portfolio consisted of 100 hotels with 22000 and 313 that brands.
Our share count currently stands at approximately $34 9 million fully diluted shares outstanding which is comprised of $34 5 million shares of common stock and 0.4 million LP units.
In the fourth quarter, our weighted average fully diluted share count used to calculate a F vote per share included approximately $1 7 million common shares associated with the exit fee on the strategic financing we completed in January 2021.
Assuming yesterdays closing stock price of $8.31, our equity market cap is approximately $290 million.
During the quarter, we refinanced our mortgage loan for the 701 room Marriott Gateway Crystal City in Arlington, Virginia, which had a final maturity date in November 2021.
The new nonrecourse loan totals $86 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 LIBOR plus 4.65%.
Our next final debt maturity is now in June of 2023 as.
As we previously discussed we selectively exchanged our preferred stock for common stock in 2020 in 2021 as a way to Delever, our balance sheet remove the accrued dividend liability and improve our equity flow through.
Through these exchanges, we have exchanged approximately 71% of our original preferred stock, which is approximately $401 $8 million of face value into common stock. These exchanges also eliminated a significant amount of accrued preferred dividends.
After taking into account the $200 million of new corporate debt from last January and our cash balance at the end of the quarter, we have lowered our net debt plus preferred equity by approximately $1 $1 billion since its peak in 2020.
We opportunistically raised equity capital in 2021 to shore up our balance sheet improve our liquidity and to be prepared for potential loan paydowns needed to achieve extension tests or beat refinancing requirements.
For the full year of 2021, we raised approximately $564 million of gross proceeds at an average price of $28.17.
During the quarter, we paid off the pik interest associated with our Oaktree loan of $24 million and also utilized cash of $18 $6 million to bring our preferred dividends current.
Our current plan is to continue to pay our preferred dividend quarterly going forward, while we expect our common dividend to continue to be suspended for the foreseeable future.
Over the past several months, we've taken numerous steps to strengthen our financial position and improve our liquidity and we are pleased with the progress that we've made while we still have work to do to lower our leverage our cash balance is solid we have an attractive maturity schedule and we believe the company is well positioned to benefit from the improving trends we are seeing in the logic industry.
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.
Thank you Derek comparable Revpar for our portfolio increased by 164% during the fourth quarter relative to the same period in 2020.
We are extremely proud of the work that our asset management team has done to drive operating results.
The team has accomplished so much this year, including driving 21 of our properties to exceed the comparable fourth quarter 2019, Revpar I would like to spend some time highlighting a few of those success stories.
Sheraton Anchorage had a strong fourth quarter with revpar exceeding comparable 2019 by 43%.
The team secured two new valuable pieces of the business during the quarter that were very profitable. The first was a group of extended stay nurses that provided 5000 group room nights in the second was a new airline crews that generated 5400 room nights together. These two pieces of business brought in an incremental $1 $7 million and.
Room revenue for the hotel.
Next I'll turn to the Marriott Beverly Hills. This hotel experienced a 16% increase in hotel EBITDA during the fourth quarter relative to the same period in 2019.
While the hotel's revpar had nearly fully recover to 2019 levels. The hotel on a number of successful waste and deliver margin expansion in every single department, increasing overall hotel EBITDA margin by over 740 basis points.
The team accomplished this through a number of initiatives, including closing the guests club lounge, optimizing F&B operations through menu changes and operating hours and executing on long term labor efficiencies.
With this increased productivity in place and the Super Bowl, having been held in Los Angeles. This hotel is primed for a great first quarter.
The embassy suites Flagstaff also produced fantastic results during the fourth quarter with hotel gross operating income increasing more than $200000 or over 30% relative to the comparable period in 2019.
Our proactive sales efforts identified and secured two large pieces of business. The first being a new long term airline contract and the second being a team of high altitude training athletes that we're preparing for the Olympics the.
The increase in base business allowed the hotel to drive rate, while yielding effectively which resulted in a revpar increase of nearly 16% over the fourth quarter of 2019.
The last hotel I'll highlight its historic gains of Annapolis.
This hotel had strong results with Revpar, increasing 18% during the fourth quarter relative to the comparable period in 2019.
These results were driven by our team's tenacity and adapting to the new challenging work environment to attract group business.
The team reached out to large groups that I previously stated the hotel over the last six years and offered them a unique and special package to return and.
In addition, the team utilize the new selling tool to attract new groups that allows future clients to have a three D tour of different spaces within the hotel the.
The tool proved to be a great resource and closing new business. These initiatives drove hotel EBITDA above 2019 levels during the fourth quarter by nearly 5%.
Okay.
Moving onto capital expenditures in prior years, we were proactive in renovating our hotels to renew our portfolio.
That commitment has now resulted in a competitive and strategic advantage as the market continues to rebound.
Not only are our properties more attractive to potential travelers, but we can also deploy capital more prudently throughout the recovery.
In 2020 , one we restarted a number of capital projects, including the Guestrooms at Marriott Fremont, the guest rooms, but health and Santa Cruz and corner Pantry and embassy suites Portland.
For 2022, we currently anticipate spending between 100 patents and $120 million capital expenditures of which.
Approximately half will be owner funded.
Before moving on to Q&A I would like to reiterate how optimistic we are about the recovery of our portfolio.
As I mentioned earlier more than 20% of our assets exceeded 2019 revpar levels during the fourth quarter.
When you look at just the month of December alone the number of properties with Revpar outperformance over 2019 jumped to nearly 30%.
With group lead volume increasing steadily we fully anticipate that this revpar momentum will continue.
That concludes our prepared remarks, and we will now open up the call for Q&A.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key our first question comes from the line of Tyler Battery with Janney. Please proceed with your question.
Thank you and good morning, I'll start with a general question here just in terms of the cap structure.
Clearly, making a lot of progress there how are you feeling about your position today, how comfortable are you with your liquidity in light of some of the expected upcoming cash flows and just help us think through some of the next steps as we move through this year in terms of making even more progress on your on your capital stock.
Sure.
This is rob.
Let me take a particular whack at that one so I think.
We're we're obviously happy with where we are overall from a cash liquidity standpoint, and believe both the access we have to what's on our balance sheet as well as having access to additional funds from the strategic financing if we need them.
Feel good about where we are but you are right to the extent that there.
There are other cash needs that are some are are known and we talked about for example, you've got a capex that is starting to ramp up again, you know we've been having that depressed for last couple of years, I guess spending $30 million to $40 million a year and now it's gonna be back up into the triple digits of about half of that.
Probably gonna be owner funded so you know that.
Our cash needs that we know we need to do it's the ones that are uncertain that or just make it a little more difficult Tyler to lay out a specific plan just as a and I think a lot of it goes around extension tests on some of our loans that are due in in in 'twenty four 'twenty five 'twenty six but some of those.
<unk> test startup as early as kind of middle of the year next year.
And depending upon the shape of this recovery it really could be something where there's no need for capital to do anything on those and it'll be fine too they could be several hundred billion dollars of pay downs in order to meet those loan extension tests and so I think realistically what's going to happen is you're going to see us now that.
We're getting within 18 months or 12 months, if some of those tests hitting is where we're getting to a place where those lenders are willing to engage a little bit more in discussions and so I think a combination of talking with the lenders because they also don't want these loans to be in any sort of difficult situations.
See if there's ways to potentially modify some of those tests, maybe it is associated with with some aspects of the paid out maybe there was an asset sale that are that we can pair with it because it is a process. We're going through right. Now is looking at what do we think market is on a good number of our assets to see if that's a alternative way to maybe help on some of the loan extension.
Yes, we obviously have some restrictions on those given the broader strategic financing that we have in place but.
There's I think ways to to use dose. So it's still a little bit of a fluid situation, but we feel that we've got kind of ample capital right now too to address those.
And then the question then as well we also have some desire to go on the offense and so we're trying.
Trying to balance the need for capital to still deal with some of the.
Loan issues versus seen opportunities in front of us and so that's where we you know you may see is a at some point in time, you know we mentioned in the call and the script things like joint ventures, and whatnot to maybe go out and work with some capital partners to go on the offense, but those are.
Still TBD.
Okay, great appreciate that.
As a follow up I thought it was interesting and helpful to commentary about 2023, and 2024 and the AR and the earnings release can you talk about what sort of macro or perhaps industry assumptions are supporting that outlook and then it's interesting you're expecting to hit 2019, Revpar before you had a 2019 hotel EBITDA.
Just explain that a little bit more you're expecting some some extra cost creep, perhaps yeah, that's talking about the lag there and and achieving 2019 hotel EBITDA.
Yeah. Good question. So I'll start this first and then maybe Derek you may have some comments as well, but yeah. We do think it's important that we've actually never really given long term formal guidance, but we wanted to at least get a.
The investors in the street and opportunity to get some thoughts around what we're thinking in order from a modeling standpoint.
And from a and so given what we're seeing obviously you Tyler no well about the some of the forecast coming from Smith travel about how the U S is basically overall going to get back to 2019 levels potentially this year in 2022, it's just that as we look at our portfolio, which is predominantly upper upscale.
Gail assets.
That's a little bit laggard, a little bit behind but then we also have some upscale limited service assets that have also been coming back stronger and so as we balance all of that we do think that 2020 threes a year as we sit here today, where revpar will get back now the reason why it's not 2023.
And instead of 2024 on the EBITDA side, it's probably a little bit less on the margin side I think over the long term, we still think that.
That that margins may have a little bit of upside to them. After everything is said and done because of the new operating models.
But there's it's it's maybe relatively small yeah. It's just the fact that when we look at all of our ancillary and F&B type revenues, particularly around the cadence catering side and group side. You know those are just a slower ramp.
And so the offset is is one where even though we think margins maybe okay. It may be just a little bit longer before those get us all the way back to kind of a total EBITDA number.
Okay, Great. That's all for me I appreciate the detail. Thank you.
Our next question comes from the line of Kyle managed from B Riley Securities. Please proceed with your question.
Good morning, this is Kyle on for Brian .
Good morning, Bill good morning.
I was hoping that you could talk a little bit more about the oaktree loan I know you mentioned that you'd like to address that by the end of this year if possible and I was curious if you could just dive in a little bit more into kind of how you're thinking about addressing that as well as the kind of industry trends do you think you'd need to see this year in order to pay that off.
Yeah, no. It's a good question. So as we sit here today that that loan is about $200 million as we mentioned on the call. We have we were accruing the interest last year on it and in order to get our preferreds paid and in order to try to get our SRA eligibility back when he began paying.
Strategic financing current as well so there's no accruals on that and so as we look at.
At what it would take to pay them off they do have a two year make whole provision. So so there's in some sense no real benefit economically are paying them off today versus.
12 months or in January of next year.
So we will have to be paying that regardless, that's another $32 million. So we know that we are gonna O&M at least $232 million $232 million.
It's part of all of that now we did obviously.
Obviously previously announced that we have the ability to pay them off and keep the additional draws outstanding which is gives us a little bit of flexibility to the extent that we ever want to draw additional capital, but it it it call. It goes to this tension that we're looking at where we obviously have the cash on our balance sheet today to.
Pay them off and pay the make whole.
But we're just coming off the heels of omicron.
And and we've seen numbers come back and I think it's just a question for us of if this trajectory recovery continues.
Continues where you know more akin to what we were just talking about with Tyler, where we think revpar numbers are going to get back to 2023 levels next year, we will be able to see that here in the next you know 368 months as we see what happens with group business, what happens with business travel.
What are the continuing trends with leisure and depending upon if those are strong enough.
That will I think give us probably more confidence in order to write the check for you know.
The 200, plus a million dollars.
But we just don't aren't we're cautious on doing that right now until we see just a little bit more traction kind of on the ground them on the on the heels of OMA crime.
Great Thanks for that color.
And then you've also mentioned in the past that you'd like to rationalize the portfolio, maybe sell 10 to 15 hotels.
Was curious if you're still thinking in that way and also you mentioned that you'd like to go on offense could we actually see you maybe go on offense and some creative ways like doing a JV, maybe before you actually sell any assets.
The answer is I think all of those things are possible and all things are on the Oh.
We are available to US right now right now we are going through a process of looking at our assets.
But again, it's a little bit more complicated because we do have obviously certain provisions within our oaktree loans within the expansion alone that.
Which determines kind of how we can use proceeds.
Which makes it a little more complicated and we do have these other.
These other loans I mentioned that have extension tests that are coming up and you know the next you know year to two years that depending upon where you know what assets are in different pools. It may make sense to pair those up together as a way to both address our alone extension or loan maturity.
So there's just a bunch of moving pieces that we're looking at them, but I think hopefully here in the next few months, you'll see us try to lay out a game plan for that at least that's my intention as I sit here now and then to your second part which is could you see us be creative and go on the offense answers, yes, I mean, there is a lot of private capital out there and available.
And if it's something where Ashford trust can at.
At least have some participation in a deal and have some sort of rights on the back side, where we can create a access to a proprietary pipeline.
And then it's definitely something that we're going to take a look at it because we do have to be.
You know I guess again cautious you know too in terms of deploying all of our you know our cash we want to see a little bit more recovery before we.
Put that out in earnest and so that's where we're looking at a few alternatives right now.
Great. Thanks, that's all for me.
Our next question comes from the line of Chris will Ranke with Deutsche Bank. Please proceed with your question.
Yeah, Hey, good morning, guys I just wanted to start with maybe asking about the what your thoughts are on if you're going to be using an ATM or anything like that.
This year I know those things can be kind of opportunistic in nature, but I'm just.
Just thoughts given the the amount you did raise last year and kind of stock bouncing around any any thoughts on whether that's more or less likely this year.
Well I mean, obviously you Chris we are we have not raised our almost any capital here since kind of this fall.
With our stock price pulled back pretty significantly and so we've been on the sidelines on that I think it's likely.
As you know just from a standard a standard operating procedure that will whenever we get our S. Rails. Your ability we will likely put an ATM in place just to have it there, but given where our stock prices currently I wouldn't anticipate using it you know until the stock prices materially higher than what it is I mean, you saw the stat or.
The stat that we you had in the release, where the capital that we raised last year, which was substantive is well over $500 million, but it was obviously done at prices materially higher as you know close to 30 bucks per share so materially higher than where it is right now and so I think until we are at a place where.
We are much closer to that.
We're not can be very comfortable raising equity. So we'll probably be on the sidelines that we will likely at least set up the ATM just to just.
Just to put it in place.
Okay very helpful. And then one one operational question for you.
If you look out across your portfolio.
Pretty diverse right and a lot you know a lot of some urban exposure.
Do you have a view on the industry and where we're getting back we're not back to prior occupancy occupancy levels, yet, we're hopefully getting there.
Still need to hire some more people right and some of the hotels I mean is there any any way to think about or are those people out there or is there another leg up in <unk>.
In wages coming or you think this thing can all kind of smooth itself out over time.
No. That's a good question I mean, I do think it will it's it'll smooth itself up over time are I mean, we were looking at you know on at least on the hourly side wages are up you know anywhere between 15 and 20% from from pre Covid and as we're looking at where do we think those can go.
The best guesses, we have is that you know wages, maybe growing over the next year or two maybe it's in.
In the 5% type of annual range, so something and but not nearly as steep as it has been.
So we do think that as the economy opens up that youre going to see some.
I guess a less dramatic.
Increases.
And I and so at the end of the day I do think we still can potentially hold on and maybe some of the margin increase because there is no doubt from an operational side, we're running leaner than they were like I said, we're still running at about 70% of our pre Covid people are.
And I don't think we'll ever going to get back to a 100%. It may end up being something closer to 90.
So it's it's a little bit of wait and see but I do think it'll smooth out a little bit.
Okay helpful. And then maybe a quick one for Derek.
I E. How are you guys kind of internally underwrite interest rates given given the where we appear to be headed on higher interest rates over time, and just I guess, the second quite I'm, assuming we're nowhere near where the caps would come in but as we think about going forward.
You guys gave us guidance on the on the run rate interest.
How much does that change if we go two and a half 3% on an on the treasury.
Yeah, Chris it's Derek.
A couple of things there I think one we take the position that it's a natural hedge to our operating cash flow. So we're we don't we're somewhat indifferent to what what happens with rates because look at we've benefited from it on the downside and when now our earnings are going up.
We would anticipate some increase in cost as interest rates go up so like I said theres a bit of a hedge there, but we do we do spend a lot of time thinking about it but we do have caps to protect us from any spike.
We're not really tied to the treasury, where we're tied to short term rates and we spent a lot of time.
Digging into this and it didn't really came to the conclusion that look most of the time that the the vast majority of the time youre better off being at the short end of the curve and being floating and it also provides a lot more flexibility to us to be opportunistic to either sell assets or refinance at an opportune time.
And.
And so.
The run rate I gave you is based on current rates. Obviously, if you look at the forward curve and what the market is expecting short term rates to do.
There's a pretty significant increase that we will just have to see if the fed ends up doing that in rates end up going up as fast as the forward curve currently predicts.
We're tied to LIBOR or will ultimately probably be one month's sofa and that's that tends to be pretty close to the fed funds rate. So as the fed moves rates, we would expect our index to be pretty close to that.
But we'll just have to see Theres, obviously, a lot of that in our economy and as that that rate goes up it really puts the brakes on our economy and so we'll just have to see how aggressive and how quickly.
One of the things we have always seen in our in our history that the market always overestimate, how fast and high rates will go and.
And we benefited from that years and years ago, when we would Boston, Florida ores to participate in that sort of dynamic.
But needless to say, we're comfortable with the exposure that we have the <unk>.
That markets have.
Ramped back up and become more attractive sooner than I thought they would for hotel assets.
We were able to the two financings that we completed last year were on assets that had no trailing cash flow. So on it on a trailing basis. There was no cash flow yet we were able to get pretty attractive financings completed well.
We'll continue to be opportunistic as we look at refinancing opportunities we're sitting in a great spot and then we have no maturities.
This year final maturities, but.
You know I wouldn't be surprised if we go refinance a few pools to give us some more flexibility we may even be in a position to lower our spread so I.
I feel I feel very good with where we sit from a balance.
Our balance sheet standpoint maturity standpoint, and also from an interest rate exposure standpoint.
Okay very good appreciate all the color thanks, guys.
As a reminder, it is star one to ask a question. Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.
Thank you and good morning, everyone.
I want to turn the clock back and kind of go back to your five year stock price analysis that you guys I'm, assuming you're still do but you've talked about it a lot more pre pandemic could you maybe update us on how you're thinking about kind of your implied cost of capital. Both today and then also when you were issuing stock call. It 15.
Dollars per share or higher before the.
Before the sell off that happened in the fall any color there would be helpful. Thank you.
Yeah. It's a good question Michael I mean, I think we all see the way that you know, we're I'll say not in a process right now of doing significant.
Underwriting of assets given some of the comments we had before so.
You know the the five year stock price analysis, obviously was more in regards to.
What did we when we were acquiring assets and that's obviously been put on hold.
And so I think where we are as we're trying to figure out what our capital structure is.
It's going to be looking like right now were.
We were running at over 10 times.
Net debt and preferred to EBITDA going into the pandemic.
Pandemic on our on kind of a run rate basis, we're probably close to kind of go back to 2019 EBITDA numbers were probably in the mid to mid eights right now.
I'd like that number to probably be closer to six.
Over the next several years.
And so I think as we think about it.
Cost of capital right.
Right now, it's we've got to get the company into a position where we are.
Healthy you know that we've got a capital structure that is sustainable.
The capital raising that we did last year.
I see and in many cases, it was painful at times, but it.
It was at times, we had to make decision is that the best way to do it or do we want to file bankruptcy or restructuring the company and so and I'll say that there is significant risk to our shareholders and potentially losing a whole thing and so I think as we look forward, we're probably going to take some sort of more.
Or I don't know traditional understanding of or more common understanding.
Our cost of capital probably trying to hit some sort of you know unlevered IRR ours as opposed to stock price.
<unk> on our acquisitions.
But that's still kind of TBD as we aren't yet in kind of full offense mode.
But also we have some sense of what.
At what point is the level that is too low and obviously, where our stock prices now.
We think it's a pretty substantial discount from both the underlying value of the assets in and even the cash on our balance sheet as Derek mentioned, so which is why you haven't seen us.
You know raise any capital, but I. So I think its really depending upon like what are the are the significant needs if it's something that.
It's about going on offense.
And trying to do deals will then I think youll see us.
More kind of a traditional IRR type return structure, you know on a deal probably on a unlevered basis.
To underwrite acquisitions.
And then I think if it's raising capital for other reasons I think it's just all be related to what's the state of the company and and what's the cost of whether it's maybe get pools out there better to sell that and raise capital to.
To solve them, so it's probably a little bit.
Probably a little bit more fluid until we kind of get the company to a place where we have a sustainable capital structure.
Okay.
Got it and then just to clarify you said mid eight times today is that right.
I think I heard there was a pro forma was that on 2019 numbers what was the yes, it's kind of like a 2019 like if you took 2019 members.
I think it's yeah, we'd kind of be in the mid <unk>. So I think we've we've reduced debt by one.
150 to almost 200 I guess yet.
The best way to putting a two turns or so.
Over the last year, and a half and we probably still have another two to go or so.
Got it and then just along the same lines thinking about the stock price. Obviously, there is some amount of that overhang and refinancing risk weighing on the stock price. So it maybe white and think about going on offense and allocating any amount of time or dollars on new investments and I get that it might be 12 plus.
Months out but yeah.
Why even think and talk about that instead of being solely focused on addressing the liability side of the balance sheet.
Well I think some of it is if you see a I mean, if we see opportunities to create value, we're going to take them and as you know, it's you're it's never 100% and zero percent right Youre always trying to find.
Some ways to grow some ways to repair your balance sheet, some ways to grow liquidity and it just depends on where you are in the cycle of how much of a dial that is and so yeah, we're not spending a.
A ton of time underwriting assets at Ashford Trust, and where we're looking at things. There's a few things that we see that are interesting, but yeah. Those are our vast majority of our energies or are on the liability side, but we also want people.
People don't know that.
This is important to us and if there is an opportunity that makes sense, where we can put out maybe it's a limited amount of capital but.
Create some attractive returns and maybe it can be a healthy step for the company over the long term then that's something that we've got to be talking about it and taking a look at but there's no doubt that the vast majority of our time is being spent on repairing and healing.
The balance sheet as opposed to.
Going on offense.
Hey, Michael This is Eric the other thing I would add there is that you know just given the nature of our financing you've really got to look loan by loan.
To kind of see where the equity value is in the company and so we we may spend more time on one individual loan on a on a kind of a restructuring or a forbearance agreement or what have you given that we think there's a significant amount of equity in that specific loan pool and there may be other loans like like you've seen in the last 18.
24 months, where it look we've got to let something go what will let it go obviously, that's not what we want to do but when you're analyzing the value of the business given the nature of our nonrecourse debt at the property level, you really have to look loan pool by loan pool and that's what we've spent a lot of time and focus on and as we think about.
Restructuring debt paying down debt or.
You know how to out of just fine tuning that given that the capital structure of each loan pool.
That's what our focus is and and you know I think that's something that the market misses me. So there's sort of an overhang of leverage on our platform.
Yeah that may be the case for certain loan pools, but then Oh loan pools, you may looking back why there's a ton of equity in that loan pool. So it takes us a little bit extra work to kind of dig into the balance sheet a little bit more.
Yeah, and one other thing I would add Michael is interesting is that you know.
The we obviously experienced some pretty good downdrafts in our stock price kind of into year end and what was interesting was the reality is that for a while there or for several months period.
We were trading.
Not really in line.
With the other lodging Reits, but we were trading a much more highly correlated with some of the other kind of mean stock peers that are out there because we also had a pretty big shift in our shareholder base.
Where I think at some point as much as 80% to 85% of our shareholder base was on the retail side and I think what has since happened is we got kind of our new shareholder base is that we now are at the end of <unk> at the end of December .
Remember.
We're now probably back to being 50% retail and 50% institutional so we've got a big swath of that selloff seem to be retail shareholders, whether you know whether it's for year end purposes, or you know some of the other MIM stock in crypto stocks and investments that were being made.
We're struggling that people were liquidating their retail accounts and I think Ashford Trust got caught up in that and so it was interesting to look we had a much tighter correlation with gamestop and AMC another.
I mean stocks and then our REIT peers, and so I think there's a little bit of noise that is caught up in there.
And I think over time, this year and I think you'll probably see more and more of an institutional shareholder base come into the stock, perhaps we'll see.
Got it helpful. And then just one last one for me switching gears just wanted to go to your 2024 kind of margin commentary that you made maybe this is for Chris here, but just can you help us think about the cadence skewed it a cadence of.
Group recovery, So, let's say in 2023 group demand is a 10% or 20% below pre pandemic levels rates the same.
How do you see that as a.
The banquet spending trending relative to the group demand was kind of the sequencing there on the group side.
Yeah. Thanks, Michael.
From a group standpoint group is definitely the lagging segment I mean, you're right. As we look ahead to 2022, our group pace is down about 26% one of the things that we're really optimistic about is as you know.
Key leading indicators as we bought it.
We continue to see lead volume increase quarter to quarter.
Core was the strongest lead volume of any quarter, we filed since it started the pandemic.
We're also very encouraged by our group ADR. Please group ADR is up next year, 2% gold and even further ahead.
'twenty three that's up high single digits.
And so what we're seeing a lot right now or are some of the smaller meetings a lot of social.
And really to get that that high bandwidth high catering contribution we need those those larger group programs conventions associations to come back and we think that that's going to be one of the one of the last segments. The return. So I think as we get further along in the recovery of the 'twenty three 'twenty four that's what we really see that.
Catering catering spend returned to pre pandemic levels.
Yeah.
Helpful. Thank you.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Thank you for joining us and we look forward to talking with you all in our next quarterly earnings call.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.