Ashford Hospitality Trust, a real estate investment trust with 103 hotels spanning the United States, filed a lawsuit against an activist investor group alleging it is breaking REIT ownership rules and improperly trying to seize control of the company, the latest sign of an industry hit with reduced demand in the pandemic.

The REIT, based in Dallas, filed the lawsuit Tuesday in the U.S. District Court for the Northern District of Texas in Dallas alleging activist investor Atlanta-based Cygnus Capital and 15 affiliates have unlawfully formed a "wolf pack of raider investors" to attempt a takeover in the worst operating environment for the hospitality industry in generations. It also alleges violations of Ashford Hospitality's charter and securities laws, a test of REIT ownership rules that affect real estate companies around the country.

Ashford Hospitality has a 9.8% ownership limit, according to its charter, to ensure it keeps its REIT status, which is important to the tax position of its investors, according to the lawsuit. REITs are designed to be attractive to investors seeking relatively high distributions.

Ashford Hospitality argues that Cygnus and the other defendants, who share close family and business ties, violated federal securities laws by failing to disclose the formation of a "secret stockholder group" that purchased about 21% ownership of the REIT's shares in November.

"We do not make this decision lightly, but REIT ownership rules exist for a reason," said Kamal Jafarnia, chair of Ashford Hospitality's nominating and corporate governance committee, in a statement. "As a result, we are compelled to take this step to protect all Ashford Trust shareholders from Cygnus proceeding with an unlawful proxy contest and continuing violations of securities laws.”

Cygnus declined to immediately comment on the lawsuit in an email to CoStar News on Wednesday.

Ashford Hospitality, with 22,592 rooms, secured a $200 million loan last month from funds managed by Oaktree Capital Management, with the ability to expand the loan up to $350 million. Before it secured the loan, Ashford Hospitality had warned investors it could file for Chapter 11 bankruptcy protection if it was unable to secure funding to continue its operations in the challenging business environment for hotels, especially hit hard by the ongoing global pandemic.

The pandemic has led to little group meeting and convention business and fewer leisure travelers. Ashford Hospitality handed back at least 13 hotels to its lenders last year and has two hotels on the market as part of its strategy.

Ashford Hospitality's executives say the company has negotiated forbearance agreements on "the vast majority of its property level debt" and converted more than 30% of its outstanding preferred shares into common shares and raised up to $450 million in financing to give the REIT "ample liquidity" to capitalize on the anticipated recovery in the hospitality industry.

Executives with the REIT anticipate that once business returns to comparable pre-pandemic revenue levels, the company will see an increase in profitability and productivity, with margins of 300 basis points or more, after the pandemic has led to operational improvement in the hotel portfolio.

Ashford Hospitality Trust's legal counsel in the lawsuit is Cadwalader, Wickersham & Taft. Defendants listed in the lawsuit include Cygnus Capital, Cygnus Capital Advisors, Cygnus General Partners, Cygnus Capital Real Estate Advisors II, Cygnus Opportunity Fund, Cygnus Property Fund IV, Cygnus Property Fund V, Christopher Swann, Richard Burns, Shannon Johnson, William Miller Jr., Roderick Newton II, ThornTree Capital Partners, ThornTree Capital Master Fund, ThornTree Capital GP, and Rebecca Harvey.