Braemar Hotels & Resorts: Internalizing Management

Throwing together a quick note on Braemar Hotels & Resorts (BHR) (~$180MM market cap) before I start a busy Friday, forgive me if there are any glaring mistakes, I'll come back and fix them over the weekend.  Today, BHR announced the conclusion of their strategic review, originally it was a sale process, but now the luxury hotel REIT is going to internalize management and distance itself from its external manager, Ashford Inc.  My first take is this move is designed to get Ashford Inc its $480MM termination fee without being subject to a shareholder vote (10% holder Al Shams Investments Ltd has been vocal in trying to block this payment to Monty Bennett) that would come with a full sale of the company.  BHR recently announced the sale of 3 hotels for a total of $437.5MM (12.5x hotel EBITDA by my math) that along with cash on the balance sheet, should be sufficient to payoff Monty.  Ashford directors are resigning, the board will be refreshed, and the new REIT will be free to pursue life without external management conflicts.

Post-internalization, this will be a pretty small subscale REIT that should attract takeover attention.  Hotel REITs have been performing exceptionally this year, the top of the K-shaped economy is doing well, especially with all the Mag7 stock comp and AI IPO money hitting the upper class brokerage accounts.  Below is my back of envelope of what BHR might fetch in a sale (so its not including corporate overhead as a standalone to be clear):

I own too much of this to begin with, but depending on where it trades today, could be provide an interesting entry point for those on the sideline now that Ashford will be out of the picture.  Some of these properties are exceptional assets that any number of other REITs or private investors would gladly scoop up.

Disclosure: I own shares of BHR

Investcorp Credit Management BDC: Visiting the Private Credit Garbage Bin

Investcorp Credit Management BDC (ICMB) ($17MM market cap) is a distressed subscale BDC that was forced to refinance maturing debt in March with an affiliate of the external manager, post refinancing, the economics of being a standalone BDC don't work and the board commenced a review of strategic alternatives led by a committee of independent directors (including Lee Shaiman, former head of the LSTA, bank loan market's trade organization and Thomas Sullivan who was on the SMTA board).  Since then, NAV has eroded to $3.65/share (versus a current quote of $1.20/share), Houlihan Lokey has been formally engaged as an advisor, the external manager has waived a bulk of their fees and closed-fund activist Bulldog Investors (4.1% owner) issued a letter demanding the external manager buy-in the outstanding shares at NAV.  This needs to be sold quick, its a melting ice cube splayed out on a hot summer day asphalt driveway.

BDCs are just pools of assets, they can be sold and merged away fairly easily to any number of eager asset managers looking to bulk up their AUM and resulting management fees.  Most of these deals happen at an NAV-for-NAV basis, so we're looking for a BDC with a smaller discount (just about all of them) to come in and merge away ICMB.  Often there's also a little cash kicker for shareholders to encourage them to vote yes and serves as compensation for entering into a new external management agreement.  ICMB's manager, Investcorp, should be incentivized to accept almost any deal, they own 25% of the BDC, have been waiving management fees and luckily for shareholders, don't appear to have a termination fee.  Reputationally, they'll want to move on from this experiment.

Below is little math based on our current favorite BDC consolidator, BCP Investment Corp (BCIC), assuming an NAV-for-NAV merger, ICMB could see significant upside.  BCIC is just an example, could be a number of potential BDC buyers or if Bulldog has its way, Investcorp might buy it into one of their other strategies (similar to Apollo with ARI) to save face.

This is an illiquid microcap with an upside down balance sheet, if it doesn't get wrapped up fairly quickly, all equity could get wiped out.

Disclosure: I own shares of ICMB