Ashford breaks pencils on 19 loans

DALLAS – The impact of higher interest rates on hotel owners’ ability to confidently refinance maturing hotel loans further reared its ugly head on Friday when Ashford Hospitality Trust announced plans to likely give back the keys on 19 underperforming hotels (3,583 keys) with $570 million in debt, predominantly limited-service and extended-stay, rather than paydown about $255 million to extend financing and spend another $80 million in capex through 2025.

“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,” Ashford’s statement read.

Ashford also said that it made deals on the debt of 15 other hotels(3,710 rooms)  by providing $129 million in paydowns with maturities extended to June 2024 when the same debt yields will be tested again for the final extension option.

Next, in November, Ashford will face debt maturities on 17 more hotels and Ashford President and CEO Rob Hays stated that he expects the company to extend those loans without additional paydowns.

Ashford believes the hotels likely to be returned, which sit in three pools of commercial mortgage-backed securities loans that matured in June, have negative equity values based on the combined trailing 12-month net operating income debt yield of 5.6% through the first quarter of 2023. The current interest rate for the loans is approximately 8.8%. Based on the current level of operating performance and the current SOFR rate, Ashford said the hotels were not covering debt service. The company marketed some of these assets but said it did not receive any bids above the existing loan balances.

For the most part, Ashford said the hotels are 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.

The move is expected to improve Ashford’s balance sheet by lowering leverage and materially improves our future cash flows. “The combination of the paydowns and the removal of the debt associated with the pools we are not extending will lower our debt by approximately $700 million, or more than 18%,” it said.

R.W. Baird analyst Michael Bellisario wrote that the jingle mail math is simple: the 19 hotels generated almost $32 million of trailing-12-month NOI (5.6% debt yield) and run-rate interest expense is ~$50 million based on today's SOFR rate. "The pools have negative equity, and the jingle mail decision will be addition by subtraction for Ashford's near-term cash flow profile (despite the hotels representing ~12% of trailing-12-month Adjusted EBITDA); the alternative would have been a $255 million paydown to meet with the extension tests."

Bellisario added that R.W. Baird had been modeling a broader restructuring and significant paydown of four asset pools. "More broadly, Ashford's actions highlight the challenges that borrowers are facing today, particularly as debt maturities approach. The hand back the keys vs. paydown decision is more difficult for higher-levered, floating-rate loans," he wrote.