Ashford Hospitality Trust, a real estate investment trust with hotels throughout the United States, is trying to better position itself financially after years of back and forth with lenders and deciding whether it is more economical to pay to extend loan due dates or hand over the keys of the properties.

With capital markets constrained, Ashford alerted investors in July that it plans to hand back 19 hotels to lenders — and industry executives say the REIT isn't the only owner parting with properties. Owners that took on debt early in the pandemic are finding it difficult to refinance today, said Tanya Little, founder and managing partner of Hart Commercial who tracks the distressed real estate market.

"Ashford is a pretty good operator but, if they were like other hotel owners, they took on liabilities when they couldn't operate during COVID and it makes it unattractive for them to refinance that debt today," Little told CoStar News. "There's going to be a value reset, especially in office, where the value drops are so large that the borrowers that have those properties may questions why they would even spend money to try to hold onto them."

That was the case with Ashford telling investors of its plans to hand back the keys for 19 hotels rather than paying $255 million to extend loan terms. However, Ashford Trust is making required paydowns adding up to $129 million for a one-year extension to loans for 15 additional properties. The company's next due date for a loan — backed by Morgan Stanley and tied to 17 hotels — comes in November, but Ashford doesn't anticipate needing to make paydowns on that loan, according to a spokeswoman for the REIT.

Rob Hays, president and CEO of Ashford Trust, told CoStar News the Dallas-based REIT's decision to hand over the keys of the 19 hotels "was a big step in helping Ashford Trust for a healthy future. It moved the needle quite a bit in terms of making progress with our biggest challenge, which is the long-term optimization of our capital structure and cash flows."

The REIT conducted so-called extension tests on the hotels, including analyzing their value and the $80 million needed in capital expenditures at the properties, as well as other costs associated with extending the loan to make sure it made more financial sense to hand back the keys to the 19 hotels. The process of transferring the hotels to the lender is underway but has not yet been finalized, Ashford's spokeswoman told CoStar News.

The hotels being given back to lenders are primarily limited-service hotels and span the country, including in Arizona, California, Georgia, Indiana, Maryland, Nevada, New Jersey, North Carolina, Pennsylvania and Texas.

Hays sees "incredible opportunities" for the REIT in the future, including putting its capital-raising initiatives in its own hands by launching Ashford Securities. The Ashford subsidiary recently announced it raised $500 million, including $42.1 million from institutions, over the past two years. The funds are targeting real estate in Texas.

"The public markets have been very poor at valuing the private market values of lodging REITs and, as a result, stock prices have been low and capital raising has been mostly shut down," Hays told CoStar News. "But we see many opportunities to capture value in times when stock prices are low, so by being able to access capital that is outside of the traded public markets, we believe that we can create value for our shareholders in both good and bad times."

Hays has sought to deleverage Ashford Trust since taking the reins of the REIT in 2020. The trust marketed several of the hotels they now plan to turn back to lenders but did not receive any bids for above what was owed on the hotels.

"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."

Some hotel operators "kicked the can" of renovations down the road from the onset of the pandemic and now those upgrades are needed, said Little with Hart Commercial. That only adds to the bill to keep property and debt in place.

But Ashford's decision to pay for the one-year extension to loans for 15 other properties shows they are confident in those hotels, said Little, who is not directly involved with Ashford's business.

"This was a strategic decision about their portfolio as a whole, putting equity into hotels with strong underlying economics and letting others go," Little said, adding, "There's tons of hotels out there with loans coming due."

Hotels have become popular with some real estate investors, with the real estate type being seen as "a great inflationary hedge" by would-be buyers, said Parker Sherrill, a director at Newmark in the firm's hospitality platform.

But potential sellers are being patient, if they are able, and it's taking longer for hotel deals to cross the finish line, he added.

"In the lodging space, on a year-to-date basis compared to the same period last year, the transaction volumes have fallen off significantly, or roughly by half," Sherrill told CoStar News, saying unpredictable capital markets and economic uncertainty plays a role in the constrained deal flow for hotels.

The leisure hotel market, which was a hot commodity among investors last year, has cooled as U.S. consumer spending has softened with inflation, he said, adding fewer employees able to work remotely has also likely cut down on travel and playing a role in cooling down leisure hotel demand.

"There's definitely a reason to wait if you are a seller. Investors are hesitant and skittish — quick to back off a deal — compared to last year," Sherrill said.