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[IMGCAP(1)]DALLAS-Ashford Hospitality Trust Inc., getting bruised by spiking Libor rates, has secured a 3.75% cap as an insurance policy for another $800 million. The one-year tax hedge with French bank Calyon will cost $1.77 million in cash, but is a safety net for a REIT strategy that went into play earlier this year when it swapped fixed rates for floating.

The publicly traded REIT’s team did not respond to requests for an interview about the SEC filing. Of the 10 traditional hotel REITs, Dallas-based Ashford has substantially more floating rate debt than its peers, with 90% of its $2.69-billion debt tied to Libor. In the first quarter, Ashford moved $1.8 billion of fixed-rate debt to a one-month Libor structure, which was 2.64% at the time. A three-year cap at 3.75% was embedded in the deal.

Since then, the Libor rate, which resets monthly, has topped 4%, driving the REIT to explore options to safeguard its strategy for its other floating-rate vehicles. [IMGCAP(2)]“They saw how the market perceived the risk and they wanted to limit their exposure,” explains David Loeb, senior real estate research analyst and managing director of Milwaukee-based RW Baird & Co. “It’s a prudent thing to do.”

Libor would have to stay at 4% or higher for one straight year before Calyon would end up losing on the bet, according to Loeb’s calculation. “It’s probably not a bad bet,” he tells GlobeSt.com. “The market is open for this, but it’s expensive.” Calyon’s clock starts ticking Oct. 14.

Loeb says the floating-rate strategy is common during slow times so the REIT’s action wasn’t out of line nor was it contrary to industry norms. All REITs have floating-rate debt, but Ashford has more than most. Ironically, Irving, TX-based FelCor Lodging Trust Inc. has the second highest floating-rate debt of the hotel REITs: 47% of its $1.49-billion burden.

“Most of the time it works. This time it doesn’t. Banks don’t trust each other,” Loeb says, estimating the first swap will cost Ashford about $10 million more than if the fixed rate had been left alone. “It’s an oddity, but it’s hurting them.” As for FelCor, which cut its dividend last week, he says “it will be interesting to see what they will do.” Hospitality experts are now saying all hotel REITs should be looking at dividend cuts, according to the Wall Street Journal.

Loeb says Ashford most likely will cut its dividend too before the year ends, possibly by half. Ashford’s stock closed at $2.36 yesterday, the lowest it’s been since its IPO launch at $9 per share in August 2003. The REIT, long considered an out-performer in Loeb’s eyes, has been downgraded to neutral, joining the lion’s share of the nation’s hotel REITs. Loeb’s price target for Ashford is $3 to $5 per share while FelCor, also rated as neutral, is $5 to $8 per share.

“It doesn’t mean it won’t come back a lot. They’re smart guys,” Loeb says. “If everything works out OK, they’ll be back in the black.”

[IMGCAP(3)]Loeb says most of Ashford’s shareholders are expecting a dividend cut. Ashford president and CEO Monty J. Bennett and his team have penciled Nov. 6 for the earnings call, but Loeb believes the cut won’t hit until December.

“Given the overall higher leverage of the company, and the expectation for meaningfully weaker RevPAR, we expect that management will make the prudent decision to conserve capital rather than fund the dividend from its credit line,” says Loeb, whose firm in the only one that covers all hotel REITs in the US.

Based on details in the SEC filing, the deal with Calyon’s New York City branch was difficult to negotiate as would be expected. Denver-based Chatham Financial Corp. pulled the deal together for the REIT. “Over the past weeks, Ashford, Wachovia and Chatham worked through various scenarios” so Ashford could “protect the remaining $800 million of floating rate exposure,” the REIT says in the filing. “As credit was no longer an issue Chatham was able to bring other potential counterparties to the mix.” Chatham gathered bids from three banks, with Calyon pitted against Wachovia for the business of the upscale owner of gems like the El Conquistador Resort at 10000 N. Oracle Rd. in Tucson.

“Calyon was far and away the best level,” the SEC filing details, noting the initial price of $1.5 million “was so good that Chatham requested they double check the trade in order to be sure it was a tradable level.” Calyon came back with $1.77 million to Wachovia’s $21.9 million.

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