Interview: Ashford Hospitality Trust Chairman And CEO Monty Bennett

Real estate investment trust Ashford Hospitality Trust this quarter is spinning off into new subsidiary Ashford Hospitality Prime eight of its top-performing hotels from its 122-property portfolio. They include the Capital Hilton in Washington, D.C.; downtown Courtyard properties in San Francisco, Seattle and Philadelphia; and the Marriott Plano Legacy Town Center in Texas. Ashford Prime then would concentrate on luxury, upper upscale and some urban select-service hotels in gateway cities worldwide, while Ashford Trust would maintain a broader focus on both full- and select-service properties generally in U.S. markets. Ashford CEO and chairman Monty Bennett spoke recently with BTN lodging editor Michael B. Baker about the reasoning behind the spinoff as well as his outlook for corporate demand and pricing in 2014.

What do you hope to accomplish through this spinoff?

It's going to lower our equity cost of capital on that platform, which will allow us to do accretive transactions in today's marketplace. Our cost of capital in our existing platform is too high. A second advantage: Many institutional dedicated real estate investors like purity of platform, and our platform, Ashford Trust, has always been less than pure and it's been higher leverage. We've been investing in all kinds of hotels, and you have higher leverage. This will be just higher-end hotels, and it will be lower leveraged, which institutional investors also like.

Is this a new type of structure?

We see some other people do it across real estate types, so you'll have one platform to invest in apartments and multi-families and a separate platform to invest in offices, but we're the only ones we know of that is splitting it up within the hotel industry and having different types of platforms within the industry. In the future, we might have other types of platforms. We'll see.

What's been the reaction from investors?

It's been very good. Investors have been very pleased with our track record. Our stock price performance has been about double our peer average since we went public 10 years ago, and investors are very happy with our returns. It took us a little while to educate the marketplace on the reasons why, but about 95 percent of our investors all seems to think it's a good idea. The only issue that any investors are hesitant about is that when you make a change like this in the short term, your stock price can hop around a little bit. In the mid-term and longer term, all our investors are very bullish on this.

What's your prediction for lodging demand in 2014?

I'm very excited about 2014 for a couple of reasons. The Federal Reserve continues to do whatever it needs to do to keep the economy stimulated. The federal government won't have as many cutbacks, and so the year-over-year comparisons will be better for government travel and the like. We find that demand for hotel rooms follows gross domestic product, but it's also amplified by strong changes in GDP. For example, if you had growth of 3 percent in GDP one year and 3 percent the next year, versus a scenario where you had growth of 1 percent one year and 3 percent the next year, in both the second year's GDP growth is 3 percent, but in the second scenario, hotel room growth is much stronger because of the change in growth. We see GDP moving up next year, and we think that will give us an extraordinary boost in hotel demand growth.

Do you think that will lead to an increase in corporate negotiated rates?

We do. We're in that process right now, setting up negotiated accounts for the following year. We're out there pushing rates. By and large, we're finding that customers are open to it. They know that markets are starting to tighten up, and in a number of major markets, it's very difficult for them to get into hotels during Tuesdays and Wednesdays. Many hotels are selling out those nights.

We've seen a lot of strength in the higher-end properties. Will that continue?

That's typical of both cycles. The higher-end properties fall off the most and hardest as far as revenues go, and they come back the strongest. This is the part of the cycle where they will continue to do well, maybe even better.

Will we start to see group business pick up as well?

We hope so. Group business has been a disappointment for the industry in this recovery. We've done a lot of analysis to try to figure out why group business has lagged behind transient growth. Anecdotally, we see a lot of financial institutions and banks spending less, and certainly the government is spending less. The only thing we could find is a business confidence index that seemed to have dropped off in early 2009, and unlike other assessments, it hasn't returned. It's still low. If business confidence increases, the group business will increase. It's always hard to say what drives that. It could be more positive from a regulatory standpoint, from the government, or it could be what's going on elsewhere in the world.