Ashford (AINC) - 2022 Q4 - Annual Report

PART I Business Ashford Inc. is an alternative asset manager for real estate and hospitality, serving Ashford Trust and Braemar, with diverse services and significant Bennett family control - Ashford Inc. is an alternative asset management company serving the real estate and hospitality sectors, with key clients being Ashford Trust and Braemar[19] - The company's growth strategy is twofold: increasing assets under management and expanding its products and services businesses to third parties[21] - As of December 31, 2022, Chairman Monty J. Bennett and his father, Archie Bennett, Jr., held a significant ownership interest of approximately 19.6% in common stock, which could increase to 65.5% upon conversion of their Series D Convertible Preferred Stock[19] Overview of Business Segments and Services | Service Line | Description | | :--- | :--- | | Advisory & Asset Management | Implements investment strategies and manages day-to-day operations for Ashford Trust and Braemar. | | Hotel Management (Remington) | Provides hotel operations, sales, marketing, and revenue management for 118 properties as of Dec 31, 2022. | | Design & Construction (Premier) | Offers renovation and construction solutions, including interior design and project management. | | Event Technology (INSPIRE) | Provides integrated audio-visual and creative services for events. | | Other Services | Includes watersports (RED), mobile room keys (OpenKey), hypoallergenic rooms (Pure Wellness), debt placement (Lismore), and broker-dealer services (Ashford Securities). | Our Advisory Agreements The company advises Ashford Trust and Braemar under similar agreements, with fees based on market capitalization and performance, and significant termination clauses - The advisory agreement with Ashford Trust was amended on January 14, 2021, establishing a 10-year initial term with a fixed base fee of 0.70% of Total Market Capitalization[52][56] - The advisory agreement with Braemar has an initial 10-year term expiring January 24, 2027, with provisions for seven successive 10-year renewal terms[88] Advisory Fees Earned (Year Ended Dec 31, 2022) | Client | Total Advisory Fees | Incentive Fees Included | | :--- | :--- | :--- | | Ashford Trust | $34.8 million | $0 | | Braemar | $13.1 million | $268,000 | - Termination of the Ashford Trust advisory agreement without cause requires a termination fee equal to 1.1 times the greater of two earnings-based calculations, plus a tax gross-up[75][76] Our Hotel Management Agreements, Project Management Agreements and Mutual Exclusivity Agreements Through Remington and Premier, the company manages hotels and capital improvements for Ashford Trust and Braemar under long-term, exclusive agreements with structured fees - Remington manages 68 of Ashford Trust's 100 properties and 4 of Braemar's properties under master hotel management agreements with 10-year initial terms and renewal options totaling up to 35 years[111][149] - Hotel management fees include a base fee of 3% of gross revenues (subject to a minimum) and an incentive fee of up to 1% of gross revenues based on profitability targets[113][151] - Premier acts as the exclusive manager for capital improvements for both Ashford Trust and Braemar, earning fees of 3-4% of total project costs, plus additional fees for specific services like architecture and interior design[144][145][182] - Mutual Exclusivity Agreements grant Ashford Trust and Braemar the first right of refusal on lodging investments identified by Remington, and in turn, Remington has the right to manage those properties if acquired[133][170] Agreements with the Bennetts and Lismore Key agreements with the controlling Bennett family include board nomination rights, non-competition clauses, and services from Lismore to Ashford Trust and Braemar - The Investor Rights Agreement grants the Bennetts the right to nominate two members to the board of directors as long as they maintain at least 20% beneficial ownership (on an as-converted basis)[189] - A Non-Competition Agreement prevents the Bennetts from engaging in hotel management or design and construction businesses in the U.S. for at least five years post-acquisition, with certain exceptions for properties they own[203] - Lismore, a subsidiary, provides debt placement services to Ashford Trust and Braemar. In 2022, it earned $3.3 million from Ashford Trust and $940,000 from Braemar[39] Regulation, Competition, and Human Capital The company and its clients are subject to REIT regulations and face intense competition, with a shareholder rights plan adopted to protect against hostile takeovers - The company's clients, Ashford Trust and Braemar, must adhere to REIT regulations, including distributing at least 90% of their taxable income[215] - The asset management industry is highly competitive, with pressure from firms that may have greater financial resources, a lower cost of capital, or different risk tolerances[224] - As of December 31, 2022, the company had 127 corporate employees and its consolidated subsidiaries had approximately 7,700 employees[217][234] - A shareholder rights plan was adopted on August 30, 2022, to protect against hostile takeovers, with a 10% beneficial ownership trigger and an expiration date of July 30, 2023[227][228] Risk Factors The company faces significant risks from its dependence on the hospitality industry and key clients, potential conflicts of interest, economic downturns, and competitive pressures - The business is highly dependent on Ashford Trust and Braemar, and any adverse events affecting them, such as loan defaults or foreclosures on their hotel properties, could significantly harm the company's revenues[237][258] - Actual and potential conflicts of interest with executive officers and non-independent directors, particularly the Bennett family who have significant control, may lead to decisions that do not align with all stockholders' interests[237][294] - Economic slowdowns, pandemics (like COVID-19), and inflation pose significant risks to the hospitality industry, which in turn directly impacts the company's advisory fees and service revenues[237][238][239] - Failure to make full dividend payments on the Series D Convertible Preferred Stock for two consecutive quarters would result in a higher interest rate and grant the Bennetts the right to appoint two additional members to the Board[237][290] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[324] Properties The company leases its corporate headquarters in Dallas, Texas, and its consolidated businesses lease various other office and warehouse facilities - The company's headquarters is located at 14185 Dallas Parkway, Suite 1200, Dallas, Texas 75254, which it leases[325] Legal Proceedings The company is involved in several legal proceedings, including class action and personal injury lawsuits, but management expects no material adverse effect - A subsidiary is facing a class action lawsuit in California regarding alleged violations of employment laws, specifically concerning employee rest breaks. The potential loss is not currently estimable[328] - A subsidiary is involved in a lawsuit in the U.S. Virgin Islands alleging negligence in connection with personal injuries. The company intends to vigorously defend against these claims[329] - Management believes that the ultimate resolution of current legal proceedings will not have a material adverse effect on the company's consolidated financial position, results of operations, or cash flow[330] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[331] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ashford Inc.'s common stock trades on NYSE American, has not paid common dividends recently, and has an active stock repurchase program with no 2022 buybacks - The company's common stock is listed on the NYSE American under the ticker symbol "AINC"[333] - No dividends were declared or paid on common stock for the years ended December 31, 2022, 2021, and 2020[336] - A stock repurchase program with up to $20 million authorization is active, but no shares were repurchased under it during the year ended December 31, 2022[340] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 1,680,223 | $65.48 | 594,121 | | Not approved by security holders | — | — | — | | Total | 1,680,223 | $65.48 | 594,121 | Management's Discussion and Analysis of Financial Condition and Results of Operations Ashford Inc. saw significant revenue growth in 2022 driven by hospitality recovery, turning an operating loss into income, while managing debt and preferred stock dividends - Key developments in 2022 included entering a new $100 million credit facility, acquiring Chesapeake Hospitality for $9.6 million, and settling an $11.4 million ERFP commitment with Ashford Trust through the disposition of the Marietta Hotel leasehold[351][353][355] Financial Performance Summary (2022 vs. 2021) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $644.4M | $384.6M | +67.6% | | Operating Income (Loss) | $21.6M | ($5.2M) | +512.6% | | Net Income (Loss) Attributable to Company | $3.6M | ($9.9M) | +136.7% | | Net Loss Attributable to Common Stockholders | ($32.8M) | ($46.0M) | +28.6% | - As of December 31, 2022, the company had $44.4 million in cash and cash equivalents and $37.1 million in restricted cash. It also had $18.4 million in undeclared and unpaid dividends on its Series D Convertible Preferred Stock[393][404] Results of Operations Total revenues increased significantly in 2022 due to hospitality recovery, leading to operating income despite higher expenses, though net loss persisted due to preferred dividends Revenue by Service Line (2022 vs. 2021) | Revenue Source | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Advisory services fees | $48.4 | $47.6 | +1.7% | | Hotel management fees | $46.5 | $26.3 | +77.3% | | Design and construction fees | $22.2 | $9.6 | +131.9% | | Audio visual | $121.3 | $49.9 | +143.1% | | Cost reimbursement revenue | $361.8 | $204.0 | +77.4% | | Total Revenues | $644.4 | $384.6 | +67.6% | - The significant increase in audio visual and design & construction revenues reflects a strong recovery in group events and increased capital expenditures by clients as the hospitality industry rebounded from the pandemic[369] - Salaries and benefits expense increased by 17.3% to $76.5 million in 2022, driven by an increase in corporate employees and the reinstatement of the company's 401(k) match[370] - Interest expense rose to $10.0 million in 2022 from $5.1 million in 2021, primarily due to borrowings under the new Credit Facility and higher average interest rates[377] Liquidity and Capital Resources Liquidity is driven by operations and a new credit facility, with cash used for preferred dividends and ERFP settlement, resulting in increased net cash from operating activities - On April 1, 2022, the company entered into a new five-year, $100 million senior secured term loan facility. As of December 31, 2022, $70.0 million was drawn[351][389] - In 2022, the company paid approximately $43.9 million in dividends on its Series D Convertible Preferred Stock, including payments for arrears from 2020. However, $18.4 million in dividends for two quarters of 2021 remained unpaid as of year-end[393][407] - The company's $11.4 million Enhanced Return Funding Program (ERFP) commitment to Ashford Trust was fully settled on December 16, 2022, through the transfer of the Marietta Hotel leasehold[355][399] Cash Flow Summary (2022 vs. 2021) | Cash Flow Activity | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $42.1 | $20.8 | | Net Cash Used in Investing Activities | ($22.4) | ($9.4) | | Net Cash Used in Financing Activities | ($10.7) | ($21.6) | Critical Accounting Policies Critical accounting policies involve significant judgment in revenue recognition, accounting for acquisitions, impairment of goodwill, and income tax assessments - Revenue Recognition: Advisory fees are recognized as services are rendered. Incentive fees are a form of variable consideration and are recognized only when it is probable that a significant reversal will not occur, typically in the fourth quarter[411][415] - Acquisitions: Business combinations are accounted for using the acquisition method, requiring assets acquired and liabilities assumed to be recorded at fair value. This process involves significant estimates for intangible assets and goodwill[430] - Goodwill and Intangible Asset Impairment: Goodwill and indefinite-lived intangibles are tested for impairment annually (as of October 1) or more frequently if indicators exist. The company uses qualitative assessments and, if necessary, quantitative tests comparing carrying value to fair value[432] - Income Taxes: The company uses the asset and liability method to account for income taxes. It assesses the realizability of deferred tax assets and establishes valuation allowances if it is more likely than not that some portion will not be realized[426] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations on variable-rate debt and foreign currency exchange rates from international operations - As of December 31, 2022, the company had $94.4 million of variable-rate debt. A 100 basis point change in interest rates would result in an approximate annual impact of $944,000[437] - The company is exposed to foreign currency exchange risk through its INSPIRE operations in Mexico and the Dominican Republic. A 10% change in the Mexican Peso exchange rate would impact net income by approximately $215,000 annually[439] - The company is managing the transition from LIBOR to alternative reference rates like SOFR for its variable-rate debt. Its Credit Agreement identifies Term SOFR as the applicable benchmark replacement rate[322][323] Financial Statements and Supplementary Data This section includes audited consolidated financial statements and notes, with a critical audit matter highlighted regarding the Chesapeake acquisition's business combination accounting - The independent auditor's report from BDO USA, LLP expresses a clean opinion on the consolidated financial statements[444] - A critical audit matter identified was the accounting for the Chesapeake Hospitality acquisition, focusing on the valuation of intangible assets (management contracts), contingent consideration, and the classification and measurement of preferred units issued as part of the purchase price[448][449][450] Consolidated Balance Sheet Highlights (as of Dec 31, 2022) | Account | Amount (in thousands) | | :--- | :--- | | Total Assets | $482,356 | | Cash and cash equivalents | $44,390 | | Goodwill | $58,675 | | Intangible assets, net | $226,544 | | Total Liabilities | $274,208 | | Notes payable, net | $94,875 | | Total Equity (Deficit) | ($271,466) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[744] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, excluding the recently acquired Chesapeake Hospitality - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[745] - Management concluded that internal control over financial reporting was effective as of December 31, 2022. The assessment excluded the recently acquired Chesapeake Hospitality[748][749] - There were no material changes in internal controls over financial reporting during the fourth quarter of 2022[750] Other Information The company reports no other information for this item - None[751] PART III Directors, Executive Officers and Corporate Governance Information concerning directors, executive officers, and corporate governance is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[754] Executive Compensation Information concerning executive compensation is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[755] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[756] Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[757] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2023 Annual Meeting of Stockholders proxy statement - Information is incorporated by reference from the registrant's definitive Proxy Statement[758] PART IV Financial Statement Schedules and Exhibits This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K, with many incorporated by reference from previous filings - The consolidated financial statements are listed under Item 8 of the report[761] - A detailed list of exhibits filed with the report is provided, including key agreements such as the Separation and Distribution Agreement, Advisory Agreements with Ashford Trust and Braemar, and the Combination Agreement for the Remington acquisition[763] Form 10-K Summary The company has not provided a summary for this item - None[772]