Doug Kessler, CEO of Ashford Hospitality Trust, believes the need for greater liquidity and scale will drive more consolidation in the hotel REIT space. In a video interview with HNN, he discussed his company’s newest funding vehicle that will help grow its portfolio.
PHOENIX—Ashford Hospitality Trust might, or might not, join in on the emerging trend of consolidation in the hotel real estate investment trust sector, but CEO Doug Kessler said during an interview at the recent Lodging Conference that it will certainly be a part of the active asset transaction landscape.
Buoyed by Pebblebrook Hotel Trust’s recent $5.2-billion acquisition of LaSalle Hotel Properties as Blackstone was closing in on a deal, and prior to that RLJ Lodging Trust’s merger with FelCor Lodging Trust, the REIT sector is seeing a resurgence of interest that will result in more mergers and acquisitions, Kessler said.
“It used to be taboo to have a REIT-to-REIT lodging M&A event happen,” Kessler said. “From the standpoint of greater liquidity, greater scale matters more today.”
The elevation of passive investment funds capturing more ownership stake in lodging REITs is a big driver of that potential M&A activity, he said.
Kessler said he couldn’t comment on whether Ashford Trust is seeking to be a part of that mergers-and-acquisitions action.
“We’re always looking at opportunities to enhance shareowner value—whether it’s single-asset investments, portfolio investments. Obviously we’ve had a great track record with respect to complex transactions,” he said.
Deals are the way of the world in Ashford Trust’s vision. The company, which owns 120 hotels comprising approximately 25,000 guestrooms, has had much success over its 15-year existence in large part because of its 18% insider ownership stake, which Kessler said is nearly six times that of its peer average.
“We’re very much in line with our shareholders, and we think and act like owners, and that’s basically what we’ve done over our 15-year history,” he said.
Ashford Trust’s fundamental strategy is to acquire full-service, upper-upscale hotels, according to Kessler. While it primarily focuses on U.S. top 25 markets, it is open to owning assets that make sense in other markets.
The company recently launched its Enhanced Return Funding Program, Kessler said, which consists of a $50-million commitment from advisor Ashford Inc. to apply 10% of the purchase price of every asset that Ashford Trust buys. Kessler also serves as senior managing director for Ashford Inc.
“That $50 million would equate to a half a billion dollars of new acquisitions where Ashford Trust would receive that $50 million of funding,” Kessler said. “The beauty of the program is that, as you can imagine, that $50 million is funded in a way that reduces the equity requirement for Ashford Trust.”
At its most basic level, the program amounts to Ashford Trust saving about one-third of the purchase price when it is acquires an asset that requires a 30% equity stake, Kessler said.
“You can imagine the power of this in terms of what it does to elevate the internal rates of returns on these investments,” Kessler said. “We predict that the internal rates of return could increase from 700 to 1,200 basis points for new acquisitions. The benefit, clearly for us, is in thinking that if we can enhance the returns on every new investment that we make in such a way that it could lead to enhanced shareholder returns through an elevation of share price, well that’s a great situation; that’s a great outcome for Ashford Trust.”
Ashford Inc. benefits through tax benefits and incremental fees from the growth of Ashford Hospitality Trust, Kessler said. As advisor, Ashford Inc. receives fees based upon the total market capitalization of the company.
“It’s very much a symbiotic relationship,” Kessler said. “In many ways it’s almost a virtue of circle of: If this capital is provided and the returns to Ashford Trust increase, which could then provide more fees to Ashford Inc., which then in turn would be more incentivized to continue to provide more ERFP funding to Ashford Trust.”
The funding is officially applied to furniture, fixtures and equipment, so it’s not a reduction in the purchase price because purchasing hotel FF&E provides a tax benefit for Ashford Inc., according to Kessler.
“We really view this to be a win-win for both sets of shareholders in something that, again, gives us a significant competitive advantage when we’re looking to bid for hotel assets,” Kessler said. “Our underwriting criteria hasn’t changed in terms of how we look at transactions, and we’ll continue to exercise that discipline. The objective is to make good deals great.”
Putting the program to work
Ashford Trust utilized the ERFP a few times since it launched in June. The first for the $111-million acquisition of the 52-room Hilton Alexandria (Virginia) Old Town. That market now accounts for 11% of Ashford Trust’s earnings before interest, taxes, depreciation and amortization, according to Kessler.
“For an asset that had effectively just over a $160 RevPAR, to be all-in, the way we look at it, north of an eight cap rate, I think is pretty attractive in today’s market,” Kessler said.
The company has no set target for the number of assets to acquire with the program, but it has a two-year commitment to utilize the capital, Kessler said, adding that the success of a hotel REIT lies in buying and selling assets at the right time.
“You’ve got to be very good at asset management,” he said. “The other aspect of operating in the public environment is you have to be very astute with respect to (the) capital market’s activity—whether that’s on the equity-raising side or on the debt side.”
The company recently announced at its investor day that the acquisitions of the 157-room La Posada de Santa Fe and the 178-room Hilton Scotts Valley/Santa Cruz will be partially financed via the ERFP.
Most of Ashford’s debt is floating rate because it gives the company the flexibility to refinance or sell at any given time, Kessler said. During 2018 it has refinanced more than half of its hotels in three waves—a group of 34 hotels in June, a group of 22 in April and a group of eight in January.
“We like the natural hedge between the movement in RevPAR and the movement in floating rate index,” Kessler said, adding that Ashford during the past couple of years has refinanced more than $3 billion—approximately 85% of its total debt.
“We essentially sequenced loan pools into the market to take advantage of the timing and the availability of debt capital today in order to accomplish a few things: One, we gave ourselves more flexibility with the loan pools that we had; two, we reduce the spreads over the previous loan terms, which is a benefit to our shareholders; and three, in some cases we either refinance at the same level or took advantage of putting some excess proceeds into our pocket for the benefit of future growth for the for the benefit of shareholders,” he said.
Bullish outlook for hotels
Ashford Trust executives remain bullish on the hotel industry as its fundamentals and the overall economy remain strong, according to Kessler.
“Wage increase is a challenge, but the flip side of that is as an industry we’re all benefiting from that because corporations are doing well, high consumer confidence, low unemployment,” he said. “The fact that there’s strength in the job market is contributing to—for example—leisure demand, which is significant, as well as the desire to expand on the corporate demand side is clearly there when you look at some of the data points as well.”
Kessler said this cycle is built on longevity rather than excessive strength, and with the forecast calling for a continuation of the growth, Ashford Trust is in an excellent position to grow.
“We are being diligent in how we buy; we have the clear benefit of the ERFP program; we have been a very calibrated seller in terms of what we’ve sold,” he said. “We’ve taken advantage of better cap rates relative to how our overall portfolio is traded on asset sales that actually have a lower RevPAR than the rest of our portfolio. … We all come from the school ‘If you don’t ask, you don’t get.’”
Extracting value from assets is the name of the game, and there are opportunities including changing a hotel’s operations through more efficient technological advancements, he said.
All of this means an active future for a company that’s celebrating its 15th anniversary in 2008.
“We’ve always been an opportunistic platform,” Kessler said. “We’ve taken advantage of opportunities in capital markets along the way, we’ve certainly bought and sold, we believe, at the right time, and we’ve aggressively asset-managed. So over the history of the company, there’s been a concerted effort to capitalize on some situations in the market and to constantly have a focus on adding to shareholder value.”