Analystsgreeted the results ofAshford Hospitality Prime Inc.'sroughly eight-month-long strategic review with a shrug, but investors found somethingto like, sending the company's share price upward in each of the two days followingthe review's completion.
AshfordPrime's share price rose 1.3% on April 8, the first trading day after the companyannounced the outcome of the strategic review, and another 2.4% on April 11 — eventhough the process yielded no company sale or other major transaction.
Instead,the company said it would repurchase up to $50 million in stock, raise its quarterlydividend by 20%, move to sell four hotels and back out of a controversial plan to sell preferred shares, with votingrights in upcoming proxy votes, to operating partnership unit holders.
Analystscovering the company were lukewarm on the moves. C. Patrick Scholes at SunTrustRobinson Humphrey called the results a "net negative" in the absence ofa company sale, since they implied that there were no strong offers for the company.David Loeb and his Robert W. Baird colleagues said the company's changes are "stepsin the right direction" but will require investor patience. And Canaccord Genuity'sRyan Meliker said the moves fail to address fundamental questions about the companythat hurt the stock's valuation, including limited liquidity, small market cap,elevated leverage and an unpopular external management structure.
So whythe share-price bump? Another analyst, Bryan Maher of FBR & Co., argued in anote that the possibility of negotiations surrounding the company's relationshipwith its manager, Ashford Inc.,are encouraging. In particular, Ashford Prime said it would negotiate with AshfordInc. for the right to sell the four properties without triggering a terminationfee to the manager — a ray of hope for observers who believe potential terminationfees to Ashford Inc. have draggedon Ashford Prime's valuation.
Still,even if investors can assume that the limited termination-fee waiver will succeed— since Ashford Prime and Ashford Inc. are run largely by the same people — questionsremain about what concessions Ashford Inc. will extract for the waiver and how muchthe negotiations will hurt Ashford Prime.
In aninterview, Canaccord Genuity's Meliker said investors may have liked Ashford Prime'sannouncement for a different reason — one related to the company's ongoing proxybattle with activist investorSessa Capital, which is trying to replace the Ashford Prime board.
If AshfordPrime's relatively news-free announcement is encouraging, "it's probably becauseinvestors feel that there is a higher degree of confidence that the proxy battlewill sway to the side of the activist," Meliker said. Ashford Prime's sisterREIT, Ashford Hospitality Trust Inc.,which is also managed externally by Ashford Inc., saw a 4.7% share-price bump ofits own April 11, even as its own activist investors remained relatively quiet,Meliker noted.
"Ithink ultimately there are sharks circling around these companies, and I think that'sprobably what's driving the stock movement, more than anything else," he said,adding that an activist victory against Ashford Prime could create a sort of roadmapfor victory in a campaign against Ashford Trust.
"IfI really believed that Sessa was going to win Ashford Prime, then I'd be buyingAshford Trust, where the stock hasn't had any of that benefit yet from an activistbeing involved," Meliker said.
Sessa'sactual chances of success in its activist bid remain unclear and depend in largepart on an ongoing court fight between the investor and the REIT. As for a companysale, while the company said it "received indications of interest from a numberof financial and strategic buyers," Scholes noted that "none of the optionsappeared to be strong enough to receive the Board or Management's support."
Whilethe specter of a termination fee likely made any potential acquisition more difficult,Meliker said, the recent climate in capital markets also worked against a deal.
"Whenthe debt markets kind of fell apart last fall, it makes it very difficult to doany of that stuff in accretive fashion," he said. "And if there's onething the Ashford team has proven over the years, it's that they don't sell assetsat discounted valuations. They bring assets to the market all the time, and allthe time don't sell them because they didn't get the pricing that they wanted."
Althoughsuch reluctance to sell could point to unfounded optimism on the company's part,"at the same time, it highlights that if the debt markets had shut like itseems like they did, they were never going to do anything that material. And that'snot their fault," Meliker said.