Business Context and Reporting Period
Company: Ashford Hospitality Trust, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: February 18, 2015
Event: Entry into a Material Definitive Agreement to spin off a portfolio of select-service hotels into a new privately-held entity, Ashford Hospitality Select, Inc. ("Ashford Select").
Key Financial Metrics and Transaction Structure
The Company entered into four agreements to contribute or sell a portfolio of 16 hotels (2,560 guestrooms) located in ten states. The aggregate consideration is approximately $321.0 million, structured as follows:
- Debt Assumption: Approximately $232.5 million.
- Cash Payment: Approximately $66.4 million.
- Equity Interests: Approximately $22.1 million in Ashford Select equity.
Transaction Components:
- Manchester Contribution Agreement: Contribution of 2 hotels (Courtyard and Residence Inn Manchester, CT). Consideration: $5.25M cash, $12.02M debt assumption, $1.36M equity.
- 13 Property Contribution Agreement: Contribution of 13 hotels across various states. Consideration: $50.59M cash, $209.82M debt assumption, $20.76M equity. Includes potential earn-out of up to $10M based on portfolio performance through December 31, 2016.
- Jacksonville Sale Agreement: Sale of Residence Inn Jacksonville, FL. Consideration: $7.11M cash and $10.66M debt assumption.
- TRS Sale Agreement: Sale of operating lessee entities for 14 properties. Consideration: $3.41M cash.
Material Changes and Contingencies
Material Changes: This filing represents a significant restructuring of the Company's asset base, moving 16 premium branded, upscale, and upper-midscale select-service hotels out of the public trust into a private entity.
Contingencies: Consummation of the transactions is contingent upon:
- Negotiation of certain definitive agreements.
- Availability of acceptable financing.
- Receipt of all necessary third-party consents, including lender consents.
- Other customary closing conditions.
The Company explicitly states it can give no assurance that the transactions will be consummated or regarding the timing if they are.
Guidance, Outlook, and Risks
Management Commentary: The transaction is designed to create a new privately-held company dedicated to investing in existing premium branded, select-service hotels. The equity transfer is intended to be governed by Section 721(a) of the Internal Revenue Code, though cash and equity portions may be treated as a sale for federal income tax purposes.
Risks and Indemnities: Ashford Select and its operating partnership have agreed to assume existing guaranties and environmental indemnities related to the loans being assumed. They have also agreed to indemnify existing guarantors against losses related to retained guaranteed obligations until those obligations are paid in full or the guarantor is released.
Investor Verification Checklist
- Verify the status of lender consents required for the debt assumption of $232.5 million.
- Confirm the final closing date and whether the $10 million performance-based earn-out is triggered.
- Review the tax implications of the cash and equity consideration treated as a sale versus the Section 721(a) contribution.
- Assess the impact of removing 16 hotels (2,560 rooms) on the Company's remaining portfolio density and revenue.
- Monitor the availability of financing for Ashford Select as a condition precedent to closing.