Ashford Plans to Sell Hotels, Expand Mezz Business

Coming off a solid fourth quarter, Ashford Hospitality Trust plans to continue selling properties and using some of the proceeds for activities it sees as more profitably attuned to the current state of the hotel and credit markets, such as mezzanine lending. During the Dallas-based REIT’s conference call yesterday, president and CEO Monty J. Bennett noted that Ashford’s enjoys a geographically diversified portfolio, a blend of full-service and limited service properties, an expanding mezzanine lending business, and “locked-in, long-term fixed-rate debt, with less than 10 percent maturing over the next two years.”Despite such strengths, investors have shied away from Ashford lately. Like most REIT stocks–and hospitality REIT stocks–Ashford share prices didn’t have a good year in 2007, droComing off a solid fourth quarter, Ashford Hospitality Trust plans to continue selling properties and using some of the proceeds for activities it sees as more profitably attuned to the current state of the hotel and credit markets, such as mezzanine lending. During the Dallas-based REIT’s conference call yesterday, president and CEO Monty J. Bennett noted that Ashford’s enjoys a geographically diversified portfolio, a blend of full-service and limited service properties, an expanding mezzanine lending business, and “locked-in, long-term fixed-rate debt, with less than 10 percent maturing over the next two years.” Despite such strengths, investors have shied away from Ashford lately. Like most REIT stocks — and hospitality REIT stocks — Ashford share prices didn’t have a good year in 2007, dropping about 42.1 percent for the year, compared with an average drop of 22.3 percent for hospitality REITs as a class, according to NAREIT REIT Watch. The company did, however, consistently pay dividends of 21 cents per share quarterly in 2007, and Bennett asserted that stocks in the sector are due for a bounce back. “We believe there’s a serious mispricing occurring in the public equity markets,” Bennett said. “The three primary RevPAR predictors in the industry are predicting 2008 RevPAR growth of 4.4 pecent, 5.1 percent and 4.6 percent, respectively. The market is pricing all hospitality REIT stocks, including our own, assuming sizable RevPAR declines in 2008.” RevPAR, which is revenue per available room, is a key metric in the hospitality industry. Ashford’s RevPAR rose 6 percent in 2007 compared with the previous year. “At some point, 2008’s actual RevPAR performance will become apparent, and at that time, hospitality sector REIT investors will be rewarded,” Bennett said. “It’s clear that real estate sold off global last year, with investor concerns about real estate assets in general causing a good deal of that selling,” David Loeb, senior analyst with Robert W. Baird & Co., told CPN this afternoon. “Some REITs are doing share buybacks in the current environment, Ashford among them.” To sustain the company’s relatively high dividend payouts, Bennett said that the company plans to continue selling assets, with about $2 billion going on the market this year, with the goal of selling $600 million. Last year the company sold $312 million worth of hospitality properties, and thus far this year it has completed the sale of the JW Marriott New Orleans for $67.5 million in cash and assumed debt. “If the company achieves its goal of selling $600 million in assets, that would be between 15 percent and 20 percent of their current portfolio,” noted Loeb. “That’s substantial, but Ashford would still be predominantly an owner of hotels.” Ashford also plans to increase its mezzanine loan activities. Toward that end last month, the REIT formed a joint venture with Prudential Real Estate Investors (PREI) to acquire or originate mezzanine loans for the hospitality sector. The JV, which will be funded over the next two years, will ultimately be capitalized with $300 million from investors in a fund managed by PREI and $100 million from Ashford. “Going forward, mezzanine investments will still be a relatively small part of Ashford’s total investment portfolio, but if you look at the returns offered by them today, they’re really quite high, and compare favorably to equity ownership,” said Loeb. “Mezzanine investments are also less risky than the equity ownership, so it’s a higher- return, lower-risk proposition for Ashford.”