In Q2 investor letter, Greenhaven Road Capital discussed Ashford Inc (NYSEAMERICAN: AINC) as well as other companies – we’ve already covered the hedge fund’s investment thesis on Fiat Chrysler Automobiles. In this article, we’re going to focus on comments made by Greenhaven founder and portfolio manager Scott Miller about Ashford in the letter. Miller believes that the company could easily double its share price by addressing certain issues and treating shareholders fairly. Let’s take a look at Miller’s comments.
Ashford Inc. is the manager of two hotel REITs and has a series of investments in the hotel space. The company is the brainchild of Monty Bennett and, as detailed in our Q1 letter, is the optimal place to invest within the Ashford company complex. Monty has built a very scalable business that should be able to monetize the growth of the underlying REITs, Ashford Trust and Braemar (formerly Ashford Prime), which should be the largest driver of the financial success of Ashford Inc. On a positive note, Ashford Inc. announced an innovative financing program that uses excess cash at the AINC level to help finance new hotel purchases at the Ashford Trust REIT.
My concern, however, is that I may have committed an “own goal” here for the partnership by underestimating Monty Bennett. When Ashford Inc. was spun out of Ashford Trust and Braemar (Ashford Prime), Monty took all of his deferred compensation in Ashford, Inc. stock and has since aggressively granted stock options and purchased shares in the open market – he clearly wants to own AINC. I knew that the company had an unconventional board of directors with several members lacking any other public markets experience. One member runs two restaurants. Another closed a golf business to become an insurance salesman. A third is involved in a printing business that historically does business with Ashford and the underlying properties. On paper, it appears to be a group grateful to Monty for their board positions and compensation vs. a group who might hold Monty in check. As we were acquiring our shares, I also knew that it was likely that Ashford Inc. would buy a project management business from Monty and his father. The high margin targeted business, Remington, manages renovation projects for hotels. Ashford had tried to buy the business before, and the most recent iteration of the deal was announced in April.
Unfortunately, as currently conceived, shareholders will not be allowed to vote on the transaction, which will ultimately increase the AINC share count by more than 50%. In my view, if it is a good deal, let shareholders vote. Ashford also surprised shareholders when the company recently disclosed the intent to buy a second business, also from Monty, related to property management.
In my opinion, the company should address its massive and easily fixable governance discount. The value of the second potential acquisition (making a few assumptions) will only modestly increase the overall Bennett family ownership of Ashford Inc. I thought we were at a point where it was in everybody’s interest to fix investor concerns and let the beauty of Monty’s creation shine, but it appears that we are not there yet. AINC’s share price could easily double by addressing these concerns and treating shareholders fairly.
As such, I am evaluating our options. Greenhaven is a substantial shareholder and has the resources to become more substantial, if desired, and we are in contact with other shareholders. I know that our LPs collectively manage billions of dollars and have hundreds of years of experience. I am open to thoughts, resources, and strategies on how to best move forward. The core business is incredibly resilient, scalable, and poised for substantial earnings growth. Its issues are fixable. To mix sports metaphors, I want to realize the home run potential, not the own goal potential.
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Ashford Inc (NYSEAMERICAN: AINC) provides asset management and other services to companies within the hospitality industry. The company serves as the advisor to two NYSE-listed real estate investment trusts, Ashford Hospitality Trust and Braemar Hotels & Resorts. Ashford shares have lost 20.19% of their value since the start of the year. However, the stock has jumped 17.57% over the past three months and 23.17% over the past 12 months.
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Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
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