Greenhaven Road Capital 1Q18: FCAU, ETSY, TRIP, EVI, Ashford Inc

Smart Money
  • Returned ~8% net of fees during 1Q18

Top 5 Positions

  • Fiat Chrysler (FCAU): company should continue to benefit from margin expansion related to their shift to SUVs and de-emphasis of fleet sales; company will also spin off its parts business, benefit from lower taxes, and reduced interest expense as it becomes a net holder of cash; prospects are bright, and the valuation is not demanding; this has been a multi-bagger, but I believe there is still significant value remaining as the valuation is very undemanding
  • ETSY (ETSY): shares have appreciated 35% YTD and are up almost 3x from our initial purchases; Etsy still has a long runway for growth, a lot of operating leverage, and will benefit from management’s focus on the core business; two-sided marketplaces are hard to create and have enormous operating leverage
  • TripAdvisor (TRIP): this is a platform business with a strong value proposition to consumers and an influential spot in the travel ecosystem; if monetization of traffic can improve modestly, the financial benefits would be substantial; traffic and engagement on the site continue to grow
  • EnviroStar (EVI): this “buy and build” roll-up had a quiet quarter with no acquisitions announced; last year, company made four acquisitions from June through December; more acquisitions are highly probable; operating results and acquisitions will be lumpy, but the strategy can certainly work as they continue to execute disciplined acquisitions at reasonable valuations using a mix of stock and cash, with a focus on improving acquired companies in the non-capital intensive, non-cyclical commercial laundry distribution business
  • Ashford Inc to be discussed below

Ashford Inc (AINC)

  • When looking at the Ashford complex of companies, which includes two publicly traded hotel REITs, Ashford Trust (AHT) and Ashford Prime (AHP), as well as an “external” asset management company, Ashford Inc. (AINC), it becomes clear that the table is tilted such that the “money” flows to the management company, which is what we own
  • When designing Ashford Inc. and separating it from the REITs, a series of choices were made – each justifiable, and each to the benefit of Ashford Inc
  • Sometimes spinoffs are garbage barges where the liabilities are cast off, and sometimes the spinoffs are the jewels; design of the management contracts make Ashford Inc. the jewel
  • 4 specific characteristics that ensure the money flows to AINC:
    • Base management fees cannot go down by more than 10% per year
    • Base management fees are paid on both the equity and debt value of the REITs, making the fees as high as possible
    • There are no high-water marks on the incentive fees. The underlying REITs are levered with the ability to dramatically outperform (and underperform). There is no penalty in calculating the management fee for this seesawing of the AHT and AHP share prices
    • Contracts are essentially non-cancellable, but are designed as 10-year terms with multi-year renewals and very onerous termination payments such that we could be better off if the contracts were cancelled should the REITs ever be sold to a 3rd party
  • 3 other indications that Ashford Inc. is the most advantaged place to be within the Ashford complex:
    • CEO Monty Bennett took all of his deferred compensation from Ashford Trust and Prime in the form of Ashford Inc. stock
    • Bennett family just negotiated the sale of their hotel project management business to Ashford Inc., which will more than triple their holdings in Ashford Inc. if the debt converts to equity
    • While Monty Bennett remains chairman of all 3 Ashford public company boards, in the past year he relinquished his CEO positions at the REITs, while remaining CEO at Ashford Inc. All indications are that growing Ashford Inc. should be his main focus as it is where his bread is buttered
  • Company has figured out that managing 140+ hotels means that they control billions of dollars of spending at these hotels; is also in a position to understand the hotel manager as a customer; to capitalize on these dynamics, they are making “accelerator investments” in the hospitality sector
    • Simplest example of this is AINC’s recent 85% purchase of J&S Audio Visual, a $60 million revenue company that provides hotel A/V services for large business meetings, conferences, and conventions
    • Given that Ashford directs the spend of 140+ hotels, it is highly likely that many, if not most, of these hotels will become J&S customers
    • Ashford estimates that simply migrating their own managed hotels will double J&S’ EBITDA, assuming no other customer growth
  • Yet another way that Monty Bennett is trying to have dollars flow to Ashford Inc. is the creation of a broker, Lismore Capital, to handle debt placements for the hotels that they manage; it is unlikely that debt placement for captive hotels will be a huge business, but they have helped refinance over $1B in debt so far this year and Lismore generated $1.3M revenue in 2017
  • As the REITs have been generally trading at or below book value, it is unlikely they will raise additional capital right now, but in the future it is an option; currently, they could make hotel acquisitions using the $600M+ cash on their balance sheets
    • Just using cash on balance sheet, the REITs could easily buy $1.5B+ of assets which would grow base management fees by almost 25%
  • Company has historically grown AUM by more than 25% per year; there are clearly a lot of levers to pull; exact growth path is not clear, but to assume no growth is to dramatically underestimate the management team and their incentives
  • We have a cost basis of $91/share; with a fully diluted share count of 2.5M, and $36M in cash, the fully diluted EV of Ashford Inc. is just north of $190M
    • Company has invested $18M in their accelerator investments and assumed $10M in debt related to those investments
  • If we conservatively back out the accelerator investments at cost, we have paid approximately $160M for the asset management business
    • This is less than 4x the 43M in base management fees, which compares very favorably to a peer group
    • Oaktree’s $320M all-cash purchase price of Fifth Street came at 5.7x pro forma adjusted revenue and 8.3x base fees
  • Now we have the proposed acquisition of Remington, a reasonable business with 60% EBITDA margins; when the deal closes, Remington will be able to work for companies beyond the Ashford group, providing another high margin revenue stream, and significantly increasing Monty Bennett’s ownership interest in Ashford Inc.
  • If now is actually “Go Time” on growth, we will get paid primarily on AUM growth and other revenue streams, plus modest multiple expansion
  • The Bad:
    • Governance is horrible and the board is in the CEO’s pocket; one of the board member’s primary qualification appears to be owning 2 Chinese food restaurants
    • Equity compensation has been aggressive, although it is not as bad as it appears in Bloomberg as there is some equity compensation kicked up from the underlying REITs that also has offsetting revenue, so there is no net economic impact
    • CEO has been receiving stock option grants which allow for him personally to receive 1-2% of the company each year, and the balance of the management team to receive another 1-2%
    • Monty and his father agreed to sell their project management business to Ashford Inc
    • Valuation of Remington was not rock bottom, but was structured to get additional shares to the Bennett family through convertible debt at $145/share (50% higher than current prices)
    • On a fully diluted basis, Monty and the Bennett family would own almost 60% of Ashford Inc.

Greenhaven Road Capital 1Q18 Letter, April 2018

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