Ashford Hospitality Trust, Inc., together with its subsidiaries, is a self-advised real estate investment trust (“REIT”). We commenced operations in August 2003 with the acquisition of six hotel properties (the “Initial Properties”) in connection with our initial public offering. We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership, our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of the Company, serves as the sole general partner of our operating partnership.
During 2004, we acquired 15 hotel properties in seven transactions. In 2005, we closed three purchase transactions, resulting in the acquisition of 43 hotel properties. In 2006, we acquired an additional nine hotel properties in five transactions. In April 2007, we acquired a 51-property hotel portfolio (“CNL Portfolio”) from CNL Hotels and Resorts, Inc. (“CNL”). Pursuant to the purchase agreement, we acquired 100% of 33 properties and interests ranging from 70% to 89% in 18 properties through existing joint ventures. In connection with the CNL transaction, we acquired the 15% remaining joint venture interest in one hotel property not owned by CNL at the acquisition and acquired in May 2007 two other hotel properties previously owned by CNL (collectively, the “CNL Acquisition”). In December 2007, we completed an asset swap with Hilton Hotels Corporation (“Hilton”), whereby we surrendered our majority ownership interest in two hotel properties in exchange for Hilton’s minority ownership interest in nine hotel properties. Net of subsequent sales and the asset swap, 42 and 43 of these hotels were included in our hotel property portfolio at December 31, 2009 and 2008, respectively. In 2008, we completed the sale of nine hotel properties and an office building for an aggregate sales price of $437.1 million. We received net proceeds of $428.5 million from the sales and recognized a net gain of $48.5 million.
In addition, beginning in March 2008, we entered into various derivative transactions with financial institutions to hedge our debt to improve cash flows and to capitalize on the historical correlation between changes in LIBOR and RevPAR. Through December 31, 2009, the derivative transactions made us income of $62.6 million.
In response to the recent financial market crisis, we have undertaken a series of actions to manage the sources and uses of our funds in an effort to navigate through challenging market conditions while still pursuing opportunities that can create long-term shareholder value. In this effort, we have attempted to proactively address value and cash flow deficits among certain of our mortgaged hotels, with a goal of enhancing shareholder value through loan amendments, or in certain instances, consensual transfers of hotel properties to the lenders in satisfaction of the related debt, some of which will likely result in impairment charges. In December 2009, after fully cooperating with the servicer for a consensual foreclosure or deed in lieu of foreclosure, we agreed to transfer possession and control of the Hyatt Regency Dearborn to a receiver. Additionally, we are continuing to negotiate a consensual transfer of the Westin O’Hare hotel to the related lender. In each of these instances, the hotel was not generating sufficient cash flow to cover its debt service and was not expected to generate sufficient cash flow to cover its debt service for the foreseeable future. The loans secured by these hotels, subject to certain customary exceptions, were non-recourse to us. We may continue to proactively address value and cash flow deficits in a similar manner as necessary and appropriate.
As of December 31, 2009, we owned 96 hotel properties directly and six hotel properties through majority-owned investments in joint ventures, which represented 22,483 total rooms, or 22,141 net rooms excluding those attributable to joint venture partners. Our hotels are primarily operated under the widely recognized upper upscale brands of Crown Plaza, Hilton, Hyatt, Marriott, Sheraton and Westin. All these hotels are located in the United States. As of December 31, 2009, we also owned $55.7 million of mezzanine or first-mortgage loans receivable. In addition, at December 31, 2009, we had a 25% ownership in a joint venture which had $80.9 million of mezzanine loans. See Notes 3, 5 and 6 of Notes to Consolidated Financial Statements included in Item 8.
For federal income tax purposes, we elected to be treated as a REIT, which imposes limitations related to operating hotels. As of December 31, 2009, 101 of our hotel properties were leased or owned by our wholly-owned subsidiaries that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, these subsidiaries are referred to as “Ashford TRS”). Ashford TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to these properties are included in the consolidated statements of operations. As of December 31, 2009, one hotel property was leased on a triple-net lease basis to a third-party tenant who operates the hotel. Rental income from this operating lease is included in the consolidated results of operations.
We do not operate any of our hotels directly; instead we employ hotel management companies to operate them for us under management contracts or operating leases. Remington Lodging & Hospitality, LLC (“Remington Lodging”), our primary property manager, is beneficially wholly owned by Mr. Archie Bennett, Jr., our Chairman, and Mr. Monty J. Bennett, our Chief Executive Officer. As of December 31, 2009, Remington Lodging managed 46 of our 102 hotel properties while third-party management companies managed the remaining 56 hotel properties.
BUSINESS STRATEGIES
CURRENT STRATEGIES
The U.S. economy has been in a recession since December 2007 caused by the global credit crisis and declining GDP, employment, business investment, corporate profits and consumer spending. As a result of the dramatic downturn in the economy, lodging demand in the U.S. declined significantly throughout 2009 and we have experienced significant declines in demand for hotel rooms associated with leisure, group, business and transient travel. Despite this negative trend, our overall current strategy is to take advantage of the cyclical nature of the hotel industry. We believe that, in the current cycle, hotel values and cash flows, for the most part, peaked in 2007. However, we also believe that the hotel industry will recover and achieve those values and cash flows again. The question is when. Currently, we believe we will not achieve similar cash flows and values in the immediate future. Industry pundits believe the industry will achieve these cash flows by 2014 through 2016.
As a result of the current unprecedented recession, we have incurred significant impairment charges against earnings from our mezzanine loan investments. Because of these difficulties and in light of the continuing challenging market conditions in the hotel industry, investing in mezzanine loans is not one of our priorities at this time. However, as the global economic environment improves and the hotel industry stabilizes, we may refocus our efforts on the acquisition or origination of mezzanine loans at that time. Given the greater repayment risks of these types of loans, to the extent we pursue a mezzanine loan investment strategy in the future, we will likely have an even more conservative approach in underwriting these types of investments.
Based on our primary business objectives and forecasted operating conditions, our key priorities and financial strategies include, among other things.
preserving capital, enhancing liquidity, continuing current cost saving measures, and creating long term shareholder value;
implementing selective capital improvements designed to increase profitability;
implementing asset management strategies to minimize operating costs and increase revenues;
repurchasing capital stock subject to regulatory limitations and our Board of Directors’ authorization;
financing or refinancing hotels on competitive terms;
utilizing hedges and derivatives to mitigate risks; and making other investments and pursuing other strategies that our Board of Directors deems appropriate.
The above strategy differs somewhat from our long-term investment strategy described below, which is to continue to invest in a variety of lodging-related assets; however, our current strategy reflects the difficult choices we are facing in the current business cycle. As the business cycle changes and the hotel markets recover, we intend to adjust to such changes and attempt to capitalize on favorable market fundamentals within the lodging industry. Any such shift in our strategy may come about suddenly and without notice due to other changes that affect us, the presentation of compelling investment opportunities, or for other reasons beyond our control.