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Ashford Prime narrows strategic focus to luxury, ups '17 dividend

Ashford Hospitality Prime Inc. is tweaking its strategy to focus on investments in the luxury segment and will pursue new acquisitions in this category.

The company designated its Courtyard Philadelphia Downtown Hotel, Courtyard San Francisco Downtown Hotel, Renaissance Tampa Hotel in Florida and Marriott Legacy Center Hotel in Plano, Texas, as noncore assets.

Richard Stockton, who took over as Ashford Prime's CEO in November 2016, said in an interview that the company will either sell the four noncore assets or rebrand them to earn higher revenue and fit into the luxury category.

While Ashford Prime intends to keep the remaining seven hotels in its portfolio, it will seek to raise its average revenue per available room by acquiring properties that perform even more highly according to the metric. Stockton added: "In the lodging REIT space we want to be the leader in RevPAR, and you do that by having a greater proportion of luxury assets."

The company is "actively looking" at new acquisitions, and will consider properties in the U.S. and the Caribbean, and potentially U.S.-dollar-nominated Mexican resort areas, Stockton said. Because the existing portfolio is small, he said, "it doesn't take much to move the needle," and one to three new hotel purchases could suffice.

Meanwhile, the REIT refinanced its Wachovia 3, Wachovia 7 and Wachovia Courtyard Philadelphia loans that will come due in April with a new $365 million loan. The existing loans had roughly $334 million in outstanding balances.

The new loan has an initial term of two years, with five conditional one-year extension options, and is secured by the REIT's Plano Marriott Legacy Town Center hotel, Seattle Marriott Waterfront hotel, Tampa Renaissance hotel in Florida, San Francisco Courtyard Downtown hotel and Philadelphia Courtyard Downtown hotel. The interest-only loan has a floating interest rate of LIBOR plus 2.58%.

Ashford Prime plans to raise its expected quarterly cash dividend by 33% to 16 cents from 12 cents per common share starting with the first quarter. The company said it will maintain a conservative leverage target of 45% net debt-to-gross assets ratio and hold 10% to 15% of its gross debt balance in cash.

Stockton cited the loan refinancing, which is expected to save the company roughly $12 million annually in interest costs, as a factor in the decision to raise the dividend.

"It was my view that we had one of the lowest dividend yields in the sector, that we have ample cash reserves, that we were in the midst of doing a refinancing to generate a lot of additional extra cash flow," he said. "So the question is, really, why not? Why not give it to shareholders and bring our payout ratio much more in line with the rest of the sector?"

The dividend raise will cost the company an incremental $4.8 million per year, in contrast with the roughly $110 million of excess cash it has on hand and the savings the refinancing will generate, Stockton said.

The increased payment "has a disproportionate impact to the benefit of shareholders," he said. "To shareholders, it's quite a big deal. For us, as management, and as I look to our growth story and our available funding, it's very manageable. As you look to that disproportionate impact, it was just too obvious to me that that was what we should do."

The REIT also amended its advisory agreement with Ashford Inc. The move reduces the termination fee by removing the tax gross-up provision and the 1.1x multiple from the fee calculation and eliminates the adviser's right to appoint a designated CEO. A change in a majority of the REIT's incumbent directors will also no longer trigger a termination fee.

If the advisory agreement is terminated before any incremental growth in the hotel portfolio, the REIT will pay $45 million to Ashford Inc. in addition to the termination fee. At the effective date of the amended advisory agreement, which has received board approval and is subject to shareholder approval, the REIT will pay Ashford Inc. $5.0 million in cash.

SunTrust Robinson Humphrey Inc. and Clifford Chance US LLP were the financial and legal advisers to the special committee of independent directors that negotiated the amended advisory agreement.