ATLANTA, Sept. 23, 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 another open
letter to the Company's common stockholders, urging stockholders to
vote AGAINST all proposals at the Company's upcoming special
meeting of stockholders scheduled to be held on October 6, 2020.
The full text of the letter follows:
Dear Fellow Stockholders,
Management of Ashford Hospitality Trust, Inc. (the "Company" or
"AHT") would have you believe that Cygnus Capital, Inc. (together
with its affiliates, "Cygnus Capital", "our" or "we"), who
beneficially own approximately 7.8% of AHT's common stock, is
looking for a quick trade or has interests that differ from other
common stockholders. We are not. We are fully
aligned with all AHT common stockholders. Cygnus Capital
has over a decade of workout and turnaround expertise having
completed hundreds of millions of dollars of distressed real estate
repositionings in the United
States, as well as in Europe. We seek to maximize long
term shareholder returns with appropriate alignment of investor and
management interests. Our average holding period of our
private and public market investments has been more than three
years. Some of our investments we have held for more than
eight years. Cygnus Capital and our leadership team has
excelled when distress has been high and prices low. Our
management team has navigated the exuberance and crash of the dot
com era in 1999 to 2000, the great financial crisis of 2008 to 2009
and now COVID-19 in 2020. Each time, a steady hand was
needed, along with a long-term vision and a strategic
plan.
It is with this mindset and view toward maximizing long-term
value that has made us so troubled by AHT's plan to significantly
dilute common stockholders. In our view, AHT's highly
dilutive exchange offers are merely an opportunistic attempt to
transfer value from AHT to its insider-controlled manager, and
publicly listed company, Ashford, Inc. ("AINC"). Common
stockholders should reject this attempt by voting AGAINST all
proposals at AHT's upcoming special meeting. It is
critical that AHT common and preferred stockholders understand that
the management team of AHT and AINC are essentially the
same. In fact, these same people also manage another
public company, Braemar (BHR). Even in good economic times,
it would be hard to not have conflicts of interest with this
convoluted and intertwined corporate structure. At Cygnus
Capital, we like to watch what management teams do, not what they
say; and the list of the conflicts between AINC and AHT grows by
the day.
- On September 14, 2020, AINC
declared a Q3 2020 dividend of $0.411875 per share for its Series D Preferred
Stock. AHT's Chairman of the Board, Monty
Bennett, who is simultaneously the Chairman and CEO of AINC,
together with his father, own approximately 18.8 million of the
approximately 19.1 million outstanding shares of AINC's Series D
Preferred Stock. Accordingly, this quarterly dividend payment is
worth approximately $7.9 million
($31.6 million annualized), nearly
all of which will go to the Bennett family. Apparently, it is
more important that Monty Bennett
and his father have their AINC dividends paid on time, rather than
delay management fees to AINC to avoid a massive dilution of 94% to
common stockholders of AHT. As a reminder, for the six months of
this year, 67% of AINC's revenue in Q2 came from AHT.
- AINC and AHT insiders and board members initially cut, but then
quickly reinstated their compensation in August in the form of cash
and stock. While Cygnus Capital and other common stockholders
appreciate the temporary gesture, we must ask, why not make the
cuts more permanent if cash at AHT is so tight? AINC has
renegotiated payment terms under its agreements with AHT to move
from monthly to weekly expense reimbursements. Why should AHT be
sucked dry of operating cash when insiders are being paid and
preferred payments are being made to AINC insiders?
- Lismore (a subsidiary of AINC) has been forced upon AHT to
renegotiate all the debt of AHT. We believe this entity is yet
another construct to create fees to flow from AHT to AINC. Among
other fees and charges, AINC is forcing AHT to pay $857,000 per month in refinancing fees to AINC
for AINC to help refinance AHT's debt. AINC is already being paid a
separate "advisory fee" and "management fee" to run AHT. We don't
believe that AINC shouldn't be soaking AHT for additional fees in a
time of need, instead AINC should be chipping in as its fiduciary
partner and rolling up its sleeves. It's interesting how the SEC
has noticed and begun an investigation into some of these related
party transactions.
- AINC in Q1 and Q2 filings reported that its auditor required
that AINC give "going concern" notices due to operating cash flow
deficiencies under GAAP. Why should AHT be forced to work with an
"advisor" that is having financial difficulties? Shouldn't AHT have
more flexibility under its advisory agreement to seek new advisors
or managers that have a better balance sheet or working capital
position?
- Ashford, LLC, the primary subsidiary of AINC, owes
approximately $11.4 million to AHT
related to the financing and purchase of the Embassy Suites New
York Manhattan Times Square. AINC "advised" AHT in this
$195 million dollar transaction but
apparently AHT has little recourse and may not recover this money
from AINC as noted in AHT's Q2 2020 10-Q filing. Further, AINC
negotiated with itself and on March 13,
2020 extended this payment due date to December 31, 2022. Again, this is for a building
that has been taken back by the lender. When will AHT get its money
from AINC? Apparently long after common stockholders are diluted by
94% and AINC Series D Preferred Stockholders are paid approximately
$7.8 million/quarter in preferred
dividends.
- Several of AINC's operating companies, namely J&S Audio
Visual and RED Hospitality & Leisure LLC, apparently have debt
service obligations they are not, or soon will not be, current on.
These entities provide audio/visual and water sports services for
AINC managed hotels. If these entities don't have enough working
capital provided to them by AINC, they likely are not able to
provide the high level of professional services required and
expected by AHT guests and customers. But again, AINC has enough
capital to pay the $7.8 million
dividend per quarter on AINC's Series D Preferred Stock and full
salaries to AINC insiders.
- According to the Company's filings and RW Baird, AHT issued
2.58 million new shares between June 17,
2020 and September 9, 2020, in
an "at the market" offering, for gross proceeds of approximately
$8.8 million. While disclosed as a
possibility, these sales seem to have already caused just under 20%
dilution to common stockholders and management has provided little
clarity as to why such a large offering was undertaken right before
the current exchange offers to exchange all AHT preferred stock
into common stock. We suspect, yet again, that this type of "easy"
offering was a convenient way for AHT to absorb the brunt of the
COVID impact; hurting common stockholders while AINC insiders are
paid and suffer no dilution.
- Last but not least, AINC created a public relations nightmare
when, in the peak of the COVID crisis, AINC thought it appropriate
to apply for $126 million in federal
grants intended for small businesses via the Payment Protection
Program (PPP). AINC ultimately returned the money, but the episode
was a strategic fiasco.
We do not claim to have a crystal ball as to when the
hospitality sector will return to 2019 levels, but we do look at
the facts. Cygnus Capital monitors daily activity data from
Open Table (restaurant bookings), US enplanement data from TSA,
real time traffic and movement data from TomTom and a host of other
economic indicators from leading economists and the Federal
Reserve. While nothing is an absolute, these sources show
steady recovery in the economy and in the hospitality sector.
Even qualitative data is encouraging; schools are reopening,
professional sports leagues are restarting, air traffic passenger
loads are slowly increasing, restaurants and malls are reopening,
businesses are increasingly sending their workers back to offices,
and traffic levels are increasing, among other things. Of
course, there will be starts and stops and inevitable setbacks as
the pandemic unwinds, but we believe in the resilience of the
American economy.
- AHT has time, there is no need to panic.
Operating activities consumed approximately $77 million of cash in Q2 2020 (excluding
dividends and capital improvements). But management noted on
their Q2 2020 earnings call that operating trends were improving.
Industry data and recent presentations by management teams of
AHT competitors supports this. Yet, AHT management keeps
beating the drum that the Company is about to collapse. It
won't, in our view, if AINC doesn't keep draining AHT of its
cash.
- Cash is King at AINC while AHT is being bled. AINC
had a positive increase in net cash in the first six months of 2020
by $49.4 million, but AHT had
decrease in net cash by $137.4
million. Why should AINC prosper and pay distributions
to insiders during COVID while AHT suffers and common stockholders
are asked to be diluted 94%?
- Property level debt is high, but preferred obligations
aren't the problem. Yes, AHT is one of the most leveraged
hotel REITs and AHT isn't current on its property level debt.
But, industry-wide, most lenders to the hospitality industry are
implicitly or explicitly granting forbearance arrangements.
Why? What choice do they really have? Do they want to
step into the same shoes as the operator/owner? In most
cases, no. At least in the foreseeable future (which could be
until there is a vaccine or there is more long term clarity on
COVID-19), most lenders are taking a wait and see approach. A
few very aggressive lenders are foreclosing and, yes, AHT is one of
a few REITs to have already lost assets. But, more
important, we believe the preferred stockholders' dividend payments
can wait. In fact, most lenders as part of a forbearance
agreement will require that the lender be paid first, before any
preferred stockholders receive distributions. Cygnus Capital
does indeed hold positions in AHT's preferred stock, not because we
are looking to arbitrage our common stock verses preferred stock,
but because we believe a full cash recovery of the preferred stock
over time is possible.
- AINC is Picking the Pockets of AHT Common
Stockholders. As previously noted, it may not be clear to
many AHT stockholders that their management team is the same
management team of another publicly traded company, AINC (Ashford,
Inc.). AINC would like you to believe it can be an impartial
"advisor" and fiduciary of AHT, but AHT's public filings are filled
with risk disclosures of the potential conflicts of
interests. Most simply, AINC derives 67% of its revenue is
from AHT. How can it be impartial when in effect it has to
negotiate daily with itself? In our view, all that
really matters to AINC is if AHT survives so fees can continue to
be paid to AINC, not what happens to common or preferred
stockholders. In this time of crisis, true independence is
needed to sort out the best options to move AHT forward.
What AHT common stockholders need is a plan to
preserve their rights and their capital, not get diluted by 94% for
the benefit of AINC
AINC should immediately hire an independent, third party
advisor to solicit and negotiate alternative financing
structures.
As part of our diligence, Cygnus Capital has spoken with several
parties that would be interested in extending working capital lines
and short-term bridge loans to AHT (if they are even needed) to
preserve the rights and assets of common stockholders. A
possible transaction that could be funded would be a bridge loan of
$50 million at a low double digit
coupon with perhaps common equity warrants, a temporary or
permanent reduction in fees to AINC and/or a board seat on AHT's
Board. Alternatively, a strategic acquirer with a strong
balance sheet may be willing to pay some or all of the termination
fee demanded by AINC if AHT were to be acquired. We believe
that if AINC were not conflicted as an advisor to AHT, such
transactions could be fully explored. Accordingly, we believe
AINC should immediately hire an independent, third party advisor to
solicit and negotiate alternative financing structures such as
these with interested parties.
Further, Cygnus Capital hopes that the independent directors
of AHT with fiduciary obligations to AHT common stockholders will
take a second look at what they have seemingly signed off on and
that they will seek outside advisors who can independently vet
strategic alternatives to this highly dilutive and illogical
proposed transaction. Particularly in light of the SEC's
recent subpoena, the PPP debacle, the continued preference payments
to AINC insiders, as well as the seemingly priority use of cash by
AINC over AHT, it is incumbent on the independent board members of
AHT to exercise their fiduciary responsibility to independently
seek the best alternatives for AHT common stockholders.
Indeed, we believe there is time for a formal and non-conflicted
third party review to take place.
Cygnus Capital urges all common stockholders to vote AGAINST
all proposals at the upcoming special meeting of
stockholders. If you already voted FOR the special
meeting proposals, a later dated vote will revoke your prior voting
instructions.
Sincerely,
Christopher Swann
CEO, Cygnus Capital, Inc.
cswann@cygnuscapital.com
(404) 465-3685
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.
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SOURCE Cygnus Capital, Inc.