Ashford Hospitality Trust (AHT-PG) – Preferred Stock Tender – 80% Upside

Current Price: $5.42

Offer Price: $10.0

Upside: 80%

Expiration Date: Q4 2020

Proxy

This idea was hinted by Brian.

 

Ashford Hospitality Trust intends to carry-out capital restructuring and has launched a tender offer to exchange all of its preferred shares into common shares. Consideration stands at $7.75/share in cash or 5.58 of AHT shares per each preferred share - equivalent to $$10.5/share at current prices. The cash option is only for 17% of the total outstanding preferred shares. The offer subject to financing (the cash portion of $30m) and still needs to be approved by common shareholders and the meeting is set for the 30th of October. Borrow for hedging is available on IB at 2% annually. The transaction seems likely to get terminated or amended, however, with 80% spread the setup looks quite interesting and the margin of safety might be sufficient.

There is no minimum tendering condition and AHT will accept any amount of preferred shares tendered. The company has 5 different classes of pref shares (G series are the cheapest currently):

aht pref ex

It is not clear how the shares (both common and preferred) would behave in case common shareholders fail to approve it. If the offer is terminated due to the absence of financing, then the prices of both common and preferred shares are likely to drop with a larger move on the common ones. In this case, hedged positions should still generate juicy returns.

 

Remaining Conditions

There are two key remaining conditions: (Update: see comment on the 27th of October - both conditions have been waived)

  • Common shareholder approval of the charter amendment to convert preferreds into common shares;
  • Pending capital raise to finance the cash portion of the transaction.

The first one requires the consent of 2/3rds of total outstanding common shares and the meeting date is set for the 30th of October. The proposed conversion would dilute the common shareholders by 90%. Moreover, there is pressure from activist (owns 9.4%) that has started a proxy fight last month by strongly opposing the transaction. However, in the most recent letter (Oct 21st) indicates a somewhat changed tone from the activists - they are now pushing for the increase in the cash portion of the consideration instead of opposing the transaction outright.

Earlier this month (6th of Oct) shareholders have already satisfied another condition and approved the issuance of common shares - the majority of total voting consent was required and 67.8% have voted in favor. However, as only 60.1% of the total outstanding shareholders have participated in the vote, the charter amendment vote was adjourned (till the 30th Oct). Looking at the approval ratio of the previous vote, it seems that nearly all of the outstanding shareholders would have to participate in the new vote to pass the charter amendment.

The important thing is that if the current offer fails, the company will be left in a rather tight spot with a non-zero chance of potential delisting, asset sale at negative equity value (bellow mortgage), or even bankruptcy. This would leave common shareholders totally screwed as AHT sits on a mountain of debt ($4.1bn property level), while the senior preferred equity ($586m) already trades at an 80% discount to its par/liquidation value. On the other hand, the share issuance vote has already showed that shareholders are ready to choose the better of the two evils and approval is still possible here. The transaction has already received favorable recommendations from ISS and Glass Lewis during the recent proxy fight with the above-mentioned activist.

Moreover, management seems very much incentivized to keep the company alive for as long as possible. Essentially the same people that sit on AHT's board also manage/own AHT's asset manager, which generates a majority of its revenues (67%) from various AHT management and property fees.

The transaction is also subject to financing condition - pending raise of $30m equity or debt.  The funds have not been secured at the beginning of October (the company even extended the expiration of the offer from the 9th of Oct to the 30th of Oct because of that). At the end of Q2, the company still had $165m of cash (+$95m in restricted cash), however, most probably these funds are not available for preferred cash-out, as AHT continues to burn significant amounts of cash, has asked for forbearance on it's mortgages as well as deferral of advisory fees to the external manager.

 

Risks

  • Conditions are not satisfied and the transaction fails. It is a bit hard to guess how common and preferred shares would react in the short term after such an event.
  • Borrow costs might increase or become unavailable, which could result in a short squeeze and wipe out short positions - 25% of AHT float is already short. It seems that there have been a number of short-lived spikes in the price of common shares during the last month
  • The offer could be extended or amended again. This is a risk for both hedged (longer timeline, larger borrow fees) and unhedged positions (common shares declined after the announcement of the previous extension on the 2nd of Oct).

 

Quick Thoughts on Margin of Safety

Assuming the transaction goes through, for unhedged positions (only longing the preferreds) to start losing money, common shares need to drop to below $1/share. While this is definitely possible due to substantial dilution (preferreds will covert into 90% of all outstanding shares) at these levels equity of the whole company post-transaction would be valued at only $140m. I am ignoring the cash balance as of Q2'20 as it is likely to be burned during the upcoming quarters.

However, if the company manages to stay afloat until the industry recovery (estimated in 2023), the value of the business is likely to return to historical levels. At the end of 2019 AHT had net equity value of $530m (market value of prefs and common less cash) and was paying out $86m/year in preferred and common dividends. From this figure, we still need to deduct the expected cash burn during the next 3 years as well as assume that the company will find ways to finance this deficit. During Q2'20 the company burned through a total of $106m of cash, however, a major part of it went for various debt-related expenses, and the actual operating cash burn was closer to $36m. This amount is also likely to be inflated due to various COVID-related costs, so overall the cash burn (ex debt service) during the two upcoming years is unlikely to exceed $200m (on top of the cash balances still present as of Q2'20). Deducting the expected cash burn from the 2019 enterprise value still leaves $190m valuation headroom.

Obviously, this is a very simplified exercise, however, it provides a useful reference point of where the shares could be trading post recapitalization. $330m enterprise value results in $2.35/share, which is way above the $1/share price per common required for the unhedged positions to breakeven.

Also worth mentioning, that according to the activist, the majority of AHT properties are close to breakeven, and the cash-burn (as well as the resulting value transfer) might turn out to be way lower than estimated above.

Cygnus Capital believes that approximately 30% of AHT’s hotels are likely at or very near property level breakeven, including debt service. The remainder of AHT’s hotels appear to need a 10-15% increase in occupancy to achieve this goal.

 

Timeline Of Events

  • 20th July.  An initial preferred-common conversion offer is announced with a consideration of $9.75/share in cash (maximum 13% of the total consideration) or 2.64 AHT shares. Conditions include $30m capital raise and 2/3rds of pref shares tendered.
  • 9th September. The offer is launched with amended consideration of $7.75/share in cash (maximum 17% of the total consideration) or 5.58 AHT shares. The same conditions remain.
  • 17th September.  Cygnus Capital reports a 7.8% stake and issues an open letter opposing the conversion. The shareholder states that the offer is premature in light of the recovering hospitality industry and sufficient available liquidity to "wait and see". Cygnus also criticizes the governance matters of AHT/AINC (the external manager) and proposes alternative paths to consider, such as asset sales, refinancing, raise of short term debt, merger with stronger REIT, etc.
  • Until the end of Sept. Proxy war between Cygnus and AHT continues (more information on AHT answers/business provided in the section below).
  • 28th September. Proxy firm ISS supports AHT management position and recommends voting in favor of the preferred-common conversion.
  • 30th September. Glass Lewis joins the recommendation stating that it will help the company to simplify the capital structure and enhance pro format market access: "While certainly not unfettered by steep dilution to common shareholders, these benefits may be expected to contribute favorably to AHT's ability to secure fresh sources of financing on more attractive terms than may presently be available, thereby potentially providing a more diverse array of avenues to improve liquidity, offset operational shortfalls and stabilize the Trust during a still unpredictable industry rebound.". Interestingly, Glass Lewis also criticizes Cygnus campaign of "dubious analytical relevance" noting overly positive market recovery assessments, underestimation of ongoing cash burn, etc.
  • 1st October. AHT received a delisting notice from NYSE due to lower than $50m market cap during the 30-day trading period and shareholder's equity being lower than $50m. AHT shareholder's equity as of Q2 wanegative $38m, down substantially from the $197m in Q1 mainly due to decreased cash balance and investment in hotel properties (impairment charges). The company can regain compliance in the 18 month period, however, it also has to submit a plan of definitive actions in 45 days since getting the notice.
  • 1st October. AHT signs forbearance agreement for $1.2bn property debt and states that it already has forbearance for 69% of the mortgage debt balance.
  • 2nd October. Cygnus raises its stake to 8.3%.
  • 2nd October. AHT extends the offer expiration date till the 30th of October to allow additional time to meet the financing condition. The company waives the minimum requirement of the 2/3rds of preferred participating in the tender.
  • 6th October.  Common shareholders approved the share issuance condition, however, not enough votes participated to pass the charter amendment condition (60.1% of total shareholders participated, while approval from 2/3rds of total outstanding was need). The vote for the charter will be reconvened on the 30th of October.
  • 7th October. Cygnus issues another letter (all the same points).
  • 20th October. Cygnus raises the stake to 9.3% with new common share purchases at $1.38 - $1.77 prices.
  • 21st October. AHT asks and gets the 30-day deferral for the advisory fees (about $4m per month).
  • 22nd October. Cygnus issues another letter and, interestingly, it seems that the tone of the activist has changed and now it actually offered recommendations to encourage participation in the offer.  Cygnus states that it believes that the offer of $7.75/share in cash is a "fair offer", however, to incentivize the participation of preferred shares, the management should increase the cash portion of the consideration and reduce the stock portion accordingly.

 

Ashford Hospitality Trust

AHT owns 116 hotels, 24.7k rooms in 30 states of the US.

Like any other hospitality REIT, it was severely hit by the COVID-19 outbreak. Q2'20 saw 89.4% revenue fall YoY and EBITDA loss of $43.5m (vs $143m EBITDA profit in the same period last year). The company keeps almost all of its hotels still operating, which results in an immense cash burn ($106m during Q2'20). The company has taken the various cost-cutting initiative, cut the workforce, temporarily decreased management salaries, etc. and also suspended common and preferred share dividends ($7m and $10.6m respectively). However, in the recent proxy fight (September), the company has mentioned that its monthly expenses (debt service and corporate expenses) are still very high and stand at $17m ($51m/quarter).

As of Q2 AHT was left with $165m of cash + $95m restricted cash, however, the later is not fully available:

The vast majority of the restricted cash is comprised of lender and manager held reserves. The Company is currently working with its property managers and lenders in order to utilize lender and manager held reserves to fund operating shortfalls.

So given the cash reserves left and the ongoing expenses, it seems that the company won't be able to survive for very long. This was also mentioned in the Q2 report:

If our cash utilization going forward is consistent with the second quarter of 2020 and we do not raise additional capital, it is possible that the Company may utilize all of its cash, cash equivalents and restricted cash within the next twelve months

The company also has $4.1bn of property-level debt. Apparently, since this April, all properties went default. Q2 report:

Beginning on April 1, 2020, we did not make principal or interest payments under nearly all of our loans, which constituted an “Event of Default” as such term is defined under the applicable loan documents.

September 21st letter:

Nearly all of our approximately $3.8 billion of property level debt has been in default at some point in the past six months as the properties have not been generating enough cash flow to pay the interest expense on our property level loans.

As of the most recent update (1st Oct) the company has managed to receive forbearance on 69% of its mortgages, however, that is only for 6 months, while the recovery period for the Hospitality industry is uncertain at this moment (Glass Lewis states that rebound to 2019 levels is not expected until 2023-2024). Asset sale also seems hardly an option due to a combination of post-COVID discounts and low demand. AHT states that certain peer hotels are currently on sale with a 25% to 40% discount to pre-COVID values, which would leave most of AHT properties with negative equity value. This is also illustrated in the September presentation (30% discount to pre-COVID price):

aht pref

Therefore, as asset sale and liquidation is not really an option, the company argues that the best way forward is to eliminate preferred equity overhang, which should provide AHT with somewhat easier access to capital to raise funds.

 

AHT management and AINC

AINC externally manages two hotel owners - AHT and Braemar (luxury hotels and resorts). Braemar has only 13 hotels in its portfolio, therefore it seems that activists claim that AHT generates 67% of AINC revenues could be legitimate.

All three entities were founded and are chaired by Mr. Monty Bennett, who together with this family and affiliates owns 68% of AINC and about 10% of AHT. The conflict of interests was frequently mentioned by Cygnus and even noted by ISS:

Over the years, unaffiliated shareholders have been subjected to egregious governance-related practices and transactions that seemed to benefit one company in the Ashford group at the expense of another, all of which one could argue were in part to perpetuate the influence and control of the Bennett family over these entities.

This year Mr. Bennett and Ashford companies also came under bad light as it appeared that they were one of the biggest receivers of the COVID outbreak-induced small business protection program. All three companies received $126m intended for the survival of small businesses. As a result, the companies received subpoenas from the SEC and returned the money, but the investigation is still ongoing.

Despite that and also all the points stated by activists and ISS, I believe this management should be very incentivized to push the conversion forward, which is positive for the trade.

Nonetheless, it should be noted that if things go south, the agreement with AINC virtually makes liquidation as a non-viable option, due to substantial agreement termination fees:

An orderly liquidation of the Company would likely trigger a termination fee under our advisory agreement with Ashford Inc. (NYSE American: AINC). This termination fee could be significantly higher than the existing liquidity of the Company and we believe this fee would be senior to both preferred and common shareholder claims, potentially wiping out both shareholder classes.

 

AHT Shareholders

Aside from the 9.6% owned by the management, other major shareholders of AHT include index fund manager Vanguard - 10.6% and Renaissance Technologies - 6.7%, which are likely to support the transaction given the recommendation from proxy firms.

62 COMMENTS

  1. Fa

    What are your odds that conditions are not satisfied and the transaction fails ?

    Thanks

    1. dt

      I think the odds are relatively high that one of the conditions fails or the transactions gets postponed/amended again.

      And I think the question should be what happens to prices of preferred and common in that case:
      – If the transaction fails due to lack of financing, my guess is that both preferred and common drop lower resulting in positive return or breakeven for the hedged trade.
      – If the transaction fails due to common shareholder vote, then market will likely interpret this as a sign that the tender offer will be amended and common shareholders will receive a larger portion of the pie. In this case common shares will trade up. Preferred shares might also trade up if the likelihood of closing increases after amendment (i.e. offsetting effects of lower consideration but higher chances of receiving it). However, for this scenario I am far less certain how share prices will react and hedged trade might result in losses.

      1. bigdaddy85

        Tender offer was amended yesterday. No shareholder approval required and no debt raised. All shares will be converted into shares of common stock. No cash option anymore. This makes thisMuch deal less risky.

  2. fishwithwings

    Even if the transaction goes through, owning the common stock seems like a rough ride. I mean does one really want to own anything hotel related when the only real catalysts at this point is a vaccine which is pretty far off?

    1. dt

      It comes down to the philosophy of buying when the market is scared. If the concerns you raised were not present, AHT would be trading at much different levels.

      This valuation risk can be avoided by hedging (long preferred and short common), which will work out beautifully if the transaction passes. However, if it fails then it is not entirely clear how share prices of both preferred and common will behave (see my comment above).

  3. dt

    The company is waving financing condition and is no longer seeking common shareholder approval for the charter amendment. Any preferred not accepted (or submitted) in the tender will remain outstanding. There might be proration as I understand only 66.6% of each class of Prefered shares can be exchanged without the concent of common shareholders.

    https://www.sec.gov/Archives/edgar/data/1232582/000110465920118206/tm2032092d10_ex99-1.htm

    From what I understand all the conditions for the exchange offer to proceed have been satisfied or waived.

    As I write this, the spread is still at 40% with plenty of cheap borrow available. So what am I missing here?

    Is the market expecting the transaction to get canceled even after all the conditions have been waived? Or are there legal aspects that are not spelled out in the prospectus but that will force the exchange offer to get canceled? Any insight would be welcome.

    Btw, in the write-up I have incorrectly noted that the exchange offer is subject to common shareholder approval – apparently, this condition had already been waived on the 2nd of October, and the company was only seeking approval of charter amendments so that all preferreds would be automatically exchanged into common (I got lost in legal language):

    The Company also announced that it is amending the Exchange Offers to waive the following conditions to the Exchange Offers: (i) the condition that holders of at least 66 2/3% of the outstanding Preferred Stock for a series of Preferred Stock tender their shares into the Exchange Offer for such series of Preferred Stock; (ii) the condition that the holders of at least 66 2/3% of the outstanding Preferred Stock for a series of Preferred Stock consent to the proposed amendments to the Company’s corporate charter (the “Proposed Amendments”); and (iii) the condition that the Proposed Amendments are approved by the holders of 66 2/3% of the Company’s Common Stock outstanding and entitled to vote at the special meeting of holders of common stock (the “Special Meeting”). Although the Company is waiving these conditions, the Company still intends to seek the consent of the holders of Preferred Stock and approval of the holders of Common Stock for the Proposed Amendments, and still intends to make the Proposed Amendments if the consent of a series of Preferred Stock and approval of the holders of Common Stock is obtained, which would, among other things, seek to automatically reclassify and convert each share of Preferred Stock into Common Stock. The Company may, accordingly, accept tenders of any series of Preferred Stock in an amount that is less than 66 2/3% of the outstanding shares of that series of Preferred Stock if the consent of such series of Preferred Stock and approval of the holders of Common Stock is not obtained, which, as a result, could mean that shares of Preferred Stock of that series would remain outstanding after the closing of the Exchange Offers.

    https://www.sec.gov/Archives/edgar/data/1232582/000110465920111742/tm2032313d1_ex99-1.htm

    1. Michael

      I don’t think this is subject to proration, or at least it isn’t any longer. They have approval to issue an amount of common stock that lines up with the total amount of pref. shares multiplied by the exchange ratio. What they don’t have approval to do is “drag along” any preferred shareholders who don’t exchange, so a pref. share overhang will exist after the exchange offer (assuming less than 100% of pref. shares submit for the exchange).

      Here are some relevant quotes from their recent earnings call:

      We amended the exchange offer earlier this week, and the total maximum consideration offered in the exchange offers is approximately 126 million of newly issued shares of our common stock, which is the maximum amount issuable if all the outstanding shares of preferred stock were tendered
      into the exchange offer.

      That second one that was for the charter amendment, we announced that, that special meeting for it is going to — we’re going to kind of withdraw that or cancel that special meeting. But the previous one of getting the approval for the shares was passed by our shareholders. So what that allows us to do is
      basically take and accept whatever is exchanged in and those that do not tender will stay as they are. And so they’ll remain outstanding, and the rest will be converted at a premium into common stock.

  4. Tom

    Thanks for all the work everyone has done on this transaction. Is there a minimum cash tender amount? Can everyone tender for shares?

    1. bigdaddy85

      There is no cash option in the new tender. You receive 5.58 shares for every preferred stock you own

  5. Ilja

    Q3 results have been announced still reflecting the significant impact of COVID on all the metrics. Apparently, the situation is getting better as occupancy and revenue are improving, but not fast enough. The company still burned $50m cash (including restricted cash), while most of the forbearance agreements (currently has them signed for 72% of properties) are expiring in October/November:
    “most of the forbearance arrangements that we have signed up to-date were six months type duration of interest forbearance which typically went up to here in October or November. And so as of right now I mean we do anticipate those loans that we signed up forbearance arrangements to restart interest expense here this month or next month.”

    Assuming full payment on all loans, the interest expense alone is $11.5-$12m. Cash as of Q3 stands at $121m + $89m of restricted cash.

    When asked about any permanent liquidity solutions, the CEO wasn’t able to answer anything concrete except that they are “considering all options”, however, with this amount of debt and cash burn the situation doesn’t look very well. The fact that they’ve even cut the cash portion (despite the push from Cygnus and very low tender rate) and had to issue some stock ATM in Q3 doesn’t say anything good either:


    Michael Bellisario: Got it. And then a follow-up on that maybe for Deric, it looks like you did issue some stock on the ATM in the quarter. Can you maybe provide how many shares were issued? And at what price or what the proceeds were?
    Deric Eubanks: Yeah. So Mike, so that will be in our Q which we’ll file next week. But we did have — we did turn on the ATM during the quarter and issued some shares. So, that will be in the Q that we’ll file next week.

    So any further debt/equity raise seems problematic, while given the industry situation and most of the assets being below the water, asset sale doesn’t look like a viable option too. So overall it seems that the company really needs this pref exchange and the CEO himself even hinted that if it doesn’t go through, the company might have to file for bankruptcy:

    “And then, we also have to look at all options, right? Are there ways for us to restructure the company, to the extent that other alternatives, don’t lead to the best result for shareholders over the long-term right? And so that’s where we are looking at things like this preferred exchange in order to redo the cap structure. There’s other ways that we can restructure the company. And it may be whether in court or out of court. I mean we’re looking at all alternatives.”

    So with the conditions now waived, the company might accept any amount of tendered pref shares. However it is worth noting, as of the most recent update, only about 15% of the total pref shares were tendered. At this rate, the exchange won’t likely help by much, so the risk of further delays is very high. If the rate stays this low, there’s a non zero chance for a scenario where the offer gets canceled and the company goes bankrupt.

    So 34% spread is still outstanding and I think the above-mentioned risks are enough to explain it. Potential delays and burn from the short side of the trade is enough of a risk by itself. No borrow is left on IB already, while the latest fees are shown at 30%/year (blew up 15x since the write-up).

    Conf call. https://seekingalpha.com/article/4382165-ashford-hospitality-trust-inc-aht-ceo-rob-hays-on-q3-2020-results-earnings-call-transcript

    Q3 PR: https://www.sec.gov/ix?doc=/Archives/edgar/data/1232582/000123258220000053/aht2020q210-q.htm

    1. Vincent

      Thanks for the update! However, last I checked, IB has 150K shares available for short at less than 2%/year.

      1. dt

        Larger borrow fees were most probably shown in pre-market session. You are correct that borrow fees still stand at 2% with current availability of 750k shares (on IB).

    2. fishwithwings

      What happens if they are not able to get enough preferred shareholders to tender?

      1. dt

        My understanding is that all tendering shareholders will be accepted (unless the offer is cancelled or amended). Minimum condition has been waived already.

  6. Sean McMahon

    Great job to everyone that’s worked on this idea.

    As long as one is fully hedged and cost to borrow stays low (2% at present), wouldn’t bankruptcy be the best possible outcome, rather than a risk?

    Also, does anyone know why the Series F shares are trading at a $0.10–$0.15 discount to the others (D, G, H, I)?

    1. dt

      Bankruptcy is a risk only for those entering this position unhedged (I have a hedged trade). So far this trade has generated juicy returns on both long and short legs and the spread has shrunk to 35% from the initial 80%.

  7. Tom

    I don’t see how this exchange makes it less likely that they will file for bankruptcy. They have already suspended the dividend on the pref so the pref does not impact the cash position. The pref cannot force bankruptcy. What is the argument that doing the exchange reduces bankruptcy risk?

    I think the worst case scenario for the arb is a bidder comes in and offers an outrageous price for the company. A bid for the common higher than $6.25 (approximately) would result in a larger loss on the short common than a gain on the pref (assuming the pref rallies to $25). There is probably at least one dividend owed on the pref. In any case, unless a bid for the company comes in at a big premium I don’t see a big downside scenario. Obviously, you can lose money if the borrow cost goes up tremendously (especially if there is a short squeeze). But that risk is in so many deals.

  8. Tom

    Any thoughts on whether the rally alters the probability that the offer will be withdrawn.

    1. dt

      I think the rally if it is sustained increases the probability that the offer will go through.

  9. bigdaddy85

    I just bought the pref shares around $7.80 and bought the equivalent after conversion $2.50 puts for .45c. Those outs are better than shorting the stock because the stock is hard to borrow, volatile, and anything price above $2.5 once I receive the shares is bonus as I won’t need to exercise my put rights. Total return with this strategy assuming worst case scenario of selling my shares at the $2.50 put is 33%

    1. dt

      I do not think it is as riskless as you indicate:
      – the worst case scenario is if the offer gets cancelled or postponed and you put expires worthless and preferreds decline.
      – depending on which expiration date you choose, new shares might not be delivered to your account till then (not sure how long it will take, but guessing it can be up to a week after the offer deadline).

      1. bigdaddy85

        I bought the December puts at 2.5, so I have about a month for shares to get delivered

  10. Michael Lax

    I did a hedged trade and now it looks like the shares will be called, according to a notice I got from IB. I am not sure why the shares suddenly became hard to borrow

  11. Dunkincoffee

    Would it have been possible for Monty to be selling part of the 120mn+ shares that have already been approved for issuance? Can a secondary happen that quickly? If so, this was his golden opportunity.

  12. dt

    What we are seeing is a short squeeze coupled with overall bullishness on hospitality sector (e.g. RHP up 40% on the day) and day-traders having their run on AHT (daily volume of 94m shares vs 14m common shares outstanding). Short-squeeze for hedged positions was one of the obvious and highlighted risks for this case.

    Similar spikes previously have reverted back quite quickly. However, this one is larger and with the backdrop of industry-wide move.

    Higher perceived spread between preferred and common increases the incentives for preferred holders to exchange into common. I think management will welcome this opportunity and proceed with the recapitalization of the company at current terms – the need to simplify capital structure in order to increase the ability to raise fresh funds has not disappeared with the earlier vaccine prospects.

    On the other hand, higher common share price increases the likelihood of the exchange ratio will be amended (e.g. to the initially contemplated 2.64).

    The next 10 days are likely to be very volatile.

  13. lupolupus

    Did anyone notice the high volume of the common? Nearly 100 million, which is 7x the total outstanding issue of stocks!! Not sure what is behind that.

  14. lupolupus

    Did a bit more thinking about this trade today, and concluded (for myself) that, overall, the preferreds might currently be correctly priced:

    The conversion itself should not change the total value of equity (common + prefereds), the pie is just sliced differently between the two parties. At current market prices, the preferreds have about 75% of total equity, after the conversion (assuming everybody converts), they will own about 90%. So this is about 20% gain.

    At the same time, the market value of equity is probably exaggerated at the moment, due to the short squeeze. The market value a few days ago was about 40% lower. So if we take half of the current, and half of the prior market value, we get a 20% overvaluation. In other words, the value of equity might decline about 20% as prices normalize after the short squeeze.

    So preferreds gain about 20% as they get a bigger slice of the pie, but lose 20% due to overvaluation.

    Play with hedging the common seems extremely risky (see short squeeze yesterday) and currently no borrow available.

    I also did some calculations using the December 2.5 put as suggested by bigdaddy85 above. I needed some assumptions of course, but I got an “implied” likelihood of the offer being cancelled of about 20%. That is, if the likelihood of offer being cancelled is 20%, and put becoming worthless and preferreds dropping, the trade breaks even in expectation. 20% seems not off to me given that offer has been delayed already several times. So no clear trade for me here.

  15. Warrant Buffet

    So, assuming the conversion goes through. It’s likely that preferred holders (now common holders) will sell their stake in the company. And this may happen as soon as they get the common shares – so reducing the spread and making the trade profitless.

    I’ve thought of this trade, and the best play I’ve found (for myself) is:

    Long preferred + Long 2.5 strike put. Exp Dec 18, 2020.

    To avoid the put expiring worthless and preferred declining at the same time. I’ll hold onto this trade until put expiration. So, I will always be hedged.

    Assuming 1 put contract per 25 preferred shares:

    The worst-case scenario: -50%. That is no conversation (or postponement) along with a decline in preferred to $2 (If price goes under $2, losses will be smaller due to long put).

    Upside: Still Open

    Thoughts?

  16. DendriteResearch

    I have a hard time imagining management is going to let this go through at the ridiculous premium it’s at now, especially considering they probably sold a bunch of stock this week through their ATM. They’ll probably still do it, but will probably adjust the conversion ratio. I never got into this in the first place and don’t see any rush to do so now. Planning to wait and see what the adjusted ratio is.

    1. bigdaddy85

      Management cares about one thing and that’s keeping their jobs. The preferred dividend costs the company $40M per year. For a company strapped for cash this is a huge burden on them. The insiders own trivial amounts of stock so any dilution doesn’t materially impact them. Plus, the stock was down 25% today alone and a lot could continue to happen with the stock as this plays out on 11/20. I think this offer stays in place as is.

      1. DavidW

        I would add to this that they’ve amended it a couple times in a way now in favor of pushing this through, it really looks like management wants to make it happen. Also only a small % of preferreds actually tendered last time, and for the reason given above I think they really want to get rid of the preferreds so they are more likely to keep the offer at a decent premium (even if they amend it downwards).

  17. Michael Lax

    Given that the stock price is fluctuating wildly, would be hard for management to decide on what a fair ratio would be. The common is trading about $3 now, at Monday’s high was $5.35.

  18. Tom

    I think the concern that the deal get recast at a lower exchange rate is overstated. Check out the stock price in early September when the deal first become effective. It was trading around $3. I think the price could get well above that price before anyone in management would consider changing the terms (i.e., at least $6 or $7, probably more). This transaction is not motivated by the interests of the shareholders. It is motivated by the management company. The management company is paid based upon assets and it’s priority is to keep the thing running.

  19. lupolupus

    Anybody have an idea why the D series since recently trade 20% above the other preferreds? For people planning to exchange them into commons, they should have the same value, or? Could this mean the market anticipates a revision of the offer that favours the D series relative to the others?

    1. DavidW

      They should all roughly have the same value. Maybe there was a buyer who was unable to buy the other preferreds?

  20. dt

    With only two days left till the expiration and the common/preferred spread still at astronomical levels one of the two things is happening (or a combination of both):
    – Market expects the transaction will not take place on current terms or current timeline – i.e. yet another amendment or postponement;
    – Market expects AHT common to drop to $1.65 – $2.00 post-transaction.

    I am betting on the second one (still have a hedged position – now wish I had decided to play this unhedged), but I have no idea if this is truly the main reason for the large spread.

    1. DavidW

      I also don’t see a lot of indication for the first reason, it’s possible but there’s nothing that makes me think it’s likely and def not likely enough for this enormous spread.

      I also think it’s mostly the 2nd reason, stock has been extremely volatile and it’s hard to hedge currently. It feels very uncertain what price you’ll get for your shares after conversion and massive sell pressure.

  21. ChrisZat

    I am not an expert and maybe someone with a bit more knowledge can shed some light.
    The December puts seem to be pointing to a 2.50 ‘ish price. Which if the terms stay the same would make this a very attractive trade even at these levels.
    One thought is the deal is too small and the volume is too low for any institutions to do the work on this deal.
    Another thought which has been mentioned, is the deal is getting revised yet again.

  22. hshane123

    you can no longer buy the AHT preferred and tender as there is no cover protect. So unless this tender gets extended you will be left owning the preferred

      1. g4734g

        OK apologies I called back in to fidelity got to reorg and you are correct….There is NO COVER PROTECT….begs the question why all the prefereds are up today

  23. g4734g

    AHT deadline 3pm tomorrow…..fido deadline COB today……fido has no shares of AHT

  24. g4734g

    Im tempted to go unhedged and pray for a PFE emergency authorization approval sooner rather than later

  25. hshane123

    that is the deadline to tender, but your tendered shares must have settled by tomorrow, which means you had to buy the preferred yesterday. unless they extend tender

  26. DavidW

    I have no clue what’s really going on at this point. AHT can drop to $1.8 and you’re still fine. I’ve tendered my prefs, no hedge, yolo.

  27. DendriteResearch

    Welp, bought a bunch of preferreds on Tuesday, along with some Dec $5 puts. If this goes through it will be the easiest money I ever made.

  28. bigdaddy85

    No announcements from the company yet on amending or canceling the tender offer. Since we are 20 minutes away from the market close on the day of expiration of the tender offer, I would say this one is going through as is!!

  29. ryanwalex

    In Interactive brokers I am seeing a new position AHTPRI.TE with a thing next to it that says Corpact. It looks like that is only one of the 3 prefs that I bought. That looks promising though.

    1. nostradamus

      IB always changes the ticker if you tender (so you can’t sell it on market). Doesn’t say anything about whether the tender succeeds or not.

  30. ChrisZat

    Press release 8 am this morning. Results are on the tape.
    Looks clean stock trading at $3.12

  31. bigdaddy85

    Tender went through as announced. 30 percent of all preferred shares validly tendered. The exchange offers should close on 11/25.

  32. nostradamus

    IB has delivered the shares. This truly was a beautiful trade, thanks guys..

  33. DavidW

    Just sold my shares on IB, no idea about the timing, always feels a bit dumb dumping it in the market like this. Amazing trade overall unhedged, but also feels like a super lucky trade with vaccine news timing and lots of gambling in this stock by traders lately.

  34. Tom

    Thanks to Brian for a great idea and to the many people that added helpful comments.

    Any thoughts on the value of the preferred given the new capital structure?

  35. DendriteResearch

    Thanks for sharing, this was a fantastic play!
    Investing is a bit like fishing — you can sometimes spend all day at it with nothing to show. Other times they bite like crazy. This one just jumped into the boat.

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