Acrophyte Hospitality Trust, a Singapore-listed real estate investment trust owning 32 select-service hotels across 17 U.S. states, is undertaking a strategic review that could result in significant changes to its portfolio or structure as it faces a critical financial situation.
Acrophyte needs about $100 million for brand-mandated renovations and building maintenance to its hotels to be completed between 2025 and 2027, according to an Acrophyte securities filing Sept. 27 in Singapore. Yet it has limited options to raise enough cash to complete the work. The hotel renovations were deferred during COVID-19, creating a backlog.
If it is unable to comply, the REIT risks having its franchise terminated and portfolio devalued, according to the filing.
The situation reflects broader challenges facing many U.S. hospitality owners and operators. Revenue per available room growth year to date is only 0.2%, and the average annual increase in average daily room rate is 1%, according to CoStar analysis. In addition, international inbound travel to the United States has been declining for several months during a period of uncertainty resulting from tariff negotiations and tightened border security.
While Acrophyte's revenue per available room has recovered to pre-COVID levels, other factors such as inflationary cost pressures, supply and labor shortages, wage increases, increases in insurance costs, and increases in debt costs continue to represent headwinds to performance, according to the filing.
The REIT's primary securities have been trading at about a 68% discount to net asset value, the filing said.
CoStar News reached out to Acrophyte for comment, but didn't immediately hear back.
Facing limited options
In its announcement, Acrophyte reported it is considering various options to address the capital expenditures. However, there are limiting factors to each option, it said.
The thin trading volume of the REIT's shares and the steep discount to net asset value further challenge raising additional equity. In addition, under U.S. REIT tax rules, the Tang Organization, the REIT's sponsor, currently owns 28.26% of the stock, just under the 30% limit.
Acrophyte said it would only be able to borrow about $58.6 million under Singapore's REIT debt limits of 50% to value, leaving a $41.4 million shortfall. In addition, current debt costs of about 6.5% exceed property income yields of 5.7%, resulting in a negative carry, the REIT said.
Property sales are another option. However, progress on that front has been slow. The REIT has sold only one hotel so far this year — the Hyatt Place Detroit Auburn Hills Hotel, which sold in September for $6.65 million.
In announcing the sale, Acrophyte said it decided to sell the hotel because it was underperforming compared to the rest of its hotel portfolio. The company cited the age of the asset, the cost of needed improvements, declining performance, and operational challenges due to a tight labor market in the area.
The filing noted that Acrophyte’s existing debt agreements require proceeds from any divestment of pledged hotels to be applied toward debt repayment rather than funding renovations.
To overcome the limitations of each individual option, Acrophyte said it is exploring a variety of outcomes including a potential sale of the entire portfolio, potentially going private, or pursuing a merger with another REIT. Acrophyte said it may also suspend or reduce distributions to retain capital. The REIT's distribution amounts for 2024 were about $9.3 million.
Additionally, Acrophyte said it intends to appoint a U.S.-based broker to identify and initiate discussions with credible parties on their potential interest in the portfolio.