Ashford Inc. (NYSE:AINC) Q1 2023 Earnings Conference Call May 3, 2023 12:00 PM ET

Company Participants

Jordan Jennings - Investor Relations

Deric Eubanks - Chief Financial Officer

Eric Batis - Executive Vice President, Operations

Conference Call Participants

Bryan Maher - B Riley

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Ashford Incorported First Quarter 2023 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Jordan Jennings, Manager of Investor Relations. Thank you. You may begin.

Jordan Jennings

Good day, and welcome to today's conference call to review results for Ashford for the first quarter of 2023 and to update you on recent developments. On the call today will be Deric Eubanks, Chief Financial Officer; and Eric Batis, Executive Vice President of Operations. The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday in our press release.

At this time, let remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to safe harbor provisions of the federal securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These factors are more fully discussed in the company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on May 1, 2023, and may also be accessed through the company's website at www.ashfordinc.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all their information provided in the release. Also, unless otherwise stated, all reported results discussed in this call compares to first quarter ended March 31, 2023, with the first quarter ended March 31, 2022.

I will now turn the call over to Deric.

Deric Eubanks

Good morning, and welcome to our call to discuss our financial results for the first quarter of 2023. I'll start by giving you an overview of our operations, strategy and financial results for the quarter, and then Eric will provide an update regarding our operating businesses. After that, we'll open it up for Q&A.

The key themes we want to highlight today are: first, we achieved strong growth in adjusted EBITDA across our portfolio companies during the quarter as the lodging industry continued to see strong trends in both demand and pricing. Second, through our focus on growing our assets under management, the pace of our capital raising efforts at Ashford Securities continues to accelerate.

We recently completed the offering for Braemar's nontraded preferred stock placing approximately $460 million and, to date, have placed $21.5 million of Ashford Trust nontraded preferred stock. And third, during the quarter, we completed a bolt-on acquisition for RED Hospitality, which expanded that business into the Hawaiian market.

As of March 31, 2023, our 2 publicly-traded REIT platforms, Ashford Trust and Braemar, had ownership interests in 118 hotels with approximately 27,000 rooms and approximately $8.1 billion of gross assets. While Braemar's exposure to the resort segment has fueled its strong performance for several quarters now, in the last 3 quarters, we've seen its urban hotels ramp up significantly. Braemar continues to report strong results with RevPAR in the first quarter up 8.4% compared to the prior year quarter.

Braemar has been active on the acquisition front and have completed 3 acquisitions this cycle: the iconic 96-room Ritz-Carlton Reserve Dorado Beach in Puerto Rico, the 210-room Four Seasons Resort Scottsdale at Troon North and the 143-room Mr. C Beverly Hills Hotel. We are also pleased to see these recent acquisitions for Braemar outperforming our original underwriting models.

Ashford Trust has significantly delevered its balance sheet from a few years ago and ended the quarter with over $442 million of net working capital. Ashford Trust has issued $21.5 million of its nontraded preferred stock to date, and we anticipate capital raising for Ashford Trust to accelerate with Braemar's offerings now completed. This source of capital could be very attractive for Ashford Trust as we look to deleverage and grow that platform.

Our strategy and structure are designed for growth. We have a powerful ecosystem of businesses that all benefit as we grow our assets under management. Our size and scale in the lodging industry also brings benefits to third-party owners and other capital providers as we are one of the largest owners and fee payers for the major hotel brands. We believe we have a superior strategy and structure that is unique within the hospitality space, and we are excited about the potential growth of our platform.

Over the past few years, we've completed numerous bolt-on acquisitions for our operating businesses. And with ample dry powder, we continue to look for attractive opportunities to strategically and accretively grow our business. During the quarter, RED Hospitality & Leisure acquired privately-held Alii Nui and Maui Dive Shop, Maui's premier luxury catamaran and diving operation. We're very excited about this acquisition as Alii Nui has developed a reputation to provide the ultimate Maui luxury sailing and water sport experience.

RED also intends to expand the Alii Nui fleet in 2023 with an additional vessel. This transaction expands RED's geographic footprint into the premier Maui market and geographically diversifies its revenue stream. By establishing a foothold in this coveted market, we believe RED is well positioned to continue to grow its business in Hawaii. Eric will discuss the Alii Nui acquisition in greater detail later in the call.

I will now turn to our financial results for the quarter. Net loss attributable to common stockholders for the quarter was $7.7 million. Adjusted EBITDA was $17.6 million for the first quarter, and adjusted EBITDA on a trailing 12-month basis as of the end of the quarter was $78.3 million. Our strong growth in adjusted EBITDA for the quarter was driven primarily by INSPIRE, Remington and Premier.

Adjusted net income for the quarter was $13.4 million, and adjusted net income per diluted share was $1.67. Total advisory fee revenue from Braemar in the first quarter increased 24% over the prior year quarter.

Our share count currently stands at 8 million fully-diluted shares outstanding, which is comprised of 3 million common shares outstanding, 0.2 million common shares earmarked for issuance under our deferred compensation plan, 4.2 million common shares associated with a Series B convertible preferred stock, and the remaining 0.6 million shares are for acquisition-related shares and restricted stock.

I'll now turn the call over to Eric to discuss our operating businesses in more detail.

Eric Batis

Thank you, Deric. We are excited to provide updates on our products and services businesses, which laid the foundation for another strong year during the first quarter. As a reminder, our strategy is to acquire exceptional businesses and create shareholder value by implementing best operating practices, executing accretive add-on acquisitions and utilizing our unique ability to refer these businesses to our advised REITs.

The first business I'd like to discuss is INSPIRE, our leading single-source solution for meeting and event needs with an integrated suite of audiovisual services, including show and event, hospitality and creative services. INSPIRE generated $40.4 million of revenue in the first quarter, a 61.6% increase over the prior year quarter and $6.9 million of adjusted EBITDA, representing a 17.0% adjusted EBITDA margin.

INSPIRE executed 2 new hospitality contracts during the first quarter, which are expected to contribute $4 million of annual audiovisual revenue. INSPIRE realized significant growth in its hospitality segment, which generated $29.3 million of revenue in the first quarter, a 77.2% increase over the prior year quarter.

In addition, INSPIRE amended its credit agreement with Comerica in March. As a result of this amendment, the credit agreement now includes a $6 million senior secured revolving line of credit and term loan of $20 million. This refinancing increased the size of the term loan from $17 million and generated $3 million of excess cash which the company plans to deploy towards growth capital expenditures.

Amounts borrowed under the term loan and line of credit will bear interest at a rate of the Bloomberg short-term bank yield index, plus a spread of 2.75%, resulting in a lower effective interest rate compared to the previous structure of the prime rate, plus a spread of 3%. The amended agreement is expected to lower annual debt service payments and improve cash flow and liquidity.

Remington is a dynamic hotel management company, providing best-in-class management and expertise to hotels across the country. Remington generated first quarter hotel management fee revenue and adjusted EBITDA of $12.2 million and $4.9 million, respectively. Hotel management fee revenue and adjusted EBITDA grew 65.6% and 41.6%, respectively over the prior year quarter.

At the end of the first quarter, Remington managed 118 properties that were open and operating. Remington managed 73 properties for Ashford's advised REITs, Ashford Hospitality Trust and Braemar Hotels & Resorts. Remington also managed 45 third-party properties for 30 different ownership groups, 11 of which have hired Remington to manage 2 or more of their hotels. These ownership groups include real estate funds, family offices, high net worth individuals, private equity groups and developers. Remington's managed portfolio operates in 26 states and Washington, D.C. across 25 brands, including 17 independent and boutique properties.

RED hospitality and Leisure is our leading provider of water sports activities and destination services in the U.S. Virgin Islands, Puerto Rico, Florida Keys, Turks and Caicos and Hawaii. In the first quarter, RED generated $7.6 million of revenue and $1.6 billion of adjusted EBITDA, representing a 21.3% adjusted EBITDA margin. Revenue and adjusted EBITDA grew 26.2% and 25.6%, respectively, over the prior year quarter. Additionally, RED executed 2 new third-party contracts in Turks and Caicos, which are expected to contribute $826,000 in annual revenue.

RED also completed the acquisition of Alii Nui and Maui Dive Shop on March 17. Alii Nui provides luxury sailing and water sports experiences in Maui and was recently ranked the #1 tour company in Maui and #10 in Hawaii by U.S.A. today. The company offers sunset sales, dinner cruises, snorkeling and whale-watching excursions and is the on-property provider of SCUBA programming at the Grand Wailea Resort in Maui.

Alii Nui has carved a niche in the Hawaiian watersports market by delivering unmatched service over the last 4 decades. This is a transformational acquisition for RED, and we are excited to support RED as it looks to expand its footprint within this new market.

The next business I'd like to discuss is Premier, which provides comprehensive and cost-effective design, development, architecture, procurement and project management services. Premier generated $6.9 million of design and construction fee revenue in the first quarter, representing 53.2% growth over the prior year quarter.

Premier also generated $2.7 million of adjusted EBITDA, resulting in a 39.6% adjusted EBITDA margin. In addition, Premier executed 6 new third-party contracts representing $862,000 of expected fee revenue during the quarter. Premier plans to further explore ground-up development, general contracting, architecture and design project opportunities to diversify its revenue streams.

We are very pleased with the tremendous success of Ashford Securities fundraising efforts. During the first quarter, Ashford Securities raised $108 million of capital for Braemar Hotels & Resorts nontraded preferred offering. This was the first investment product Ashford Securities brought to market. The offering closed on February 23, having raised a total of $460 million of retail and institutional capital. The results of this first offering positions Ashford Securities well for future success with additional investment products.

Ashford Securities is now in the market with a redeemable nontraded preferred stock offering for Ashford Trust. Early reception by our institutional broker-dealer and RIA partners has been very strong and continues to build momentum. Presently, the Ashford Trust syndicate includes 30 firms. And to date, Ashford Securities has placed $21.5 million of capital in the offering, including $9.1 million in the month of March. It's also interesting to note that in terms of pace of capital raising, Ashford Trust is pacing at almost double where Braemar was at this point in its offering, which we believe shows this could be a very successful offering for Ashford Trust.

Ashford Securities is also in the market with a growth-oriented investment product focused on commercial real estate in the state of Texas. We are very bullish on Texas commercial real estate market because of the continued migration of people, companies and wealth into the Lone Star state. It continues to be a very attractive place to live and do business. We currently have signed dealer agreements with 11 dealers to distribute the product. Between insiders, friends and family and Ashford Inc.'s commitment to this product, we have raised approximately $4 million and are currently looking for investment opportunities.

After a strong first quarter, we are optimistic about the opportunities ahead for the remainder of 2023. We continue to maintain a focus on growing our products and services platform through two primary initiatives, third-party sales and strategic acquisitions, while we continue to pursue opportunities to meaningfully scale across all our portfolio companies.

That concludes our prepared remarks, and we will now open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] Our first question is from Tyler Batory with Oppenheimer.

Unidentified Analyst

Hi, good afternoon guys. This is Jonathan on for Tyler. Thanks for taking my questions. First one from me, I think you have a pretty unique viewpoint given the businesses that you own and right now, there's a large degree of macro concerns out there. Are you seeing the trend line slow at all into May here or does everything feel healthy across the businesses?

Eric Batis

Yes. We're not seeing anything slow. I mean in Q1 -- this is Eric, by the way. We still have some recovery versus Q1 of prior year, and we don't see any sign of slowing down. We've got growth not just from our existing business but growth from our ability to add new contracts as well. So we think the economic environment for our businesses is great.

Remington continues to add contracts. Hotels are continuing to perform well. Spend for CapEx is continuing to escalate for Premier. People are not slowing down, going on vacations for RED. And business is certainly, as you can tell from the numbers, still picking up for INSPIRE as corporate travel and groups are continuing to grow. So we're not really seeing much in terms of worry about numbers slowing down for our companies.

Unidentified Analyst

Okay. Excellent. I appreciate the color. And then Ashford Securities raised the trust preferred, has obviously seen some strong acceleration here in March and April. Any additional color on that or your thoughts on why spacing so far ahead of where Braemar was and how that raised so far as compared to your original expectations when you set out?

Deric Eubanks

Yes, Jonathan, this is Deric. I'll take that. You're right. Look, the pace of capital raising has been faster than Braemar just like we mentioned. In fact, we're kind of in month 6 or 7 of the raise for AHT, and this raise will be open for 3 years. So it's a 3-year offering. And the way that these raises work is, over time, you build a syndicate of dealers, and then those dealers have financial reps that are out there selling the security of the product to their clients.

And so with Braemar, it was our first offering in this channel and in this space, and so it took a little bit longer really to build the syndicate and to get high-quality dealers in that syndicate. And so with the trust offering being our second offering, we were really able to kind of start with some of the great dealers that we had in the Braemar offering, and that produced a lot of the capital that we ended up raising for Braemar. So we're kind of starting a little bit ahead of where we were with Braemar.

And the other interesting thing about Braemar's offering is it was really only open for about 18 or 20 months because of the pandemic and because we had actually filed that offering right before the pandemic. And then when the pandemic hit, we get to shove it for a little while, and then we've dusted it off and relaunched it in July of '21. And because the offering has kind of a fixed period of time, too, and as we had to close it, it was only open for about 20 months, so we ended up raising or placing about $460 million.

So AHT's offering will have the benefit of really being out there for the full 3 years. So we're very optimistic that that syndicate will continue to build, that capital raising will continue to accelerate and view that as a very, very attractive source of capital, not only for AHT, but also for us to just grow our assets under management.

Unidentified Analyst

Okay, great. Thank you for the color there. And then one last one from me, if I could, on the RED acquisition. Any additional high-level commentary on the opportunity in Hawaii for RED and why that market, an acquisition makes sense over other potentially Caribbean acquisitions closer to where RED has historically operated?

Eric Batis

Yes. So there's two reasons. One, we like the geographic diversification. We've had some volatility in weather in the Caribbean, as you guys have seen over the last several years, and having a base of operations in Hawaii as well gives us some security over there with that diversification. But really, the big reason is Hawaii is the biggest market for watersports and for this type of service. And it's bigger than probably the Caribbean, maybe big enough size of the Caribbean combined. And so us getting into that market, and we believe that this Alii Nui acquisition is really just our first step there, we think we can really grow both through acquisition and other contracts with hotels there.

We've got one contract with hotel to provide SCUBA services, but we believe we can expand greatly within that market. You see that in Turks And Caicos, I mentioned in some of our prepared comments that we added two contracts in Turks And Caicos. We would expect to do a lot of that in Hawaii, and so that's on all the islands. So the Hawaii presents our biggest opportunity for growth. We continue to look at opportunities in the Caribbean as well. But Hawaii is a market that we've been targeting for some time, and we're very excited about the opportunity there.

Unidentified Analyst

That's great. Thank you for all the color guys. That's all from me.

Eric Batis

Thanks.

Operator

[Operator Instructions] Our next question is from Bryan Maher with B. Riley.

Bryan Maher

Thank you and good morning. I wanted to take a minute and drill down a little bit more on INSPIRE, the strength there, how much it can grow, what the strategy is and how capital-intensive that business might be. I think you mentioned $3 million from the refi going into growth capital there. It's really become kind of a big part of the Ashford Inc. story. So if we could spend a couple of minutes on that, that would be helpful.

Eric Batis

Sure. So we think INSPIRE has a ton of runway of growth to answer your first question about how big it can grow. There's a very large player in the space, Encore, and we're very small in comparison to them. There's some significant contracts that are coming up with the brands primarily in the next couple of years, which we believe that we can get a much more meaningful footprint in with the large brands that have master services agreements. We're already in with some of those, but they have master services agreements in place that we're not currently part of that we expect to be part of.

So in terms of revenue, the sky is the limit. I wouldn't want to put a number on it because I think there's a lot we can do there, and that's just on the hospitality side. We continue to look, you guys might recall, in 2019, we acquired a bolt-on acquisition, the BAV. We continue to look at other bolt-ons as well, both on the hospitality side and on the show services side. But we have a relatively small market share at INSPIRE in both segments of hospitality and show services. So I think we can continue to see significant growth. I noted adding $4 million of annual revenue and contracts here in Q1, and I think we can continue to see growth like that.

As far as CapEx, INSPIRE requires both growth CapEx and maintenance CapEx. So we kind of look at both of those independently. When you sign up a new contract, the range is anywhere from 20% to 30% of the annual contract value and revenue that you need to spend on the initial CapEx. And then over time, you'll spend between 15% and 25% of your EBITDA on maintenance CapEx. Those are kind of rough figures that we would look at as we try to model out our CapEx needs going forward.

That obviously has the ability to scale, particularly in the show services group but with hospitality as well as we could set up satellite offices around the country as we continue to get larger and larger and reduce our sub-rentals expenses there. So that gives you a little bit of a summary. If you want me to dive in a little further, I'm happy to, but I'll give you an opportunity to ask any clarifying question.

Bryan Maher

No. That's helpful. Kind of moving on my next question, Pure Wellness and OpenKey, you guys used to talk about that a lot. Haven't heard much about in the last couple of quarters. What's going on there, if anything? Just curious.

Eric Batis

Yes, sure. They're just smaller parts of our business. We prepare a lot of remarks for you guys. And our other businesses, as you guys have noticed, have grown substantially. So where RED was once a smaller piece of our business, it's much more substantial now. Obviously, Remington and Premier having acquired those just before the pandemic, we're starting to see those, be what we believe that they can be. And with Ashford Securities raising so much money, now we're focusing on those. So we really just focus on the big four portfolio companies, if you will, of Remington, Premier and INSPIRE and RED and then the capital raising efforts of Ashford Securities for you guys.

But Pure and OpenKey are still around. We're still working aggressively on those businesses. OpenKey is seeing a lot of growth. They're adding contracts. We've gone through a significant effort this year to shore up the app and continue working on having a rock-solid product, which our CEO Steve Bodnar has done a great job of. So still focuses of ours, just smaller pieces of the business that we haven't prepared remarks on, and Pure as well, similar story, just still continuing to grow, still continuing to add rooms just at a slower pace than some of these other businesses' growth.

Bryan Maher

Okay, thanks. That's all from me.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session.