Dead End Fight Drags Down These REIT Share Prices

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The battle between Ashford Hospitality Prime’s external advisor (AINC) and activist Sessa Capital is getting uglier and just reinforces the speculative situation of the stock at this moment. Unfortunately, this hasn’t helped the share price. Last week, the shares of both hotel REITs managed by AINC, Ashford Hospitality Prime (AHP) and Ashford Hospitality Trust (AHT), trailed our roster or equity REITs once again.

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Ahead of AHP’s 2016 shareholder meeting in June, both sides have filed lawsuits against the other and made their case to shareholders through presentations and press releases. Sessa, the third largest shareholder of AHP, even created a website, www.FixAshfordPrime.com.

In the latest developments, AINC announced they were suing Sessa Capital for tortious interference for $200 million (AHP’s market cap is under $300 million). In a recent press release, they also argued that Sessa failed to propose a plan that maximizes shareholder’s value. They went on to say that Sessa and its director nominees don’t have the necessary experience in lodging, so they aren’t going to simply hand over the keys to them. They even tried to disqualify Sessa’s director choices, while accusing a director nominee of “blatant resume padding.” The management filed a compelling investor presentation to showcase their credentials and performance as managers on ahpreit.com.

Sessa, who is coming from the other perspective, reproves Ashford Prime’s underperformance by saying it is the result of bad governance. The slate of directors that Sessa picked leans toward corporate governance. On numerous occasions, they have brought up the controversial terms of the advisory agreement between AHP and AINC, as well as the conflict of interests.

The change of directors that Sessa is proposing could lead to hefty termination fees (“proxy penalty”), for which they criticize AINC heavily. They say the penalty could be in the range of hundreds of millions of dollars and make up for a significant portion of AHP’s share price.

Since it’s currently unclear how Sessa will be able to get around the termination fee, it looks like their inexperience has put them in the midst of a dead end legal fight. First-time activist, Sessa Capital is learning that external managers don’t release their bones easily. If the solution to the termination fees must be found through a legal battle, the outcome will probably not be positive for shareholders. And, of course, the legal fees can be astronomical.

Sessa Capital has already made it clear that they want to clear the way for the company to sell their assets. This way, they can take full advantage of the discrepancy between share price and asset value in private markets. Indeed, like many hotel REITs, Ashford Prime share price dropped 40% over the past twelve months. Sessa Capital has made white proxy cards available to Ashford shareholders, so they could vote for the slate of directors they recommend.

Ashford Prime, like the name suggests, has assembled the most luxurious assets (high RevPAR) that Ashford Trust previously had.

Due to deep undervalue, I still see some upsides to AHP, but I’d only invest in the company for speculative purposes. I feel that, due to inexperience, Sessa Capital will not be able to be successful.

Feel free to let us know which side you are on in the comments section below.

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on March 25, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of February 29, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Activists Help Sink Both Ashford REITs

chart01Activists, Rambleside Real Estate Capital, a NY based investment company, and Sessa Capital, also a NY investment firm, appear to have picked the wrong fight and are now helping sink both Ashford REITs, Ashford Hospitality Trust and Ashford Hospitality Prime. In the past few days, Rambleside and Sessa have made their discontent with the lodging REITs publicly known. Both Ashfords are advised by the same management team.

Last week, Ashford Prime’s share price plummeted by 18% and Ashford Trust’s by 16%. On Wednesday, January 13, Ashford Prime saw their most substantial drop of 10%. On Monday, January 18, shares fell by 4%. Obviously, investors are fleeing, rather than jumping in.

chart02I’ve never been a fan of external management and I welcome any initiative designed to correct misalignments between management teams and their REITs. Rambleside Holdings, who owns less than 1% of Ashford Trust, complained about the low share prices and urged the company to make a share buyback. They also asked the management team to remove the termination advisory fee.

At the same time, Sessa Capital, who owns 8.2% of Ashford Prime, has stated a desire to nominate a slate of independent board directors and begin a sale process. Sessa reports they are tired of board and management taking “one self-serving action after another.”

Ashford Prime

Ashford Prime’s issue is deeper and not restricted to the company alone. In the past twelve months, Ashford Prime lost 40% of its value. Their peers experienced the same thing. On average, lodging REITs fell 40% during the same period. The valuation metrics of lodging REITs have fallen to ridiculously cheap levels. Currently, other REITs are trading at 9x AFFO, on average, while Ashford Prime is trading at 7x AFFO.

chart03.pngPerhaps, the biggest source of frustration for shareholders is the fact that Ashford Prime never lived up to what it was meant to be. In 2013, Ashford Prime was spun off from Ashford Trust to provide shareholders with added value. Montgomery Bennett, Chairman, and Chief Executive Officer of the Ashfords, had intended to capitalize on the lodging sector’s good fundamentals. He believed it would be most beneficial to split into two companies with well-defined goals. Ashford Prime invests in luxury hotels, as well as gateway and resort locations, while Ashford Trust is more open-targeted and invests across a variety of segments in the hospitality sector.

chart04In summary, there are several uncertainties that could lead Sessa Capital to a dead end fight that results in lost money on the initiative. First, Ashford Prime’s advisor is also its shareholder and owns a significant ownership. Second, lodging isn’t in favor of the market. As a result, even if they sell the assets, they are unlikely to realize the full net asset value. Finally, the activists’ plan B, which includes selling stock, isn’t the right answer at the current time. Stocks have dropped so significantly that if they did this, they would have no choice but to realize losses.

Source: Ashford Hospitality Prime (NYSE:AHP), Ashford Hospitality Trust (NYSE:AHT), Fast Graphs, Yahoo!Finance.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.