The decisions by two U.S. hotel real estate investment trusts to turn over keys to troubled properties made waves across the industry this year.
Over the summer, executives at Park Hotels & Resorts and Ashford Hospitality Trust announced they would return their troubled properties back to their lenders due to maturing commercial mortgage-backed securities. For Park, it was the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco. For Ashford, it was a collection of 19 select-service and extended-stay hotels across the U.S.
While many had predicted a wave of hotel distress during and following the COVID-19 pandemic, that has not come to pass, at least not yet. Federal stimulus, the rebound of hotel demand and lender flexibility all helped buoy owners along during the worst of the pandemic into the recovery.
However, not all recoveries are made equal, and maturing debt and renovations coming due can exacerbate a slower rebound.
Both Park and Ashford showed signs early in 2023 that they were in some trouble. In February, Ashford CEO Rob Hays told investors during the company’s fourth-quarter and full-year 2022 earnings call that it was planning on selling some of its hotels to help deleverage its balance sheet.
"We have a handful of assets we've identified internally as our potential for-sale assets that are maybe not long-term core assets, and we are working with a variety of brokers to figure out what is the best timing," Hays said on the call. "Some of those are in the market right now and some maybe have size or scale where we think it's hard to achieve a certain sales price. If there's value in it, we are out in the market right now. We have a lot of irons in the fire."
Similarly, Park Chairman, President and CEO Tom Baltimore Jr. said during his company’s earnings call in February that the company was studying carefully the situation involving its $725 million mortgage loan for the two San Francisco hotels that would mature in the fourth quarter of this year.
"Rest assured, we will have it solved by the third quarter if not sooner," he told analysts. "And we've got optionality. We could put debt on an asset or a combination of assets. We could extend. We could reach out to the servicer. There are a number of different things that we can do here, so we're not at all alarmed."
Over the coming months, neither REIT saw their situations improve. Ashford ran into trouble with its plan to sell off hotels, with Hays telling investors during its first-quarter earnings call in May that the company didn’t have access to debt markets and there were few buyers out there.
"Capital recycling remains an important component of our strategy and we continue to pursue opportunities to sell certain noncore assets," Hays said. "We've identified several assets that we may bring to market for sale if market conditions warrant. The proceeds of those sales would go towards paying down debt."
Days after the call, Ashford announced the successful refinancing of two maturing hotel loans into one non-recourse loan totaling $98.5 million. The loans for the 157-room La Posada de Santa Fe, a Tribute Portfolio Resort & Spa, and the 252-room Hilton Alexandria Old Town, were set to mature in 2023, but the refinancing pushed the debt maturity back three years with two, one-year extension options.
For Park, the possibility of losing the two San Francisco hotels edged closer to reality. Baltimore told investors and analysts during the company’s May earnings call that “all options are on the table.”
"Look, these are never cut and dry,” he said. “So, if we were, hypothetically, to give back the keys, there's a forgiveness of debt and the income we would have we are able to shield, certainly most of that, but not all of that. It would result in a potential dividend payout of $150 million to $200 million approximately, in theory. And it obviously reduces our leverage."
One month later, Park announced it was ceasing payments starting in June toward the Parc 55 and the Hilton San Francisco Union Square. Baltimore said in a news release that the decision was in the best interest of the company’s stockholders to reduce their exposure to the San Francisco market.
“Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges — both old and new: record-high office vacancy; concerns over street conditions; lower return to office than peer cities; and a weaker-than-expected citywide convention calendar through 2027 that will negatively impact business and leisure demand and will likely significantly reduce compression in the city for the foreseeable future,” he said. “Unfortunately, the continued burden on our operating results and balance sheet is too significant to warrant continuing to subsidize and own these assets."
By early July, Ashford’s executives decided their REIT, too, needed to hand back the keys to 19 hotels after failing to meet debt yield tests on maturing loans. The hotels sat in three pools of CMBS loans that would have required $255 million in paydowns to extend their loan terms, a move that executives thought would create negative equity value. The REIT was making required paydowns of up to $129 million for one-year extensions on loans for 15 other properties in its portfolio.
"The company has been in discussions with the lenders on these loan pools seeking modifications to the extension tests, but at this time, it appears that the most likely outcome will be a consensual transfer of these hotels to the respective lenders," an Ashford news release stated.
In late July, Hays said in an interview with CoStar News that he had been working to deleverage the company since becoming CEO in 2020. The company had tried to sell several of the hotels it was turning back to lenders, but it did not receive any bids that valued the properties above what the company owed.
"The decision was primarily an economic one due to several factors including the [hotels] we are handing back have negative equity value, meaning that the combined property values are below the nominal value of the debt," Hays said. The hotels "have significant upcoming renovation and CapEx needs that we don't believe will get meaningful returns" and the loans are not "covering their interest expense at these high short-term interest rate levels."
During Ashford’s second-quarter earnings call, Hays said the REIT was repositioning itself to pay down debt it took on as a result of the pandemic. It sold 79 units at WorldQuest Resort in Orlando, a condo-style hotel, for $14.8 million, and at the time it had three limited-service hotels and a full-service hotel on the market.
"You will likely see us get more aggressive here in the next few quarters on some asset sales both in order to clean up the portfolio, but you'll also see assets that we like and are solid assets, but have some equity value to generate some proceeds," Hays said. "We do see asset sales as a crucial part to what we are doing in the next couple of years to get the portfolio and capital structure where we want it."
Baltimore confirmed the REIT's decision to hand back the keys for the two San Francisco hotels during the company’s August earnings call.
“I want to emphasize that this decision is not intended to be a negotiating tactic, and we continue to work with the servicer to divest these assets as quickly as possible," he said.
While Baltimore cited the troubled San Francisco market as a key driver in the REIT’s decision to stop payments on its loan for the Parc 55 and Hilton San Francisco Union Square, he said the company still owned several hotels in the Bay area, including San Francisco proper. He said he expects an “elongated recovery” for the market, which is why it made financial sense to turn over the keys for the two troubled hotels with a $200 million renovation due and the $725 million loan maturing.
By November, with Park’s troubled San Francisco hotels officially in receivership, Baltimore said in its recent earnings call that the company was ready to move on.
"We've eliminated the noise around San Francisco," he said. "We could not be prouder. ... We are glad to be moving forward. There is a clear path forward and really positive tailwinds for Park as we look forward."
For Ashford, the company had not yet completed turning over the 19 troubled properties in its portfolio. Ashford Chief Financial Officer Deric Eubanks said during the company’s third-quarter earnings call that the transaction process seems to be taking longer.
"Hopefully, by the end of the year, all 19 of those hotels will be transferred to the lender," he said.
The company was still working on its hotel disposition strategy with plans to use proceeds from those sales to pay off its $200 million loan that it borrowed from Oaktree Capital Management in January 2021. At the time of the call, there was still $107 million left to pay off. In total, the REIT had $3.6 billion in loans with a blended average interest rate of 7.9%, not including loans that weren’t extended during the year.
Trouble continued to follow the REIT, however, when Morgan Stanley Bank, Barclays Bank and Bank of America sued Ashford, claiming it had breached its contracts in defaulting on loans tied to 14 hotels. The hotels are included in the 19 that Ashford had been turning back to lenders.
Court documents show the three banks originally loaned $293.8 million for the 14 hotels in question. The banks are asking the court to appoint a receiver to preserve their value and stay compliant with brand standards.