Two of San Francisco’s largest hotels are headed to their loan servicer after their owner announced it would stop paying the debt.

Park Hotels & Resorts stopped making payments this month on a $725M CMBS loan tied to two of its San Francisco hotels. The Virginia-based real estate investment trust is looking to strengthen its balance sheet and shed the assets in San Francisco as the city continues a moribund recovery from pandemic lows.

The loan is serviced by Wells Fargo, according to CoStar, and is scheduled to mature in November. It backs the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco, which together make up around 9% of the city’s total hotel inventory.

A release from Park Hotels said the company would “work in good faith with the loan’s servicers to determine the most effective path forward, which is expected to result in ultimate removal of these hotels from its portfolio.”

Thomas Baltimore, the chairman and CEO of Park Hotels, said in the release that San Francisco’s recovery from the pandemic “remains clouded and elongated by major challenges — both old and new.”

Park chose to step away from the hotels because of San Francisco’s record-high office vacancy and slower pace of bringing workers back to the office, along with a weaker-than-expected convention schedule and concerns over street conditions, Baltimore said.

“Ultimately removing the loan and the hotels will substantially improve our balance sheet and operating metrics, as net leverage is reduced by nearly a full turn,” he said.

Baltimore first said on a May earnings call that Park was considering returning the keys to the hotels, saying that surrendering the properties would result in a dividend payout of about $150M to $250M.

The decision to stop making payments is part of a broader restructuring to increase profitability, Baltimore said Monday.

“Reducing the negative overhang from San Francisco will allow Park to continue to focus on our key priorities to reshape our portfolio by selling non-core assets, and recycling capital to reduce leverage, invest in strategic ROI projects, and opportunistically repurchase stock and/or acquire assets," Baltimore said in a release.

Park has been a major player in the San Francisco hotel market. It also owns the 344-room JW Marriott Union Square and the 316-room Hyatt Centric Fisherman’s Wharf. During the pandemic it sold the 360-room Le Meridien for $221M and the 171-room Hotel Adagio for $82M, according to the San Francisco Chronicle.

The four San Francisco hotels in Park’s portfolio were 48% occupied in the first quarter, up from 24.7% during the same period last year, according to the Chronicle report.

The U.S. hotel industry has largely recovered from the pandemic-era lockdowns that kept travelers, especially business travelers, at home.

Hilton CEO Chris Nassetta said on the company’s earnings call in April that first-quarter revenue per available room, a key metric of hotel performance, was 4% higher than the first quarter of 2019. The strong recovery led Hilton to post $641M in first quarter earnings before interest, taxes, depreciation and amortization, up 43% from last year and beating both analysts’ and the company’s own guidance.

Marriott International also beat analyst expectations in the first quarter, helped along by demand from leisure and group travelers as well as rising demand from the business sector. The company posted $5.6B in revenue for the first quarter, $200M higher than analysts’ expectations.

San Francisco’s real estate market, however, has had a tumultuous recovery as the city emerged from the pandemic. A tech-heavy workforce has largely continued to work from home, which has left office vacancy around 30%. A wave of distressed assets have hit the market, and sellers are taking large write-downs on their assets.

There are also signs of trouble in the market’s multifamily sector. A $1B loan portfolio from Veritas Investments backed by 75 Bay Area multifamily assets with 2,452 units went into delinquency last month. The lender, Eastdil Secured, is looking to resell the loans.

The issues facing San Francisco are unlikely to fade away soon, Baltimore said in the release, which was a major factor in the decision to shed the hotel assets.

High vacancy and safety concerns, he said, “will negatively impact business and leisure demand and will likely significantly reduce compression in the city for the foreseeable future. Unfortunately, the continued burden on our operating results and balance sheet is too significant to warrant continuing to subsidize and own these assets.”