At 6-30-2011, Ashford had a little over $150M in unrestricted cash (not counting $75M in restricted cash). On 7-5-11, they issued 7M shares and received approximately $83M. They paid down the $50M drawn on their credit line at some point in the 3rd quarter. Based on conservative cash flow projections for Q3, they should have a little over $200M in unrestricted cash on their balance sheet right at 9-30-11. That’s the same amount in the buy-back authorization, and I doubt it’s a coincidence.
They’ve been maintaining large cash reserves, but with a new revolving credit line, assuming they have some degree of comfort that they can refinance hotels as they come do (every if small equity infusions are required), they can in fact use all that cash to repurchase shares.
Now look at the speed at which they are allowed to repurchase. I believe they are restricted to 1/4 of the average daily volume. This will mean that they can only get about 5M shares per month. Assume that the share price starts to rise as they purchase (all the better in the long run if it doesn’t), and that they can get 25M shares for an average price of $8 per share. They will not report 4th quarter results until late February, 2012 – approximately 5 months from when they announced the buyback program, which is approximately how long it will take to use the full authorization. Basically, they can use the full authorization before they have to report on it and before the market will realize the extent of what they have done. Granted, they’ll show a modest repurchase in Q3 as they probably bought shares last week and there will be a subsequent events note in the 3rd quarter 10-Q disclosing what they did in October of 2011, but for the most part, assuming the price doesn’t appreciate rapidly, they are in a position to retire almost 40% (a little over at today’s price) of the outstanding shares before the market can react to that news. Imagine the short squeeze something like that can create when it’s announced – especially if it were in conjunction with a good q4 report.
Now take a look at this buy-back from an income prospective on a per-share basis. The 2012 projection was FFO of $1.80 per share. The cash wasn’t adding to those projections. Now add in the 7M shares that were issued and subtract out the 25M shares they could potentially be buying back and the FFO per share goes up to $2.55. Assuming the economy tanks and there is a double dip recession in 2012. Say hypothetically, FFO would have gone done to $1.00 per share. With a reduced share count, that will end up being $1.42 per share.
Basically, the math is the same regardless. You use cash that is sitting on your balance sheet making no return and that you no longer need to keep as a reserve, use it to repurchase a huge % of the float and immediately increase cash flow and future dividends by over 40% on a per share basis.
I have guesses as to where the stock price will be once the economy settles, but the point is unless you think the economy is so bad that FFO could potentially turn negative, you should be pretty happy about this buy-back and should be rutting for them to use every penny of it at today’s price. Unless of course you’re a short, in which case I’m wondering what you think your upside is.
Agree, the more commmon shares that are bought, the less common dividends paid. But the total stockholder equity is reduced too. That is the concern of the preferred shareholders.... less stockholder equity coverage for them.
Don't understand your reasoning.
If AHT spends its ready cash on common stock repurchase, how does this work to the advantage of preferred holders?
[IMO AHT will not make significant repurchases at these levels, i.e. the repurchase announcement is to placate institutional buyers who recently came in at 12+; however, the wild card is how much management anticipates future help on the bottom line coming from their hedges.]
How significant is their derivative gain/loss to their FFO? Will there be a large decline in FFO when the successful interest rate hedges end?
Since operations/cash flow/EBITDA have not recovered much back to the 2007/08 levels, if there is now a decline in RevPAR, will the company be able to handle it as well as they did a couple years ago?
Also it appears that the Company will not be able to access the cash flow from the Highland Hospitality Portfolio to assist with any funding needs on the AHT portfolio.
I think there is great asset value potential, but based upon the current valuations; I must be missing something or not fully understanding the risks.
There is definitely interest rate risk, but I'm not overly concerned as management was spot on with their hedges and I believe they will be able to mitigate it going forward. If interest rates rise after 2013 and REVPAV doesn't continue to grow, then FFO will take a hit. But even in that scenario, it's temporary as hotel supply isn't increasing, and in the mid-term/long-run, revenue will increase, particularly as interest rates increase due to the economy being healthy and/or inflation.