Ashford Hospitality Trust recently launched Ashford’s Enhanced Return Funding Program, a first of its kind in the public REIT space. LODGING caught up with Doug Kessler, CEO of Ashford Hospitality Trust, to discuss how this program will fuel growth for the company as well as industry trends and recent acquisitions, such as the Hilton Alexandria Old Town.
What is Ashford’s Enhanced Return Funding Program?
The Enhanced Return Funding Program (ERFP) was developed between Ashford Trust and our advisor, Ashford Inc., and it’s a cash funding program that Ashford Inc. provides to Ashford Trust. Ashford Inc. has pledged $50 million that can be applied towards 10 percent of the transaction price of assets that Ashford Trust acquires. Its true purpose is to make good deals great. The $50 million could go towards half a billion dollars of new deals, and it’s a two-year commitment. The way that it’s funded is that Ashford Inc. is essentially acquiring furniture, fixtures, and equipment (FF&E) at the hotels, which reduces the required equity amounts that Ashford Trust needs to put into its investments and, therefore, elevates the projected internal rates of return on the acquisition by 700, 1200 basis points, which is a meaningful increase. ERFP could potentially enhance the returns on acquisitions we’re making, which we believe could translate into improved stock price for our investors to continue our efforts to maximize shareholder returns.
How do you expect the ERFP to fuel growth for the Trust and what impact do you anticipate?
We don’t have any specific targets other than maximizing the benefits of the ERFP commitment. We’ve announced and closed on the Hilton Alexandria Old Town, which was a $111 million transaction, and recently announced two additional acquisitions that will close either in the fourth quarter of this year or the first quarter of next year. They are the Hilton Scotts Valley Santa Cruz, a $50 million transaction, and La Posada de Santa Fe in Santa Fe, New Mexico, also a $50 million transaction. We’ve spent $211 million on transactions, leaving us with another $289 million to potentially benefit from the ERFP funding. We also think that this program can create a virtuous cycle of potentially improved returns for Ashford Trust and additional fees to Ashford Inc., so it’s possible that the ERFP fund could increase from $50 million to $100 million. While we don’t have any stated target, we would like to fully utilize the ERFP.
What else are you looking forward to in the next year?
We’re excited about a couple of things. We have a very opportunistic approach to our investments, and backed by the ERFP, this gives us a competitive advantage. We’re looking forward to the continued utilization of the ERFP until it’s depleted or perhaps renewed. We are focused and enthusiastic about what our business continues to accomplish in terms of value-added approaches to assets, whether it’s through brand conversions or additional revenue enhancement initiatives. Over the past year, we recently refinanced a significant portion of our balance sheet, which has given us more headroom in terms of maturity dates, and it reduced our spreads on many of the loans that we finance relative to what we had in place previously. I think a lot of this can provide tailwinds to 2019 for us.
Are there any trends that you’re keeping your eye on for the year ahead?
One thing on our radar is the labor situation, with respect to availability of workers and higher costs. We are also keenly focused on the Federal interest rate movement. We remain hopeful that the economy continues to grow and that the Federal rate movement doesn’t reduce those great prospects. We are concerned about the pace of the interest rate increases and the impact that could have on the overall economy. And then, we’re looking at the technological advances that continue to occur throughout our industry.