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.

It’s Not a Good Time to Own Lodging REITs

 

sample.pngI am surprised at the financial markets sudden pessimism at the beginning of 2016 after the markets ended 2015 on a positive note. The interest rate hike made the domestic economy more predictable, but concerns overseas have amplified losses in the S&P 500 and equity REITs. Suddenly I started to give Janet Yellen credit for being concerned about China.

In 2016, lodging and timber REIT stocks could be potential casualties. Two weeks into 2016, lodging is down by 17% and timber is down by 14%; this is already half the losses both sectors experienced in all of 2015. In 2015, infrastructure fell by 32%, lodging by 29%, and timber by 17%.

Lodging REIT stocks have had great growth rates, but now is not a good time to own these stocks. First, market sentiment is negative towards lodging due to their performance. Investors have assumed that they are at its peak and ready to go downhill. Investors have been so sensitive that every piece of bad news associated with lodging makes them dump the stocks.

In addition, market sentiment is negative towards REITs in general due to the interest rate hike. Whenever the Fed raises the yield on 10-year treasury notes, they become more competitive against REIT dividend yields. 10-year treasury notes are risk free which gives them a clear advantage over owning REITs.

In a statement last week, LaSalle Hotel Properties said they have revised down the metrics and don’t expect fourth quarter growth in RevPAR. They also will not provide forward looking statements for 2016 because the current environment has been too clouded. Their stocks have dropped by 11.4%. Largely because of the statement, lodging stocks, on average, have fallen by 10%.

Also, John Petry of Sessa Capital LP, which owns 8.2% of Ashford Hospitality Prime, is currently trying to remove the board and management after witnessing ‘one self-serving action after another.’ Petry wants to put it up for sale. I welcome a move to more transparency in the REIT space, but in this negative environment, I can only wish Petry good luck. Easy to play the hero role, but hard to execute it. The market seems to believe the same thing as Ashford’s stocks plummeted between 16%-18% last week.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Heli Brecailo

Companies: Ashford Hospitality Prime, Inc. (NYSE:AHP), Ashford Hospitality Trust, Inc. (NYSE:AHT), LaSalle Hotel Properties (NYSE:LHO)

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 January 15, 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 December 31, 2015, 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.

Ashford Prime Stumbles Badly in Q3

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Although we are are not very keen on external management, we featured the Ashford REITs–Ashford Hospitality Prime (NYSE:AHP) and Ashford Hospitality Trust (NYSE:AHT)– a couple of weeks ago (Note: insider ownership for the Ashfords is between 14 and 15 percent). Eventually, Prime turned out to be better than Trust from a dividend generation potential. In fact, in Q2, Prime demonstrated one of the best performances among all hospitality REITs, which resulted in its inclusion on our watchlist. However, Prime’s performance took a dive in Q3 which caused us to take several steps back.

Pro-forma hotel EBITDA, which measures internal growth, went from 10 percent year-over-year in Q2 to -3 percent in Q3. Also, adjusted FFO dropped from 33 to -7 percent. Finally, although management targets high debt levels, total debt to total capitalization rose to 57 percent.

chart02Looking at specific metrics associated with hospitality, Q3 has also clearly underperformed in comparison with Q2. RevPAR and ADR both had lowered growth, and occupancy dropped.

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Management defends Q3 as an anomaly and things are going to get back to normal in Q4. Hotels under renovation and holiday mismatch between this year and last year have contributed to the drop. They even split pro forma figures between all hotels (11 hotels) and hotels not under renovation (9 hotels), but the results have not been encouraging. Regarding the holidays, this is what management said:

“Headwinds during the third quarter came from holiday changes including Labor Day falling a week later this year which extended the summer season and reduced business travel and the Jewish holiday of Yom Kippur, which fell in the third quarter this year and the fourth quarter last year, which also negatively impacted business in the third quarter.”

Despite a drop in share price following the release of the results, the valuation metric price-to-AFFO continues in line with the sector. Dividend yield continues low, but so does the dividend payout.

Source: Seeking Alpha, Ashfords

Stay tuned! Our US equity REIT ranking is finally close to release.

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.