Ashford Hospitality Trust Inc

Greetings. Welcome to Ashford Hospitality Trust's third quarter 2021 results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jordan Jennings, Manager of Investor Relations. Thank you. You may begin.

Good day, everyone, and welcome to today's conference call to review the results for Ashworth Hospitality Trust for the third quarter of 2021 and to update you on recent developments. On the call today will be Rob Hayes, President and Chief Executive Officer, Derek Eubanks, Chief Financial Officer, and Jeremy Walters, Chief Operating Officer. The results as well as notice of the 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. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations, which are provided in the company's earnings release and the company's tables or schedules. which have been filed on form 8K with SEC on October 26, 2021, and may also be accessed through the company's website at www.ahpreach.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 third quarter of 2021 with the third quarter of 2020. I will now turn the call over to Rob Hayes. Please go ahead, sir.

Good morning and welcome to our call. I'll start by providing an overview of the current environment and how Ashford Trust has been navigating the recovery. After that, Derek will review our financial results and then Jeremy will provide an operational update on our portfolio. I'd first like to highlight some of our recent accomplishments and the main themes for our call. First, we had strong hotel performance and solid earnings in the third quarter that exceeded both street estimates and our internal forecast. Second, our liquidity continues to improve and our cash balance is building. We ended the quarter with over $672 million of cash and cash equivalents. Third, we have continued to lower our leverage and improve our financial position. Since its peak in 2020, we have lowered our net debt plus preferred equity by over $1.1 billion. equating to a decrease in our leverage ratio, defined as net debt plus preferred equity gross assets, by over 13 percentage points. Finally, even with an already attractive loan maturity schedule, we remain proactive in our capital markets activities and balance sheet management. During the quarter, we successfully refinanced a mortgage loan for the Hilton Boston Back Bay, which had a final maturity date in November of 2022, and this financing addresses the only significant final debt maturity in 2022, and we have made significant progress on refinancing our upcoming debt maturity at the Marriott Crystal Gateway City and hope to have more information for you soon on it. We are optimistic about the long-term outlook for the company, and by taking decisive actions to strengthen our balance sheet, we feel well-positioned to capitalize on the recovery we are already seeing in the hospitality industry. Subsequent to quarter end, we announced an amendment to our strategic financing which provides us with some flexibility to access undrawn capital if needed, even after we have paid off the current balance. While our optimism remains, we also must acknowledge some risks to the pace of the recovery due to the ongoing variants of COVID-19. In addition, we believe the majority of our loans continue to be in cash traps over the next 12 to 24 months or more, and as a result, we will continue to focus on building our liquidity and improving our capital structure in the months to come. In regards to dividends, the company and its board of directors previously announced a suspension of its common stock dividend, and therefore the company does not pay a dividend on its common stock and common units for the third quarter. The company also does not pay a dividend on its preferred stock for the third quarter. However, the board will continue to monitor the situation and assess future dividend declarations. We have significantly reduced our planned spend for capital expenditures this year. However, given the sizable strategic capital expenditures we made in our properties over the past several years, We believe our hotels are in fantastic condition and are well positioned for the industry rebound. Let me turn now to the operating performance at our hotels. The lodging industry is clearly showing signs of improvement. REVPAR for all hotels in the portfolio increased approximately 166% to the third quarter, with only seven of our hotels having negative hotel EBITDA on the quarter. This REVPAR result equates to a decrease of 25.6% versus the third quarter of 2019. We remain encouraged by the continued strength and weekend leisure demand at our properties. And the fourth quarter looks to be building upon our strong momentum with October numbers likely to outperform September numbers, so we are confident that the industry recovery is continuing to take hold. We believe our geographically diverse portfolio, consisting of high-quality, well-located assets across the U.S. that are approximately 80% relying on transient demand, will be in a position to capitalize on the pent-up leisure and the acceleration of transient corporate demand. We continue to be focused on aggressive cost control initiatives, including working closely with our property managers to minimize cost structures and maximize liquidity at our hotels. This is where our relationship with our affiliated property manager, Remington, really sets us apart. Remington was able to quickly cut costs and rapidly adjust to this new operating environment. In the same way they were hyper responsive on the way down, we expect them to be hyper responsive on the way up, mitigating cost creep as much as possible throughout the recovery. We're proud of their efforts over the past year and believe this important relationship has enabled us to outperform the industry from an operations standpoint. Jeremy will discuss this in a bit more detail. In terms of investor relations, we recently held a very well-attended investor day in New York. If you're not able to join us, I encourage you to go to our website and watch the webcast. For the remainder of the year and into 2020, we will expand our efforts to get out on the road and meet with investors, communicate our strategy, and explain what we believe to be an attractive investment opportunity to ask for trust. We look forward to speaking with many of you during the upcoming events. We believe we have the right plan in place to capitalize on the recovery as it unfolds. This plan includes continuing to maximize liquidity across the company, optimizing the operating performance of our assets as they recover, deleveraging the balance sheet over time, and looking for opportunities to invest and grow our portfolio. Going forward, we will be laser focused on all of these. I'll now turn the call over to Derek to review our third quarter financial performance.

Thanks, Rob. For the third quarter of 2021, we reported a net loss attributable to common stockholders of $47.5 million, or $1.70 per diluted share. For the quarter, we reported ASFO per diluted share of 11 cents. We are pleased to report that our adjusted EBITDA RE for the quarter was $46.8 million, which is the strongest number since the first quarter of 2020, and a 49% increase over the second quarter of 2021. At the end of the third quarter, we had $3.9 billion of loans with a blended average interest rate of 4.2%. Our loans were approximately 11% fixed rate and 89% floating rate. We utilize floating rate debt as we believe it is a better hedge of our operating cash flows. However, we do utilize caps on those floating rate loans to protect the company against significant interest rate increases. Our hotel loans are all non-recourse, and as Rob mentioned, nearly all of them are currently in cash traps. meaning that we are currently unable to utilize property level cash for corporate related purposes. As the properties recover and meet the various debt yield or coverage thresholds, we will be able to utilize that cash freely at corporate. We ended the quarter with cash and cash equivalents of $673 million and restricted cash of $85 million. The vast majority of that restricted cash is comprised of lender and manager held reserve accounts. At the end of the quarter, we also had $24.1 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 networking capital of $707 million, compared to networking capital of $9.8 million at the end of 2020, which highlights the continued improvement in our financial position. I think it's also important to point out that this networking capital amount of $707 million equates to almost $21 per share. This compares to our closing stock price from yesterday of $12.97, which is almost a 40% discount to our networking capital per share. Our networking capital reflects value over and above the value of our hotels As such, we believe that our current stock price does not reflect the intrinsic value of our high-quality hotel portfolio. From a cash utilization standpoint, our portfolio generated hotel EBITDA of $62 million in the quarter. Our current monthly run rate for interest expense is approximately $11 million, and our current monthly run rate for corporate G&A and advisory expense is approximately $4 million. As of September 30, 2021, our portfolio consisted of 100 hotels, with 22,286 net rooms. Our share count currently stands at approximately 33.9 million fully diluted shares outstanding, which is comprised of 33.5 million shares of common stock and 0.4 million OP units. In the third 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 that we completed in January. Assuming yesterday's closing stock price of $12.97, our equity market cap is approximately $440 million. During the quarter, we successfully refinanced our mortgage loan for the 390-room Hilton Boston Back Bay in Boston, Massachusetts, which had a final maturity date in November 2022. This financing addresses our only significant final debt maturity in 2022. Furthermore, the company was able to complete this financing with a best-in-class institutional balance sheet lender. The new non-recourse loan totals $98 million and has a four-year initial term with one-year extension option subject to the satisfaction of certain conditions. The loan is interest-only for the initial term with quarterly amortization payments during the extension term and provides for a floating interest rate of live work plus 3.8%. Additionally, we have made significant progress on the upcoming debt maturity the Marriott Gateway Crystal City and hope to provide you an update on that refinancing soon. Our next hard debt maturity after the Marriott Gateway is in June of 2023. As we previously discussed, we have been selectively exchanging our preferred stock for common stock as a way to de-lever our balance sheet, remove the accrued dividend liability and improve our equity flow. Through these exchanges, we have exchanged approximately 70.2% of our original preferred stock, which is approximately $396.5 million of face value into common stock. These exchanges also eliminated a significant amount of accrued preferred dividends. After taking into account the $200 million of new corporate debt that we closed in January and our cash balance at the end of the quarter, We have lowered our net debt plus preferred equity by over $1.1 billion since its peak in 2020. We have also been opportunistically raising equity capital to shore up our balance sheet, improve our liquidity, and to be prepared for potential loan paydowns needed to achieve extension tests or meet refinancing requirements. During the third quarter, we issued approximately 8.6 million shares of common stock for approximately $148.8 million in gross proceeds. Over the past several months we have taken numerous steps to strengthen our financial position and improve our liquidity and we are pleased with the progress that we've made. While we still have work to do to improve our capital structure, our cash balance is building, we have an attractive maturity schedule and we believe the company is well positioned to benefit from the improving trends we are seeing in the lodging industry. This concludes our financial review and I would now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

Thank you, Derek. Comparable rent par for our portfolio increased 166% during the third quarter of 2021, while house profit flow-through was a solid 48%. We're extremely encouraged with the continued acceleration of occupancy at our hotels, with the third quarter outperforming the second quarter 63% to 57%, respectively.

Additionally, we're outperforming the U.S.

upper upscale chain scale in the third quarter occupancy by 700 basis points. While the recovery continues, we're seeing a number of hotels stabilize at performance metrics that exceed 2019. I'd like to spend some time highlighting some success stories. The highest Coral Gables produced phenomenal results during the third quarter, with Hotel EBITDA exceeding comparable 2019 by more than $725,000. That is a 163% increase. The performance premium is being propelled by additional occupancy that is driven by an airline contract that our team was able to secure early during the pandemic. This increase in base business has allowed the hotel to shift our revenue strategies and be more proactive in pushing rain, resulting in a rep part increase of 25% over the third quarter of 2019. Our La Concha Key West property has also done an excellent job exceeding 2019 results, with Hotel EBITDA increasing 143% during the third quarter relative to 2019. A lot of that success is attributable to the hotel's top-line growth, with third quarter REVPAR increasing 70% relative to the comparable period in 2019. The revenue team identified an opportunity to capture additional business, resulting in booking a government training program. which added an additional 5% of occupancy to the hotel during the third quarter. Renaissance Nashville produced $6.8 million in hotel EBITDA during the third quarter, which exceeded the comparable period in 2019. These results are on the back of the hotel selling nearly 22,000 group room nights. That could be a headline on its own. This is one of the largest group houses, and it has seen significant levels of demand. One of the competitive advantages of our asset management team is how our structure is broken down by industry specific experts. Our property tax team has been extraordinarily successful this year. Year to date through the third quarter in 2021, we saved $4.5 million for property tax appeals. Notably, we have had a 92% success rate on our appeals this year. To achieve these results and maximize our potential savings, we have proactively reached out to local assessors in some states before they issue values to start a dialogue and discuss items that we believe should be considered. We found that using this proactive approach both unlocks additional savings and builds strong relationships with the local assessors. Moving on to capital management, in prior years, we were proactive in renovating our hotels to renew our portfolio. That commitment has now resulted in a competitive and strategic advantage as the market rebounds. Not only are our properties more attractive to potential travelers, but we can also deploy capital more prudently throughout the recovery. Thus far in 2021, the only major project that we have completed is the ballroom renovation at the Ritz-Carlton Atlanta. Looking ahead, major capital projects on the horizon include a renovation of the public space and guest rooms at the Hilton Santa Cruz, a renovation of the guest rooms at the Marriott Fremont, and renovation of the public spaces at six of our select service hotels. Equivably, we estimate spending $40 to $55 million in capital expenditures in 2021, which is significantly less than we have spent in previous years. Before moving to Q&A, I'd like to reiterate how optimistic we are about the recovery of our portfolio and the industry as a whole. During this last quarter, nearly all of our hotels were GOP positive and a number were outperforming the comparable period in 2019. We fully anticipate that this momentum will continue. Data from Sprint Travel Research suggests that the top 25 U.S. markets are expected to have 32% Red Park growth in 2022 compared to all other markets at 13%. This is fantastic news for our portfolio given that 56% of our hotel keys fall within these markets. That concludes our prepared remarks. We'll now open the call for Q&A.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is Brian Mayer with B. Riley Securities. Please proceed.

Good morning, guys. Thanks for taking my question. Starting out with the large cash hoard you have basically accumulated over the past, I don't know, six to nine months, How do you think about deploying that as opposed to holding cash? And I know that there are reasons to hold cash, but as it relates to maybe, A, making a hole on the preferred accrued dividends, which I think is $20 million, which is maybe 5% of what you have in cash, taking care of Oak Tree, and then bigger picture, maybe peeling away at some of the portfolio financings such that you come to an agreement with the lenders, and I know there's oak tree obstacles in here, but making it such that you can peel away the assets in the portfolio, you know, financing that you really want to keep, being able to sell the ones that you really don't want, or you can take advantage of buyers in the marketplace, and then maybe putting new fresh debt on those assets you really want to keep. How are you thinking about that with all of your cash?

Yeah, that's a good question, Brian. I think you're, hinting at the exact thing that we're thinking through right now, which is we do have these, I guess, kind of structural obstacles that come from the strategic financing and the various make-holes, which do overall incent you to sell closer to the ending of that make-hole period, which is going to be, I guess, 15 months from now. But it is something where we have had initial discussions with several of our lenders on alternatives around that to see if there are certain assets that if we did sell them, even though currently those pools don't meet the test required, whether it's by debt yields or coverage ratios, in order to normally extract them, are those possible to do now? So those are conversations currently underway. And I do think, as you said, we've got to, we obviously are looking for ways to go on the offense with our capital as opposed to just being on the defense. But we also have to look at all of the cash needs that we have, which do include obviously paying off the strategic financing, bringing our preferreds current, which would lead us to also need to bring the strategic financing current as well. So if we're going to make the call it $20 million preferred payment to catch people up. We also need to catch up the deferred payments on that. So that's another $30 something million. And then we've also got some tap backs that is starting to ramp up over the next 12 to 24 months. So we do have some cash needs that we have to be thoughtful of and in the back of our minds, obviously be cautious to the extent that we don't know exactly what this recovery looks like and are there other variants or other things and what does... the return to office pacing look like after the new year. So we're trying to be thoughtful around all those different items. One thing I think is encouraging is starting to see the healing of the debt markets. And we obviously did our back-based financing, which we thought was pretty attractive terms. We're working on our gateway deal that hopefully we'll have something to talk about soon on that. But as we're starting to see quotes, particularly on the CMBS side, in the hospitality. There have been a few bigger deals and a little bit higher-end deals, but that will start to spread. And so I think one thing that we'll be looking at, particularly maybe as it gets into the new year, is are there ways to start chipping away at some of these refinancings and pairing those up maybe with some asset sales of what we don't think are long-term strategic assets. But there's, like I said, a handful of levers that we've got to pull, but we're very, very focused on and looking at those alternatives.

Great. And just as a follow-up, I think Jeremy mentioned $40 to $55 million in CapEx for 2021 and that you had already done the ballroom renovation in Atlanta. How much is left of the $40 to $55 million to do in the fourth quarter of this year? And what do you think that there might be in 2022? And is there deferred CapEx from the past 12 to 24 months that might make that higher than maybe you previously might have thought? And that's all for me.

Yeah, I'll take that. We're probably close to $20 million that we hope to do in the fourth quarter. So it's always timing is kind of tough because we've got a lot of renovations typically in the fourth quarter, and it just depends on when we actually pay out all our vendors. And so I'm not sure if we're going to hit $55 million, which was the top end of the range. I think that's probably unlikely. So it's going to be probably closer to $40 million, and I think to date we spent close to $15 million. Now next year, we haven't put together our capital plans, but I would say that there's not a lot of deferred capex. We've gone through our portfolio in pretty good detail, and there's not a ton of renovations that we see for next year.

Thank you.

Our next question is from Tyler Batori with Danny Montgomery Scott. Please proceed.

Hi, good morning. This is Jonathan. I'm for Tyler. Thanks for taking our questions. First one for me, rate continued to be strong in the quarter. And I'm curious if that's all from leisure travel or if there's been some pickup in corporate that's impacting that positively. And then maybe bigger picture, can you provide any additional color in how you're thinking about race long term, particularly with business transit becoming a more meaningful contributor, presumably in the future?

Yeah, there's some interesting stats that are popping out in the quarter in regards to kind of corporate versus leisure travel. And it's really looking at the weekend versus weekday disparity. Because obviously, historically speaking, You're typically having higher occupancies, or I guess similar occupancies, but higher rates on the corporate side. And right now it's the inverse, it's the opposite, where we're seeing both higher occupancies on weekends by a decent amount, but then you're having also a rate premium, as much as $20 to $30 on the weekend leisure. So it's a unique scenario that I don't think we've ever seen before in our industry. So right now we think out of our occupancy, probably five to six percent of that is corporate transient. So it's still a very small percent of our overall occupancy. So I'd say right now it's still the majority of the rate gains is actually driven by leisure, not corporate. Yeah, I'll give you a little bit more specifics. So in the third quarter, our ADR for weekend travel was up 12%, which is pretty impressive. And the red part was up 5%. So where we're seeing the declines, as Rob mentioned, is the weekday travel. And traditionally, Tuesday, Wednesday, Thursday was always the bread and butter of this portfolio. But the business transient customer has been a little bit slower to come back, but we're seeing that accelerate each month. But specifically, we're down about 60% from 2019 in our business transient segment. And then looking in the group, in 2022, we're actually pacing ahead in ADR about 3%. That's a comparison, and that's 3% increase over 2019. That compares to 2021, which our ADR compared to 2019 was down 19%. So there's a pretty big delta we're able to kind of push rate in certain segments. that we haven't been able to do coming out of the pandemic. So I think that's a really positive sign. Yeah, I think that's what is one of the maybe underappreciated opportunities in the industry for investors as they look at the recovery is typically if we had this sort of occupancy losses, our rate would have collapsed. And you're typically digging yourself out of this ditch of rate so that it's not comparable and competitive level. Well, in this situation, rates are already close to or in some cases higher than they were in 2019 with significant occupancy losses still existing. So that gives us pricing power that makes us obviously very bullish and obviously being able to push rate is highly profitable. So I think that shouldn't be lost on investors of the opportunities of being able to push rate.

Great, I appreciate all that detail.

And then any update you guys can provide on the labor headwinds that seem to be impacting the industry? Has there been any noticeable difference or easing, I should say, post-Labor Day? And then, you know, how are you thinking about balancing labor going forward and into the future and other cost pressures back as business continues to ramp?

Yeah, I think that, so on the cost pressures, We're still seeing cost pressures, but the majority of the pressures where we really saw the wage increases was in the second quarter. So we're still seeing some wage pressures in the third quarter. We still expect some in the fourth quarter, but it's coming down pretty significantly when you look at percentage increases. In terms of open positions, it hasn't been a problem yet in terms of impacting our revenues. And what I mean by that is that we haven't had to take out rooms, put them out of service or anything like that because we can't clean them. And part of that is just because occupancy is still a little bit lower than what we'd like to see. But we do have open positions. I think it's about, we're running about 13.5% or so in terms of open positions that are properties. And that is down from previous months, but it's not down dramatically. And so hopefully, we'll see more of an acceleration than we actually saw after Labor Day in terms of filling those positions.

Very helpful. Thank you.

And the last one, if I could, turning to the group side, Jeremy, you provided some helpful stats on the ADR in 2022, but I'm curious if you have any additional color on demand or future bookings in 2022 and how that's been progressing and any color you can provide there.

Yeah, so as we sit right now, the group room revenue compared to 2019 for 2022 is down 24%. But that's, you know, in spite of an increase in ADR, slight increase in ADR, which we view as a very healthy sign. I don't think we'll actualize there. We're seeing pickup, and we're getting a lot, we're seeing that the lead times for bookings continues to be very compressed versus what it was before the pandemic. And so I would anticipate that that 24% will continue to come down each quarter, and so we'll actually have somewhere hopefully much less than that. Yeah, but again, if that same wallet's down 25% right now and should compress, again, the ADR on that is still up 3% over time. great story, which is a positive for us.

Okay, very helpful. Thank you for all the color. That's all for me.

Our next question is from Chris Ruanka with Deutsche Bank. Please proceed.

Yeah, hey, guys. Morning. Thanks for taking the questions. I guess this one's maybe for Jeremy. Jeremy, can you talk a little bit about where leisure rates are versus corporate either now or third quarter versus historically? And I guess the question is, when you remix a little bit next year, it's obviously going to be very net additive because you're going to have more occupancy, but rate, I mean, is there a widening gap between what you guys see in leisure and corporate negotiated rates?

Please check and see if you have the speaker line muted. Okay.

Hey, Chris. Sorry we had a little technical difficulty for a minute. I apologize for that. When we look at leisure, and the best way to look at this probably right now is just to look at our weekend rate increase. So we're up 12% in the quarter in ADR in our weekend rates from 2019. All these numbers are compared to 2019. Weekday travel is down 12%. So the spread of ADR definitely continues to occur, but what we are seeing is that business transit actually is picking up more gains than the leisure segment, but it was down so much more than leisure, as you know. And so even though we're continuing to have larger gains in our business traveler, it's still off quite a bit from 2019. Okay.

Okay, that's helpful. Thanks, Jeremy. And then you guys mentioned a lot of progress on property tax appeals. Is that going to help more in 2021, or is that more of a 2022 event in terms of how you're going to book the expenses or any refunds?

Yeah, I think it's going to help in both years. I think that we're going to see savings in both 2021 and 2022. Okay.

Okay, very helpful. And then also, you may have mentioned it earlier, but trying to get a sense for select service versus full service operationally, because some of your full service hotels, you don't have a ton of resorts, and some of them are in the more suburban markets, not a ton of city centers. So is there any sense you can give us for how your full service is performing versus select service in kind of those outer markets?

Yeah, really, I'd say in some ways it's less dependent upon full service versus select service, and it's really more market by market. I mean, because even the select service properties that we have in certain MSAs are underperforming the limited service assets in other markets. So I think the better way to look at it is where are your markets performing? And right now the weak markets continue to be the Bay Area market, Chicago, Philadelphia, Minneapolis, and around New York. And those markets are just having a harder time, particularly because of their, it's been interesting because there's been a debate, I think, in the industry of are various mandate and other COVID prevention mechanisms going to cause travel or performance in certain markets to help it or hurt it? Do people feel safer and so they're willing to go, or is it they're seen as a hindrance? And I think what we're seeing right now is the markets that perform stronger tended to be in markets that had less COVID restrictions. So particularly, for example, the Nashville asset. That seemed to be an asset where once the COVID restrictions and mandates were removed and it was an attractive leisure market, that hotel started to kind of unleash and really perform well. So I don't know if it's as much limited service versus full service as it is market by market. Yeah, I had one little comment on that is that I was pleased and surprised with how well our Boston assets did in the quarter. So it's good to see some markets, urban markets that I would have otherwise anticipated to be a little bit slower to recover, recover pretty significantly. And so I think you'll see that in some of these other markets that have underperformed. It's just a matter of time that you're going to see a massive bounce in the Bay Area and in some of the other urban locations that have underperformed pretty significantly.

Got it. Very helpful. If I could speak one last one, and it's a question about the labor you guys talked about, but are you seeing any differences in the open positions geographically? Is this more of a problem in urban or northern half or southern half? Any kind of color you could give us on where the shortages are?

Yeah, it's interesting. In some ways, it's hard to tell because in those markets that are urban is that that also tends to be where we're having lower occupancies. And so in some of the markets like in the New York MSA or in D.C. or in the Bay Area, it hasn't really been a significant issue because we're still operating at lower occupancies than we'd like. Again, some of these other markets where the economies have opened up a little bit more, it's been a little bit easier to get people. What I think is still left to be seen is when DC and New York and Minneapolis and the Bay Area start really starting to push occupancy a little bit more, what happens then? I think our guess is that it's going to be a better situation than it is now, and that it'll probably be somewhat difficult, but not overly difficult, but it's hard to know right now. In some sense, you don't really know until you're out pounding the pavement trying to round up new associates and employees at the outset. What I'd add to that, Chris, is that it is a pervasive issue across the country in terms of labor shortages, but there is a difference between the state's that stopped the enhanced benefits relative to other states. And so I can use maybe Nashville as an example. That in June of this year, we were very concerned about being able to ramp up and staff up, given the massive acceleration of snapback of occupancy when that market opened up. We were just very pleased with the demand, but very concerned about the inability to service the property. When those benefits did run out, it was about three-week lag time, and we were able to fill a good amount of those positions. But we still are running a little bit higher open positions across the board, even in hotels that have ramped up. So it's a pervasive issue, but you're seeing a lag time on the markets that kept the enhanced benefits in place, if that helps.

Yeah, yeah, very helpful. Thanks, guys. Appreciate it.

As a reminder, just star 1 on your telephone keypad if you would like to ask a question. Our next question is from Michael Bellisaro with Robert W. Baird. Please proceed.

Thanks. Good morning, everyone. Good morning. I want to go back to the balance sheet. I guess the first part of the question is, One, when do you think you'll have enough cash on hand? Is there a number that you guys have in mind that you're targeting as you think about issuing shares and raising cash? And then the second part of the question is, any timing incentives for you to get the preferred accrual and the oak tree pick paid back sooner rather than later, aside from the obvious accrual that's occurring?

Yes. All right. Good question. So for the first one, let me at least one point out this. While we did raise some capital in the third quarter, it was substantially less than we did in the second quarter. And so there is a, you know, given where our share price is, and we are obviously very cautious on what is that share price and where we're raising capital at to be very thoughtful around that. So there is obviously some trends there that you can look at. But it's hard to come up with the exact number, but there is, there are goals that we're trying to accomplish. And the goals that we're trying to accomplish is, one, we are going to need to pay off the strategic financing, and that could be as much as, call it, $300 million that we need to pay off at some point in time here. We do need to bring these preferreds current. That's our preference. In order to do that, as long as we have the strategic financing, there's, you know, that'll be a $20 million payment. We will need to bring the strategic financing current as well, and that's another, call it, $30-ish million. And then we also have these other kind of CapEx needs. So we do have some capital needs that we have. I think it really is going to depend upon what happens here over the next few months in terms of the return of business transient and what the recovery looks like. And our goal is to maintain a certain amount of cash so that to the extent that for whatever reason there's other risks in this recovery, other variants, that we still have ample capital to weather those storms because this has been a very uncertain time. At the same time, if the winds blow in our direction, that we will pivot very quickly. And as we sit here now, we're underwriting many assets and many acquisitions to be ready to see and pivot towards going on offense. as soon as we feel comfortable with the capital that we have. I can't give you an exact number, but what I can tell you is we obviously have slowed down the raise in our capital and are keeping a close eye on the trajectory. In terms of the preferred, we obviously have our preferences to pay it off soon. The important factor that we're trying to get to is getting back to what's called S3 eligibility, shelf eligibility. And in order to do that, we do need to have those preferreds current. And in order for that to happen, we would need to complete that by the end of this year. And then once our 10-K was filed, which is probably in February of next year, then we would have that eligibility. That's our intention. That's our preference. But, again, that's still – TBD has not yet been finalized by the board.

Got it. And if the preferreds are – current, you're also then presumably paying the quarterly dividend on those two then, right? That would reserve.

Yeah, that would be, we would then be paying those on a go-forward basis and we would be paying the strategic financing basically on a current basis as well.

Got it. And then just on acquisitions, you touched on it a couple times, but fast forward, is it six months or is it more like 18 or 24 months when you think you'd be in position to grow the portfolio again and then What do, at least as you said today, what do the target assets and markets look like?

Good question. I mean, I hope it's something that comes with the new year. I mean, I think that's what, in our ideal world, that the recovery continues to take hold, and as we're getting into next year, that we can pivot to go on offense because we are seeing a lot of opportunities. I mean, we are spending, you know, we sit in our deal meetings every week and are looking at opportunities, and there's a lot out there, which is exciting. accomplish a few other things first. But I think the assets will be comparable and similar to what we've done historically over the last three to five years is that they'll predominantly be full-service assets. They'll be most likely franchised assets where our affiliate with Remington can really add value and pull a lot of levers. They'll mostly be affiliated with Marriott, Hilton, and Hyatt branded assets. though I'm sure we'll have a mix of independents. And they'll probably be predominantly transient based demand. That's what we do well. It's unlikely that we'll be buying huge urban big box assets. That's never been what we've flourished at. And they'll continue to be, I'd say, well diversified across top 25, top 30, top 40 markets. There's just a lot of great markets out there that we think were underappreciated by institutional investors and Wall Street that we've been invested in and are performing well now and we think those markets continue to exist. I think it'll be assets that feel similar to acquisitions that we've done in the last few years like La Posada in Santa Fe or the Hilton in Alexandria and Old Town Alexandria in Virginia. or the Hilton in Santa Cruz, that asset's been performing great.

So those are the types of assets that we'll be doing. Got it. Thank you.

We now have a follow-up question from Brian Maher with the Riley Securities. Please proceed.

Yes. Thank you. Just to be clear, on getting back to the S3 eligibility, You're required to make current on the preferreds, which I think we said was about $20 million, $30 million for Oak Tree. That brings you current, but you're not required to pay off Oak Tree to be S3 eligible. Is that correct?

That's correct. There was a provision in our loan agreement that, obviously, typically in a strategic financing like that, typically a lender is not super thrilled about leaking cash flow out to a junior lender. you know, a junior liability. So, but obviously the strategic importance of being S3 eligible is important to us. And so the negotiated deal with them was that we were able to pay that, pay the preferreds current, bring them current, and continue to keep them current as long as, one, we maintain a certain amount of liquidity and cash on our balance sheet, which we obviously meet today, and that we effectively pay them current as well as opposed to picking them or having them accrue. So that's the stipulation. And we're allowed to do that starting in December of this year.

Got it. And then more of a big picture question. I mean, look, we all know for the past 15 years that Ashford has preferred to do floating rate financing versus fixed rates. But in the world that we live in today with material concerns on inflation and the potential for interest rates to push higher over the next couple of years, as you refinance debt over the next, you know, let's say 12 to 24 months, is there any thought process within Ashford to start to layer on some more fixed rate debt?

That's a good question. I guess we are always open to considering things that might be a better structure. It's just that in our experience and analysis over time, you're almost always better off being a floating rate hotel owner. Now, the question is, is there something different today than there's been before? And also, you're looking at whether there's risk to hyperinflation or other inflationary risks where it would be a negative. It's something we'll look at, Brian. But given the flexibility that exists within floating rate debt and the fact that we typically have to buy caps on them anyway, so to the extent that there is significant moving rates, we're protected from that perspective. We just find that pairing your assets and liabilities and the other benefits of floating rate debt typically benefit the portfolio. I think we're willing to spend some time to really think about it and look through it. But if I had to put money on the table right now, I would say we still anticipate being predominantly floating rate debt.

Right. I mean, I get that. But you guys also ran a higher leverage than everyone else, and it didn't kind of work out over a pandemic scenario. And to the extent that we do have some hyperinflation and interest rates were to spike, and I know that there's a huge amount of debate over that, It just seems to me that the institutional investor community might feel better and maybe even assign you a higher multiple with at least some respectable component of fixed rate debt versus floating. I just think it's – I understand all the studies you've done, but it seems like it could be a multiple overhang for your valuation situation. to continue down that road in a hugely uncertain interest rate environment. So just kind of throwing that out there, but we'll be interested in seeing what you do.

And I think if the answer is, hey, companies that have a higher fixed rate component get significant multiple premiums, well, that also is an important factor to consider. I haven't seen... data or analysis to support that within the hospitality side, but if that is indeed the case, then that's obviously a very important factor for us to consider as we're contemplating it.

Thank you.

Thanks, Brian.

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Thank you for joining us, and we look forward to talking with you all in our next earnings call.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.