“This journey has been long and arduous, but one that we strongly believe has been worth the effort,” Bennett noted. He explained that the opportunity to acquire the Highland Hospitality portfolio, which includes 8,082 rooms located in 13 states, began with a mezzanine loan in 2008.

Ashford and PREI provided a $70 million mezzanine loan in the sixth tranche position for the $2.2 billion portfolio. The rest of the capital stack consisted of $1.5 billion in senior debt with five lenders, $172 million of mezzanine debt with two lenders and $440 million in equity.

“As market conditions deteriorated, we became aware of an opportunity to purchase participation in mezzanine four position [that was] senior to us in the capital stack at a significant discount to par,” Bennett said. “That strategy enabled us to better protect our original investment and open the possibility of gaining control of the entire portfolio.”

In total, the Ashford JV invested $96.1 million in the portfolio’s mezzanine tranches. Upon Highland Hospitality’s default, Ashford initiated discussions with “all parties involved” in the capital stack regarding ways to restructure the company and debt, Bennett says.

The Ashford JV hired Jones Lang LaSalle Hotels’ distressed asset recovery experts to market the portfolio, according to Bill Grice, a senior vice president with the firm. The Ashford JV prevailed at the UCC Foreclosure Auction since no other bidders registered or placed a bid.

The JV worked out a consensual restructuring with the existing senior lenders. The existing senior lenders will provide $530 million of first mortgage three-year financing with two one-year extension options on 25 of the hotels and the joint venture assumed first mortgage financing of $146 million on three of the hotels with approximately two years remaining until maturity.

Additionally certain lenders will provide $419 million of mezzanine financing that will cover all 28 hotels. The structure provides for fixed and floating rates with LIBOR floors and spreads for various tranches with an anticipated first year interest rate of 5.25% based upon the current forward LIBOR curve.

The portfolio is mostly comprised of full-service, upper-upscale and luxury hotels with a concentration in major brands such as Hilton, Marriott, Hyatt and Starwood. “This portfolio gives us increased exposure to the luxury and upper-upscale segments and builds upon our strong affiliations, in particular with Hilton and Marriott,” Bennett said.

Moreover, the portfolio strengthens Ashford’s geographic diversity, giving the REIT a presence in markets including Boston, New York and New Jersey metro areas, Denver, San Antonio and Nashville. It also expands the company’s footprint in key markets such as Washington D.C.

Over the next 10 months, the venture plans to invest roughly $43 million in a capital improvement program to upgrade these hotels. The program will be funded through existing and on-going reserves at the property level together with $32 million set aside for owner-funded capital improvements.

Remington Lodging will manage 17 of the hotels, followed by six with Marriott, two each for Hyatt and McKibbon and one for Hilton. Ashford will asset manage the entire portfolio on behalf of the venture.

“I can confidently state that by comparison to every other investment we have considered pursuing or seen priced in the marketplace recently, the Highland transaction offers the potential for superior returns,” Bennett said. “In the same way that the $2.4 billion acquisition of 51 hotels from CNL back in 2007 was transformational for this company, the Highland Hospitality transaction sets us apart from our peers and illustrates our ability to capitalize on complex strategic transactions that can create significant shareholder value.”