"The decision will be based primarily on the offers received versus what we think the values are," Monty J. Bennett, Ashford's president and CEO, told shareholders and analysts during yesterday's earnings call. A handful of hospitality brokers have been tapped to market the assets. The hotels haven't been publicly identified as yet, but he describes it as a mix of select-service portfolios and one-off full-service properties, predominately encumbered by management contracts and assumable debt.
Bennett says Ashford's mezzanine platform will dominate the REIT's strategy for the next few years. And, it will be an asset seller rather than a buyer. The plan is being funded through hotel sales and a $400-million joint venture with Parsippany, NJ-based Prudential Real Estate Investors, which has a first right of refusal for all mezz loans.
Bennett says the decision has been based on projections of moderate growth in hotel values versus possible yields of 17% or slightly more in the mezz arena. "It makes sense for us to migrate more toward the mezzanine business," he says. "At some point in time, I think in three to four years, it will start to reverse and we'll start to migrate the other way." He says the crystal ball prediction doesn't have to be right on target as long as Ashford is ready to shift gears when the market moves.
The Ashford team explained its best sources of capital lie in its operating cash flow above the dividend, sales and joint ventures. And, the team believes its best uses of capital are debt reduction, mezzanine lending, share buybacks and its cap-ex program.
Ashford has $2.7 billion of debt, which presently represents 61.5% of net debt to gross assets. Bennett says the goal is to be below 60% by year's end, returning the REIT to its positioning before its $6.6-billion acquisition of Orlando-based CNL Hotels & Resorts Inc. The REIT only has $74 million of loans maturing in 2008 and $125 million in 2009.
On the buyback front, the REIT has deployed $18.2 million, but is authorized to spend up to $50 million in that arena. Also, it has $190 million earmarked for the 2008 cap-ex program, but only $80 million is required to be spent. The REIT has the option to defer and redeploy the lion's share of the balance. Ashford's executives weren't available for an interview following the earnings call.
"We thought there would be more asset sales and that proceeds would go to pay down debt and use a portion to increase investment in mezzanine lending," David Loeb, a senior real estate research analyst and managing director for Milwaukee-based Robert W. Baird & Co., tells GlobeSt.com. "Deleveraging certainly is the right thing to do. And reinvesting in the mezzanine business, given where the markets are, is pretty attractive."
Ashford is the only publicly traded hospitality company to play on the mezz field. However, the decision mirrors that of others like opportunity funds, which are seeing green thanks to the CMBS market. "The market for mezzanine debt is so ripe because investment banks originated whole mortgages that they intended to put into the CMBS markets," Loeb explains. "Now, they're sitting on paper they don't really want to own. It's a slice of the mortgage business that they don't want tying up capital and they aren't able to easily put it into securities."
As with any lending scenario, there is a risk. "Every time, Ashford underwrites a mezzanine loan, they assess what the risks are and whether the price going in would give them a return that they'd be comfortable with if they ended up owning it," Loeb says.
Douglas Kessler, Ashford's COO and acquisitions director, says they tagged $2 billion of assets for sale to build in flexibility. "While that figure is more than we would expect to actually sell, it should create a significant pipeline of future sources of capital as well as a reduction in the associated property debt," he says.
Most "for sale" hotels are encumbered by assumable loans, according to Kessler. The REIT's strategy includes offering mezz loans to its prospective asset buyers.
"If it looks like the opportunities to deploy capital in mezzanine lending are growing, it may lead us to sell more than $600 million of assets," Bennett says. "This type of environment is where we believe we excel and where we can be very opportunistic."
Ashford has inked several mezz deals just this month. The REIT Feb. 6 paid $33 million for a $38-million loan secured by the Ritz-Carlton Key Biscayne in Miami. The wholly owned loan, bearing a 9.66% interest rate, matures in June 2017. It's expected to yield about 12.5% over the term. Eight days later, the PREI-backed JV bought a senior mezzanine loan secured by a 29-hotel portfolio of full- and select service hotels. The JV is a 75-25% structure so the REIT's share, requiring a $17.5-million investment, is projected to yield about 17.9% after all adjustments.
In other adjustments for today's market, Ashford has implemented cost-saving plans at all 37 hotels managed by Remington Lodging, which is owned by the REIT's chairman and CEO. It also has a similar strategy ready to deploy, if necessary, at hotels managed by others if the hospitality market softens.
Bennett says the measures call for labor reductions, hiring and salary freezes, elimination of certain employee benefits, scaling back of non-essential services and cutting into discretionary spending, including marketing expenditures. The measures are "designed to maintain flows to hotel EBITDA without impact to brand-mandated service levels," Bennett says. "We also have prioritized our capital expenditures and are prepared to make adjustments if economic conditions warrant a change."
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