Quick Pitch: Ashford (AINC)

Odd Lot Arbitrage – $1500-$2000 Upside (risky)

This is a pretty unusual odd-lot arbitrage opportunity with potential $1500-$2000 upside per account. I don’t find this setup particularly attractive, but as I keep receiving questions about it from SSI members, I have written down my thoughts below. TLDR: the transaction has high chances of closing on current terms, but despite the ‘odd-lot’ tag the whole setup is akin to merger arb with a 4% spread, 3-4 months till closing and questionable management.

Ashford provides advisory and asset management services to hotel REITs and also manages some of their underlying hotels. Management has decided the company would be better off running privately and has proposed to deregister AINC from the SEC and delist. This will be implemented through a reverse split followed by a forward split aimed at reducing shareholder count below 300 – the threshold for mandatory SEC reporting. Management has proposed a 1 for 10,000 split ratio with all odd-lot holders being cashed out at $5/share. At the current prices, that’s $1500 of potential upside for a full odd-lot position (9,999 shares). Shares held in “street name” will be treated in the same manner as record holders. Shareholders will vote on the plan in the summer and the splits will be announced around that time as well. No further details on the timeline has been provided yet, although preliminary proxy already came out two weeks ago.

While framed as a delisting, this is essentially a management buyout of minority shareholders. Management seems to be rather upfront about. This is probably the first odd-lot transaction (tender/split/split-off, etc.) I’ve ever seen where the company emphasizes the opportunity for participation in this arbitrage with multiple accounts.

The company is controlled by the Bennett family, which owns around 10% of common stock and has 57% voting power of AINC (largely through preferred shares). Other insiders own additional own 15% of common and have additional 6.5% the votes.

Why would management want to take the company private? AINC is a troubled nano-cap equity stub, where common equity is just 2% of the company’s enterprise value. AINC has $16m market cap, $171m of debt and $480m of preferred stock. Most of the debt matures by 2026 and the preferred stock (only half of which is owned by Bennetts) also becomes redeemable in 2026. The debt-issues are even deeper than it seems as AINC’s two main revenue generators – hotel REITs AHT and BHR – are also extremely over-levered. AHT defaulted on certain loans and gave away a bunch of hotels to the lenders last year. It’s not clear how the whole situation will transpire, but AINC management apparently believes they can address these issues better as a private company. The leverage is so significant that if management successfully navigates through it, they could make multi-bagger return on this buyout of minority holders.

Besides that, AINC’s stock has now been destroyed to the level, where the transaction also makes a decent sense from the cost-saving perspective. At the time of the announcement (April 2), AINC estimated that 1.1m of common shares would be cashed out under the reverse/forward split. That is 31% of total common shares or 41% of minority shareholders. The transaction would cost the company a bit over $12m ($5.5m cash out + $6.7m transaction costs). Management expects that privatization will save AINC $2.5m annually, which implies 20% IRR. Even assuming that all minority shareholders would have to be cashed out, the total cost of this delisting would rise only to $20m, still yielding 13% IRR.

As for the common shareholders, I think they will be more than happy to take this deal and exit at 125% premium to pre-announcement levels. AINC exists primarily for the benefit of the Bennett family and the preferred shareholders. The company generates $60m-$70m EBITDA annually (so leverage is 10x), and $35m out of that goes to preferred dividends. The EBITDA multiple valuation (whatever that’s worth at such leverage levels) of AINC isn’t low or cheap compared to the peer group either. AINC now trades at around 9x 2024E EBITDA compared to the 8x average for the RE asset managers and RE service peers (see slide 10):

Note: Antelope is the code name for Ashford.

I think that it will be easy to secure shareholder approval at current terms. Approval from majority of shareholders, except the Bennett family, will be required. Voting will be done on as-converted basis. As I understand it, other insiders (excluding the Bennetts), who collectively hold 6.5% of the voting power, will also be counted as part of the minority. Additionally, there will likely be substantial participation from arbitrageurs as well.

That’s more or less the bullish angle on the situation.

However, I’m staying on the sidelines for now and here’s why.

There are approximately 3-4 months until the transaction is launched and finalized. The terms of the reverse/forward split could still change. For example, the split ratio or the offer price might be adjusted lower, which could result in substantial loss on this arb. As detailed in the background section of the proxy and these two previously confidential internal presentations (here and here), financial advisors initially advocated to set the cash-out price at $4/share. That was changed a few weeks later to $5/share, although not clear why. From the Bennetts’ perspective, minority shareholders would do just as well with a cash-out at $4/share. That would still be a massive premium to pre-announcement levels (80%), substantially higher than most other reverse/forward split transactions in the recent years (the average premium is at 40%, slide 25).

The Bennett family are the ones who run the show here. Their reputation isn’t great (e.g. here, here and here) and they have destroyed tons of shareholder value over the years. Given the situation at AINC, I don’t see why they couldn’t just suddenly decide that it’s not worth spending millions to cash-out minority shareholders.

Gun to the head, I would probably still say the transaction is going to close on current terms and that is why the remaining spread is tiny. Management seems motivated enough to push the offer through, regardless of the number of shareholders they need to cash out. However, when you factor in all the risks, including the Bennett family’s dubious reputation, the risk-reward ratio just feels too uncomfortable. Especially for a 4% gross spread. I intend to continue tracking the situation and will reassess if the spread widens.