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