Ashford Hospitality Trust Paring Select Service Assets

Ashford Hospitality Trust’s move (NYSE: AHT) to sell its select service hotel portfolio in order to focus on upper upscale properties has helped simplify the REIT’s strategy, according to chairman and CEO Monty Bennett.

“Our shareholders wanted clarity,” Bennett said in an interview with REIT.com. He said the decision marks a step toward creating well-defined, distinct strategies for the investment platforms operated by Ashford Inc. (NYSE: AINC), Ashford Trust’s advisor. Ashford Inc.'s other REIT platform, Ashford Hospitality Prime (NYSE: AHP), which targets luxury, chain-focused hotels in gateway and resort markets, announced Aug. 28 that it is exploring strategic alternatives to boost shareholder value, including a possible sale.

Ashford Trust opted to sell the select service portfolio after conducting a full analysis of the potential strategies, and listening to investor feedback. Bennett stressed that Ashford Inc. may pursue sponsoring a separate select service platform. “We still want to launch a select service strategy, just not out of Trust,” Bennett said.

Patrick Scholes, managing director at SunTrust Robinson Humphrey, Inc., applauded the move to sell off the select service portfolio. Because of its unusual structure, investors were worried how the economics would work out if Ashford Trust had incubated a select service platform, he said. Such a strategy also would have made for “a very complicated story at a relatively small REIT,” Scholes added.

Ashford Trust to Focus on Upper Upscale, Full Service

Ashford Trust plans to sell approximately $500 million of select service properties by the first quarter of 2016 and focus on upper upscale, full service hotels across the United States. Bennett said the company sees more value-add potential in full service hotels, which “have always provided more of that opportunity than select service.”

Ashford Trust is expecting to plough funds from the sale into upper upscale acquisitions “in just about any market in the U.S.,” Bennett said. He noted that Ashford Trust will seek a broader footprint than Ashford Prime.

Current market conditions for acquisitions are “competitive,” Bennett said, with transaction volume in 2015 again likely to surpass prior years. At the same time, however, assets are trading at prices that are “rational and justifiable,” he added.

Rod Petrik, analyst at Stifel Nicholaus, noted that Ashford Trust has been the most active lodging REIT this year on the acquisition front, closing on more than $1 billion of acquisitions year-to-date.

“With its new investment strategy and conceivably a lot of dry powder to work with from the potential sale of the 23-asset select service portfolio, we believe the company will be active in the near term,” he said.

Introduction of Key Money Concept

A recent acquisition by Ashford Trust underscores its move into the upper echelons of the hotel industry. In June the company paid $62.5 million for Le Pavillon Hotel in New Orleans, a property that has been included in media company Condé Nast’s lists of the best hotels in the world.

To secure the acquisition, Ashford Inc. provided Ashford Trust with $4 million of key money, a financing option that is common in the hotel industry. Typically, key money is a one-time, upfront payment by a hotel brand to the owner of a sought-after hotel in return for branding the property. In Ashford Inc.’s case, key money will be used to help Ashford Trust and Ashford Prime acquire assets that ordinarily would be beyond their reach.

“We don’t expect to do it on a regular basis. It’s only for those rare opportunities where Ashford Inc. really wants to manage a certain asset and the economics don’t work for Trust or Prime,” Bennett said.

Public/Private Market Disconnect

As he scans the acquisitions landscape, one factor that is giving Bennett pause is the disconnect between public and private market valuations.

“It’s one of the largest mispricings that we’ve seen for quite some time,” Bennett said. Public market values on a per-key basis are around 15 percent or more below private market values, according to Bennett.

“When you acquire, you have to look at your cost of capital. Our cost of capital is what we’ve raised equity at, so it does make us more cautious about acquisitions until we see if this phase passes,” Bennett said.

Chris Woronka, an analyst at Deutsche Bank, noted that if the wide valuation gap continues much longer, Ashford Trust could deliver significant shareholder value, net asset value (NAV) and funds from operation (FFO) accretion, by repurchasing its own stock.

 Industry Fundamentals Remain Favorable

Turning to the general health of the lodging sector, Bennett said new demand continues to outstrip supply growth. The trend is likely to hold through 2017, at least, he noted.

Indeed, in its latest update on the hospitality sector, national commercial real estate brokerage Marcus & Millichap reported that the hospitality industry’s upswing is now in its fifth year and showing no signs of slowing down.

“The hotel sector sailed through the first seven months of 2015 and will reach new recorded highs in occupancy, average daily rate (ADR) and revenue per available room (RevPAR) this year as the U.S. economy continues to expand,” the firm noted.