Greetings, and welcome to the Ashford Hospitality Trust Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jordan Jennings, Manager, Investor Relations. Thank you. You may begin, ma'am.

Good day, everyone, and welcome to today's conference call to review the results for Ashford Hospitality Trust for the second quarter of 2023 and to update you on recent developments. On the call today will be Rob Hays, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Chris Nixon, Executive Vice President and Head of Asset Management. The results as well as notice of accessibility of this conference call on a listen-only basis over the Internet were distributed yesterday afternoon in a press release. At this time, let me 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 the 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. Statements made during this call do not constitute an offer to sell or solicitation of an offer to buy any securities. Securities will be offered only by means of our registration statement and prospectus, which can be found at www.sec.gov. 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 filed today with the SEC on August 2, 2023, and may also be accessed through the company's website at www.ahtreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. Also, unless otherwise stated, all reported results discussed in this call compare the second quarter ended June 30, 2023, with the second quarter ended June 30, 2022. I will now turn the call over to Rob Hays. Please go ahead, sir.

Good morning. Welcome to our call. After my introductory comments, Deric will review our second quarter financial results and then Chris will provide an operational update on our portfolio. The main themes for our call today are: first, we are very pleased with the strong RevPAR growth we achieved in the second quarter. Our portfolio continues to ramp up nicely. We are clearly seeing the benefit of a broadly diversified high-quality portfolio that is balanced across leisure, corporate, and group demand sources. Second, our liquidity and cash position continue to be strong. We ended the quarter with approximately $442 million of net working capital. We feel well-positioned for our upcoming extension tests. In addition, we have access to undrawn capital, if needed, via our strategic financing. Third, the capital raising for our non-traded preferred is ramping up nicely and increased over 148% from the first quarter. We continue to be excited about this source of capital for our platform. Now for some additional details on these three themes. RevPAR for all hotels in our portfolio increased 6.7% in the second quarter compared to the prior year quarter. This RevPAR growth was led by occupancy, which increased 2.8% over the prior year quarter. We also saw strong growth in average rates, which increased 3.8% over the prior year quarter. In addition to our solid hotel performance, the vast majority of our hotels are now out of their respective cash traps. This is an important step for our company as it allows us full flexibility to use our cash to optimize our capital structure, pay down debt or invest in growth opportunities. Looking ahead, we believe our geographically diverse portfolio consisting of high-quality assets with best-in-class brands and management companies is well-positioned. We also believe that our relationship with our affiliated property manager, Remington, really sets us apart. Remington has been able to consistently manage costs and optimize revenues aggressively, enabling us to outperform the industry from an operational standpoint for many years. During the quarter, we made significant progress on our loan extensions and made the strategic decision not to make required paydowns on our KEYS A, B, and F loan pools in order to meet those extension debt yield tests. This was a prudent economic decision that reflected a comprehensive capital management process by the company, which explored and assessed multiple options for these assets, including refinancing, extensions, and asset sales. Importantly, the recent amendment to our corporate financing provides us with added flexibility regarding these loan pools, and by proactively choosing not to extend three of those pools, we will improve our balance sheet by lowering leverage, which materially improves our future cash flows. Further, the combination of the paydowns and the ultimate removal of the debt associated with the pools that we did not extend will lower our debt by approximately $700 million or more than 18%. We have been committed to deleveraging the company over time, and this is a significant step towards our long-term goals of creating a more sustainable capital structure. Additionally, capital recycling remains an important component of our strategy and we continue to pursue opportunities to sell certain non-core assets. We recently sold a small asset in Orlando for nearly $15 million and have four other assets that are currently being marketed for sale. We have identified several additional assets that we may bring to market for sale if market conditions warrant. We expect any net proceeds from these sales will go towards paying down debt. We also continue to be excited about our non-traded preferred capital offering and believe this offering will not only provide an attractive cost of capital but allow us to accretively grow our portfolio over time, subject to future market conditions. We believe access to this growth capital is a significant competitive advantage, particularly given the fact that lodging REITs are currently trading at material discounts to their net asset values. Our preference would be to use this capital for future growth, though we may also use some of the capital to pay down debt or for other corporate uses as needed. We continue to build a selling syndicate and currently have 35 signed dealer agreements representing over 5,027 reps selling the security. We are still very early in the capital raising process; to date, we've issued approximately $50.6 million of gross proceeds, including $9.5 million in July alone. Turn to Investor Relations, we continue to have a robust outreach effort to get in front of investors, communicate our strategy, and explain what we believe to be an attractive investment opportunity at Ashford Trust. We have already attended numerous industry and Wall Street conferences this year and have several upcoming conferences later this year. We look forward to speaking with many of you during those events. We believe we have the right plan in place to move forward and maximize value at Ashford Trust. This plan includes continuing to grow liquidity across the company, optimizing the operating performance of our assets, improving the balance sheet over time, and looking for opportunities to invest and grow in our portfolio. We have a track record of success when it comes to property acquisitions, joint ventures, and asset sales, and we expect they will continue to be part of our plans moving forward. We ended the second quarter with a substantial amount of cash on our balance sheet and, with the launch of our non-traded preferred stock offering, we are excited about the opportunities we've seen in front of us. Now I'll turn the call over to Deric to review our second quarter financial performance.

Thanks, Rob. For the second quarter, we reported a net loss attributable to common stockholders of $30.3 million or $0.88 per diluted share. For the quarter, we reported AFFO per diluted share of $0.78. Adjusted EBITDAre for the quarter was $104 million, which reflected a growth rate of 8% over the prior year quarter. At the end of the second quarter, we had $3.7 billion of loans with a blended average interest rate of 7.8%, taking into account the in-the-money interest rate caps. Considering the current levels of LIBOR and SOFR and the corresponding interest rate caps, 96% of our debt is now effectively fixed, as almost all of our interest rate caps are now in the money. During the quarter, we extended our BAML Highland loan pool until April 2024. As part of this extension, we paid down the existing loan balance by $45 million. Also, during the quarter, we refinanced our mortgage loans for the 157-room La Posada de Santa Fe, New Mexico, which had a final maturity date in November 2023, and the 252-room Hilton Alexandria, in Alexandria, Virginia, which had a final maturity date in June 2023. These two loans were our only final debt maturities in 2023. The new non-recourse loan totaled $98.5 million and has a three-year initial term with two one-year extension options, subject to the satisfaction of certain conditions. The loan is interest-only and provides for a floating interest rate of SOFR plus 4%. Also, during the quarter, we extended our KEYS Pool C loans secured by five hotels with a paydown of approximately $62 million. Subsequent to quarter-end, we extended our KEYS Pool D loan secured by five hotels with a paydown of approximately $26 million and our KEYS Pool E loans secured by five hotels with a paydown of approximately $41 million. As Rob discussed, we also elected not to make the required paydowns to extend our KEYS Pool A, B, and F loans, which in total are secured by 19 hotels. The required paydowns needed to extend these loans totaled approximately $255 million. By not extending these loan pools, we not only saved the $255 million required paydowns, but also approximately $80 million in capital expenditures at these hotels through 2025. Many of the properties in the non-extended KEYS pools are in markets that have experienced significant headwinds throughout their post-pandemic recoveries, and a number of these markets are not forecasted to reach pre-pandemic top-line levels until 2025 or 2026. Further, the non-extended KEYS hotels only generated approximately 10% of our hotel EBITDA, and our portfolio RevPAR will increase approximately 3% by removing these lower RevPAR hotels from the portfolio. With the KEYS loan pool extensions behind us, our next significant extension test is our Morgan Stanley loan pool secured by 17 hotels, which has an initial maturity in November, and we currently believe that loan should be able to be extended until 2024 with no paydown required. We ended the quarter with cash and cash equivalents of $252 million and restricted cash of $150 million. The vast majority of that restricted cash is comprised of lender and manager held reserve accounts and $13.3 million related to trap cash held by lenders. At the end of the quarter, we also had $19 million in due from third-party hotel managers. This primarily represents cash held by one of our property managers, which is also available to fund hotel operating costs. We also ended the quarter with net working capital of approximately $344 million. As of June 30, 2023, our consolidated portfolio consisted of 100 hotels with 22,316 rooms. Our share count currently stands at approximately 36.6 million fully diluted shares outstanding, which is comprised of 34.5 million shares of common stock and 2.1 million OP units. In the second quarter, our weighted average fully diluted share count used to calculate AFFO per share included approximately 1.7 million common shares associated with the exit fee on the strategic financing we completed in January 2021. Assuming yesterday's closing stock price, our equity market cap is approximately $144 million. While we are currently paying our preferred dividends quarterly or monthly, we do not anticipate reinstating a common dividend for some time. Our liquidity position is solid and we are pleased with the progress that we've made on our loan extensions and the pace of our non-traded preferred capital raising. While it continues to be a challenging market for hotel debt financing, with the increase in both credit spreads and base rates, our portfolio is performing well. From a capital structure and balance sheet perspective, we will continue to focus on raising capital through our non-traded preferred stock, potential asset sales and paying down our corporate financing. This concludes our financial review, and I would now like to turn it over to Chris to discuss our asset management activities for the quarter.

Thank you, Deric. For the quarter, comparable RevPAR for our portfolio increased approximately 7% over the prior year quarter. This RevPAR growth compared favorably to the national averages for both the upscale and upper upscale chain scales. Despite significant cost pressures, we were also able to generate approximately 5% growth in comparable hotel EBITDA. This is a testament to our talented team of asset managers who work relentlessly with our hotel managers to maximize the operating performance of our hotels. The portfolio saw a number of records set in the second quarter. In fact, 37% of our hotels set all-time second-quarter records in comparable total revenue. These record-breaking performances were spread across various markets, ranging from Florida to Alaska and among different hotel classes, which included resort, urban, suburban, and airport locations. We remain encouraged by the continuing recovery that we are seeing in our urban markets. A large portion of the year-over-year comparable hotel EBITDA success during the second quarter was from Washington, D.C., New York, New Jersey, and Atlanta. We have a large concentration of assets in these markets, and they collectively increased comparable hotel EBITDA for the quarter by 12% over the prior year quarter. In fact, four of our hotels in these markets set all-time hotel EBITDA performance records during the second quarter. We positioned the airport properties in our portfolio to capitalize on increased airlift and accelerating demand trends seen by the airlines. In the second quarter, our airport hotels collectively achieved growth of 15% in comparable hotel EBITDA over the prior year quarter. Our Courtyard Crystal City, located by Reagan International Airport, capitalized on increased parking demand by revamping its parking rates and offerings for both hotel guests and other customers utilizing the airport and increased the number of available rooms earmarked for distressed airline passengers. Our Embassy Suites Orlando Airport leveraged a partnership with two major airlines to capture long-term stays associated with their respective training programs. As those training needs exceeded what was contracted, we were able to provide additional inventory at premium rates to further drive revenue. Another key differentiator and competitive advantage for us is our dedicated revenue optimization team. This team works at a granular level to optimize performance during high-demand periods. During the second quarter, the portfolio realized 16% more room nights with 95% or higher occupancy than we did in the prior year quarter. This is particularly encouraging for our urban and suburban hotels where the number of peak room nights during the second quarter increased 43% and 21% over the prior year quarter, respectively. These peak nights present us with the opportunity to improve profit margins as we're able to drive rates. Our revenue optimization team conducts monthly deep dive calls across our portfolio, focusing on driving pricing strategy in each segment of top-line business, creating tools to build a strong group base, pushing premiums on club and suite room types, and ensuring our properties follow our optimized marketing strategy. We remain encouraged by the continued strength we are seeing in the group segment. In the second quarter, group room revenue increased 14% over the prior year quarter. This marks the ninth consecutive quarter with positive year-over-year quarterly growth in group room revenue. We've had a heavy focus on driving group banquet and catering revenue as these are often the most profitable revenue streams within the food and beverage department. In the second quarter, catering revenues increased 19% over the prior year quarter. The increase in group revenue and bookings occurred broadly across the portfolio and included gains in many of our large hotels, including Marriott Crystal City Gateway, Renaissance Nashville, and Marriott DFW. We remain excited about the continuum momentum from the group segment. Moving on to capital expenditures. We have noted in previous calls that we have taken a strategic approach to renovating and strategically repositioning our hotels. So far in 2023, we've completed the renovation of the lobby and bar at the Ritz-Carlton Atlanta, the guest rooms at Hampton Inn Evansville, and Residence Inn Phoenix, the guest rooms and public space at SpringHill Suites Beaufort, and the relocation of the concierge lounge at the Renaissance Nashville. Later this year, we plan to start a guest room and public space renovation at the Embassy Suites Dallas, a guest room renovation at Marriott Sugar Land, and a fitness center renovation in key addition at the Renaissance Nashville. For 2023, we anticipate spending between $110 million and $130 million in capital expenditures. Looking forward, we are considering several new initiatives across our portfolio, including brand conversions at several hotels, accretive key additions, and executing high-margin ROI projects. I would like to finish by emphasizing how optimistic we are about the future of this portfolio. As mentioned earlier, group business has continued to show growth. We are seeing more markets rebound, and many of our assets continue to break comparable hotel EBITDA records. The portfolio is well-diversified geographically, allowing us to continue to capitalize on the industry's continued recovery. We have a number of value-add and ancillary initiatives we are working on behind the scenes to further add value to the portfolio, which we are excited about. With these new initiatives underway, we are confident that the portfolio will continue to outperform. That concludes our prepared remarks, and we'll now open up the call for Q&A.

Thank you. We'll now be conducting a question-and-answer session. Thank you. Our first question is from Chris Woronka with Deutsche Bank. Please proceed.

Good morning, everyone. To start, could you provide some details on the KEYS loans pool that you extended? Specifically, regarding the C, D, and E loans, will these be reevaluated after the extension? What are the potential scenarios that could lead to missed payments in the future, or do you believe they have reached a point where that is no longer a concern?

Hey Chris, it's Rob. In that, we obviously went through a pretty rigorous process of going through all of these loan pools this past year in determining where we thought equity was, what we thought the value was, and where we thought the markets were. The big factor in a lot of these decisions is future capital expenditures where we thought we could or wouldn't get returns on that capital. In terms of the pools we did extend, we paid those down to debt yields. They were typically around 10% or so, which gives us confidence in those portfolios from a value standpoint and where we feel from a refinancing standpoint, even in a challenging market. So unless we have a significant recession, or something major that could cause numbers to pull back significantly across the portfolio, we feel good about the portfolios we chose to keep and do not foresee any issues with those or on their future extension tests or refinancings.

Okay. Very helpful. On the operational front, we've been noticing a gradual improvement in labor availability. Could you provide an update on your staffing situation and share any insights regarding wages in the union versus non-union markets? Also, are you still utilizing any contract labor? Thanks.

Yes. Thanks for the question, Chris. I think you phrased it well. We're seeing slow and steady improvements. When we look at our total FDA equivalent labor count to last year we're actually flat to last year, which is remarkable given that for the portfolio, occupancy has increased 2 percentage points. When you equate that to the increased number of sold rooms, it's just over 40,000 rooms. So we've been focused on managing labor, being able to keep it flat year-over-year while servicing additional rooms. We're starting to see a pullback in contract labor. Our contract utilization rate decreased about 14% from last year for the quarter. That's kind of the start of the pullback we've been expecting. In Q2, we're becoming less reliant on contract labor, which is great because contract labor is obviously much more expensive than in-house labor. So we are seeing slow and steady improvements in terms of the labor market.

Okay. Thanks, Chris. Just a quick question for Deric. I believe you mentioned that after addressing the KEYS and the three pools, you're effectively 95% fixed with the swaps or caps. Does that indicate that our Q3 interest expense will represent a run rate moving forward?

Assuming LIBOR or SOFR stay where they are and that the caps stay in place, yes. Unfortunately, we have an array of caps that all expire at different times, and typically the caps are structured to expire co-terminus with the initial maturity dates of the underlying loans. So they will kind of match up with the maturities of the underlying loans. But I think for all intents and purposes for the next quarter, it's probably a pretty good runway.

Thank you. Our next question is from Tyler Batory with Oppenheimer and Company. Please proceed.

Thank you. Good morning. First question for me is on trends in the portfolio. I think there's a view out there that leisure travel is slowing industry-wide, and there's less pricing power, and that corporate travel has peaked. I mean, your RevPAR on the quarter is really quite strong, so are you seeing any sort of evidence of those trends playing out in your portfolio and kind of how are you thinking about the rest of the year in terms of how these in corporate travel play out?

Yes. Hey, thanks for that question, Tyler. So I can start with corporate travel. We're continuing to see signs of recovery and strength out of the corporate segment. In the second quarter, Ashford Trust was up 13% year-over-year in corporate revenue. That's broadly driven by ADR, which was up 8% and room nights were up just over 5%. So broadly, we're seeing continued strength out of corporate. Now within that, there are kind of market-specific nuances; many of our markets that have significant exposure to tech companies are down in year-over-year revenue. We're seeing softness in corporate in Austin, Santa Clara, and markets like Portland that rely on a lot of tech business. But overall, we see continued recovery and signs of strength in corporate. On the leisure side, I wouldn't say that things are softening broadly in leisure. We're seeing more of a stabilization within this portfolio. When we look at our weekend occupancies, we were flat to last year. Within urban markets, we're continuing to see growth. It's really more markets where you're seeing leisure customers. We are starting to see a little bit of softness in Nashville. We're noticing short-term demand that isn't as strong as we've seen in recent months, but it's more a stabilizing trend in leisure. For what it's worth, we expect continued growth; group pace remains strong, and we're up significantly in group pace high-single-digits for Q3 and Q4. The corporate segment continues to increase quarter-over-quarter, and from the leisure side, we see stabilization with weekend occupancy rates flat to last year.

Okay. That's very helpful. Question on the asset sales, any kind of update there in terms of how that process is going? I mean, you mentioned perhaps bringing some more assets to market. Just kind of what's the interest spend on what you have out there right now and how are you thinking and deciding when and what you might bring to market in the future?

Yes. Good question. Thanks, Tyler. We've got, like I said, four assets in the market right now. We've got a three-pack of limited-service assets and a full-service asset that are kind of in the second round or getting towards the end of those processes. We should have some more color on those in the next month or so. Internally, to the extent that we have successfully fine-tuned deals, it'll be a couple of months before those probably close. I think for us, it's really looking at what we think is the best path to pay off our strategic financing. We've had great partners with them, but we do want to pay off that loan. The proceeds that are coming in from the non-trade preferred are going towards this as well. You may see us get a bit more aggressive in the next few quarters on some asset sales to clean up the portfolio. Potentially, some additional assets may come to market that are non-core. We may sell solid assets that have some equity value in them to generate proceeds. Those decisions are still being considered internally in terms of the right moves for the future.

Thank you. Our next question is from Michael Bellisario with Baird. Please proceed.

Thank you. Good morning, everyone. Rob, I just want to go back to that last question and your answer there, and maybe just talk about the sequencing that you think needs to occur to be able to pay Oaktree and also maybe sort of the timeline that you're thinking about today. Do you need to sell more hotels beyond these four? Do you need to raise more preferred or is it maybe just simply being patient and waiting for EBITDA to continue to recover? But any color around sort of the sequencing and timing would be helpful?

Sure. I mean, as with all these things, Michael, it's a combination of everything, and it depends on how one versus the other turns out. So we've been happy with the way the non-traded preferred REIT has progressed. You never know if it will continue to accelerate or remain at similar levels. We assume somewhat conservative estimates for internal planning to ensure whether we have the capital and cash needed to grow and payoff the strategic financing. On asset sales, we're focused on generating proceeds to ensure we have the available cash to pay off the strategic financing. We still have 2.5 years left on it. We've got time, but it remains important to signal to the market that we're transitioning out of our post-COVID phase and moving towards growth with a sustainable capital structure. Therefore, we're going to focus more aggressively on proceeds from non-traded preferred and asset sales to pay down and clean the portfolio for future stability.

Got it. Fair enough. And then just switching gears a little bit on CapEx, sounds like it's the same dollars you expect to spend this year, but you've significantly reduced the number of hotels that are at least under renovation in your press release schedule. Are some of those obviously part of the KEYS portfolio that you're not going to renovate because you're handing them back, but are some of those falling to 2024? Are you deciding not to renovate a handful of properties, and then presumably, if the costs are the same or your $110 million to $130 million are projects costing more? Any color around CapEx also would be helpful. Thank you.

Sure. Yes, absolutely. It's a similar number in that we had already begun that process some time ago of thinking about where as we were analyzing these pools, that also led us to halt many of the projects in these portfolios anyway. We were analyzing how these projects would fit into future CapEx needs. Some will be pushed into 2024. I don't have specific numbers on that yet, but it will become clearer as we reassess the portfolio and make strategic decisions.

Thank you. Our next question is from Bryan Maher with B. Riley Securities. Please proceed.

Thank you. As I consider all the questions, I have more inquiries regarding the strategic plan. Rob, could you elaborate on whether there is an overarching plan for the portfolio? Can you identify which hotels you might sell or return over the next several quarters, or is your approach more flexible, adapting quarter-by-quarter based on fundamentals, interest rates, and hedge costs? I don’t want to imply that you’re improvising, but are you taking a more adaptable stance for the upcoming quarters and years?

No, I mean we've got a plan laid out. As a matter of fact, as we are talking right now, we have been through the process of taking a close look at a portion of our portfolio. We have identified assets that we don't view as long-term holds. We are conducting a thorough analysis of every asset, focusing on what the anticipated CapEx needs are, the ROI, and their performance indicators. While we have a strategy, we also need to remain flexible. It's important that while we pursue a plan, we adjust according to what's happening in the economy and ensure smooth transitions as opportunity arises.

I can appreciate that, but when we think about the preferreds, if you are issuing non-traded preferreds at 8% and you've got this 16% Oaktree debt outstanding. To your point on wanting to get that taken out or cleaned up, why wouldn't you all day long issue 8% preferreds and pay off 16% Oaktree debt? It’s basically found money.

If I could get the 8% money to show up and a $200 million chunk tomorrow, I would take it and pay off that immediately. The truth is we are currently facing a very competitive financing landscape, and the 8% money from Ashford Securities platform is incredibly attractive. We have plenty of opportunities; it's just a matter of building demand on that front.

Yes. And just last for me, why wouldn't we expect to see, for lack of a better word, some kind of shell game here where you've got a couple of hotels worth $100 million with a loan of $100 million that are really worth 60, 70, 80, and you turn around and hand those back to the lender, but your peer also has the same situation and is handing them back at 67 or 80. You take the $100 million worth of debt, you now don't have to pay and redeploy that capacity into taking that bank's assets that they just took back at 67 or 80 and generate growth that way. Is that something we could see unfold over the next year or two?

It tends to be more complicated. There are specific processes and fiduciary responsibilities involved with these lenders, and it's not that simple. While there's a chance we could see peers accessing debt on other assets, these processes take time and coordination within the lender's frameworks. Our experience tells us these complex transitions are not straightforward.

Right. Which brings up another question that I had that I was holding back on, which is when do we hand these 19 hotels out of our model? I mean, it's kind of important, right? It's not one or two or three, who cares? It's 19 and $700 million worth of debt. I mean, do you or Deric recommend that we all pull these out effective when beginning of the fourth quarter for conservative state?

I mean, it's a good question, Bryan. From my perspective, I'd go ahead and take them out of the portfolio now. I mean, that could happen imminently, and it could drag on, so from our perspective, we're ready to hand the KEYS over and from a modeling perspective, I'd take them out.

This concludes today's question-and-answer session. I would like to turn the floor back over to the management for closing comments.

All right. Thank you, everybody for joining us on our second quarter call. I look forward to speaking with you next quarter.

This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.