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Smaller than Anticipated IPO Raised $202.5 million
 for Ashford Hospitality Trust

By Danielle DiMartino, The Dallas Morning News
Knight Ridder/Tribune Business News

Aug. 27, 2003 -- Ashford Hospitality Trust made its delayed Wall Street debut Tuesday with a smaller-than-anticipated initial public offering that raised $202.5 million for the Dallas-based real estate investment trust.

Ashford, formed this year to invest in distressed hotel properties, sold 22.5 million shares at $9 each before they began trading on the New York Stock Exchange at noon.

By the end of the trading day, 3.75 million shares, or about 15 percent, had traded hands.

The shares never traded above $9.04 and closed flat at $9.

The offering was a substantial reduction from the IPO's original terms, which stated Ashford could sell as many as 35 million shares at $9 to $11 a share, depending on the investment community's appetite for the deal.

At the top of the range, the company would have raised nearly double what it collected Tuesday.

"From the company's standpoint, they were expecting a better reception, so there was definitely skepticism on the part of the investors," said Tom Taulli, author of Investing in IPOs and an IPO advisor to Edgar Online Inc., a financial data services company.

Ashford's Wall Street introduction was delayed twice – once because of the East Coast blackout and again when the initial offering was reduced.

Still, Mr. Taulli said, "I mean the blackout can only explain so much."

Ashford's IPO originally was slated to come to market last week, but the lead underwriter, Friedman Billings Ramsey of Arlington, Va., delayed it after the blackout to give investors more time to evaluate the deal.

The IPO pricing was rescheduled for Monday but was delayed again when Friedman Billings had to get Securities and Exchange Commission approval to reduce the offering.

Such an OK is required if a deal is downsized by more than 20 percent.

"I've seen it happen before and I wouldn't put it up as a big red flag," said Sal Morreale, who tracks IPOs for Cantor Fitzgerald in Los Angeles.

The second delay led to the unusual midday trading debut for Ashford shares.

"Usually IPOs are priced in the evening, and then the morning after, they start to trade," Mr. Tauilli said.

But the investment community appears to have counted up enough red flags to muscle down the size of the deal.

REITs are attractive to investors for the yields they generate.

But with U.S. Treasury yields ticking up in recent weeks, REITs have to offer more rewards to justify the added risk.

And the Ashford IPO is what is known as a "rollup" – it's being formed through the IPO and will use the proceeds to acquire assets.

"There's always execution risk involved with these kinds of offerings," Mr. Tauilli said. "And the hotel industry is not growing at a rapid rate anyway."

Ashford's initial assets will consist of six hotels – four Embassy Suites and two Radisson hotels – and eight asset management and consulting agreements.

With those assets, Ashford would have recorded a net loss of $3.09 million on revenue of $35.4 million in 2002.

In the first six months of 2003 it would have reported a loss of $1.39 million on revenue of $17.9 million.

"Unlike in the heyday, institutions are really doing their homework these days," Mr. Tauilli said.

"If things don't add up," he added, "the investment community is not going to be fully committed to the offering."

Late August is typically not IPO season, but the welcome reception some have received in the last few months may have pushed management to take a chance in the dicey late summer trading waters.

"You can't bring junk to the Street any more," Mr. Morreale said. "They may have cut it back, but they wanted to get this deal done, and they did."

The volume of Ashford shares that traded Monday was relatively small. In the late 1990s – when IPOs were an almost-daily occurrence – it was almost unheard of to have so few shares trade hands right out of the gate.

The size of Ashford's, 22.5 million shares, might trade two or three times that number before the first day of trading came to a close, reflecting the short-term trading perspective of the issues' original buyers.

"Obviously Friedman Billings did a great job of putting the stock in good hands," Mr. Morreale said.

The company also privately sold 500,000 shares to Ashford chairman Archie Bennett Jr. and his son, Montgomery J. Bennett, who will serve as president and chief executive officer.

The Bennetts and other officers – David A. Brooks, chief legal officer; Mark L. Nunneley, chief accounting officer; and Martin L. Edelman, a director – own Ashford's initial assets and are selling them in exchange for cash and interests in the company.

The Bennetts will each receive $1.5 million in cash and a 10.3 percent interest in the company on a fully diluted basis, valued at $27.5 million.

Mr. Brooks, Mr. Nunneley, Mr. Edelman and two others will collectively receive a 2.3 percent interest in the company valued at $6.2 million.

Dow Jones Newswires contributed to this report.

-----To see more of The Dallas Morning News, or to subscribe to the newspaper, go to http://www.dallasnews.com.

(c) 2003, The Dallas Morning News. Distributed by Knight Ridder/Tribune Business News. AHT, EDGR, FBR, HLT,

 
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