Things went from bad to worse at Hospitality Investors Trust. Last year, they had to enter into a forbearance agreement with certain lenders. Earlier this year the DI Wire reported on a liquidity dilemma at Hospitality Investors Trust. Now at last the inevitable has happened. Hospitality Investors Trust has filed for bankruptcy.
On May 19, 2021, Hospitality Investors Trust, Inc. (HIT) announced that it and certain operating subsidiaries had filed voluntary bankruptcy petitions under Chapter 11 of the Bankruptcy Code. The United States Bankruptcy Court for the District of Delaware is administering the cases under the caption In re: Hospitality Investors Trust, Inc., et al.
HIT and affiliates filed for first day relief including the authority to pay certain vendors, suppliers and employee wages and benefits in the ordinary course of business as well as for approval of a debtor in possession (DIP) financing facility of up to $65 million in aggregate principal balance. Brookfield (via multiple affiliates), which had previously made an approximately $300 million investment in HIT, has agreed under a restructuring support agreement to “support and take any and all commercially reasonable, necessary or appropriate actions in furtherance of the consummation of the restructuring transactions.” HIT noted that it had received approval from “certain of the Company’s lenders, franchisors and other parties in interests” regarding the planned restructuring and that implementation of the planned restructuring will not constitute a default or triggering event under certain loans or financial obligations.
Under the proposed restructuring plan, the existing common stock will be cancelled and exchanged into non-transferable contingent valuation rights (CVRs) which will receive distributions once certain hurdles are achieved for Brookfield. The maximum value of the CVRs is $6.00. Considering the retail investors originally bought in at $25.00, this is probably a painful outcome. At least there will be some tax benefits.
Hospitality Investors Trust has a long and sordid backstory. Formerly known as American Realty Capital Hospitality Trust, it raised capital quickly from the broker-dealer channel right at the peak of Nick Schorsch’s reign as the non-traded REIT Czar. However it got overextended financially, and everything unwound right as an accounting scandal broke out at American Realty(now known as VEREIT. (See “History Repeats: The Serpent on the Rock” for details on this). Eventually they struck a Faustian bargain with Brookfield, who bailed them out in exchange for some extremely generous preferred stock. Then the pandemic hit.
Many analysts have speculated that there is a lot of pent up demand for travel. If that is the case, then there is a lot of upside for the hospitality industry. There might be upside for Hospitality Investors Trust, but its complex capital structure means it will take a lot before the outside shareholders benefit. Its possible that the CVRs resulting from this bankruptcy might achieve the full targeted payout of $6.00. Considering that shares have recently exchanged hands at $0.50, this might be an extreme deep value play, albeit with a lot of risk. One thing is for certain: Brookfield will do extremely well no matter what happens.