Deric Eubanks is the CFO of 3 separate publicly held companies. In fact, at that spot is a unmarried administration squad that runs all three.
![Deric Eubanks is the CFO of 3 separate publicly held companies BurjAlArabDubai; All inward the Family: Three Companies, One [REIT] CFO](http://cdn.cfo.com/content/uploads/2015/10/Deric-Eubanks.jpg)
Deric Eubanks
That’s an odd setup, but less hence inward the existent estate investment trust (REIT) space. Indeed, REITs as well as what yous usually call back of equally “companies” receive got close equally much commonality equally theatre cats as well as leopards: yous know they portion a broad category, but yous wouldn’t confuse them amongst each other.
In Nov 2013, Ashford Trust, a REIT that owned a diversified portfolio of hotels, decided to spin off its higher-end properties into a novel REIT called Ashford Prime. Ordinarily amongst a spinoff, some executives remain amongst the nurture as well as others boot the bucket amongst the spun-off entity. Ashford, though, wanted to hold its administration squad intact.
Happily, rules for forming as well as operating REITs allow them to go operated yesteryear “external advisers” that supply investment administration services as well as everything needed to run a business, including an executive team. For the start twelvemonth of Ashford Prime’s existence, Ashford Trust served equally its external adviser. But that meant the older society was getting administration fees from the newer, as well as nether REIT rules, the vast bulk of a REIT’s income must come upward from existent estate investments.
So, inward Nov 2014, Ashford Trust spun off a minute company, Ashford Inc., which acts equally external adviser to both REITs. Most of its revenue to appointment is from administration fees paid to it yesteryear Ashford Trust as well as Ashford Prime, as well as it’s opened upward to advising other investment platforms equally well. (It likewise operates Ashford Investment Management, an equity long/short choice property manager specializing inward the existent estate, hospitality, as well as leisure sectors.)
Most recently, inward September of this year, Ashford Inc. announced an understanding to larn 80% of Remington Holdings, a hotel administration society controlled yesteryear Ashford’s chairman as well as CEO, Monty Bennett, as well as his father. The deal, expected to unopen inward early on 2016, volition to a greater extent than than double the size of Ashford Inc. as well as seat it for futurity growth.
Eubanks, who joined Ashford Trust when it launched inward 2003 as well as became its CFO inward June 2014, late spoke amongst CFO close the “All inward the Family” construction as well as his operate inward running the businesses. An edited transcript of the conversation follows.
Why did yous spin off your higher-end hotels into a novel REIT?
The rationale was to simplify the investment strategy. One of the things nosotros heard from investors over the years was that they preferred investment platforms that had to a greater extent than well-defined strategies, equally opposed to an opportunistic strategy of investing majuscule where nosotros felt nosotros could larn the best returns.
What are the administration fees for the REITs based on?
It’s based on what nosotros telephone hollo upward the full capitalization of the [REIT]. We add together upward its marketplace capitalization, debt, as well as whatever preferred equity as well as multiply it yesteryear 0.7%. That’s the base of operations fee.
Some external advisory agreements receive got fees based on gross property value. We didn’t desire to practise it that way. We wanted to exhibit investors inward the REITs that the administration squad is highly aligned amongst them to actually increment the value of those platforms. And if it’s non increasing value — if the stock’s going downward — it’s non expert for Ashford Inc.’s fees.
Since all of the Ashford entities receive got a mutual management, it seems similar these fees are but existence passed unopen to internally, rather than actual revenue that’s existence generated. How practise yous thought it?
Well, they are separate companies, amongst separate sets of shareholders as well as independent boards of directors. The REITs ain hotels, they larn all of the revenue that the hotels generate, they pay the hotels’ expenses, but they practise non receive got whatever employees — those are provided yesteryear Ashford Inc. So the fee is comparable to the G&A expenses of an internally managed REIT. It’s but accounted for equally an advisory fee, which Ashford Inc. uses to pay the administration squad as well as its other expenses.
How meaning to your overall strategy is the Remington transaction?
Very significant, for Ashford Inc. It doesn’t actually touching the REITs. As a REIT, yous receive got to receive got 3rd parties handle your properties. Trust as well as Prime both ain a lot of hotels, but nosotros don’t receive got employees at the hotels. Their employees piece of occupation for the administration firms, similar Hilton or Marriott or Westin, that nosotros hire to run the hotels. And at that spot are likewise independent third-party hotel managers, which could go franchisees [of those chains, or companies similar Remington].
Influenza A virus subtype H5N1 combination amongst Remington was actually the adjacent measuring for Ashford Inc. We tin give the sack larn into the line of piece of occupation organisation of managing hotels. And the bargain is structured inward a way that allows us to larn a much larger society than Ashford Inc. We’re paying alone $10 1000000 inward cash, summation nosotros volition number $230 1000000 of convertible preferred shares as well as 916,000 shares of nonvoting mutual stock. Typically when a society acquires a much larger company, it has to surrender some voting command or pay to a greater extent than inward cash.
What’s the biggest item on your plate since yous became CFO final year?
We had but completed the Ashford Prime spinoff as well as were inward the procedure of completing the Ashford Inc. spinoff, hence at that spot were a lot of SEC filings as well as fiscal reporting unopen to those.
But the biggest portion of my chore late has been investor relations. It’s a fleck of a complex structure, as well as at that spot is a lot of moving pieces. If yous were an investor inward Ashford Trust, yous directly ain stock inward these other 2 companies equally well. So there’s a lot of communicating the storey as well as the strategy, why we’ve done what we’ve done as well as why nosotros experience that it volition ultimately practise to a greater extent than value for shareholders than if nosotros hadn’t done anything as well as stayed equally Ashford Trust.
Where does that incremental value come upward from?
This administration squad has a long tape of delivering really attractive returns to our shareholders that receive got significantly exceeded our peer average. But Ashford Inc.’s construction directly volition enable it to grow, which nosotros weren’t able to accomplish equally good when nosotros were but Ashford Trust.
I call back 1 of the reasons we’ve [delivered those attractive returns] is that insiders ain a lot of the stock. Trust as well as Prime receive got the highest insider ownership of whatever of the hotel REITs. We call back as well as deed similar investors, because we are significant investors.
What are your upcoming challenges?
We’ve got some debt maturities that we’re working through. The debt markets receive got been a lilliputian fleck volatile from a spread standpoint [that is, the spread of debt involvement rates over an index charge per unit of measurement similar LIBOR, the prime number rate, or a U.S. of America Treasury rate]. Typically equally nosotros boot the bucket through a line of piece of occupation organisation cycle, debt spreads boot the bucket along to compress equally to a greater extent than lenders larn to a greater extent than aggressive. In this cycle, it’s been a lilliputian fleck different. Spreads start to compress, as well as hence they widen dorsum out.
I call back that’s the sign of a salubrious market. It shows dependent champaign on the portion of lenders as well as bond investors. We’re non anywhere unopen to what nosotros were seeing inward 2006 as well as 2007, which I’d telephone hollo upward the peak of the credit cycle, where lenders were providing really aggressive loans as well as the underwriting standards had fallen quite a bit.
At the same time, a challenge we’re having correct directly is that it’s difficult to purchase hotel assets inward a way that accretive to shareholders, because our cost of equity has gone upward quite a fleck amongst what’s going on inward the stock market. Cost of majuscule is really of import to a REIT, because yous receive got to pay out almost all your earnings equally dividends, hence you’re relying on the majuscule markets to grow.
When stock prices drop, if nosotros experience similar the futurity prospects of our line of piece of occupation organisation haven’t changed, it increases the potential render an investor could accomplish from owning our stock. That way nosotros receive got a higher cost of equity — if nosotros desire to purchase a hotel that’s accretive to our shareholders, nosotros would withdraw to earn a higher render on that hotel than the render an investor could larn from but owning our stock. Otherwise, our shareholders would receive got been ameliorate off if nosotros didn’t purchase that detail hotel.
Are hotel REIT stocks performing worse than the overall market?
Yes. The stocks receive got performed pretty poorly. That could go a business office of investors’ concerns close involvement rates perhaps going upward as well as how that powerfulness impact hotel values as well as earnings.
The reality is, equally a hotel possessor nosotros would honey for involvement rates to boot the bucket up. That way either the economic scheme is doing ameliorate or inflation is heating up, as well as both of those things are nifty for the hotel business. If the economic scheme is doing ameliorate to a greater extent than people are traveling, as well as if inflation is going upward nosotros tin give the sack reprice our rooms every day.
Or it could go the fact the hotel manufacture has had a pretty long recovery upward to this point, as well as people are people are thinking we’re toward the destination of the cycle as well as hence they’re cycling out of REIT stocks.
But at that spot is a disconnect betwixt [the wretched stock performance] as well as the fundamentals at our hotels. If yous expression at hotel earnings growth, it’s been strong. Industrywide, revenue per available room is upward 6.7% through August.
This inward plow has led a disconnect betwixt what nosotros telephone hollo upward populace marketplace values as well as someone marketplace values. Public value refers to how the stock marketplace is valuing portfolios of hotels owned yesteryear publicly held companies, spell someone values refers to [the purchase prices] of hotels existence traded yesteryear either populace or someone companies. The someone marketplace values are way higher than the populace marketplace values.
That disconnect doesn’t tend to final long, because people tin give the sack accept payoff of that arbitrage — they tin give the sack purchase a hotel REIT, accept it private, as well as sell the assets. Or if it’s the other way around, yous powerfulness come across a bunch of someone companies trying to boot the bucket public. Either populace marketplace values are going to boot the bucket up, or someone marketplace values are going to boot the bucket down. But amongst the strong fundamentals at our hotels, it’s tough to come across how that could termination inward someone hotel values coming down.