Ashford Hospitality Trust, Inc. (AHT) Q3 2022 Earnings Call Transcript

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Tyler Batory with Oppenheimer. Please proceed with your question.

Tyler Batory

Good morning. Thanks for taking my questions. First one for me, on margin and labor costs. Are you seeing any pressure on margin from higher labor costs? What does the hiring situation look like right now? Where are you on FTEs now versus pre-COVID? And any other areas of cost inflation that are worth calling out, besides potentially labor?

Chris Nixon

Yes, this is, Chris. I’ll take that. So, great question. I mean, we are still seeing labor pressures. We’re seeing wages continue to increase. It’s definitely been a challenge. I think wages are up over 30%, since 2019. In terms of being able to staff and hire, it does remain a challenge. We’re seeing some signs of encouragement. The recent trends are showing that the quick quits are down. Those are employees that quit, within 90 days of being hired. We haven’t gotten to the point where, we’ve had to turn away demand based on labor needs, but we have more heavily utilized contract labor where needed than we have in the past.

And so, one of the things we’re encouraged by though is that, we pulled forward a lot of the efficiencies that we found through COVID. And we’re actually seeing low double-digit improvements in productivity across our portfolio. Some of the other issues that are factoring into margins, as you mentioned the costs. Inflationary pressures, the cost of supplies are up. We’re also seeing utility costs increase. And on a POR basis, we’re seeing broad utility costs that are up about 25% over 2019. And so those are some of the major issues playing into margin.

I mean the one thing we are encouraged by is Q3. Our EBITDA margin improved significantly over third quarter of 2021. And so again, we pulled forward a lot of those efficiencies. And as we move forward through the recovery, we expect to see continued margin improvement. You asked about kind of FTE count to pre-COVID levels. Right now, we’re between 75% and 80% of pre-COVID staffing levels, through the third quarter across the portfolio.

Tyler Batory

Okay. Great. Thank you for that. And then a follow-up question on the cash trap. The percentage of the hotels in cash traps was flat quarter-over-quarter. It doesn’t really seem to line up with improvements in fundamentals. So is that really just a function of, how those cash traps are calculated? And can you help us think about your expectation for what percentage of hotels could still be in cash traps by the end of the year?

Deric Eubanks

Yes, this is Deric. I’ll take that. So it varies by loan and depends on the performance of the underlying assets in each loan. And they’re mostly debt yield tests that are backwards looking on a trailing 12-month basis and you take the NOI over a trailing 12-month basis as a percent of the existing loan balance.

You’re right. So very few hotels came out of traps this quarter. We anticipate that probably a few more will come out at the end of the year, but do not anticipate that a significant amount will come out prior to their extension tests, which will happen in 2023.

The good thing is any cash that’s sitting there in the trap is available to fund any potential paydown that’s needed for those extension tests. So that’s a positive. But we anticipate that the vast majority of those hotels will continue to be in traps over the next 12 months or so.

Rob Hays

Yes, Tyler, I mean, I think the reality is that the first quarter of this year was, obviously, soft with the Omicron variant. And so as we’ve seen is since those — most of those tests are on a TTM basis, there’s a little bit of headwinds on that test until we kind of get past that year-over-year comparison.

Tyler Batory

Okay, great. It makes sense. That’s all for me. Thank you.

Operator

Thank you. Our next question is coming from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Chris Woronka

Hey, guys, good morning. I wanted to ask also on margins as to whether you’re seeing any meaningful difference in kind of the ability to push on select serve versus full serve? I know you’re tilting a little bit more towards full serve. But given some of the — is it just more difficult to find ways to optimize select serve given that there’s kind of less to be flexible with?

Chris Nixon

There is less to be flexible with. I think our employees at our select service hotels are great at wearing multiple hats and they’re cross trained. And so there are some efficiencies that we’re able to pull through. I think from a wage standpoint to your question, we’re seeing in Q3 that wages grew a little bit higher at our select-serve hotels than our full-service hotels.

We saw an increase of about 5% across full service and that was 8% or 9% across select service. And so I think it speaks to some of the challenges we’re experiencing hiring in select service hotels and in kind of that they might have a lower hourly starting point depending on the market that they’re in.

The positive thing we’re seeing though is that we believe wages are starting to level off. And so in talking with our brand partners and our management companies I mean what they’re expecting is somewhere around 5% growth to kind of the prior year on a go-forward basis. And that’s in line with what we saw broadly when you average those two across our portfolio for Q3 we were at about 6%.

Chris Woronka

Okay. Thanks, Chris. Very helpful. And then a follow-up. Rob you mentioned the valuation metrics on the sale of the Ann Arbor hotel. I guess — and you mentioned you have another one for sale and maybe more down the road. Are the buyers how are they underwriting? Are they purely looking at 2019 and just kind of saying that’s the run rate, or are they kind of underwriting economic softness next year? I know the trailing number is a much lower cap rate than the 2019 cap rate?

Rob Hays

Yes. I mean, as you can imagine, Chris, it really varies by property and market and the story. The buyer that we had for this previous one is someone that owns other assets in that market to know that market well and has a very bullish view of that market probably more so than we did, which is why that transaction made sense.

So I think it really varies. I mean I think you’re seeing people that are looking at leisure-heavy southern warmer markets. I think some of them are potentially pulling back either rate or RevPAR a little bit or at least not growing it as aggressively as other parts of the country. I do think as you’re looking at assets and markets that are more urban a little bit more northern, I do think people are starting to underwrite recoveries in those markets more aggressively. So I think it really varies by story.

I think you — the smaller assets are ones where you can bring in some owner operators and they maybe bringing in something they think are different operation strategies. But overall, as you can imagine things are slowing down. We do have an asset in the market. It’s a smaller asset. But even that has been somewhat impacted by the movement in the debt markets and things going sideways. So, it’s just hard to it’s hard to see the transaction market getting too aggressive until the debt markets at least show some trajectory of recovery, which they aren’t quite yet.

Chris Woronka

Okay. Fair enough. Thanks, Rob. And one final one I guess for Deric. I think you mentioned, 59% of debt being effectively fixed through the swaps. Is that — can that — or should that change much going forward? I mean how much can you or do you want to move down the fixed curve with I guess more swaps?

Deric Eubanks

Yes. So, they’re not swaps, they’re caps that kick-in depending on where LIBOR goes. And I’m not sure, if you heard the prepared remarks. But once LIBOR goes above 4%, then we would effectively be 100% fixed. We’re currently — LIBOR is currently at 3.8%. So we’re almost there and it looks like we’re probably headed there. So, I would anticipate that we’d be basically 100% fixed here pretty soon. Now that will start to trail off as those loans mature and — or at least have their initial maturity date.

Our anticipation is that we would extend those loans. The loans that we have obviously have very attractive spreads on them compared to where spreads are today. And so, the thinking is that we would need to replace those interest rate caps with new interest rate caps when we exercise those extension options, which is why we’ve gone ahead and kind of pre-purchased several forward-starting interest rate caps to be prepared for that. But, I mean I think the easy way to think about it is, if LIBOR is above 4%, we’re pretty effectively fixed for an extended period of time. And if it’s less than that then we’d be more floating.

Chris Woronka

Okay. Great. Very helpful. Thanks guys.

Operator

Thank you. Our next questions come from the line of Michael Bellisario with Baird. Please proceed with your questions.

Michael Bellisario

Thanks. Good morning, everyone.

Rob Hays

Good morning, Michael.

Michael Bellisario

Deric, just one follow-up on that same topic. What’s the cost associated with buying interest rate caps today or presumably what the costs might be in six or nine months? I would think either to be more expensive where your cap rate might be higher than 4%, right?

Deric Eubanks

Yes. So it totally depends on the strike rate the term how long it goes out and what the market’s expectation is for future rates. So, it just depends. I’ll tell you that the forward starting rate caps that we just recently bought, we bought on a notional amount of $2.8 billion, which is a pretty significant amount of our floating rate debt and those cost $25 million.

Michael Bellisario

Got it. That’s helpful. And then along the same lines, can you maybe just update us where you’re seeing mortgage debt price today?

Deric Eubanks

Yeah. Thankfully we’re not in market for any refinancings at the moment. It’s not a great time to get a hotel loan. As I’ve said before, typically when you’re seeing short-term rates go up we’ve always seen spreads compress. And it’s ironic because the credit is getting better. Hotels are more profitable and they’re doing better.

So from a credit perspective, the credit is just getting better but the market is a little dislocated at the moment and spreads are still relatively wide for a typical call it 60% LTV loan. You’re probably in the 400 to 500 basis point spread range.

And thankfully like I said, we don’t have a ton of maturities that we’re looking at. We’ve got extension options on really all of the loans that you see with near-term maturities except for two in 2023 that have final maturity days. It’s only $98 million that we don’t believe we’ll have any problem refinancing.

So thankfully we’re in a fortunate spot there. I suspect that once there’s some clarity in terms of what the Fed is going to do with short-term rates that the debt markets will soften a little and be a little bit more attractive. But I think until we have that clarity, it may be a difficult time on the hotel financing front.

Michael Bellisario

Got it. Thank you. And then Chris back to you just one more follow-up on the same topic on expenses. They may be asked slightly differently. Are you seeing any difference in cost pressures between your brand managed and Remington managed hotels?

Chris Nixon

I wouldn’t say that we’re seeing any differences. I think if anything, Remington is very nimble and they’re able to adjust very quickly. They’re typically quicker to rollout creative solutions and test things. And so we’re not seeing any meaningful differences in terms of broad productivity or broad wage increases, it’s between brand and in our third-party managed hotels it’s really driven more by markets. That’s where we’re seeing the big variances. But I will say there’s a benefit to Remington is just nimbleness and how quickly they can roll out new initiatives or pivots.

Michael Bellisario

Okay. Thanks. And then just last one for me for Rob just on capital allocation. Maybe when does it make sense to start putting some of your cash balance to work on the acquisition front, or is that really solely depend the pace of the non-traded preferred?

Rob Hays

Well, I think that as of right now, given that, we’re being I’d say a little bit cautious in the sense that, we want to make sure, we understand what’s going on with the debt financing markets, we do have extension tests, and – on some of our loans next year that are – kind of happened throughout the year. And we anticipate that some of those could need some aspect of some paydowns in order to receive extensions, and we’ve obviously begun conversations with lenders as part of all that.

And so that can be – we as we said are now not knowing exactly what’s going to happen next year from an operations standpoint. We don’t know, if the risk to that is zero or is it something? And so obviously that’s why we’re holding the amount of cash that we are until, we feel confident that, we see the kind of what the path forward looks like and have some agreements in hand on those loans. And so the combination of that, and yes, the pacing of the non-traded preferred can also dictate how aggressive we get.

So I think to the extent that, you see us do something on the acquisition side, it will be either some smallish acquisitions or potentially, some joint ventures with partners where we’re probably the smaller piece of that until we get a little bit more clarity on the debt markets.

Michael Bellisario

That’s all for me. Thank you.

Rob Hays

Thanks, Michael.

Operator

Thank you. [Operator Instructions] Our next question is come from the line of Bryan Maher with B. Riley. Please proceed with your questions.

Bryan Maher

Good morning. Staying with the line of putting on the caps, the $2.8 billion of notional value that you discussed for $25 million how is that being expensed through the P&L?

Deric Eubanks

That’s capitalized. So it’s not expensed through the P&L. It gets capitalized. It’s an asset that we purchased.

Rob Hays

And probably have what sort of mark-to-market or as you…

Deric Eubanks

Yes. The value of that would fall through the unrealized gains on derivatives. And if it ultimately pays off that would show up in other income, or it would just burn out through ultimately a realized loss at some point through our P&L.

Bryan Maher

And was the notional value on that was that assuming also sticking with the 4% cap or did you buy that at a higher rate 5%, 6%, et cetera?

Deric Eubanks

Yeah. So it’s a blend between 4% and 5.5%. So, kind of a weighted average strike rate of 4.75%. It’s basically a way to protect us, if short-term rates just keep going up. The forward curve right now shows, LIBOR starting to come down in sort of April, May of next year.

Whether that really happens or not who knows. And we just wanted to protect ourselves because in most cases the cap that, we’re going to have to replace are around a 4% strike.

Bryan Maher

Okay. And then, lastly kind of on that topic, when you look out to 2023 and you see these debt pieces maturing, that are associated with certain hotel assets and you think about the cost of extending those or refinancing those at a new rate or buying caps.

Is that influencing your decision on potentially selling some of those hotels? I mean, we found it a little bit interesting that certain hotel REITs are still having some success transacting, not broadly so, but definitely assets here or there. Is that how you’re approaching 2023 taking that into consideration?

Rob Hays

Yeah. I mean, I think, we’re looking at — we’ve got a handful of assets that we are contemplating. I mean, it’s, let’s call it seven to 10 assets that are contemplated. The issue we have is just that some of them are crossed in other pools and other loans. And so because of the way that our loans are crossed to sell some of these assets would require either one of the ability to extract them.

But given that current debt yield and other — you’re still amidst the recovery it’s a little bit more difficult to extract the assets than kind of in typical times. And so we don’t quite have as much flexibility as we wish we had, to sell off some of these assets.

So the answer is, as I think, as operations continue to improve and it gets easier to potentially extract those assets. And I think it’s something we’ll be looking at more aggressively. And hopefully, if the debt markets have improved it can make those transactions a little bit easier as well. So it’s definitely on the table.

Bryan Maher

Okay. And last for me, is it still the plan to retire the outstanding balance on the Oaktree loan in the first quarter and thus that would impact to some degree your sizable net working capital balance?

Rob Hays

Again, I’d say Bryan, I would like to, but it’s just dependent upon what happens over the next several months. I mean, I think as you can imagine given the way the debt markets have moved it gives us a little less comfort in the ability to do some re-financings and asset sales like we hope.

So I think it’s going to be — we’ll just have to see what happens in the next few weeks or next few months and how the recovery happens. If things go extremely well and there’s some change in trajectory on the debt markets then perhaps. But I think more likely as we sit here now it may just be a little bit of a waiting game until we again get more, little more clarity on the debt markets.

Bryan Maher

Okay. Thank you.

Rob Hays

You bet.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to management, for any closing comments.

End of Q&A

Chris Nixon

Thank you everybody for attending today’s call. And we look forward to speaking with you next quarter.

Operator

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.