Ashford Hospitality Trust Looks to Hand Lenders the Keys on 19 Hotels

Ashford Hospitality Trust, a REIT that concentrates on upper upscale, full-service hotels said it is “most likely” that it would hand back the keys to lenders on 19 hotels.

“The company believes it’s in the best interest of its common and preferred stockholders to not make the required paydown of approximately $255 million,” it said, adding that would save an additional $80 million in expected capital expenditures in the properties through 2025.

Ashford had ended the first quarter with $3.8 billion in total loans with a blended average interest rate of 7.1%. “As of the end of the first quarter, approximately 40% of the company’s hotels were in cash traps under their respective loans compared to 79% at the end of the fourth quarter of 2022,” the REIT said. “The hotels that are currently out of cash traps generated approximately 70% of the company’s full-year 2022 Hotel EBITDA. Any excess cash flow generated by hotels in cash traps will be held by the lender and will not be available for corporate purposes.”

In other words, 40% of the hotels, even if they were technically profitable, absorb more cash than they generate. In CRE, that can happen when lenders require a cash trap trigger, where cash flow from a property goes into an escrow account when the borrower doesn’t meet covenant requirements.

Ashford said it believed that there was negative equity in the properties in question “as evidenced by the combined trailing 12-month Net Operating Income debt yield of 5.6% through the first quarter of 2023.” While the blended average interest rate was 7.1%, for the group of hotels, it was approximately 8.8%, based on current SOFR rates.

The hotels were also expected to require capital expenditures that would average 18% of annual revenues “compared to the industry standard capital expenditure reserve of 4%-5% of annual revenues.”

In the first quarter of 2023, the 12-month-trailing revenue was down 13% compared to 2019 and total labor cost per occupied room was up 27%. The group of hotels were “located in markets that have experienced significant headwinds throughout their post-pandemic recoveries, and a number of these markets are not forecasted to reach pre-pandemic topline levels until 2025 or 2026.”

Some large hand-backs have been occurring in CRE, like Unibail-Rodamco-Westfield stopping payments on $558 million in debt for the Westfield San Francisco Centre, the largest shopping mall in the city. Last month, Park Hotels & Resorts stopped making payments on a $725 million CMBS loan backed by two of the largest hotels in San Francisco. Earlier this year, Columbia Property Trust defaulted on $1.7 billion in loans and Brookfield Asset Management defaulted on $784 million in loans.