ATLANTA, Sept. 17, 2020 /PRNewswire/ -- Cygnus
Capital, Inc. (together with its affiliates, "Cygnus Capital"), one
of the largest stockholders of Ashford Hospitality Trust, Inc. (the
"Company") (NYSE:AHT), beneficially owning approximately 7.8% of
the Company's outstanding common stock, today issued an open letter
to the Company's stockholders urging them to vote at the Company's
upcoming special meeting of stockholders scheduled to be held on
October 6, 2020, "AGAINST" the
proposals to amend the Company's corporate charter and approve the
issuance of common stock that are conditions to consummating the
proposed, highly dilutive exchange offers of all of the Company's
outstanding preferred stock into shares of the Company's common
stock.
The full text of the letter follows:
3060 Peachtree Road NW, Suite 1080, Atlanta, GA 30305
P: (404) 467-6100 | F: (404) 467-6101
September 17, 2020
To Our Fellow Stockholders,
Cygnus Capital, Inc. (together with its affiliates, "Cygnus
Capital", "we" or "our"), is one of the largest stockholders of
Ashford Hospitality Trust, Inc. ("AHT" or the "Company")
beneficially owning approximately 7.8% of the Company's common
stock (the "Common Stock"). We are writing to express our
strong opposition to the Company's proposed offers (the "Exchange
Offers") to the holders of each series of AHT's preferred stock
(the "Preferred Stock") to exchange all of the shares of Preferred
Stock for shares of Common Stock. If all shares of
Preferred Stock are exchanged in the Exchange Offers, existing
common stockholders will be immediately diluted by approximately
94%.
In order to consummate the Exchange Offers, common stockholders
are being asked to vote upon and approve two proposals at the
Company's upcoming special meeting of stockholders scheduled to be
held on October 6, 2020 (the "Special
Meeting"): to amend the Company's corporate charter and to issue up
to 126,048,813 shares of Common Stock in connection with the
Exchange Offers (the "Special Meeting Proposals"). We believe
the Company is prematurely undertaking these highly dilutive
Exchange Offers, just as the operating performance of the
hospitality industry and AHT's peers are showing signs of
improvement, because management's interests are not fully aligned
with common stockholders. In our view, there are other
strategic alternatives that can be explored to address the
Company's current liquidity needs and obligations to preferred
stockholders until markets can stabilize
post-COVID-19.
Fortunately, the Exchange Offers can be stopped. In order
to consummate the Exchange Offers, 66 2/3% of the outstanding
Common Stock must vote to approve the Special Meeting
Proposals. Accordingly, Cygnus Capital urges its fellow
common stockholders to vote AGAINST the Special Meeting
Proposals today.
We Believe the Highly Dilutive Exchange Offers
Are Premature in Light of Rapidly Improving Trends in the
Hospitality Industry and AHT's Current Cash Levels
In our view, the Exchange Offers are on an aggressive and
expedited time-frame that seem to ignore rapidly improving dynamics
in the hospitality industry overall and the Company's available
cash.
The operating performance of the hospitality industry in
the United States is rapidly
improving. While still depressed, the
operating performance of the overall hospitality industry in
the United States is rapidly
improving as travel restrictions due to COVID-19 ease.
According to STR, a leading industry data service provider and
Deutsche Bank, total hospitality industry RevPAR (revenue per
available room) and occupancy rates in the United States declined in April 2020 by approximately -84% and -70%
year-over-year, respectively, but have since recovered nearly every
week sequentially to -32.8% and -18.9%, respectively, as of the
week ending September 5,
2020.
Even in the more impacted luxury hospitality segment that makes
up a meaningful portion of AHT's asset base, recovery in industry
trends has been dramatic and continues to improve each week,
according to STR. The slope of the recovery suggests that a
near full recover is possible within a year.
In geographies where COVID-19 has been brought under
control, hotel usage has returned to or in some cases exceeded 2019
levels. In China, for example, ADRs (Average Daily Rate)
and occupancy rates are nearly back to 2019 levels, suggesting that
typical behavior patterns will resume once the fear of COVID-19 is
lifted. We assume that the United
States will be able to eventually obtain the same level of
public confidence in the control of COVID-19 that China has already obtained, which should
translate into greatly improved hotel occupancy rates.
The operating performance of AHT's peers appear to be
improving. AHT's peers and comparable real
estate investment trusts (REITs) such as Pebblebrook (PEB), Xenia
(XHR), Braemar (BHR), Diamondrock (DRH) and Sunshone (SHO), have
recently released public presentations that show near breakeven
operations at their property and/or corporate levels. STR's
industry data also shows that trends for the hospitality segments
that AHT operates in are not deteriorating, rather the exact
opposite – trends seem to be improving. In fact, "drive to"
and "leisure" properties in the industry, of which AHT has many,
are generally generating positive cash flow including debt service
coverage, according to industry analysts and public comments by
management teams operating in these segments. At the recent
JP Morgan hospitality conference on September 14-15, 2020, management teams of REITs
and publicly traded C-corps in the hospitality industry reported
steadily improving industry financial conditions, not deteriorating
conditions.
Comparable asset sales are improving. The sales of
assets comparable to AHT's assets, despite the effects of COVID-19,
also point to rapidly improving asset values and recovery values
for owners of hospitality assets. In 2019, typical cap rates
for hospitality assets were 5.0-8.0% for assets of the quality in
AHT's portfolio. Using AHT's 2019 performance of
approximately $425 million of EBITDA,
the implied unlevered market value of AHT's assets prior to
COVID-19 was $5.3 billion to
$8.5 billion. COVID-19 has
logically impaired near term asset values, but recent industry
transactions suggest that cap rates are currently in the range of
10% (and declining) as the effects of COVID-19 begin to level
off. Further, the Federal Reserve has stated a policy of
continued support for low interest rates which is highly supportive
of asset values for income generative properties such as
hotels. AHT has approximately $4.1
billion of property level debt and approximately
$565 million of Preferred Stock
liquidation preference ahead of Common Stock holders. Even
the extreme measure of an orderly liquidation of the Company over
the next 12-24 months appears likely to result in a much higher
recovery for holders of Common Stock, assuming these cap rates,
than the proposed highly dilutive Exchange Offers.
AHT's appears to have sufficient liquidity to fund
operating costs and AHT's overall performance may be
improving. In AHT's quarterly report for Q2
2020, AHT disclosed that the Company burned $77 million in Q2 2020, but as of the end of Q2
2020, had $274 million of liquidity,
consisting of $165 million of cash,
$95 million of restricted cash and
$13 million due from third party
managers. On AHT's Q2 2020 earnings call, AHT's CEO noted
that while they were looking for ways to improve liquidity, he
stated, "as we sit here, now we feel like we have ample
liquidity".
Management also noted that the Company does not have high
exposure to group business, which has been particularly impacted by
COVID-19. Management further stated, on this call, that
RevPAR was down 93%, 89% and 82% in April, May and June of this
year, respectively, but that they expect in July 2020 to only be down "somewhere in the 70s
range". In addition, AHT's CEO stated that, "for limited
service properties, the property level breakeven was between
25-35%, and for full service hotels…35-45% occupancy. Some
individual assets… in higher wage markets could be higher so closer
to 50% or so… you probably need to add 10 points or so to kind of
get to a total corporate level break even".
AHT has a highly diverse asset base that has generally trailed
the industry RevPAR and occupancy rates by about 10-20%
points. As noted above, STR had disclosed that overall RevPAR
and occupancy rates in the United
States have recovered to approximately -33% and -19%,
respectively for the week ending September
5, 2020. Accordingly, it is possible that AHT has
similarly recovered to a range of RevPAR being down -55-60% and
occupancy rates being down in the -40-45% range. If true,
this would mean that 30% of AHT's portfolio (limited service) is
close or able to service its property level expenses and debt and
approximately 70% of AHT's portfolio (full service) is at breakeven
at the property level, excluding debt service. If each week
continues to add 1-2 percentage points of performance improvement
in RevPAR and occupancy, as the past few months have trended in the
industry, we believe that by year end, all of AHT's portfolio could
be able to service its debt obligations.
Given the Company's relatively ample liquidity and overall
industry trends, AHT management and board of directors (the
"Board") seem to be rushing to consummate a highly dilutive
restructuring of the Preferred Stock at the expense of common
stockholders without a pressing need. Why is there such a
rush to essentially wipe out common stockholders? Even if
the above projections are optimistic, the Company seems to have
enough cash to wait a couple more quarters before undertaking these
devastating Exchange Offers. Furthermore, management has said
they manage the Company's property level performance weekly, but
they have not provided any of this data to stockholders to allow
them to decide if the situation is truly as dire as management
claims.
Preferred Stock Is Not a Current Cash Drain; Property
Level Operating Performance Is. AHT management has
argued the cumulative dividend payments owed to preferred
stockholders are so onerous that the only solution is to
essentially wipe out common stockholders through these Exchange
Offers. In our experience, preferred stock in a corporation's
capital structure is designed exactly for crisis situations such as
COVID-19 to allow a management team operational flexibility in a
time of financial crisis. A management team can temporarily suspend
preferred stock dividend payments to focus on its operations and
weather the storm for a better economic climate. That is
exactly what AHT management should be doing with the Preferred
Stock at this time. The cost of not paying dividends on the
Preferred Stock is only about $30
million per quarter and while this accruing obligation would
eventually dilute common stockholders if it cannot be paid off in
cash, there is still plenty of time to see if the worst case cash
scenario is really necessary at this juncture.
In contrast, we believe a more pressing cash issue at the moment
at AHT is not the accruing obligations to the holders of Preferred
Stock, but rather operating costs at the property level. In
our view, we do not believe AHT's Board and management are focused
enough on closing hotel assets that are not covering their variable
costs and question whether this lack of focus is due to the Board
and management's desire to preserve the fees paid to AHT's
management company, Ashford, Inc. ("AINC") which is controlled by
members of the Board and management team.
We Believe AHT Management and Board Have
Conflicting Interests, Are Not Aligned with Common Stockholders and
Are Not Fully Exploring Other Strategic Alternatives.
Due to REIT tax rules, AHT must use a separate property manager
to manage its assets. Despite industry trends toward self or
internally managed and advised hospitality REITs, AHT has a highly
conflicted structure where the management of AHT is also the owner
of the property/asset management company, in this case another
publicly traded company, AINC. Monty
Bennett who is also the Chairman of the Board of AHT owns,
together with his father, a 68.1% interest in AINC on a fully
diluted and converted basis and also serves as AINC's Chairman and
CEO. In addition to Mr. Bennett's holdings, several of AHT's
management team are insiders at AINC.
We believe AHT management and AINC are operating AHT to maximize
AINC's management fees, to the detriment of AHT common
stockholders. The primary objective for AINC is to grow its
fees (revenue). We believe numerous expense reductions are
likely possible at AINC that could benefit AHT, but AINC
stockholders/insiders are better served if the AHT common
stockholders are diluted and AHT as a company survives, instead of
other alternatives such as a sale or orderly liquidation of AHT's
assets. AINC stockholders and insiders needs AHT to keep
paying fees for AINC to survive. Even if owners and
management of AINC are also stockholders of AHT, we believe their
interests are not aligned as AINC is highly compensated by the fees
that AHT pays to AINC. In fact, according to AINC most
recently filed 10-Q, for the six months ending June 30, 2020, AINC derived $120 million from AHT out of $179 million total revenue for the period.
Said another way, for the first six months of this year, 67% of
AINC's revenue came from AHT. Given a choice between the two,
we believe AINC and AHT management have a bigger economic interest
in the survival of AINC than they do in the dilution of their
ownership position of AHT, creating an inherent conflict of
interest.
We note further that AHT, AINC, Lismore, a subsidiary of AINC,
and certain other parties are being formally investigated by the
SEC relating to certain related party transactions and the
Company's accounting policies, procedures, and internal controls
related to such related party transactions.
We Believe Numerous and Less Dilutive
Strategic Alternatives Exist for AHT
We believe numerous and less dilutive strategic alternatives
exist for AHT to navigate the impact of COVID-19, including orderly
asset sales, refinancing of assets, raising additional short term
debt, merger with or sale to a stronger REIT, a rights offering to
the common stockholders, further reductions in expenses at AHTs
hotel assets or evaluation of more drastic actions such has
foregoing REIT status or cancelling AHT's management contract with
AINC to preserve value for common stockholders.
In our view, the obligations to the Preferred Stock can be
handled in the future either by restructuring the Preferred Stock,
repurchasing shares of Preferred Stock at a discount or negotiating
with the Preferred Stock holders in the future to convert accrued,
but unpaid dividends into additional new shares of Preferred Stock
in a PIK or other similar type of transaction. The
Preferred Stock obligations do not appear to represent a pressing
threat to the Company currently as they don't burn cash. Yet,
AHT management is effectively bankrupting the Company with these
proposed Exchange Offers without going through a formal bankruptcy
process.
Finally, industry analysts such as Deutsche Bank, Baird and
others have target prices for the Common Stock at multiples of
current levels and have not forecasted the dire strategic necessity
of this proposed dilutive transaction. Deutsche Bank
put out a "sum or the parts" analysis of the Company that suggests
that the Company could be liquidated for at least $190,000/key and still have recovery of
$11 per share for Common Stock after
all debt and Preferred Stock preferences are repaid. Prior to
the announced Exchange Offers, Baird recently placed a $6 per share target price for the Common
Stock.
Given the reasons outlined above we plan to vote, and urge all
common stockholders to vote, AGAINST the Special Meeting
Proposals. The Exchange Offers are not in the best interests
of common stockholders and the common stockholders have the power
to stop the consummation of the Exchange Offers by voting
AGAINST the Special Meeting Proposal today.
Sincerely,
Christopher Swann
CEO, Cygnus Capital, Inc.
About Cygnus Capital, Inc.
Cygnus Capital, Inc. is an
integrated real estate investment and alternative asset management
company focused on opportunistic, special situation, and distressed
real estate investments. Cygnus targets long term, absolute returns
for investors by applying a differentiated approach to real estate
investing. By placing an emphasis on the acquisition, workout, and
disposition of real estate debt assets characterized by their
complexity, inefficiency, and niche qualities, Cygnus
Capital is able to target superior, absolute returns for its
investors. Cygnus Capital and its affiliates own approximately 1.9%
of the outstanding shares of the Series D Preferred Stock, 2.4% of
the outstanding shares of the Series F Preferred Stock, 2.4% of the
outstanding shares of the Series G Preferred Stock, 4.8% of the
outstanding shares of the Series H Preferred Stock, and 2.4% of the
outstanding shares of the Series I Preferred Stock.
* * *
Written materials are submitted voluntarily pursuant to Rule
14a-6(g)(1) promulgated under the Securities Exchange Act of 1934.
This is not a solicitation of authority to vote your proxy.
Cygnus Capital is not asking for your proxy card and will not
accept proxy cards if sent. The cost of this filing is being
borne entirely by Cygnus Capital and its affiliates.
PLEASE NOTE: Cygnus Capital is not asking for your proxy card
and cannot accept your proxy card. Please DO NOT send us your proxy
card.
View original content to download
multimedia:http://www.prnewswire.com/news-releases/cygnus-capital-inc-issues-open-letter-to-stockholders-of-ashford-hospitality-trust-inc-301133585.html
SOURCE Cygnus Capital, Inc.