Hospitality Investors Trust Negotiates Alternative to Class C Share Distributions
December 29, 2020 | James Sprow | Blue Vault
On December 28, 2020, Hospitality Investors Trust, Inc. (“the Company”) filed an 8-K with the SEC describing an amendment to the Limited Partnership Agreement (the “LPA”) with Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the “Brookfield Investor”), the holder of all issued and outstanding units of the limited partner interest in the Operating Partnership (the “OP”) entitled “Class C Units.”
Blue Vault views the December 28, 2020, 8-K filing as evidence that the REIT will effectively become controlled by the Brookfield Investor, and the Brookfield Investor will have the option at some point to liquidate the REIT’s hotel portfolio to make any and all payments or distributions due or past due with respect to the Class C Units. The REIT’s estimated net asset value per share of common stock as of December 31, 2019, that was announced on April 21, 2020, of $8.35 per share, has been rendered meaningless given the events since March 2020, and it is now doubtful that an estimated net asset value per share of common stock as of September 30, 2020, would be more than a small fraction of that December 31, 2019, estimated value.
From the 8-K filing:
“…due to the impact of the coronavirus pandemic on the Company’s business, the Company expects it will no longer have sufficient cash on hand to continue to pay its current obligations during the first half of 2021 and the additional liquidity from a source other than property operations the Company requires may not be available on favorable terms or at all. The objective of the LPA Amendment is to preserve at least in the short-term the Company’s cash position as it continues discussions with the Brookfield Investor regarding a holistic solution to the Company’s liquidity dilemma. If there is a material breach by the OP of the A&R LPA, which may include, subject to certain conditions similar to those applicable to the PIK Redemption, failure to pay the full amount of cash distributions on Class C Units to the Brookfield Investor on any quarterly distribution date, the Brookfield Investor’s right to require the OP to redeem all the Class C Units at a significant premium would arise. If the OP fails to complete any redemption when required to do so (including a PIK Redemption), other severe consequences would also arise, such as the activation of rights that would allow the Brookfield Investor to appoint a majority of the Company’s board of directors and commence selling the assets and properties of the OP until the Class C Units have been fully redeemed. As previously disclosed, the Company has been engaged in ongoing discussions with the Brookfield Investor regarding the Company’s strategic and liquidity alternatives. There can be no assurance the Company will be able to enter into a recapitalization agreement as contemplated by the LPA Amendment on favorable terms, or at all, or that the discussions with the Brookfield Investor will otherwise be successful. Any failure in this regard could materially and adversely affect the Company.”
According to the Company’s quarterly report for the quarter ended September 30, 2020:
“On April 21, 2020, the Company’s board of directors unanimously approved and the Company published an updated Estimated Per-Share NAV equal to $8.35 based on an estimated fair value of the Company’s assets less the estimated fair value of the Company’s liabilities, divided by 39,151,201 shares of common stock outstanding on a fully diluted basis as of December 31, 2019 (the “2020 NAV”). The 2020 NAV and the underlying estimates and assumptions are as of December 31, 2019, and have not been revised to reflect any potential negative impact on the Company of the coronavirus pandemic or any other transactions or events occurring subsequent to December 31, 2019. While the Company’s board of directors has approved the 2020 NAV, it has only done so for the sole purpose of allowing the Company to comply with applicable rules of FINRA for use on customer account statements. As a result of the existing and anticipated impact of the coronavirus pandemic and taking into consideration the declines in publicly traded hospitality company stock prices during 2020, the Company’s board of directors believes the 2020 NAV is significantly above the current value of a share of common stock. Accordingly, stockholders should not rely on the 2020 NAV in respect of any investment decisions relating to the Company, including in making any decision to buy or sell shares of the Company’s common stock. The Company intends to publish an updated Estimated Per-Share NAV on at least an annual basis.”
“The Brookfield Investor holds all the issued and outstanding Class C Units and the sole issued and outstanding Redeemable Preferred Share (as defined herein), and, as a result, has significant governance and other rights that could be used to control or influence the Company’s decisions or actions. As of September 30, 2020, the total liquidation preference of the issued and outstanding Class C Units was $427.7 million. The Class C Units are convertible into units of limited partner interest in the OP entitled “OP Units” (“OP Units”), which may be redeemed for shares of the Company’s common stock or, at the Company’s option, the cash equivalent. As of the date of this Quarterly Report on Form 10-Q, the Brookfield Investor owns or controls 42.6% of the voting power of the Company’s common stock on an as-converted basis.”
“As part of its investment strategy to continue to pursue the sale of non-core hotels and reallocate capital into other corporate purposes, including debt reduction, the Company commenced marketing for sale a total of 45 hotels during the year ended December 31, 2019. As of September 30, 2020, 43 of these hotels have been sold and the remaining two hotels were subject to definitive sale agreements where the buyer had made a non-refundable deposit. However, due to the impact of the coronavirus pandemic, the Company was not able to conclude as of September 30, 2020, that the sales are probable to occur and to close within one year, so the Company has not classified the hotels as held for sale as of September 30, 2020. During October 2020, the pending sale of one hotel was terminated due to the buyer’s default and the Company was entitled to retain the non-refundable deposit as liquidated damages.”
“As of September 30, 2020, the Company owns or has an interest in a total of 101 hotels with a total of 12,673 guest rooms located in 29 states. As of September 30, 2020, all but one of these hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., and Hyatt Hotels Corporation or one of their respective subsidiaries or affiliates. The Company’s one unbranded hotel has a direct affiliation with a leading university in Atlanta.”
“In early March 2020, the Company started to experience the effects of the coronavirus pandemic on its business through softening of demand and revenue weakness across its portfolio triggered by direct guest cancellations at its hotels as well as cancellations of business and industry conventions and meetings in certain of its markets. These conditions significantly worsened over the course of the month and continued through the second and third quarters and into the fourth quarter as the level of overall travel has declined significantly due to concerns about the coronavirus pandemic and actions taken by governments, businesses and other organizations to contain the coronavirus that have included restrictions on travel and the operation of many businesses as well as event cancellations and social distancing measures. During the months of May through October, the Company has seen some return of demand primarily from leisure travelers with occupancy numbers improving each month from May through October, although the overall level of guests at its hotels remains substantially lower due to the continuing impact of the coronavirus pandemic. The Company anticipates that demand from business travelers will remain muted at least until the development and widespread distribution of a coronavirus vaccine.“
“If the OP fails to redeem Class C Units when required to do so pursuant to the terms of the A&R LPA, beginning three months after such failure BSREP II Hospitality II Special GP OP LLC (the “Special General Partner”), an affiliate of the Brookfield Investor, has the exclusive right, power and authority to sell the assets or properties of the OP for cash at such time or times as the Special General Partner may determine, upon engaging a reputable, national third party sales broker or investment bank reasonably acceptable to holders of a majority of the then outstanding Class C Units to conduct an auction or similar process designed to maximize the sales price. The proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on the Company or the OP.”
Source: SEC
