Braemar Hotels & Resort: Gross Asset Management Contract, Initiated Sales Process

It's probably a sign of the times, have to dip in quality to find some ideas and this pitch makes me throw up a little in my mouth. 

Braemar Hotels & Resorts (BHR) (~$200MM market cap, ~$2.1B enterprise value) is a luxury hotel REIT that was formerly known as Ashford Prime, a spin of Ashford Hospitality Trust (AHT) in 2013.  BHR is externally managed by Ashford Inc (formerly AINC, went private via a reverse/forward split last year), the creation of the infamous Monty Bennett.  Hotel REITs are a challenging business because they need to outsource the hotel management function to a third party to maintain REIT status, then also pay for the franchise flag, throw on top of that an egregious external asset management contract and BHR never had a chance.  The only reason these external Ashford hotel REITs exist is because they were all originally under one roof before AINC was spun from AHT.  I don't think this structure would have gotten public otherwise.

Again, skipping a lot of history here, there has been numerous activists at BHR trying various ways to remove Ashford from an otherwise healthy portfolio of luxury hotels.  Finally, on August 26th, the REIT officially waived the white flag and announced the initiation of a sale process.

In a typical external REIT management agreement, there might be a 3x termination fee, not so with BHR, Ashford has negotiated a "discount" to their termination fee with the board to facilitate a sale:

Their termination fee is 12x PLUS another 20% on top of that, again truly gross and no way AINC would have come public without being a spinout of its blood sucking host AHT.  Bennett would later steal AINC by issuing himself preferred stock and draining all value from minority AINC shareholders.  While I just wrote up not being sure about the incentives in the TURN/MCLI deal, here they're squarely in our face that Ashford only cares about themselves and views this as an opportune time to get 14-15 years worth of management fees upfront.

However, I still think there might be a trade here, albeit a very risky one.  This sale process rhymes a bit with Bluerock Residential Growth REIT (fka BRG, now BHM) where you had an externally managed REIT with a messy balance sheet that effectively made the equity a stub.  Any positive surprise in the sales process produced exceptional returns for the stub.  Below is my quick back of the envelope math on the potential outcomes of a BHR sale based on various cap rates:

Most of the value in the portfolio is in a handful of luxury hotels, 4 under the Ritz-Carlton flag (Lake Tahoe, Puerto Rico, Sarasota and St. Thomas), 1 under the Four Seasons (Scottsdale).  Luxury hotels have continued to perform well through the covid bullwhip with some luxury hotels trading hands well within the range above.  I've also included the $25MM termination fee to rid the buyer of Remington, Ashford's hotel management arm, plus the potential for the preferred stock to convert to common above $4.39/share.  Again, it feels a little gross to own this one, Ashford is really incentivized to only get a price above their termination fee so we're counting on the independent board members (one new board member already came out publicly they were unaware of the termination fee negotiation) to keep the process honest.  But I think it's an interesting bet in small size.

Disclosure: I own shares of BHR plus a few call options

180 Degree Capital: Merger w/ Mount Logan Capital, Tender Offer, Questions Remain

180 Degree Capital (TURN) is a microcap (~$46MM market cap) closed end fund (CEF) pursuing an activist strategy in microcap stocks.  Before 2017, some of you might remember the name, it was a venture capital fund known as Harris & Harris Inc (TINY).  There are a few similar ones today, these almost never work.  CEO Kevin Rendino took over, changed the strategy, but was hampered by their legacy venture portfolio weighting down overall returns.  The last few years have been a difficult time for microcap investing, large caps seem to outperform year in and year out, but it's especially difficult to outperform if you're running a subscale internally managed CEF.  Expenses create too high of a hurdle to justify a small fund's existence.

I'm going to skip some background but TURN trades at a discount to NAV (not uncommon for CEFs) and has for some time.  Naturally activists showed up (Marlton Partners and others) and pushed the company to close the discount by repurchasing shares, liquidating and/or distributing the underlying public equities in TURN's portfolio in-kind to shareholders.  To management's credit, TURN did implement a "Discount Management Program", but to limited success.

In January of this year, TURN entered into a reverse merger with private credit manager, Mount Logan Capital Inc (trades as MLC on Cboe Canada) valuing TURN at NAV (later revised to 110%) and Mount Logan at $67.4MM.  This transaction potentially fits the "balance sheet to income statement transformation" theme where the market is currently valuing TURN at a multiple of book value and in the future will judge Mount Logan Capital on an earnings basis.  Marlton Partners pushed back on the transaction, there was even a counter proposal from another CEF, Source Capital (SOR), at NAV, but TURN rebuffed that deal.  Shareholders on both sides of the transaction have now approved the reverse merger with Mount Logan Capital, which should close sometime this month.

Who is Mount Logan Capital?  It is an affiliate of BC Partners, where BC Partners credit team's executive management team also doubles as Mount Logan Capital's management team subject to an expense sharing agreement (so not quite an externally managed company).  Mount Logan has a random assortment of low-quality asset management contracts plus an owned insurance company where they're managing the float for a total of $2.8B (the graphic is from last November), but that number is puffed up a bit by the insurance AUM and a couple run off management mandates.

Source: November 2024 Investor Presentation

It is unclear to me why Mount Logan exists separate from BC Partners which has its own credit platform and the delineation between the two on future asset management contracts.  Management owns some shares here but not really enough to prioritize Mount Logan or become exceptionally rich if it is successful.  The incentives are hard to tease out, which likely means they're not well aligned with outside minority shareholders.  The relationship with BC Partners is strange, the two BDCs (PTMN and LRFC) recently merged, LRFC was being managed by Mount Logan Capital and PTMN by Sierra Crest Investment Management (a JV where BC Partners is the majority owner, Mount Logan Capital held a minority stake), the combined BDC was rebranded as BCP Investment Corp (BCIC) and will be managed by Sierra Crest.  What's the point of Mount Logan?

In the merger proxy, Mount Logan management did put forth some pretty ambitious fee-related earnings projections that seems difficult to achieve:

If the 2026 numbers are to be believed, the $67.4MM valuation put on Mount Logan in the merger (actually less now that its been revised) is only 3.5x FRE (heavily adjusted) and doesn't count the spread earnings they receive from the owned insurance subsidiary.  So either BC Partners is so desperate to get Mount Logan off of a backwater Canadian exchange and onto the NASDAQ, or something isn't right here.  In July, they put out a SPAC-like deck comparing their FRE multiple to much larger more established peers and includes some wild upside targets.

Luckily, as part of the revised merger agreement, new Mount Logan Capital (will trade under the ticker MCLI) has agreed to a $15MM tender offer (presumably funded by liquidating TURN's portfolio) after closing at NAV (~$5/share) for any shareholders that don't want to go along for the ride.  It's a bit of a free look to see if MCLI trades better on a U.S. exchange.  Additionally, they've committed to a $10MM share repurchase program post-tender offer to support the stock and provide liquidity.

Small-cap BDC/credit managers haven't done particularly well in public markets despite the permanent capital angle, two that come immediately to mind are Fifth Street Asset Management (FSAM) and Medley Management (MDLY).  Interested in hearing others thoughts, especially if you have a strong view on the future of Mount Logan.  I own a bit, mostly hoping it trades well out of the gate, if not, there's some support from the tender offer (management has committed to not participating).

Disclosure: I own shares in TURN