Business Context and Reporting Period
Company: Ashford Hospitality Prime, Inc. (AHP)
Filing Type: Form 8-K (Current Report)
Date of Report: January 24, 2017
Event: Entry into a Material Definitive Agreement. AHP entered into an Amended and Restated Advisory Agreement with Ashford Inc. (the "Advisor"). The agreement amends the prior advisory relationship and requires stockholder approval to become effective.
Key Financial Metrics and Terms
This filing details contractual terms rather than operational financial results. Key financial figures associated with the agreement include:
- Upfront Payment: AHP will pay the Advisor $5.0 million in cash upon the agreement's effectiveness.
- Management Fee: Fixed at 70 basis points (0.70%), payable monthly.
- Net Worth Covenant: AHP must maintain a net worth of at least $390 million plus 75% of equity proceeds from securities sales after December 31, 2016.
- Dividend Restriction: Dividends are prohibited if payment would reduce net worth below the required minimum, except as necessary to maintain REIT status.
- Growth Covenant: AHP receives a credit against a $45.0 million base amount for 3.75% of the purchase price of Advisor-recommended hotel acquisitions, netted against 3.75% of hotel sales. The remaining balance is the "Uninvested Amount."
- Termination Fee: If terminated (excluding certain Advisor acts), AHP must pay the Uninvested Amount plus any applicable termination fee. The 1.1x multiplier and tax gross-up components of the prior termination fee were eliminated.
Material Changes Versus Prior Period
The Amended Agreement introduces significant structural changes compared to the Existing Agreement (dated June 10, 2015):
- CEO Appointment: The Advisor's right to appoint a "Designated CEO" has been eliminated.
- Board Changes: The Advisor's right to terminate due to a change in the majority of the "Company Incumbent Board" has been eliminated.
- Change of Control: AHP's right to terminate due to a change of control of the Advisor has been eliminated.
- Termination Rights: AHP's right to terminate at the end of each term based on fee disagreements or performance has been eliminated. Instead, a mechanism for renegotiation based on market conditions (subject to floors and caps) is established.
- Default Termination: AHP's ability to terminate for material default is now limited to instances where a court determines the default had a material adverse effect and the Advisor fails to pay damages.
- Transparency: The Advisor must publicly disclose revenues and expenses used to calculate "Net Earnings" quarterly and retain an accounting firm to report on the reasonableness of expense determinations.
Guidance, Outlook, and Risks
Outlook and Governance: A special committee of independent directors led negotiations and recommended the agreement to the full board and stockholders. The initial term is 10 years, renewable by the Advisor for up to seven additional 10-year terms.
Risks and Contingencies:
- Escrow Requirements: In the event of a pending Change of Control, AHP must deposit 50% to 100% of the termination fee in escrow, with remaining amounts secured by a letter of credit or first-priority lien on assets.
- Liquidated Damages: If AHP repudiates the agreement, it is liable for a liquidated damages amount.
- Forward-Looking Statements: The filing includes standard safe harbor language noting that actual events may differ materially from expectations due to risks and uncertainties.
Important Facts for Investors to Verify
- Review the upcoming Proxy Statement for detailed voting information and participant interests.
- Verify the specific calculation methodology for the "Uninvested Amount" under the growth covenant.
- Confirm the impact of the $5.0 million upfront payment and the 70 bps management fee on future cash flows.
- Assess the implications of the eliminated termination rights for AHP's flexibility in future management changes.
- Monitor the quarterly disclosures of "Net Earnings" expenses as required by the new transparency provisions.