By Allison Landa

VITAL STATISTICS: Ashford Hospitality Trust Inc. ADDRESS: 14185 Dallas Parkway, Suite 1,100, Dallas, TX 75254 PHONE: 972-490-9600 WEB SITE: www.ahtreit.com SYMBOL: AHT, listed on the New York Stock Exchange 52-WEEK HIGH: $12.22 52-WEEK LOW: $8.40 MANAGEMENT: Archie Bennett, Jr., non-executive chairman; Montgomery J. Bennett, president and CEO; Douglas A. Kessler, COO and head of acquisitions; David A. Brooks, CLO and head of transactions; David J. Kimichik, CFO and head of asset management; Mark L. Nunneley, CAO

Monty Bennett knows that timing is everything. As president and chief executive officer of Ashford Hospitality Trust (NYSE: AHT), Bennett banks his business on a strategic understanding of the hotel trade's ebbs and flows.

Crowne Plaza Hotel Key West-La Concha in Key West, Fla.

"In hospitality, we think it is important that you not only buy right, but sell right," Bennett says, describing a typical hotel cycle as decade-long from peak to peak.

Dallas-based Ashford Hospitality Trust was founded in August 2003, as an offshoot of a private investment platform that had been buying and selling hotel properties for more than a decade. The platform included New York-based Fisher Partners, the Gordon Getty Trust, and well-known investor George Soros.

"We bought quite a lot of hotels," Bennett recalls. "Not only did we buy them at the right time, in the early 1990s, but we sold them at the right time. We had bought almost 200 (in the early part of the decade), and sold them off and were down to about 30 by the late 1990s."

The investors for some time were seeking to involve themselves more deeply in the hotel industry, but high prices prohibited them from doing so until late 2001. Following the terrorist attacks on the United States, tourism and business travel slowed dramatically and hotel real estate values, subsequently, dropped sharply.

Hyatt Regency Orange County in Anaheim, Calif.

The decline in values, in turn, swung open a new window of opportunity for hospitality investors. "Values fell sharply," Bennett says. "They declined for a year or two, and we started considering how we were going to position ourselves for a future upswing in hotel values."

The group's answer came in the form of Ashford Hospitality Trust, which incorporated in order to go public in August 2003. The offering was that year's only hotel IPO and one of a mere handful of IPOs in all of 2003. The group of investors raised an estimated blind equity capital pool of $200 million.

"We contributed four assets, but essentially it was a blind pool to take advantage of depressed hotel values," Bennett says.

Following the Cycle

Ashford went public with a portfolio of six hotel properties that totaled $125 million. Today the self-administered REIT owns just shy of $1.4 billion in assets, including $100 million in mezzanine loans, and has holdings of 77 hotels totaling 12,500 rooms. "Over time we've bought more assets, raised more capital, bought more assets, raised more capital," Bennett says.

Throughout its brief history, the company has strategically positioned itself to ride the wave of the hospitality cycle. It's a tactic that Bennett believes separates Ashford from other hotel REITs.

"If you're a REIT, traditionally the model has been buy and hold," he says. "If you look at the history of REITs, particularly hotel REITs, they bought in and out of season. They never sold."

Currently Ashford finds itself in a buy cycle. In late April 2005, the company announced a 30-property, 4,328-room agreement with CNL Hotels & Resorts Inc. The $465 million deal includes 13 Residence Inns by Marriott in nine states; six Courtyards by Marriott in five states; seven TownePlace Suites by Marriott in six states; and four SpringHill Suites by Marriott in three states. On average, the hotels are slightly younger than nine years old, with most built between 1997 and 2000. The company expects to invest $34 million in property expenditures.

March 2005 was also fruitful for Ashford, which bought the Hilton Santa Fe Hotel in New Mexico for $18.2 million, upping its portfolio by 157 rooms. Earlier that month, Ashford bought a 21-hotel portfolio in a deal that consisted of $35 million in cash, the issuance of $50.3 million in operating partnership units and the assumption of $164.7 million in debt.

The current window of opportunity for buying, according to Bennett, swung open right around the time Ashford went public. "We believe values have increased since 2003," he says. He believes the buy cycle will continue until mid to late 2006, at which time Ashford may begin to concentrate more heavily on sales and allocate capital to making loans.

"New demand for hotel rooms was at an absolute standstill (immediately following the attacks)," Bennett says. "As a result, right now we have extremely low levels of new supply growth: 0.6 percent. Room demand growth is 3.7 percent. That's a huge favorable variance....It's a huge demand and supply gap."

This gulf allows Ashford to wield pricing power at its hotels and to raise its room rates more aggressively. Bennett cites a recovering economy and strong industry fundamentals as reasons for optimism going forward.

"If you believe the economy is going to click along, which most people do, people on the supply side can't build rooms fast enough," he says. "There's a lag, there's a long lead time during which new supply will start to inch up, but also a very large gap between supply and demand for the next two to three years at least. That will help drive occupancy, room rates and profitability."

Diversity by Design

Ashford aims to be a one-stop shop as a leading provider of capital to the lodging industry—a company whose activities include direct hotel investments, first mortgages, mezzanine loans and sale-leaseback transactions. Unlike many REITs, the company does not specialize in a carefully chosen handful of geographical areas, nor does it limit itself to one brand of service.

"We have been very intentional about diversification," Bennett says. "We want diversification across the capital structure. We also want diversification across geography and asset types. We want to be in urban cores, in cities and near highway locations. We really think that our strategy maximizes risk-adjusted returns. In hotel investments, risks don't need to be compounded by us concentrating in certain locations. We saw what happened following 9/11."

Diversification fits in with Ashford's theme of following the hospitality cycle. By being a company that can do it all, they can more fluidly shift gears from buying to selling.

"We can net down our portfolio when we think it's a good time to be sellers, but then we also diversify our assets by being a mortgage and mezzanine lender," Bennett says. He adds that this benefits investors as well as consumers: Investors are putting their money into a platform that is both broader and more stable, and consumers can have a wide range of capital needs met.

Bennett cites Winston Hotels Inc. (NYSE: WXH) as another REIT that lends. "But as of yet, other than Winston doing mezzanine lending, none of the other (REITs) have engaged in this," he says. "We're unique in that regard, though some others might join the party."

Finding Hot Properties

Ashford employs 30 people at its Dallas headquarters and has holdings in 20 U.S. states: California, Nevada, Arizona, New Mexico, Colorado, Minnesota, Illinois, Indiana, Ohio, New York, Vermont, Massachusetts, Pennsylvania, Kentucky, Georgia, Texas, Alabama, Florida, Virginia and Maryland.

The company is less specific about geography than about the quality of its hotels. "We like properties that are midscale, upscale, or upper-upscale," Bennett says. "Most are in the upscale or upper-upscale segments."

The company's direct hotel investments include the Marriott family of brands, the Hilton and Starwood family of brands, Hyatt, Radisson and Intercontinental Hotel Group brands and a sprinkling of independents. It also has an active development history, though there is no new construction in the current pipeline.

"We think there's a right time in the cycle to be developers, and we think we're at least a year away," Bennett says. "We're in the process of examining (development possibilities) and will probably develop when acquisitions have (dried up)."

As a public company, Ashford can turn to the markets for funding. Other strategic sources include equity capital and perpetual preferred funding. "We've been able to procure some very attractive secured debt, being creative and aggressive in tapping potential sources of capital," Bennett says. "It depends on where the markets are, and where we are."

Bennett points to the rising economic tide as a boon for Ashford, saying that the company's eye for timing and taste for diversification make it well positioned for the future.

"The profitability of the industry is growing substantially. . . .There are very, very strong fundamentals," he says. "We're banking on the improvement of the market and are taking advantage of the (current) great times to buy property. Within the next 12 to 18 months, we'll shift and buy fewer properties. We'll be developing and cranking up our first-mortgage and mezzanine lending business. That's how we're going to continue to grow."