Dallas hotelier Monty Bennett, who earlier became a lightning rod as the biggest known recipient of COVID-19 small business relief loans, is fighting to keep one of the companies in his family-built hotel empire from going insolvent.
And he wants preferred shareholders of Ashford Hospitality Trust, a real estate investment trust that owns more than 100 hotels around the U.S., to help by giving up lucrative dividend-paying shares in exchange for common stock.
The nearly 6-to-1 exchange offer is spawning a fiery back-and-forth with one of the trust’s largest shareholders in a lead-up to the company’s Tuesday board meeting. If the board approves the move, the plan will go forward. The trust is also offering to buy back preferred shares outright.
With the hotel industry “on the brink of collapse,” as the American Hotel & Lodging Association describes it, Bennett’s turnaround proposal puts a fine point on COVID-19′s toll on the hospitality sector. The association estimates that nearly 7 out of 10 hotels in Texas are at risk of closure without government assistance.
The nation’s two largest shareholder advisory firms — Institutional Shareholder Services Inc. and Glass Lewis — are on board with Bennett’s plan. “The proposal is expected to simplify the capital structure and remove debt overhang, allowing the company to stave off bankruptcy,” according to ISS.
But Atlanta-based Cygnus Capital, in a letter to other stockholders, said it’s “troubled” by what it thinks is a premature move that effectively dilutes the worth of common stock by 94%. “Why is there such a rush to essentially wipe out common stockholders?” the firm asks.
Cygnus Capital insists the trust isn’t exploring other alternatives, such as selling assets, seeking additional short-term debt or merging with a more financially sound competitor.
“The company seems to have enough cash to wait a couple more quarters before undertaking these devastating exchange offers,” Cygnus said in the letter.
It also said there are signs the hotel industry is slowly recovering, citing improvement since April when occupancy plunged 83% nationally. The hotel association said occupancy is hovering around 50%.
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Bennett said it will likely be years before the trust’s cash flow recovers to the point where it can meet dividends to be paid to preferred shareholders. Those payments are accruing at over $42.4 million a year, he said, and the trust’s monthly debt service and corporate expenses are about $17 million.
“A failure to complete the exchange offers may hasten a path to insolvency,” the company told shareholders in defending the exchange plan. “There is substantial doubt about the company’s ability to continue.”
In bankruptcies, preferred shareholders, bondholders and creditors receive payment before common stockholders. Owners of common stock often receive nothing after bankruptcy.
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A tough year
After the global pandemic closed businesses around the country, Bennett became the largest known recipient of government small business loans when it collected at least $69 million. It later returned the money when the U.S. Small Business Administration rewrote the rules to exclude public companies with other ways to access capital.
Bennett’s Plan B was lobbying Congress for stimulus funds specifically for the decimated hotel industry. Congressional and White House leaders have been unable to reach an agreement on additional support.
Ashford Hospitality Trust was dealt another blow this week when it received notice from the New York Stock Exchange that it was in danger of being delisted because its market capitalization no longer met requirements. The company must submit a plan to NYSE within 45 days and regain compliance within 18 months.
At the same time that it’s fighting against a delisting, AHT is going head to head with Cygnus Capital, which it says is cherry-picking positive recovery statistics.
“It is unfortunate that Cygnus Capital is forcing the company to waste time and resources correcting Cygnus' misstatements and clearing up the confusion they are causing,” Bennett told The News in an email.
Cygnus is focusing on how far the industry has recovered since May, while AHT is focusing on how far the industry is from where it was in 2019.
Texas has 5,528 hotels. If Congress doesn’t send more aid, an estimated 67% of the properties could close, according to the hotel association. U.S. leisure and hospitality employment hit a low in May but had gained 20% by July (still 37% off from July 2019), according to data from the U.S. Bureau of Labor Statistics.
Cygnus insists AHT is better off than management indicates. The firm pointed out that it has reworked loan terms for 61 hotels, representing 69% of its outstanding mortgage debt. Cygnus said it’s so confident in AHT’s recovery that it increased its common stock ownership from 7.8% to 8.3%.
For the quarter ended in June, AHT reported that comparable revenue per available room for its hotels decreased 88% from the same period last year. Net loss came in at $215.3 million.
Both AHT and Cygnus believe the other has ulterior motives. Bennett said Cygnus isn’t interested in AHT’s long-term viability because it’s looking to profit from a short-term trade, hence its recent increase in ownership. He said the hedge fund has rejected AHT’s attempts to talk.
“Our belief is that no respected investment fund would make the comments they have made if they had any reasonable working knowledge of the hotel industry,” Bennett said.
On the other hand, Cygnus argues that AHT’s plan is an “opportunistic attempt” to benefit another of Bennet’s companies, Ashford Inc., which collects fees as an adviser to Ashford Hospitality Trust. The management teams of AHT and Ashford Inc. are nearly the same, including Bennett and his father, Archie, which allows them to make decisions that benefit Ashford Inc. over AHT, Cygnus claims.
If AHT were to pay out preferred dividends, it may not have the money to keep up the fees to Ashford Inc., Cygnus argues.
“Even in good economic times, it would be hard to not have conflicts of interest with this convoluted and intertwined corporate structure,” the firm wrote.
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AHT also paid about $6 million in fees to an Ashford Inc. subsidiary, Lismore Capital, which has been negotiating the company’s forbearance agreements. Cygnus said this pay agreement is another example of “a concerning pattern of self-dealing.”
This isn’t the first time Bennett and his father have been accused of making decisions to their benefit.
Earlier this year, the Bennetts received a $2 million dividend payment on preferred shares from Ashford Inc. while the company halted payments on most of its $4 billion debt and cut dividends for common shareholders of its REITs. Bennett defended the payout, saying it was only a 50% payout. He also said he doesn’t own any of the two REITs' preferred shares, yet those dividends were paid out in full.
Glass Lewis, in advising shareholders to support the exchange, said it considers AHT’s plan to be the best option for reducing its cash burdens. It also said data presented by Cygnus offered a “skewed impression” of the U.S. hotel market by using figures boosted by the Labor Day holiday and by assuming the U.S. will recover as quickly as China.
The possibility of watching a company collapse is never easy for its leader, especially when it’s part of his family’s legacy. Ashford was started in 1968 when Bennett’s father began buying troubled properties at a time when both father and son were close to broke.
“Respectfully, Cygnus Capital does not appear to understand either our company or our industry,” Bennett said.
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