New York building under construction with financial alert tag

After spending much of 2021 attempting to reorganize its debts amidst liens, defaulted loans, and a loss of revenue from the COVID-19 pandemic, Hospitality Investors Trust, Inc. filed for Chapter 11 bankruptcy protection on May 19, 2021 — entering a prepackaged agreement to give control of the company to Brookfield Asset Management, Inc.

Hospitality Investors is a real estate investment trust — a company that owns and operates real estate properties. As of the fourth quarter of 2020, the company had a $2 billion investment portfolio which included stakes in 100 properties.

The company’s portfolio is focused on partnerships with major international franchisers, as it owns 47 Hilton hotels, 45 Marriott hotels, and eight Hyatt hotels. 

In its bankruptcy filing, the company listed its financial situation as of March 31, 2021, with a dip in assets to $1,701,867,000 noted alongside $1,360,423,000 in debts — the vast majority of which are owed to mortgage lenders.

Hospitality Investors’ first-quarter report to the US Securities and Exchange Commission (SEC) outlined the company’s short-term struggles. The company notes that in December 2020 it had access to cash and cash equivalents totaling $48.4 million — a number that had fallen to $28.3 million by March 31, 2021.

Chapter 11 bankruptcy allows for a company to offer a plan to reorganize and restructure its debts while continuing business operations. Hospitality Investors’ particular bankruptcy filing is “prepackaged,” with the plan for restructuring already negotiated with its creditors and approved by the company’s shareholders.

Hospitality Investors’ plan also gives 100% of its equity to Brookfield Asset Management, the company’s largest investor. Hospitality Investors noted in its first-quarter 2021 SEC filing the absolute necessity of having outside support to repair its cash flow issues, saying that “the Company will soon require additional liquidity from a source other than property operations, and to date the Company not been able to identify an available source that can satisfy this requirement other than the Brookfield Investor.”

Hospitality Investors’ cash flow problems have affected multiple contractors

Even as the vast majority of the company’s liabilities are to its mortgage lenders — with contingent debt to these lenders totaling $1,334,000 — Hospitality Investors’ liquidity issues have begun to affect contractors who have worked on the company’s properties.

According to documents detailing the company’s 20 largest claims, the company has a total of at least $103,148.65 in unsecured claims owed to 10 contractors in Maryland, Florida, Massachusetts, Texas, New Mexico, Georgia, New Jersey, and Indiana.

In addition, the company has also faced recent liens over non-payment, though the company has made efforts to resolve them. A mechanics lien filed June 1, 2020, by contractor Interstate Restoration, LLC for $9,804.12 of work done on a Fort Collins, Colorado Hilton Garden Inn was resolved and released after just over two weeks on June 17, 2020.

However, there are still multiple active liens on Hospitality Investors’ properties, illustrating the difficulty the company has had dealing with even small needs for its cash flow.

A June 9, 2020, lien filed by Fibergrate Composite Structures Inc. claims $33,414 in services for work done on a parking garage in Louisville, Kentucky, while a November 13, 2020, lien filed by National Air Corp. claims $9,786.29 over a Springhill Suites by Marriott hotel in Round Rock, Texas. Both liens are still active through the company’s bankruptcy proceedings.

Struggling state of the hospitality industry greatly influenced Hospitality Investors’ bankruptcy

In its March 31, 2021, financial statement to the SEC, Hospitality Investors focused on the impact of the pandemic and subsequent reduced travel on its operations, stating that “In early March 2020, the Company started to experience the effects of the coronavirus pandemic on its business through softening of demand…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…through the remainder of 2020 and into the first and second quarters of 2021 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…that have included restrictions on travel and the operation of many businesses as well as event cancellations, capacity limits and social distancing measures,” the report continued.

These struggles are unfortunately not unique to Hospitality Investors’ situation. Estimates from the American Hotel and Lodging Association’s 2021 State of the Hotel Industry report noted that hotel room revenue fell from $167 billion in 2019 to $85 billion in 2020, while hotels ran at near 44% occupancy in 2020 — a stark contrast when compared to 66% occupancy in 2019.

As the report continued, half of US hotel rooms are expected to remain empty in 2021, while business travel — a major source of revenue for Hospitality Investors’ higher-end properties — is projected to remain 85% lower than 2019 levels through at least April 2021.

Data analysis provider STR reported a decline of 84.6% in US hotels’ gross operating profit per available room (GOPPAR) in 2020. In 2019, U.S. hotels gained $245.10 in total revenue per available room and $94.72 in GOPPAR — in 2020, these levels fell significantly to $88.90 and $14.62.

However, the company and analysts alike to forecast recovery in the near future, with Hospitality Investors noting that “The Company saw gradual recovery in occupancy levels at its hotels primarily from leisure travel in the summer and into the fall of 2020 followed by some slowing of the recovery as an additional wave of the pandemic developed in the late fall.” 

“As the newly developed vaccines were made more widely available during the first quarter of 2021, occupancy levels have continued to gradually improve,” the company’s statement continued.

This small level of optimism was echoed by the American Hotel and Lodging Association’s report, adding that “The second phase of recovery is forecasted to resume in Q2 2021.”

For now, however, the industry’s situation has not been able to improve enough to keep Hospitality Investors from requiring Chapter 11 protection, as it notes that, despite improvements “Overall, the number of guests at hotels [owned and operated by the company] remains significantly lower than historical levels due to the ongoing impact of the coronavirus pandemic.” 

As the company maintained in its first-quarter report to the SEC, it anticipates that “this trend of significantly lower guest demand and revenue across its hotel portfolio will continue and the extent to which the coronavirus pandemic will impact the Company’s financial results will depend on future developments, which are unknown and cannot be predicted.”