NEW YORK—Looking back, Ashford Hospitality Trust could not be happier with its US$1.28-billion acquisition of the 28-hotel Highland Hospitality portfolio in March, and President Doug Kessler said Wednesday the buy puts Ashford in the best position to take advantage of a forecasted hotel industry up-cycle.
“According to PKF, demand growth will continue to outgrow supply through 2014. If you look at the historical (revenue per available room) cycle, fundamentals have a long way to go until they reach peak levels,” Kessler said during REITWeek 2011 at the Waldorf-Astoria in New York. “Investors at this part of the cycle have made historic returns.
“Based upon historical cycles, there is no question in our mind now is the time to investing in lodging.”
Kessler spoke on a panel moderated by David Loeb, senior analyst at Robert W. Baird, who said Ashford is “by far” the top performing hotel real-estate investment trust on his list of 20 or so hotel stocks.
Ashford’s portfolio is positioned in many of the top rebounding industry segments and geographic areas. More than 90% of the REIT’s earnings before interest, taxes, depreciation and amortization come from the Top 50 hotel markets. The top five markets by EBIDTA for Ashford are: Washington, D.C.; Dallas-Fort Worth; New York-New Jersey; Boston; and Orlando. Two-thirds of EBITDA come from the luxury and upscale segments, and 85% from Marriott International- and Hilton Worldwide-branded assets, Kessler said.
In Ashford’s asset portfolio, the majority of guests are corporate transient—a group that is poised for large-scale rate growth. “Transient rates are typically higher than group and have a long way to go,” Kessler said.
Kessler described the revenue-growth potential for Ashford. He said that according to a PKF model, if one assumes 7% RevPAR growth over five years, EBITDA flow would increase more than 72% over 2010 numbers.
“So from a macro perspective it appears this is the appropriate time to invest in lodging,” he said.
In terms of leverage, Ashford’s debt ratio is just under 61%, Kessler said.
“We believe that we have demonstrated that by actively managing the capital stack, having higher leverage can be a benefit to shareholders, particularly at this part in the cycle,” he said.
Ashford also recently reinstated a quarterly dividend of 10 cents per share, “with the potential to grow,” Kessler said. The dividend represents about 3% of the share price, which is higher than what peer REITs have been issuing.
“No other lodging REIT is more closely aligned with shareholders than Ashford,” he said. “We have the highest insider ownership percentage, (about 21%). The majority of our management’s net worth is tied up in the company.”
Benefits of Highland buy
Kessler said the Highland portfolio—of which Ashford invested US$150 million at closing and will own 71% in a joint venture—further positions the REIT to capitalize on increasing fundamentals.
The portfolio Includes 19 full-service hotels and nine select-service hotels with a concentration in major brands such as Hilton Worldwide, Marriott International, Hyatt Hotels and Resorts and Starwood Hotels & Resorts Worldwide. The price of the portfolio equaled US$158,000 per key at a 13-times EBITDA multiple for 2010.
The US$158,000 per key price is significantly lower than recent purchase prices by peer REITs of nearly US$300,000 for new assets, Kessler said. In addition, “The US$158,000 per key looks inexpensive relative to Highland’s original acquisition price of US$244,000 per key in 2007 when it went private,” he said.
The sale represented a 44% discount on replacement costs.
“We believe there is substantial operational upside in this investment,” Kessler said.
In 2010, EBITDA within the Highland portfolio was 18%, compared to an EBITDA of 104% for the Ashford properties.
To better position the acquired hotels, Remington Hospitality Services has taken over management of 17 of assets, Kessler said. At the time of the buy, net operating income at the properties was 36% below its peak, which Kessler said is expected to improve dramatically.
A US$32-million reserve was set aside at closing to be used for owner-funded capital expenditures of many hotels in Highland’s portfolio. Ashford will consider branding some of the independent hotels that came with the buy.
“We believe there are many reasons to be enthusiastic,” Kessler said. “We definitely believe we bought it at the right price and put in place attractive financing. It’s a high-quality portfolio that we expect to add value to our returns to come.”
