UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-32319
Sunstone Hotel Investors, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland | | 20-1296886 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
Incorporation or Organization) | | Identification Number) |
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200 Spectrum Center Drive, 21st Floor | | |
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(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (949) (949) 330-4000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value | SHO | New York Stock Exchange |
Series E Cumulative Redeemable Preferred Stock, $0.01 par value | SHO.PRE | New York Stock Exchange |
Series F Cumulative Redeemable Preferred Stock, $0.01 par value | SHO.PRF | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒⌧ No ☐◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ ◻No ☒⌧
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒⌧ No ☐◻
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, (as defined” and “emerging growth company” in Rule 12b-2 of the Exchange Act).Act.
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Large accelerated filer | | Accelerated filer |
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Non-accelerated filer | | Smaller reporting company ☐ |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒⌧
The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing sale price of the registrant’s common stock on June 30, 20172020 as reported on the New York Stock Exchange (“NYSE”) was approximately $3.6$1.7 billion.
The number of shares of the registrant’s common stock outstanding as of February 8, 20185, 2021 was 225,321,660.215,593,401.
Documents Incorporated by Reference
Part III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant’s 20182021 Annual Meeting of Stockholders.
SUNSTONE HOTEL INVESTORS, INC.
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 20172020
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 38 | |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 61 | |
Certain Relationships and Related Transactions, and Director Independence | ||
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The “Company” means“Company,” “we,” “our,” and “us” refer to Sunstone Hotel Investors, Inc., a Maryland corporation, and one or more of itsour subsidiaries, including Sunstone Hotel Partnership, LLC, or the Operating Partnership, and Sunstone Hotel TRS Lessee, Inc., or the TRS Lessee, and, as the context may require, Sunstone Hotel Investors only or the Operating Partnership only.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Item 1. | Business |
Our Company
We were incorporated in Maryland on June 28, 2004. We are a real estate investment trust or REIT,(“REIT”), under the Internal Revenue Code of 1986, as amended (the “Code”). As of December 31, 2017,2020, we had interests in 2717 hotels (the “27 hotels”), including the Marriott Philadelphia and the Marriott Quincy which we classified as held for sale and subsequently sold in January 2018, leaving 25 hotels currently held for investment (the “25 hotels”“17 Hotels”). The 25 hotels17 Hotels are comprised of 12,4509,017 rooms, located in 118 states and in Washington, DC.
We are the premier steward of Long-Term Relevant Real Estate® (“LTRR®”) in the lodging industry. Our primary business is to acquire, own, asset manage and renovate primarily or reposition hotels that we consider to be long-term relevant real estateLTRR® in the United States,. specifically hotels in urban, resort and destination locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As part of our ongoing portfolio management strategy, on an opportunistic basis, we may also selectively sell hotel properties from time to time.that we do not believe meet our criteria of LTRR®. All but two (the Boston Park Plaza and the Oceans Edge HotelResort & Marina) of our 25 hotelsthe 17 Hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. We believe the largestOur two unbranded hotels are located in top urban and most stable segment of travelers prefer the consistent serviceresort markets that have enabled them to establish awareness with both group and quality associated with nationally recognized brands and well-known independent hotels.transient customers. Our portfolio primarily consists of urban and resort upper upscale hotels located in the United States. Of the 25 hotels, we include 22 as upper upscale, two as upscalemajor convention, resort, destination and one as luxury as defined by STR, Inc., an independent provider of lodging industry statistical data. STR, Inc. classifies hotel chains into the following segments: luxury; upper upscale; upscale; upper midscale; midscale; economy; and independent.urban markets.
Our hotels are operated by third-party managers pursuant tounder long-term management agreements with ourthe TRS Lessee or its subsidiaries. As of December 31, 2017,2020, our third-party managers included: subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively “Marriott”), managers of ninesix of the Company’s 25 hotels; InterstateCrestline Hotels & Resorts Inc. (“IHR”Crestline”), manager of four of the Company’s 25 hotels; Highgate Hotels L.P. and an affiliate (“Highgate”), manager of three of the Company’s 25 hotels; Crestline Hotels & Resorts (“Crestline”), Hilton Worldwide (“Hilton”) and Hyatt CorporationInterstate Hotels & Resorts, Inc. (“Hyatt”IHR”), each a manager of two of the Company’s 25 hotels; and Davidson Hotels & Resorts (“Davidson”), HEI Hotels & ResortsHyatt Corporation (“HEI”Hyatt”) and Singh Hospitality, LLC (“Singh”), each a manager of one of the Company’s 25 hotels.
As is typical of the lodging industry, we experience some seasonality in our business. Information regarding the seasonal patterns affecting our hotels is included in this Annual Report on Form 10-K under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Impact of the COVID-19 Pandemic on our Business
In March 2020, the COVID-19 pandemic was declared a National Public Health Emergency, which led to significant cancellations, corporate and government travel restrictions and an unprecedented decline in hotel demand. As a result of these cancellations, restrictions and the health concerns related to COVID-19, we determined that it was in the best interest of our hotel employees and the communities in which our hotels operate to temporarily suspend operations at the majority of our hotels.
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In response to the COVID-19 pandemic, we temporarily suspended operations at 14 of the 17 Hotels during the first half of 2020, 12 of which have since resumed operations as of December 31, 2020:
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Hotel | | Suspension Date | | Resumption Date |
Oceans Edge Resort & Marina | | March 22, 2020 | | June 4, 2020 |
Embassy Suites Chicago | | April 1, 2020 | | July 1, 2020 |
Marriott Boston Long Wharf | | March 12, 2020 | | July 7, 2020 |
Hilton New Orleans St. Charles | | March 28, 2020 | | July 13, 2020 |
Hyatt Centric Chicago Magnificent Mile | | April 6, 2020 | | July 13, 2020 |
JW Marriott New Orleans | | March 28, 2020 | | July 14, 2020 |
Hilton San Diego Bayfront | | March 23, 2020 | | August 11, 2020 |
Renaissance Washington DC | | March 26, 2020 | | August 24, 2020 |
Hyatt Regency San Francisco | | March 22, 2020 | | October 1, 2020 |
Renaissance Orlando at SeaWorld® | | March 20, 2020 | | October 1, 2020 |
The Bidwell Marriott Portland | | March 27, 2020 | | October 5, 2020 |
Wailea Beach Resort | | March 25, 2020 | | November 1, 2020 |
Hilton Garden Inn Chicago Downtown/Magnificent Mile | | March 27, 2020 | | |
Renaissance Westchester | | April 4, 2020 | | |
Three of the 17 Hotels remained open throughout 2020: the Boston Park Plaza; the Embassy Suites La Jolla; and the Renaissance Long Beach. The hotels in operation during 2020 experienced a significant decrease in occupancy due to the COVID-19 pandemic. As a result, we, in conjunction with our third-party managers, reduced operating expenses to preserve liquidity by implementing stringent operational cost containment measures, including significantly reduced staffing levels, limited food and beverage offerings, elimination of non-essential hotel services and the temporary closure of various parts of the hotels. In addition, enhanced cleaning procedures and revised operating standards were developed and implemented. To preserve additional liquidity, we temporarily suspended both our stock repurchase program and our common stock quarterly dividend, and deferred a portion of our portfolio’s planned 2020 non-essential capital improvements.
While demand for our hotels remained stable during the first two months of 2020, COVID-19 and the related government and health official mandates in many markets in March through December virtually eliminated demand across our portfolio, resulting in a significant net loss recognized in 2020.
While a recovery timeline is highly uncertain, we expect to resume operations at our two remaining suspended hotels when there is sufficient market demand, which we anticipate may not occur until the second half of 2021. The extent of the effects of the pandemic on our business and the hotel industry at large, however, will ultimately depend on future developments, including, but not limited to, the duration and severity of the pandemic, how quickly and successfully effective vaccines and therapies are distributed and administered, as well as the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume.
Competitive Strengths
We believe the following competitive strengths distinguish us from other owners of lodging properties:
| High Quality |
Focus on Owning Long-Term Relevant Real EstateEstate®. We believe that we will create lasting stockholder value through the active ownership of long-term relevant real estate. Long-term relevant real estateLTRR®. LTRR® consists of hotels that we believe possess unique attributes that are difficult to replicate, and most of all, whose locations are highly desirable and are relevant today and whose relevance will remain relevantstand the test of time for generations to come. We believe that owning LTRR® provides superior long-term relevant real estateeconomics and reduces the risk of waning demand that often happens to undercapitalized and pedestrian hotels.
Presence in Key Markets. A cornerstone of long-term relevant real estateLTRR® is location. We believe that our hotels are located in many of the most desirable long-term relevant markets with major and diverse demand generators and significant barriers to entry for new supply. In 2017, approximately 96%All of the revenues generated by the 25 hotels were earned by hotels17 Hotels are located in key gateway markets and unique resort and destination locations such as Boston, New York, Washington, DC/Baltimore, Chicago, Orlando, Key West, Maui, New Orleans, Orlando, Portland, San Diego, San Francisco Los Angeles/Orange County, San Diego and Maui.Washington DC. Over time, we expect the revenues of hotels located in key gateway markets and unique resort and destination locations to generate superior long-term growth rates as compared to the average for U.S. hotels, as a result of stronger and more diverse economic drivers.
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Nationally Recognized Brands and Well KnownEstablished Independents. All As noted above, all but two of our 25 hotelsthe 17 Hotels are operated under nationally recognized brands, including Marriott, Hilton and Hyatt.brands. We believe that affiliations with strong brands and established independents improve the appeal of our hotels to a broad set of travelers and help to drive business to our hotels. Our two unbranded hotels are located in top urban and resort markets that have enabled them to build awareness with both group and transient customers.
Recently Renovated Hotels. From January 1, 2013 through December 31, 2017, During the past five years, we invested $652.2$493.8 million in capital renovations throughout the 25 hotels.17 Hotels. We believe that these capital renovations have improved the competitiveness of our hotels and have helped to position our portfolio for future growth.
| Significant Cash Position. As of December 31, |
| Flexible Capital Structure. We believe our capital structure provides us with |
| Low Leverage. |
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economic recession or global pandemics, but also provides |
| Strong Access to Low Cost Capital. As a publicly traded REIT, over the long-term, we may benefit from greater access to a variety of forms of capital as compared to non-public investment vehicles. In addition, over the long-term, we may benefit from a lower cost of capital as compared to non-public investment vehicles as a result of our investment liquidity, balance sheet optionality, professional management and portfolio diversification. |
| Seasoned Management Team. Each of our core disciplines, including asset management, acquisitions, finance and legal, are overseen by industry leaders with demonstrated track records. |
Asset Management. Our asset management team is responsible for maximizing the long-term value of our real estate investments by achieving above average revenue and profit performance through proactive oversight of hotel operations. Our asset management team leadsworks with our third-party managers to drive property-level innovation, benchmarks best practices and aggressively oversees hotel management teams and property plans. We work with our operators to develop hotel-level “business plans,” which include positioning and capital renovationinvestment plans. We believe that a proactive asset management program can help grow the revenues of our hotel portfolio and maximize operational and environmental efficiency by leveraging best practices and innovations across our various hotels, and by initiating well-timed and focused capital improvements aimed at improving the appeal of our hotels.
Acquisitions. Our acquisitions team is responsible for enhancing our portfolio quality and scale by executing well-timed acquisitions and dispositions that generate attractive risk-adjusted returns on our investment dollars. We believe that our significant acquisition and disposition experience will allow us to continue to execute our strategy to redeploy capital from slower growth assets to long-term relevant real estateLTRR® with higher long-term growth rates. Our primary focus is to acquire LTRR®. Depending on acquiring long-term relevant real estate. We intend toavailability, we select the branding and operatorsoperating partners for our hotels that we believe will lead to the highest returns.returns and greatest long-term value. We will also focus on disciplined capital recycling, and may selectively sell hotels that no longer fit our target profile, will notstated strategy, are unlikely to offer long-term returns in excess of our cost of capital, will achieve a sale price in excess of our internal valuation, or that have high risk relative to their anticipated returns.
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Finance. We have a highly experienced finance team focused on minimizing our cost of capital and maximizing our financial flexibility by proactively managing our capital structure and opportunistically sourcing appropriate capital for growth, while maintaining a best in class disclosure and investor relations program. Accordingly, our financial objectives include the maintenance of appropriate levels of liquidity throughout the cycle. During 2017, we reduced our total mortgage debt by $9.9 million through principal payments, and by an additional $176.0 million through repayment of one mortgage. We also refinanced an existing $219.6 million mortgage bearing interest at a variable rate of one-month LIBOR plus 225 basis points maturing in August 2019 with a new interest only $220.0 million loan bearing interest at a variable rate of one-month LIBOR plus 105 basis points maturing in December 2020. The new loan contains three one-year extension options, subject to the satisfaction of certain conditions.
Legal. Our legal team is responsible for overseeing and supporting all company-wideCompany-wide legal matters, including all legal matters related to corporate (including corporate oversight and governance), investment, asset management, design and construction, finance initiatives and litigation. We believe active and direct oversight of legal matters allows the companyCompany the flexibility to pursue opportunities while minimizing legal exposure, protecting corporate assets, and ultimately maximizing stockholder returns.
Business Strategy
Our mission is to create meaningful value for our stockholders by producing superior long-term returns through the ownership of long-term relevant real estate in the lodging sector. Our values include transparency, trust, ethical conduct, honest communication and discipline. As demand for lodging generally fluctuates with the overall economy, we seek to own hotelsLTRR® that will maintain a high appeal with lodging travelers over long periods of time and will generate superior economic earnings
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materially in excess of recurring capital requirements. Our strategy is to maximize stockholder value through focused asset management and disciplined capital recycling, which is likely to include selective acquisitions and dispositions, while maintaining balance sheet flexibility and strength. Our goal is to maintain lowappropriate leverage and high financial flexibility to position the companyCompany to create value throughout all phases of the operating and financial cycles.
Competition
The hotel industry is highly competitive. Our hotels compete with other hotels for guests in each of their markets. Competitive advantage is based on a number of factors, including location, physical attributes, service levels and reputation. Competition is often specific to the individual markets in which our hotels are located and includes competition from existing and new hotels operated under brands in the luxury, upper upscale and upscale segments. Increased competition could harm our occupancy or revenues or may lead our operators to unnecessarily increase service or amenity levels, which may reduce the profitability of our hotels.
We believe that competition for the acquisition of hotels is fragmented.widespread. We face competition from institutional pension funds, private equity investors, high net worth individuals, other REITs and numerous local, regional, national and international owners in each of our markets. Some of these entities may have substantially greater financial resources than we do and may be able and willing to accept more risk than we believe we can prudently manage. During times when we seek to acquire hotels, competition among potential buyers may increase the bargaining power of potential sellers, which may reduce the number of suitable investment opportunities available to us or increase pricing. Similarly, during times when we seek to sell hotels, competition from other sellers may increase the bargaining power of the potential property buyers.
Management Agreements
All of our 25 hotelsthe 17 Hotels are managed by third parties pursuant tounder management agreements with ourthe TRS Lessee or its subsidiaries. The following is a general description of our third-party management agreements as of December 31, 2017.2020.
Marriott. The following hotels are operated under management agreements with Marriott: JW Marriott New Orleans; Marriott Boston Long Wharf; Renaissance Long Beach; Renaissance Orlando at SeaWorld®; Renaissance Washington DC; and Wailea Beach Resort. Our management agreements with Marriott require us to pay Marriott a base management fee equal to 3.0% of total revenue. Inclusive of renewal options and absent prior termination by either party, thesethe Marriott management agreements expire between 20312047 and 2078. Additionally, fivethree of the aforementioned management agreements require payment of an incentive fee of 20.0% of the excess of gross operating profit over a certain threshold; one management agreement requires payment of an incentive fee of 20% of the excess of gross operating profit over a certain threshold, however the total base and incentive fees were capped at 4.25% of gross revenue for 2013, 4.5% of gross revenue for 2014, 4.75% of gross revenue for 2015, 5.0% of gross revenue for the first seven months of 2016, and are capped at 5.25% of gross revenue for the remaining term of the agreement; one management agreement requires payment of an incentive fee of 35.0% of the excess of gross operating profit over a certain threshold; one management agreement requires payment of a tiered incentive fee ranging from 15.0% to 20.0% of the excess of gross operating profit over certain thresholds; and one management agreement requires payment of an incentive fee of 10.0% of adjusted gross operating profit, capped at 3.0% of gross revenue. The management agreements with Marriott may be terminated earlier than the stated term if certain events occur, including the failure of Marriott to satisfy certain performance standards,thresholds, a condemnation of, a casualty to, or force majeure event involving a hotel, the withdrawal or revocation of any license or permit required in connection with the operation of a hotel and upon a default by Marriott or us that is not cured prior to the expiration of any applicable cure periods. In certain instances, Marriott has rights of first refusal to either purchase or lease hotels, or to terminate the applicable management agreement in the event we sell the respective hotel.
IHR. Our management agreements with IHR require us to pay a management fee of 2.0% of gross revenue; plus an incentive fee of 10.0% of the excess of net operating income over a certain threshold. The incentive fee, however, may not exceed 1.5% of the total revenue for all the hotels managed by IHR for any fiscal year. The IHR management agreements expire in 2024 and provide us the right to renew each management agreement for up to two additional terms of five years each, absent a prior termination by either party.
Highgate. Our Boston Park Plaza, Hilton Times Square and Renaissance Westchester hotels are operated under management agreements with Highgate. The management agreement at the Boston Park Plaza required us to pay Highgate a base management fee of 2.5% of gross revenue until July 1, 2014. From July 2, 2014 to July 1, 2015, the base management fee increased to 2.75% of gross revenue, and thereafter the base management fee is 3.0% of gross revenue. In
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addition, the management agreement at the Boston Park Plaza requires us to pay an incentive fee of 15.0% of the excess of net operating income over a certain threshold. The agreement expires in 2023, absent a prior termination by either party.
The management agreements at the Hilton Times Square and the Renaissance Westchester require us to pay Highgate a base management fee of 3.0% of gross revenue. In addition, the management agreement at the Hilton Times Square requires us to pay an incentive fee of 50.0% of the excess of net operating income over a certain threshold, limited to 1.25% of total revenue. The management agreement at the Hilton Times Square expires in 2021 and provides Highgate with the right to renew for two additional terms of five years upon the achievement of certain performance thresholds, absent a prior termination by either party. The management agreement at the Renaissance Westchester expires in 2022, absent early termination by either party, and does not require payment of an incentive fee.
Crestline. Our Embassy Suites Chicago and Hilton Garden Inn Chicago Downtown/Magnificent Mile hotels are operated under management agreements with Crestline. The management agreement at the Embassy Suites Chicago expires in 2019 (absent early termination by either party), and provides no renewal options. The agreement requiredagreements with Crestline require us to pay Crestline a base management fee of 1.5% of gross revenue through May 31, 2016, increasing to 2.0% of gross revenue thereafter.
Therevenue. Additionally, one of the management agreement at the Hilton Garden Inn Chicago Downtown/Magnificent Mile expires in 2022 (absent early termination by either party), and provides us with the right to renew for up to two additional terms of five years each. The agreement requires us to pay 2.0% of gross revenue as a base management fee, andagreements requires us to pay an incentive fee of 10.0% of the excess of operating profit over a certain threshold.threshold, and the other management agreement does not require payment of an incentive fee.
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Inclusive of renewal options and absent prior termination by either party, both of the Crestline management agreements expire in 2032; however, we have the ability to terminate the Embassy Suites Chicago agreement without a termination fee at any time upon 60 days prior notice, and the Hilton Garden Inn Chicago Downtown/Magnificent Mile management agreement without a termination fee upon sale of the hotel, performance test failure or Crestline default.
Highgate. Our Boston Park Plaza and Renaissance Westchester hotels are operated under management agreements with Highgate. The management agreements with Highgate require us to pay Highgate a base management fee equal to 3.0% of gross revenue. Additionally, one of the management agreements requires us to pay an incentive fee of 15.0% of the excess of net operating income over a certain threshold; and one of the management agreements does not require payment of an incentive fee. The management agreements with Highgate do not include renewal options, and expire in 2022 and 2023, absent prior termination by either party.
Hilton. Our Embassy Suites La Jolla and Hilton San Diego Bayfront hotels are operated under management agreements with Hilton. TheOne of the management agreement at the Embassy Suites La Jolla expires in 2026 (absent early termination by Hilton), and provides no renewal options. The agreement requiredagreements with Hilton requires us to pay Hilton a base management fee of 2.25% of gross revenue through 2016, decreasing to 1.75% of gross revenue, thereafter. There is no incentive fee underand the agreement.
Theother management agreement at the Hilton San Diego Bayfront, which originally provided for an extension option at Hilton’s election up through 2033, was amended in February 2017, with the new expiration date established as December 31, 2046. The amended agreement provides no renewal options. The agreement requires us to pay Hilton a base management fee of 2.5% of total revenue andrevenue. Additionally, one of the management agreements requires us to pay an incentive fee of 15.0% of the excess of operating cash flow over a certain percentage.percentage, and the other management agreement does not require payment of an incentive fee. The management agreements with Hilton do not include renewal options, and expire in 2026 and 2046, absent prior termination by either party.
Hyatt.IHR. Our Hilton New Orleans St. Charles and The Bidwell Marriott Portland hotels are operated under management agreements with IHR. The management agreements with IHR require us to pay IHR a base management fee of 2.0% of gross revenue or total revenue, as applicable. Additionally, one of the management agreements provides IHR the opportunity to earn an incentive fee if certain operating thresholds are achieved, limited to 1.0% of the hotel’s total revenue, and one of the management agreements requires an incentive fee of 10.0% of the excess of net operating income over a certain threshold, limited to 1.5% of the total revenue for all the hotels managed by IHR for any fiscal year. Inclusive of renewal options and absent prior termination by either party, the IHR management agreements expire in 2033 and 2034; provided, however, we have the unilateral ability to terminate the IHR management agreements upon 60 days (Hilton New Orleans St. Charles) and 30 days (The Bidwell Marriott Portland) prior written notice.
Davidson. Our Hyatt Regency Newport BeachCentric Chicago Magnificent Mile hotel is operated under a management agreement with Hyatt.Davidson. The management agreement expires in 2019 and provides either party the right to renew for successive periods of 10 years (provided that the term of the agreement shall in no event extend beyond 2039), absent early termination by either party. The agreementwith Davidson requires us to pay 3.5% of total hotel revenue asDavidson a base management fee with an additional 0.5%of 2.5% of total revenue, payable to Hyatt based upon the hotel achieving specific operating thresholds. The agreement also requires us to payand an incentive fee equal toof 10.0% of the excess of adjusted profitnet operating income over $2.0 million,a certain threshold, limited to 1.5% of total revenue. The base and 5.0%incentive management fees have an aggregate cap of 4.0% of total revenue. Inclusive of renewal options and absent prior termination by either party, the excess of adjusted profit over $6.0 million.Davidson management agreement expires in 2029; however, we have the ability to terminate the agreement at any time without a termination fee upon 90 days prior written notice.
Hyatt.Our Hyatt Regency San Francisco hotel is operated by Hyatt under an operating lease with economics that follow a typical management fee structure. The lease expires in 2050, and provides no renewal options. Pursuant to the lease, Hyatt retains 3.0% of total revenue as a base management fee. The lease also provides Hyatt the opportunity to earn an incentive fee if gross operating profit exceeds certain thresholds.
Davidson. Our Under the operating lease, we are entitled to the payment of net income generated by the hotel, whereas Hyatt Centric Chicago Magnificent Mileis solely and exclusively responsible for the operation of the hotel, is operated under a management agreement with Davidson.including all costs and liabilities arising from such operation. The management agreement at the Hyatt Centric Chicago Magnificent Milelease expires in 2019,2050, and provides us with the right to renew for up to two additional terms of five years each, absent a prior termination by either party. The agreement requires us to pay 2.5% of total revenue as a base management fee and calls for an incentive fee of 10.0% of the excess of net operating income over a certain threshold, limited to 1.5% of total revenue. The base and incentive management fees payable to Davidson under the Hyatt Centric Chicago Magnificent Mile management agreement have an aggregate cap of 4.0% of total revenue.no renewal options.
HEI. Our Hilton New Orleans St. Charles hotel is operated under a management agreement with HEI. The agreement expired in 2017, but currently automatically renews on a month-to-month basis. The agreement requires us to pay 2.0% of
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gross revenue as a base management fee and calls for an incentive fee of 20.0% of the excess of adjusted gross operating profit over a certain threshold.
Singh. Our Oceans Edge HotelResort & Marina hotel is operated under a management agreement with Singh. The management agreement at the Oceans Edge Hotel & Marina expires in 2027 (absent early termination by either party), and provides no renewal options. The agreementwith Singh requires us to pay Singh a base management fee of 3.0% of gross revenue, as a base management fee and calls for an incentive fee of 10.0% of adjusted net operating income, capped at 1.5% of gross revenue. The Singh management agreement provides no renewal options, and expires in 2027, absent prior termination by either party; however, we have the ability to terminate the agreement at any time without a termination fee upon 30 days prior written notice.
The existing management agreements with Marriott, Hilton and Hyatt require the manager to furnish chain services that are generally made available to other hotels managed by that operator. Costs for these chain services are reimbursed by us. Such services include: (1) the development and operation of computer systems and reservation services; (2) management and administrative services; (3) marketing and sales services; (4) human resources training services; and (5) such additional services as may from time to time be more efficiently performed on a national, regional or group level.
Franchise Agreements
As of December 31, 2017, 112020, seven of the 25 hotels17 Hotels were operated subject to franchise agreements. Franchisors provide a variety of benefits to franchisees, including nationally recognized brands, centralized reservation systems, national advertising, marketing programs and publicity designed to increase brand awareness, training of personnel and maintenance of operational quality at hotels across the brand system.
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The following table sets forth the expiration dates of our hotel franchise agreements:
| |
Embassy Suites Chicago | October 26, 2024 |
The Bidwell Marriott Portland | October 26, 2024 |
Embassy Suites La Jolla | May 17, 2026 |
Hilton Garden Inn Chicago Downtown/Magnificent Mile | January 19, 2027 |
Renaissance Westchester | February 24, 2027 |
Hilton New Orleans St. Charles | May 31, 2028 |
Hyatt Centric Chicago Magnificent Mile | June 3, 2039 |
The franchise agreements generally specify management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which our subsidiary, as the franchisee, must comply. The franchise agreements obligate the subsidiary to comply with the franchisors’ brand standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance the types ofcoverages, services and products ancillary to guest room services, that may be provided by the subsidiary, display of signage and the type, quality and age of furniture, fixtures and equipment (“FF&E”) included in guest rooms, lobbies and other common areas. The franchise agreements for our hotels require that we reserve up to 5.0% of the gross revenues of the hotels into a reserve fund for capital expenditures.
The franchise agreements also provide for termination at the franchisor’s option upon the occurrence of certain events, including failure to pay royalties and fees, orfailure to perform other obligations under the franchise license, bankruptcy, and abandonment of the franchise or a change in control. The subsidiary that is the franchisee is responsible for making all payments under the franchise agreements to the franchisors; however, the Company guaranties certain obligations under a majority of the franchise agreements.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 859 of the Code, commencing with our taxable year ended December 31, 2004. Under current federal income tax laws, we are required to distribute at least 90% of our netREIT taxable income to our stockholders each year in order to satisfy the REIT distribution requirement. While REITs enjoy certain tax benefits relative to C corporations, as a REIT we may still be subject to certain federal, state and local taxes on our income and property. We may also be subject to federal income and excise tax on our undistributed income.
Taxable REIT Subsidiary
Subject to certain limitations, a REIT is permitted to own, directly or indirectly, up to 100% of the stock of a taxable REIT subsidiary, or TRS. A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by us. A TRS may perform activities such as development, and other independent business activities that may be prohibited to a REIT. A hotel REIT is permitted to own a TRS that leases hotels from the REIT, rather than requiring the lessee to be an unaffiliated third party, provided certain conditions are satisfied. However, a hotel leased to a TRS still must be managed by an unaffiliated third party in the business of managing hotels because a TRS may not directly or indirectly operate or manage any hotels or provide rights to any brand name under which any hotel is operated. The TRS provisions are complex and impose certain conditions on the use of TRSs. This isTRSs to assure that TRSs are subject to an appropriate level of federal corporate taxation.
We and the TRS Lessee must makehave made a joint election with the Internal Revenue Service (“IRS”) for the TRS Lessee to be treated as a TRS. A corporation of which a qualifying TRS owns, directly or indirectly, more than 35% of the voting
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power or value of the corporation’s stock will automatically be treated as a TRS. Overall, for taxable years beginning after December 31, 2017, no more than 20% (25% for taxable years beginning after July 30, 2008 and on or before December 31, 2017) of the value of our assets may consist of securities of one or more TRS, and no more than 25% of the value of our assets may consist of the securities of TRSs and other assets that are not qualifying assets for purposes of the 75% asset test. The 75% asset test generally requires that at least 75% of the value of our total assets be represented by real estate assets, cash, or government securities.
The rent that we receive from a TRS attributable to leases of “qualified lodging facilities” qualifies as “rents from real property” as long as the property is operated on behalf of the TRS by a person who qualifies as an “independent contractor” and who is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to us and the TRS (an “eligible independent contractor”). A “qualified lodging facility” is a hotel, motel or other establishment in which more than one-half of the dwelling units are used on a transient basis. A “qualified lodging facility” does not include any facility where wagering activities are conducted. A “qualified lodging facility” includes customary amenities and facilities operated as part of, or associated with, the lodging facility as long as such amenities and facilities are customary for other properties of a comparable size and class owned by other unrelated owners.
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We have formed the TRS Lessee as a wholly owned TRS. We lease each of our hotels to the TRS Lessee or one of its subsidiaries. These leases provide for a base rent plus variable rent based on occupied rooms and departmental gross revenues. These leases must contain economic terms which are similar to a lease between unrelated parties. If they do not, the IRS could impose a 100% excise tax on certain transactions between the TRS Lessee and us or our tenants that are not conducted on an arm’s-length basis. We believe that all transactions between us and the TRS Lessee are conducted on an arm’s-length basis.
The TRS Lessee has engaged eligible independent contractors to manage the hotels it leases from the Operating Partnership.
Ground, Building and AirAirspace Lease Agreements
At December 31, 2017, six2020, two of the 25 hotels17 Hotels are subject to ground (the Hilton San Diego Bayfront) and building and/or air(the Hyatt Centric Chicago Magnificent Mile) leases with unaffiliated parties that cover either all or portions of their respective properties. The JW Marriott New Orleans is subject to an airspace lease that applies only to certain balcony space fronting Canal Street that is not integral to the hotel’s operations. As of December 31, 2017,2020, the remaining terms of these ground, building and airairspace leases (including renewal options) range from approximately 2623 to 8077 years. These leases generally require us to make rental payments and payments for all or portions of costs and expenses, including real and personal property taxes, insurance and utilities associated with the leased property.
Any proposed sale of a property that is subject to a ground, building or airairspace lease or any proposed assignment of our leasehold interest as lessee under the ground, building or airairspace lease may require the consent of the applicable lessor. As a result, we may not be able to sell, assign, transfer or convey our interest in any such property in the future absent the consent of the ground, building or airairspace lessor, even if such transaction may be in the best interests of our stockholders.
ThreeOne of the six leases prohibitprohibits the sale or conveyance of the hotel and assignment of the lease by us to another party without first offering the lessor the opportunity to acquire our interest in the associated hotel and property upon the same terms and conditions as offered by us to the third party. Two of theseThe same leaseslease also allowallows us the option to acquire the ground or building lessor’s interest in the ground or building lease subject to certain exercisabilitynotice and process provisions. From time to time, we evaluate our options to purchase the lessors’ interests in the leases.
OfficesCorporate Office
We currently lease our headquarters located at 120 Vantis, Suite 350, Aliso Viejo,200 Spectrum Center Drive, 21st Floor, Irvine, California 9265692618 from an unaffiliated third party. We occupy our headquarters under a lease that terminates on August 30, 2018. During 2017, we entered into a new lease with an unaffiliated third party to occupy the premises located at 200 Spectrum Center Drive, Suite 2100, Irvine, California 92618. Our new lease begins on September 1, 2018 and terminates on August 31, 2028.
EmployeesHuman Capital Resources
As of February 1, 2018,2021, we had 4940 employees. We believe that our relations withNone of our employees are positive.represented by a labor union or covered by a collective bargaining agreement. All persons employed in the day-to-day operations of the hotels are employees of the management companies engaged by the TRS Lessee or its subsidiaries to operate such hotels.
In March 2020, we temporarily closed our corporate office due to the COVID-19 pandemic, and our employees began to work remotely. We provided various office supplies and resources to our employees as needed to allow them to perform their work remotely. While our office currently remains closed, our employees may, at times, work from the office. We have implemented COVID-19 protection protocols in order to minimize the spread of COVID-19 in our corporate office. All of our employees have received training on these protocols, and are required to sign an acknowledgement of such protocols prior to returning to the corporate office.
Our employees are vital to the success of our Company. We place a very high emphasis on maintaining positive relations with all of our employees and strive to create an inspiring and inclusive work environment where our employees feel motivated and empowered to produce exceptional results for the Company. Our capital resource objectives include, as applicable, identifying, recruiting, retaining and incentivizing our employees. To attract and retain top talent, we have designed our compensation and benefits programs to provide a balanced and effective reward structure, including:
● | Subsidized medical, dental and vision insurance; |
● | Life and disability insurance; |
● | Stock grant program; |
● | 401(k) savings and retirement plan with Company Safe Harbor contribution; |
● | Profit sharing plan; and |
● | Gym membership. |
We believe that our compensation and employee benefits are competitive and allow us to attract and retain skilled employees throughout our Company. We frequently benchmark our compensation and benefits package against those in both our industry and in similar disciplines.
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We are committed to maintaining a work culture that treats all employees fairly and with respect, promotes inclusivity and provides equal opportunities for advancement based on merit. At December 31, 2020, females constituted approximately 40% of our workforce, and ethnic and racial minorities constituted approximately 15% of our workforce. We intend to continue using a combination of targeted recruiting, talent development and internal promotion strategies to expand the diversity of our employee base across all roles and functions.
Environmental
We strive to maintain an inclusive environment free from discrimination of any kind, including sexual or other discriminatory harassment. Our employees have multiple avenues available through which concerns or inappropriate behavior can be reported, including a confidential hotline. All concerns or reports of inappropriate behavior are promptly investigated with appropriate action taken to address such concerns or behavior.
Environmental, Social and Governance Matters (“ESG”)
We are committed to ensuring environmental and social initiatives are part of our operating and investment strategies. We continuously seek opportunities to invest in renovations, implement initiatives intended to reduce energy, water and waste impacts, enhance the overall environment and well-being of guests and associates at our properties, and improve the local communities in which we conduct business or own hotels. As owners of LTRR®, we take a holistic view in investing in our assets, balancing the best interests of our stockholders, the environment, our employees, the hotel associates and the communities in which we operate. As our board of directors recognizes the importance of an effective sustainability strategy on our operations and returns, the board of directors has assigned the board’s Nominating and Corporate Governance Committee with overseeing the strategy, policies and implementation of our ESG program.
As an owner of real estate, we are subject to the risks associated with the physical effects of climate change, which can include more frequent or severe storms, hurricanes, flooding, droughts and fires, any of which could have a material adverse effect on our hotels. While we are not directly involved in the operation of our properties or other activities that could produce meaningful levels of greenhouse gas emissions, we do control the capital invested in our hotels and have invested in initiatives aimed at reducing the levels of greenhouse gas emissions at our properties, such as LED lighting retrofits, low-flow plumbing fixture installations and building system upgrades. We are also installing bulk amenity dispensers in our hotels to reduce waste. Additionally, on an annual basis, we publish an environmental and sustainability report to monitor the carbon footprint and emissions at our hotels, and compare our energy, carbon, water and waste performance to the targets we announced in our 2019 Sustainability Report.
Environmental Reviews
Environmental reviews have been conducted on all of our hotels. From time to time, our secured lenders have requested environmental consultants to conduct Phase I environmental site assessments on many of our properties. In certain instances, these Phase I assessments relied on older environmental assessments prepared in connection with prior financings. Phase I assessments are designed to evaluate the potential for environmental contamination of properties based generally upon site inspections, facility personnel interviews, historical information and certain publicly available databases. Phase I assessments will not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties. In addition, material environmental conditions, liabilities or compliance concerns may arise after the Phase I assessments are completed, or may arise in the future, and future laws, ordinances or regulations may impose material additional environmental liabilities.
Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on the property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment of a hazardous substance at another property may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of our properties, we or the TRS Lessee, as the case may be, may be potentially liable for such costs. Although we have tried to mitigate environmental risk through insurance, this insurance may not cover all or any of the environmental risks we encounter.
As an owner of real estate, we are not directly involved in the operation of our properties or other activities that could produce meaningful levels of greenhouse gas emissions. As a result, we have not implemented a formal program to measure or manage emissions associated with our corporate office or hotels. Although we do not believe that climate change represents a direct material risk to our business, we could be indirectly affected by climate change and other environmental issues to the extent these issues negatively affect the broader economy, result in increased regulation or costs, or have a negative impact on travel.
We have provided customary unsecured environmental indemnities to certain lenders and buyers of our properties.properties, including in particular, environmental indemnities. We have performed due diligence on the potential environmental risks, including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteedindemnified parties for damages related to environmental matters. There is generally no term or damage limitation on these indemnities; however, if an environmental matter arises, we could have recourse against other previous owners.owners or a claim against its environmental insurance policies.
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ADA Regulation
Our properties must comply with various laws and regulations, including Title III of the Americans with Disabilities Act (“ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA; however, noncompliance with the ADA could result in capital expenditures, the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Inflation
Inflation may affect our expenses, including, without limitation, by increasing costs such as labor, food, taxes, property and casualty insurance, borrowing costs and utilities.
Securities Exchange Act Reports
Our internet address is www.sunstonehotels.com. Periodic and current Securities and Exchange Commission (“SEC”) reports and amendments to those reports, such as our annual proxy statement, our annual reports on Form 10-K, quarterly
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reports on Form 10-Q and current reports on Form 8-K, are available, free of charge, through links displayed on our website as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. In addition, the SEC maintains a website that contains these reports at www.sec.gov. Our website and the SEC website and the information on our and the SEC’s website is not a part of this Annual Report on Form 10-K.
Information relating to revenue, operating profit and total assets is set forth in Part I,II, Item 6 of this Annual Report on Form 10-K.
Information about our Executive Officers
The following table sets forth certain information regarding the executive officers of the Company at January 1, 2021. All officers serve at the discretion of the board of directors subject to the terms of their respective employment agreements with the Company.
| | | | |
Name | | Age | | Position |
John V. Arabia | | 51 | | Director, President and Chief Executive Officer |
Bryan A. Giglia | | 44 | | Executive Vice President and Chief Financial Officer |
Marc A. Hoffman | | 63 | | Executive Vice President and Chief Operating Officer |
Robert C. Springer | | 43 | | Executive Vice President and Chief Investment Officer |
David M. Klein | | 51 | | Executive Vice President and General Counsel |
The following is additional information with respect to the above-named officers.
John V. Arabia is our President and Chief Executive Officer and a director. In April 2011, Mr. Arabia began serving as our Executive Vice President of Corporate Strategy and Chief Financial Officer. In February 2013, he was promoted to President, in February 2014, he was appointed to serve as a member of our board of directors, and in January 2015 he was promoted to President and Chief Executive Officer. Prior to joining Sunstone, Mr. Arabia served as Managing Director of Green Street Advisors’ (“Green Street”) real estate research team. Mr. Arabia joined Green Street in 1997 and created and managed the firm’s lodging research platform. Prior to joining Green Street, Mr. Arabia was a Consulting Manager at EY Kenneth Leventhal in the firm’s west coast lodging consulting practice. Mr. Arabia also served on the board of directors of Education Realty Trust, Inc. (NYSE: EDR) until its privatization in September 2018. Mr. Arabia served as chair of the nominating and corporate governance committee and as a member of the investment and oversight committee of the board of directors of EDR. He also serves as a director of the American Hotel & Lodging Association (AH&LA) and is a member of the Real Estate Finance Advisory Council. Mr. Arabia, who earned a CPA certificate from the state of Illinois, holds an M.B.A. degree in Real Estate/Accounting from the University of Southern California and a B.S. degree in Hotel Administration from Cornell University.
Bryan A. Giglia is our Executive Vice President and Chief Financial Officer. Mr. Giglia joined the Company in March 2004 as a financial analyst, serving in the capacity of Director of Finance from October 2005 through February 2007. In March 2007, he was appointed Vice President Corporate Finance, and in March 2010 he was appointed Senior Vice President Corporate Finance, a position he held until February 2013, where he oversaw capital market transactions, corporate financial planning and analysis, and
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investor relations. In February 2013, Mr. Giglia was appointed Senior Vice President and Chief Financial Officer, a position he held until February 2016 when he was promoted to Executive Vice President and Chief Financial Officer. Prior to joining Sunstone, Mr. Giglia served in a variety of accounting positions for Hilton Hotels Corporation. Mr. Giglia attended the Marshall School of Business at the University of Southern California, where he earned an M.B.A. degree. Mr. Giglia earned his B.S. degree in Business Administration from the University of Arizona.
Marc A. Hoffman is our Executive Vice President and Chief Operating Officer. Mr. Hoffman joined the Company in June 2006 as Vice President Asset Management, and was appointed Senior Vice President Asset Management in January 2007, a position he held until February 2010 when he was promoted to Executive Vice President and Chief Operating Officer. Prior to joining Sunstone, Mr. Hoffman served in various positions at Marriott International, Inc., including General Manager of The Vail Marriott, General Manager of Marriott's Harbor Beach Resort and Spa, Marriott Market Manager for Fort Lauderdale, General Manager of The Ritz-Carlton Palm Beach (where under Mr. Hoffman's leadership, the hotel obtained the Mobil 5 Star Award), and most recently as Vice President and Managing Director of Grande Lakes Orlando, which included the 1,000-room JW Marriott, the 584- room Ritz-Carlton Resort and Spa and The Ritz-Carlton Golf Club. Mr. Hoffman holds an A.O.S. degree from The Culinary Institute of America and a B.A. degree from Florida International University.
Robert C. Springer is our Executive Vice President and Chief Investment Officer. Mr. Springer joined the Company in May 2011 as Senior Vice President Acquisitions, and in February 2013, he was appointed Senior Vice President and Chief Investment Officer, a position he held until February 2016 when he was promoted to Executive Vice President and Chief Investment Officer. Prior to joining Sunstone, Mr. Springer served as a Vice President in the Merchant Banking Division of Goldman, Sachs & Co. ("Goldman") and in the firm's principal lodging investing activity, which investments were primarily placed through the Whitehall Street Real Estate series of private equity funds, as well as the Goldman Sachs Real Estate Mezzanine Partners fund. Mr. Springer's involvement with these funds included all aspects of hotel equity and debt investing, as well as asset management of numerous lodging portfolios. Mr. Springer joined Goldman in February 2006. Prior to joining Goldman, Mr. Springer worked in both the feasibility and acquisitions groups at Host Hotels & Resorts from 2004 to 2006 and was integral to the closing of several large lodging deals. Mr. Springer started his career with PricewaterhouseCoopers, LLP in the Hospitality Consulting Group from 1999 to 2004. Mr. Springer holds a B.S. degree in Hotel Administration from Cornell University.
David M. Klein is our Executive Vice President and General Counsel. Mr. Klein joined the Company in July 2016 as Senior Vice President and General Counsel, a position he held until February 2019 when he was promoted to Executive Vice President and General Counsel. Prior to joining Sunstone, Mr. Klein was a Partner in the Hospitality & Leisure group of Dentons, LLP, one of the world’s largest law firms, where his practice focused solely on the hospitality and leisure industry. Prior to joining Dentons, Mr. Klein held the position of co-founding Principal, Chief Administrative Officer and General Counsel of NYLO Hotels and Advaya Hospitality. At NYLO, Mr. Klein spearheaded the company’s joint venture capitalization with Lehman Brothers, as well as multiple debt facilities for all company-owned hotel properties. He also led the structuring of the joint venture capitalization of Advaya with Auromatrix, a large private Indian conglomerate based in Chennai, India. Additionally, he oversaw all corporate and legal matters related to both companies’ ongoing franchise, management, development, financing and corporate affairs. Prior to his roles with NYLO and Advaya, Mr. Klein was a partner in the Hospitality & Leisure group of Squire Sanders (Squire Patton Boggs). Mr. Klein received his J.D. degree from the Sandra Day O’Connor College of Law at Arizona State University and his B.A. degree from the University of California at Los Angeles.
Item 1A. | Risk Factors |
The statements in this section describe some of the significantmaterial risks to our business and should be considered carefully in evaluating our business and the other information in this Form 10-K. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995, as amended. The following is a summary of the material risks to our business, all of which are described in more detail below:
Risks Related to our Business and Industry:
● | general factors common to the lodging industry but beyond our control, such as economic and business conditions, including a U.S. recession, trade conflicts and tariffs, changes impacting global travel, regional or global economic slowdowns, any flu or disease-related pandemic that impacts travel or the ability to travel, including COVID-19, the adverse effects of climate change, the threat of terrorism, terrorist events, civil unrest, government shutdowns, events that reduce the capacity or availability of air travel, volatility in the capital markets, increased competition from other hotels in our markets, new hotel supply or alternative lodging options, unexpected changes in business, commercial and leisure travel and tourism, increases in operating costs, changes in our relationships with, and the requirements, performance, and reputation of, our management companies and franchisors, and changes in government laws, regulations, fiscal policies, and zoning ordinances and the related costs to comply; |
● | the impact on the economy and travel from the COVID-19 pandemic; |
● | our existing terrorism insurance may not fully cover any losses we incur related to terrorist acts, and in the future, we may not be able to obtain terrorism insurance in adequate amounts or at acceptable premium levels; |
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● | system security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to guests at our hotels; |
● | a significant portion of our hotels are geographically concentrated and, accordingly, we could be disproportionately harmed by economic downturns or natural disasters in these areas of the country; |
● | uninsured or underinsured losses; |
● | we own primarily urban, resort and destination upper upscale hotels, and the upper upscale segment of the lodging market is highly competitive and may be subject to greater volatility than other segments of the market; |
● | the hotel business is seasonal and seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenue; |
● | the operating results of some of our individual hotels are significantly impacted by group contract business and room nights generated by large corporate customers, and the loss of any such customer for any reason could harm our results; |
● | the need for business-related travel, and, therefore, demand for rooms in our hotels may be materially and adversely affected by the increased use of business-related technology; |
● | the growth of alternative hotel reservation channels that increases the supply and competition of traditional and alternative accommodations; |
● | rising operating expenses or low occupancy rates; |
● | the failure of tenants to make rent payments under our retail and restaurant leases; |
● | the ground, building or airspace leases with unaffiliated parties at three of the 17 Hotels; |
● | future adverse litigation judgments, including claims by persons relating to our properties, or settlements resulting from legal proceedings; |
● | certain of our long-lived assets have in the past become impaired and may become impaired in the future; |
● | our hotels have an ongoing need for renovations and potentially significant capital expenditures in connection with acquisitions, repositionings, and other capital improvements, some of which are mandated by applicable laws or regulations or agreements with third parties, and the costs of such renovations, repositionings or improvements may exceed our expectations or cause other problems; |
● | we face competition for hotel acquisitions and dispositions, and we may not be successful in completing hotel acquisitions or dispositions that meet our criteria; |
● | delays in the acquisition and renovation or repositioning of hotel properties; |
● | accounting for the acquisition of a hotel property or other entity; |
● | the acquisition of a portfolio of hotels or a company presents more risks to our business and financial results than the acquisition of a single hotel; |
● | joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a co-venturer’s financial condition, and disputes between us and our co-venturer; |
● | we may be subject to unknown or contingent liabilities related to recently sold or acquired hotels, as well as hotels we may sell or acquire in the future; |
● | the sale of a hotel or portfolio of hotels is typically subject to contingencies, risks, and uncertainties, any of which may cause us to be unsuccessful in completing the disposition; |
● | the illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels; |
● | the hotel loans in which we may invest in the future involve greater risks of loss than senior loans secured by income-producing real properties; |
● | if we make or invest in mortgage loans with the intent of gaining ownership of the hotel secured by or pledged to the loan, our ability to perfect an ownership in the hotel is subject to the sponsor’s willingness to forfeit the property in lieu of the debt; |
● | because we are a REIT, we depend on third-parties to operate our hotels; |
● | we are subject to risks associated with the employment of hotel personnel; |
● | a substantial number of our hotels operate under a brand owned by Marriott, Hilton or Hyatt. Should any of these brands experience a negative event, or receive negative publicity, our operating results may be harmed; |
● | our franchisors and brand managers may change certain policies or cost allocations that could negatively impact our hotels; |
● | our franchisors and brand managers may require us to make capital expenditures pursuant to property improvement plans in order to comply with brand standards; |
● | termination of any of our franchise, management or operating lease agreements could cause us to lose business or lead to a default or acceleration of our obligations under certain notes payable; |
● | we rely on our senior management team, the loss of whom may cause us to incur costs and harm our business; and |
● | if we fail to maintain effective internal control over financial controls and procedures, we may not be able to accurately report our financial results. |
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Risks Related to our Debt and Financing:
● | the current amount of our debt may harm our financial flexibility; |
● | we are subject to various financial covenants, and should we default, we may be required to pay additional fees, provide additional security, repay the debt or forfeit the hotel securing the debt; |
● | unsecured debt covenants may restrict our ability to invest in our assets or pay dividends; |
● | our financial covenants currently restrict, and may in the future restrict, our operating and acquisition activities; |
● | many of our existing mortgage debt agreements contain “cash trap” provisions that could limit our ability to use funds generated by our hotels; |
● | cash generated by our hotels that secure our existing mortgage debt agreements is distributed to us only after the related debt service and certain impound accounts are paid; |
● | we may not be able to refinance our debt on favorable terms or at all; |
● | our organizational documents do not limit the amount of debt we can incur; and |
● | any replacement of LIBOR as the basis on which our variable-rate debt is calculated may harm our results. |
Risks Related to our Status as a REIT:
● | our failure to qualify as a REIT for any reason, including if the leases of our hotels to the TRS Lessee are not respected as true leases or if they are held not to be on an arm’s length basis; |
● | even as a REIT, we may become subject to federal, state, or local taxes on our income or property, including a penalty tax upon the sale of a hotel or corporate level income tax on certain built-in gains; |
● | dividends payable by REITS generally do not qualify for the reduced tax rates available for some dividends; |
● | the TRS Lessee is subject to special rules that may result in increased taxes; |
● | because we are a REIT, we depend on the TRS Lessee and its subsidiaries to make rent payments to us; |
● | states may not recognize the federal dividends paid deduction resulting in state income taxes due; |
● | a transaction intended to qualify as a Section 1031 Exchange may later be determined to be taxable; and |
● | legislative or other actions affecting REITS could have a negative effect on us. |
Risks Related to our Common Stock and Corporate Culture:
● | the market price of our equity securities may vary substantially; |
● | our distributions to stockholders may vary, and distributions on our common stock may be made in the form of cash, stock, or a combination of both; however, the IRS may disallow our use of stock dividends; |
● | shares of our common stock that are or become available for sale could affect the share price; |
● | our earnings and cash distributions will affect the market price of our common stock; |
● | provisions of Maryland law and our organizational documents may limit the ability of a third party to acquire control of our Company and may serve to limit our stock price; and |
● | our board of directors may change our significant corporate policies with the consent of our stockholders. |
The following includes a more detailed discussion of our material risk factors:
Risks Related to Our Business and Industry
A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business, including the following:
● | general economic and business conditions, including a U.S. recession, trade conflicts and tariffs between the U.S. and its trading partners, changes impacting global travel, regional or global economic slowdowns, which may diminish the desire for leisure travel or the need for business travel, as well as any type of flu or disease-related pandemic that impacts travel or the ability to travel, including COVID-19, or the adverse effects of climate change, affecting the lodging and travel industry, internationally, nationally, and locally; |
● | threat of terrorism, terrorist events, civil unrest, government shutdowns, events that reduce the capacity or availability of air travel or other factors that may affect travel patterns and reduce the number of business and commercial travelers and tourists; |
● | volatility in the capital markets and the effect on lodging demand or our ability to obtain capital on favorable terms or at all; |
● | increased competition from other hotels in our markets; |
● | new hotel supply, or alternative lodging options such as timeshare, vacation rentals or sharing services such as Airbnb, in our markets, which could harm our occupancy levels and revenue at our hotels; |
● | unexpected changes or government mandated restrictions in business, commercial and leisure travel and tourism; |
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● | increases in operating costs due to inflation, labor costs, workers’ compensation, and health-care related costs, utility costs, insurance, and unanticipated costs such as acts of nature and their consequences and other factors that may not be offset by increased room rates; |
● | changes in our relationships with, and the requirements, performance, and reputation of, our management companies and franchisors; and |
● | changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and zoning ordinances. |
These factors, many of which are discussed in more detail below, could harm our financial condition, results of operations and ability to make distributions to our stockholders.
COVID-19 has had, and is expected to continue to have, a significant impact on our financial condition and results of operations. The current, and uncertain future, impact of the COVID-19 pandemic, including its effect on the ability or desire of people to travel for leisure or for business, is expected to continue to impact our financial condition, results of operations, cash flows, liquidity, business plans, distributions to our common and preferred stockholders and their respective stock prices.
The COVID-19 pandemic, along with federal, state and local government mandates have disrupted and are expected to continue to disrupt our business. In the United States, individuals are being encouraged to practice social distancing, are restricted from gathering in groups, and in some areas, either have been or are subject to mandatory shelter-in-place orders, all of which have restricted or prohibited social gatherings, travel and non-essential activities outside of their homes. In response to the COVID-19 pandemic, during the first half of 2020, we temporarily suspended operations at 14 of the 17 Hotels. As of December 31, 2020, we have resumed operations at 12 hotels, leaving two of the 17 Hotels with operations currently suspended. All operating hotels are currently running at limited capacity with significantly reduced staffing, limited food and beverage operations and materially reduced amenity offerings. We may determine in the future that it is in the best interest of our Company, guests, and employees to temporarily suspend operations at some or all of our open hotels. With hotel operations temporarily suspended or reduced, we may be required to use a substantial portion of our available cash to pay hotel payroll expenses, maintenance expenses, fixed hotel costs such as ground rent, insurance expenses, property taxes and scheduled debt payments. Use of the Company’s cash will reduce the amount of cash available for hotel capital expenditures, future business opportunities and other purposes, including distributions to our common and preferred stockholders. We have suspended paying dividends on our common stock in order to conserve cash. We cannot predict how long the COVID-19 pandemic will last or what the long-term impact will be on hotel operations and our cash position.
We incurred $29.1 million of additional expenses as a result of the COVID-19 pandemic during 2020 related to wages and benefits for furloughed or laid off hotel employees, net of $5.2 million in employee retention tax credits and various industry grants received by our hotels. In addition to direct employee expenses related to COVID-19, we continue to use cash on hand to support the operations of our hotels, debt service and corporate expenses. We may be subject to increased risks related to employee matters, including increased employment litigation and claims for severance or other benefits tied to termination or furloughs as a result of temporary hotel suspensions or reduced hotel operations due to COVID-19.
We are unable to predict when any of our hotels with temporarily suspended operations will resume operations, or if additional operational hotels will need to suspend operations. Moreover, once travel advisories and restrictions, which may be continued or reinstituted due to the continued outbreak or a resurgent outbreak of COVID-19 (such as has occurred in many states in the U.S. in July 2020 and in the fall and winter of 2020), are lifted, travel demand may remain weak for a significant length of time as individuals may fear traveling, and we are unable to predict if and when occupancy and the average daily rate at each of the 17 Hotels will return to pre-pandemic levels. Additionally, our hotels may be negatively impacted by adverse changes in the economy, including higher unemployment rates, declines in income levels, loss of personal wealth and possibly a national and/or global recession resulting from the impact of COVID-19. Declines in demand trends, occupancy and the average daily rate at our hotels may indicate that one or more of our hotels is impaired, which would adversely affect our financial condition and results of operations.
To preserve additional liquidity, during 2020, we temporarily suspended both our stock repurchase program and our common stock quarterly dividend, and deferred a portion of our portfolio’s planned 2020 non-essential capital improvements. We expect to continue our cash preservation programs throughout 2021. We believe that the steps we have taken to increase our cash position and preserve our financial flexibility, combined with the amendments to our unsecured debt, our waiver to further extend our unsecured debt’s covenant relief period, our already strong balance sheet, and our low leverage, will be sufficient to allow us to navigate through this crisis. Given the unprecedented impact of COVID-19 on the global market and our hotel operations, we cannot, however, assure you that our forecast or the assumptions we used to estimate our liquidity requirements will be correct. In addition, the magnitude and duration of the COVID-19 pandemic is uncertain. We cannot accurately estimate the impact on our business, financial condition, or operational results with reasonable certainty; however, we reported a significant net loss on our operations for the year ending December 31, 2020, and it is possible that we may report a net loss on our operations for the year ending December 31, 2021.
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The market price of our common stock has been and may continue to be negatively affected by the impact of the COVID-19 pandemic on our hotel operations and future earnings. The extent of the effects of the pandemic on our business and the hotel industry at large, however, will ultimately depend on future developments, including, but not limited to, the duration and severity of the pandemic, how quickly and successfully effective vaccines and therapies are distributed and administered, as well as the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume. To the extent COVID-19 adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described herein.
In the past, events beyond our control, including economic slowdowns, global pandemics, natural disasters, civil unrest and terrorism, harmed the operating performance of the hotel industry generally and the performance of our hotels, and if these or similar events occur again, our operating and financial results may be harmed by declines in average daily room rates and/or occupancy.
The operating and financial performance of the lodging industry has traditionally been closely linked with the performance of the general economy. The majority of our hotels are classified as upper upscale hotels. In an economic downturn, this type of hotel may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates in part because upper upscale hotels generally target business and high-end leisure travelers. In periods of economic difficulties, including those caused by global pandemics, business and leisure travelers may reduce travel costs by limiting travel or by using lower cost accommodations. In addition, operating results at our hotels in key gateway markets may be negatively affected by reduced demand from international travelers due to financial conditions in their home countries or a material strengthening of the U.S. dollar in relation to other currencies. Also, volatility in transportation fuel costs, increases in air and ground travel costs, and decreases in airline capacity may reduce the demand for our hotel rooms. In addition, we own sevenfour hotels located in seismically active areas of California and sevenfive hotels located in areas that have an increased potential to experience hurricanes (Florida, Hawaii, Louisiana and Texas)Louisiana). We have acquired and intend to maintain comprehensive insurance on each of our hotels, including liability, terrorism, fire, and extended coverage, of the type and amount that we believe are customarily obtained for or by hotel owners. We cannot guarantee that such coverage will continue to be available at reasonable coverage levels, at reasonable rates or at reasonable deductible levels. Additionally, deductible levels are typically higher for earthquakes, floods and named windstorms. Accordingly, our financial results may be harmed if any of our hotels are damaged by natural disasters resulting in losses (either insured or uninsured) or causing a decrease in average daily room rates and/or occupancy. Even in the absence of direct physical damage to our hotels, the occurrence of any natural disasters, terrorist attacks, military actions, outbreaks of diseases, such as Zika, Ebola, H1N1 or other similar viruses, or other casualty events, may have a material adverse effect on our business, the impact of which could result in a material adverse effect on our financial condition, results of operations and our ability to make distributions to our stockholders.
Terrorist attacks and military conflicts may adversely affect the hospitality industry.
The terrorist attacks on September 11, 2001 and subsequent events underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. In particular, properties that are well-known or are located in concentrated business sectors in major cities may be subject to higher-than-normal risk of terrorist attacks. The occurrence or the possibility of terrorist attacks or military conflicts could:
● | cause damage to one or more of our properties that may not be fully covered by insurance to the value of the damages; |
● | cause all or portions of affected properties to be shut down for prolonged periods, resulting in a loss of income; |
● | generally reduce travel to affected areas for tourism and business or adversely affect the willingness of customers to stay in or avail themselves of the services of the affected properties; |
● | expose us to a risk of monetary claims arising out of death, injury or damage to property caused by any such attacks; and |
● | result in higher costs for security and insurance premiums or diminish the availability of insurance coverage for losses related to terrorist attacks, particularly for properties in target areas, all of which could adversely affect our results. |
We may not be able to recover fully under our existing terrorism insurance for losses caused by some types of terrorist acts, and federal terrorism legislation does not ensure that we will be able to obtain terrorism insurance in adequate amounts or at acceptable premium levels in the future.
We obtain terrorism insurance as part of our all-risk property insurance program. However, our all-risk policies have limitations such as per occurrence limits and sublimits that might have to be shared proportionally across participating hotels under certain loss scenarios. Also, all-risk insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Act (the “TRIA”) for “certified” acts of terrorism — namely those which are committed on behalf of non-United States persons or interests. Furthermore, we may not have full replacement coverage for all of our properties for acts of terrorism committed on behalf of United States persons or interests (“noncertified” events), as well as for “certified” events, as our terrorism coverage for such incidents is subject to sublimits and/or annual aggregate limits. In addition, property damage related to war and to nuclear, biological, and chemical incidents is excluded under our policies. To the extent we have property damage directly related to fire following a nuclear, biological, or chemical incident, however, our coverage may extend to reimburse us for our losses. While the TRIA provides for the reimbursement of insurers for losses resulting from nuclear, biological, and chemical perils, the TRIA does not require insurers
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to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. As a result of the above, there remains considerable uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to guests at our hotels, and any such disruption could reduce our expected revenue, increase our expenses, compromise confidential information, damage our reputation, and adversely affect our stock price.
We and our third-party managers and franchisors rely on information technology networks and systems, including the internet, to access, process, transmit and store electronic and customer information. The systems operated by our third-party managers and franchisors require the collection and retention of large volumes of our hotel guests’ personally identifiable information, including credit card numbers. In addition to the systems operated by our third-party managers and franchisors, we have our own corporate technologies and systems to support our corporate business. Experienced computer programmers and hackers may be able to penetrate our network security or the network security of our third-party managers and franchisors, and misappropriate or compromise our confidential information or that of our hotel guests, create system disruptions or cause the shutdown of our hotels. Computer programmers and hackers also may be able to develop and deploy viruses, worms, ransomware and other malicious software programs that attack our computer systems or the computer systems operated by our third-party managers and franchisors, or otherwise exploit any security vulnerabilities of our respective networks. In addition, sophisticated hardware and operating system software and applications that we and our third-party managers or franchisors may procure from outside companies may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with our internal operations or the operations at our hotels. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, ransomware, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential business at our hotels. Any compromise of our third-party managers and franchisor information networks’ function, security and availability could result in disruptions to operations, delayed sales or bookings, lost guest reservations, increased costs, and lower margins. Any of these events could adversely affect our financial results, stock price and reputation, lead to unauthorized disclosure of confidential information, result in misstated financial reports and subject us to potential litigation and liability.
Portions of our information technology infrastructure or the information technology infrastructure of our third-party managers and franchisors also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We or our third-party managers and franchisors may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive, and resource-intensive. Such disruptions could adversely impact the ability of our third-party managers and franchisors to fulfill reservations for guestrooms and other services offered at our hotels or to deliver to us timely and accurate financial information.
Although we have taken steps to protect the security of our information systems, and the data maintained in these systems, there can be no assurance that the security measures we have taken will prevent failures, inadequacies, or interruptions in system services, or that system security will not be breached through physical or electronic break-ins, computer viruses, cyber extortionists or attacks by hackers. In addition, we rely on the security systems of our third-party managers and franchisors to protect proprietary and customer information from these threats.
Our third-party managers carry cyber insurance policies to protect and offset a portion of potential costs that may be incurred from a security breach. Additionally, we currently have a cyber insurance policy to cover breaches of our corporate infrastructure and systems and to provide supplemental coverage above the coverage carried by our third-party managers. We cannot guarantee that such coverage will continue to be available at reasonable coverage levels, at reasonable rates or at reasonable deductible levels. Our policy is subject to limits and sub-limits for certain types of claims, and we do not expect that this policy will cover all of the losses that we could experience from these exposures. Despite various precautionary steps to protect our hotels from losses resulting from cyber-attacks, however, any occurrence of a cyber-attack could still result in losses at our properties, which could affect our results of operations.
We face possible risks associated with the physical and transitional effects of climate change.
We disclose climate-related risks in alignment with the recommendations made in 2017 by the Task Force on Climate-Related Financial Disclosures (“TCFD”). We are subject to the risks associated with the physical effects of climate change, which can include more frequent or severe storms, hurricanes, flooding, droughts and fires, any of which could have a material adverse effect on our hotels, operating results and cash flows. To the extent climate change causes changes in weather patterns, our coastal markets could experience increases in storm intensity and rising sea-levels causing damage to our hotels. As a result, we could become subject to significant losses and/or repair costs that may or may not be fully covered by insurance. Other markets may experience prolonged variations in temperature or precipitation that may limit access to the water needed to operate our hotels or significantly increase energy costs, which may subject those hotels to additional regulatory burdens, such as limitations on water usage or stricter energy
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efficiency standards. Climate change also may affect our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable in areas most vulnerable to such events, increasing operating costs at our hotels, such as the cost of water or energy, and requiring us to expend funds as we seek to mitigate, repair and protect our hotels against such risks.
We are subject to the risks associated with the transitional effects of climate change to a low carbon scenario, which can include increased regulation for building efficiency and equipment specifications, increased regulations or investor requirements for Environmental and Social disclosures and increased costs to manage the shift in consumer preferences. In an effort to mitigate the impact of climate change, our hotels could become subject to increased governmental regulations mandating energy efficiency standards, the usage of sustainable energy sources and updated equipment specifications which may require additional capital investments or increased operating costs. Climate change may also affect our business by the shift in consumer preferences for sustainable travel. Our hotels may be subject to additional costs to manage consumer expectations for sustainable buildings and hotel operations.
There can be no assurance that climate change will not have a material adverse effect on our hotels, operating results, or cash flows.
A significant portion of our hotels are geographically concentrated and, accordingly, we could be disproportionately harmed by economic downturns or natural disasters in these areas of the country.
As of December 31, 2020, four of the 17 Hotels are located in California, which is the largest concentration of our hotels in any state, representing 30% of our rooms and 36% of the revenue generated by the 17 Hotels during 2020. In addition, the following other areas include concentrations of our hotels as of December 31, 2020: Florida, where two of the 17 Hotels represent 11% of our rooms and 15% of the revenue generated by the 17 Hotels during 2020; Hawaii, where one of the 17 Hotels represents 6% of our rooms and 15% of the revenue generated by the 17 Hotels during 2020; Illinois, where three of the 17 Hotels represent 13% of our rooms and 5% of the revenue generated by the 17 Hotels during 2020; and Massachusetts, where two of the 17 Hotels represent 16% of our rooms and 13% of the revenue generated by the 17 Hotels during 2020. The concentration of our hotels in California, Florida, Hawaii, Illinois and Massachusetts exposes our business to economic conditions, competition and real and personal property tax rates unique to these locales. In addition, natural disasters in these locales would disproportionately affect our hotel portfolio. The economies and tourism industries in these locales, in comparison to other parts of the country, are negatively affected to a greater extent by changes and downturns in certain industries, including the entertainment, high technology, financial, and government industries. It is also possible that because of our California, Florida, Hawaii, Illinois and Massachusetts concentrations, a change in laws applicable to such hotels and the lodging industry may have a greater impact on us than a change in comparable laws in another geographical area in which we have hotels. Adverse developments in these locales could harm our revenue or increase our operating expenses.
Uninsured and underinsured losses could harm our financial condition, results of operations and ability to make distributions to our stockholders.
Various types of litigation losses and catastrophic losses, such as losses due to wars, terrorist acts, earthquakes, floods, hurricanes, pollution, climate change or other environmental matters, generally are either uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any notes payable or other financial obligations related to the property, in addition to obligations to our ground lessors, franchisors and managers.
Of the 17 Hotels, four are located in California, which has been historically at greater risk to certain acts of nature (such as fires, earthquakes, and mudslides) than other states. In addition, a total of five hotels are located in Florida, Hawaii, and Louisiana, which each have an increased potential to experience hurricanes. In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed hotel. Acts of nature that do not result in physical loss at our hotels could diminish the desirability of our hotel’s location, resulting in less demand by travelers.
Property and casualty insurance, including coverage for terrorism, can be difficult or expensive to obtain. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our hotels at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (e.g., earthquake, fire, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we are unable to obtain adequate insurance on our hotels for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments we have to our ground lessors, franchisors and managers which require us to maintain adequate insurance on our
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properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damages which would otherwise have been covered by insurance, it could harm our financial condition and results of operations.
In addition, there are other risks, such as certain environmental hazards, that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or too expensive to justify coverage. We also may encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy.
We own primarily urban, resort and destination upper upscale hotels, and the upper upscale segment of the lodging market is highly competitive and may be subject to greater volatility than other segments of the market, which could negatively affect our profitability.
The upper upscale segment of the hotel business is highly competitive. Our hotels compete on the basis of location, physical attributes, service levels and reputation, among many other factors. Some of our competitors may have hotels that are better located, have a stronger reputation, or possess superior physical attributes than our hotels. This competition could reduce occupancy levels and room revenue at our hotels, which would harm our operations. Over-building in the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. We may also face competition from nationally recognized hotel brands with which we are not associated. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale hotels when compared to other classes of hotels.
The hotel business is seasonal and seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenue.
As is typical of the lodging industry, we experience some seasonality in our business. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Hawaii, Key West and Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for Hawaii and Key West). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, natural disasters, terrorist attacks or alerts, civil unrest, public health concerns, government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. Seasonal fluctuations in revenue may affect our ability to make distributions to our stockholders or to fund our debt service.
The operating results of some of our individual hotels are significantly impacted by group contract business and room nights generated by large corporate transient customers, and the loss of such customers for any reason could harm our operating results.
Group contract business and room nights generated by large corporate transient customers can significantly impact the results of operations of our hotels. These contracts and customers vary from hotel to hotel and change from time to time. Such group contracts are typically for a limited period of time after which they may be put up for competitive bidding. The impact and timing of large events are not always easy to predict. Some of these contracts and events may also be cancelled (such as occurred in 2020 and into 2021 due to the COVID-19 pandemic), which could reduce our expectations for future revenues or result in potential litigation in order to collect cancellation fees. As a result, the operating results for our individual hotels can fluctuate as a result of these factors, possibly in adverse ways, and these fluctuations can affect our overall operating results.
The need for business-related travel, and, therefore, demand for rooms in our hotels may be materially and adversely affected by the increased use of business-related technology.
During 2020, the COVID-19 pandemic caused a significant decrease in business-related travel as companies turned to virtual meetings in order to protect the health and safety of their employees. The increased use of teleconferencing and video-conference technology by businesses may continue in the future, which could result in further decreases in business travel as companies become accustomed to the use of technologies that allow multiple parties from different locations to participate in meetings without traveling to a centralized meeting location, such as our hotels. To the extent that such technologies, or new technologies, play an increased role in day-to-day business interactions and the necessity for business-related travel decreases, demand for hotel rooms may decrease and our hotels could be materially and adversely affected.
The growth of alternative reservation channels could adversely affect our business and profitability.
A significant percentage of hotel rooms for individual guests is booked through internet travel intermediaries. Many of our managers and franchisors contract with such intermediaries and pay them various commissions and transaction fees for sales of our rooms through their systems. If such bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant concessions from us or our franchisees. Although our managers and franchisors may have established agreements with many of these intermediaries that limit transaction fees for hotels, there can be no assurance that our managers and franchisors will be able to renegotiate such agreements upon their expiration with terms as favorable as the provisions that exist today. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for
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online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to the brands of our managers and franchisors. If this happens, our business and profitability may be significantly negatively impacted.
In addition, in general, internet travel intermediaries have traditionally competed to attract individual consumers or “transient” business rather than group and convention business. However, some hospitality intermediaries have grown their business to include marketing to large group and convention business. If that growth continues, it could both divert group and convention business away from our hotels, and it could also increase our cost of sales for group and convention business.
In an effort to lure business away from internet travel intermediaries and to drive business on their own websites, our managers and franchisors may discount the room rates available on their websites even further, which may also significantly impact our business and profitability.
Rising operating expenses or low occupancy rates could reduce our cash flow and funds available for future distributions.
Our hotels, and any hotels we buy in the future, are and will be subject to operating risks common to the lodging industry in general. If any hotel is not occupied at a level sufficient to cover our operating expenses, then we could be required to spend additional funds for that hotel’s operating expenses. For example, during 2020, operations at the 17 Hotels were either temporarily suspended or reduced due to the COVID-19 pandemic, and we were required to fund hotel payroll expenses, maintenance expenses, fixed hotel costs such as ground rent, insurance expenses, property taxes and scheduled debt payments. Our hotels have in the past been, and may in the future be, subject to increases in real estate and other tax rates, utility costs, operating expenses including labor and employee-related benefits, insurance costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and funds available for future distributions.
The failure of tenants in our hotels to make rent payments under our retail and restaurant leases may adversely affect our results of operations.
A portion of the space in many of our hotels is leased to third-party tenants for retail or restaurant purposes. At times, we hold security deposits in connection with each lease, which may be applied in the event that a tenant under a lease fails or is unable to make its rent payments. In the event that a tenant continually fails to make rent payments, we may be able to apply the tenant’s security deposit to recover a portion of the rents due; however, we may not be able to recover all rents due to us, which may harm our operating results. During 2020, we entered into several rent abatement and rent deferral agreements with tenants at our hotels who were negatively affected by the temporary suspensions and reduced operations at our hotels due to the COVID-19 pandemic. If these tenants are unable to make their deferred rent payments once they become due in 2021, it may harm our operating results. Additionally, the time and cost associated with re-leasing our retail space could negatively impact our operating results.
Because three of the 17 Hotels are subject to ground, building or airspace leases with unaffiliated parties, termination of these leases by the lessors for any reason, including due to our default on the lease, could cause us to lose the ability to operate these hotels altogether and to incur substantial costs in restoring the premises.
Our rights to use the underlying land, building or airspace of three of the 17 Hotels are based upon our interest under long-term leases with unaffiliated parties. Pursuant to the terms of the applicable leases for these hotels, we are required to pay all rent due and comply with all other lessee obligations. As of December 31, 2020, the terms of these ground, building and airspace leases (including renewal options) range from approximately 23 to 77 years. All of the leases contain provisions that increase the payments due to the lessors. Any market-based increases to the payments due to our lessors could be substantial, resulting in a decrease to our profitability: one lease increases at regular intervals by 10%, and two leases increase at regular intervals as determined by the applicable Consumer Price Index.
Any pledge of our interest in a ground, building or airspace lease may also require the consent of the applicable lessor and its lenders. As a result, we may not be able to sell, assign, transfer, or convey our lessee’s interest in any hotel subject to a ground, building or airspace lease in the future absent consent of such third parties even if such transactions may be in the best interest of our stockholders.
The lessors may require us, at the expiration or termination of the ground, building or airspace leases, to surrender or remove any improvements, alterations or additions to the land at our own expense. The leases also generally require us to restore the premises following a casualty and to apply in a specified manner any proceeds received in connection therewith. We may have to restore the premises if a material casualty, such as a fire or an act of nature, occurs and the cost thereof may exceed available insurance proceeds.
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Future adverse litigation judgments or settlements resulting from legal proceedings could have an adverse effect on our financial condition.
In the normal course of our business, we are involved in various legal proceedings, including those involving our third-party managers that relate to the management of our hotels. While we may agree to share any legal costs with our third-party managers, any adverse legal judgments or settlements resulting in payment by us of a material sum of money may materially and adversely affect our financial condition and results of operations.
Claims by persons relating to our properties could affect the attractiveness of our hotels or cause us to incur additional expenses.
We could incur liabilities resulting from loss or injury to our hotels or to persons at our hotels. These losses could be attributable to us or result from actions taken by a hotel management company. If claims are made against a management company, it may seek to pass those expenses through to us. Claims such as these, whether or not they have merit, could harm the reputation of a hotel, or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.
We have in the past and could in the future incur liabilities resulting from claims by hotel employees. While these claims are, for the most part, covered by insurance, some claims (such as claims for unpaid overtime wages) generally are not insured or insurable. These claims, whether or not they have merit, could harm the reputation of a hotel, or cause us to incur losses which could harm our results of operations.
Laws and governmental regulations may restrict the ways in which we use our hotel properties and increase the cost of compliance with such regulations. Noncompliance with such regulations could subject us to penalties, loss of value of our properties or civil damages.
Our hotel properties are subject to various federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such as swimming pool chemicals at our hotels) to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for the types of costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
Our hotel properties are also subject to the ADA. Under the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers and non-compliance could result in the U.S. government imposing fines or in private litigants’ winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and the ability to make distributions to our stockholders could be harmed. In addition, we are required to operate our hotel properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties.
Volatility in the debt and equity markets may adversely affect our ability to acquire, renovate, refinance or sell hotel assets.our hotels.
Volatility in the global financial markets may have a material adverse effect on our financial condition or results of operations. Among other things, over time,During 2020, the capital markets have experienced periods ofeconomic downturn caused by the COVID-19 pandemic resulted in extreme price volatility, dislocations and liquidity disruptions in the capital markets, all of which have exerted downward pressure on stock prices, widened credit spreads on debt financing and led to declines in the market values of U.S. and foreign stock exchanges. FutureCurrent and future dislocations in the debt markets may reduce the amount of capital that is available to finance real estate, which, in turn may limit our ability to finance the
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acquisition of hotels or the ability of purchasers to obtain financing for hotels that we wish to sell, either of which may have a material adverse impact on revenues, income and/or cash flow.
We have historically used capital obtained from debt and equity markets, including both secured mortgage debt and unsecured corporate debt, to acquire, renovate and refinance hotel assets. If these markets become difficult to access as a
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result of low demand for debt or equity securities, higher capital costs and interest rates, a low value for capital securities (including our common or preferred stock), and more restrictive lending standards, our business could be adversely affected. In particular, rising interest rates could make it more difficult or expensive for us to obtain debt or equity capital in the future. Similar factors could also adversely affect the ability of others to obtain capital and therefore could make it more difficult for us to sell hotel assets.
Changes in the debt and equity markets may adversely affect the value of our hotels.
The value of hotel real estate has an inverse correlation to the capital costs of hotel investors. If capital costs increase, real estate values may decrease. Capital costs are generally a function of the perceived risks associated with our assets, interest rates on debt and return expectations of equity investors. While interest rates may have increased from cyclical lows, they remain low relative to historic averages, but may continue to increase in the future. Interest rate volatility, both in the U.S. and globally, could reduce our access to capital markets or increase the cost of funding our debt requirements. If the income generated by our hotels does not increase by amounts sufficient to cover such higher capital costs, the market value of our hotel real estate may decline. In some cases, the value of our hotel real estate has previously declined, and may in the future decline, to levels below the principal amount of the debt securing such hotel real estate.
AsCertain of December 31, 2017,our long-lived assets have in the past become impaired and may become impaired in the future.
We periodically review the fair value of each of our hotels for possible impairment. For example, in 2020, we had approximately $990.4identified indicators of impairment at the Hilton Times Square and the Renaissance Westchester related to deteriorating profitability exacerbated by the effects of the COVID-19 pandemic on our expected future operating cash flows, resulting in us recording impairment losses of $107.9 million and $18.7 million, respectively, on the two hotels. In addition, during 2020 we recorded an impairment loss of consolidated outstanding debt,$18.1 million on the Renaissance Harborplace as the fair value less hotel sale costs was lower than the hotel’s carrying value. We also recorded an impairment loss of $24.7 million on the Renaissance Harborplace in 2019, as we identified indicators of impairment associated with declining demand trends at both the hotel and carrying such debtin the Baltimore market, along with our plan for the hotel’s estimated hold period. In the future, additional hotels may impairbecome impaired, or our hotels which have previously become impaired may become further impaired, which may adversely affect our financial flexibility or harm our businesscondition and financial results by imposing requirements on our business.of operations.
Of our total debt outstanding as of December 31, 2017, approximately $403.0 million matures over the next four years (none in either 2018 or 2019, $296.1 million in 2020Our hotels have an ongoing need for renovations and $106.9 million in 2021). The $403.0 million in debt maturities due over the next four years does not include $7.4 million of scheduled loan amortization payments due in 2018, $8.0 million due in each of the years 2019 and 2020, or $4.4 million due in 2021. Carrying our outstanding debt may adversely impact our business and financial results by:
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We also may incur additional debt in connection with future acquisitions, repositionings and other capital improvements, some of real estate, which are mandated by applicable laws or regulations or agreements with third parties, and the costs of such renovations, repositionings or improvements may include loans secured by someexceed our expectations or all of the hotels we acquire or our existing hotels. cause other problems.
In addition to capital expenditures required by our outstanding debt, at December 31, 2017, we had $0.5 million in outstanding letters of credit.
We anticipate that we will refinance our indebtednessmanagement, franchise and loan agreements, from time to time we will need to repaymake capital expenditures to comply with applicable laws and regulations, to remain competitive with other hotels and to maintain the economic value of our debt, and our inabilityhotels. We also may need to refinance on favorable terms, or at all, could impact our operating results.
Becausemake significant capital improvements to hotels that we anticipate that our internally generated cash will be adequate to repay onlyacquire. During 2020, we deferred a portion of our indebtedness priorportfolio’s planned 2020 non-essential capital improvements in order to maturity, we expect that we will be requiredpreserve additional liquidity in light of the COVID-19 pandemic. We did, however, invest $51.4 million on capital improvements to repayour hotel portfolio. We accelerated specific capital investment projects in order to take advantage of the COVID-19-related suspended operations and the low demand environment at several hotels to perform otherwise extremely disruptive capital projects. Under the terms of the 2020 amendments to our unsecured debt from time to time through refinancings of our indebtedness and/or offerings of equity, preferred equity or debt. The amount of our existing indebtedness may impede our ability to repay our debt through refinancings. Ifagreements, we are unableable to refinanceinvest up to $100.0 million into capital improvements in 2021. Occupancy and ADR are often affected by the maintenance and capital improvements at a hotel, especially in the event that the maintenance or improvements are not completed on schedule or if the improvements require significant closures at the hotel. The costs of capital improvements we need or choose to make could harm our indebtedness with property secured debt or corporate debt on acceptable terms, or at all, and are unable to negotiate an extension with the lender, we may be in default or forced to sell one or more of our properties on potentially disadvantageous terms, which might increase our borrowing costs, result in losses to usfinancial condition and reduce the amount of cashamounts available to us for distributionsdistribution to our stockholders. If prevailing interest rates or other factors atThese capital improvements may give rise to the time of any refinancing result in higher interest rates on new debt, our interest expense would increase, and potential proceeds we would be able to secure from future debt refinancings may decrease, which would harm our operating results.following additional risks, among others:
● | construction cost overruns and delays; |
● | a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms; |
● | uncertainties as to market demand or a loss of market demand after capital improvements have begun; |
● | disruption in service and room availability causing reduced demand, occupancy and rates; |
● | possible environmental problems; and |
● | disputes with managers or franchisors regarding our compliance with the requirements under the relevant management, operating lease or franchise agreement. |
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If we were to default on our secured debt in the future, the loss of our property securing the debt may negatively affect our ability to satisfy other obligations.
All of our mortgage debt, excluding letters of credit, unsecured term loans and unsecured senior notes, as of December 31, 2017 is secured by first deeds of trust on our properties. Using our properties as collateral increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property that secures any loan under which we are in default. Additionally, defaulting on indebtedness may damage our reputation as a borrower, and may limit our ability to secure financing in the future. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not necessarily receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash or employ a partial cash and partial stock dividend to satisfy our taxable income distribution requirements.
Financial covenants in our debt instruments may restrict our operating or acquisition activities.
Our credit facility, unsecured term loans and unsecured senior notes contain, and other potential financings that we may incur or assume in the future may contain, restrictions, requirements and other limitations on our ability to incur additional debt and make distributions to our stockholders, as well as financial covenants relating to the performance of our hotel properties. Our ability to borrow under these agreements is subject to compliance with these financial and other covenants. If we are unable to engage in activities that we believe would benefit our hotel properties or we are unable to incur debt to pursue those activities, our growth may be limited. Obtaining consents or waivers from compliance with these covenants may not be possible, or if possible, may cause us to incur additional costs or result in additional limitations.
Many of our existing mortgage debt agreements contain “cash trap” provisions that could limit our ability to use funds for other corporate purposes or to make distributions to our stockholders.
Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. If these provisions are triggered, substantially all of the profit generated by the secured hotel would be deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of the lender. As of December 31, 2017, no cash trap provisions were triggered at any of our hotels.
Cash generated by our hotels that secure our existing mortgage debt agreements is distributed to us only after the related debt service and certain impound amounts are paid, which could affect our liquidity and limit our ability to use funds for other corporate purposes or to make distributions to our stockholders.
Cash generated by our hotels that secure our existing mortgage debt agreements is distributed to us only after certain items are paid, including, but not limited to, deposits into leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses. This limit on distributions could affect our liquidity and our ability to use cash generated by those hotels for other corporate purposes or to make distributions to our stockholders.
Our organizational documents contain no limitations on the amount of debt we may incur, so we may become too highly leveraged.
Our organizational documents do not limit the amount of indebtedness that we may incur. If we were to increase the level of our borrowings, then the resulting increase in cash flow that must be used for debt service would reduce cash available for capital investments or external growth, and could harm our ability to make payments on our outstanding indebtedness and our financial condition.
We face competition for hotel acquisitions and dispositions, and we may not be successful in completing hotel acquisitions or dispositions that meet our criteria, which may impede our business strategy.
Our business strategy is predicated on a cycle-appropriate approach to hotel acquisitions and dispositions. We may not be successful in identifying or completing acquisitions or dispositions that are consistent with our strategy of owning long-term relevant real estate.LTRR®. For example, we have not acquired a hotel since 2017. We compete with institutional pension funds, private equity investors, high net worth individuals, other REITs and numerous local, regional, national and international owners who are engaged in the acquisition of hotels, and we rely on such entities as purchasers of hotels we seek to sell. These competitors may affect the
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supply/demand dynamics and, accordingly, increase the price we must pay for hotels or hotel companies we seek to acquire, and these competitors may succeed in acquiring those hotels or hotel companies themselves. Furthermore, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater financial resources, may be willing to pay more, or may have a more compatible operating philosophy. Under the terms of the 2020 amendments to our unsecured debt agreements, we have the unlimited ability to fund future acquisitions with proceeds from the issuance of common equity or through the sale of unencumbered hotels. In addition, the number of entities competing for suitable hotels may increasewe can invest up to $250.0 million into acquisitions subject to maintaining certain minimum liquidity thresholds.
We believe that both new hotel construction and new hotel openings will be delayed or even cancelled in the future, which would increase demand for these hotelsnear-term due to the negative effects of the COVID-19 pandemic on the economy and the prices we must pay to acquire them, which, although beneficial to dispositions of hotels, may materially impact our ability to acquire new properties.lodging industry. We are also unable to predict certain market changes including changes in supply of, or demand for, similar real properties in a particular area. If we pay higher prices for hotels, our profitability may be reduced. Also, future acquisitions of hotels or hotel companies may not yield the returns we expect and, if financed using our equity, may result in stockholder dilution. In addition, our profitability may suffer because of acquisition-related costs, or amortization costs for acquired intangible assets, and the integration of such acquisitions may cause disruptions to our business and may strain management resources.
Delays in the acquisition and renovation or repositioning of hotel properties may have adverse effects on our results of operations and returns to our stockholders.
Delays we encounter in the selection, acquisition, renovation, repositioning and development of real properties could adversely affect investor returns. Our ability to commit to purchase specific assets will depend, in part, on the amount of our available cash at a given time.time and on restrictions placed on our use of cash by the 2020 amendments to our unsecured debt agreements. Renovation or repositioning programs may take longer and cost more than initially expected. Therefore, we may experience delays in receiving cash distributions from such hotels. If our projections are inaccurate, we may not achieve our anticipated returns.
Accounting for the acquisition of a hotel property or other entity as a purchase combination requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective relative or estimated fair values. Should the allocation be incorrect, our assets and liabilities may be overstated or understated, which may also affect depreciation expense on our statement of operations.
Accounting for the acquisition of a hotel property or other entity as a purchase combination requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective relative fair values for an asset acquisition or at their estimated fair values.values for a business combination. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment and intangible assets, together with any finance or operating lease right-of-use assets and capital lease obligations that are assumed as part of the acquisition of a leasehold interest.their related obligations. As with previous acquisitions, should we acquire a hotel property or other entity as a purchase combination in the future, we will use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Should any of these allocations be incorrect, our assets and liabilities may be overstated or understated, which may also affect depreciation expense on our statement of operations. In addition, should any of our allocations overstate our assets, we may be at risk of incurring an impairment charge.
In January 2018, we adopted the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the DefinitionThe acquisition of a Business” (“ASU No. 2017-01”), which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. If, and when, we acquire a hotel property or other entity as a purchase combination inrequires an analysis of the future, we will be required to analyze the acquisitiontransaction to determine if the transactionit qualifies as the purchase of a business or an asset. The result of this analysis will affect both our balance sheet and our statement of operations as transaction costs associated with asset acquisitions will be capitalized and subsequently depreciated over the life of the related asset, while the same costs associated with a business combination will continue to be expensed as incurred and included in corporate overhead. In addition,Also, asset acquisitions will not be subject to a measurement period, as are business combinations. Should our conclusion of the transaction as the purchase of a business or an asset be incorrect, our assets and our expenses may be overstated or understated.
The acquisition of a portfolio of hotels or a company presents more risks to our business and financial results than the acquisition of a single hotel.
We have acquired in the past, and may acquire in the future, multiple hotels in single transactions. We may also evaluate acquiring companies that own hotels. Multiple hotel and company acquisitions, however, are generally more complex than single hotel acquisitions and, as a result, the risk that they will not be completed is greater. These acquisitions may also result in our owning hotels in new markets, which places additional demands on our ability to actively asset manage the hotels. In addition, we may be required by a seller to purchase a group of hotels as a package, even though one or more of the hotels in the package do not meet our
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investment criteria. In those events, we expect to attempt to sell the hotels that do not meet our investment criteria, but may not be able to do so on acceptable terms, or if successful, the sales
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may be recharacterized by the IRS as dealer sales and subject to a 100% “prohibited transactions” tax on any gain. These hotels may harm our operating results if they operate below our underwriting or if we sell them at a loss. Also, a portfolio of hotels may be more difficult to integrate with our existing hotels than a single hotel, may strain our management resources and may make it more difficult to find one or more management companies to operate the hotels. Any of these risks could harm our operating results.
The sale of a hotel or a portfolio of hotels is typically subject to contingencies, risks and uncertainties, any of which may cause us to be unsuccessful in completing the disposition.
We may not be successful in completing the sale of a hotel or a portfolio of hotels, which may negatively impact our business strategy. Hotel sales are typically subject to customary risks and uncertainties. In addition, there may be contingencies related to, among other items, seller financing, franchise agreements, ground leases and other agreements. As such, we can offer no assurances as to whether any closing conditions will be satisfied on a timely basis or at all, or whether the closing of a sale will fail to occur for these or any other reasons.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a co-venturer’s financial condition and disputes between us and our co-venturers.
We have co-invested, and may in the future co-invest, with third parties through partnerships, joint ventures or other entities, acquiring noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. For example, in April 2011, we acquired a 75.0% majority equity interest in One Park Boulevard, LLC, a Delaware limited liability company (“One Park”), the joint venture that holds title to the 1,190-room Hilton San Diego Bayfront hotel located in San Diego, California. As of December 31, 2017, Park Hotels & Resorts, Inc. is the 25.0% minority equity partner in One Park. Accordingly, we are not in a position to exercise sole decision-making authority regarding One Park, and we may not be in a position in the future to exercise sole decision-making authority regarding aanother property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third partythird-party partners or co-venturers.
Wemaybesubjecttounknownorcontingentliabilitiesrelatedtorecently sold or acquiredhotels, as well as hotels that we may sell or acquire in the future.
Ourrecently sold or acquiredhotels,as well ashotelswemay sell oracquireinthefuture,maybesubjecttounknownorcontingentliabilitiesforwhichwe may be liable to the buyers or for which we mayhavenorecourse,oronlylimitedrecourse,againstthesellers.Ingeneral,therepresentationsandwarrantiesprovidedunder our transactionagreementsrelatedtothesaleorpurchaseof ahotelmaysurviveforadefinedperiodoftimeafterthecompletionofthetransaction. Furthermore,indemnificationundersuchagreementsmaybelimitedandsubjecttovariousmaterialitythresholds,asignificantdeductible,oranaggregatecaponlosses.As aresult,thereisnoguarantee that wewill notbeobligatedtoreimbursebuyersfortheirlosses or thatwewill be able to recoveranyamountswithrespecttolossesduetobreachesbysellersoftheirrepresentationsandwarranties.Inaddition,thetotalamountofcostsandexpensesthatmaybeincurredwithrespecttotheunknownorcontingent liabilitiesmayexceedourexpectations,andwemayexperienceotherunanticipatedadverseeffects,allofwhichcouldmateriallyandadverselyaffectour operating resultsand cash flows.
The sale of a hotel or a portfolio of hotels is typically subject to contingencies, risks and uncertainties, any of which may cause us to be unsuccessful in completing the disposition.
As part of our ongoing portfolio management strategy, on an opportunistic basis, we may selectively sell hotel properties that we believe do not meet our criteria of LTRR®, as we did with two hotels sold in 2020. We may not be successful in completing the sale of a hotel or a portfolio of hotels, which may negatively impact our business strategy. Hotel sales are typically subject to customary risks and uncertainties. In addition, there may be contingencies related to, among other items, seller financing, franchise agreements, ground leases and other agreements. As such, we can offer no assurances as to whether any closing conditions will be satisfied on a timely basis or at all, or whether the closing of a sale will fail to occur for these or any other reasons.
The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.
Because commercial real estate investments are relatively illiquid, our ability to promptly sell one or more of our hotels in response to changing economic, financial and investment conditions is limited. The real estate market, including our hotels, is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We may not be able to sell any of our hotels on favorable terms. It may take a long time to find a willing purchaser and to close the sale of a hotel if we want to sell. Should we decide to sell a hotel during the term of that particular hotel’s management agreement, we may have to pay termination fees, which could be substantial, to the applicable management company.
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In addition, hotels may not be readily converted to alternative uses if they were to become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures and may give rise to substantial payments to our franchisors, management companies and lenders.
We may be required to expend funds to correct defects or to make improvements before a hotel can be sold. We may not have funds available to correct those defects or to make those improvements and, as a result, our ability to sell the hotel would be restricted. In acquiring a hotel, we may agree to lock-out provisions that materially restrict us from selling that hotel for a period of time or impose other restrictions on us, such as a limitation on the amount of debt that can be placed or repaid on that hotel to address specific concerns of sellers. These lock-out provisions would restrict our ability to sell a hotel. These factors and any others that would impede our ability to respond to adverse changes in the performance of our hotels could harm our financial condition and results of operations.
The hotel loans in which we may invest in the future involve greater risks of loss than senior loans secured by income-producing real properties.
We have invested in hotel loans, and may invest in additional loans in the future, including mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of the entity owning the real property, the entity that owns the interest in the entity owning the real property or other assets. These types of investments involve a higher degree of risk than direct hotel investments because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.
If we make or invest in mortgage loans with the intent of gaining ownership of the hotel secured by or pledged to the loan, our ability to perfect an ownership interest in the hotel is subject to the sponsor’s willingness to forfeit the property in lieu of the debt.
If we invest in a mortgage loan or note secured by the equity interest in a property with the intention of gaining ownership through the foreclosure process, the time it will take for us to perfect our interest in the property may depend on
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the sponsor’s willingness to cooperate during the foreclosure process. The sponsor may elect to file bankruptcy which could materially impact our ability to perfect our interest in the property and could result in a loss on our investment in the debt or note.
Certain of our long-lived assets and goodwill have in the past become impaired and may become impaired in the future.
We periodically review the fair value of each of our hotels and related goodwill for possible impairment. For example, in 2017,Because we identified indicators of impairment at our two Houston, Texas hotels associated with continued operational declines dueare a REIT, we depend on third parties to weakness in the Houston market, combined with the effects of Hurricane Harvey on our two hotels. As such, we recorded a total impairment charge of $40.1 million on the two Houston hotels. In the future, additional hotels and related goodwill may become impaired, oroperate our hotels, which have previously become impaired may become further impaired, which may adversely affectcould harm our financial condition and results of operations.
We own primarily urban and resort upper upscale hotels, and the upper upscale segment of the lodging market is highly competitive and may be subjectIn order to greater volatility than other segments of the market, which could negatively affect our profitability.
The upper upscale segment of the hotel business is highly competitive. Our hotels compete on the basis of location, physical attributes, service levels and reputation, among many other factors. There are many competitors that may have hotels that are better located, havequalify as a stronger reputation or possess superior physical attributes thanREIT, we cannot directly operate our hotels. This competition could reduce occupancy levels and room revenue atAccordingly, we must enter into management or operating lease agreements (together, “management agreements”) with eligible independent contractors to manage our hotels, which would harm our operations. Over-building inhotels. Thus, independent management companies control the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. We may also face competition from nationally recognized hotel brands with which we are not associated. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale hotels when compared to other classes of hotels.
Rising operating expenses or low occupancy rates could reduce our cash flow and funds available for future distributions.
Our hotels, and any hotels we buy in the future, are and will be subject to operating risks common to the lodging industry in general. If any hotel is not occupied at a level sufficient to cover our operating expenses, then we could be required to spend additional funds for that hotel’s operating expenses. In the future, our hotels will be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and funds available for future distributions.
A significant portiondaily operations of our hotels are geographically concentrated and, accordingly, we could be disproportionately harmed by economic downturns or natural disasters in these areas of the country.hotels.
As of December 31, 2017, seven2020, our third-party managers consisted of Marriott, Crestline, Highgate, Hilton, IHR, Davidson, Hyatt and Singh. We depend on these independent management companies to operate our hotels as provided in the applicable management agreements. Thus, even if we believe a hotel is being operated inefficiently or in a manner that does not result in satisfactory ADR, occupancy rates or profitability, we may not necessarily have contractual rights to cause our independent management companies to change their method of operation at our hotels. We can only seek redress if a management company violates the terms of its applicable management agreement with us or fails to meet performance objectives set forth in the applicable management agreement, and then our remedies may be limited by the terms of the 25 hotels are located in California, which is the largest concentration ofmanagement agreement.
A failure by our management companies to successfully manage our hotels could lead to an increase in any state, representing 31% of our rooms and 35% of the revenue generated by the 25 hotels during 2017. In addition, as of December 31, 2017, three of the 25 hotels are locatedoperating expenses or a decrease in Illinois, as well as three in the greater Washington DC area, and two of the 25 hotels are located in Massachusetts. The three hotels located in Illinois represented 9% of our rooms and 7% of the revenue generated by the 25 hotels during 2017. The three hotels located in the greater Washington DC area represented 15% of our rooms and 14% of the revenue generated by the 25 hotels during 2017. The two hotels located in Massachusetts represented 12% of our rooms and 14% of the revenue generated by the 25 hotels during 2017. To a lesser, but still significant extent, our hotels in Florida, Hawaii and Louisiana represented 8%, 4% and 6% of our rooms, respectively, and 8%, 8%, and 5% of the revenue generated by the 25 hotels during 2017, respectively. The concentration of our hotels in California, Florida, Hawaii, Illinois, Massachusetts, Louisiana and the greater Washington DC area exposes our business to economic conditions, competition and real and personal property tax rates unique to these locales. In addition, natural disasters in these locales would disproportionately affect our hotel portfolio. The economies and tourism industries in these locales, in comparison to other parts of the country, are negatively affected to a greater extent by changes and downturns in certain industries, including the entertainment, high technology, financial and government industries. It is also possible that because of our California, Florida, Hawaii, Illinois, Massachusetts, Louisiana and the greater Washington DC area concentrations, a change in laws applicable to such hotels and the lodging industry may have a greater impact on us than a change in comparable laws in another geographical area in which we have hotels. Adverse developments in these locales could harm our revenue, or increaseboth, which may affect the TRS Lessee’s ability to pay us rent and would reduce the amount available for dividends on our operating expenses.common stock and our preferred stock. In addition, the management companies may operate other hotels that may compete with our hotels or divert attention away from the management of our hotels.
While our management agreements typically provide for limited contractual penalties in the event that we terminate the applicable management agreement upon an event of default, such terminations could result in significant disruptions at the affected hotels. If we were to terminate any of these agreements and enter into new agreements with different hotel operators, we cannot assure you that any new management agreement would contain terms that are favorable to us, or that a new management company would be successful in managing our hotels. If any of the foregoing occurs at franchised hotels, our relationships with the franchisors may be damaged, and we may be in breach of one or more of our franchise or management agreements.
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We are subject to risks associated with the employment of hotel personnel, which could increase our expenses or expose us to additional liabilities.
The operating results of some of our individual hotels
Our third-party managers are significantly impacted by group contract businessresponsible for hiring and room nights generated by large corporate transient customers, andmaintaining the loss of such customers for any reason could harm our operating results.
Group contract business and room nights generated by other large corporate transient customers can significantly impact the results of operationslabor force at each of our hotels. These contractsAlthough we do not directly employ or manage employees at our consolidated hotels, we are still subject to many of the costs and customers vary fromrisks generally associated with the hotel to hotel and changelabor force. Increases in minimum wages, or changes in work rules, could negatively impact our operating results. Additionally, from time to time. Such group contracts are typically for a limited period of time, after which theyhotel operations may be put up for competitive bidding. The impact and timing of large events are not always easy to predict. Some of these contracts and events may also be cancelled, which could reduce our expectations for future revenues or result in potential litigation in order to collect cancellation fees. As a result, the operating results for our individual hotels can fluctuatedisrupted as a result of strikes, lockouts, public demonstrations or other negative actions and publicity. We also may incur increased legal costs and indirect labor costs as a result of contract disputes involving our third-party managers and their labor force or other events. The resolution of labor disputes or re-negotiated labor contracts could lead to increased labor costs, a significant component of our costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. We generally do not have the ability to affect the outcome of these factors, possibly in adverse ways, and these fluctuations can affect our overall operating results.negotiations.
The need for business-related travel, and, therefore, demand for rooms in our hotels may be materially and adversely affected by the increased use of business-related technology.
The increased use of teleconferencing and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate in meetings without traveling to a centralized meeting location, such as our hotels. To the extent that such technologies, or new technologies, play an increased role in day-to-day business interactions and the necessity for business-related travel decreases, demand for hotel rooms may decrease and our hotels could be materially and adversely affected.
A substantial number of our hotels operate under a brand owned by Marriott, Hilton or Hyatt. Should any of these brands experience a negative event, or receive negative publicity, our operating results may be harmed.
We believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands. As of December 31, 2017, 132020, all but two (the Boston Park Plaza and the Oceans Edge Resort & Marina) of our 25 hotels utilizedthe 17 Hotels are operated under nationally recognized brands owned by Marriott. In addition, seven and three of our 25 hotels were utilized bysuch as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands respectively.in the lodging industry. As a result, a significant concentration of our success is dependent in part on the success of Marriott, Hilton and Hyatt, or their respective brands. Consequently, if market recognition or the positive perception of Marriott, Hilton and/or Hyatt is reduced or compromised, the goodwill associated with our Marriott, Hilton and/or Hyatt branded hotels may be adversely affected, which may have an adverse effect on our results of operations, as well as our ability to make distributions to our stockholders. Additionally, any negative perceptions or negative impact to operating results from any proposed or future consolidations between nationally recognized brands could have an adverse effect on our results of operations, as well as our ability to make distributions to our stockholders.
In addition, during 2016, MarriottOur franchisors and Starwood Hotels & Resorts completed a merger between the two companies. Should additional hotel brands consolidate in the future, the mergerbrand managers may change certain policies or cost allocations that could reducenegatively impact our bargaining power in negotiating management agreementshotels.
Our franchisors and franchise agreements duebrand managers incur certain costs that are allocated to decreased competition among major brand companies, as well as contracts between our hotels and various unions. In addition, the potential combined company could have more leverage when negotiating for property improvement plans upon the acquisition of a hotel in cases where the franchisor or hotel brand requires non-economic renovationssubject to bring the physical condition of a hotel into compliance with the specifications and standards each franchisor or hotel brand has developed.
Because all but two of our hotels are operated under franchise agreements or are brand managed, termination of these franchise, management or operating lease agreements or circumstances that negatively affect the franchisor or the hotel brand could cause us to lose business at our hotels or lead to a default or acceleration of our obligations under certain of our notes payable.
As of December 31, 2017, all of the 25 hotels except the Boston Park Plaza and the Oceans Edge Hotel & Marina were operated under franchise, management or operating lease agreements with franchisors or hotel management companies, such as Marriott, Hilton and Hyatt. In general, under these arrangements, the franchisor or brand manager provides marketing services and room reservations and certain other operating assistance, but requires us to pay significant fees to it and to maintain the hotel in a required condition. If we fail to maintain these required standards, then the franchisor or hotel brand may terminate its agreement with us and obtain damages for any liability we may have caused. Moreover, from time to time, we may receive notices from franchisors or the hotel brands regarding our alleged non-compliance with the franchise agreements or brand standards, and we may disagree with these claims that we are not in compliance. Any disputes arising under these agreements could also lead to a termination of a franchise, management or
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operating lease agreement and a payment of liquidated damages. Such a termination may trigger a default or acceleration of our obligations under some of our notes payable. In addition, as our franchise, management, or operating lease agreements expire, weagreements. Those costs may notincrease over time or our franchisors and brand managers may elect to introduce new programs that could increase costs allocated to our hotels. In addition, certain policies, such as our third-party managers’ frequent guest programs, may be ablealtered resulting in reduced revenue or increased costs to renew them on favorable terms or at all. If we were to lose a franchise or hotel brand for a particular hotel, it could harm the operation, financing, or value of that hotel due to the loss of the franchise or hotel brand name, marketing support and centralized reservation system. Moreover, negative publicity affecting a franchisor or hotel brand in general could reduce the revenue we receive from the hotels subject to that particular franchise or brand. Any loss of revenue at a hotel could harm the ability of the TRS Lessee, to whom we have leased our hotels, to pay rent to the Operating Partnership and could harm our ability to pay dividends on our common stock or preferred stock.hotels.
Our franchisors and brand managers may require us to make capital expenditures pursuant to property improvement plans or PIPs,(“PIPs”), and the failure to make the expenditures required under the PIPs or to comply with brand standards could cause the franchisors or hotel brands to terminate the franchise, management, or operating lease agreements.
Our franchisors and brand managers may require that we make renovations to certain of our hotels in connection with revisions to our franchise, management or operating lease agreements. In addition, upon regular inspection of our hotels, our franchisors and hotel brands may determine that additional renovations are required to bring the physical condition of our hotels into compliance with the specifications and standards each franchisor or hotel brand has developed. In connection with the acquisitions of hotels, franchisors and hotel brands may also require PIPs, which set forth their renovation requirements. If we do not satisfy the PIP renovation requirements, the franchisor or hotel brand may have the right to terminate the applicable agreement. In addition, in the event that we are in default under any franchise agreement as a result of our failure to comply with the PIP requirements, in general, we will be required to pay the franchisor liquidated damages, generally equal to a percentage of gross room revenue for the preceding two-, three- or five-year period for the hotel or a percentage of gross revenue for the preceding twelve-month period for all hotels operated under the franchised brand if the hotel has not been operating for at least two years.
Our franchisors and brand managers may change certain policies or cost allocations that could negatively impact our hotels.
Our franchisors and brand managers incur certain costs that are allocated toBecause all but two of our hotels subjectare operated under franchise agreements or are brand managed, termination of these franchise, management or operating lease agreements could cause us to lose business at our hotels or lead to a default or acceleration of our obligations under certain of our notes payable.
As of December 31, 2020, all of the 17 Hotels except the Boston Park Plaza and the Oceans Edge Resort & Marina were operated under franchise, management or operating lease agreements with franchisors or hotel management companies, such as Marriott, Hilton and Hyatt. In general, under these arrangements, the franchisor or brand manager provides marketing services and room reservations and certain other operating assistance, but requires us to pay significant fees to it and to maintain the hotel in a required condition. If we fail to maintain these required standards, then the franchisor or hotel brand may terminate its agreement with us and obtain damages for any liability we may have caused. Moreover, from time to time, we may receive notices from franchisors or the hotel brands regarding our alleged non-compliance with the franchise agreements or brand standards, and we may disagree with these claims that we are not in compliance. Any disputes arising under these agreements could also lead to a termination of a franchise, management or operating lease agreement and a payment of liquidated damages. Such a termination may trigger a default or acceleration of our obligations under some of our notes payable. In addition, as our franchise, management or operating lease agreements. Thoseagreements expire, we may not be able to renew them on favorable terms or at all. If we were to lose a franchise or hotel brand for a
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particular hotel, it could harm the operation, financing or value of that hotel due to the loss of the franchise or hotel brand name, marketing support and centralized reservation system. Any loss of revenue at a hotel could harm the ability of the TRS Lessee, to whom we have leased our hotels, to pay rent to the Operating Partnership and could harm our ability to pay dividends on our common stock or preferred stock.
We rely on our senior management team, the loss of whom could cause us to incur costs and harm our business.
Our continued success will depend to a significant extent on the efforts and abilities of our senior management team. These individuals are important to our business and strategy and to the extent that any of them departs, we could incur severance or other costs. The loss of any of our executives could also disrupt our business and cause us to incur additional costs to hire replacement personnel.
If we fail to maintain effective internal control over financial reporting and disclosure controls and procedures in the future, we may increasenot be able to accurately report our financial results, which could have an adverse effect on our business.
If our internal control over timefinancial reporting and disclosure controls and procedures are not effective, we may not be able to provide reliable financial information. In addition, due to the COVID-19 pandemic, we temporarily closed our corporate office in March 2020 in order to comply with California’s governmental directives and to safeguard our employees. Since March 2020, our employees have worked remotely while continuing to maintain effective internal control over financial reporting and disclosure controls and procedures. If we discover deficiencies in our internal controls, we will make efforts to remediate these deficiencies; however, there is no assurance that we will be successful either in identifying deficiencies or in their remediation. Any failure to maintain effective controls in the future could adversely affect our business or cause us to fail to meet our reporting obligations. Such non-compliance could also result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements. In addition, perceptions of our business among customers, suppliers, rating agencies, lenders, investors, securities analysts, and others could be adversely affected.
Risks Related to Our Debt and Financing
As of December 31, 2020, we had approximately $747.9 million of consolidated outstanding debt, and carrying such debt may impair our financial flexibility or harm our business and financial results by imposing requirements on our business.
Of our total debt outstanding as of December 31, 2020, approximately $529.1 million matures over the next five years (zero in 2021 (assuming we exercise all two of our remaining one-year options to extend the maturity date of the $220.0 million loan secured by the Hilton San Diego Bayfront from December 2021 to December 2023), $85.0 million in 2022, $320.0 million in 2023, $72.1 million in 2024, and $52.0 million in 2025). The $529.1 million in debt maturities due over the next five years does not include $3.3 million of scheduled amortization payments due in 2021, or $3.4 million, $3.6 million, $3.5 million, and zero due in 2022, 2023, 2024 and 2025, respectively. Carrying our outstanding debt may adversely impact our business and financial results by:
● | requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce the amount of cash available to us for our operations and capital expenditures, future business opportunities and other purposes, including distributions to our stockholders; |
● | making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions; |
● | limiting our ability to undertake refinancings of debt or borrow more money for operations or capital expenditures or to finance acquisitions; and |
● | compelling us to sell or deed back properties, possibly on disadvantageous terms, in order to make required payments of interest and principal. |
We also may incur additional debt in connection with future acquisitions of real estate, which may include loans secured by some or all of the hotels we acquire or our franchisors and brand managers may elect to introduce new programs that could increase costs allocated to ourexisting hotels. In addition certain policies, such asto our third-party managers’ frequent traveler programs,outstanding debt, at December 31, 2020, we had $0.3 million in outstanding letters of credit.
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We are subject to various financial covenants on our unsecured and secured debt. If we were to default on our debt in the future, we may be alteredrequired to repay the debt or we may lose our property securing the debt, all of which would negatively affect our financial conditions and results from operations.
We are subject to various financial covenants on our unsecured and secured debt. Failure to meet any financial covenants of our unsecured debt without receiving a covenant waiver would adversely affect our financial conditions and results from operations, and may raise doubt about our ability to continue as a going concern. Additionally, defaulting on indebtedness may damage our reputation as a borrower, and may limit our ability to secure financing in the future.
In July 2020 and December 2020, we completed amendments to the agreements governing our unsecured debt, which includes our revolving credit facility, term loans and senior notes, providing financial covenant relief through the first quarter of 2022, with the first quarterly covenant test as of the period ended March 31, 2022. Due to the negative impact of the COVID-19 pandemic on our operations throughout 2020 and its expected impact into 2021, it is possible that we may not meet the terms of our unsecured debt financial covenants once such covenants are effective again in 2022. As of December 31, 2020, operations at two of the 17 Hotels remain suspended, with the remainder operating at reduced capacities. Our future liquidity will depend on the gradual return of guests, particularly group business, to our hotels and the stabilization of demand throughout our portfolio.
All of our secured debt as of December 31, 2020 is collateralized by first deeds of trust on our properties. Using our properties as collateral increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property that secures any loan under which we are in default. For example, in 2020, we experienced decreased profitability at the Hilton Times Square that was exacerbated by the COVID-19 pandemic. In April 2020, we ceased making debt payments on the $77.2 million mortgage secured by the hotel, resulting in our default on the debt. In December 2020, we executed an assignment-in-lieu agreement with the mortgage holder whereby our debt was extinguished in exchange for our leasehold interest in the Hilton Times Square, a $20.0 million payment and certain additional concessions. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not necessarily receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash or employ a partial cash and partial stock dividend to satisfy our taxable income distribution requirements as a REIT. In addition, due to the suspension of operations at certain hotels and the reduced revenuecash flows at other hotels, our mortgage loans will likely require a cash sweep be put in place, restricting the use of that cash until the cash sweep requirement is terminated.
Financial covenants in our debt instruments may restrict our operating or increased costsacquisition activities.
Our credit facility, unsecured term loans and unsecured senior notes contain, and other potential financings that we may incur or assume in the future may contain, restrictions, requirements and other limitations on our ability to incur additional debt and make distributions to our hotels.stockholders, as well as financial covenants relating to the performance of our hotel properties. For example, under the terms of the 2020 amendments to our unsecured debt agreements, our capital improvement expenditures are limited to a total of $100.0 million in 2021. In addition, the unsecured debt agreement amendments stipulate that while we have the unlimited ability to fund future acquisitions with proceeds from the issuance of common equity or through the sale of unencumbered hotels, we are limited to the usage of up to $250.0 million of our available cash to invest into future acquisitions, subject to maintaining certain minimum liquidity thresholds. Our ability to borrow under these agreements is subject to compliance with these financial and other covenants. If we are unable to engage in activities that we believe would benefit our business or our hotel properties, or we are unable to incur debt to pursue those activities, our growth may be limited. Obtaining consents or waivers from compliance with these covenants may not be possible, or if possible, may cause us to incur additional costs or result in additional limitations.
Many of our existing mortgage debt agreements contain “cash trap” provisions that could limit our ability to use funds for other corporate purposes or to make distributions to our stockholders.
Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. If these provisions are triggered, substantially all of the profit generated by the secured hotel would be deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of the lender. While none of the 17 Hotels were in a cash trap in 2020, in January 2021, these provisions were triggered for the loans secured by the Embassy Suites La Jolla and the JW Marriott New Orleans. Going forward, excess cash generated by the hotels will be held in lockbox accounts for the benefit of the lenders and included in restricted cash on our consolidated balance sheet. We expect the mortgage secured by the Hilton San Diego Bayfront will also enter a cash trap in 2021.
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Cash generated by our hotels that secure our existing mortgage debt agreements is distributed to us only after the related debt service and certain impound amounts are paid, which could affect our liquidity and limit our ability to use funds for other corporate purposes or to make distributions to our stockholders.
Cash generated by our hotels that secure our existing mortgage debt agreements is distributed to us only after certain items are paid, including, but not limited to, deposits into maintenance reserves and the payment of debt service, insurance, taxes, operating expenses and capital expenditures. This limit on distributions could affect our liquidity and our ability to use cash generated by those hotels for other corporate purposes or to make distributions to our stockholders.
We anticipate that we will refinance our indebtedness from time to time to repay our debt, and our inability to refinance on favorable terms, or at all, could impact our operating results.
Because we anticipate that our internally generated cash will be adequate to repay only a portion of our indebtedness prior to maturity, we expect that we will be required to repay debt from time to time through refinancings of our indebtedness and/or offerings of equity, preferred equity or debt. The amount of our existing indebtedness may impede our ability to repay our debt through refinancings. If we are a REIT,unable to refinance our indebtedness with property secured debt or corporate debt on acceptable terms, or at all, and are unable to negotiate an extension with the lender, we dependmay be in default or forced to sell one or more of our properties on third partiespotentially disadvantageous terms, which might increase our borrowing costs, result in losses to operateus and reduce the amount of cash available to us for distributions to our hotels,stockholders. If prevailing interest rates or other factors at the time of any refinancing result in higher interest rates on new debt, our interest expense would increase, and potential proceeds we would be able to secure from future debt refinancings may decrease, which would harm our operating results.
Our organizational documents contain no limitations on the amount of debt we may incur, so we may become too highly leveraged.
Our organizational documents do not limit the amount of indebtedness that we may incur. If we were to increase the level of our borrowings, then the resulting increase in cash flow that must be used for debt service would reduce cash available for capital investments or external growth, and could harm our ability to make payments on our outstanding indebtedness and our financial condition.
Any replacement of LIBOR as the basis on which interest on our variable-rate debt is calculated may harm our financial results, profitability, and cash flows.
As of operations.December 31, 2020, all of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates except the $220.0 million non-recourse mortgage on the Hilton San Diego Bayfront. Interest on the Hilton San Diego Bayfront loan is calculated using the London Inter-bank Offered Rate (“LIBOR”), at a blended rate of one-month LIBOR plus 105 basis points, subject to an interest rate cap agreement that caps the interest rate at 6.0% until December 2021. The LIBOR interest rate swaps associated with our $85.0 million unsecured term loan maturing in September 2022 and our $100.0 million unsecured term loan maturing in January 2023 were fixed to a LIBOR rate of 1.591% and 1.853%, respectively. However, as part of the 2020 amendments to our unsecured debt agreements, a 25-basis point LIBOR floor was added for the remaining term of the term loan facilities. In addition, while we currently have no amounts outstanding on our credit facility, should we draw upon the credit facility in the future, amounts outstanding will be subject to interest at a rate ranging from 140 to 240 basis points over LIBOR. Any replacement of LIBOR as the basis on which interest on our variable-rate debt, amounts outstanding under our credit facility or interest rate swaps is calculated may harm our financial results, profitability and cash flows.
In 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that LIBOR is to be replaced by the end of 2021 with “a more reliable alternative.” In addition, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (“ARRC”) in order to identify best practices for alternative reference rates, identify best practices for contract robustness, develop an adoption plan and create an implementation plan with metrics of success and a timeline. The ARCC accomplished its first set of objectives and has identified the Secured Overnight Financing Rate (“SOFR”) as the rate that represents best practice for use in certain new U.S. dollar derivatives and other financial contracts.
The Hilton San Diego Bayfront loan, our interest rate swaps associated with our unsecured term loans and our credit facility provide for alternative methods of calculating the interest rate payable by us if LIBOR is not reported, including using a floating rate index that is both commonly accepted as an alternative to LIBOR and that is publicly recognized by the International Swaps and Derivatives Association as an alternative to LIBOR. The method and rate used to calculate our variable-rate debt in the future may result in interest rates and/or payments that are higher than, lower than, or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR were available in its current form.
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Risks Related to Our Status as a REIT
If we fail to qualify as a REIT, our distributions will not be deductible by us and our income will be subject to federal and state taxation, reducing our cash available for distribution.
We are organized as a REIT under the Code, which affords us material tax advantages. The requirements for qualifying as a REIT, however, are complex. If we cannot directly operatefail to meet these requirements and certain relief provisions do not apply, our hotels. Accordingly,distributions will not be deductible by us and we must enter into management or operating lease agreements (together, “management agreements”) with eligible independent contractorswill have to managepay a corporate federal and state level tax on our hotels. Thus, independent management companies controlincome. This would substantially reduce our cash available to pay distributions and the daily operationsyield on your investment in our common stock. In addition, such a tax liability might cause us to borrow funds, liquidate some of our hotels.investments or take other steps which could negatively affect our results of operations. Moreover, if our REIT status is terminated because of our failure to meet a technical REIT requirement, we would generally be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT. Moreover, our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT.
AsEven as a REIT, we may become subject to federal, state or local taxes on our income or property, reducing our cash available for distribution.
Even as a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have net income from a “prohibited transaction,” that income will be subject to a 100% tax. A “prohibited transaction” is, in general, the sale or other disposition of December 31, 2017, our 25 hotels were managed as follows: Marriott nine hotels; IHR four hotels; Highgate three hotels; Crestline two hotels; Hilton two hotels; Hyatt two hotels; and Davidson, HEI and Singh one hotel each. We depend on these independent management companiesinventory or property, other than foreclosure property, held primarily for sale to operate our hotels as providedcustomers in the applicable management agreements. Thus, even ifordinary course of business. To qualify as a REIT, we believe a hotel is being operated inefficiently or in a manner that does not result in satisfactory ADR, occupancy rates or profitability,generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding net capital gains, and we may not necessarily have contractual rightswill be subject to cause our independent management companiesregular corporate income tax to change their method of operation at our hotels. We can only seek redress if a management company violates the terms of its applicable management agreement with us or fails to meet performance objectives set forth in the applicable management agreement, and then our remedies may be limited by the terms of the management agreement. Additionally, while our management agreements typically provide for limited contractual penalties in the eventextent that we terminate the applicable management agreement upon an event of default, such terminations could result in significant disruptions at the affected hotels. If any of the foregoing occurs at franchised hotels, our relationships with the franchisors may be damaged, and we may be in breach of one or moredistribute less than 100% of our franchise or management agreements.
Of these agreements, one was entered into during 2017, two were entered into during 2015, one was entered into during 2014, and three were entered into during 2013. If we wereREIT taxable income (determined without regard to terminate any of these agreements and enter into new agreements with different hotel operators, the day to day operations of our hotels may be disrupted.deduction for dividends paid) each year. In addition, we cannot
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assure you85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We may not be able to make sufficient distributions to avoid paying income tax or excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay federal income tax directly on that any new management agreementincome. In that event, our stockholders would contain termsbe treated as if they earned that income and paid the tax on it directly. However, stockholders that are favorabletax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of that tax liability. We may also be subject to federal and/or state income taxes when changing the valuation of our deferred tax assets and liabilities.
The TRS Lessee is subject to tax as a regular corporation. In addition, we may also be subject to state and local taxes on our income or property at the level of the Operating Partnership or at the level of the other companies through which we indirectly own our assets. In the normal course of business, entities through which we own or operate real estate either have undergone, or may undergo future tax audits. Should we receive a material tax deficiency notice in the future which requires us to incur additional expense, our earnings may be negatively impacted. There can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a new management company would be successful in managingmaterial adverse effect on our hotels.
results of operations. We also cannot assure you that our existing management companieswe will successfully manage our hotels. A failure by our management companies to successfully manage our hotels could lead to an increase in our operating expenses or a decrease in our revenue, or both, which may affect our TRS’s ability to pay us rent and would reduce the amount available for dividends on our common stock and our preferred stock. In addition, the management companies may operate other hotels that may compete with our hotels or divert attention away from the management of our hotels.
We are subject to risks associated with the employment of hotel personnel, which could increase our expenses or expose us to additional liabilities.
Our third-party managers are responsible for hiring and maintaining the labor force at each of our hotels. Although we do not directly employ or manage employees at our consolidated hotels, we are still subject to many of the costs and risks generally associated with the hotel labor force. Increases in minimum wages, or changes in work rules, could negatively impact our operating results. Additionally, from time to time, hotel operations may be disrupted as a result of strikes, lockouts, public demonstrations or other negative actions and publicity. We also may incur increased legal costs and indirect labor costs as a result of contract disputes involving our third-party managers and their labor force or other events. The resolution of labor disputes or re-negotiated labor contracts could lead to increased labor costs, a significant component of our costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. We generally do not have the ability to affect the outcome of these negotiations.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to guests at our hotels, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
We and our third-party managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and customer information. These systems require the collection and retention of large volumes of our hotel guests’ personally identifiable information, including credit card numbers. Experienced computer programmers and hackers may be able to penetratecontinue to satisfy the REIT requirements, or that it will be in our network securitybest interests to continue to do so.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for these reduced rates. Under the Tax Cuts and Jobs Act of 2017 (the “TCJA”), however, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the shareholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs.
If the leases of our hotels to the TRS Lessee are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests annually, under which specified percentages of our gross income must be passive income. Passive income includes rent paid pursuant to our operating leases between the TRS Lessee and its subsidiaries and the Operating Partnership. These rents constitute substantially all of our gross income. For the rent to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as
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service contracts, joint ventures or some other type of arrangement. If the leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
We may be subject to taxes in the event our operating leases are held not to be on an arm’s-length basis.
In the event that leases between us and the TRS Lessee are held not to have been made on an arm’s-length basis, we or the network security of our third-party managers and franchisors, and misappropriate or compromise our confidential information or that of our hotel guests, create system disruptions or cause the shutdown of our hotels. Computer programmers and hackers also mayTRS Lessee could be ablesubject to develop and deploy viruses, worms, and other malicious software programs that attack our computer systems or the computer systems operated by our third-party managers and franchisors, or otherwise exploit any security vulnerabilities of our respective networks.income taxes. In addition, sophisticated hardware and operating system software and applications that we and our third-party managers or franchisors may procure from outside companies may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with our internal operations or the operations at our hotels. The costsorder for rents paid to us by the TRS Lessee to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problemsqualify as “rents from real property,” such rents may not be successfulbased on net income or profits. Our leases provide for a base rent plus a variable rent based on occupied rooms and departmental revenues rather than on net income or profits. If the IRS determines that the rents charged under our leases with the TRS Lessee are excessive, the deductibility thereof may be challenged, and to the extent rents exceed an arm’s-length amount, we could result in interruptions, delays, cessation of service and loss of existingbe subject to a 100% excise tax on “re-determined rent” or potential business at“re-determined deductions.” While we believe that our hotels. Any compromise of our third-party managers and franchisor information networks’ function, security and availability could result in disruptions to operations, delayed sales or bookings, lost guest reservations, increased costs, and lower margins. Any of these events could adversely affect our financial results, stock price and reputation, result in misstated financial reports, and subject us to potential litigation and liability.
Portions of our information technology infrastructure or the information technology infrastructure of our third-party managers and franchisors also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We or our third-party managers and franchisors may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability of our third-party managers and franchisors to fulfill reservations for guestroomsrents and other services offered at our hotels.
Although we have taken steps to protecttransactions with the security of our information systems,TRS Lessee are based on arm’s-length amounts and the data maintained in these systems,reflect normal business practices, there can be no assurance that the security measures we have taken will prevent failures, inadequacies or interruptionsIRS would agree.
The TRS Lessee is subject to special rules that may result in system services, orincreased taxes.
Several Code provisions ensure that system security willa TRS is subject to an appropriate level of federal income taxation. For example, the REIT has to pay a 100% penalty tax on some payments that it receives if the economic arrangements between us and the TRS Lessee are not be breached through physical or electronic break-ins,
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computer viruses or attacks by hackers. In addition, we rely on the security systemsany of our third-party managers and franchisors to protect proprietary and customer information from these threats.
Many of our managers carry cyber insurance policies to protect and offset a portion of potential costs that may be incurred from a security breach. Additionally, we currently have a cyber insurance policy to provide supplemental coverage aboveintercompany transactions, including the coverage carried by our third-party managers. We cannot guarantee that such coverage will continue to be available at reasonable coverage levels, at reasonable rates or at reasonable deductible levels. Despite various precautionary steps to protect our hotels from losses resulting from cyber-attacks, however, any occurrence of a cyber-attack could still result in losses at our properties, which could affect our results of operations.
Our hotels have an ongoing need for renovations and potentially significant capital expenditures in connection with acquisitions, repositionings and other capital improvements, some of which are mandated by applicable laws or regulations or agreements with third parties, and the costs of such renovations, repositionings or improvements may exceed our expectations or cause other problems.
In addition to capital expenditures required by our management, franchise and loan agreements, from time to time we will need to make capital expenditures to comply with applicable laws and regulations, to remain competitive with other hotels and to maintain the economic value of our hotels. We also may need to make significant capital improvements to hotels that we acquire. During 2017, we invested $115.1 million on capital improvements to our hotels. We expect the amount of our capital expenditures to be similar in 2018. Occupancy and ADR are often affected by the maintenance and capital improvements at a hotel especially in the event that the maintenance or improvementsleases, are not completed on schedule or if the improvements require significant closures at the hotel. The costs of capital improvements we need or choosecomparable to make could harm our financial condition and reduce amounts available for distribution to our stockholders. These capital improvements may give rise to the following additional risks, among others:similar arrangements between unrelated parties.
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Because six of the 25 hotels are subject to ground, building or air leases with unaffiliated parties, termination of these leases by the lessors could cause us to lose the ability to operate these hotels altogether and incur substantial costs in restoring the premises.
Our rights to use the underlying land, building and/or air space of six of the 25 hotels are based upon our interest under long-term leases with unaffiliated parties. Pursuant to the terms of the applicable leases for these hotels, we are required to pay all rent due and comply with all other lessee obligations. As of December 31, 2017, the terms of these ground, building and air leases (including renewal options) range from approximately 26 to 80 years. Any pledge of our interest in a ground, building or air lease may also require the consent of the applicable lessor and its lenders. As a result, we may not be able to sell, assign, transfer or convey our lessee’s interest in any hotel subject to a ground, building or air lease in the future absent consent of such third parties even if such transactions may be in the best interest of our stockholders.
The lessors may require us, at the expiration or termination of the ground, building or air leases, to surrender or remove any improvements, alterations or additions to the land at our own expense. The leases also generally require us to restore the premises following a casualty and to apply in a specified manner any proceeds received in connection therewith.
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We may have to restore the premises if a material casualty, such as a fire or an act of nature, occurs and the cost thereof exceeds available insurance proceeds.
The failure of tenants in our hotels to make rent payments under our retail and restaurant leases may adversely affect our results of operations.
A portion of the space in many of our hotels is leased to third-party tenants for retail or restaurant purposes. At times, we hold security deposits in connection with each lease, which may be applied in the event that a tenant under a lease fails or is unable to make its rent payments. In the event that a tenant continually fails to make rent payments, we may be able to apply the tenant’s security deposit to recover a portion of the rents due; however, we may not be able to recover all rents due to us, which may harm our operating results. Additionally, the time and cost associated with re-leasing our retail space could negatively impact our operating results.
Because we are a REIT, we depend on the TRS Lessee and its subsidiaries to make rent payments to us, and their inability to do so could harm our revenue and our ability to make distributions to our stockholders.
Due to certain federal income tax restrictions on hotel REITs, we cannot directly operate our hotel properties. Therefore, we lease our hotel properties to the TRS Lessee or one of its subsidiaries, which contracts with third-party hotel managers to manage our hotels. Our revenue and our ability to make distributions to our stockholders will depend solely upon the ability of the TRS Lessee and its subsidiaries to make rent payments under these leases. In general, under the leases with the TRS Lessee and its subsidiaries, we will receive from the TRS Lessee or its subsidiaries both fixed rent and variable rent based upon a percentage of gross revenues and the number of occupied rooms. As a result, we participate in the operations of our hotels only through our share of rent paid pursuant to the leases.
The ability of the TRS Lessee and its subsidiaries to pay rent ismay be affected by factors beyond its control, such as changes in general economic conditions, the level of demand for hotels and the related services of our hotels, competition in the lodging and hospitality industry, the ability to maintain and increase gross revenue at our hotels and other factors relating to the operations of our hotels.
Although failure on the part of the TRS Lessee or its subsidiaries to materially comply with the terms of a lease (including failure to pay rent when due) would give us the right to terminate the lease, repossess the hotel and enforce the payment obligations under the lease, such steps may not provide us with any substantive relief since the TRS Lessee is our subsidiary. If we were to terminate a lease, we would then be required to find another lessee to lease the hotel or enter into a new lease with ourthe TRS Lessee or its subsidiaries because we cannot operate hotel properties directly and remain qualified as a REIT. We cannot assure you that we would be able to find another lessee or that, if another lessee were found, we would be able to enter into a new lease on similar terms.
If we failWe may be required to maintain effective internal control over financial reporting and disclosure controls and procedurespay a penalty tax upon the sale of a hotel.
The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a hotel (or other property) constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements of the safe harbors or the IRS may successfully assert that one or more of our sales are prohibited transactions and, therefore, we may be required to pay a penalty tax.
We may be subject to corporate level income tax on certain built-in gains.
We may acquire properties in the future from C corporations, in which we must adopt the C corporation’s tax basis in the acquired asset as our tax basis. If the asset’s fair market value at the time of the acquisition exceeds its tax basis (a “built-in gain”), and we sell that asset within five years of the date on which we acquire it, then we generally will have to pay tax on the built-in gain at the regular U.S. federal corporate income tax rate.
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If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to accurately reportdispose of properties on a tax deferred basis.
From time to time we may dispose of properties in transactions that are intended to qualify as tax deferred exchanges under Section 1031 of the Code (a “Section 1031 Exchange”). If the qualification of a disposition as a valid Section 1031 Exchange is successfully challenged by the IRS, the disposition may be treated as a taxable exchange. In such case, our financial results,taxable income and earnings and profits would increase as would the amount of distributions we are required to make to satisfy the REIT distribution requirements. As a result, we may be required to make additional distributions or, in lieu of that, pay additional corporate income tax, including interest and penalties. To satisfy these obligations, we may be required to borrow funds. In addition, the payment of taxes could cause us to have less cash available to distribute to our stockholders. Moreover, it is possible that legislation could be enacted that could modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult, or not possible, for us to dispose of properties on a tax deferred basis.
Legislative or other actions affecting REITs could have an adversea negative effect on our business.us.
If our internal control over financial reporting and disclosure controls and proceduresThe rules dealing with federal income taxation are not effective, we may not be able to provide reliable financial information. If we discover deficiencies in our internal controls, we will make efforts to remediate these deficiencies; however, there is no assurance that we will be successful either in identifying deficiencies or in their remediation. Any failure to maintain effective controlsconstantly under review by persons involved in the futurelegislative process and by the IRS and the U.S. Department of the Treasury (the “Treasury Department”). Changes to the tax laws, with or without retroactive application, could adversely affect our businessinvestors or cause us to fail to meet our reporting obligations. Such non-compliance could also result in an adverse reactionus. We cannot predict how changes in the financial marketplace duetax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations, or court decisions could significantly and negatively affect our ability to qualify as a lossREIT or the federal income tax consequences of investor confidencesuch qualification, or the federal income tax consequences of an investment in us. Also, the reliabilitylaw relating to the tax treatment of our financial statements.other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.
The TCJA significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. The TCJA remains unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury Department and IRS, any of which could lessen or increase the impact of the legislation. In addition, perceptionsit remains unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
While some of our business among customers, suppliers, rating agencies, lenders, investors, securities analyststhe changes made by the TCJA may adversely affect the Company in one or more reporting periods and others couldprospectively, other changes may be adversely affected.beneficial on a going forward basis.
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Risks Related to Our OrganizationCommon Stock and Corporate Structure
The market price of our equity securities may vary substantially.
The trading prices of equity securities issued by REITs may be affected by changes in market interest rates and other factors. During 2020, our closing daily stock price fluctuated from a low of $6.99 to a high of $13.81. One of the factors that may influence the price of our common stock or preferred stock in public trading markets is the annual yield from distributions on our common stock or preferred stock, if any, as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our stock to demand a higher annual yield, which could reduce the market price of our equity securities.
In addition to the risk factors discussed, other factors that could affect the market price of our equity securities include the following:
● | the impact of the COVID-19 pandemic on our hotel operations and future earnings; |
● | a U.S. recession impacting the market for common equity generally; |
● | actual or anticipated variations in our quarterly or annual results of operations; |
● | changes in market valuations or investment return requirements of companies in the hotel or real estate industries; |
● | changes in expectations of our future financial performance, changes in our estimates by securities analysts or failures to achieve those expectations or estimates; |
● | the trading volumes of our stock; |
● | additional issuances or repurchases of our common stock or other securities, including the issuance or repurchase of our preferred stock; |
● | the addition or departure of board members or senior management; |
● | disputes with any of our lenders or managers or franchisors; and |
● | announcements by us, our competitors or other industry participants of acquisitions, investments or strategic alliances. |
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Our distributions to stockholders may vary.
Due to the COVID-19 pandemic, we suspended our common stock quarterly dividend beginning with the second quarter of 2020 to preserve additional liquidity. The resumption in quarterly common stock dividends will be determined by our board of directors after considering our obligations under our various financing agreements, projected taxable income, compliance with our debt covenants, long-term operating projections, expected capital requirements and risks affecting our business. Furthermore, our board of directors may elect to pay dividends on our common stock by any means allowed under the Code, including a combination of cash and shares of our common stock. We cannot assure you as to the timing or amount of future dividends on our common stock.
During the past three years, we paid quarterly cash dividends of $0.434375 to the stockholders of our Series E cumulative redeemable preferred stock (“Series E preferred stock”) and $0.403125 to the stockholders of our Series F cumulative redeemable preferred stock (“Series F preferred stock”). During the past three years, we paid quarterly cash dividends on our common stock as follows:
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January | $ | 0.58 | | $ | 0.54 | | $ | 0.59 | | $ | 0.00 |
April | $ | 0.05 | | $ | 0.05 | | $ | 0.05 | | | |
July | $ | 0.05 | | $ | 0.05 | | $ | 0.00 | | | |
October | $ | 0.05 | | $ | 0.05 | | $ | 0.00 | | | |
Distributions on our common stock may be made in the form of cash, stock, or a combination of both.
As a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders. Typically, we generate cash for distributions through our operations, the disposition of assets or the incurrence of additional debt. We have elected in the past, and may elect in the future, to pay dividends on our common stock in cash, shares of common stock or a combination of cash and shares of common stock. Changes in our dividend policy could adversely affect the price of our stock.
The IRS may disallow our use of stock dividends to satisfy our distribution requirements.
We may elect to satisfy our REIT distribution requirements in the form of shares of our common stock along with cash. We have previously received private letter rulings from the IRS regarding the treatment of these distributions for purposes of satisfying our REIT distribution requirements. In the future, however, we may make cash/common stock distributions prior to receiving a private letter ruling. Should the IRS disallow our future use of cash/common stock dividends, the distribution would not qualify for purposes of meeting our distribution requirements, and we would need to make additional all cash distributions to satisfy the distribution requirement through the use of the deficiency dividend procedures outlined in the Code.
Shares of our common stock that are or become available for sale could affect the share price.
We have in the past, and may in the future, issue additional shares of common stock to raise the capital necessary to finance hotel acquisitions, fund capital expenditures, redeem our preferred stock, repay indebtedness or for other corporate purposes. Sales of a substantial number of shares of our common stock, or the perception that sales could occur, could adversely affect prevailing market prices for our common stock. In addition, we have reserved approximately 12 million shares of our common stock for issuance under the Company’s long-term incentive plan, and 2,911,865 shares remained available for future issuance as of December 31, 2020.
Our earnings and cash distributions will affect the market price of shares of our common stock.
We believe that the market value of a REIT’s equity securities is based primarily on the value of the REIT’s owned real estate, capital structure, debt levels and perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales, acquisitions, development or refinancings. Because our market value is based on a combination of factors, shares of our common stock may trade at prices that are higher or lower than the net value per share of our underlying assets. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes rather than distributing the cash flow to stockholders, these retained funds, while increasing the value of our underlying assets, may negatively impact the market price of our common stock. Our failure to meet our expectations or the market’s expectation with regard to future earnings and cash distributions would likely adversely affect the market price of our common stock.
Provisions of Maryland law and our organizational documents may limit the ability of a third party to acquire control of our company and may serve to limit our stock price.
Provisions of Maryland law and our charter and bylaws could have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change in control of us, and may have the effect of entrenching our management and members of our board of directors, regardless of performance. These provisions include the following:
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Aggregate Stock and Common Stock Ownership Limits. In order for us to qualify as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, actually or constructively, by five or fewer individuals at any time during the last half of each taxable year. To assure that we will not fail to qualify as a REIT under this test, subject to some exceptions, our charter prohibits any stockholder from owning beneficially or constructively more than 9.8% (in number or value, whichever is more restrictive) of the outstanding shares of our common stock or more than 9.8% of the value of the outstanding shares of our capital stock. Any attempt to own or transfer shares of our capital stock in excess of the ownership limit without the consent of our board of directors will be void and could result in the shares (and all dividends thereon) being automatically transferred to a charitable trust. The board of directors has granted waivers of the aggregate stock and common stock ownership limits to ten “look through entities” such as mutual or investment funds. This ownership limitation may prevent a third party from acquiring control of us if our board of directors does not grant an exemption from the ownership limitation, even if our stockholders believe the change in control is in their best interests. These restrictions will not apply if our board of directors determines that it no longer is in our best interests to continue to qualify as a REIT, or that compliance with the restrictions on transfer and ownership no longer is required for us to qualify as a REIT.
Authority to Issue Stock. Our charter authorizes our board of directors to cause us to issue up to 500,000,000 shares of common stock and up to 100,000,000 shares of preferred stock. Our charter authorizes our board of directors to amend our charter without stockholder approval to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of our stock that it has authority to issue, to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of our company, including change of control transactions offering a premium over the market price of shares of our common stock, even if our stockholders believe that a change of control is in their interest.
Number of Directors, Board Vacancies, Term of Office. Under our charter and bylaws, we have elected to be subject to certain provisions of Maryland law which vest in the board of directors the exclusive right to determine the number of directors and the exclusive right, by the affirmative vote of a majority of the remaining directors, to fill vacancies on the board even if the remaining directors do not constitute a quorum. Any director elected to fill a vacancy will hold office until the next annual meeting of stockholders, and until his or her successor is elected and qualifies. As a result, stockholder influence over these matters is limited. Notwithstanding the foregoing, we amended our corporate governance guidelines in 2017 to provide that the board shall be required to accept any resignation tendered by a nominee who is already serving as a director if such nominee shall have received more votes “against” or “withheld” than “for” his or her election at each of two consecutive annual meetings of stockholders for the election of directors at which a quorum was present and the number of director nominees equaled the number of directors to be elected at each such annual meeting of stockholders.
Limitation on Stockholder Requested Special Meetings. Our bylaws provide that our stockholders have the right to call a special meeting only upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to be cast by the stockholders at such meeting. This provision makes it more difficult for stockholders to call special meetings.
Advance Notice Provisions for Stockholder Nominations and Proposals. Our bylaws require advance written notice for stockholders to nominate persons for election as directors at, or to bring other business before, any meeting of our stockholders. This bylaw provision limits the ability of our stockholders to make nominations of persons for election as directors or to introduce other proposals unless we are notified and provided certain required information in a timely manner prior to the meeting.
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Authority of our Board to Amend our Bylaws. Our bylaws may be amended, altered, repealed or rescinded (a) by our board of directors or (b) by the stockholders, by the affirmative vote of a majority of all the votes entitled to be cast generally in the election of directors, except with respect to amendments to the provision of our bylaws regarding our opt out of the Maryland Business Combination and Control Share Acquisition Acts, which must be approved by the affirmative vote of a majority of votes cast by stockholders entitled to vote generally in the election of directors.
Duties of Directors. Maryland law requires that a director perform his or her duties (1)as follows: in good faith, (2)faith; in a manner he or she reasonably believes to be in the best interests of the corporationcorporation; and (3) with the care that an ordinary prudent person in a like position would use under similar circumstances. The duty of the directors of a Maryland corporation does not require them to (1)to: accept, recommend or respond on behalf of the corporation to any proposal by a person seeking to acquire control of the corporation, (2)corporation; authorize the corporation to redeem any rights under, or modify or render inapplicable, a stockholders’ rights plan, (3)plan; elect on behalf of the corporation to be subject to or refrain from electing on behalf of the corporation to be subject to the unsolicited takeover provisions of Maryland law, (4)law; make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition ActAct; or (5) act or fail to act solely because of the effect the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition. Moreover, under Maryland law the act of the directors of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director. Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable
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standards of conduct for directors under Maryland law. These provisions increase the ability of our directors to respond to a takeover and may make it more difficult for a third party to effect an unsolicited takeover.
Unsolicited Takeover Provisions. Provisions of Maryland law permit the board of a corporation with a class of equity securities registered under the Exchange Act and at least three independent directors, without stockholder approval, to implement possible takeover defenses, such as a classified board or a two-thirds vote requirement for removal of a director. These provisions, if implemented, may make it more difficult for a third party to effect a takeover. In April 2013, however, we amended our charter to prohibit us from dividing directors into classes unless such action is first approved by the affirmative vote of a majority of the votes cast on the matter by stockholders entitled to vote generally in the election of directors.
We rely onOur board of directors may change our senior management team,significant corporate policies without the lossconsent of whom could cause us to incur costs and harm our business.stockholders.
Our continued success will dependboard of directors determines our significant corporate policies, including those related to acquisitions, financing, borrowing, qualification as a significant extent onREIT and distributions to our stockholders. These policies may be amended or revised at any time at the efforts and abilitiesdiscretion of our senior management team. These individuals are important to our business and strategy and toboard of directors without the extent that any of them departs, we could incur severance or other costs. The loss of anyconsent of our executivesstockholders. Any policy changes could also disrupt our business and cause us to incur additional costs to hire replacement personnel.
Risks Related to the Lodging and Real Estate Industries
A number of factors, many of which are common to the lodging industry and beyond our control, couldhave an adverse affect our business, including the following:
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These factors could harm our financial condition, results of operations, and ability to make distributions to our stockholders.
The hotel business is seasonal and seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenue.
As is typical of the lodging industry, we experience some seasonality in our business. Revenue for certaintrading price of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Hawaii, Key Westcommon stock and Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City, Hawaii and Key West). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, natural disasters, terrorist attacks or alerts, civil unrest, public health concerns, government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. Seasonal fluctuations in revenue may affect our ability to make distributions to our stockholders or to fund our debt service.
The growth of alternative reservation channels could adversely affect our businesscommon and profitability.
A significant percentage of hotel rooms for individual guests is booked through internet travel intermediaries. Many of our managers and franchisors contract with such intermediaries and pay them various commissions and transaction fees for sales of our rooms through their systems. If such bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant concessions from us or our franchisees. Although our managers and franchisors may have established agreements with many of these intermediaries that limit transaction fees for hotels, there can be no assurance that our managers and franchisors will be able to renegotiate such agreements upon their expiration with terms as favorable as the provisions that exist today. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to brands of our managers and franchisors. If this happens, our business and profitability may be significantly negatively impacted.
In addition, in general, internet travel intermediaries have traditionally competed to attract individual consumers or “transient” business rather than group and convention business. However, hospitality intermediaries have recently grown their business to include marketing to large group and convention business. If that growth continues, it could both divert group and convention business away from our hotels, and it could also increase our cost of sales for group and convention business.
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In an effort to lure business away from internet travel intermediaries and to drive business on their own websites, our managers and franchisors may discount the room rates available on their websites even further, which may also significantly impact our business and profitability.
The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.
Because commercial real estate investments are relatively illiquid, our ability to promptly sell one or more of our hotels in response to changing economic, financial and investment conditions is limited. The real estate market, including our hotels, is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We may not be able to sell any of our hotels on favorable terms. It may take a long time to find a willing purchaser and to close the sale of a hotel if we want to sell. Should we decide to sell a hotel during the term of that particular hotel’s management agreement, we may have to pay termination fees, which could be substantial, to the applicable management company.
In addition, hotels may not be readily converted to alternative uses if they were to become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures and may give rise to substantial payments to our franchisors, management companies and lenders.
We may be required to expend funds to correct defects or to make improvements before a hotel can be sold. We may not have funds available to correct those defects or to make those improvements and, as a result, our ability to sell the hotel would be restricted. In acquiring a hotel, we may agree to lock-out provisions that materially restrict us from selling that hotel for a period of time or impose other restrictions on us, such as a limitation on the amount of debt that can be placed or repaid on that hotel to address specific concerns of sellers. These lock-out provisions would restrict our ability to sell a hotel. These factors and any others that would impede our ability to respond to adverse changes in the performance of our hotels could harm our financial condition and results of operations.
Claims by persons relating to our properties could affect the attractiveness of our hotels or cause us to incur additional expenses.
We could incur liabilities resulting from loss or injury to our hotels or to persons at our hotels. These losses could be attributable to us or result from actions taken by a hotel management company. If claims are made against a management company, it may seek to pass those expenses through to us. Claims such as these, whether or not they have merit, could harm the reputation of a hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.
We have in the past and could in the future incur liabilities resulting from claims by hotel employees. While these claims are, for the most part, covered by insurance, some claims (such as claims for unpaid overtime wages) generally are not insured or insurable. These claims, whether or not they have merit, could harm the reputation of a hotel or cause us to incur losses which could harm our results of operations.
Uninsured and underinsured losses could harm our financial condition, results of operations and ability to make distributions to ourpreferred stockholders.
Various types of litigation losses and catastrophic losses, such as losses due to wars, terrorist acts, earthquakes, floods, hurricanes, pollution or environmental matters, generally are either uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments.
Of the 25 hotels, seven are located in California, which has been historically at greater risk to certain acts of nature (such as fires, earthquakes and mudslides) than other states. In addition, a total of seven hotels are located in Florida, Hawaii, Louisiana and Texas, which each have an increased potential to experience hurricanes. In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any notes payable or other financial obligations related to the property, in addition to obligations to our ground lessors, franchisors and managers. Inflation, changes in building codes and ordinances,
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environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed hotel.
Property and casualty insurance, including coverage for terrorism, can be difficult or expensive to obtain. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our hotels at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (e.g., earthquake, fire, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we are unable to obtain adequate insurance on our hotels for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments we have to our ground lessors, franchisors and managers which require us to maintain adequate insurance on our properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damages which would otherwise have been covered by insurance, it could harm our financial condition and results of operations.
In addition, there are other risks, such as certain environmental hazards, that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or too expensive to justify coverage. We also may encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur, or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all or a part of the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.
Terrorist attacks and military conflicts may adversely affect the hospitality industry.
The terrorist attacks on September 11, 2001 and subsequent events underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. In particular, properties that are well-known or are located in concentrated business sectors in major cities may be subject to higher-than-normal risk of terrorist attacks. The occurrence or the possibility of terrorist attacks or military conflicts could:
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We may not be able to recover fully under our existing terrorism insurance for losses caused by some types of terrorist acts, and federal terrorism legislation does not ensure that we will be able to obtain terrorism insurance in adequate amounts or at acceptable premium levels in the future.
We obtain terrorism insurance as part of our all-risk property insurance program. However, our all-risk policies have limitations such as per occurrence limits and sublimits that might have to be shared proportionally across participating hotels under certain loss scenarios. Also, all-risk insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Act (the “TRIA”) for “certified” acts of terrorism — namely those which are committed on behalf of non-United States persons or interests. Furthermore, we may not have full replacement coverage for all of our
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properties for acts of terrorism committed on behalf of United States persons or interests (“noncertified” events), as well as for “certified” events, as our terrorism coverage for such incidents is subject to sublimits and/or annual aggregate limits. In addition, property damage related to war and to nuclear, biological and chemical incidents is excluded under our policies. To the extent we have property damage directly related to fire following a nuclear, biological or chemical incident, however, our coverage may extend to reimburse us for our losses. While the TRIA provides for the reimbursement of insurers for losses resulting from nuclear, biological and chemical perils, the TRIA does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. As a result of the above, there remains considerable uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.
Laws and governmental regulations may restrict the ways in which we use our hotel properties and increase the cost of compliance with such regulations. Noncompliance with such regulations could subject us to penalties, loss of value of our properties or civil damages.
Our hotel properties are subject to various federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such as swimming pool chemicals at a hotel) to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for the types of costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
Our hotel properties are also subject to the Americans with Disabilities Act of 1990, or the ADA. Under the ADA, all public accommodations must meet various Federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers and non-compliance could result in the U.S. government imposing fines or in private litigants’ winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and the ability to make distributions to our stockholders could be harmed. In addition, we are required to operate our hotel properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties.
Tax Risks
If we fail to qualify as a REIT, our distributions will not be deductible by us and our income will be subject to federal and state taxation, reducing our cash available for distribution.
We are organized as a REIT under the Code, which affords us material tax advantages. The requirements for qualifying as a REIT, however, are complex. If we fail to meet these requirements and certain relief provisions do not apply, our distributions will not be deductible by us and we will have to pay a corporate federal and state level tax on our income. This would substantially reduce our cash available to pay distributions and your yield on your investment in our common stock. In addition, such a tax liability might cause us to borrow funds, liquidate some of our investments or take other steps which could negatively affect our results of operations. Moreover, if our REIT status is terminated because of
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our failure to meet a technical REIT requirement, we would generally be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT. Moreover, our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT.
Even as a REIT, we may become subject to federal, state or local taxes on our income or property, reducing our cash available for distribution.
Even as a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have net income from a “prohibited transaction,” that income will be subject to a 100% tax. A “prohibited transaction” is, in general, the sale or other disposition of inventory or property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding net capital gains, and we will be subject to regular corporate income tax to the extent that we distribute less than 100% of our REIT taxable income (determined without regard to the deduction for dividends paid) each year. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. We may not be able to make sufficient distributions to avoid paying income tax or excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay federal income tax directly on that income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of that tax liability. We may also be subject to federal and/or state income taxes when using net operating loss carryforwards to offset current taxable income, or when changing the valuation of our deferred tax assets and liabilities.
Our taxable REIT subsidiary is subject to tax as a regular corporation. In addition, we may also be subject to state and local taxes on our income or property at the level of our Operating Partnership or at the level of the other companies through which we indirectly own our assets. In the normal course of business, entities through which we own or operate real estate either have undergone, or may undergo future tax audits. Should we receive a material tax deficiency notice in the future which requires us to incur additional expense, our earnings may be negatively impacted. There can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations. We cannot assure you that we will be able to continue to satisfy the REIT requirements, or that it will be in our best interests to continue to do so.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for these reduced rates. Under recently enacted tax legislation (the “Tax Cuts and Jobs Act”), however, U.S. stockholders that are individuals, trusts and estates generally may deduct up to 20% of the ordinary dividends (e.g., dividends not designated as capital gain dividends or qualified dividend income) received from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs (generally to 29.6% assuming the shareholder is subject to the 37% maximum rate), such tax rate is still higher than the tax rate applicable to corporate dividends that constitute qualified dividend income. Accordingly, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs.
If the leases of our hotels to our taxable REIT subsidiary are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests annually, under which specified percentages of our gross income must be passive income. Passive income includes rent paid pursuant to our operating leases between our TRS Lessee and its subsidiaries and our Operating Partnership. These rents constitute substantially all of our gross income. For the rent to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If the leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
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We may be subject to taxes in the event our operating leases are held not to be on an arm’s-length basis.
In the event that leases between us and our taxable REIT subsidiary are held not to have been made on an arm’s-length basis, we or our taxable REIT subsidiary could be subject to income taxes. In order for rents paid to us by our taxable REIT subsidiary to qualify as “rents from real property,” such rents may not be based on net income or profits. Our leases provide for a base rent plus a variable rent based on occupied rooms and departmental revenues rather than on net income or profits. If the IRS determines that the rents charged under our leases with our taxable REIT subsidiary are excessive, the deductibility thereof may be challenged, and to the extent rents exceed an arm’s-length amount, we could be subject to a 100% excise tax on “re-determined rent” or “re-determined deductions.” Legislation enacted in 2015 expanded the items subject to this 100% excise tax for tax years beginning on or after January 1, 2016. While we believe that our rents and other transactions with our taxable REIT subsidiary are based on arm’s-length amounts and reflect normal business practices, there can be no assurance that the IRS would agree.
Our taxable REIT subsidiary is subject to special rules that may result in increased taxes.
Several Code provisions ensure that a taxable REIT subsidiary is subject to an appropriate level of federal income taxation. For example, the REIT has to pay a 100% penalty tax on some payments that it receives if the economic arrangements between us and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. The IRS may successfully assert that the economic arrangements of any of our intercompany transactions, including the hotel leases, are not comparable to similar arrangements between unrelated parties.
We may be required to pay a penalty tax upon the sale of a hotel.
The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a hotel (or other property) constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements of the safe harbors or the IRS may successfully assert that one or more of our sales are prohibited transactions and, therefore, we may be required to pay a penalty tax.
We may be subject to corporate level income tax on certain built-in gains.
We may acquire properties in the future from C corporations, in which we must adopt the C corporation’s tax basis in the acquired asset as our tax basis. If the asset’s fair market value at the time of the acquisition exceeds its tax basis (a “built-in gain”), and we sell that asset within five years of the date on which we acquire it, then we generally will have to pay tax on the built-in gain at the highest regular corporate tax rate.
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
From time to time we may dispose of properties in transactions that are intended to qualify as tax deferred exchanges under Section 1031 of the Code (a “Section 1031 Exchange”). If the qualification of a disposition as a valid Section 1031 Exchange is successfully challenged by the IRS, the disposition may be treated as a taxable exchange. In such case, our taxable income and earnings and profits would increase as would the amount of distributions we are required to make to satisfy the REIT distribution requirements. As a result, we may be required to make additional distributions or, in lieu of that, pay additional corporate income tax, including interest and penalties. To satisfy these obligations, we may be required to borrow funds. In addition, the payment of taxes could cause us to have less cash available to distribute to our stockholders. Moreover, it is possible that legislation could be enacted that could modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult, or not possible, for us to dispose of properties on a tax deferred basis.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury (the “Treasury Department”). Changes to the tax laws,
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with or without retroactive application, could adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.
The Tax Cuts and Jobs Act has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the Tax Cuts and Jobs Act that could affect the Company and its stockholders include:
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Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The Tax Cuts and Jobs Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury Department and IRS, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
While some of the changes made by the Tax Cuts and Jobs Act may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. The Company continues to work with its tax advisors and auditors to determine the full impact that the Tax Cuts and Jobs Act as a whole will have on the Company.
Risks Related to Our Common Stock
The market price of our equity securities may vary substantially.
The trading prices of equity securities issued by REITs may be affected by changes in market interest rates and other factors. During 2017, our closing daily stock price fluctuated from a low of $14.24 to a high of $17.44. One of the factors that may influence the price of our common stock or preferred stock in public trading markets is the annual yield from distributions on our common stock or preferred stock, if any, as compared to yields on other financial instruments. An
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increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our stock to demand a higher annual yield, which could reduce the market price of our equity securities.
In addition to the risk factors discussed, other factors that could affect the market price of our equity securities include the following:
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Our distributions to stockholders may vary.
During the past three years, we paid quarterly cash dividends to the stockholders of our Series D cumulative redeemable preferred stock (“Series D preferred stock”), Series E cumulative redeemable preferred stock (“Series E preferred stock”), Series F cumulative redeemable preferred stock (“Series F preferred stock”) and our common stock as follows:
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2015 |
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January | $ | 0.500000 |
| $ | — |
| $ | — |
| $ | 0.36 | (1) |
April | $ | 0.500000 |
| $ | — |
| $ | — |
| $ | 0.05 |
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July | $ | 0.500000 |
| $ | — |
| $ | — |
| $ | 0.05 |
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October | $ | 0.500000 |
| $ | — |
| $ | — |
| $ | 0.05 |
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2016 |
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January | $ | 0.500000 |
| $ | — |
| $ | — |
| $ | 1.26 | (1) |
April | $ | 0.527778 |
| $ | — |
| $ | — |
| $ | 0.05 |
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July | $ | — |
| $ | 0.535700 |
| $ | 0.201600 |
| $ | 0.05 |
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October | $ | — |
| $ | 0.434375 |
| $ | 0.403125 |
| $ | 0.05 |
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January | $ | — |
| $ | 0.434375 |
| $ | 0.403125 |
| $ | 0.53 |
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April | $ | — |
| $ | 0.434375 |
| $ | 0.403125 |
| $ | 0.05 |
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July | $ | — |
| $ | 0.434375 |
| $ | 0.403125 |
| $ | 0.05 |
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October | $ | — |
| $ | 0.434375 |
| $ | 0.403125 |
| $ | 0.05 |
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January | $ | — |
| $ | 0.434375 |
| $ | 0.403125 |
| $ | 0.58 |
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Future distributions will be authorized and determined by our board of directors in its sole discretion from time to time and will be dependent upon a number of factors, including long-term operating projections, expected capital requirements and risks affecting our business. Furthermore, our board of directors may elect to pay dividends on our common stock by any means allowed under the Code, including a combination of cash and shares of our common stock. We cannot assure you as to the timing or amount of future dividends; however, we expect to continue to pay a regular dividend of $0.05 per share of common stock throughout 2018. To the extent that expected regular quarterly dividends for 2018 do not satisfy our annual distribution requirements, we expect to satisfy the annual distribution requirement by paying a “catch up” dividend in January 2019, which dividend may be paid in cash and/or shares of common stock. We believe that investors consider the relationship of dividend yield to market interest rates to be an important factor in deciding whether to buy or sell shares of a REIT. If market interest rates increase, prospective purchasers of REIT shares may expect a higher dividend rate. Thus, higher market interest rates could cause the market price of our shares to decrease.
Distributions on our common stock may be made in the form of cash, stock, or a combination of both.
As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders. Typically, we generate cash for distributions through our operations, the disposition of assets, or the incurrence of additional debt. We have elected in the past, and may elect in the future, to pay dividends on our common stock in cash, shares of common stock or a combination of cash and shares of common stock. Changes in our dividend policy could adversely affect the price of our stock.
The IRS may disallow our use of stock dividends to satisfy our distribution requirements.
We may elect to satisfy our REIT distribution requirements in the form of shares of our common stock along with cash. We have previously received private letter rulings from the IRS, including for both tax years 2014 and 2015, regarding the treatment of these distributions for purposes of satisfying our REIT distribution requirements. All dividends for 2016 and 2017 have been paid in cash. In the future, however, we may make cash/common stock distributions prior to receiving a private letter ruling. Should the IRS disallow our future use of cash/common stock dividends, the distribution would not qualify for purposes of meeting our distribution requirements, and we would need to make additional all cash distributions to satisfy the distribution requirement through the use of the deficiency dividend procedures outlined in the Code.
Shares of our common stock that are or become available for sale could affect the share price.
We have in the past, and may in the future, issue additional shares of common stock to raise the capital necessary to finance hotel acquisitions, fund capital expenditures, redeem our preferred stock, repay indebtedness or for other corporate purposes. Sales of a substantial number of shares of our common stock, or the perception that sales could occur, could adversely affect prevailing market prices for our common stock. In addition, we have reserved approximately 12 million shares of our common stock for issuance under the Company’s long-term incentive plan, and 4,824,586 shares remained available for future issuance as of December 31, 2017.
Our earnings and cash distributions will affect the market price of shares of our common stock.
We believe that the market value of a REIT’s equity securities is based primarily on the value of the REIT’s owned real estate, capital structure, debt levels and perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales, acquisitions, development or refinancings. Because our market value is based on a combination of factors, shares of our common stock may trade at prices that are higher or lower than the net value per share of our underlying assets. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes rather than distributing the cash flow to stockholders, these retained funds, while increasing the value of our underlying assets, may negatively impact the market price of our common stock. Our failure to meet our expectations or the market’s expectation with regard to future earnings and cash distributions would likely adversely affect the market price of our common stock.
Item 1B.Unresolved Staff Comments
None.
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Item 2.Properties
The following table sets forth additional summary information with respect to the 27 hotels we owned17 Hotels as of December 31, 2017:
2020:
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Hotel | | City | | State | | Chain Scale | | Service | | Rooms | | Manager | ||
Boston Park Plaza | | Boston | | Massachusetts | | Upper Upscale | | Full Service | | 1,060 | | Highgate | ||
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Embassy Suites Chicago | | Chicago | | Illinois | | Upper Upscale | | Full Service | | 368 | | Crestline | ||
Embassy Suites La Jolla | | San Diego | | California | | Upper Upscale | | Full Service | | 340 | | Hilton | ||
Hilton Garden Inn Chicago Downtown/Magnificent Mile | | Chicago | | Illinois | | Upscale | | Full Service | | 361 | | Crestline | ||
Hilton New Orleans St. Charles | | New Orleans | | Louisiana | | Upper Upscale | | Full Service | |
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Hilton San Diego Bayfront (1) (2) | | San Diego | | California | | Upper Upscale | | Full Service | | 1,190 | | Hilton | ||
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Hyatt Centric Chicago Magnificent Mile | | Chicago | | Illinois | | Upper Upscale | | Full Service | | 419 | | Davidson | ||
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Hyatt Regency San Francisco | | San Francisco | | California | | Upper Upscale | | Full Service | | 821 | | Hyatt | ||
JW Marriott New Orleans | | New Orleans | | Louisiana | | Luxury | | Full Service | | 501 | | Marriott | ||
Marriott Boston Long Wharf | | Boston | | Massachusetts | | Upper Upscale | | Full Service | |
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Oceans Edge | | Key West | | Florida | | Upper Upscale | | Full Service | | 175 | | Singh | ||
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Renaissance Long Beach | | Long Beach | | California | | Upper Upscale | | Full Service | | 374 | | Marriott | ||
Renaissance Orlando at | | Orlando | | Florida | | Upper Upscale | | Full Service | | 781 | | Marriott | ||
Renaissance Washington DC | | Washington DC | | District of Columbia | | Upper Upscale | | Full Service | | 807 | | Marriott | ||
Renaissance Westchester | | White Plains | | New York | | Upper Upscale | | Full Service | | 348 | | Highgate | ||
The Bidwell Marriott Portland | | Portland | | Oregon | | Upper Upscale | | Full Service | | 258 | | IHR | ||
Wailea Beach Resort | | Wailea | | Hawaii | | Upper Upscale | | Full Service | | 547 | | Marriott | ||
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Total number of rooms | | | | | | | | | | 9,017 | | |
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Geographic Diversity
We own a geographically diverse portfolio of hotels located in 11 states and in Washington, DC. The following tables summarize our total portfolio of 27 hotels by region as of December 31, 2017, and the operating statistics by region for our 24 Hotel Portfolio, 26 Hotel Portfolio and 27 Hotel Portfolio (all of which are defined below) for 2017, 2016 and 2015, including prior ownership results for the Oceans Edge Hotel & Marina, which we acquired in July 2017. The Oceans Edge Hotel & Marina is a newly-developed hotel that opened in January 2017; therefore, there are no prior year operating statistics for this hotel.
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| 7 |
| 3,804 |
| 33.3 | % |
Other West (2) |
| 4 |
| 1,666 |
| 11.6 | % |
Midwest (3) |
| 3 |
| 1,148 |
| 6.9 | % |
East (4) |
| 13 |
| 6,585 |
| 48.2 | % |
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27 Hotel Portfolio (5) |
| 27 |
| 13,203 |
| 100.0 | % |
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| Occupancy |
| ADR |
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California (1) |
| 86.6 | % | $ | 219.38 |
| $ | 189.98 |
| 86.8 | % | $ | 218.95 |
| $ | 190.05 |
| (20) | bps | 0.2 | % | (0.0) | % | ||||||||
Other West (2) |
| 76.0 | % | $ | 211.83 |
| $ | 160.99 |
| 77.8 | % | $ | 173.63 |
| $ | 135.08 |
| (180) | bps | 22.0 | % | 19.2 | % | ||||||||
Midwest (3) |
| 83.7 | % | $ | 189.38 |
| $ | 158.51 |
| 82.7 | % | $ | 198.31 |
| $ | 164.00 |
| 100 | bps | (4.5) | % | (3.3) | % | ||||||||
East (4) |
| 81.5 | % | $ | 205.05 |
| $ | 167.12 |
| 80.8 | % | $ | 199.45 |
| $ | 161.16 |
| 70 | bps | 2.8 | % | 3.7 | % | ||||||||
26 Hotel Portfolio (6) |
| 82.5 | % | $ | 208.84 |
| $ | 172.29 |
| 82.3 | % | $ | 202.25 |
| $ | 166.45 |
| 20 | bps | 3.3 | % | 3.5 | % | ||||||||
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24 Hotel Portfolio (7) |
| 82.9 | % | $ | 211.30 |
| $ | 175.17 |
| 82.7 | % | $ | 204.45 |
| $ | 169.08 |
| 20 | bps | 3.4 | % | 3.6 | % | ||||||||
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27 Hotel Portfolio (5) |
| 82.4 | % | $ | 209.06 |
| $ | 172.27 |
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| ADR |
| RevPAR |
| Occupancy |
| ADR |
| RevPAR |
| Occupancy |
| ADR |
| RevPAR |
| ||||
California (1) |
| 86.8 | % | $ | 218.95 |
| $ | 190.05 |
| 86.7 | % | $ | 209.66 |
| $ | 181.78 |
| 10 | bps | 4.4 | % | 4.5 | % |
Other West (2) |
| 77.8 | % | $ | 173.63 |
| $ | 135.08 |
| 83.6 | % | $ | 180.48 |
| $ | 150.88 |
| (580) | bps | (3.8) | % | (10.5) | % |
Midwest (3) |
| 82.7 | % | $ | 198.31 |
| $ | 164.00 |
| 85.3 | % | $ | 201.76 |
| $ | 172.10 |
| (260) | bps | (1.7) | % | (4.7) | % |
East (4) |
| 80.8 | % | $ | 199.45 |
| $ | 161.16 |
| 79.6 | % | $ | 198.53 |
| $ | 158.03 |
| 120 | bps | 0.5 | % | 2.0 | % |
26 Hotel Portfolio (6) |
| 82.3 | % | $ | 202.25 |
| $ | 166.45 |
| 82.7 | % | $ | 199.91 |
| $ | 165.33 |
| (40) | bps | 1.2 | % | 0.7 | % |
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24 Hotel Portfolio (7) |
| 82.7 | % | $ | 204.45 |
| $ | 169.08 |
| 83.2 | % | $ | 201.82 |
| $ | 167.91 |
| (50) | bps | 1.3 | % | 0.7 | % |
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We are involved from time to time in various claims and legal actions in the ordinary course of our business. We do not believe that the resolution of any such pending legal matters will have a material adverse effect on our financial position or results of operations when resolved.
34
35
Item 4.Mine Safety Disclosures
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NYSENew York Stock Exchange under the symbol “SHO.” On February 8, 2018, the last reported price per share of common stock on the NYSE was $15.43. The table below sets forth the high and low closing price per share of our common stock as reported on the NYSE and the cash dividends per share of common stock we declared with respect to each period.
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| High |
| Low |
| Dividends Declared |
| |||||
2016 |
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| ||
First Quarter |
| $ | 14.00 |
| $ | 10.13 |
| $ | 0.05 |
| ||
Second Quarter |
| $ | 13.85 |
| $ | 11.37 |
| $ | 0.05 |
| ||
Third Quarter |
| $ | 13.89 |
| $ | 12.03 |
| $ | 0.05 |
| ||
Fourth Quarter |
| $ | 15.91 |
| $ | 12.20 |
| $ | 0.53 |
| ||
2017 |
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| ||
First Quarter |
| $ | 15.65 |
| $ | 14.24 |
| $ | 0.05 |
| ||
Second Quarter |
| $ | 16.72 |
| $ | 14.89 |
| $ | 0.05 |
| ||
Third Quarter |
| $ | 16.67 |
| $ | 15.23 |
| $ | 0.05 |
| ||
Fourth Quarter |
| $ | 17.44 |
| $ | 15.90 |
| $ | 0.58 |
|
Subject to certain limitations, we intend to make dividends on our stock in amounts equivalent to 100% of our annual taxable income. The level of any future dividends will be determined by our board of directors after considering long-term operating projections, expected capital requirements and risks affecting our business; however, we expect to continue to pay a regular quarterly dividend of $0.05 per share of common stock throughout 2018. To the extent that expected regular quarterly dividends for 2018 do not satisfy our annual distribution requirements, we expect to satisfy the annual distribution requirement by paying a “catch up” dividend in January 2019.
As of February 8, 2018,5, 2021, we had approximately 22 holders of record of our common stock. However, because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our common stock than record holders. In order to comply with certain requirements related to our qualification as a REIT, our charter limits the number of common shares that may be owned by any single person or affiliated group to 9.8% of the outstanding common shares, subject to the ability of our board to waive this limitation under certain conditions.
Due to the COVID-19 pandemic, we suspended our common stock quarterly dividend beginning with the second quarter of 2020 to preserve additional liquidity. The resumption in quarterly common stock dividends will be determined by our board of directors after considering our obligations under our various financing agreements, projected taxable income, compliance with our debt covenants, long-term operating projections, expected capital requirements and risks affecting our business.
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of this Annual Report on Form 10-K.
In February 2017, the Company’s board of directors authorized a stock repurchase program to acquire up to an aggregate of $300.0 million of the Company’s common and preferred stock. In February 2020, the Company’s board of directors authorized an increase to the existing 2017 stock repurchase program to acquire up to $500.0 million of the Company’s common and preferred stock. During the three months ended March 31, 2020, the Company repurchased 9,770,081 shares of its common stock for a total purchase price of $103.9 million, including fees and commissions, of which $3.7 million was repurchased under the 2017 stock repurchase program and $100.2 million was repurchased under the 2020 stock repurchase program, leaving $400.0 million remaining under the 2020 stock repurchase program. In February 2021, the Company’s board of directors reauthorized the existing stock repurchase program, allowing the Company to acquire up to $500.0 million of the Company’s common and preferred stock. The 2021 stock repurchase program has no stated expiration date. Future repurchases will depend on various factors, including the Company’s capital needs, restrictions under its various financing agreements, as well as the price of the Company’s common and preferred stock.
Fourth Quarter 20172020 Purchases of Equity Securities:
| | | | | | | | | | |
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| | |
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| Maximum Number (or | |
| | | | | | | Total Number of | | Appropriate Dollar | |
| |
| | | | | Shares Purchased | | Value) of Shares that | |
| | Total Number | |
| | | as Part of Publicly | | May Yet Be Purchased | |
| | of Shares | | Average Price | | Announced Plans | | Under the Plans or | ||
Period | | Purchased | | Paid per Share | | or Programs | | Programs | ||
October 1, 2020 — October 31, 2020 | | — | | $ | — | | — | | $ | 400,000,001 |
November 1, 2020 — November 30, 2020 | | — | | | — | | — | | $ | 400,000,001 |
December 1, 2020 — December 31, 2020 | | — | | | — | | — | | $ | 400,000,001 |
Total | | — | | $ | — | | — | | $ | 400,000,001 |
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| Maximum Number (or |
| |
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|
| Total Number of |
| Appropriate Dollar |
| |
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|
| Shares Purchased |
| Value) of Shares that |
| |
|
| Total Number |
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| as Part of Publicly |
| May Yet Be Purchased |
| |
|
| of Shares |
| Average Price |
| Announced Plans |
| Under the Plans or |
| ||
Period |
| Purchased |
| Paid per Share |
| or Programs |
| Programs |
| ||
October 1, 2017 — October 31, 2017 |
| — |
| $ | — |
| — |
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|
November 1, 2017 — November 30, 2017 |
| — |
| $ | — |
| — |
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|
December 1, 2017 — December 31, 2017 |
| — |
| $ | — |
| — |
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Total |
| — |
|
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|
| $ | 300,000,000 | (1) |
36
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35
| Selected Financial Data |
Item 6.Selected Financial Data
The following table sets forth selected financial information for the Company that has been derived from the consolidated financial statements and notes. This information should be read together with “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| |||||||||||||
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| |||||
Operating Data ($ in thousands): | | | | | | | | | | | | | | | |
|
REVENUES | | | | | | | | | | | | | | | | |
Room | | $ | 169,522 | | $ | 767,392 | | $ | 799,369 | | $ | 829,320 | | $ | 824,340 | |
Food and beverage | | | 54,900 | |
| 272,869 | |
| 284,668 | |
| 296,933 | |
| 294,415 | |
Other operating | | | 43,484 | |
| 74,906 | |
| 75,016 | |
| 67,385 | |
| 70,585 | |
Total revenues | | | 267,906 | |
| 1,115,167 | |
| 1,159,053 | |
| 1,193,638 | |
| 1,189,340 | |
OPERATING EXPENSES | | | | | | | | | | | | | | | | |
Room | | | 76,977 | |
| 202,889 | |
| 210,204 | |
| 213,301 | |
| 211,947 | |
Food and beverage | | | 63,140 | |
| 186,436 | |
| 193,486 | |
| 201,225 | |
| 204,102 | |
Other operating | | | 7,636 | |
| 16,594 | |
| 17,169 | |
| 16,392 | |
| 16,684 | |
Advertising and promotion | | | 23,741 | |
| 54,369 | |
| 55,523 | |
| 58,572 | |
| 60,086 | |
Repairs and maintenance | | | 27,084 | |
| 41,619 | |
| 43,111 | |
| 46,298 | |
| 44,307 | |
Utilities | | | 17,311 | |
| 27,311 | |
| 29,324 | |
| 30,419 | |
| 30,424 | |
Franchise costs | | | 7,060 | |
| 32,265 | |
| 35,423 | |
| 36,681 | |
| 36,647 | |
Property tax, ground lease and insurance | | | 76,848 | |
| 83,265 | |
| 82,414 | |
| 83,716 | |
| 82,979 | |
Other property-level expenses | | | 49,854 | |
| 130,321 | |
| 132,419 | |
| 138,525 | |
| 142,742 | |
Corporate overhead | | | 28,149 | |
| 30,264 | |
| 30,247 | |
| 28,817 | |
| 25,991 | |
Depreciation and amortization | | | 137,051 | |
| 147,748 | |
| 146,449 | | | 158,634 | | | 163,016 | |
Impairment losses | | | 146,944 | |
| 24,713 | |
| 1,394 | |
| 40,053 | |
| — | |
Total operating expenses | | | 661,795 | |
| 977,794 | |
| 977,163 | |
| 1,052,633 | |
| 1,018,925 | |
| | | | | | | | | | | | | | | | |
Interest and other income | | | 2,836 | |
| 16,557 | |
| 10,500 | |
| 4,340 | |
| 1,800 | |
Interest expense | | | (53,307) | |
| (54,223) | |
| (47,690) | |
| (51,766) | |
| (50,283) | |
Gain on sale of assets | | | 34,298 | | | 42,935 | | | 116,961 | | | 45,474 | | | 18,413 | |
Gain (loss) on extinguishment of debt, net | | | 6,146 | |
| — | |
| (835) | |
| (824) | |
| (284) | |
(Loss) income before income taxes and discontinued operations | | | (403,916) | |
| 142,642 | |
| 260,826 | |
| 138,229 | |
| 140,061 | |
Income tax (provision) benefit, net | | | (6,590) | |
| 151 | |
| (1,767) | |
| 7,775 | |
| 616 | |
(Loss) income from continuing operations | | | (410,506) | |
| 142,793 | |
| 259,059 | |
| 146,004 | |
| 140,677 | |
Income from discontinued operations, net of tax | | | — | |
| — | |
| — | |
| 7,000 | |
| — | |
| | | | | | | | | | | | | | | | |
NET (LOSS) INCOME | | | (410,506) | |
| 142,793 | |
| 259,059 | |
| 153,004 | |
| 140,677 | |
Loss (income) from consolidated joint venture attributable to noncontrolling interest | | | 5,817 | |
| (7,060) | |
| (8,614) | |
| (7,628) | |
| (6,480) | |
Preferred stock dividends and redemption charge | | | (12,830) | |
| (12,830) | |
| (12,830) | |
| (12,830) | |
| (15,964) | |
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (417,519) | | $ | 122,903 | | $ | 237,615 | | $ | 132,546 | | $ | 118,233 | |
(Loss) income from continuing operations attributable to common stockholders per diluted common share | | $ | (1.93) | | $ | 0.54 | | $ | 1.05 | | $ | 0.56 | | $ | 0.55 | |
Distributions declared per common share | | $ | 0.05 | | $ | 0.74 | | $ | 0.69 | | $ | 0.73 | | $ | 0.68 | |
Balance Sheet Data ($ in thousands): | | | | | | | | | | | | | | | | |
Investment in hotel properties, net (1) (2) | | $ | 2,461,498 | | $ | 2,872,353 | | $ | 3,030,998 | | $ | 3,106,066 | | $ | 3,158,219 | |
Total assets (2) | | $ | 2,985,717 | | $ | 3,918,974 | | $ | 3,972,833 | | $ | 3,857,812 | | $ | 3,739,234 | |
Total debt, net | | $ | 744,789 | | $ | 971,063 | | $ | 977,063 | | $ | 982,759 | | $ | 931,303 | |
Total liabilities (2) | | $ | 896,338 | | $ | 1,297,903 | | $ | 1,261,662 | | $ | 1,275,634 | | $ | 1,207,402 | |
Equity | | $ | 2,089,379 | | $ | 2,621,071 | | $ | 2,711,171 | | $ | 2,582,178 | | $ | 2,531,832 | |
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|
|
|
| Year Ended December 31, |
| |||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
| |||||
Operating Data ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
| $ | 829,320 |
| $ | 824,340 |
| $ | 874,117 |
| $ | 811,709 |
| $ | 653,955 |
|
Food and beverage |
|
| 296,933 |
|
| 294,415 |
|
| 293,892 |
|
| 259,358 |
|
| 213,346 |
|
Other operating |
|
| 67,385 |
|
| 70,585 |
|
| 81,171 |
|
| 70,931 |
|
| 56,523 |
|
Total revenues |
|
| 1,193,638 |
|
| 1,189,340 |
|
| 1,249,180 |
|
| 1,141,998 |
|
| 923,824 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
|
| 213,301 |
|
| 211,947 |
|
| 224,035 |
|
| 214,899 |
|
| 170,361 |
|
Food and beverage |
|
| 201,225 |
|
| 204,102 |
|
| 204,932 |
|
| 180,053 |
|
| 147,713 |
|
Other operating |
|
| 16,392 |
|
| 16,684 |
|
| 21,335 |
|
| 21,012 |
|
| 16,819 |
|
Advertising and promotion |
|
| 58,572 |
|
| 60,086 |
|
| 61,892 |
|
| 54,992 |
|
| 47,306 |
|
Repairs and maintenance |
|
| 46,298 |
|
| 44,307 |
|
| 46,557 |
|
| 45,901 |
|
| 35,884 |
|
Utilities |
|
| 30,419 |
|
| 30,424 |
|
| 34,543 |
|
| 34,141 |
|
| 27,006 |
|
Franchise costs |
|
| 36,681 |
|
| 36,647 |
|
| 40,096 |
|
| 38,271 |
|
| 32,932 |
|
Property tax, ground lease and insurance |
|
| 83,716 |
|
| 82,979 |
|
| 94,967 |
|
| 84,665 |
|
| 79,004 |
|
Other property-level expenses |
|
| 138,525 |
|
| 142,742 |
|
| 142,332 |
|
| 126,737 |
|
| 103,454 |
|
Corporate overhead |
|
| 28,817 |
|
| 25,991 |
|
| 33,339 |
|
| 28,739 |
|
| 26,671 |
|
Depreciation and amortization |
|
| 158,634 |
|
| 163,016 |
|
| 164,716 |
|
| 155,845 |
|
| 137,476 |
|
Impairment loss |
|
| 40,053 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Total operating expenses |
|
| 1,052,633 |
|
| 1,018,925 |
|
| 1,068,744 |
|
| 985,255 |
|
| 824,626 |
|
Operating income |
|
| 141,005 |
|
| 170,415 |
|
| 180,436 |
|
| 156,743 |
|
| 99,198 |
|
Interest and other income |
|
| 4,340 |
|
| 1,800 |
|
| 3,885 |
|
| 3,479 |
|
| 2,821 |
|
Interest expense |
|
| (51,766) |
|
| (50,283) |
|
| (66,516) |
|
| (72,315) |
|
| (72,239) |
|
Loss on extinguishment of debt |
|
| (824) |
|
| (284) |
|
| (2,964) |
|
| (4,638) |
|
| (44) |
|
Gain on sale of assets |
|
| 45,474 |
|
| 18,413 |
|
| 226,217 |
|
| — |
|
| — |
|
Income before income taxes and discontinued operations |
|
| 138,229 |
|
| 140,061 |
|
| 341,058 |
|
| 83,269 |
|
| 29,736 |
|
Income tax benefit (provision), net |
|
| 7,775 |
|
| 616 |
|
| (1,434) |
|
| (179) |
|
| (8,145) |
|
Income from continuing operations |
|
| 146,004 |
|
| 140,677 |
|
| 339,624 |
|
| 83,090 |
|
| 21,591 |
|
Income from discontinued operations, net of tax |
|
| 7,000 |
|
| — |
|
| 15,895 |
|
| 4,849 |
|
| 48,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
| 153,004 |
|
| 140,677 |
|
| 355,519 |
|
| 87,939 |
|
| 70,001 |
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
| (7,628) |
|
| (6,480) |
|
| (8,164) |
|
| (6,708) |
|
| (4,045) |
|
Preferred stock dividends and redemption charges |
|
| (12,830) |
|
| (15,964) |
|
| (9,200) |
|
| (9,200) |
|
| (19,013) |
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | 132,546 |
| $ | 118,233 |
| $ | 338,155 |
| $ | 72,031 |
| $ | 46,943 |
|
Income (loss) from continuing operations attributable to common stockholders per diluted common share |
| $ | 0.56 |
| $ | 0.55 |
| $ | 1.54 |
| $ | 0.34 |
| $ | (0.01) |
|
Distributions declared per common share |
| $ | 0.73 |
| $ | 0.68 |
| $ | 1.41 |
| $ | 0.51 |
| $ | 0.10 |
|
Balance Sheet Data ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net (1) |
| $ | 3,106,066 |
| $ | 3,158,219 |
| $ | 3,230,852 |
| $ | 3,542,155 |
| $ | 3,235,433 |
|
Total assets |
| $ | 3,857,812 |
| $ | 3,739,234 |
| $ | 3,865,093 |
| $ | 3,921,443 |
| $ | 3,505,067 |
|
Total debt, net (1) |
| $ | 982,759 |
| $ | 931,303 |
| $ | 1,096,595 |
| $ | 1,421,744 |
| $ | 1,396,293 |
|
Total liabilities |
| $ | 1,275,634 |
| $ | 1,207,402 |
| $ | 1,513,973 |
| $ | 1,652,609 |
| $ | 1,552,668 |
|
Equity |
| $ | 2,582,178 |
| $ | 2,531,832 |
| $ | 2,351,120 |
| $ | 2,268,834 |
| $ | 1,952,399 |
|
(1) |
| Does not include hotels |
(2) | Amounts have not been retrospectively adjusted to reflect the |
3637
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report. This discussion focuses on our financial condition and results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019. A discussion and analysis of the year ended December 31, 2019 as compared to the year ended December 31, 2018 is included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2020, under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust or REIT.(“REIT”). A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust.trust for federal income tax purposes. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which, directly or indirectly, leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.
We own primarily urban and resort upper upscale hotels that we consider to be LTRR® in the United States.States, specifically hotels in urban, resort and destination locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As part of our ongoing portfolio management strategy, on an opportunistic basis, we may also selectively sell hotel properties that we believe do not meet our criteria of LTRR®. As of December 31, 2017,2020, we had interests in 2717 hotels including the Marriott Philadelphia and the Marriott Quincy which we classified as held for sale and subsequently sold in January 2018, leaving 25 hotels(the “17 Hotels”) currently held for investment (the “25 hotels”). Of the 25 hotels, we classify 22 as upper upscale, two as upscale and one as luxury as defined by Smith Travel Research, Inc.investment. All but two (the Boston Park Plaza and the Oceans Edge HotelResort & Marina) of our 25 hotelsthe 17 Hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. Our two unbranded hotels are located in top urban and resort markets that have enabled them to buildestablish awareness with both group and transient customers. We believe
The following tables summarize our total portfolio and room data from January 1, 2018 through December 31, 2020:
| | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
|
Portfolio Data—Hotels | | | | | | | |
Number of hotels—beginning of year |
| 20 |
| 21 |
| 27 | |
Less: Dispositions |
| (3) |
| (1) |
| (6) | |
Number of hotels—end of year |
| 17 | | 20 | | 21 | |
| | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
|
Portfolio Data—Rooms | | | | | | | |
Number of rooms—beginning of year |
| 10,610 |
| 10,780 |
| 13,203 | |
Add: Room expansions |
| 9 |
| 17 |
| 4 | |
Less: Dispositions |
| (1,602) |
| (187) |
| (2,427) | |
Number of rooms—end of year |
| 9,017 |
| 10,610 |
| 10,780 | |
Average rooms per hotel—end of year |
| 530 |
| 531 |
| 513 | |
2020 Summary
COVID-19.In March 2020, the largestCOVID-19 pandemic was declared a National Public Health Emergency, which led to significant cancellations, corporate and most stable segmentgovernment travel restrictions and an unprecedented decline in hotel demand. As a result of travelers preferthese cancellations, restrictions and the consistent servicehealth concerns related to COVID-19, we determined that it was in the best interest of our hotel employees and quality associated with nationally recognized brands and well-known independentthe communities in which our hotels operate to temporarily suspend operations at the majority of our hotels.
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We seekIn response to own hotels primarily in urban and resort locations that benefit from significant barriers to entry by competitors and diverse economic drivers. Asthe COVID-19 pandemic, we temporarily suspended operations at 14 of the 17 Hotels during the first half of 2020, 12 of which have since resumed operations as of December 31, 2017,2020:
| | | | |
Hotel | | Suspension Date | | Resumption Date |
Oceans Edge Resort & Marina | | March 22, 2020 | | June 4, 2020 |
Embassy Suites Chicago | | April 1, 2020 | | July 1, 2020 |
Marriott Boston Long Wharf | | March 12, 2020 | | July 7, 2020 |
Hilton New Orleans St. Charles | | March 28, 2020 | | July 13, 2020 |
Hyatt Centric Chicago Magnificent Mile | | April 6, 2020 | | July 13, 2020 |
JW Marriott New Orleans | | March 28, 2020 | | July 14, 2020 |
Hilton San Diego Bayfront | | March 23, 2020 | | August 11, 2020 |
Renaissance Washington DC | | March 26, 2020 | | August 24, 2020 |
Hyatt Regency San Francisco | | March 22, 2020 | | October 1, 2020 |
Renaissance Orlando at SeaWorld® | | March 20, 2020 | | October 1, 2020 |
The Bidwell Marriott Portland | | March 27, 2020 | | October 5, 2020 |
Wailea Beach Resort | | March 25, 2020 | | November 1, 2020 |
Hilton Garden Inn Chicago Downtown/Magnificent Mile | | March 27, 2020 | | |
Renaissance Westchester | | April 4, 2020 | | |
Three of the 17 Hotels remained open throughout 2020: the Boston Park Plaza; the Embassy Suites La Jolla; and the Renaissance Long Beach. The hotels comprisingin operation during 2020 experienced a significant decrease in occupancy due to the COVID-19 pandemic. As a result, we, in conjunction with our 25third-party managers, reduced operating expenses to preserve liquidity by implementing stringent operational cost containment measures, including significantly reduced staffing levels, limited food and beverage offerings, elimination of non-essential hotel portfolio average 498services and the temporary closure of various parts of the hotels. In addition, enhanced cleaning procedures and revised operating standards were developed and implemented.
We incurred $29.1 million of additional expenses as a result of the COVID-19 pandemic during 2020 related to wages and benefits for furloughed or laid off hotel employees, net of $5.2 million in employee retention tax credits and various industry grants received by our hotels. The $29.1 million of COVID-19-related expenses included severance of $11.0 million.
Our asset management team has worked closely with each hotel’s third-party manager to create a detailed path to reopening, which includes the following protocols:
● | Local/Government Direction: The hotel is eligible to resume operations based on health metrics or reopening phases adopted by authorities in both the local area and the state in which the hotel operates, as well as by guidance from the Center for Disease Control and Prevention, the World Health Organization, the U.S. Department of State, and other public health experts; |
● | Staff and Guest Safety Plan: The hotel has developed a detailed plan to promote the safety of all hotel staff and guests, including frequent and enhanced cleaning and sanitation, contactless check in, and increased physical distancing throughout the hotel; |
● | Training: The hotel’s operating procedures have been updated, and all hotel staff have been trained to comply with the new protocols; |
● | Financial: The hotel has updated its financial model to include the additional costs for cleaning equipment, personal protective equipment, hand sanitizer dispensers and signage to inform and direct its guests; and |
● | Equipment: The hotel has installed enhanced cleaning supplies and equipment to comply with state and local guidelines. |
In addition to approving the above COVID-19 protocols, before we authorize a hotel to resume operations, we first determine whether enough demand exists in the hotel’s market to financially support resuming operations. As hotels begin to resume operations, we are experiencing more competition for hotel guests. After reaching a trough in April, we experienced slow but steady improvements in hotel demand, most significantly in leisure travel, which benefited our hotels in drive-to leisure markets such as the Embassy Suites La Jolla, the Renaissance Long Beach and the Oceans Edge Resort & Marina. We also experienced a modest demand increase at our hotels in certain urban markets after resuming operations in Boston, Chicago, New Orleans and San Diego. These improving demand trends moderated in December when several states reimplemented travel restrictions and stay-at-home orders.
A majority of our group business for 2020 cancelled. In addition, we believe that a significant portion of the group business booked through the first half of 2021 has cancelled or will eventually cancel. Of the group business that has cancelled to date, approximately 25% has rebooked into future periods. The extent of the effects of the pandemic on our business and the hotel industry at large, however, will ultimately depend on future developments, including, but not limited to, the duration and severity of the pandemic, how quickly and successfully effective vaccines and therapies are distributed and administered, as well as the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume.
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Significant Renovations.In response to the economic challenges caused by the COVID-19 pandemic, we are focused on maximizing our liquidity. To increase liquidity, we deferred a portion of our planned 2020 non-essential capital improvements to our portfolio. However, we did accelerate specific capital investment projects in order to take advantage of the suspended operations and the low demand environment to perform otherwise extremely disruptive capital projects. These projects took place at the Renaissance Orlando at SeaWorld®, the Renaissance Washington DC and The Bidwell Marriott Portland, all while adhering to the relevant government regulations and social distancing mandates aimed at both protecting those involved in the construction work and stemming the spread of COVID-19. At the Renaissance Orlando at SeaWorld®, the hotel’s closure allowed us to completely upgrade the hotel’s atrium and lobby. At the Renaissance Washington DC, we remodeled the porte-cochere, which improved traffic flow and the guest’s arrival experience. Additionally, at the Renaissance Washington DC, we replaced the escalators that connect all levels of the hotel’s meeting space with the lobby, a project that would not be possible with group business in the hotel. At The Bidwell Marriott Portland, we took advantage of the hotel’s closure by completely remodeling the guest rooms, gym, meeting rooms, public space and the M Club. We also converted a majority of the guestroom baths to showers, and added nine new guest rooms.
Dispositions. During 2020, we sold or disposed of three hotels. In July 2020, we sold the Renaissance Harborplace for net proceeds of $76.9 million, and recorded a net gain of $0.2 million on the sale. In December 2020, we sold the Renaissance Los Angeles Airport for net proceeds of $89.9 million, and recorded a net gain of $34.1 million on the sale. Also in size.December 2020, we entered into an agreement with the lender of the Hilton Times Square’s mortgage whereby we transferred possession and control of our leasehold interest in the Hilton Times Square to the lender as noted in the summary below of our 2020 debt transactions.
2017 HighlightsDebt Transactions.In March 2020, we drew $300.0 million under the revolving portion of our credit facility as a precautionary measure to increase our cash position and preserve financial flexibility. In June 2020 and August 2020, we repaid $250.0 million and $50.0 million, respectively, of the outstanding credit facility balance. At December 31, 2020, we have no amount outstanding under the credit facility, with $500.0 million of capacity available for additional borrowing under the agreement. The revolving portion of the credit facility matures in April 2023, but may be extended for two six-month periods to April 2024, upon the payment of applicable fees and satisfaction of certain customary conditions.
In January 2017,July 2020 and December 2020, we received proceedscompleted amendments to the agreements governing our unsecured debt, consisting of $240.0 million in a private placementthe revolving credit facility, term loans and senior notes, providing financial covenant relief through the first quarter of senior unsecured notes. The private placement consisted2022, with the first quarterly covenant test as of $120.0 million of notes bearing interest at a fixed rate of 4.69%, maturing in January 2026 (the “Series A Senior Notes”), and $120.0 million of notes bearing interest at a fixed rate of 4.79%, maturing in January 2028 (the “Series B Senior Notes,” together the “Senior Notes”).period ended March 31, 2022.
In January 2017,December 2020, we used proceeds received from our sale of the Senior NotesRenaissance Los Angeles Airport to repay the loan$107.9 million mortgage secured by the Marriott Boston Long Wharf, which had a balance of $176.0 million and an interest rate of 5.58%. The Marriott Boston Long Wharf loan was scheduledRenaissance Washington DC. Additionally, in December 2020, we exercised our first option to mature in April 2017, and was available to be repaid without penalty in January 2017.
In February 2017, we soldextend the 444-room Fairmont Newport Beach, California for net proceeds of $122.8 million, and recognized a net gain on the sale of $44.3 million. The sale did not represent a strategic shift that had a major impact on our business plan or our primary markets, and, therefore, did not qualify as a discontinued operation.
In February 2017, we entered into separate “At the Market” Agreements (the “ATM Agreements”) with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and Wells Fargo Securities, LLC. In accordance with the termsmaturity date of the ATM Agreements, we may from time to time offer and sell our shares of common stock having an aggregate offering price of up to $300.0 million. During 2017, we received gross proceeds of $79.4 million, and paid $1.5 million in costs, from the issuance of 4,876,855 shares of our common stock in connection with the ATM Agreements. As of December 31, 2017, we have $220.6 million available for sale under the ATM Agreements.
In February 2017, our board of directors authorized a share repurchase plan to acquire up to $300.0 million of our common and preferred stock. As of December 31, 2017, no shares of either our common or preferred stock have been
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repurchased. Future purchases will depend on various factors, including our capital needs, as well as our common and preferred stock price.
In June 2017, we sold the 199-room Marriott Park City, Utah for net proceeds of $27.0 million, and recognized a net gain on the sale of $1.2 million. The sale did not represent a strategic shift that had a major impact on our business plan or our primary markets, and, therefore, did not qualify as a discontinued operation.
In July 2017, we purchased the newly-developed 175-room Oceans Edge Hotel & Marina in Key West, Florida for a net purchase price of $173.9 million, including prorations. The purchase of the hotel included a marina, wet and dry boat slips and other customary marina amenities. We incurred and expensed acquisition related costs during 2017 of $0.7 million.
During the third quarter of 2017, four of our 25 hotels were impacted to varying degrees by Hurricanes Harvey and Irma: the Hilton North Houston; the Marriott Houston; the Oceans Edge Hotel & Marina; and the Renaissance Orlando at SeaWorld®. In August 2017, Hurricane Harvey attained Category 4 intensity as it made landfall in the Eastern and Southern United States, inflicting widespread damage in Texas, among other areas. Our two Houston hotels remained open during Hurricane Harvey; however, they both sustained wind-driven rain infiltration and water damage within some of the guestrooms, meeting space and public areas. In September 2017, Hurricane Irma attained Category 4 intensity as it made landfall in Florida, inflicting widespread damage, particularly in the Florida Keys, in which our Oceans Edge Hotel & Marina is located. The hotel closed on September 7, 2017, following a mandatory evacuation order, and then partially reopened on September 27, 2017. The property sustained limited damage as a result of Hurricane Irma, and the hotel was able to reopen all guestrooms on October 19, 2017. Finally, our Renaissance Orlando at SeaWorld® hotel in Orlando, Florida remained open and operational during Hurricane Irma and sustained minimal damage.
We maintain customary property, casualty, environmental, flood and business interruption insurance at all of our hotels, the coverage of which is subject to certain limitations including higher deductibles in the event of a named storm. We are evaluating our ability to submit claims at each of the Houston hotels for portions of the costs related to the hurricane. For our Houston hotels, we incurred combined hurricane-related restoration expense of $0.8 million in 2017, which is included in our repairs and maintenance expense in our consolidated statements of operations for the year ended December 31, 2017. The deductibles related to property damage at the Oceans Edge Hotel & Marina are structured on a building by building basis, none of which sustained enough damage to exceed their deductibles. In 2017, we incurred hurricane-related restoration expense of $0.8 million for the Oceans Edge Hotel & Marina, along with $0.1 million for the Renaissance Orlando at SeaWorld®, both of which are included in our repairs and maintenance expense in our consolidated statements of operations for the year ended December 31, 2017. Should we incur additional hurricane-related costs in the future for any of these four hotels, additional expense will be recognized at that time.
In addition, we filed a claim under our business interruption insurance policy for business profits lost at the Oceans Edge Hotel & Marina as a result of the damage suffered by Hurricane Irma. Once the claim is settled with the Company’s insurance carriers, the payments, if any, will be recorded in the period or periods in which they are received.
In the aftermath of Hurricane Harvey, combined with continued operational declines due to weakness in the Houston market, and in accordance with the Property, Plant and Equipment Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), we identified indicators of impairment and reviewed our two Houston hotels for possible impairment. Based on each hotel’s undiscounted cash flow analysis, which took into account each hotel’s expected cash flow from operations, anticipated holding period and estimated proceeds from disposition, we determined that neither hotel’s carrying value was fully recoverable. As such, during 2017, we recorded a total impairment charge of $40.1 million, including $31.0 million for the Hilton North Houston and $9.1 million for the Marriott Houston, which is included in impairment loss on our consolidated statements of operations for the year ended December 31, 2017.
In November 2017, we refinanced our existing $219.6 million loanmortgage secured by the Hilton San Diego Bayfront with a new $220.0 million loan. The new loan has an initial maturity date offrom December 2020 and three one-year extension options, subjectto December 2021. Finally, in December 2020, we satisfied all of our obligations related to the satisfaction$77.2 million mortgage secured by the Hilton Times Square by assigning our leasehold interest in the hotel to the mortgage holder in addition to other concessions.
For more details on our 2020 debt transactions, see “Liquidity and Capital Resources” below.
Stock Repurchase Program and Common Stock Dividends.To preserve additional liquidity, during 2020, we temporarily suspended both our stock repurchase program and our common stock quarterly dividends. During the first quarter of certain conditions. The new loan is interest only and provides for a floating interest rate of one-month LIBOR plus 105 basis points with a 25 basis point increase during the final one-year extension period, if extended. The new loan replaced the existing loan that was scheduled to mature in August 2019 and had a floating interest rate of one-month LIBOR plus 225 basis points.
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As of December 31, 2017, the weighted average term to maturity2020, we repurchased 9,770,081 shares of our debt is approximately five years, and 77.8%common stock under our stock repurchase program at an average purchase price of $10.61 per share. Approximately $400.0 million of authorized capacity remains under our debt, includingstock repurchase program. Future repurchases will depend on the effects of interest rate swapthe COVID-19 pandemic and various other factors, including our obligations under our various financing agreements is fixed rate with a weighted average interest rate of 4.5%. The weighted average interest rate on alland capital needs, as well as the price of our common and preferred stock. Prior to temporarily suspending our quarterly common stock dividends, on April 15, 2020, we paid our previously announced first quarter dividends and distributions which totaled $14.0 million, including $10.8 million paid to our common stockholders. The resumption in quarterly common dividends will be determined by our board of directors after considering our obligations under our various financing agreements, projected taxable income, compliance with our debt which includescovenants, long-term operating projections, expected capital requirements and risks affecting our variable-rate debt obligation based on the variable rate at December 31, 2017, is 4.1%.business.
Operating Activities
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
| Room revenue, which is the product of the number of rooms sold and the average daily room rate, or “ADR,” as defined below; |
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| Food and beverage revenue, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and |
| Other operating revenue, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone/internet, parking, spa, |
Expenses. Our expenses consist of the following:
| Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room |
| Food and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage |
| Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities and franchise |
| Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, however property tax is subject to regular revaluations based on the specific tax regulations and practices of each |
| Other property-level expenses, which includes our property-level general and administrative expenses, such as payroll, benefits and |
| Corporate overhead expense, which includes our corporate-level expenses, such as payroll, benefits and |
| Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment (“FF |
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| Impairment |
Other Revenue and Expense. Other revenue and expense consists of the following:
| Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts, |
| Interest expense, which includes interest expense incurred on our outstanding fixed and |
● | Gain on sale of assets, which includes the gains we recognized on our hotel sales that do not qualify as discontinued operations; |
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|
|
|
| Income tax (provision) benefit |
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|
|
| Preferred stock dividends, |
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
| Occupancy, which is the quotient of total rooms sold divided by total rooms available; |
| Average daily room rate |
| Revenue per available room |
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| Comparable RevPAR, which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale, those hotels that are undergoing a material renovation or repositioning, those hotels whose operations have either been temporarily suspended or significantly reduced and those hotels whose room counts have materially changed during either the current or prior year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our “Comparable Portfolio.” Currently, |
| RevPAR index, which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than the average of its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index; |
|
|
| Adjusted |
| Funds from operations (“FFO”) attributable to common stockholders, which is net income (loss), excluding: preferred stock |
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| Adjusted FFO attributable to common stockholders, which is FFO attributable to common stockholders adjusted to exclude: |
Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
| Demand. The demand for lodging generally fluctuates with the overall economy. In |
| Supply. The addition of new competitive hotels affects the ability of existing hotels to absorb demand for lodging and, therefore, impacts the ability to drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. |
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| Revenues and |
With respect to improving RevPAR index, we continually work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Increased capital investment in our properties may lead to short-term revenue disruption and negatively impact RevPAR index. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses such as housekeeping, labor and utilities expense. Our Comparable Portfolio RevPAR index increased 180 basis points in 2017 as compared to 2016. The increase in our Comparable Portfolio RevPAR index was due in part to increased rates at our Boston Park Plaza and Wailea Beach Resort post-repositioning and at our Hyatt Regency Newport Beach due to less competition from area hotels under renovation, along with a strong group base that allowed the hotel to increase rates. These increases were partially offset by decreased rates at our Courtyard by Marriott Los Angeles and Renaissance Los Angeles Airport due to increased competition from area hotels that were newly constructed or under renovation during 2016, and at our Houston hotels due to a weak energy market, a decline in contract business, as well as Hurricane Harvey-related cancellations. In 2016, our Comparable Portfolio RevPAR index decreased by 280 basis points as compared to 2015 due in part to the extensive repositioning at the Wailea Beach Resort, decreased rates at our Chicago hotels due to a weak market in this area and at our Houston hotels due to a weak energy market and loss of contract business.
We continue to work with our operators to identify operational efficiencies designed to reduce expenses while minimally affecting guest experience and hotel employee satisfaction. Key asset management initiatives include optimizing hotel staffing levels, increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, and selectively combining certain food and beverage outlets. Our operational efficiency initiatives may be difficult to implement, as most categories of variable operating expenses, such as utilities and housekeeping labor costs, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. We have experienced, either currently or in the past, increases in hourly wages, employee benefits, utility costs and property insurance, which have negatively affected our operating margins. Moreover, there are limits to how far our operators can reduce expenses without affecting brand standards or the competitiveness of our hotels.
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Operating Results. The following table presents our operating results for our total portfolio for the years ended December 31, 20172020 and 2016,2019, including the amount and percentage change in the results between the two periods.
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| 2020 |
| 2019 |
| Change $ |
| Change % | ||||||||||||||||
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|
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| ||||||||||||
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| 2017 |
| 2016 |
| Change $ |
| Change % | ||||||||||||||||
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| (dollars in thousands, except statistical data) |
| |||||||||||||||||||||
| | (in thousands, except statistical data) |
| |||||||||||||||||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Room |
| $ | 829,320 |
| $ | 824,340 |
| $ | 4,980 |
| 0.6 | % | | $ | 169,522 | | $ | 767,392 | | $ | (597,870) | | (77.9) | % |
Food and beverage |
|
| 296,933 |
|
| 294,415 |
|
| 2,518 |
| 0.9 | % | | | 54,900 | |
| 272,869 | | | (217,969) | | (79.9) | % |
Other operating |
|
| 67,385 |
|
| 70,585 |
|
| (3,200) |
| (4.5) | % | | | 43,484 | |
| 74,906 | | | (31,422) | | (41.9) | % |
Total revenues |
|
| 1,193,638 |
|
| 1,189,340 |
|
| 4,298 |
| 0.4 | % | | | 267,906 | |
| 1,115,167 | | | (847,261) | | (76.0) | % |
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Hotel operating |
|
| 686,604 |
|
| 687,176 |
|
| (572) |
| (0.1) | % | | | 299,797 | |
| 644,748 | | | (344,951) | | (53.5) | % |
Other property-level expenses |
|
| 138,525 |
|
| 142,742 |
|
| (4,217) |
| (3.0) | % | | | 49,854 | |
| 130,321 | | | (80,467) | | (61.7) | % |
Corporate overhead |
|
| 28,817 |
|
| 25,991 |
|
| 2,826 |
| 10.9 | % | | | 28,149 | |
| 30,264 | | | (2,115) | | (7.0) | % |
Depreciation and amortization |
|
| 158,634 |
|
| 163,016 |
|
| (4,382) |
| (2.7) | % | | | 137,051 | | | 147,748 | | | (10,697) | | (7.2) | % |
Impairment loss |
|
| 40,053 |
|
| — |
|
| 40,053 |
| 100.0 | % | ||||||||||||
Impairment losses | | | 146,944 | |
| 24,713 | | | 122,231 | | 494.6 | % | ||||||||||||
Total operating expenses |
|
| 1,052,633 |
|
| 1,018,925 |
|
| 33,708 |
| 3.3 | % | | | 661,795 | |
| 977,794 | | | (315,999) | | (32.3) | % |
Operating income |
|
| 141,005 |
|
| 170,415 |
|
| (29,410) |
| (17.3) | % | ||||||||||||
| | | | | | | | | | | | | ||||||||||||
Interest and other income |
|
| 4,340 |
|
| 1,800 |
|
| 2,540 |
| 141.1 | % | | | 2,836 | |
| 16,557 | | | (13,721) | | (82.9) | % |
Interest expense |
|
| (51,766) |
|
| (50,283) |
|
| (1,483) |
| (2.9) | % | | | (53,307) | |
| (54,223) | | | 916 | | 1.7 | % |
Loss on extinguishment of debt |
|
| (824) |
|
| (284) |
|
| (540) |
| (190.1) | % | ||||||||||||
Gain on sale of assets |
|
| 45,474 |
|
| 18,413 |
|
| 27,061 |
| 147.0 | % | | | 34,298 | |
| 42,935 | | | (8,637) | | (20.1) | % |
Income before income taxes and discontinued operations |
|
| 138,229 |
|
| 140,061 |
|
| (1,832) |
| (1.3) | % | ||||||||||||
Income tax benefit, net |
|
| 7,775 |
|
| 616 |
|
| 7,159 |
| 1,162.2 | % | ||||||||||||
Income from continuing operations |
|
| 146,004 |
|
| 140,677 |
|
| 5,327 |
| 3.8 | % | ||||||||||||
Income from discontinued operations |
|
| 7,000 |
|
| — |
|
| 7,000 |
| 100.0 | % | ||||||||||||
NET INCOME |
|
| 153,004 |
|
| 140,677 |
|
| 12,327 |
| 8.8 | % | ||||||||||||
Income from consolidated joint venture attributable to noncontrolling interest |
|
| (7,628) |
|
| (6,480) |
|
| (1,148) |
| (17.7) | % | ||||||||||||
Preferred stock dividends and redemption charge |
|
| (12,830) |
|
| (15,964) |
|
| 3,134 |
| 19.6 | % | ||||||||||||
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | 132,546 |
| $ | 118,233 |
| $ | 14,313 |
| 12.1 | % | ||||||||||||
Gain on extinguishment of debt, net | | | 6,146 | | | — | | | 6,146 | | 100.0 | % | ||||||||||||
(Loss) income before income taxes | | | (403,916) | |
| 142,642 | | | (546,558) | | (383.2) | % | ||||||||||||
Income tax (provision) benefit, net | | | (6,590) | |
| 151 | |
| (6,741) | | (4,464.2) | % | ||||||||||||
NET (LOSS) INCOME | | | (410,506) | |
| 142,793 | | | (553,299) | | (387.5) | % | ||||||||||||
Loss (income) from consolidated joint venture attributable to noncontrolling interest | | | 5,817 | |
| (7,060) | |
| 12,877 | | 182.4 | % | ||||||||||||
Preferred stock dividends | | | (12,830) | |
| (12,830) | | | — | | ��� | % | ||||||||||||
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (417,519) | | $ | 122,903 | | $ | (540,422) | | (439.7) | % |
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Operating Statistics. The following table presents our operating results for our total portfolio for the years ended December 31, 2016 and 2015, including the amount and percentage change in the results between the two periods.
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| 2016 |
| 2015 |
| Change $ |
| Change % | ||||||
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| (dollars in thousands, except statistical data) |
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REVENUES |
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Room |
| $ | 824,340 |
| $ | 874,117 |
| $ | (49,777) |
| (5.7) | % | ||
Food and beverage |
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| 294,415 |
|
| 293,892 |
|
| 523 |
| 0.2 | % | ||
Other operating |
|
| 70,585 |
|
| 81,171 |
|
| (10,586) |
| (13.0) | % | ||
Total revenues |
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| 1,189,340 |
|
| 1,249,180 |
|
| (59,840) |
| (4.8) | % | ||
OPERATING EXPENSES |
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|
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Hotel operating |
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| 687,176 |
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| 728,357 |
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| (41,181) |
| (5.7) | % | ||
Other property-level expenses |
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| 142,742 |
|
| 142,332 |
|
| 410 |
| 0.3 | % | ||
Corporate overhead |
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| 25,991 |
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| 33,339 |
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| (7,348) |
| (22.0) | % | ||
Depreciation and amortization |
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| 163,016 |
|
| 164,716 |
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| (1,700) |
| (1.0) | % | ||
Total operating expenses |
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| 1,018,925 |
|
| 1,068,744 |
|
| (49,819) |
| (4.7) | % | ||
Operating income |
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| 170,415 |
|
| 180,436 |
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| (10,021) |
| (5.6) | % | ||
Interest and other income |
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| 1,800 |
|
| 3,885 |
|
| (2,085) |
| (53.7) | % | ||
Interest expense |
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| (50,283) |
|
| (66,516) |
|
| 16,233 |
| 24.4 | % | ||
Loss on extinguishment of debt |
|
| (284) |
|
| (2,964) |
|
| 2,680 |
| 90.4 | % | ||
Gain on sale of assets |
|
| 18,413 |
|
| 226,217 |
|
| (207,804) |
| (91.9) | % | ||
Income before income taxes and discontinued operations |
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| 140,061 |
|
| 341,058 |
|
| (200,997) |
| (58.9) | % | ||
Income tax benefit (provision), net |
|
| 616 |
|
| (1,434) |
|
| 2,050 |
| 143.0 | % | ||
Income from continuing operations |
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| 140,677 |
|
| 339,624 |
|
| (198,947) |
| (58.6) | % | ||
Income from discontinued operations, net of tax |
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| — |
|
| 15,895 |
|
| (15,895) |
| (100.0) | % | ||
NET INCOME |
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| 140,677 |
|
| 355,519 |
|
| (214,842) |
| (60.4) | % | ||
Income from consolidated joint ventures attributable to noncontrolling interests |
|
| (6,480) |
|
| (8,164) |
|
| 1,684 |
| 20.6 | % | ||
Preferred stock dividends and redemption charge |
|
| (15,964) |
|
| (9,200) |
|
| (6,764) |
| (73.5) | % | ||
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | 118,233 |
| $ | 338,155 |
| $ | (219,922) |
| (65.0) | % |
Operating Statistics. The following tables includeincludes comparisons of the key operating metrics. Because the Oceans Edge Hotel & Marina was not open in either 2016 or 2015 and is, therefore non-comparable, we present the operating statistics for our Total Portfolio (27 hotels), our 26 Hotel Portfolio (which excludes the Oceans Edge Hotel & Marina) and our Comparable Portfolio (24 hotels). Operating statistics for our Total Portfolio include prior ownership 2017 resultsmetrics for the Oceans Edge Hotel & Marina, acquired by us in July 2017.17 Hotels.
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| Occ% |
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| RevPAR |
| Occ% |
| ADR |
| RevPAR |
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17 Hotels | | 22.5 | % | $ | 204.52 | | $ | 46.02 |
| 83.9 | % | $ | 240.51 | | $ | 201.79 | | (6,140) | bps | (15.0) | % | (77.2) | % |
Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:
● | COVID-19: In response to the COVID-19 pandemic, we temporarily suspended operations at 14 of the 17 Hotels during 2020. As of December 31, 2020, we have resumed operations at 12 hotels, resulting in a total of 15 open hotels at the end of 2020; however, all operating hotels are running at significantly reduced capacity, with limited food and beverage and ancillary offerings. As of December 31, 2020, two of the 17 Hotels remain closed, the Hilton Garden Inn Chicago Downtown/Magnificent Mile and the Renaissance Westchester. As a result, our revenues and operating expenses for the year ended December 31, 2020 have been severely impacted as hotel demand has been decimated by the COVID-19 pandemic. |
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The following table includes details regarding our open hotels:
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| ADR |
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Total Portfolio |
| 82.4 | % | $ | 209.06 |
| $ | 172.27 |
| N/A |
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| N/A |
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| N/A |
| N/A |
| N/A |
| N/A |
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26 Hotel Portfolio |
| 82.5 | % | $ | 208.84 |
| $ | 172.29 |
| 82.3 | % | $ | 202.25 |
| $ | 166.45 |
| 20 | bps | 3.3 | % | 3.5 | % |
Comparable Portfolio |
| 82.9 | % | $ | 211.30 |
| $ | 175.17 |
| 82.7 | % | $ | 204.45 |
| $ | 169.08 |
| 20 | bps | 3.4 | % | 3.6 | % |
| | | | | | | | | | | | | | | |||||||||
Hotels Open During All of the | | Hotels Open During All or a Portion of the | |||||||||||||||||||||
First Quarter 2020 | | Second Quarter 2020 | | Third Quarter 2020 | | Fourth Quarter 2020 | |||||||||||||||||
Hotel | Number of Rooms | | Hotel | Number of Rooms | | Hotel | Number of Rooms | | Hotel | Number of Rooms | |||||||||||||
1 | Boston Park Plaza | 1,060 | | 1 | Boston Park Plaza | 1,060 | | 1 | Boston Park Plaza | 1,060 | | 1 | Boston Park Plaza | 1,060 | |||||||||
2 | Embassy Suites La Jolla | 340 | | 2 | Embassy Suites La Jolla | 340 | | 2 | Embassy Suites La Jolla | 340 | | 2 | Embassy Suites La Jolla | 340 | |||||||||
3 | Renaissance Long Beach | 374 | | 3 | Renaissance Long Beach | 374 | | 3 | Renaissance Long Beach | 374 | | 3 | Renaissance Long Beach | 374 | |||||||||
4 | Embassy Suites Chicago | 368 | | 4 | Oceans Edge Resort & Marina | 175 | | 4 | Oceans Edge Resort & Marina | 175 | | 4 | Oceans Edge Resort & Marina | 175 | |||||||||
5 | Hyatt Centric Chicago Magnificent Mile | 419 | | 5 | | — | | 5 | Embassy Suites Chicago | 368 | | 5 | Embassy Suites Chicago | 368 | |||||||||
6 | Renaissance Westchester | 348 | | 6 | | — | | 6 | Marriott Boston Long Wharf | 415 | | 6 | Marriott Boston Long Wharf | 415 | |||||||||
7 | | — | | 7 | | — | | 7 | Hilton New Orleans St. Charles | 252 | | 7 | Hilton New Orleans St. Charles | 252 | |||||||||
8 | | — | | 8 | | — | | 8 | Hyatt Centric Chicago Magnificent Mile | 419 | | 8 | Hyatt Centric Chicago Magnificent Mile | 419 | |||||||||
9 | | — | | 9 | | — | | 9 | JW Marriott New Orleans | 501 | | 9 | JW Marriott New Orleans | 501 | |||||||||
10 | | — | | 10 | | — | | 10 | Hilton San Diego Bayfront | 1,190 | | 10 | Hilton San Diego Bayfront | 1,190 | |||||||||
11 | | — | | 11 | | — | | 11 | Renaissance Washington DC | 807 | | 11 | Renaissance Washington DC | 807 | |||||||||
12 | | — | | 12 | | — | | 12 | | — | | 12 | Hyatt Regency San Francisco | 821 | |||||||||
13 | | — | | 13 | | — | | 13 | | — | | 13 | Renaissance Orlando at SeaWorld® | 781 | |||||||||
14 | | — | | 14 | | — | | 14 | | — | | 14 | The Bidwell Marriott Portland | 258 | |||||||||
15 | | — | | 15 | | — | | 15 | | — | | 15 | Wailea Beach Resort | 547 | |||||||||
16 | | — | | 16 | | — | | 16 | | — | | 16 | | — | |||||||||
17 | | — | | 17 | | — | | 17 | | — | | 17 | | — | |||||||||
| Total Number of Rooms | 2,909 | | | Total Number of Rooms | 1,949 | | | Total Number of Rooms | 5,901 | | | Total Number of Rooms | 8,308 |
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26 Hotel Portfolio |
| 82.3 | % | $ | 202.25 |
| $ | 166.45 |
| 82.7 | % | $ | 199.91 |
| $ | 165.33 |
| (40) | bps | 1.2 | % | 0.7 | % | |||||||
Comparable Portfolio |
| 82.7 | % | $ | 204.45 |
| $ | 169.08 |
| 83.2 | % | $ | 201.82 |
| $ | 167.91 |
| (50) | bps | 1.3 | % | 0.7 | % |
● | Property Dispositions: We sold the Renaissance Harborplace, the Renaissance Los Angeles Airport and the Courtyard by Marriott Los Angeles in July 2020, December 2020 and October 2019, respectively. In addition, in December 2020, we assigned our leasehold interest in the Hilton Times Square to its mortgage holder. As a result of these four hotel dispositions (the “Four Disposed Hotels”), our revenues and operating expenses decreased for the year ended December 31, 2020 as compared to the same period in 2019. |
Room revenueRevenue. Room revenue increased $5.0decreased $597.9 million, or 0.6%77.9%, in 20172020 as compared to 2016 as follows:
The Oceans Edge Hotel & Marina generated $3.6 million in room revenue during 2017. Both revenues and expenses at the Oceans Edge Hotel & Marina were negatively impacted by Hurricane Irma, as noted above in the 2017 Highlights.
Room revenue generated by the same 26 hotels we owned during both 2017 and 2016 (our “26 Hotel Portfolio”), increased $26.1 million in 2017 as compared to 2016 due to an ADR increase of $25.9 million, combined with an
44
occupancy increase of $0.2 million. The increase in ADR was primarily driven by strong ADR growth post-repositioning at both the Boston Park Plaza and the Wailea Beach Resort. During 2016, a combined total of 33,165 room nights were out of service at these two hotels, displacing approximately $8.0 million in room revenue based on the hotels achieving a potential combined 78.7% occupancy rate and combined RevPAR of $180.20 without the renovations. Strong ADR growth was also achieved in Washington DC due to improved convention calendars, and as a result of the Presidential inauguration and the Women’s March on Washington earlier in the year. In addition, despite a weak energy market and convention calendar combined with Hurricane Harvey-related cancellations, our two Houston hotels ended 2017 with positive ADR growth as Hurricane Harvey relief groups helped to increase demand for hotel rooms in the city. These increases in ADR were partially offset by weak markets and convention calendars in Baltimore and New Orleans, and increased competition in Chicago, New York City and Portland.
The increase in our 26 Hotel Portfolio’s occupancy during 2017 as compared to 2016 was caused by 26,107 more transient room nights partially offset by 25,091 fewer group room nights. The increase in transient room nights was caused by significant increases at both the Boston Park Plaza and the Wailea Beach Resort post-repositioning, and in Orlando due to increased leisure demand from new attractions at local theme parks. The decrease in group room nights was caused by weak convention calendars in Orlando, San Francisco and San Diego. These decreases were partially offset by increases in group room nights at both the Boston Park Plaza and the Wailea Beach Resort post-repositioning. Finally, despite Hurricane relief-related ADR growth during the fourth quarter of 2017, both group and transient room nights decreased at our Houston hotels due to a weak energy market combined with Hurricane Harvey-related cancellations and a decline in contract business.
We sold two hotels in 2017, and one hotel in 2016: the Fairmont Newport Beach in February 2017; the Marriott Park City in June 2017; and the Sheraton Cerritos in May 2016 (the “Three Sold Hotels”). The sales of the Three Sold Hotels caused room revenue to decrease by $24.7 million in 2017 as compared to 2016.
Room revenue decreased $49.8 million, or 5.7%, in 2016 as compared to 20152019 as follows:
● | Room revenue at the 17 hotels decreased $510.8 million. |
● | The dispositions of the Four Disposed Hotels caused room revenue to decrease by $87.1 million. |
We sold one hotel each year during 2016 and 2015: the Sheraton Cerritos in May 2016; and the Doubletree Guest Suites Times Square in December 2015 (the “Two Sold Hotels”). The sale of the Two Sold Hotels caused room revenue to decrease by $59.6 million in 2016 as compared to 2015.
Room revenue generated by the same 28 hotels we owned during both 2016 and 2015 (our “Prior Year Existing Portfolio”), increased $9.8 million during 2016 as compared to 2015 due to an ADR increase of $12.2 million, partially offset by an occupancy decrease of $2.4 million. The increase in ADR was primarily driven by strong demand, allowing for double-digit ADR growth in San Francisco (primarily due to the Super Bowl, which took place in the San Francisco Bay Area during the first quarter of 2016), Los Angeles and Orlando. These increases to ADR were partially offset by a weak Chicago market, increased competition in New York City and weak energy markets in both New Orleans and Houston, combined with a loss of contract business in Houston.
Although we increased our total number of rooms sold by 4,565 during 2016 as compared to 2015, occupancy decreased year-over-year as we increased our total rooms available by 18,971 due to 2016 being a leap year and due to the addition of rooms resulting from repositioning and renovation at the Boston Park Plaza and the Hilton Times Square. The overall increase in our total rooms sold during 2016 as compared to 2015 was comprised of an 8,294 increase in group room nights, partially offset by a 3,729 decrease in transient room nights. Group room nights increased in Orlando and San Diego due to strong convention activity in these locales. Overall, transient room nights decreased due to a weak Chicago market, displacement from the complete hotel repositioning at the Wailea Beach Resort, and weak energy markets in both New Orleans and Houston.
During both 2016 and 2015, the most significant renovation impacts to room revenue occurred at the Boston Park Plaza and the Wailea Beach Resort. During 2016, a combined total of 33,165 room nights were out of service at these two hotels, displacing approximately $8.0 million in room revenue based on the hotels achieving a combined potential 78.7% occupancy rate and combined RevPAR of $180.20 without the renovations. During 2015, a combined total of 18,607 room nights were out of service at these two hotels, displacing approximately $2.9 million in room revenue based on the hotels achieving a combined potential 75.9% occupancy rate and combined RevPAR of $144.40 without the renovations.
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Food and beverage revenueBeverage Revenue. Food and beverage revenue increased $2.5decreased $218.0 million, or 0.9%79.9%, in 20172020 as compared to 2016 as follows:
The Oceans Edge Hotel & Marina generated $0.5 million in food and beverage revenue during 2017.
Food and beverage revenue generated by our 26 Hotel Portfolio increased $13.0 million in 2017 as compared to 2016 primarily due to increased banquet and outlet revenue at the Boston Park Plaza and the Wailea Beach Resort due to additional restaurant and meeting space options available post-repositioning, as well as at the Hyatt Regency San Francisco due to the redesign of certain restaurant and lounge areas and the introduction of a new grab-and-go concept, and at the Hilton San Diego Bayfront due to a strong convention calendar in the first half of the year, along with an increase in the number of customers utilizing the hotel’s outlets. In addition, banquet revenue increased in 2017 as compared to 2016 at the JW Marriott New Orleans due to increased group spend, and at the Renaissance Harborplace due to increases in the number of groups. These increases were partially offset by decreased banquet revenue in Orlando due to a strong 2016, as well as in Houston due to a weak market and hurricane-related cancellations, along with at the Marriott Quincy due to renovation of the function space during the first quarter of 2017. In addition, outlet revenue decreased at the Renaissance Washington DC due to the leasing of a previously hotel-run outlet combined with decreased guest capture at the remaining outlets, and at the Marriott Quincy due to a restaurant renovation during the first few months of 2017. In addition, room service revenue decreased at the Hyatt Regency San Francisco due to the restructuring of this dining option in 2016.
The Three Sold Hotels caused food and beverage revenue to decrease by $11.0 million in 2017 as compared to 2016.
Food and beverage revenue increased $0.5 million, or 0.2%, in 2016 as compared to 20152019 as follows:
● | Food and beverage revenue at the 17 Hotels decreased $197.9 million. |
● | The dispositions of the Four Disposed Hotels caused food and beverage revenue to decrease by $20.1 million. |
Food and beverage revenue generated by our Prior Year Existing Portfolio increased $7.4 million in 2016 as compared to 2015 primarily due to increased banquet and outlet revenue caused by the increase in group room nights. In addition, outlet revenue increased, the majority of which occurred at the Hyatt Regency San Francisco due to the redesign of certain restaurant and lounge areas and the introduction of a new grab-and-go concept, as well as at the Boston Park Plaza due to additional restaurant options available post-repositioning. Food and beverage revenue also increased at the Renaissance Harborplace during 2016 as compared to 2015, as the hotel’s operations suffered during 2015 due to civil unrest in Baltimore. These increases in food and beverage revenue were partially offset by a decrease in banquet revenue at the Hilton Times Square due to the conversion of meeting space to guest rooms in 2016, and a decrease in room service revenue at the Hyatt Regency San Francisco due to the restructuring of this dining option in 2016.
The increase in our Prior Year Existing Portfolio’s food and beverage revenue was partially offset by the Two Sold Hotels, which decreased food and beverage revenue by $6.9 million in 2016 as compared to 2015.
Other operating revenueOperating Revenue. Other operating revenue decreased $3.2$31.4 million, or 4.5%41.9%, in 20172020 as compared to 2016 as follows:
The Three Sold Hotels caused other operating revenue to decrease by $2.5 million in 2017 as compared to 2016.
Other operating revenue in our 26 Hotel Portfolio decreased $1.7 million in 2017 as compared to 2016, primarily due to a $5.0 million performance guarantee received in 2016 from the manager of the Wailea Beach Resort. Marriott, the hotel manager, provided the performance guarantee as operational support for our significant repositioning of the hotel. Other operating revenue in our 26 Hotel Portfolio also decreased due to decreases in parking revenue and telephone/internet revenue. These decreases were partially offset by increased attrition and cancellation revenues due to our managers taking a more aggressive stance on collecting these fees, along with increased resort fees and tenant lease revenue (including the year-over-year effect of our 2016 write-off of $0.1 million for three above/below market lease intangible assets/liabilities due to the renovation-related closure of a tenant’s space at the Wailea Beach Resort), combined with increased retail revenue at the Wailea Beach Resort.
The Oceans Edge Hotel & Marina generated $1.0 million in other operating revenue during 2017.
46
Other operating revenue decreased $10.6 million, or 13.0%, in 2016 as compared to 20152019 as follows:
● | Other operating revenue at the 17 Hotels decreased $26.9 million. The decrease in other operating revenue at the 17 Hotels was partially offset by a $10.7 million reimbursement to offset net losses at the Hyatt Regency San Francisco as stipulated by the hotel’s operating lease agreement. |
● | The dispositions of the Four Disposed Hotels caused other operating revenue to decrease by $4.5 million. |
The Two Sold Hotels decreased other operating revenue by $7.1 million in 2016 as compared to 2015. In addition, BuyEfficient, which we sold in September 2015, decreased other operating revenue by $5.7 million in 2016 as compared to 2015.
Other operating revenue in our Prior Year Existing Portfolio increased $2.2 million in 2016 as compared to 2015. A substantial portion of our other operating revenue in 2016 resulted from a $5.0 million performance guarantee provided by the manager of the Wailea Beach Resort. Marriott, the hotel manager, provided the performance guarantee as operational support for our significant repositioning of the hotel. Additionally, other operating revenue in our Prior Year Existing Portfolio increased in 2016 as compared to 2015 due to increases in resort fees, as well as attrition and cancellation revenue. Partially offsetting these increases to other operating revenue, our Prior Year Existing Portfolio recognized decreases in parking revenue, telephone/internet revenue, and spa revenue. In addition, tenant lease revenue decreased as 2016 includes the renovation-related write-off of $0.1 million for three above/below market lease intangible assets/liabilities at the Wailea Beach Resort, as compared to the write off of a total of $1.8 million in below market lease intangible liabilities due to the termination of two tenant leases at the Boston Park Plaza in 2015. Additionally, other operating revenue decreased during 2016 as compared to 2015 due to our recognition of $0.6 million in business interruption proceeds during 2015 for our Renaissance Harborplace related to a settled claim filed in response to the disruption caused at the hotel during the periods of civil unrest in Baltimore earlier in the year.
Hotel operating expensesOperating Expenses.Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance, and other hotel operating expenses decreased $0.6$345.0 million, or 0.1%53.5%, in 20172020 as compared to 2016 as follows:
The Three Sold Hotels caused hotel operating expenses to decrease by $24.3 million in 2017 as compared 2016.
The Oceans Edge Hotel & Marina generated $4.2 million in hotel operating expenses in 2017, including $0.8 million in Hurricane Irma-related restoration expenses which are included in repairs and maintenance expense in our consolidated statements of operations.
Hotel operating expenses in our 26 Hotel Portfolio increased $19.6 million in 2017 as compared to 2016. This increase is primarily related to the corresponding increases in room revenue, food and beverage revenue and retail revenue. In addition, hotel operating expenses in our 26 Hotel Portfolio increased in 2017 as compared to 2016 due to the following increased expenses: advertising and promotion at both the Boston Park Plaza and the Wailea Beach Resort to promote the hotels post-repositioning; repairs and maintenance due to a total of $0.9 million in hurricane-related restoration expenses recorded for the Houston hotels and the Renaissance Orlando at SeaWorld®, along with increased payroll and related costs in this department and increased building and elevator maintenance; utilities due to increased fuel, water and sewer costs; franchise costs due to the increase in revenues; property taxes due to the year-over-year effect of the variance in assessment decreases received at our three Chicago hotels and the Renaissance Washington DC, combined with increased assessments received in 2017 at several of our hotels, partially offset by decreased appeal fees; and Hawaii general excise tax (“GET”) due to higher revenue at the Wailea Beach Resort post-repositioning. These increases in our 26 Hotel Portfolio’s hotel operating expenses were slightly offset by decreased insurance expense.
Hotel operating expenses decreased $41.2 million, or 5.7%, in 2016 as compared to 20152019 as follows:
The Two Sold Hotels decreased hotel operating expenses by $49.1 million in 2016 as compared to 2015.
Hotel operating expenses in our Prior Year Existing Portfolio increased $7.9 million in 2016 as compared to 2015. This increase in hotel operating expenses is primarily related to the corresponding increased room revenue and food and beverage revenue. In addition, hotel operating expenses in our Prior Year Existing Portfolio increased in 2016 as compared to 2015 due to the following increased expenses: food and beverage due to $1.5 million in severance incurred at several hotels in conjunction with the elimination of various outlets and banquet areas; both advertising and promotion and repairs and maintenance due to increased hotel payroll and related expenses in these two departments, including $0.1 million in severance incurred at one of our hotels; franchise costs due to the increase in revenues; and ground lease expense due to increased percentage rent at several of our hotels caused by the increase in revenues, as well as the expiration of a ground rent abatement given to the Hilton San Diego Bayfront. These increases were partially offset by decreased
● | Hotel operating expenses at the 17 Hotels decreased $300.5 million. Hotel operating expenses in 2020 included $23.1 million of COVID-19-related expenses consisting of additional wages, benefits and severance for furloughed or laid off hotel employees. |
4745
● | The dispositions of the Four Disposed Hotels caused hotel operating expenses to decrease by $44.5 million, which included $7.9 million of COVID-19-related expenses consisting of additional wages, benefits and severance for furloughed or laid off hotel employees. |
telephone/internet expense due to the corresponding decreased telephone/internet revenue, combined with decreased utilities as well as decreased Hawaii GET due to lower revenue at the Wailea Beach Resort while undergoing a complete hotel repositioning. In addition, property taxes decreased in 2016 as compared to 2015 due to refunds received during 2016 at several of our hotels related to prior years, combined with lower current year assessments at our Chicago hotels.
Other property-level expensesProperty-Level Expenses.Other property-level expenses decreased $4.2$80.5 million, or 3.0%61.7%, in 20172020 as compared to 2016 as follows:
The Three Sold Hotels caused other property-level expenses to decrease by $5.1 million in 2017 as compared to 2016.
The Oceans Edge Hotel & Marina generated $0.8 million in other property-level expenses during 2017.
Other property-level expenses in our 26 Hotel Portfolio increased $0.1 million in 2017 as compared to 2016, primarily due to increases in the following expenses caused by higher revenue: basic and incentive management fees; payroll and related costs; supplies; credit and collection expenses; employee relocation and training; travel; and permits and licenses. Partially offsetting these increased expenses, legal fees decreased in 2017 as compared to 2016 as during 2016, we recognized $1.4 million to terminate tenant leases at two hotels, and $0.4 million related to a hotel wage measure that increased payroll costs at one of our hotels. In addition, contract and professional fees and purchase rebates decreased in 2017 as compared to 2016.
Other property-level expenses increased $0.4 million, or 0.3%, in 2016 as compared to 20152019 as follows:
● | Other property-level expenses at the 17 Hotels decreased $68.9 million. Other property-level expenses in 2020 included a credit of $2.4 million consisting of $4.9 million in employee retention tax credits and various industry grants received by our hotels, net of additional COVID-19-related wages, benefits and severance for furloughed or laid off hotel employees. |
● | The dispositions of the Four Disposed Hotels caused other property-level expenses to decrease by $11.6 million, which included $0.5 million of COVID-19-related expenses consisting of additional wages, benefits and severance for furloughed or laid off hotel employees, net of $0.3 million in employee retention tax credits received by our hotels. |
Other property-level expenses in our Prior Year Existing Portfolio increased $12.2 million in 2016 as compared to 2015, primarily due to increases in the following expenses caused by higher room revenue: payroll and related expenses; management fees; credit and collection expenses; and supplies. In addition, legal fees increased as the Company recognized $1.4 million in 2016 to terminate tenant leases at two hotels, and $0.4 million related to a hotel wage measure that increased payroll costs at one of our hotels. In addition, contract and professional fees also increased in 2016 as compared to 2015, partially offset by decreased employee training.
The Two Sold Hotels and BuyEfficient decreased other property-level expenses by $6.5 million and $5.3 million, respectively, in 2016 as compared to 2015.
Corporate overhead expenseOverhead Expense. Corporate overhead expense increased $2.8 million, or 10.9%, in 2017 as compared to 2016, primarily due to increased payroll and related costs, deferred stock compensation expense, contract and professional fees, due diligence costs (the majority of which relates to our purchase of the Oceans Edge Hotel & Marina in July 2017), Hawaii GET related to the 2017 receipt of a $5.0 million performance guarantee provided by the manager of the Wailea Beach Resort and donations. These increases were partially offset by decreased travel and entity-level state franchise and minimum taxes.
Corporate overhead expense decreased $7.3$2.1 million, or 22.0%7.0%, in 2016during 2020 as compared to 2015, primarily2019, due to decreased payroll and related expenses, deferred stock compensation expense, legal expense, contract and professional fees and donations. The decreases in payroll and related costs and deferred stock compensation expense were primarily due to $6.9including the recognition of $0.2 million in costs recognized in January 2015 related to the departure of our former chief executive officer.employee retention tax credits, and decreased travel expenses. These decreasesdecreased expenses were partially offset by increased bad debt expense, due diligence expense, and employee relations, recruitment and relocation expense.amortization of deferred stock compensation.
Depreciation and amortization expenseAmortization Expense. Depreciation and amortization expense decreased $4.4$10.7 million, or 2.7%7.2%, in 20172020 as compared to 2016 as follows:
The Three Sold Hotels caused depreciation and amortization to decrease by $6.1 million in 2017 as compared to 2016.
The Oceans Edge Hotel & Marina caused depreciation and amortization to increase by $1.5 million in 2017.
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Depreciation and amortization expense in our 26 Hotel Portfolio increased $0.2 million in 2017 as compared to 2016, due to additional depreciation recognized at the Boston Park Plaza and the Wailea Beach Resort post-repositioning, partially offset by decreases in depreciation due to fully depreciated assets, as well as the year-over-year effect of our 2016 write-off of $0.3 million for three in-place lease intangible assets due to the renovation-related closure of a tenant’s space at the Wailea Beach Resort.
Depreciation and amortization expense decreased $1.7 million, or 1.0%, in 2016 as compared to 20152019 as follows:
● | Depreciation and amortization expense generated by the 17 Hotels remained consistent as decreased expenses resulting from our $15.4 million impairment of the depreciable assets at one of our hotels during 2020 and from fully depreciated assets was mostly offset by increased depreciation and amortization at our newly renovated hotels. |
● | The dispositions of the Four Disposed Hotels caused depreciation and amortization to decrease by $10.7 million due in part to our $103.6 million impairment of the depreciable assets at the Hilton Times Square and the Renaissance Harborplace during 2020. |
The Two Sold Hotels and BuyEfficient decreased depreciation and amortization by $7.0 million and $0.7 million, respectively, in 2016 as compared to 2015.
Depreciation and amortization expense in our Prior Year Existing Portfolio increased $6.0Impairment Losses. Impairment losses totaled $146.9 million in 2016 as compared to 2015, due to additional depreciation recognized on hotel renovations2020 and purchases of FF&E for our Prior Year Existing Portfolio. This increase was partially offset by a $0.4 million year-over-year decrease in our write-off of in-place lease intangible assets; we recognized $0.3$24.7 million in the renovation-related write-off of three in-place lease intangible assets in 20162019 as compared to $0.7 million due to the termination of two tenant leases in 2015.follows:
| | | | | | |
| | 2020 | | 2019 | ||
Renaissance Harborplace (1) | | $ | 18,100 | | $ | 24,713 |
Hilton Times Square (2) | | | 107,857 | | | — |
Renaissance Westchester | | | 18,685 | | | — |
Abandoned development costs | | | 2,302 | | | — |
| | $ | 146,944 | | $ | 24,713 |
(1) | We sold the Renaissance Harborplace in July 2020. |
(2) | We assigned our leasehold interest in the Hilton Times Square to its mortgage holder in December 2020. |
Impairment loss. Impairment loss totaled $40.1 million in 2017, and zero in both 2016 and 2015. In the aftermath of Hurricane Harvey, combined with continued operational declines due to weakness in the Houston market, and in accordance with the Property, Plant and Equipment Topic of the FASB ASC, we identified indicators of impairment and reviewed our two Houston hotels for possible impairment. Based on each hotel’s undiscounted cash flow analysis, which took into account each hotel’s expected cash flow from operations, anticipated holding period and estimated proceeds from disposition, we determined that neither hotel’s carrying value was fully recoverable. As such, during 2017, we recorded a total impairment charge of $40.1 million, including $31.0 million for the Hilton North Houston and $9.1 million for the Marriott Houston, which is included in impairment loss on our consolidated statements of operations for the year ended December 31, 2017.
Interest and other incomeOther Income. Interest and other income totaled $4.3decreased $13.7 million, or 82.9%, in 2020 as compared to 2019, due to declines in interest rates, cash account balances and other income. During 2020, we recognized $2.6 million in 2017, $1.8 million in 2016 and $3.9 million in 2015. In 2017, we recognized $3.8 million in interest and miscellaneous income and $0.2 million in energy rebates due to energy efficient renovations at our hotels. In addition,
During 2019, we recognized $0.3 million in earn-out proceeds related to the Royal Palm Miami Beach, which we sold in 2011. With the receipt of the $0.3 million in 2017, the earn-out is complete.
In 2016, we recognized $1.1 million in interest and miscellaneous income and $0.7 million in energy rebates due to energy efficient renovations at our hotels.
In 2015, we recognized $1.6$14.1 million in interest income, on$1.0 million related to an area of protection agreement with Hyatt Corporation for the Preferred Equity Investment, which we sold in July 2015 (seeHyatt Regency San Francisco, $0.9 million related to a contingency funding payment received from the discussion regarding “Income from discontinued operations, netprior owner of tax”). In 2015, we also recognized $0.9one of our hotels, $0.3 million in energy rebates due to energy efficient renovations at our hotels and $0.4$0.3 million in vendor rebates and other interest and miscellaneous income. In addition, in 2015, we recognized a $0.9 million gain due to our receipt of a payment from the 2010 purchase of an unsecured note on a boutique hotel.
Interest expenseExpense. InterestWe incurred interest expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Interest expense on debt and capital lease obligations |
| $ | 46,251 |
| $ | 49,509 |
| $ | 63,677 |
|
Noncash interest on derivatives and capital lease obligations, net |
|
| 3,106 |
|
| (1,426) |
|
| (309) |
|
Amortization of deferred financing fees |
|
| 2,409 |
|
| 2,200 |
|
| 3,148 |
|
Total interest expense |
| $ | 51,766 |
| $ | 50,283 |
| $ | 66,516 |
|
| | | | | | |
| | 2020 | | 2019 | ||
Interest expense on debt and finance lease obligations | | $ | 45,441 | | $ | 45,381 |
Noncash interest on derivatives and finance lease obligations, net | |
| 4,740 | |
| 6,051 |
Amortization of deferred financing costs | |
| 3,126 | |
| 2,791 |
Total interest expense | | $ | 53,307 | | $ | 54,223 |
Interest expense increased $1.5decreased $0.9 million, or 2.9%1.7%, in 20172020 as compared to 20162019 as follows:
Interest expense on our debt and capital lease obligations decreased $3.3 million in 2017 as compared 2016 as a result of lower balances due to monthly amortization and loan repayments during 2016 and 2017. Partially offsetting these decreases, interest expense on our debt and capital lease obligations increased due to higher interest on our variable rate debt, as well as interest on our Senior Notes issued in January 2017 and the cash component of interest on the Courtyard by
49
46
Marriott Los Angeles ground lease, which we reclassified as a capital lease in the third quarter of 2017 (see discussion below).
Noncash interest on derivatives and capital lease obligations, net increased $4.5 million in 2017 as compared to 2016. While the changes in the fair market valuesvalue of our derivatives decreasedand on our finance lease obligations caused interest expense $0.1to decrease $1.1 million and $0.2 million, respectively, in 20172020 as compared to 2016, noncash2019. Noncash interest expense on our capitalfinance lease obligations increased interest expense $4.6 million in 2017 as compareddecreased due to 2016. During 2017, we corrected an immaterial error by reclassifyingour sale of the Courtyard by Marriott Los Angeles ground lease from an operating leasein October 2019. Excluding the impact of these noncash expenses, interest expense would have increased $0.4 million in 2020 as compared to a capital lease2019 due to the lease containing a future purchase right option. Upon examination of this future purchase right option, we determined thatdraw on our credit facility and to the economic disincentive for continuing to leaseamendments on our unsecured debt, which increased the property will be so significant that we will likely exercise the option. This reclassification resulted in a cumulative immaterial increase of $4.5 million to noncash interest expense in 2017. In addition, the noncash componentamount of interest charged on our capital lease obligations increased $0.1 million during 2017term loans and senior notes, as compared to 2016.
Finally, amortization of deferred financing fees increased interest expense by $0.2 million in 2017well as compared to 2016 due to additional fees incurreddefault interest and penalties on our Senior Notes issued in January 2017 and on our refinancing of the debt secured by the Hilton San Diego Bayfront in November 2017.
Interest expenseTimes Square, bank fees and deferred financing costs. These increases were partially offset by decreased $16.2 million, or 24.4%, in 2016 as compared to 2015. Interest expenseinterest on our lower debt and capital lease obligations decreased $14.2 million in 2016 as compared to 2015, as a result of lower balances due to monthly amortization, loan repayments during 2015 and 2016, and lower interest rates from our 2015 and 2016 debt transactions. Partially offsetting these decreases, interest expense on our debt and capital lease obligations increased due to higher interest rates on our variable rate debt, as well as interest on our two unsecured term loans entered into October 2015 and January 2016. debt.
Interest expense related to the amortization of deferred financing fees decreased $0.9 million in 2016 as compared to 2015 primarily due to the accelerated amortization of $0.5 million of deferred financing fees related to our prior credit facility during the second quarter of 2015, as well as to lower amortization resulting from our loan repayments during 2015 and 2016.
Interest expense in 2016 further decreased as compared to 2015 due to a $1.4 million gain we recognized on our interest rate derivatives during 2016 as compared to a $0.3 million gain recognized during 2015.
Our weighted average interest rate per annum, including our variable-ratevariable rate debt obligations,obligation, was approximately 4.09%3.8% and 4.1% at December 31, 2017, 4.29% at December 31, 2016,2020 and 4.45% at December 31, 2015. At December 31, 2017, 20162019, respectively. Approximately 70.6% and 2015, approximately 77.8%, 76.2% and 79.5%, respectively,77.4% of our outstanding notes payable had fixed interest rates, including the effects of interest rate swap agreements.agreements, at December 31, 2020 and 2019, respectively.
For a discussion regarding our 2017, 2016 and 2015 debt transactions, see the discussion included in “Liquidity and Capital Resources—Debt.”
Loss on extinguishment of debt. Loss on extinguishment of debt totaled $0.8 million in 2017, $0.3 million in 2016 and $3.0 million in 2015. In 2017, we recognized a loss of $0.8 million related to our refinancing of the debt secured by the Hilton San Diego Bayfront and a nominal loss related to our repayment of debt secured by the Marriott Boston Long Wharf.
In 2016, we recognized losses of $0.1 million and $0.2 million related to our repayments of debt secured by the Boston Park Plaza and the Renaissance Orlando at SeaWorld®, respectively, as well as a nominal loss related to our repayment of debt secured by the Embassy Suites Chicago.
During 2015, we recognized a loss on extinguishment of debt of $2.9 million related to our repayment of debt secured by the Doubletree Guest Suites Times Square, and a total of $0.1 million related to our repayments of debt secured by six of our hotels: the Marriott Houston; the Marriott Park City; the Marriott Philadelphia; the Marriott Tysons Corner; the Renaissance Harborplace; and the Hilton North Houston.
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Gain on saleSale of assetsAssets. Gain on sale of assets totaled $45.5$34.3 million and $42.9 million in 2017, $18.4 million in 20162020 and $226.2 million in 2015. None of these sales qualified as a discontinued operation. During 2017,2019, respectively. In 2020, we recognized a $44.3$0.2 million net gain on the sale of the Fairmont Newport Beach,Renaissance Harborplace and a $1.2$34.1 million net gain on the sale of the Marriott Park City.Renaissance Los Angeles Airport.
During 2016,In 2019, we recognized an $18.2a $42.9 million net gain on the sale of the Sheraton Cerritos,Courtyard by Marriott Los Angeles.
Gain on Extinguishment of Debt, Net. Gain on extinguishment of debt, net totaled $6.1 million in 2020 and a $0.2 million net gain on the sale of an undeveloped parcel of land.
zero in 2019. During 2015,2020, we recognized an $11.7a gain of $6.4 million net gain onrelated to the sale of BuyEfficient, and a $214.5 million net gain on the saleassignment of the Doubletree Guest SuitesHilton Times Square.Square to the hotel’s mortgage holder. In addition, we recognized a loss of $0.3 million related to the write-off of deferred financing fees associated with repayments of a portion of our unsecured senior notes and the mortgage secured by the Renaissance Washington DC.
Income Tax (Provision) Benefit, Net.Income tax (provision) benefit, (provision), net. Income tax benefit (provision), net totaled a benefit of $7.8 million in 2017, a benefit of $0.6 million in 2016 and a provision of $1.4 million in 2015. was incurred as follows (in thousands):
| | | | | | |
| | 2020 | | 2019 | ||
Current | | $ | 825 | | $ | 839 |
Deferred | | | (7,415) | | | (688) |
Income tax (provision) benefit, net | | $ | (6,590) | | $ | 151 |
We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and the REIT and Operating Partnership may also be subject to various state and local income taxes.
In 2017, we fully released the $13.62020, we recognized a current net income tax benefit of $0.8 million, valuation allowance primarily related to ourresulting from tax credits and refunds, net of combined current federal and state net operating loss carryforwards asincome tax expense. In addition, we determined it was more likely than not that these deferred tax assets will be realized. The decision to release therecorded a full valuation allowance was made after management considered all available evidence, both positive and negative, including but not limited to, historical operating results, cumulative income in recent years and forecasted earnings. The income tax benefit caused by the release in the valuation allowance was partially offset in the fourth quarter of 2017 as we recognized a $4.4$7.4 million charge to income tax expense due to the use of net operating losses in the fourth quarter, and a write-down in the value ofon our deferred tax assets asbecause we can no longer be assured that we will be able to realize these assets due to uncertainties regarding how long the COVID-19 pandemic will last or what the long-term impact will be on our hotel operations.
In 2019, we recognized a current net income tax benefit of December 31, 2017 as a result of$0.8 million, resulting from tax credits and refunds available under the Tax Cuts and& Jobs Act which lowered the corporate tax rates from a maximum rate of 35% to a flat rate2017 and operating loss carryforwards for our taxable entities, net of 21% effective for tax years beginning after December 31, 2017. In addition, during 2017, we recognized combined current federal and state income tax expense of $1.4 million, based on 20172019 projected taxable incomeincome. In 2019, we also recognized a net of operating loss carryforwards for our taxable entities.
As part of our ongoing evaluations of our uncertain tax positions, during 2016, we reversed a $1.5 milliondeferred income tax accrual that we previously recorded during 2013, plus $0.1 million in accrued interest, through the 2016 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset as we recognized combined federal and state income tax expense of $1.0 million based on 2016 projected taxable income net of operating loss carryforwards for our taxable entities.
During 2015, we recognized combined federal and state income tax expenseprovision of $0.7 million related to adjustments to our sale of BuyEfficient. In addition, we recognized $0.7 million based on 2015 projected taxable income net of operating loss carryforwards for our taxable entities.deferred tax assets, net.
(Loss) Income from discontinued operations, net of tax. Though we have not sold any hotels or businesses that qualified as a discontinued operation since 2013, we recognized items relatedConsolidated Joint Venture Attributable to our 2013 sale of the Rochester Portfolio as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| ||||||||||
Gain on sale of hotels and other assets, net |
| $ | 7,000 |
| $ | — |
| $ | 16,000 |
| |||||||
Income tax provision |
|
| — |
|
| — |
|
| (105) |
| |||||||
Income from discontinued operations, net of tax |
| $ | 7,000 |
| $ | — |
| $ | 15,895 |
|
During 2017, we recognized an additional $7.0 million gain related to our 2013 sale of the Rochester Portfolio. Upon sale of the Rochester Portfolio in 2013, we retained a liability not to exceed $14.0 million. The recognition of the $14.0 million liability reduced our gain on the sale of the Rochester Portfolio. In 2014, we were released from $7.0 million of our liability, and we recorded additional gain on the sale, which we included in discontinued operations. During 2017, we determined that our remaining liability was remote based on the requirements of the Contingencies Topic of the FASB ASC. As such, we recorded additional gain on the sale of the Rochester Portfolio of $7.0 million, which is included in discontinued operations for the year ended December 31, 2017. In January 2018, we were officially released from all liability.
During 2015, we recognized an additional $15.9 million gain, net of tax, related to our 2013 sale of the Rochester Portfolio. Upon sale of the Rochester Portfolio, we retained the Preferred Equity Investment, and provided the buyer of the Rochester Portfolio with a $3.7 million working capital loan, resulting in a $28.7 million deferred gain on the sale. The gain
51
was to be deferred until the Preferred Equity Investment was either redeemed or sold and the working capital loan was repaid. Both the Preferred Equity Investment and the working capital loan were carried net of deferred gains, resulting in zero balances on our balance sheet. In 2015, we sold the Preferred Equity Investment and settled the working capital loan for an aggregate payment of $16.0 million, plus accrued interest. We recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with relatedNoncontrolling Interest. (Loss) income tax expense of $0.1 million, in discontinued operations, net of tax during the year ended December 31, 2015, as these additional sales proceeds could not be recognized until realized.
Income from consolidated joint venturesventure attributable to noncontrolling interests. Income from consolidated joint ventures attributable to noncontrolling interests totaled $7.6 million in 2017, $6.5 million in 2016 and $8.2 million in 2015. Consistent withinterest, which represents thePresentation Topic of the FASB ASC, our net income for the years ended December 31, 2017, 2016 and 2015 includes 100% of the net income generated by the entity that owns the Hilton San Diego Bayfront. The outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront, earned nettotaled a loss of $5.8 million and income of $7.6$7.1 million $6.5 millionin 2020 and $8.1 million for the years ended December 31, 2017, 2016 and 2015,2019, respectively. In addition, prior to our sale of the Doubletree Guest Suites Times Square in December 2015, income from consolidated joint ventures attributable to noncontrolling interests included a nominal amount of preferred dividends earned by preferred investors in the entity that owned the Doubletree Guest Suites Times Square, including related administrative fees.
Preferred Stock Dividends. Preferred stock dividends totaled $12.8 million in both 2020 and redemption charge. Preferred2019, comprised of $8.0 million in preferred stock dividends and redemption charge were incurred as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Series D preferred stock |
| $ | — |
| $ | 2,428 |
| $ | 9,200 |
|
Series E preferred stock |
|
| 7,993 |
|
| 6,460 |
|
| — |
|
Series F preferred stock |
|
| 4,837 |
|
| 3,024 |
|
| — |
|
Redemption charge on Series D preferred stock |
|
| — |
|
| 4,052 |
|
| — |
|
|
| $ | 12,830 |
| $ | 15,964 |
| $ | 9,200 |
|
We redeemed all 4,600,000 shares ofon our Series D preferred stock in April 2016. We recorded a redemption charge of $4.1 million during the second quarter of 2016 related to the original issuance costs of these shares, which were previously included in additional paid in capital. In March 2016, we issued 4,600,000 shares of Series E preferred stock, and $4.8 million in May 2016, we issued 3,000,000 shares ofpreferred stock dividends on our Series F preferred stock.
Non-GAAP Financial Measures. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDAre; Adjusted EBITDAre, excluding noncontrolling interest; FFO attributable to common stockholders,stockholders; Adjusted FFO attributable to common stockholdersstockholders; and Comparable Portfolio17 Hotel portfolio revenues. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. EBITDA, Adjusted EBITDA, FFO attributable to common stockholders, Adjusted FFO attributable to common stockholders and Comparable Portfolio revenues, as calculated by us,In addition, our calculation of these measures may not be comparable to other companies that do not define such terms exactly the same as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit,net income (loss), cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations
47
that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. For example, we believe that Comparable Portfolio17 Hotel portfolio revenues are useful to both us and investors in evaluating our operating performance by removing the impact of non-hotel results such as the amortization of favorable and unfavorable tenant lease contracts and, prior to its sale in September 2015, BuyEfficient.contracts. We also believe that our use of Comparable Portfolio17 Hotel portfolio revenues is useful to both us and our investors as it facilitates the comparison of our operating results from period to period by removing fluctuations caused by any acquisitions or dispositions, as well as by those hotels that we classify as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year.dispositions. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.
We present EBITDAre in accordance with guidelines established by the National Association of Real Estate Investment Trusts (“NAREIT”), as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Adjusted EBITDA are commonly used measures of performance in many industries.Amortization for Real Estate.” We believe EBITDA and Adjusted EBITDA arere is a useful performance measure to investors in evaluating our operating performance because these measures
52
help investors evaluate and compare the results of our operations from period to period by removing the impact ofin comparison to our capital structure (primarilypeers. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense) and our asset base (primarilyexpense, income tax expense, depreciation and amortization) from our operating results. We also believeamortization, gains or losses on the usedisposition of EBITDAdepreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and Adjusted EBITDA facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. In addition, certain covenants includedof investments in our indebtedness use EBITDA asunconsolidated affiliates caused by a measure of financial compliance. We also use EBITDA and Adjusted EBITDA as measuresdecrease in determining the value of hotel acquisitionsdepreciated property in the affiliate, and dispositions.adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates.
Historically, we have adjustedWe make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDAre, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions. We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDA:EBITDAre, excluding noncontrolling interest:
| Amortization of deferred stock compensation: we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels. |
| Amortization of favorable and unfavorable contracts: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the |
|
|
● | Finance lease obligation interest – cash ground rent: we include an adjustment for the cash |
|
|
| Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure. |
| Acquisition costs: under GAAP, costs associated with |
48
| Noncontrolling |
53
| Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period. |
|
|
| Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for |
54
The following table reconciles our net (loss) income to EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest for our total portfolio for the years ended December 31, 2017, 20162020 and 20152019 (in thousands):
| | | | | | |
|
| 2020 |
| 2019 | ||
Net (loss) income | | $ | (410,506) | | $ | 142,793 |
Operations held for investment: | | | | | | |
Depreciation and amortization | | | 137,051 | |
| 147,748 |
Interest expense | | | 53,307 | |
| 54,223 |
Income tax provision (benefit), net | | | 6,590 | |
| (151) |
Gain on sale of assets | | | (34,298) | |
| (42,935) |
Impairment losses - hotel properties | | | 144,642 | | | 24,713 |
EBITDAre | | | (103,214) | |
| 326,391 |
| | | | | | |
Operations held for investment: | | | | | | |
Amortization of deferred stock compensation | | | 9,576 | |
| 9,313 |
Amortization of right-of-use assets and liabilities | | | (1,260) | |
| (782) |
Finance lease obligation interest - cash ground rent | | | (1,404) | |
| (2,175) |
Gain on extinguishment of debt, net | | | (6,146) | |
| — |
Property-level severance | | | 11,038 | |
| — |
Prior year property tax adjustments, net | | | (276) | |
| 168 |
Prior owner contingency funding | | | — | | | (900) |
Impairment loss - abandoned development costs | | | 2,302 | | | — |
Noncontrolling interest: | | | | | | |
Loss (income) from consolidated joint venture attributable to noncontrolling interest | | | 5,817 | |
| (7,060) |
Depreciation and amortization | | | (3,228) | |
| (2,875) |
Interest expense | | | (1,194) | |
| (2,126) |
Amortization of right-of-use asset and liability | | | 290 | |
| 290 |
Impairment loss - abandoned development costs | | | (449) | | | — |
Adjustments to EBITDAre, net | | | 15,066 | |
| (6,147) |
Adjusted EBITDAre, excluding noncontrolling interest | | $ | (88,148) | | $ | 320,244 |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Net income |
| $ | 153,004 |
| $ | 140,677 |
| $ | 355,519 |
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 158,634 |
|
| 163,016 |
|
| 164,716 |
|
Amortization of lease intangibles |
|
| 251 |
|
| 252 |
|
| 3,791 |
|
Interest expense |
|
| 51,766 |
|
| 50,283 |
|
| 66,516 |
|
Income tax (benefit) provision, net |
|
| (7,775) |
|
| (616) |
|
| 1,434 |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
| (7,628) |
|
| (6,480) |
|
| (8,164) |
|
Depreciation and amortization |
|
| (2,767) |
|
| (3,480) |
|
| (3,432) |
|
Interest expense |
|
| (1,950) |
|
| (1,684) |
|
| (1,537) |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
| — |
|
| — |
|
| 105 |
|
EBITDA |
|
| 343,535 |
|
| 341,968 |
|
| 578,948 |
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
| 8,042 |
|
| 7,157 |
|
| 6,536 |
|
Amortization of favorable and unfavorable contracts, net |
|
| 218 |
|
| 394 |
|
| (1,623) |
|
Noncash ground rent |
|
| (1,122) |
|
| 1,878 |
|
| 1,987 |
|
Capital lease obligation interest — cash ground rent |
|
| (1,867) |
|
| (1,404) |
|
| (1,404) |
|
Gain on sale of assets, net |
|
| (45,747) |
|
| (18,422) |
|
| (226,234) |
|
Severance costs associated with sale of BuyEfficient |
|
| — |
|
| — |
|
| 1,636 |
|
Loss on extinguishment of debt |
|
| 824 |
|
| 284 |
|
| 2,964 |
|
Impairment loss |
|
| 40,053 |
|
| — |
|
| — |
|
Hurricane-related uninsured losses |
|
| 1,690 |
|
| — |
|
| — |
|
Gain on redemption of note receivable |
|
| — |
|
| — |
|
| (939) |
|
Closing costs — completed acquisition |
|
| 729 |
|
| — |
|
| — |
|
Prior year property tax adjustments, net |
|
| (800) |
|
| (3,971) |
|
| (865) |
|
Property-level restructuring, severance and management transition costs |
|
| — |
|
| 1,578 |
|
| 1,219 |
|
Lease termination costs |
|
| — |
|
| 1,000 |
|
| 300 |
|
Costs associated with CEO severance |
|
| — |
|
| — |
|
| 5,257 |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
Noncash ground rent |
|
| 290 |
|
| (450) |
|
| (450) |
|
Loss on extinguishment of debt |
|
| (205) |
|
| — |
|
| — |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
| (7,000) |
|
| — |
|
| (16,000) |
|
|
|
| (4,895) |
|
| (11,956) |
|
| (227,616) |
|
Adjusted EBITDA |
| $ | 338,640 |
| $ | 330,012 |
| $ | 351,332 |
|
49
Adjusted EBITDA was $338.6re, excluding noncontrolling interest decreased $408.4 million, or 127.5%, in 2017, $330.0 million in 2016 and $351.3 million in 2015.
Adjusted EBITDA increased $8.6 million in 20172020 as compared to 2016, due to additional earnings generated by the 26 Hotel Portfolio, predominately by both the Boston Park Plaza and the Wailea Beach Resort post-repositioning, and by the Oceans Edge Hotel & Marina, acquired in July 2017. Partially offsetting these increases, Adjusted EBITDA decreased2019 primarily due to the sales of the Three Sold Hotels in May 2016, February 2017 and June 2017.following:
● | Adjusted EBITDAre at the 17 Hotels decreased $373.9 million, or 120.5%. The Company recorded $20.7 million in COVID-19-related expenses for the 17 Hotels during 2020, consisting of additional wages, benefits and severance for furloughed or laid off hotel employees, net of $4.9 million in employee retention tax credits and various industry grants received by our hotels. Of this amount, $5.3 million of property-level severance was added back and included in Adjustments to EBITDAre, net. These increased COVID-19-related expenses were partially offset during 2020 by $10.7 million in reimbursements to offset net losses at the Hyatt Regency San Francisco as stipulated by the hotel’s operating lease agreement. |
● | The dispositions of the Four Disposed Hotels caused Adjusted EBITDAre to decrease by $49.9 million. The Company recorded $8.4 million in COVID-19-related expenses for the Four Disposed Hotels during 2020, consisting of additional wages, benefits and severance for furloughed or laid off hotel employees, net of $0.3 million in employee retention tax credits received by our hotels. Of this amount, $5.7 million of property-level severance was added back and included in Adjustments to EBITDAre, net. |
Adjusted EBITDA decreased $21.3 million in 2016 as compared to 2015 primarily due to the sales of the Two Sold Hotels in May 2016 and December 2015, and BuyEfficient in September 2015.
We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, amortization of lease intangibles, any real estate impairment loss and any
55
gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the National Association of Real Estate Investment Trusts’ (“NAREIT”)NAREIT definition of “FFO applicable to common shares.” Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.
We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
| Amortization of favorable and unfavorable contracts: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the |
|
|
| Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired, as well as the noncash interest on our derivatives and |
| Acquisition costs: under GAAP, costs associated with |
| Noncontrolling |
| Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period. |
50
| Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: |
56
The following table reconciles our net (loss) income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our total portfolio for the years ended December 31, 2017, 20162020 and 20152019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Net income |
| $ | 153,004 |
| $ | 140,677 |
| $ | 355,519 |
|
Preferred stock dividends and redemption charge |
|
| (12,830) |
|
| (15,964) |
|
| (9,200) |
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization |
|
| 158,177 |
|
| 162,431 |
|
| 163,361 |
|
Amortization of lease intangibles |
|
| 251 |
|
| 252 |
|
| 3,791 |
|
Gain on sale of assets, net |
|
| (45,747) |
|
| (18,422) |
|
| (226,234) |
|
Impairment loss |
|
| 40,053 |
|
| — |
|
| — |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
| (7,628) |
|
| (6,480) |
|
| (8,164) |
|
Real estate depreciation and amortization |
|
| (2,767) |
|
| (3,480) |
|
| (3,432) |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
| (7,000) |
|
| — |
|
| (16,000) |
|
FFO attributable to common stockholders |
|
| 275,513 |
|
| 259,014 |
|
| 259,641 |
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
Write-off of deferred financing fees |
|
| — |
|
| — |
|
| 455 |
|
Amortization of favorable and unfavorable contracts, net |
|
| 218 |
|
| 394 |
|
| (1,623) |
|
Noncash ground rent |
|
| (1,122) |
|
| 1,878 |
|
| 1,987 |
|
Noncash interest on derivatives and capital lease obligations, net |
|
| 3,106 |
|
| (1,426) |
|
| (309) |
|
Loss on extinguishment of debt |
|
| 824 |
|
| 284 |
|
| 2,964 |
|
Hurricane-related uninsured losses |
|
| 1,690 |
|
| — |
|
| — |
|
Gain on redemption of note receivable |
|
| — |
|
| — |
|
| (939) |
|
Closing costs — completed acquisition |
|
| 729 |
|
| — |
|
| — |
|
Prior year property tax adjustments, net |
|
| (800) |
|
| (3,971) |
|
| (865) |
|
Property-level restructuring, severance and management transition costs |
|
| — |
|
| 1,578 |
|
| 1,219 |
|
Lease termination costs |
|
| — |
|
| 1,000 |
|
| 300 |
|
Noncash income tax benefit, net |
|
| (9,235) |
|
| (1,596) |
|
| — |
|
Preferred stock redemption charge |
|
| — |
|
| 4,052 |
|
| — |
|
Costs associated with CEO severance |
|
| — |
|
| — |
|
| 5,257 |
|
Amortization of deferred stock compensation associated with CEO severance |
|
| — |
|
| — |
|
| 1,623 |
|
Severance costs associated with sale of BuyEfficient |
|
| — |
|
| — |
|
| 1,636 |
|
Income tax provision related to gain on sale of BuyEfficient |
|
| — |
|
| — |
|
| 720 |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
Noncash ground rent |
|
| 290 |
|
| (450) |
|
| (450) |
|
Noncash interest related to loss on derivative, net |
|
| (30) |
|
| — |
|
| (3) |
|
Loss on extinguishment of debt |
|
| (205) |
|
| — |
|
| — |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
| — |
|
| — |
|
| 105 |
|
|
|
| (4,535) |
|
| 1,743 |
|
| 12,077 |
|
Adjusted FFO attributable to common stockholders |
| $ | 270,978 |
| $ | 260,757 |
| $ | 271,718 |
|
| | | | | | |
|
| 2020 |
| 2019 | ||
Net (loss) income | | $ | (410,506) | | $ | 142,793 |
Preferred stock dividends | |
| (12,830) | |
| (12,830) |
Operations held for investment: | | | | | | |
Real estate depreciation and amortization | |
| 134,555 | |
| 145,260 |
Gain on sale of assets | |
| (34,298) | |
| (42,935) |
Impairment losses - hotel properties | | | 144,642 | | | 24,713 |
Noncontrolling interest: | | | | | | |
Loss (income) from consolidated joint venture attributable to noncontrolling interest | |
| 5,817 | |
| (7,060) |
Real estate depreciation and amortization | |
| (3,228) | |
| (2,875) |
FFO attributable to common stockholders | |
| (175,848) | |
| 247,066 |
| | | | | | |
Operations held for investment: | | | | | | |
Real estate amortization of right-of-use assets and liabilities | |
| 376 | |
| 590 |
Noncash interest on derivatives and finance lease obligations, net | |
| 4,740 | |
| 6,051 |
Gain on extinguishment of debt, net | |
| (6,146) | |
| — |
Property-level severance | |
| 11,038 | |
| — |
Prior year property tax adjustments, net | |
| (276) | |
| 168 |
Prior owner contingency funding | | | — | | | (900) |
Impairment loss - abandoned development costs | | | 2,302 | | | — |
Noncash income tax provision, net | |
| 7,415 | |
| 688 |
Noncontrolling interest: | | | | | | |
Real estate amortization of right-of-use asset and liability | |
| 290 | |
| 290 |
Noncash interest on derivatives, net | | | (27) | | | — |
Impairment loss - abandoned development costs | | | (449) | | | — |
Adjustments to FFO attributable to common stockholders, net | |
| 19,263 | |
| 6,887 |
Adjusted FFO attributable to common stockholders | | $ | (156,585) | | $ | 253,953 |
Adjusted FFO attributable to common stockholders was $271.0decreased $410.5 million, or 161.7%, in 2017, $260.8 million in 2016 and $271.7 million in 2015.
Adjusted FFO attributable to common stockholders increased $10.2 million in 20172020 as compared to 20162019 primarily due to the same reasons noted in the discussion above regarding Adjusted EBITDA. In addition, the decrease in interest expense on debt and capital lease obligations during 2017 as compared to 2016 positively affected Adjusted FFO attributable to common stockholders.EBITDAre, excluding noncontrolling interest.
57
Adjusted FFO attributable to common stockholders decreased $11.0 million in 2016 as compared to 2015 primarily due to the same reasons noted in the discussion regarding Adjusted EBITDA. These decreases in earnings were partially offset by a decrease in interest expense on our debt and capital lease obligations, which positively affected Adjusted FFO attributable to common stockholders in 2016.
Investing Activities
The following table summarizes our total portfolio and room data from January 1, 2015 through December 31, 2017, adjusted for the hotels acquired and sold during the respective periods.
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
|
Portfolio Data—Hotels |
|
|
|
|
|
|
|
Number of hotels—beginning of period |
| 28 |
| 29 |
| 30 |
|
Add: Acquisitions |
| 1 |
| — |
| — |
|
Less: Dispositions |
| (2) |
| (1) |
| (1) |
|
Number of hotels—end of period (1) |
| 27 |
| 28 |
| 29 |
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
|
Portfolio Data—Rooms |
|
|
|
|
|
|
|
Number of rooms—beginning of period |
| 13,666 |
| 13,845 |
| 14,303 |
|
Add: Acquisitions |
| 175 |
| — |
| — |
|
Add: Room expansions, net |
| 5 |
| 24 |
| 10 |
|
Less: Dispositions |
| (643) |
| (203) |
| (468) |
|
Number of rooms—end of period |
| 13,203 |
| 13,666 |
| 13,845 |
|
Average rooms per hotel—end of period |
| 489 |
| 488 |
| 477 |
|
|
|
Acquisitions. We acquired one hotel in 2017, and no hotels in either 2016 or 2015. In July 2017, we acquired the Oceans Edge Hotel & Marina located in Key West, Florida for a net purchase price of $173.9 million, including prorations. The newly constructed and recently opened fee simple hotel also includes a marina, wet and dry boat slips and other customary marina amenities. We funded the acquisition with available cash on hand, including proceeds from the sales of the Marriott Park City and the Fairmont Newport Beach, as well as net proceeds received from our equity issuances under our ATM Agreements.
In addition to the above noted hotel, in 2016, we purchased the air rights associated with our Renaissance Harborplace for $2.4 million, including closing costs, resulting in a $2.4 million intangible asset with an indefinite life. In 2017, we received a $0.2 million refund of closing costs, reducing our air rights intangible asset to $2.3 million.
Our primary focus is to acquire long-term relevant real estate. We intend to select the branding and operators for our hotels that we believe will lead to the highest returns and the greatest long-term value. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans. Future acquisitions, if any, may be funded with cash on hand, by our issuance of additional debt or equity securities, including our common and preferred OP units provided that our stock price is at an attractive level, by draws on our $400.0 million senior unsecured credit facility, or by proceeds received from sales of existing assets.
Dispositions. We have from time to time divested of assets that no longer fit our stated strategy, are unlikely to offer long-term returns in excess of our cost of capital, will achieve a sale price in excess of our internal valuation, or that have high risk relative to their anticipated returns. We sold two hotels in 2017, and one hotel in each of 2016 and 2015. In addition, we sold two hotels in January 2018. None of these sales represented a strategic shift that had a major impact on our business plan or our primary markets; therefore, none of these sales qualified as a discontinued operation. In June 2017, we sold the Marriott Park City for net proceeds of $27.0 million, and recognized a net gain on the sale of $1.2 million. In
58
February 2017, we sold the Fairmont Newport Beach for net proceeds of $122.8 million, and recognized a net gain on the sale of $44.3 million.
In May 2016, we sold the Sheraton Cerritos for net proceeds of $41.2 million, and recognized a net gain on the sale of $18.2 million.
In December 2015, one of our subsidiaries sold 100% of its membership interests in Times Square Hotel Sub, LLC, the indirect holder of 100% of the leasehold interests through which the Doubletree Guest Suites Times Square located in New York City, New York, is operated. We received net proceeds of $522.7 million, and recognized a net gain on the sale of $214.5 million. Concurrent with the sale, we wrote off $83.9 million of net intangible assets, which reduced our gain on the sale. In addition, we repaid the remaining $175.0 million balance of the mortgage secured by the hotel, incurred a prepayment penalty of $1.2 million, and wrote off $1.7 million in related deferred financing fees.
In January 2018, we sold the Marriott Philadelphia and the Marriott Quincy for a combined gross sales price of $139.0 million.
In addition to the above noted hotels, in 2016, we sold an undeveloped parcel of land for net proceeds of $0.4 million, and recognized a net gain on the sale of $0.2 million. In 2015, we sold BuyEfficient for net proceeds of $26.4 million, and recognized a net gain on the sale of $11.7 million. Also in 2015, we sold the Preferred Equity Investment and settled the working capital loan related to the Rochester Portfolio, which we sold in 2013. We received an aggregate payment of $16.0 million, plus accrued interest. In accordance with the Real Estate Subtopic of the FASB ASC, we recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with related income tax expense of $0.1 million, in discontinued operations, net of tax during the year ended December 31, 2015, as these additional sales proceeds could not be recognized until realized.
Renovations. We invested $115.1 million, $182.2 million and $164.2 million in capital improvements to our hotel portfolio during the years ended December 31, 2017, 2016 and 2015, respectively. Consistent with our strategy, during 2017, 2016 and 2015, we undertook major renovations, repositionings and ordinary course rooms, restaurants and public space renovations. During 2017, none of our renovations caused material room revenue disruption; however, during 2016 and 2015, our repositionings at the Boston Park Plaza and the Wailea Beach Resort caused room revenue disruption of approximately $8.0 million and $2.9 million, respectively, all of which was in line with our expectations.
Liquidity and Capital Resources
Historical. During the periods presented, our sources of cash included our operating activities and working capital, sales and redemptions of hotels and other assets, as well as proceeds from sales of hotels and our credit facility debt refinancings, term loan agreements, Senior Notes, and common and preferred stock offerings.contributions from our joint venture partner. Our primary uses of cash were for capital expenditures for hotels acquisitions of a hotel and other assets, acquisitions of assets, operating expenses, repaymentincluding funding the negative cash flow at our hotels, repurchases of our common stock, repayments of notes payable and our credit facility, redemption of our Series D preferred stock, dividends and distributions on our common and preferred stock and distributions to our joint venture partners.partner. We cannot be certain that traditional sources of funds will be available in the future.
Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in RevPARhotel revenue and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided byused in operating activities was $310.8$116.7 million for 2017, $305.4 million for 2016 and $309.3 million for 2015.
The net increase to cash provided by operating activities during 2017in 2020 as compared to 2016 was primarily due to increasednet cash generated by our hotels, most significantly at the Boston Park Plaza and the Wailea Beach Resort post-repositioning, partially offset by decreased cash generated due to our salesprovided of the Three Sold Hotels.
$290.9 million in 2019. The net decrease in cash provided by operating activities during 2016in 2020 as compared to 20152019 was primarily due to decreased cash generatedthe temporary suspensions and reduced operations at our hotels caused by both the Boston Park Plaza and the Wailea Beach Resort, which were undergoing complete hotel repositionings during 2016, as well as decreased cash generated due to our sales of the Two Sold Hotels. These decreases were partially offset by increased cash generated by our other hotels, combined with the release of restrictedCOVID-19 pandemic.
59
51
lender reserves upon our repayments of the loans secured by the Boston Park Plaza and the Renaissance Orlando at SeaWorld®.
Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels.hotels and other assets. Net cash used inprovided by or provided by(used in) investing activities in 2017, 20162020 and 20152019 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| ||||||||
Proceeds from sales of assets |
| $ | 150,215 |
| $ | 41,587 |
| $ | 565,115 |
| |||||
Disposition deposit |
|
| — |
|
| 250 |
|
| — |
| |||||
Proceeds from redemption of note receivable |
|
| — |
|
| — |
|
| 1,125 |
| |||||
Restricted cash — replacement reserve |
|
| (7,384) |
|
| (9,368) |
|
| (2,642) |
| |||||
Acquisitions of hotel property and other assets, net |
|
| (173,728) |
|
| (2,447) |
|
| — |
| |||||
Renovations and additions to hotel properties |
|
| (115,097) |
|
| (182,185) |
|
| (164,232) |
| |||||
Payment for interest rate derivatives |
|
| (125) |
|
| — |
|
| (13) |
| |||||
Net cash (used in) provided by investing activities |
| $ | (146,119) |
| $ | (152,163) |
| $ | 399,353 |
|
| | | | | | |
| | 2020 | | 2019 | ||
Proceeds from sales of assets | | $ | 166,737 | | $ | 49,538 |
Acquisitions of hotel property and other assets | |
| (1,296) | |
| (705) |
Acquisitions of intangible assets | |
| (102) | |
| (25) |
Renovations and additions to hotel properties and other assets | |
| (51,440) | |
| (95,958) |
Payment for interest rate derivative | | | (111) | | | — |
Net cash provided by (used in) investing activities | | $ | 113,788 | | $ | (47,150) |
During 2017,In 2020, we received total proceeds of $150.2$166.7 million from our sales of two hotels, consisting of $76.9 million for the Marriott Park City,Renaissance Harborplace and $89.9 million for the Fairmont Newport Beach and surplus FF&E, along with the earn-out proceeds received related to the sale of the Royal Palm Miami Beach. TheseRenaissance Los Angeles Airport. This cash inflows wereinflow was partially offset as we increased our restricted cash replacement reserve accounts by $7.4paid $1.3 million paid a total net $173.7 million to acquire assets, including $173.9and $0.1 million to purchase additional wet boat and dry boat slips, respectively, at the Oceans Edge HotelResort & Marina, less a $0.2 million refund of closing costs related to our purchase of the Renaissance Harborplace air rights, paid $115.1invested $51.4 million for renovations and additions to our portfolio and other assets and paid $0.1 million for an interest rate cap agreementsderivative on our variable-rate mortgagedebt secured by the Hilton San Diego Bayfront.
During 2016,In 2019, we received a totalproceeds of $41.6 million in net proceeds from the sales of the Sheraton Cerritos, an undeveloped parcel of land and surplus FF&E. In addition, we received a deposit of $0.3$49.5 million from the buyersale of the Fairmont Newport Beach. TheseCourtyard by Marriott Los Angeles. This cash inflows wereinflow was offset as we increased our restricted cash replacement reserve accounts by $9.4paid $0.7 million paid $2.4 millionand $25,000 to acquirepurchase additional wet boat and dry boat slips, respectively, at the air rights at our Renaissance HarborplaceOceans Edge Resort & Marina, and paid $182.2 million for renovations and additions to our portfolio.
During 2015, we received a total of $565.1 million in proceeds from the sales of the Doubletree Guest Suites Times Square, BuyEfficient, the Preferred Equity Investment combined with the settlement of a working capital loan provided to the buyer of the Rochester Portfolio, and surplus FF&E. In addition, we received $1.1 million from the redemption of an unsecured note receivable. These cash inflows were partially offset as we increased the balance of our restricted cash replacement reserve accounts by $2.6 million, paid $164.2invested $96.0 million for renovations and additions to our portfolio and paid $13,000 for an interest rate cap agreement on our variable-rate mortgage secured by the Hilton San Diego Bayfront.other assets.
60
Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our distributions paid, issuance and repurchase of common stock, our issuance and repayment of notes payable and our credit facility, debt restructurings and our issuance and redemption of other forms of capital, including preferred equity. Net cash used in financing activities in 2017, 20162020 and 20152019 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Proceeds from preferred stock offerings |
| $ | — |
| $ | 190,000 |
| $ | — |
|
Payment of preferred stock offering costs |
|
| — |
|
| (6,640) |
|
| — |
|
Redemption of preferred stock |
|
| — |
|
| (115,000) |
|
| — |
|
Proceeds from common stock offerings |
|
| 79,407 |
|
| 55,133 |
|
| — |
|
Payment of common stock offering costs |
|
| (1,475) |
|
| (941) |
|
| — |
|
Repurchase of common stock for employee withholding obligations |
|
| (3,793) |
|
| (2,641) |
|
| (9,264) |
|
Proceeds from notes payable and credit facility |
|
| 460,000 |
|
| 100,000 |
|
| 123,000 |
|
Payments on notes payable and credit facility |
|
| (405,542) |
|
| (265,536) |
|
| (450,812) |
|
Payments of costs related to extinguishment of notes payable |
|
| (1) |
|
| (173) |
|
| (1,245) |
|
Payments of deferred financing costs |
|
| (3,537) |
|
| (1,759) |
|
| (5,861) |
|
Dividends and distributions paid |
|
| (163,014) |
|
| (227,486) |
|
| (77,544) |
|
Distributions to noncontrolling interests |
|
| (8,250) |
|
| (7,737) |
|
| (9,981) |
|
Net cash used in financing activities |
| $ | (46,205) |
| $ | (282,780) |
| $ | (431,707) |
|
| | | | | | |
| | 2020 | | 2019 | ||
Repurchases of outstanding common stock | | $ | (103,894) | | $ | (50,088) |
Repurchases of common stock for employee tax obligations | | | (3,992) | | | (4,435) |
Proceeds from credit facility | | | 300,000 | | | — |
Payments on credit facility | | | (300,000) | | | — |
Payments on notes payable | | | (149,743) | | | (7,965) |
Payments of costs related to extinguishment of debt | | | (27,975) | | | — |
Payments of deferred financing costs | | | (4,361) | | | — |
Dividends and distributions paid | | | (156,271) | | | (170,166) |
Distributions to noncontrolling interest | | | (2,000) | | | (8,512) |
Contributions from noncontrolling interest | | | 2,319 | | | — |
Net cash used in financing activities | | $ | (445,917) | | $ | (241,166) |
During 2017,In 2020, we received net proceeds of $77.9drew $300.0 million from the issuance of our common stock,credit facility and $460.0received $2.3 million in proceedscontributions from debt obligations, including $220.0 million from a new loan secured by the Hilton San Diego Bayfront and $240.0 million from the Senior Notes.our joint venture partner. These cash inflows were offset byas we paid the following cash outflows: $3.8following: $103.9 million paidto repurchase 9,770,081 shares of our outstanding common stock; $4.0 million to repurchase common sharesstock to satisfy the tax obligations in connection with the vesting of restricted common sharesstock issued to employees; $405.5$300.0 million to repay all amounts outstanding on our credit facility; $149.7 million in principal payments on our notes payable, including $219.6$35.0 million forto repay a portion of our senior notes, $107.9 million to repay the priormortgage loan secured by the Hilton San Diego Bayfront, $176.0Renaissance Washington DC and $6.8 million for the loan secured by the Marriott Boston Long Wharf and $9.9 million in scheduled principal payments on our notes payable; $3.5$28.0 million in combined loan extinguishment costs related to extinguish the payment of the loansdebt secured by the Hilton San Diego BayfrontTimes Square and assign our leasehold interest in the Marriott Boston Long Wharfhotel to its mortgage holder, including a $20.0 million payment to the mortgage holder, $3.2 million and $0.8 million in FF&E restricted cash and hotel unrestricted cash, respectively, given to the mortgage holder, a $1.3 million payment for a labor dispute at the hotel and a total of $2.7 million in payments for legal, tax and other miscellaneous costs; $4.4 million in deferred financing costs related to the amendments on our new loan secured by the Hilton San Diego Bayfront, the Senior Notes and our credit facility; $163.0unsecured debt; $156.3 million in dividends and distributions to our common and preferred stockholders; and $8.3$2.0 million in distributions to our joint venture partner.
In 2019, we paid the noncontrolling interest in the Hilton San Diego Bayfront.
Net cash used in financing activities during 2016 consistedfollowing: $50.1 million to repurchase 3,783,936 shares of the following cash outflows: $115.0our outstanding common stock; $4.4 million paid to redeem our Series D preferred stock; $2.6 million paid to repurchase common sharesstock to satisfy the tax obligations in connection with the vesting of restricted common sharesstock issued to employees; $265.5 million in principal payments on our notes payable, including $114.2 million for the loan secured by the Boston Park Plaza, $72.6 million for the loan secured by the Renaissance Orlando at SeaWorld®, $66.1 million for the loan secured by the Embassy Suites Chicago and $12.6$8.0 million in principal payments on our notes payable; $0.2 million in costs paid to extinguish the loans secured by the Renaissance Orlando at SeaWorld® and the Embassy Suites Chicago; $1.8 million in deferred financing costs related to our $100.0 million unsecured term loan, our credit facility and our Senior Notes which were funded in January 2017; $227.5$170.2 million in dividends and distributions to our common and preferred stockholders; and $7.7$8.5 million in distributions to our joint venture partner.
Future. We believe the noncontrolling interest inongoing effects of the Hilton San Diego Bayfront. These cash outflows were slightly offset by total net proceedsCOVID-19 pandemic and the current economic downturn on our operations will continue to have a material negative impact on our financial results and liquidity during at least the first half of $183.4 million received from our preferred stock offerings, including $111.0 million from2021. As previously
52
noted, operations at two of the issuance17 Hotels remain suspended as of our Series E preferred stock and $72.4 million from the issuance of our Series F preferred stock, $54.2 million in net proceeds received from the issuance of our common stock, and $100.0 million in proceeds received from our unsecured term loan.
During 2015, we paid $9.3 million to repurchase common shares to satisfy the tax obligations in connectionDecember 31, 2020, with the vestingremainder operating at reduced capacities due to COVID-19; therefore, our traditional source of restricted common shares issued to employees. We also paid $450.8 million in principal payments on our notes payable and credit facility, including: $99.1 million in total to repay four loans each separately secured by either the Marriott Philadelphia, the Marriott Park City, the Marriott Houston or the Marriott Tysons Corner; $85.9 million to repay the loan secured by the Renaissance Harborplace; $30.7 million to repay the loan secured by the Hilton North Houston; $175.0 million to repay the loan secured by the Doubletree Guest Suites Times Square; $38.0 million to repay a draw on our credit facility; and $22.1 million in principal payments on our notes payable. In addition, during 2015cash from operating activities has been significantly reduced. Despite these challenges, we paid a total of $1.2 million in fees upon our repayment of the loans noted above, and $5.9 million in deferred financing costs related to our $400.0 million senior unsecured credit facility whichbelieve that we entered into in April 2015,have sufficient liquidity, as well as the two unsecured term loan agreements entered into in September 2015 and December 2015, and the loans entered into in December 2014 secured by
61
the Embassy Suites La Jolla and the JW Marriott New Orleans. We also paid $77.5 million in dividends and distributionsaccess to our commoncredit facility and preferred stockholders, and $10.0 million in distributionscapital markets, to withstand the noncontrolling interestscurrent decline in our hotels. Theseoperating cash outflows were slightly offset by a total of $123.0 million in proceeds from debt obligations, including $85.0 million received from an unsecured term loan and $38.0 million received from our credit facility.
Future. We expect our primary uses of cash to be for operating expenses, capital investments in our hotels, repayment of principal on our notes payable and credit facility, interest expense, dividends and distributions on our common and preferred stock, potential repurchases of our common stock, potential retirement of our preferred stock, potential purchases of debt or other securities in other hotels, and acquisitions of hotels, including possibly hotel portfolios.flow. We expect our primary sources of cash will continue to be our operating activities, working capital notes payable and our credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the maintenance of our credit ratios, appropriate levels of liquidity and continued balance sheet strength. Consistent with maintaining our low leverage and balance sheet strength, in the near-term, we expect to fund future acquisitions, if any, largely through cash on hand, modest amounts of debt, the issuance of common or preferred equity, providedHowever, there can be no assurance that our stock price is at an attractive level, or by proceeds received from sales of existing assets in order to selectively grow the quality and scale of our portfolio. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility, including pursuant to the ATM Agreements we entered into in February 2017. Under the terms of the agreements, we may issue and sell from time to time through or to the managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $300.0 million. Through December 31, 2017, we have received $77.9 million in net proceeds from the issuance of 4,876,855 shares of our common stock in connection with the ATM Agreements, leaving $220.6 million available for sale under the ATM agreements. However, when needed, the capital markets may notwill be available to us on favorable terms or at all.
We expect our primary uses of cash to be for operating expenses, including funding the cash flow needs at our hotels, capital investments in our hotels, repayment of principal on our notes payable and possibly on our unsecured debt, interest expense, dividends on our preferred stock and acquisitions of hotels or interests in hotels. At this time, we do not expect to pay a quarterly common stock dividend in 2021. The resumption in quarterly common stock dividends will be determined by our board of directors after considering our obligations under our various financing agreements, projected taxable income, compliance with our debt covenants, long-term operating projections, expected capital requirements and risks affecting our business. We have taken additional steps to preserve our liquidity, including the deferral of portions of our planned 2021 capital improvements into our portfolio, as well as the temporary suspension of our stock repurchase program.
We believe that the steps we have taken to increase our cash position and preserve our financial flexibility, combined with the amendments to our unsecured debt, our already strong balance sheet and our low leverage will be sufficient to allow us to navigate through this crisis. Given the unprecedented impact of COVID-19 on the global market and our hotel operations, we cannot, however, assure you that our forecast or the assumptions we used to estimate our liquidity requirements will be correct. In January 2018, we soldaddition, the Marriott Philadelphiamagnitude and duration of the Marriott Quincy for a combined gross sales price of $139.0 million.COVID-19 pandemic is uncertain. We cannot accurately estimate the impact on our business, financial condition or operational results with reasonable certainty.
Cash Balance. As of December 31, 2017,2020, our unrestricted cash balance was $488.0$368.4 million. By minimizingWe believe that our needcurrent unrestricted cash balance and our ability to access external capitaldraw the $500.0 million capacity available for borrowing under the unsecured revolving credit facility will enable us to successfully manage our Company while operations at the 17 Hotels are either temporarily suspended or greatly reduced.
Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. While none of these cash trap provisions were triggered by maintaining higher than typicalthe 17 Hotels during 2020, in January 2021, these provisions were triggered for the loans secured by the Embassy Suites La Jolla and the JW Marriott New Orleans. Going forward in 2021, excess cash balances, our financial securitygenerated by the hotels will be held in lockbox accounts for the benefit of the lenders and flexibility are meaningfully enhanced because we are able to fund our business needs (including payment ofincluded in restricted cash distributions on our common stock, if declared) and near-term debt maturities with ourconsolidated balance sheet. We expect the mortgage secured by the Hilton San Diego Bayfront will also enter a cash on hand.trap in 2021.
Debt. As of December 31, 2017,2020, we had $990.4$747.9 million of consolidated debt, $559.3$416.1 million of cash and cash equivalents, including restricted cash, and total assets of $3.9$3.0 billion. We believe that by controllingmaintaining appropriate debt levels, staggering maturity dates and maintaining a highly flexible capital structure, we can maintainwill have lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants.
The weighted average term to maturityIn March 2020, we drew $300.0 million under the revolving portion of our credit facility as a precautionary measure to increase our cash position and preserve financial flexibility. In June 2020 and August 2020, we repaid $250.0 million and $11.2 million, respectively, of the outstanding credit facility balance after determining that we had sufficient cash on hand in addition to access to our credit facility. In addition, in August 2020, we used a portion of the proceeds we received from the sale of the Renaissance Harborplace to repay $38.8 million of the outstanding credit facility balance as stipulated in the Unsecured Debt Amendments (defined below).
At December 31, 2020, we have no amount outstanding on the revolving portion of our amended credit facility, with $500.0 million of capacity available for additional borrowing under the facility. Our ability to draw on the revolving portion of the amended credit facility may be subject to our compliance with various financial covenants on our secured and unsecured debt. The revolving portion of the amended credit agreement matures in April 2023, but may be extended for two six-month periods to April 2024, upon the payment of applicable fees and satisfaction of certain customary conditions.
In September 2020, we repaid $35.0 million of our senior notes, comprising $30.0 million to the Series A note holders and $5.0 million to the Series B note holders, using a portion of the proceeds we received from the sale of the Renaissance Harborplace as stipulated in the Unsecured Debt Amendments (defined below). In conjunction with these repayments, we recorded a $0.2 million loss on extinguishment of debt related to the write-off of deferred financing costs.
53
In July 2020 and December 2020, we completed amendments to our unsecured debt, consisting of our revolving credit facility, term loans and senior notes (the “Unsecured Debt Amendments”). Key terms of the Unsecured Debt Amendments include:
● | Waiver of required financial covenants through the end of the first quarter of 2022, with quarterly testing resuming for the period ending March 31, 2022 (the “Covenant Relief Period”). We can elect to terminate the Covenant Relief Period early, subject to the achievement of the original financial covenants at the end of any quarterly measurement period; |
● | Following the end of the Covenant Relief Period, original financial covenants will be phased-in over the following four quarters to ease compliance; |
● | Continued payment of existing preferred stock dividends and the ability to issue up to $200.0 million of additional preferred stock, subject to the satisfaction of certain conditions; |
● | Unlimited ability to fund future acquisitions with proceeds from the issuance of common equity or through the sale of unencumbered hotels; |
● | Flexibility to invest up to $250.0 million into acquisitions (in addition to acquisitions funded with equity or with hotel sale proceeds) subject to maintaining certain minimum liquidity thresholds; |
● | Ability to invest up to $100.0 million into capital improvements during 2021; |
● | Ability to pay dividends on common stock to the extent required to maintain REIT status and comply with IRS regulations; |
● | Addition of a 25-basis point LIBOR floor for the remaining term of the revolving credit facility and term loan facilities. The applicable LIBOR spread for each of the facilities is fixed during the Covenant Relief Period at 240 basis points for the revolving credit facility and 235 basis points for the term loan facilities, which is the high end of the pricing grid plus 15 points; |
● | Addition of 125 basis points to the annual interest rate of the senior notes during the Covenant Relief Period which will decrease by 25 basis points following the Covenant Relief Period until the Company’s leverage ratio is below 5.00x as follows: |
o | Until the Company achieves a leverage ratio less than 6.50x, the interest rate on the senior notes will be increased by 100 basis points; |
o | From the period the leverage ratio is less than 6.50x but greater than 5.00x the interest rate on the senior notes will be increased by 75 basis points; and |
● | Addition of certain restrictions and covenants during the Covenant Relief Period including, but not limited to, restrictions on share repurchases, maintenance of minimum liquidity of at least $180.0 million, certain required mandatory debt prepayments on asset sales and equity issuances (if funds are not used to purchase assets) and restrictions on the incurrence of new indebtedness. |
In December 2020, we used proceeds received from our sale of the Renaissance Los Angeles Airport to repay the $107.9 million mortgage secured by the Renaissance Washington DC. The mortgage was set to mature in May 2021, but was available to be repaid without penalty beginning in November 2020.
In December 2020, we exercised our first option to extend the maturity date of the mortgage secured by the Hilton San Diego Bayfront from December 2020 to December 2021. We intend to exercise the remaining two one-year options to extend the maturity to December 2023. Assuming we are successful in extending the maturity to December 2023, our first debt maturity will be for the $85.0 million unsecured term loan due in September 2022.
Additionally, in December 2020, we executed an assignment-in-lieu agreement with the holder of the $77.2 million mortgage secured by the Hilton Times Square. As stipulated in the agreement, we satisfied all outstanding debt obligations, including regular and default interest or late charges that were assessed, in exchange for a $20.0 million payment, the credit of $3.2 million of restricted cash held by the noteholder and $0.8 million of the hotel’s unrestricted cash, the assignment of our leasehold interest in the Hilton Times Square, and the retention of certain potential employee-related obligations. In conjunction with this agreement, we wrote off approximately $22.2 million of various accrued expenses related to the hotel’s operating lease and sublease, including, but not limited to, accrued property taxes, recapture of deferred taxes due from a prior deferral period, accrued ground rent and accrued easement payments. We removed the net assets and liabilities related to the hotel from our December 31, 2020 balance sheet; however, we retained approximately $11.6 million in certain current and potential employee-related obligations, which is currently held in escrow until those obligations are resolved. We recorded a $6.4 million gain on extinguishment of debt as a result of December 31, 2017,this transaction.
We are subject to various financial covenants on our secured and unsecured debt. Due to COVID-19’s expected negative impact on our operations through at least the first half of 2021, it is approximately five years, and 77.8%possible that we may not meet the terms of our unsecured debt includingfinancial covenants once such covenants are effective again in 2022. As noted above, due to COVID-19, operations at two of the effects17 Hotels remain suspended as of interest rate swap agreements, is fixed rateFebruary 1, 2021, with a weighted average interest rate of 4.5%. Including our variable-rate debt obligation basedthe remainder operating at reduced capacities. Our future liquidity will depend on the variable rate at December 31, 2017,gradual return of guests, particularly group business, to our hotels and the weighted average interest rate onstabilization of demand throughout our debt is 4.1%.portfolio.
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As of December 31, 2017,2020, all of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, except the $220.0 million non-recourse mortgage on the Hilton San Diego Bayfront, which is subject to an interest rate cap agreement that caps the interest rate at 6.0% until December 2020.2021. Our remaining mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to our mortgage debt, as of December 31, 2017,2020, we have two unsecured corporate-level term loans as well as the Senior Notes. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt.two unsecured corporate-level senior notes.
Each of our debt transactions for the years ended December 31, 2017, 2016 and 2015 are discussed below.
2017. In January 2017, we received proceeds of $240.0 million in a private placement of the Senior Notes. The private placement consisted of the Series A Senior Notes, which includes $120.0 million of notes bearing interest at a fixed
62
rate of 4.69%, maturing in January 2026, and the Series B Senior Notes, which includes $120.0 million of notes bearing interest at a fixed rate of 4.79%, maturing in January 2028.
In January 2017, we used proceeds received from the Senior Notes to repay the loan secured by the Marriott Boston Long Wharf, which had a balance of $176.0 million and an interest rate of 5.58%. The Marriott Boston Long Wharf loan was scheduled to mature in April 2017, and was available to be repaid without penalty in January 2017.
In November 2017, we refinanced our existing $219.6 million loan secured by the Hilton San Diego Bayfront with a new $220.0 million loan. The new loan has an initial maturity date of December 2020 and three one-year extension options, subject to the satisfaction of certain conditions. The new loan is interest only and provides for a floating interest rate of one-month LIBOR plus 105 basis points with a 25 basis point increase during the final one-year extension period, if extended. The new loan replaced the existing loan that was scheduled to mature in August 2019 and had a floating interest rate of one-month LIBOR plus 225 basis points.
As of December 31, 2017, we have no outstanding amounts due under our credit facility.
2016. In January 2016, we drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds in February 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on our leverage ratios. We entered into a forward swap agreement in December 2015 that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan. Based on our current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In May 2016, we repaid $72.6 million of debt secured by the Renaissance Orlando at SeaWorld®, using proceeds received from our issuance of the Series F preferred stock. The Renaissance Orlando at SeaWorld® loan was scheduled to mature in July 2016, and was available to be repaid without penalty in May 2016.
In December 2016, we repaid $66.1 million of debt secured by the Embassy Suites Chicago using cash on hand. The Embassy Suites Chicago loan was scheduled to mature in March 2017, and was available to be repaid without penalty at the end of December 2016.
2015. In April 2015, we entered into a $400.0 million senior unsecured credit facility, which replaced our prior $150.0 million senior unsecured credit facility. The credit facility’s interest rate is based on a pricing grid with a range of 155 to 230 basis points over LIBOR, depending on our leverage ratios, and represents a decline in pricing from the prior credit facility of approximately 30 to 60 basis points. The initial term of the credit facility is four years, expiring in April 2019, with an option to extend for an additional one year subject to the satisfaction of certain customary conditions. The credit facility also includes an accordion option, which allows us to request additional lender commitments for up to a total capacity of $800.0 million.
In May 2015, we repaid $99.1 million of debt secured by four of our hotels: the Marriott Houston, the Marriott Park City, the Marriott Philadelphia and the Marriott Tysons Corner.
In October 2015, we drew down $85.0 million in funds available from a term loan supplement agreement under our credit facility and used the proceeds, combined with cash on hand, to repay the $85.9 million loan secured by the Renaissance Harborplace. Interest on the term loan is based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on our leverage ratios. Additionally, we entered into a swap agreement effective in October 2015, fixing the LIBOR rate at 1.591% for the duration of the $85.0 million term loan. Based on our current leverage, the loan reflects a fixed rate of 3.391%.
In December 2015, we repaid the $30.7 million loan secured by the Hilton North Houston, which loan was scheduled to mature in March 2016.
Additionally, in December 2015, we repaid the remaining $175.0 million balance of the loan secured by the Doubletree Guest Suites Times Square concurrent with the sale of the hotel. We incurred a $1.2 million prepayment penalty
63
upon the loan’s repayment, and wrote off $1.7 million in deferred financing fees, both of which are included in loss on extinguishment of debt on our consolidated statements of operations.
We may in the future seek to obtain mortgages on one or allmore of our 2214 unencumbered hotels 15(subject to certain stipulations under our unsecured term loans and senior notes), 12 of which are currently held by subsidiaries whose interests are pledged to our credit facility. Our 2214 unencumbered hotels include: Boston Park Plaza; Courtyard by Marriott Los Angeles; Embassy Suites Chicago; Hilton Garden Inn Chicago Downtown/Magnificent Mile; Hilton New Orleans St. Charles; Hilton North Houston; Hyatt Centric Chicago Magnificent Mile; Hyatt Regency Newport Beach; Hyatt Regency San Francisco; Marriott Boston Long Wharf; Marriott Houston; Marriott Philadelphia; Marriott Portland; Marriott Quincy; Marriott Tysons Corner; Oceans Edge HotelResort & Marina; Renaissance Harborplace; Renaissance Long Beach; Renaissance Los Angeles Airport; Renaissance Orlando at SeaWorld®; Renaissance Washington DC; Renaissance Westchester; The Bidwell Marriott Portland; and Wailea Beach Resort. After our sales ofIn January 2021, the Marriott Philadelphia andRenaissance Washington DC was pledged to the Marriott Quincycredit facility, resulting in January 2018, we have 20 unencumbered13 hotels 14 of which remaincurrently held by subsidiaries whose interests are pledged to our credit facility. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility may be reduced.
Contractual Obligations
The following table summarizes our payment obligations and commitments as of December 31, 20172020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
|
| Payment due by period |
| ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
| Less Than |
| 1 to 3 |
| 3 to 5 |
| More than |
| |||||||||||||||||||||||||||||||||||
|
| Total |
| 1 year |
| years |
| years |
| 5 years |
| ||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||
| | Payment due by period |
| ||||||||||||||||||||||||||||||||||||||||||||
| | | | | Less Than | | 1 to 3 | | 3 to 5 | | More than | | |||||||||||||||||||||||||||||||||||
| | Total | | 1 year | | years | | years | | 5 years |
| ||||||||||||||||||||||||||||||||||||
Notes payable |
| $ | 990,402 |
| $ | 7,420 |
| $ | 312,094 |
| $ | 199,693 |
| $ | 471,195 |
| | $ | 747,945 | | $ | 3,305 | | $ | 412,039 | | $ | 127,601 | | $ | 205,000 | | |||||||||||||||
Interest obligations on notes payable |
|
| 233,083 |
|
| 40,921 |
|
| 80,056 |
|
| 49,260 |
|
| 62,846 |
| | | 119,182 | | | 29,951 | | | 48,410 | | | 24,939 | | | 15,882 | | |||||||||||||||
Capital lease obligations |
|
| 26,805 |
|
| 1 |
|
| 2 |
|
| 3 |
|
| 26,799 |
| |||||||||||||||||||||||||||||||
Interest obligations on capital leases |
|
| 123,781 |
|
| 2,356 |
|
| 4,712 |
|
| 4,839 |
|
| 111,874 |
| |||||||||||||||||||||||||||||||
Operating lease obligations (2) |
|
| 294,519 |
|
| 9,278 |
|
| 20,841 |
|
| 21,256 |
|
| 243,144 |
| |||||||||||||||||||||||||||||||
Finance lease obligation, including imputed interest | | | 108,012 | | | 1,403 | | | 2,806 | | | 2,806 | | | 100,997 | | |||||||||||||||||||||||||||||||
Operating lease obligations, including imputed interest (3) | | | 41,834 | | | 6,676 | | | 13,509 | | | 13,731 | | | 7,918 | | |||||||||||||||||||||||||||||||
Construction commitments |
|
| 60,875 |
|
| 60,875 |
|
| — |
|
| — |
|
| — |
| | | 19,847 | | | 19,847 | |
| — | |
| — | |
| — | | |||||||||||||||
Employment obligations |
|
| 871 |
|
| 871 |
|
| — |
|
| — |
|
| — |
| |||||||||||||||||||||||||||||||
Total |
| $ | 1,730,336 |
| $ | 121,722 |
| $ | 417,705 |
| $ | 275,051 |
| $ | 915,858 |
| | $ | 1,036,820 | | $ | 61,182 | | $ | 476,764 | | $ | 169,077 | | $ | 329,797 | |
(1) |
|
(2) | Interest on our variable-rate debt |
(3) |
|
|
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground, building and airairspace leases, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described below.in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested $115.1$51.4 million in our portfolio and other assets during 2017, $182.22020 and $96.0 million in 2016 and $164.2 million in 2015.2019. As of December 31, 2017,2020, we have contractual construction commitments totaling $60.9$19.8 million for ongoing renovations. As noted above, in light of the COVID-19 pandemic, we have elected to conserve cash by deferring a portion of our planned 2021 non-essential capital improvements into our portfolio. In February 2021, however, we entered into an agreement with Marriott to rebrand the Renaissance Washington DC to The Westin Washington DC, upon substantial completion of a repositioning of the hotel. If we renovate or develop additional hotels or other assets in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel’s totalapplicable annual revenue. As of December 31, 2017,2020, our balance sheet includes restricted cash of $67.2$35.9 million, which was held in FF&E reserve accounts for future capital expenditures at the majority of our 25 hotels.the 17 Hotels. According to certain loan agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount
55
in such reserve accounts each year. In light of the COVID-19 pandemic, some of our third-party managers have suspended the requirement to fund into the FF&E reserves throughout 2021. Additionally, some of our third-party managers are permitting owners the ability to draw from the FF&E reserve to fund operating expenses, subject to certain conditions including a future repayment to the reserve.
64
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Hawaii, Key West and Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City, Hawaii and Key West). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weathereconomic and business conditions, natural disasters,including a U.S. recession, trade conflicts and tariffs, changes impacting global travel, regional or global economic slowdowns, any flu or disease-related pandemic that impacts travel or the ability to travel, including COVID-19, the adverse effects of climate change, the threat of terrorism, terrorist attacks or alerts,events, civil unrest, public health concerns, government shutdowns, airline strikesevents that reduce the capacity or reduced airline capacity, economic factorsavailability of air travel, increased competition from other hotels in our markets, new hotel supply or alternative lodging options and other considerations affecting travel.unexpected changes in business, commercial travel, leisure travel and tourism. Revenues for our 24 hotel Comparable Portfoliothe 17 Hotels by quarter for 2015, 20162018 and 2017 were as follows2019 are provided in the table below (dollars in thousands):, which information indicates the consistent seasonality of our results. While 2020 revenues for the 17 Hotels are not comparable to 2019 and 2018 due to the COVID-19 pandemic and temporary suspension of operations at certain hotels, the information is presented in the table below for illustrative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| First |
| Second |
| Third |
| Fourth |
|
|
|
| |||||||||||||||||||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Total |
| ||||||||||||||||||||||
2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total revenues |
| $ | 284,385 |
| $ | 339,267 |
| $ | 324,595 |
| $ | 300,933 |
| $ | 1,249,180 |
| |||||||||||||||||
Held for sale hotel revenues (1) |
|
| (9,889) |
|
| (14,120) |
|
| (13,704) |
|
| (12,303) |
|
| (50,016) |
| |||||||||||||||||
Sold hotel revenues (2) |
|
| (28,260) |
|
| (30,820) |
|
| (33,335) |
|
| (27,775) |
|
| (120,190) |
| |||||||||||||||||
Non-hotel revenues (3) |
|
| (2,097) |
|
| (2,044) |
|
| (2,076) |
|
| (1,605) |
|
| (7,822) |
| |||||||||||||||||
Total Comparable Portfolio revenues (4) |
| $ | 244,139 |
| $ | 292,283 |
| $ | 275,480 |
| $ | 259,250 |
| $ | 1,071,152 |
| |||||||||||||||||
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues |
|
| 22.8 | % |
| 27.3 | % |
| 25.7 | % |
| 24.2 | % |
| 100 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total revenues |
| $ | 274,292 |
| $ | 322,160 |
| $ | 303,304 |
| $ | 289,584 |
| $ | 1,189,340 |
| |||||||||||||||||
Held for sale hotel revenues (1) |
|
| (9,922) |
|
| (14,432) |
|
| (13,322) |
|
| (12,359) |
|
| (50,035) |
| |||||||||||||||||
Sold hotel revenues (2) |
|
| (15,773) |
|
| (11,667) |
|
| (11,210) |
|
| (9,466) |
|
| (48,116) |
| |||||||||||||||||
Non-hotel revenues (3) |
|
| (121) |
|
| (99) |
|
| 210 |
|
| (5,066) |
|
| (5,076) |
| |||||||||||||||||
Total Comparable Portfolio revenues (4) |
| $ | 248,476 |
| $ | 295,962 |
| $ | 278,982 |
| $ | 262,693 |
| $ | 1,086,113 |
| |||||||||||||||||
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues |
|
| 22.9 | % |
| 27.2 | % |
| 25.7 | % |
| 24.2 | % |
| 100 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total revenues |
| $ | 280,743 |
| $ | 318,796 |
| $ | 303,909 |
| $ | 290,190 |
| $ | 1,193,638 |
| |||||||||||||||||
Non-comparable hotel revenues (5) |
|
| — |
|
| — |
|
| (1,848) |
|
| (3,275) |
|
| (5,123) |
| |||||||||||||||||
Held for sale hotel revenues (1) |
|
| (9,607) |
|
| (13,966) |
|
| (12,642) |
|
| (12,207) |
|
| (48,422) |
| |||||||||||||||||
Sold hotel revenues (2) |
|
| (8,737) |
|
| (1,244) |
|
| — |
|
| — |
|
| (9,981) |
| |||||||||||||||||
Non-hotel revenues (3) |
|
| (18) |
|
| (22) |
|
| (22) |
|
| (20) |
|
| (82) |
| |||||||||||||||||
Total Comparable Portfolio revenues (4) |
| $ | 262,381 |
| $ | 303,564 |
| $ | 289,397 |
| $ | 274,688 |
| $ | 1,130,030 |
| |||||||||||||||||
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues |
|
| 23.2 | % |
| 26.9 | % |
| 25.6 | % |
| 24.3 | % |
| 100 | % |
| | | | | | | | | | | | | | | | |
| | First | | Second | | Third | | Fourth | | | | | ||||
Revenues: | | Quarter | | Quarter | | Quarter | | Quarter | | Total | | |||||
2018 | | | | | | | | | | | | | | | | |
Total revenues | | $ | 271,446 | | $ | 317,447 | | $ | 289,308 | | $ | 280,852 | | $ | 1,159,053 | |
Sold hotel revenues (1) | | | (52,906) | | | (62,374) | | | (49,886) | | | (43,207) | | | (208,373) | |
Non-hotel revenues (2) | | | (832) | | | (21) | | | (25) | | | (4,987) | | | (5,865) | |
17 Hotel portfolio revenues (3) | | $ | 217,708 | | $ | 255,052 | | $ | 239,397 | | $ | 232,658 | | $ | 944,815 | |
Quarterly 17 Hotel portfolio revenues as a percentage of total annual revenues | | | 23.0 | % | | 27.0 | % | | 25.3 | % | | 24.7 | % | | 100 | % |
| | | | | | | | | | | | | | | | |
2019 | | | | | | | | | | | | | | | | |
Total revenues | | $ | 257,680 | | $ | 302,896 | | $ | 281,639 | | $ | 272,952 | | $ | 1,115,167 | |
Sold hotel revenues (1) | | | (27,769) | | | (37,527) | | | (35,768) | | | (34,624) | | | (135,688) | |
Non-hotel revenues (2) | | | (23) | | | (25) | | | (22) | | | (22) | | | (92) | |
17 Hotel portfolio revenues (3) | | $ | 229,888 | | $ | 265,344 | | $ | 245,849 | | $ | 238,306 | | $ | 979,387 | |
Quarterly 17 Hotel portfolio revenues as a percentage of total annual revenues | | | 23.5 | % | | 27.1 | % | | 25.1 | % | | 24.3 | % | | 100 | % |
| | | | | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | | | | |
Total revenues | | $ | 191,212 | | $ | 10,424 | | $ | 28,910 | | $ | 37,360 | | $ | 267,906 | |
Sold hotel revenues (1) | | | (19,170) | | | (1,743) | | | (1,934) | | | (1,249) | | | (24,096) | |
Non-hotel revenues (2) | | | (22) | | | (2,393) | | | (4,618) | | | (3,783) | | | (10,816) | |
17 Hotel portfolio revenues (3) | | $ | 172,020 | | $ | 6,288 | | $ | 22,358 | | $ | 32,328 | | $ | 232,994 | |
Quarterly 17 Hotel portfolio revenues as a percentage of total annual revenues | | | 73.8 | % | | 2.7 | % | | 9.6 | % | | 13.9 | % | | 100 | % |
(1) |
|
|
| Sold hotel revenues include those generated by the |
(2) |
| Non-hotel revenues include |
(3) |
|
|
|
|
65
56
Inflation
Inflation
Inflation may affect our expenses, including, without limitation, by increasing such costs as labor, employee-related benefits, food, commodities, taxes, property and casualty insurance and utilities.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
| Impairment of long-lived assets. |
| Acquisition related assets and liabilities. Accounting for the acquisition of a hotel property or other entity |
In addition, the acquisition of a hotel property or other entity requires an analysis of the transaction to determine if it qualifies as the purchase of a business or an asset. If the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the transaction is an asset acquisition. Transaction costs associated with asset acquisitions are capitalized and subsequently depreciated over the life of the related asset, while the same costs associated with a business combination are expensed as incurred and included in corporate overhead on our consolidated statements of operations. Also, asset acquisitions are not subject to a measurement period, as are business combinations.
| Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five to |
57
assets are amortized using the straight-line method over the shorter of their estimated useful life or the length of the related agreement. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels. We have not changed the |
| Income taxes. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to our |
66
owned TRS, which leases our hotels from |
We review any uncertain tax positions and, if necessary, we will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.
New Accounting Standards and Accounting Changes
See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
To the extent that we incur debt with variable interest rates, our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have no derivative financial instruments held for trading purposes. We use derivative financial instruments, which are intended to manage interest rate risks.risks on our floating rate debt.
As of December 31, 2017, 77.8%2020, 70.6% of our debt obligations are fixed in nature, which largely mitigates the effect of changes in interest rates on our cash interest payments. If the market rate of interest on our variable ratevariable-rate debt increases or decreases by 100 basis points, interest expense would increase or decrease, respectively, our future consolidated earnings and cash flows by approximately $2.2 million based on the variable rate at December 31, 2017.2020. After adjusting for the noncontrolling interest in the Hilton San Diego Bayfront, this increase or decrease in interest expense would increase or decrease, respectively, our future consolidated earnings and cash flows by $1.7 million based on the variable rate at December 31, 2017.2020.
Item 8. | Financial Statements and Supplementary Data |
Item 8.See Index to Financial Statements and Supplementary Data
See index to financial statementsSchedule included in this report.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A.Controls and Procedures
Item 9A. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that as of the end of the period covered by this Annual Report on Form 10-K10-K our disclosure
58
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified by the rules and forms of the SEC and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
67
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 Framework). Based on its evaluation, our management concluded that our internal control over financial reporting was effective to the reasonable assurance level as of December 31, 2017.2020.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued its report, included herein at page 69,60, on the effectiveness of our internal control over financial reporting.
(c) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
68
59
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Sunstone Hotel Investors, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Sunstone Hotel Investors, Inc.’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Sunstone Hotel Investors, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and the financial statement schedule listed in the Index at Item 15 and our report dated February 14, 201812, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| |
/s/ Ernst & Young LLP | |
| |
Irvine, California | |
February | |
69
60
Item 9B. | Other Information |
None.
PART III
Our discussion of federal income tax considerations in Exhibit 99.1 attached hereto, which is incorporated herein by reference, supersedes and replaces, in its entirety, the disclosure under the heading “U.S. Federal Income Tax Considerations” in the prospectus dated February 24, 2017, which is a part of our Registration Statement on Form S-3 (File No. 333-216233). Our updated discussion addresses recently enacted tax law changes.
Item 10. | Directors, Executive Officers and Corporate Governance |
Item 10.Directors, Executive Officers and Corporate Governance
The information required by this Item is set forth under the caption “Electioncaptions “Proposal 1: Election of Directors”Directors,” “Delinquent Section 16(a) Reports” and “Company Information” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
Certain other information concerning executive officers of the Company is included in Part I, Item 1 of this Annual Report on Form 10-K under the caption “Information about our Executive Officers.”
Item 11. | Executive Compensation |
The information required by this Item is set forth under the captioncaptions “Compensation Discussion and Analysis,” “Compensation Committee Report to Stockholders,” “Executive Officer Compensation” and “Compensation Committee Interlocks and Insider Participation” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Except as set forth below, the information required by this Item is set forth under the caption “Security Ownership by Directors, Executive Officers and Five Percent Stockholders” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference. The following table sets forth certain information with respect to securities authorized for issuance under the equity compensation plan as of December 31, 2017:2020:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of securities |
|
|
|
|
|
|
| remaining available |
|
|
|
|
|
|
| for future issuance |
|
|
|
|
|
|
| under the Long-term |
|
| Number of securities to |
| Weighted-average |
| Incentive Plan | |
|
| be issued upon exercise |
| exercise price of |
| (excluding securities | |
|
| of outstanding awards |
| outstanding awards |
| reflected in column a) | |
|
| (a) |
| (b) |
| (c) | |
Equity compensation plans approved by the Company’s stockholders: |
|
|
|
|
|
|
|
- 2004 Long-Term Incentive Plan |
| 200,000 |
| $ | 17.71 | (1) | 4,824,586 |
|
| |
| | | | | ||||
| | | | | Number of securities | ||||||
| | | | | | | remaining available | ||||
| | | | | | | for future issuance | ||||
| | | | | | | under the Long-term | ||||
| | Number of securities to | | Weighted-average | | Incentive Plan | |||||
| | be issued upon exercise | | exercise price | | (excluding securities | |||||
| | of outstanding awards | | outstanding awards | | reflected in column a) | |||||
| | (a) | | (b) | | (c) | |||||
Equity compensation plans approved by the | | | | | | | | ||||
- 2004 Long-Term Incentive Plan, as | ⸺ | | | ⸺ | | 2,911,865 |
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is set forth under the caption “Certain Relationships and Related Transactions” and “Corporate Governance”“Company Information” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
Item 14.Principal Accounting Fees and Services
Item 14. | Principal Accountant Fees and Services |
The information required by this Item is set forth under the caption “Ratification of the Audit Committee’s Appointment of“Our Independent Registered Public Accounting Firm” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
7061
PART IV
Item 15.Exhibits and Financial Statement Schedules
Item 15. | Exhibits and Financial Statement Schedules |
| | |
(a)(1) | | Financial Statements. See Index to Financial Statements and Schedules on page F-1. |
| | |
(a)(2) | | Financial Statement Schedules. See Index to Financial Statements and Schedules on page F-1. |
| | |
(a)(3) | | Exhibits. The following exhibits are filed (or incorporated by reference herein) as a part of this Annual Report on Form 10-K: |
| | |
Exhibit | | |
| | Description |
| |
|
| ||
3.1 | | |
| | |
3.2 | | |
| ||
| | |
| | |
| ||
| ||
| | |
| | |
| | |
| | |
| | |
4.1 | | |
| | |
4.2 | | |
| | |
4.3 | | |
| | |
4.4 | | |
| | |
71
4.5 | | |
| | |
10.1 | | |
| | |
10.2 | | |
| | |
10.3 | | |
| | |
10.3.1 | | |
| | |
10.3.2 | | |
| | |
62
10.4 | | |
| | |
10.4.1 | | |
| | |
10.5 | | |
| ||
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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| | |
| | |
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72
| ||
| | |
| | |
| ||
| | |
10.14 | | |
| | |
10.15 | | |
| | |
10.16 | | |
| | |
10.17 | | |
| | |
10.18 | |
63
| | |
10.18.1 | | |
| | |
10.19 | | |
| | |
10.19.1 | | |
| | |
10.19.2 | | |
| | |
10.19.3 | | |
| | |
10.19.4 | | |
| | |
10.20 | | |
|
| |
| | |
10.20.1 | | |
| | |
10.20.2 | | |
| | |
21.1 | | |
| | |
23.1 | | |
| | |
31.1 | | Certification of Principal Executive Officer (Section 302 Certification).* |
| | |
31.2 | | Certification of Principal Financial Officer (Section 302 Certification).* |
| | |
32.1 | | |
| | |
| ||
| ||
101.INS | | Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. * |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document * |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document * |
73
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document * |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document * |
| | |
64
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document * |
| | |
| | |
| | |
104 | | Cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 formatted in Inline XBRL (included in Exhibit 101). |
*Attached as Exhibit 101 to this Annual Report on Form 10-K are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at December 31, 2017 and December 31, 2016; (ii) the Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015; (iii) the Consolidated Statements of Equity for the years ended December 31, 2017, 2016 and 2015 (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and (v) Notes to Consolidated Financial Statements that have been detail tagged.Filed herewith.
#Management contract or compensatory plan or arrangement.
Item 16. | Form 10-K Summary |
None.
7465
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
| Sunstone Hotel Investors, Inc. |
| |
Date: February | /S/ Bryan A. Giglia |
| Bryan A. Giglia |
| Chief Financial Officer (Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| | | | |
Signature | Title | Date | ||
| |
| |
|
| ||||
/S/ DOUGLAS M. PASQUALE | | Non-Executive Chairman | | February |
Douglas M. Pasquale | | | | |
| | | | |
/S/ JOHN V. ARABIA | | Director, President and Chief Executive Officer | | February |
John V. Arabia | | (Principal Executive Officer) | | |
| | | | |
/S/ W. BLAKE BAIRD | | Director | | February |
W. Blake Baird | | | | |
| | | | |
/S/ ANDREW BATINOVICH | | Director | | February |
Andrew Batinovich | | | | |
| | | | |
/S/ | | Director | | February |
| | | | |
| | | | |
/S/ THOMAS A. LEWIS, JR. | | Director | | February |
Thomas A. Lewis, Jr. | | | | |
| | | | |
/S/ MURRAY J. MCCABE | | Director | | February |
Murray J. McCabe | | | | |
| | | | |
/S/ KEITH P. RUSSELL | | Director | | February |
Keith P. Russell | | | | |
75
66
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
| | |
Sunstone Hotel Investors, Inc.: | Page | |
| | |
| F-2 | |
| | |
Consolidated Balance Sheets as of December 31, | |
|
| | |
|
| |
| | |
Consolidated Statements of Equity for the years ended December 31, | |
|
| | |
| ||
| F-7 | |
| | |
| F-9 | |
| | |
| F-35 |
F-1
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sunstone Hotel Investors, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sunstone Hotel Investors, Inc. (the Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework)framework) and our report dated February 14, 201812, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
| | |
| | Hotel investment impairment |
Description of the Matter | | The Company’s investment in hotel properties, including related lease right-of-use assets, totaled $2.5 billion as of December 31, 2020. As more fully described in Note 2 to the consolidated financial statements, the Company’s accounting policy is to record impairment losses when indicators of impairment are present and the future undiscounted net cash flows expected to be generated by those hotel investments are less than the hotel investments’ carrying amount. The impairment recognized is the amount by which the carrying amount of the hotel investment exceed their estimated fair value. The Company evaluates each of its hotel investments for impairment indicators and prepares future undiscounted cash flow estimates to determine if a hotel investment is impaired, if necessary. No single indicator would necessarily result in management preparing an estimate to determine if the future undiscounted cash flows are less than the book value of the hotel investments. Management uses judgment to determine if the severity of any single indicator or when there are a number of indicators of less severity when combined would result in an indication that a hotel investment requires an estimate of undiscounted cash flows to determine if an impairment of a hotel investment has occurred. Once management determines that a hotel investment is impaired, further judgments are required to be made by management to estimate the fair value of the hotel investment. For the year ended December 31, 2020, management identified hotel investments that had indicators of impairment that required further analysis. For each hotel investment in which the Company determined that indicators existed requiring further analysis, one or more cash flow analyses were prepared, and when multiple cash flows were prepared a |
F-2
probability was assigned to each cash flow based upon the estimated likelihood of each scenario occurring. Based upon the analysis, management determined that the total cash flows for three hotel investments were less than the book value of the related asset groups. As a result, the Company determined the fair value of the hotel investments and recognized $146.9 million impairment losses, which is the amount by which the carrying value exceeded the estimated fair value of the hotel investments. Auditing management’s hotel investment impairment assessment and measurement was challenging because determining whether events or changes in circumstances indicate that the investment may not be recoverable is highly judgmental due to the high degree of subjectivity in evaluating management’s identification of indicators of impairment, the related assessment of the severity of such indicators, and in evaluating management’s assumptions used in determining the future undiscounted cash flows of the hotel investments. In particular, the impairment indicators were based on qualitative and quantitative factors for the specific hotel investments as determined by management. Such factors included, but were not limited to, significant changes to hotel property operations, management’s ongoing hotel capital investment, ultimate hold period, disposition strategy, and current industry and economic trends. No one set of indicators that trigger a cash flow assessment are common to all hotel investments but are unique to each investment. Changes to management’s identification of indicators of impairment and assessment of the indicator’s severity could have a significant effect on management’s determination of whether the asset needed to be tested for recovery as of December 31, 2020. Management’s impairment assessment and impairment measurement is sensitive to significant assumptions such as hold periods, discount rates, capitalization rates, revenue growth rates, expense growth rates, expected margins, and where there are multiple cash flow outcomes, the probability assigned to each cash flow scenario, all of which are affected by expectations about future market or economic conditions. | ||
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls related to the hotel investment impairment assessment and impairment measurement process, including controls over management’s identification of indicators of impairment and management’s review of the significant assumptions. We performed audit procedures to test management’s identification of events or changes in circumstances that might indicate that the carrying amount of a hotel might not be recoverable, and to test management’s assessment of the severity of indicators of impairment for each of the Company’s hotel investments, that included, among others, obtaining evidence to corroborate management’s judgments and searching for contrary evidence such as significant declines in operating results, market and economic trends, disposition strategies, natural disasters or the effects on the valuation assumptions as a result of the COVID 19 pandemic. To test management’s future undiscounted cash flows of hotel properties identified as having an indicator of impairment, as well as the fair value of the hotel investment, we performed audit procedures that included, among others, assessing the methodologies and involving our valuation specialists to assist in testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. As part of our evaluation of indicators of impairment, the measurement of the Company’s undiscounted future cash flows and fair value of the hotel investment, we considered hotel property operations, management’s hotel capital investment, hold period, disposition strategy, current industry and economic trends and other relevant factors and assumptions. |
/s/ Ernst & Young, LLP
We have served as the Company’s auditor since 2004.
| |
Irvine, California | |
February | |
F-2F-3
SUNSTONECSUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2016 |
| ||
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 488,002 |
| $ | 369,537 |
|
Restricted cash |
|
| 71,309 |
|
| 67,923 |
|
Accounts receivable, net |
|
| 34,219 |
|
| 39,337 |
|
Inventories |
|
| 1,323 |
|
| 1,225 |
|
Prepaid expenses |
|
| 10,464 |
|
| 10,489 |
|
Assets held for sale, net |
|
| 122,807 |
|
| 79,113 |
|
Total current assets |
|
| 728,124 |
|
| 567,624 |
|
Investment in hotel properties, net |
|
| 3,106,066 |
|
| 3,158,219 |
|
Deferred financing fees, net |
|
| 1,305 |
|
| 4,002 |
|
Other assets, net |
|
| 22,317 |
|
| 9,389 |
|
Total assets |
| $ | 3,857,812 |
| $ | 3,739,234 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 31,810 |
| $ | 36,110 |
|
Accrued payroll and employee benefits |
|
| 26,687 |
|
| 24,896 |
|
Dividends and distributions payable |
|
| 133,894 |
|
| 119,847 |
|
Other current liabilities |
|
| 44,502 |
|
| 39,869 |
|
Current portion of notes payable, net |
|
| 5,477 |
|
| 184,929 |
|
Liabilities of assets held for sale |
|
| 189 |
|
| 3,153 |
|
Total current liabilities |
|
| 242,559 |
|
| 408,804 |
|
Notes payable, less current portion, net |
|
| 977,282 |
|
| 746,374 |
|
Capital lease obligations, less current portion |
|
| 26,804 |
|
| 15,574 |
|
Other liabilities |
|
| 28,989 |
|
| 36,650 |
|
Total liabilities |
|
| 1,275,634 |
|
| 1,207,402 |
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100,000,000 shares authorized: |
|
|
|
|
|
|
|
6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at December 31, 2017 and 2016, stated at liquidation preference of $25.00 per share |
|
| 115,000 |
|
| 115,000 |
|
6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at December 31, 2017 and 2016, stated at liquidation preference of $25.00 per share |
|
| 75,000 |
|
| 75,000 |
|
Common stock, $0.01 par value, 500,000,000 shares authorized, 225,321,660 shares issued and outstanding at December 31, 2017 and 220,073,140 shares issued and outstanding at December 31, 2016 |
|
| 2,253 |
|
| 2,201 |
|
Additional paid in capital |
|
| 2,679,221 |
|
| 2,596,620 |
|
Retained earnings |
|
| 932,277 |
|
| 786,901 |
|
Cumulative dividends and distributions |
|
| (1,270,013) |
|
| (1,092,952) |
|
Total stockholders’ equity |
|
| 2,533,738 |
|
| 2,482,770 |
|
Noncontrolling interest in consolidated joint venture |
|
| 48,440 |
|
| 49,062 |
|
Total equity |
|
| 2,582,178 |
|
| 2,531,832 |
|
Total liabilities and equity |
| $ | 3,857,812 |
| $ | 3,739,234 |
|
| | | | | | | |
|
| December 31, 2020 |
| December 31, 2019 |
| ||
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 368,406 | | $ | 816,857 | |
Restricted cash | |
| 47,733 | |
| 48,116 | |
Accounts receivable, net | |
| 8,566 | |
| 35,209 | |
Prepaid expenses and other current assets | |
| 10,440 | |
| 13,550 | |
Total current assets | |
| 435,145 | |
| 913,732 | |
Investment in hotel properties, net | |
| 2,461,498 | |
| 2,872,353 | |
Finance lease right-of-use asset, net | | | 46,182 | | | 47,652 | |
Operating lease right-of-use assets, net | | | 26,093 | | | 60,629 | |
Deferred financing costs, net | |
| 4,354 | |
| 2,718 | |
Other assets, net | |
| 12,445 | |
| 21,890 | |
Total assets | | $ | 2,985,717 | | $ | 3,918,974 | |
| | | | | | | |
LIABILITIES AND EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable and accrued expenses | | $ | 37,326 | | $ | 35,614 | |
Accrued payroll and employee benefits | |
| 15,392 | |
| 25,002 | |
Dividends and distributions payable | |
| 3,208 | |
| 135,872 | |
Other current liabilities | |
| 32,606 | |
| 46,955 | |
Current portion of notes payable, net | |
| 2,261 | |
| 82,109 | |
Total current liabilities | |
| 90,793 | |
| 325,552 | |
Notes payable, less current portion, net | |
| 742,528 | |
| 888,954 | |
Finance lease obligation, less current portion | |
| 15,569 | |
| 15,570 | |
Operating lease obligations, less current portion | | | 29,954 | | | 49,691 | |
Other liabilities | |
| 17,494 | |
| 18,136 | |
Total liabilities | |
| 896,338 | |
| 1,297,903 | |
Commitments and contingencies (Note 13) | | | | | | | |
Equity: | | | | | | | |
Stockholders’ equity: | | | | | | | |
Preferred stock, $0.01 par value, 100,000,000 shares authorized: | | | | | | | |
6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at December 31, 2020 and 2019, stated at liquidation preference of $25.00 per share | | | 115,000 | | | 115,000 | |
6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at December 31, 2020 and 2019, stated at liquidation preference of $25.00 per share | | | 75,000 | | | 75,000 | |
Common stock, $0.01 par value, 500,000,000 shares authorized, 215,593,401 shares issued and outstanding at December 31, 2020 and 224,855,351 shares issued and outstanding at December 31, 2019 | |
| 2,156 | |
| 2,249 | |
Additional paid in capital | |
| 2,586,108 | |
| 2,683,913 | |
Retained earnings | |
| 913,766 | |
| 1,318,455 | |
Cumulative dividends and distributions | |
| (1,643,386) | |
| (1,619,779) | |
Total stockholders’ equity | |
| 2,048,644 | |
| 2,574,838 | |
Noncontrolling interest in consolidated joint venture | |
| 40,735 | |
| 46,233 | |
Total equity | |
| 2,089,379 | |
| 2,621,071 | |
Total liabilities and equity | | $ | 2,985,717 | | $ | 3,918,974 | |
See accompanying notes to consolidated financial statements.
F-4
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | | | | | | | | |
|
| Year Ended |
| Year Ended |
| Year Ended |
| |||
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| |||
REVENUES | | | | | | | | | | |
Room | | $ | 169,522 | | $ | 767,392 | | $ | 799,369 | |
Food and beverage | |
| 54,900 | |
| 272,869 | |
| 284,668 | |
Other operating | |
| 43,484 | |
| 74,906 | |
| 75,016 | |
Total revenues | |
| 267,906 | |
| 1,115,167 | |
| 1,159,053 | |
OPERATING EXPENSES | | | | | | | | | | |
Room | |
| 76,977 | |
| 202,889 | |
| 210,204 | |
Food and beverage | |
| 63,140 | |
| 186,436 | |
| 193,486 | |
Other operating | |
| 7,636 | |
| 16,594 | |
| 17,169 | |
Advertising and promotion | |
| 23,741 | |
| 54,369 | |
| 55,523 | |
Repairs and maintenance | |
| 27,084 | |
| 41,619 | |
| 43,111 | |
Utilities | |
| 17,311 | |
| 27,311 | |
| 29,324 | |
Franchise costs | |
| 7,060 | |
| 32,265 | |
| 35,423 | |
Property tax, ground lease and insurance | |
| 76,848 | |
| 83,265 | |
| 82,414 | |
Other property-level expenses | |
| 49,854 | |
| 130,321 | |
| 132,419 | |
Corporate overhead | |
| 28,149 | |
| 30,264 | |
| 30,247 | |
Depreciation and amortization | | | 137,051 | | | 147,748 | | | 146,449 | |
Impairment losses | |
| 146,944 | |
| 24,713 | |
| 1,394 | |
Total operating expenses | |
| 661,795 | |
| 977,794 | |
| 977,163 | |
| | | | | | | | | | |
Interest and other income | |
| 2,836 | |
| 16,557 | |
| 10,500 | |
Interest expense | |
| (53,307) | |
| (54,223) | |
| (47,690) | |
Gain on sale of assets | |
| 34,298 | |
| 42,935 | |
| 116,961 | |
Gain (loss) on extinguishment of debt, net | | | 6,146 | | | — | | | (835) | |
(Loss) income before income taxes | |
| (403,916) | |
| 142,642 | |
| 260,826 | |
Income tax (provision) benefit, net | |
| (6,590) | |
| 151 | |
| (1,767) | |
NET (LOSS) INCOME | |
| (410,506) | |
| 142,793 | |
| 259,059 | |
Loss (income) from consolidated joint venture attributable to noncontrolling interest | |
| 5,817 | |
| (7,060) | |
| (8,614) | |
Preferred stock dividends | |
| (12,830) | |
| (12,830) | |
| (12,830) | |
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (417,519) | | $ | 122,903 | | $ | 237,615 | |
| | | | | | | | | | |
Basic and diluted per share amounts: | | | | | | | | | | |
Basic and diluted (loss) income attributable to common stockholders per common share | | $ | (1.93) | | $ | 0.54 | | $ | 1.05 | |
| | | | | | | | | | |
Basic and diluted weighted average common shares outstanding | | | 215,934 | | | 225,681 | | | 225,924 | |
See accompanying notes to consolidated financial statements.
F-3
F-5
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| Year Ended |
| Year Ended |
| |||
|
| December 31, 2017 |
| December 31, 2016 |
| December 31, 2015 |
| |||
REVENUES |
|
|
|
|
|
|
|
|
|
|
Room |
| $ | 829,320 |
| $ | 824,340 |
| $ | 874,117 |
|
Food and beverage |
|
| 296,933 |
|
| 294,415 |
|
| 293,892 |
|
Other operating |
|
| 67,385 |
|
| 70,585 |
|
| 81,171 |
|
Total revenues |
|
| 1,193,638 |
|
| 1,189,340 |
|
| 1,249,180 |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
Room |
|
| 213,301 |
|
| 211,947 |
|
| 224,035 |
|
Food and beverage |
|
| 201,225 |
|
| 204,102 |
|
| 204,932 |
|
Other operating |
|
| 16,392 |
|
| 16,684 |
|
| 21,335 |
|
Advertising and promotion |
|
| 58,572 |
|
| 60,086 |
|
| 61,892 |
|
Repairs and maintenance |
|
| 46,298 |
|
| 44,307 |
|
| 46,557 |
|
Utilities |
|
| 30,419 |
|
| 30,424 |
|
| 34,543 |
|
Franchise costs |
|
| 36,681 |
|
| 36,647 |
|
| 40,096 |
|
Property tax, ground lease and insurance |
|
| 83,716 |
|
| 82,979 |
|
| 94,967 |
|
Other property-level expenses |
|
| 138,525 |
|
| 142,742 |
|
| 142,332 |
|
Corporate overhead |
|
| 28,817 |
|
| 25,991 |
|
| 33,339 |
|
Depreciation and amortization |
|
| 158,634 |
|
| 163,016 |
|
| 164,716 |
|
Impairment loss |
|
| 40,053 |
|
| — |
|
| — |
|
Total operating expenses |
|
| 1,052,633 |
|
| 1,018,925 |
|
| 1,068,744 |
|
Operating income |
|
| 141,005 |
|
| 170,415 |
|
| 180,436 |
|
Interest and other income |
|
| 4,340 |
|
| 1,800 |
|
| 3,885 |
|
Interest expense |
|
| (51,766) |
|
| (50,283) |
|
| (66,516) |
|
Loss on extinguishment of debt |
|
| (824) |
|
| (284) |
|
| (2,964) |
|
Gain on sale of assets |
|
| 45,474 |
|
| 18,413 |
|
| 226,217 |
|
Income before income taxes and discontinued operations |
|
| 138,229 |
|
| 140,061 |
|
| 341,058 |
|
Income tax benefit (provision), net |
|
| 7,775 |
|
| 616 |
|
| (1,434) |
|
Income from continuing operations |
|
| 146,004 |
|
| 140,677 |
|
| 339,624 |
|
Income from discontinued operations, net of tax |
|
| 7,000 |
|
| — |
|
| 15,895 |
|
NET INCOME |
|
| 153,004 |
|
| 140,677 |
|
| 355,519 |
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
| (7,628) |
|
| (6,480) |
|
| (8,164) |
|
Preferred stock dividends and redemption charge |
|
| (12,830) |
|
| (15,964) |
|
| (9,200) |
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | 132,546 |
| $ | 118,233 |
| $ | 338,155 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted per share amounts: |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common stockholders |
| $ | 0.56 |
| $ | 0.55 |
| $ | 1.54 |
|
Income from discontinued operations, net of tax |
|
| 0.03 |
|
| — |
|
| 0.08 |
|
Basic and diluted income attributable to common stockholders per common share |
| $ | 0.59 |
| $ | 0.55 |
| $ | 1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding |
|
| 221,898 |
|
| 214,966 |
|
| 207,350 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | | | | | | | | | | | | | | | Noncontrolling | | | |
| |||||||||
| | Series E | | Series F | | Common Stock | | | | | | | Cumulative | | Interest in | | | |
| ||||||||||||
| | Number of | | |
| | Number of | |
|
| | Number of |
|
| |
| Additional |
| Retained |
| Dividends and |
| Consolidated |
|
| |
| ||||
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Paid in Capital | | Earnings | | Distributions | | Joint Venture | | Total Equity |
| ||||||||
Balance at December 31, 2017 | | 4,600,000 | | $ | 115,000 | | 3,000,000 | | $ | 75,000 | | 225,321,660 | | $ | 2,253 | | $ | 2,679,221 | | $ | 932,277 | | $ | (1,270,013) | | $ | 48,440 | | $ | 2,582,178 | |
Amortization of deferred stock compensation |
| — | | | — | | — | | | — | | — | |
| — | |
| 9,383 | |
| — | |
| — | |
| — | |
| 9,383 | |
Issuance of restricted common stock, net | | — | | | — | | — | | | — | | 346,526 | | | 4 | | | (4,236) | | | — | | | — | | | — | | | (4,232) | |
Forfeiture of restricted common stock | | — | | | — | | — | | | — | | (12,793) | | | (1) | | | 1 | | | — | | | — | | | — | | | — | |
Common stock distributions and distributions payable at $0.69 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (157,359) | | | — | | | (157,359) | |
Series E preferred stock dividends and dividends payable at $1.7375 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (7,992) | | | — | | | (7,992) | |
Series F preferred stock dividends and dividends payable at $1.6125 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (4,838) | | | — | | | (4,838) | |
Distributions to noncontrolling interest |
| — | | | — | | — | | | — | | — | |
| — | |
| — | |
| — | |
| — | |
| (9,369) | |
| (9,369) | |
Net proceeds from sale of common stock |
| — | | | — | | — | | | — | | 2,590,854 | |
| 26 | |
| 44,315 | |
| — | |
| — | |
| — | |
| 44,341 | |
Net income | | — | | | — | | — | | | — | | — | |
| — | |
| — | |
| 250,445 | |
| — | |
| 8,614 | |
| 259,059 | |
Balance at December 31, 2018 |
| 4,600,000 | | | 115,000 | | 3,000,000 | | | 75,000 | | 228,246,247 | | | 2,282 | | | 2,728,684 | | | 1,182,722 | | | (1,440,202) | | | 47,685 | | | 2,711,171 | |
Amortization of deferred stock compensation |
| — | | | — | | — | | | — | | — | | | — | | | 9,719 | | | — | | | — | | | — | |
| 9,719 | |
Issuance of restricted common stock, net | | — | | | — | | — | | | — | | 396,972 | | | 4 | | | (4,439) | | | — | | | — | | | — | | | (4,435) | |
Forfeiture of restricted common stock | | — | | | — | | — | | | — | | (3,932) | | | — | | | — | | | — | | | — | | | — | | | — | |
Common stock distributions and distributions payable at $0.74 per share |
| — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (166,747) | | | — | |
| (166,747) | |
Series E preferred stock dividends and dividends payable at $1.7375 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (7,993) | | | — | | | (7,993) | |
Series F preferred stock dividends and dividends payable at $1.6125 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (4,837) | | | — | | | (4,837) | |
Distributions to noncontrolling interest |
| — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (8,512) | |
| (8,512) | |
Repurchase of outstanding common stock | | — | | | — | | — | | | — | | (3,783,936) | | | (37) | | | (50,051) | | | — | | | — | | | — | | | (50,088) | |
Net income |
| — | | | — | | — | | | — | | — | | | — | | | — | | | 135,733 | | | — | | | 7,060 | |
| 142,793 | |
Balance at December 31, 2019 |
| 4,600,000 | | | 115,000 | | 3,000,000 | | | 75,000 | | 224,855,351 | |
| 2,249 | |
| 2,683,913 | |
| 1,318,455 | |
| (1,619,779) | |
| 46,233 | |
| 2,621,071 | |
Amortization of deferred stock compensation |
| — | | | — | | — | | | — | | — | | | — | | | 9,988 | | | — | | | — | | | — | |
| 9,988 | |
Issuance of restricted common stock, net | | — | | | — | | — | | | — | | 550,635 | | | 5 | | | (3,997) | | | — | | | — | | | — | | | (3,992) | |
Forfeiture of restricted common stock | | — | | | — | | — | | | — | | (42,504) | | | — | | | — | | | — | | | — | | | — | | | — | |
Common stock distributions and distributions payable at $0.05 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (10,777) | | | — | | | (10,777) | |
Series E preferred stock dividends and dividends payable at $1.7375 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (7,992) | | | — | | | (7,992) | |
Series F preferred stock dividends and dividends payable at $1.6125 per share |
| — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (4,838) | | | — | |
| (4,838) | |
Distributions to noncontrolling interest | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (2,000) | | | (2,000) | |
Contributions from noncontrolling interest | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 2,319 | | | 2,319 | |
Repurchase of outstanding common stock |
| — | | | — | | — | | | — | | (9,770,081) | | | (98) | | | (103,796) | | | — | | | — | | | — | |
| (103,894) | |
Net loss |
| — | | | — | | — | | | — | | — | | | — | | | — | | | (404,689) | | | — | | | (5,817) | |
| (410,506) | |
Balance at December 31, 2020 |
| 4,600,000 | | $ | 115,000 | | 3,000,000 | | $ | 75,000 | | 215,593,401 | | $ | 2,156 | | $ | 2,586,108 | | $ | 913,766 | | $ | (1,643,386) | | $ | 40,735 | | $ | 2,089,379 | |
See accompanying notes to consolidated financial statements.
F-4F-6
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Noncontrolling |
|
|
|
| ||||||||||||||
|
| Series D |
| Series E |
| Series F |
| Common Stock |
| Additional |
|
|
|
| Cumulative |
| Interests in |
|
|
|
| |||||||||||||||
|
| Number of |
|
|
|
| Number of |
|
|
|
| Number of |
|
|
|
| Number of |
|
|
|
| Paid in |
| Retained |
| Dividends and |
| Consolidated |
|
|
|
| ||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Distributions |
| Joint Ventures |
| Total |
| |||||||||
Balance at December 31, 2014 |
| 4,600,000 |
| $ | 115,000 |
| — |
| $ | — |
| — |
| $ | — |
| 204,766,718 |
| $ | 2,048 |
| $ | 2,418,567 |
| $ | 305,503 |
| $ | (624,545) |
| $ | 52,261 |
| $ | 2,268,834 |
|
Deferred stock compensation, net |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| 710,108 |
|
| 7 |
|
| 2,840 |
|
| — |
|
| — |
|
| — |
|
| 2,847 |
|
Distributions to noncontrolling interests |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (9,981) |
|
| (9,981) |
|
Sale of noncontrolling interest |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (125) |
|
| (125) |
|
Issuance of common stock distributions declared in 2014 at $0.36 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| 2,127,565 |
|
| 21 |
|
| 37,328 |
|
| — |
|
| — |
|
| — |
|
| 37,349 |
|
Common stock distributions and distributions payable at $1.41 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (294,123) |
|
| — |
|
| (294,123) |
|
Series D preferred dividends and dividends payable at $2.00 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (9,200) |
|
| — |
|
| (9,200) |
|
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 347,355 |
|
| — |
|
| 8,164 |
|
| 355,519 |
|
Modified retrospective adjustment due to adoption of ASU No. 2016-09 |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 154 |
|
| (154) |
|
| — |
|
| — |
|
| — |
|
Balance at December 31, 2015 |
| 4,600,000 |
|
| 115,000 |
| — |
|
| — |
| — |
|
| — |
| 207,604,391 |
|
| 2,076 |
|
| 2,458,889 |
|
| 652,704 |
|
| (927,868) |
|
| 50,319 |
|
| 2,351,120 |
|
Redemption of preferred stock |
| (4,600,000) |
|
| (115,000) |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 4,052 |
|
| — |
|
| (4,052) |
|
| — |
|
| (115,000) |
|
Net proceeds from sales of preferred stock |
| — |
|
| — |
| 4,600,000 |
|
| 115,000 |
| 3,000,000 |
|
| 75,000 |
| — |
|
| — |
|
| (6,640) |
|
| — |
|
| — |
|
| — |
|
| 183,360 |
|
Net proceeds from sale of common stock |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| 3,564,047 |
|
| 36 |
|
| 54,156 |
|
| — |
|
| — |
|
| — |
|
| 54,192 |
|
Deferred stock compensation, net |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| 1,482,621 |
|
| 15 |
|
| 7,414 |
|
| — |
|
| — |
|
| — |
|
| 7,429 |
|
Distributions to noncontrolling interest |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7,737) |
|
| (7,737) |
|
Issuance of common stock distributions declared in 2015 at $1.26 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| 7,422,081 |
|
| 74 |
|
| 78,749 |
|
| — |
|
| — |
|
| — |
|
| 78,823 |
|
Common stock distributions and distributions payable at $0.68 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (149,120) |
|
| — |
|
| (149,120) |
|
Series D preferred stock dividends at $0.527778 per share through redemption date |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (2,428) |
|
| — |
|
| (2,428) |
|
Series E preferred stock dividends and dividends payable at $1.40445 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (6,460) |
|
| — |
|
| (6,460) |
|
Series F preferred stock dividends and dividends payable at $1.00785 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (3,024) |
|
| — |
|
| (3,024) |
|
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 134,197 |
|
| — |
|
| 6,480 |
|
| 140,677 |
|
Balance at December 31, 2016 |
| — |
|
| — |
| 4,600,000 |
|
| 115,000 |
| 3,000,000 |
|
| 75,000 |
| 220,073,140 |
|
| 2,201 |
|
| 2,596,620 |
|
| 786,901 |
|
| (1,092,952) |
|
| 49,062 |
|
| 2,531,832 |
|
Net proceeds from sale of common stock |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| 4,876,855 |
|
| 48 |
|
| 77,884 |
|
| — |
|
| — |
|
| — |
|
| 77,932 |
|
Deferred stock compensation, net |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| 371,665 |
|
| 4 |
|
| 4,717 |
|
| — |
|
| — |
|
| — |
|
| 4,721 |
|
Distributions to noncontrolling interest |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| (8,250) |
|
| (8,250) |
|
Common stock distributions and distributions payable at $0.73 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (164,231) |
|
| — |
|
| (164,231) |
|
Series E preferred stock dividends and dividends payable at $1.7375 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (7,993) |
|
| — |
|
| (7,993) |
|
Series F preferred stock dividends and dividends payable at $1.6125 per share |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (4,837) |
|
| — |
|
| (4,837) |
|
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 145,376 |
|
| — |
|
| 7,628 |
|
| 153,004 |
|
Balance at December 31, 2017 |
| — |
| $ | — |
| 4,600,000 |
| $ | 115,000 |
| 3,000,000 |
| $ | 75,000 |
| 225,321,660 |
| $ | 2,253 |
| $ | 2,679,221 |
| $ | 932,277 |
| $ | (1,270,013) |
| $ | 48,440 |
| $ | 2,582,178 |
|
See accompanying notes to consolidated financial statements
F-5
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| Year Ended |
| Year Ended |
| |||
|
| December 31, 2017 |
| December 31, 2016 |
| December 31, 2015 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 153,004 |
| $ | 140,677 |
| $ | 355,519 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Bad debt expense |
|
| 730 |
|
| 618 |
|
| 238 |
|
Gain on sale of assets, net |
|
| (52,747) |
|
| (18,422) |
|
| (242,234) |
|
Loss on extinguishment of debt |
|
| 824 |
|
| 284 |
|
| 2,964 |
|
Gain on redemption of note receivable |
|
| — |
|
| — |
|
| (939) |
|
Noncash interest on derivatives and capital lease obligations, net |
|
| 3,106 |
|
| (1,426) |
|
| (309) |
|
Depreciation |
|
| 155,962 |
|
| 159,919 |
|
| 160,405 |
|
Amortization of franchise fees and other intangibles |
|
| 3,141 |
|
| 3,743 |
|
| 6,479 |
|
Amortization of deferred financing fees |
|
| 2,409 |
|
| 2,200 |
|
| 3,148 |
|
Amortization of deferred stock compensation |
|
| 8,042 |
|
| 7,157 |
|
| 9,695 |
|
Impairment loss |
|
| 40,053 |
|
| — |
|
| — |
|
Hurricane-related loss |
|
| 201 |
|
| — |
|
| — |
|
Deferred income taxes, net |
|
| (9,235) |
|
| — |
|
| — |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
| 3,998 |
|
| 17,625 |
|
| 8,536 |
|
Accounts receivable |
|
| 3,175 |
|
| (8,401) |
|
| 1,775 |
|
Inventories |
|
| (16) |
|
| 40 |
|
| 44 |
|
Prepaid expenses and other assets |
|
| (1,820) |
|
| 977 |
|
| 1,445 |
|
Accounts payable and other liabilities |
|
| (822) |
|
| 476 |
|
| 4,619 |
|
Accrued payroll and employee benefits |
|
| 784 |
|
| (54) |
|
| (2,060) |
|
Net cash provided by operating activities |
|
| 310,789 |
|
| 305,413 |
|
| 309,325 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of assets |
|
| 150,215 |
|
| 41,587 |
|
| 565,115 |
|
Disposition deposit |
|
| — |
|
| 250 |
|
| — |
|
Proceeds from redemption of note receivable |
|
| — |
|
| — |
|
| 1,125 |
|
Restricted cash — replacement reserve |
|
| (7,384) |
|
| (9,368) |
|
| (2,642) |
|
Acquisitions of hotel property and other assets, net |
|
| (173,728) |
|
| (2,447) |
|
| — |
|
Renovations and additions to hotel properties |
|
| (115,097) |
|
| (182,185) |
|
| (164,232) |
|
Payment for interest rate derivatives |
|
| (125) |
|
| — |
|
| (13) |
|
Net cash (used in) provided by investing activities |
|
| (146,119) |
|
| (152,163) |
|
| 399,353 |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Proceeds from preferred stock offerings |
|
| — |
|
| 190,000 |
|
| — |
|
Payment of preferred stock offering costs |
|
| — |
|
| (6,640) |
|
| — |
|
Redemption of preferred stock |
|
| — |
|
| (115,000) |
|
| — |
|
Proceeds from common stock offerings |
|
| 79,407 |
|
| 55,133 |
|
| — |
|
Payment of common stock offering costs |
|
| (1,475) |
|
| (941) |
|
| — |
|
Repurchase of common stock for employee withholding obligations |
|
| (3,793) |
|
| (2,641) |
|
| (9,264) |
|
Proceeds from notes payable and credit facility |
|
| 460,000 |
|
| 100,000 |
|
| 123,000 |
|
Payments on notes payable and credit facility |
|
| (405,542) |
|
| (265,536) |
|
| (450,812) |
|
Payments of costs related to extinguishment of notes payable |
|
| (1) |
|
| (173) |
|
| (1,245) |
|
Payments of deferred financing costs |
|
| (3,537) |
|
| (1,759) |
|
| (5,861) |
|
Dividends and distributions paid |
|
| (163,014) |
|
| (227,486) |
|
| (77,544) |
|
Distributions to noncontrolling interests |
|
| (8,250) |
|
| (7,737) |
|
| (9,981) |
|
Net cash used in financing activities |
|
| (46,205) |
|
| (282,780) |
|
| (431,707) |
|
Net increase (decrease) in cash and cash equivalents |
|
| 118,465 |
|
| (129,530) |
|
| 276,971 |
|
Cash and cash equivalents, beginning of year |
|
| 369,537 |
|
| 499,067 |
|
| 222,096 |
|
Cash and cash equivalents, end of year |
| $ | 488,002 |
| $ | 369,537 |
| $ | 499,067 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 40,987 |
| $ | 50,107 |
| $ | 63,552 |
|
Cash paid for income taxes, net |
| $ | 1,433 |
| $ | 1,241 |
| $ | 583 |
|
NONCASH INVESTING ACTIVITY |
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in accounts payable related to renovations and additions to hotel properties and other assets |
| $ | (3,180) |
| $ | 6,429 |
| $ | 8,268 |
|
Amortization of deferred stock compensation — construction activities |
| $ | 472 |
| $ | 591 |
| $ | 580 |
|
NONCASH FINANCING ACTIVITY |
|
|
|
|
|
|
|
|
|
|
Preferred stock redemption charge |
| $ | — |
| $ | 4,052 |
| $ | — |
|
Issuance of common stock distributions |
| $ | — |
| $ | 78,823 |
| $ | 37,349 |
|
Dividends and distributions payable |
| $ | 133,894 |
| $ | 119,847 |
| $ | 265,124 |
|
| | | | | | | | | | |
|
| Year Ended |
| Year Ended |
| Year Ended |
| |||
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | |
Net (loss) income | | $ | (410,506) | | $ | 142,793 | | $ | 259,059 | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | | | | | |
Bad debt expense | |
| 384 | |
| 361 | |
| 815 | |
Gain on sale of assets | |
| (34,298) | |
| (42,935) | |
| (116,916) | |
(Gain) loss on extinguishment of debt, net | |
| (6,146) | |
| — | |
| 835 | |
Noncash interest on derivatives and finance lease obligations, net | |
| 4,740 | |
| 6,051 | |
| (1,190) | |
Depreciation | |
| 137,010 | |
| 147,669 | |
| 144,958 | |
Amortization of franchise fees and other intangibles | |
| 41 | |
| 79 | |
| 1,582 | |
Amortization of deferred financing costs | |
| 3,126 | |
| 2,791 | |
| 2,947 | |
Amortization of deferred stock compensation | |
| 9,576 | |
| 9,313 | |
| 9,007 | |
Impairment losses | | | 146,944 | | | 24,713 | | | 1,394 | |
Gain on hurricane-related damage | | | — | | | — | | | (1,100) | |
Deferred income taxes, net | | | 7,415 | | | 688 | | | 1,132 | |
Changes in operating assets and liabilities: | | | | | | | | | | |
Accounts receivable | |
| 26,827 | |
| (1,726) | |
| 905 | |
Prepaid expenses and other assets | |
| 3,663 | |
| (1,387) | |
| 189 | |
Accounts payable and other liabilities | |
| 4,065 | |
| 2,935 | |
| 3,322 | |
Accrued payroll and employee benefits | |
| (8,286) | |
| 357 | |
| (1,648) | |
Operating lease right-of-use assets and obligations | | | (1,260) | | | (782) | | | — | |
Net cash (used in) provided by operating activities | |
| (116,705) | |
| 290,920 | |
| 305,291 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
Proceeds from sales of assets | |
| 166,737 | |
| 49,538 | |
| 348,032 | |
Proceeds from property insurance | | | — | | | — | | | 1,100 | |
Acquisitions of hotel property and other assets | |
| (1,296) | |
| (705) | |
| (15,147) | |
Acquisitions of intangible assets | |
| (102) | |
| (25) | |
| (18,543) | |
Renovations and additions to hotel properties and other assets | |
| (51,440) | |
| (95,958) | |
| (159,076) | |
Payment for interest rate derivative | |
| (111) | |
| — | |
| — | |
Net cash provided by (used in) investing activities | |
| 113,788 | |
| (47,150) | |
| 156,366 | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
Proceeds from common stock offerings | |
| — | |
| — | |
| 45,125 | |
Payment of common stock offering costs | |
| — | |
| — | |
| (784) | |
Repurchases of outstanding common stock | | | (103,894) | | | (50,088) | | | — | |
Repurchases of common stock for employee tax obligations | | | (3,992) | | | (4,435) | | | (4,232) | |
Proceeds from credit facility | | | 300,000 | | | — | | | — | |
Payments on credit facility | | | (300,000) | | | — | | | — | |
Proceeds from notes payable and debt restructuring | |
| — | |
| — | |
| 65,000 | |
Payments on notes payable and debt restructuring | |
| (149,743) | |
| (7,965) | |
| (72,574) | |
Payments of costs related to extinguishment of debt | |
| (27,975) | |
| — | |
| (131) | |
Payments of deferred financing costs | |
| (4,361) | |
| — | |
| (4,012) | |
Dividends and distributions paid | |
| (156,271) | |
| (170,166) | |
| (177,622) | |
Distributions to noncontrolling interest | | | (2,000) | | | (8,512) | | | (9,369) | |
Contributions from noncontrolling interest | |
| 2,319 | |
| — | |
| — | |
Net cash used in financing activities | |
| (445,917) | |
| (241,166) | |
| (158,599) | |
Net (decrease) increase in cash and cash equivalents and restricted cash | |
| (448,834) | |
| 2,604 | |
| 303,058 | |
Cash and cash equivalents and restricted cash, beginning of year | |
| 864,973 | |
| 862,369 | |
| 559,311 | |
Cash and cash equivalents and restricted cash, end of year | | $ | 416,139 | | $ | 864,973 | | $ | 862,369 | |
See accompanying notes to consolidated financial statements.
F-6
F-7
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental Disclosure of Cash Flow Information
| | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | |||
Cash and cash equivalents | | $ | 368,406 | | $ | 816,857 | | $ | 809,316 |
Restricted cash | | | 47,733 | | | 48,116 | | | 53,053 |
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows | | $ | 416,139 | | $ | 864,973 | | $ | 862,369 |
| | | | | | | | | |
| | Year Ended | | Year Ended | | Year Ended | |||
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | |||
Cash paid for interest | | $ | 40,309 | | $ | 45,301 | | $ | 44,795 |
Cash (refund) paid for income taxes, net | | $ | (996) | | $ | (395) | | $ | 693 |
Operating cash flows used for operating leases | | $ | 10,112 | | $ | 7,238 | | $ | — |
| | | | | | | | | |
Changes in operating lease right-of-use assets | | $ | 3,483 | | $ | 3,447 | | $ | — |
Changes in operating lease obligations | | | (4,743) | | | (4,229) | | | — |
Changes in operating lease right-of-use assets and lease obligations, net | | $ | (1,260) | | $ | (782) | | $ | — |
Supplemental Disclosure of Noncash Investing and Financing Activities
| | | | | | | | | |
| | Year Ended | | Year Ended | | Year Ended | |||
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | |||
Accrued renovations and additions to hotel properties and other assets | | $ | 3,344 | | $ | 9,771 | | $ | 10,534 |
Amortization of deferred stock compensation — construction activities | | $ | 412 | | $ | 406 | | $ | 376 |
Assets transferred to lender in assignment-in-lieu transaction | | $ | (74,583) | | $ | — | | $ | — |
Liabilities transferred to lender in assignment-in-lieu transaction | | $ | (108,947) | | $ | — | | $ | — |
Assignment of operating lease right-of-use asset in connection with disposition of hotel | | $ | (12,518) | | $ | — | | $ | — |
Assignment of operating lease obligation in connection with disposition of hotel | | $ | (14,695) | | $ | — | | $ | — |
Assignment of finance lease right-of-use asset in connection with disposition of hotel | | $ | — | | $ | (6,605) | | $ | — |
Assignment of finance lease obligation in connection with disposition of hotel | | $ | — | | $ | (11,620) | | $ | — |
Operating lease right-of-use assets obtained in exchange for operating lease obligations | | $ | — | | $ | 45,677 | | $ | — |
Increase in unsecured terms loans due to debt restructuring | | $ | — | | $ | — | | $ | 50,000 |
Decrease in unsecured terms loans due to debt restructuring | | $ | — | | $ | — | | $ | (50,000) |
Dividends and distributions payable | | $ | 3,208 | | $ | 135,872 | | $ | 126,461 |
See accompanying notes to consolidated financial statements.
F-8
SUNSTONE HOTEL INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004. The Company elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with its taxable year ended on December 31, 2004. The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in acquiring, owning, asset managing and renovating or repositioning hotel properties. The Companyproperties, and may also selectively sell certain hotel properties from time to time. The Company operates as a real estate investment trust (“REIT”) for federal income tax purposes.hotels that no longer fit its stated strategy.
As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. The Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels, in transactions that are intended to generate qualifying income.
As of December 31, 2017,2020, the Company had interests in 2717 hotels (the “27 hotels”“17 Hotels”), two of which were considered held for sale, leaving 25 hotels currently held for investment (the “25 hotels”).investment. The Company’s third-party managers included the following:
|
|
|
|
|
| Number of Hotels |
|
Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”) |
| 11 | (1) |
Interstate Hotels & Resorts, Inc. |
| 4 |
|
Highgate Hotels L.P. and an affiliate |
| 3 |
|
Crestline Hotels & Resorts |
| 2 |
|
Hilton Worldwide |
| 2 |
|
Hyatt Corporation |
| 2 |
|
Davidson Hotels & Resorts |
| 1 |
|
HEI Hotels & Resorts |
| 1 |
|
Singh Hospitality, LLC |
| 1 |
|
|
|
|
|
Total hotels owned as of December 31, 2017 |
| 27 |
|
| | | |
|
| Number of Hotels |
|
Subsidiaries of Marriott | | 6 | |
Crestline Hotels & Resorts | | 2 | |
Highgate Hotels L.P. and | | 2 | |
Hilton Worldwide | | 2 | |
Interstate Hotels & Resorts, Inc. | | 2 | |
Davidson Hotels & Resorts | | 1 | |
Hyatt Corporation | | 1 | |
Singh Hospitality, LLC | | 1 | |
| | | |
Total hotels owned as of December 31, | 17 | |
The novel coronavirus (“COVID-19”) pandemic, along with federal, state and local government mandates have disrupted and are expected to continue to disrupt the Company’s business. In the United States, individuals are being encouraged to practice social distancing, are restricted from gathering in groups, and in some areas, either have been or are subject to mandatory shelter-in-place orders, which have restricted or prohibited social gatherings, travel and non-essential activities outside of their homes.
In response to the COVID-19 pandemic, the Company temporarily suspended operations at 14 of the 17 Hotels during 2020, 12 of which have since resumed operations:
| | | | |
Hotel | | Suspension Date | | Resumption Date |
Oceans Edge Resort & Marina | | March 22, 2020 | | June 4, 2020 |
Embassy Suites Chicago | | April 1, 2020 | | July 1, 2020 |
Marriott Boston Long Wharf | | March 12, 2020 | | July 7, 2020 |
Hilton New Orleans St. Charles | | March 28, 2020 | | July 13, 2020 |
Hyatt Centric Chicago Magnificent Mile | | April 6, 2020 | | July 13, 2020 |
JW Marriott New Orleans | | March 28, 2020 | | July 14, 2020 |
Hilton San Diego Bayfront | | March 23, 2020 | | August 11, 2020 |
Renaissance Washington DC | | March 26, 2020 | | August 24, 2020 |
Hyatt Regency San Francisco | | March 22, 2020 | | October 1, 2020 |
Renaissance Orlando at SeaWorld® | | March 20, 2020 | | October 1, 2020 |
The Bidwell Marriott Portland | | March 27, 2020 | | October 5, 2020 |
Wailea Beach Resort | | March 25, 2020 | | November 1, 2020 |
Hilton Garden Inn Chicago Downtown/Magnificent Mile | | March 27, 2020 | | |
Renaissance Westchester | | April 4, 2020 | | |
The Company is unable to predict when any of its remaining hotels with temporarily suspended operations will resume their operations, or if those hotels that have resumed operations will be temporarily suspended again. The extent of the effects of the pandemic on the Company’s business and the hotel industry at large, however, will ultimately depend on future developments,
F-9
including, but not limited to, the duration and severity of the pandemic, how quickly and successfully effective vaccines and therapies are distributed and administered, as well as the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements as of December 31, 20172020 and 2016,2019, and for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, include the accounts of the Company, the Operating Partnership, the TRS Lessee, and their controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity, within the meaning of the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Based on its review,
The Company does not have any comprehensive income other than what is included in net income. If the Company determined that all of its subsidiaries were properly consolidated as of December 31, 2017 and 2016, and for the years ended December 31, 2017, 2016 and 2015.
Noncontrolling interest at both December 31, 2017 and 2016 represents the outside 25.0% equity interesthas any comprehensive income in the Hilton San Diego Bayfront, whichfuture such that a statement of comprehensive income would be necessary, the Company includeswill include such statement in its financial statements on aone continuous consolidated basis.statement of operations.
The Company has evaluated subsequent events through the date of issuance of these financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
F-7
Cash and Cash Equivalents
Cash and cash equivalents are defined asincludes cash on hand and in various bank accounts plus credit card receivables and all short-term investments with an original maturity of three months or less.
The Company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. These financial institutions are located throughout the country and the Company’s policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company’s investment strategy. At December 31, 20172020 and 2016,2019, the Company had amounts in banks that were in excess of federally insured amounts.
Restricted Cash
Restricted cash is comprised of reserve accounts for debt service, interest reserves, seasonality reserves, capital replacements, ground leases, property taxes and property taxes.hotel-generated cash that is held in an account for the benefit of a lender. These restricted funds are subject to supervisiondisbursement approval based on in-place agreements and disbursement approvalpolicies by certain of the Company’s lenders and/or hotel managers. In addition, restricted cash at December 31, 2020 includes $11.6 million held in escrow related to certain current and potential employee-related obligations in accordance with the assignment-in-lieu agreement between the Company and the mortgage holder of the Hilton Times Square (see Note 7). Restricted cash may also include earnest money received from a buyer or potential buyer of one of the Company’s hotels and held in escrow until either the sale is complete or subject to terms of the purchase and sale agreements.
Accounts Receivable
Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. Accounts receivable also includes, among other things, receivables from tenants who lease space in the Company’s hotels. The Company maintains an allowance for doubtful accounts sufficient to cover potential credit losses. The Company’s accounts receivable includes an allowance for doubtful accounts of $0.3 million and $0.2 million at December 31, 2017 and 2016, respectively.
Inventories
Inventories, consisting primarily of food and beverages at the hotels, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.
Acquisitions of Hotel Properties and Other Entities
Accounting for the acquisition of a hotel property or other entity as a business combination requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective relative fair values for an asset acquisition or at their
F-10
estimated fair values.values for a business combination. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment and intangible assets, together with any finance or operating lease right-of-use assets and any capital lease obligations that are assumed as part of the acquisition of a leasehold interest.their related obligations. When the Company acquires a hotel property or other entity, as a business combination, it uses all available information to make these fair value determinations, and engages independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, the Company believes that the recording of acquired assets and liabilities is a critical accounting policy.
In addition, the acquisition of a hotel property or other entity requires an analysis of the transaction to determine if it qualifies as the purchase of a business or an asset. If the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the transaction is an asset acquisition. Transaction costs associated with asset acquisitions are capitalized and subsequently depreciated over the life of the related asset, while the same costs associated with a business combination are expensed as incurred and included in corporate overhead on the Company’s consolidated statements of operations. Also, asset acquisitions are not subject to a measurement period, as are business combinations.
Investments in Hotel Properties
Investments in hotel properties, including land, buildings, furniture, fixtures and equipment (“FF&E”) and identifiable intangible assets are recorded at fair value upon acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation is removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations.
Depreciation expense is based on the estimated life of the Company’s assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish the Company’s hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 3540 years for buildings and improvements and three to 12 years for furniture, fixtures and equipment.FF&E. Finance lease right-of-use assets other than land are depreciated using the straight-line method over the shorter of either their estimated useful life or the life of the related finance lease obligation. Intangible assets are amortized using the straight-line method over the shorter of their estimated useful life or over the length of the related agreement, whichever is shorter.agreement.
The Company’s investment in hotel properties, net also includes initial franchise fees which are recorded at cost and amortized using the straight-line method over the livesterms of the franchise agreements ranging from 14 to 27 years. All other franchise fees that are based on the Company’s results of operations are expensed as incurred.
While the Company believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of the Company’s hotels. The Company has not changed the useful lives of any of its assets during the periods discussed.
The Company follows the requirements of the Property, Plant and Equipment Topic of the FASB ASC, which requires impairmentImpairment losses to beare recorded on long-lived assets to be held and used by the Company when indicators of impairment are present and the future undiscounted net cash flows, including potential sale proceeds, expected to be generated by those assets, based on the Company’s anticipated investment horizon, are less than the assets’ carrying amount. The Company evaluates its long-lived assets to determine if there are indicators of impairment on a quarterly basis. No single indicator would necessarily result in the Company preparing an estimate to determine if a hotel’s future undiscounted cash flows are less than the book value of the hotel. The Company uses judgment to determine if the severity of any single indicator, or the fact there are a number of indicators of less severity that when combined, would result in an indication that a hotel requires an estimate of the undiscounted cash flows to determine if an impairment has occurred. If such
F-8
assets area hotel is considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment loss is recognized. The impairment loss recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The Company performs a Level 3 analysis of fair value assessment, using aone or more discounted cash flow analysisanalyses to estimate the fair value of itsthe hotel, properties, taking into account each property’sthe hotel’s expected cash flow from operations, the Company’s estimate of how long it will own the hotel and the estimated proceeds from the disposition of the property.hotel. When multiple cash flow analyses are prepared, a probability is assigned to each cash flow analysis based upon the estimated likelihood of each scenario occurring. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company’s judgementjudgment is required in determining the discount rate applied to estimated cash flows, the estimated growth rate of the properties,revenues and expenses, net operating income of the properties,and margins, the need for capital expenditures, as well as specific market and economic conditions. Based on the Company’s review, two hotel properties3 hotels were impaired during 2017in 2020, 1 hotel was impaired in 2019 and 2 hotels were impaired in 2018 (see Note 3 and Note 5), and no hotel properties were impaired during either 2016 or 2015..
Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and
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conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing. The realization of the Company’s investment in hotel properties is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from their estimated fair values.
Assets Held for Sale
The Company considers a hotel held for sale if it is probable that the sale will be completed within twelve months, among other requirements. A sale may beis considered to be probable once the buyer completes its due diligence of the asset, there is an executed purchase and sale agreement between the Company and the buyer, the buyer waives any closing contingencies, there are no third partythird-party approvals necessary and the Company has received a substantial non-refundable deposit. Depreciation ceases when a property is held for sale. Should an impairment loss be required for assets held for sale, the related assets are adjusted to their estimated fair values, less costs to sell. If the sale of the hotel represents a strategic shift that will have a major effect on the Company’s operations and financial results, the hotel is included inqualifies as a discontinued operations,operation, and operating results are removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented must also be reclassified as discontinued operations. As of December 31, 2017, the Company’s Marriott Philadelphia and Marriott QuincyNo hotels were considered held for sale and subsequently sold in January 2018 (see Note 14). Asas of either December 31, 2016, the Company’s Fairmont Newport Beach was considered held for sale, and subsequently sold in February 2017 (see Note 4). Based on the criteria noted above, none of these hotels were included in discontinued operations.2020 or 2019.
Deferred Financing FeesCosts
Deferred financing feescosts consist of loan fees and other financing costs related to the Company’s outstanding indebtedness and credit facility commitments, and are amortized to interest expense over the terms of the related debt or commitment. If a loan is refinanced or paid before its maturity, any unamortized deferred financing costs will generally be expensed unless specific rules are met that would allow for the carryover of such costs to the refinanced debt.
Deferred financing feescosts related to the Company’s undrawn credit facility are included on the Company’s consolidated balance sheets as an asset, and are amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. At December 31, 2016, the deferred financing fees asset on the Company’s consolidated balance sheet also included fees related to the Company’s unfunded senior unsecured notes. During the first quarter of 2017, the senior unsecured notes were funded, and the related deferred financing fees were reclassified to the appropriate current and long-term liabilities. Deferred financing feescosts related to the Company’s outstanding debt are included on the Company’s consolidated balance sheets as a contra-liability (see Note 7), and subsequently amortized ratably over the term of the related debt.
Interest Rate Derivatives
The Company’s objective in holding interest rate derivatives is to manage its exposure to the interest rate risks related to its floating rate debt. To accomplish this objective, the Company uses interest rate caps and swaps, none of which qualifies for effective hedge accounting treatment. The Company records interest rate protection agreementscaps and swaps on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in the consolidated statements of operations.
Revenue RecognitionFinance and Operating Leases
Room revenueThe Company determines if a contract is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Expense for these short-term leases is recognized on a straight-line basis over the lease term. For leases with an initial term greater than 12 months, the Company records a right-of-use (“ROU”) asset and fooda corresponding lease obligation. ROU assets represent the Company’s right to use an underlying asset for the lease term, and beverage revenuelease obligations represent the Company’s obligation to make fixed lease payments as stipulated by the lease. The Company has elected to not separate lease components from nonlease components, resulting in the Company accounting for lease and nonlease components as one single lease component.
Leases are accounted for using a dual approach, classifying leases as either operating or financing based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the Company. This classification determines whether the lease expense is recognized on a straight-line basis over the term of the lease for operating leases or based on an effective interest method for finance leases.
Operating lease ROU assets are recognized at the lease commencement date, and include the amount of the initial operating lease obligation, any lease payments made at or before the commencement date, excluding any lease incentives received, and any initial direct costs incurred. For leases that have extension options that the Company can exercise at its discretion, management uses judgment to determine if it is reasonably certain that the Company will in fact exercise such option. If the extension option is reasonably certain to occur, the Company includes the extended term’s lease payments in the calculation of the respective lease liability. None of the Company’s leases contain any material residual value guarantees or material restrictive covenants.
Operating lease obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based on information available at the commencement date in determining the present value of lease payments over the lease term. The
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IBR is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In order to estimate the Company’s IBR, the Company first looks to its own unsecured debt offerings, and adjusts the rate for both length of term and secured borrowing using available market data as earned,well as consultations with leading national financial institutions that are active in the issuance of both secured and unsecured notes.
The Company reviews its right-of-use assets for indicators of impairment. If such assets are considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment loss is recognized. The impairment loss recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Based on the Company’s review, the operating lease right-of-use asset at 1 hotel was impaired during 2020 (see Note 5).
Noncontrolling Interest
The Company’s consolidated financial statements include an entity in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interest is reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses, and net income or loss from the less-than-wholly-owned subsidiary are reported at their consolidated amounts, including both the amounts attributable to the Company and the noncontrolling interest. Income or loss is allocated to the noncontrolling interest based on its weighted average ownership percentage for the applicable period. The consolidated statements of equity include beginning balances, activity for the period and ending balances for each component of stockholders’ equity, noncontrolling interest and total equity.
At December 31, 2020, 2019 and 2018, the noncontrolling interest reported in the Company’s consolidated financial statements consisted of a third-party’s 25.0% ownership interest in the Hilton San Diego Bayfront.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to hotel guests, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Room revenue and other occupancy based fees are recognized over a guest’s stay at a previously agreed upon daily rate. Additionally, some of the Company’s hotel rooms are booked through independent internet travel intermediaries. RevenueIf the guest pays the independent internet travel intermediary directly, revenue for these roomsthe room is bookedrecognized by the Company at the price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid.
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Other operating revenue consists of revenue derived from incidental hotel services such as telephone/internet, parking, spa, entertainment and other If the guest services, along with tenant lease revenues related to hotel space leased by third parties, any cancellation or attrition revenue and any performance guarantees. During 2016,pays the Company directly, revenue for the room is recognized $5.0 millionby the Company on a gross basis, with the related discount or commission recognized in other operatingroom expense. A majority of the Company’s hotels participate in frequent guest programs sponsored by the hotel brand owners whereby the hotel allows guests to earn loyalty points during their hotel stay. The Company expenses charges associated with these programs as incurred, and recognizes revenue at the amount it will receive from the brand when a performance guarantee received from Marriott related toguest redeems their loyalty points by staying at one of the Wailea Beach Resort.Company’s hotels. In addition, priorsome contracts for rooms or food and beverage services require an advance deposit, which the Company records as deferred revenue (or a contract liability) and recognizes once the performance obligations are satisfied. Cancellation fees and attrition fees, which are charged to its sale in September 2015, other operatinggroups when they do not fulfill their contracted minimum number of room nights or minimum food and beverage spending requirements, are typically recognized as revenue also included revenue generated by BuyEfficient, LLC Inc. (“BuyEfficient”), an electronic purchasing platform that allowed members to procure food, operating supplies, furniture, fixtures and equipment. Revenues from incidental hotel services and BuyEfficient are recognized in the period the relatedCompany determines it is probable that a significant reversal in the amount of revenue recognized will not occur, which is generally the period in which these fees are collected.
Food and beverage revenue and other ancillary services revenue are generated when a customer chooses to purchase goods or services separately from a hotel room. These revenue streams are recognized during the time the goods or services are provided to the customer at the amount the Company expects to be entitled to in exchange for those goods or services. For those ancillary services provided by third parties, the Company assesses whether it is the principal or the agent. If the Company is the principal, revenue is earned.recognized based upon the gross sales price. If the Company is the agent, revenue is recognized based upon the commission earned from the third party.
Additionally, the Company collects sales, use, occupancy and other similar taxes at its hotels. These taxes are collected from customers at the time of purchase, but are not included in revenue. The Company records a liability upon collection of such taxes from the customer, and relieves the liability when payments are remitted to the applicable governmental agency.
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Trade receivables and contract liabilities consisted of the following (in thousands):
| | | | | | |
| | December 31, | | December 31, | ||
| | 2020 | | 2019 | ||
| | | | | | |
Trade receivables, net (1) | | $ | 8,110 | | $ | 21,201 |
Contract liabilities (2) | | $ | 16,815 | | $ | 18,498 |
(1) | Trade receivables are included in accounts receivable, net on the accompanying consolidated balance sheets. |
(2) | Contract liabilities consist of advance deposits and are included in either other current liabilities or other liabilities on the accompanying consolidated balance sheets. |
During 2020 and 2019, the Company recognized revenue of approximately $10.2 million and $16.7 million, respectively, related to its outstanding contract liabilities.
Advertising and Promotion Costs
Advertising and promotion costs are expensed when incurred. Advertising and promotion costs represent the expense for advertising and reservation systems under the terms of the hotel franchise and brand management agreements and general and administrative expenses that are directly attributable to advertising and promotions.
Stock Based Compensation
Compensation expense related to awards of restricted shares are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.
Income Taxes
The Company has elected to be treated as a REIT pursuant to the Internal Revenue Code of 1986, as amended (the “Code”). Management believes that the Company has qualified and intends to continue to qualify as a REIT. Therefore, the Company is permitted to deduct distributions paid to its stockholders, eliminating the federal taxation of income represented by such distributions at the company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax for tax years prior to 2018) on taxable income at regular corporate tax rates.
The Company is subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, the TRS Lessee, which leases the Company’s hotels from the Operating Partnership, is subject to federal and state income taxes. The Company accounts for income taxes in accordance withusing the Income Taxes Topic of the FASB ASC. Accordingly,asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company performs a quarterly review forreviews any uncertain tax positions and, if necessary, records the expected future tax consequences of uncertain tax positions in accordance with the Income Taxes Topic of the FASB ASC. The guidance requires the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority.its consolidated financial statements. Tax positions not deemed to meet the more-likely-than-not“more-likely-than-not” threshold would beare recorded as a tax benefit or expense in the current year. The Company’s management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.
Comprehensive Income
The Company does not haverecognizes any comprehensivepenalties and interest related to unrecognized tax benefits in income other than what is includedtax expense in net income. If the Company has any comprehensive income in the future such that a statement of comprehensive income would be necessary, the Company will include such statement in one continuousits consolidated statementstatements of operations.
Noncontrolling InterestsDividends
The Company’s financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling
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interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Income or loss is allocated to noncontrolling interests based on their weighted average ownership percentage for the applicable period. The consolidated statements of equity include beginning balances, activity for the period and ending balances for each component of stockholders’ equity, noncontrolling interests and total equity.
At December 31, 2017, 2016 and 2015, the noncontrolling interests reported in the Company’s financial statements included Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront. Additionally, prior to the Company’s sale of its interests in the Doubletree Guest Suites Times Square in December 2015, the noncontrolling interests reported in the Company’s financial statements also included preferred investors that owned a $0.1 million preferred equity interest in a subsidiary captive REIT that owned the Doubletree Guest Suites Times Square.
Dividends
Under current federal income tax laws related to REITs, the Company is required to distribute at least 90% of its netREIT taxable income to its stockholders. Currently, the Company pays quarterly cash dividends to its common stockholders, as well as to the preferred stockholders of its 6.95% Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) and its 6.45% Series F Cumulative Preferred Stock (“Series F preferred stock”) as declared by the Company’s board of directors. Prior to its redemption date in April 2016,At this time, the Company also paiddoes not expect to pay a quarterly cash dividendsdividend on its common stock during 2021 due to the preferred stockholders of its 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”) as declaredCOVID-19 pandemic’s negative effect on the Company’s income. The resumption in quarterly common dividends will be determined by the Company’s board of directors.directors after considering the Company’s obligations under its various financing agreements, projected taxable income, compliance with its debt covenants, long-term operating projections, expected capital requirements and risks affecting its business. The Company’s ability to pay dividends is dependent on the receipt of distributions from the Operating Partnership.
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Earnings Per Share
The Company applies the two-class method when computing its earnings per share. As required by the Earnings Per Share Topic of the FASB ASC, the netNet income per share for each class of stock (common stock and convertible preferred stock) is calculated assuming all of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights. To the extent the Company has undistributed earnings in any calendar quarter, the Company will follow the two-class method of computing earnings per share.
The Company follows the requirements of the Earnings Per Share Topic of the FASB ASC. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall beare included in the computation of earnings per share pursuant to the two-class method.share.
In accordance with the Earnings Per Share Topic of the FASB ASC, basicBasic earnings (loss) attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock awards, and the incremental common shares issuable upon the exercise of stock options, using the more dilutive of either the two-class method or the treasury stock method.
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The following table sets forth the computation of basic and diluted (loss) earnings per common share (in thousands, except per share data):
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|
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| Year Ended |
| Year Ended |
| Year Ended |
| |||||||||||||
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| December 31, 2017 |
| December 31, 2016 |
| December 31, 2015 |
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| | | | | | | | |||||||||||||
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| Year Ended |
| Year Ended |
| Year Ended |
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| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| |||||||||||||
Numerator: |
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|
|
|
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|
|
|
| | | | | | | | | | |
Net income |
| $ | 153,004 |
| $ | 140,677 |
| $ | 355,519 |
| ||||||||||
Income from consolidated joint ventures attributable to noncontrolling interests |
|
| (7,628) |
|
| (6,480) |
|
| (8,164) |
| ||||||||||
Preferred stock dividends and redemption charge |
|
| (12,830) |
|
| (15,964) |
|
| (9,200) |
| ||||||||||
Net (loss) income | | $ | (410,506) | | $ | 142,793 | | $ | 259,059 | | ||||||||||
Loss (income) from consolidated joint venture attributable to noncontrolling interest | |
| 5,817 | |
| (7,060) | |
| (8,614) | | ||||||||||
Preferred stock dividends | |
| (12,830) | |
| (12,830) | |
| (12,830) | | ||||||||||
Distributions paid on unvested restricted stock compensation |
|
| (860) |
|
| (754) |
|
| (1,405) |
| |
| (69) | |
| (901) | |
| (814) | |
Undistributed income allocated to unvested restricted stock compensation |
|
| — |
|
| — |
|
| (155) |
| |
| — | |
| — | |
| (422) | |
Numerator for basic and diluted income attributable to common stockholders |
| $ | 131,686 |
| $ | 117,479 |
| $ | 336,595 |
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|
|
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Numerator for basic and diluted (loss) income attributable to common stockholders | | $ | (417,588) | | $ | 122,002 | | $ | 236,379 | | ||||||||||
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Denominator: |
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|
|
|
| | | | | | | | | | |
Weighted average basic and diluted common shares outstanding |
|
| 221,898 |
|
| 214,966 |
|
| 207,350 |
| |
| 215,934 | |
| 225,681 | |
| 225,924 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic and diluted income attributable to common stockholders per common share |
| $ | 0.59 |
| $ | 0.55 |
| $ | 1.62 |
| ||||||||||
| | | | | | | | | | | ||||||||||
Basic and diluted (loss) income attributable to common stockholders per common share | | $ | (1.93) | | $ | 0.54 | | $ | 1.05 | |
The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings per share for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, as their inclusion would have been anti-dilutive.
Segment Reporting
The Company considers each of its hotels to be an operating segment, none of which meetsand allocates resources and assesses the thresholdoperating performance for a separate reportable segment in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, hotel ownership.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). The core principal of ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principal, an entity will need to apply a five-step model: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 was originally to be effective during the first quarter of 2017; however, the FASB issued a one-year deferral so that it now becomes effective during the first quarter of 2018. ASU No. 2014-09 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In March 2016, the FASB clarified the principal versus agent guidance in ASU No. 2014-09 with it issuance of Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). In particular, ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions by explaining what a principal controls before the specified good or service is transferred to the customer. In addition, ASU No. 2016-08 reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. ASU No. 2016-08 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-08 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In May 2016, the FASB amended ASU No. 2014-09’s guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes with its issuance of Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This clarification is important because entities that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach
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may apply certain practical expedients to completed contracts. In addition, ASU No. 2016-12 clarifies that an entity should consider the probability of collecting substantiallyeach hotel. Because all of the consideration to which it will be entitled in exchange for goodsCompany’s hotels have similar economic characteristics, facilities and services, expected to be transferred to the customer rather than the total amount promised for all the goods or services in the contract. ASU No. 2016-12 also clarifies that an entity may consider its ability to manage its exposure to credit risk as part of the collectability assessment, as well as that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. Finally, ASU No. 2016-12 allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected fromhotels have been aggregated into a customer if it discloses that policy. ASU No. 2016-12 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-12 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.single reportable segment, hotel ownership.
The Company will adopt ASU No. 2014-09, along with the related clarifications and amendments in ASU No. 2016-08 and ASU No. 2016-12, during the first quarter of 2018 using a modified retrospective approach to all contracts that are not completed as of the date of initial adoption. Based on the Company’s assessment of ASU No. 2014-09, the adoption of the standard will not have a material effect on the Company’s consolidated financial statements, though additional disclosure will be required. Regarding future hotel sales, however, the standard may allow for earlier gain recognition for certain sale transactions under which the Company has continuing involvement.
In February 2016, the FASB issuedNew Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which will require lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU No. 2016-02 will become effective during the first quarter of 2019, and will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is creating an inventory of its leases and is analyzing its current ground lease obligations. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its consolidated financial statements, and, other than the inclusion of operating leases on the Company’s balance sheet, such effects have not yet been determined.Accounting Changes
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”), which will replace today’sreplaced the “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans, and other instruments, entities will be required to use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In addition, entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. In both November 2019 and November 2018, the FASB issued codification improvements to ASU No. 2016-13, is effective during the first quarter of 2020. including Accounting Standards Update No. 2019-11 (“ASU No. 2016-13 will require a modified retrospective approach, with early adoption permitted during2019-11”) in 2019 and Accounting Standards Update No. 2018-19 (“ASU No. 2018-19”) in 2018. ASU No. 2019-11 includes an amendment requiring entities to include certain expected recoveries of the first quarteramortized cost basis previously written
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off, or expected to be written off, in the allowance for credit losses for purchased credit deteriorated assets. ASU No. 2018-19 clarifies that operating lease receivables accounted for under ASC 842 are not believe thatin the adoptionscope of ASU No. 2016-13 will have a2016-13. The Company adopted all three of these ASUs on January 1, 2020, with no material impact on its consolidated financial statements.
In September 2016,March 2020, the FASB issued Accounting Standards Update No. 2016-15,2020-04, “Statement of Cash FlowsReference Rate Reform (Topic 230)848): Classification of Certain Cash Receipts and Cash Payments (a consensusFacilitation of the Emerging Issues Task Force)Effects of Reference Rate Reform on Financial Reporting” (“ASU No. 2016-15”2020-04”), which clarifies how entities should classify certainprovides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Contracts that meet the following criteria are eligible for relief from the modification accounting requirements in GAAP: the contract references LIBOR or another rate that is expected to be discontinued due to reference rate reform; the modified terms directly replace or have the potential to replace the reference rate that is expected to be discontinued due to reference rate reform; and any contemporaneous changes to other terms that change or have the potential to change the amount and timing of contractual cash receiptsflows must be related to the replacement of the reference rate. For a contract that meets the criteria, the guidance generally allows an entity to account for and cash payments onpresent modifications as an event that does not require contract remeasurement at the statementmodification date or reassessment of cash flows.a previous accounting determination. That is, the modified contract is accounted for as a continuation of the existing contract. ASU No. 2016-15 addresses certain issues where diversity in practice was identified. It amends existing guidance, which2020-04 is principles basedeffective upon issuance, and often requires judgmentis applied prospectively from any date beginning March 12, 2020. The relief is temporary and generally cannot be applied to determinecontract modifications that occur after December 31, 2022. The Company intends to take advantage of the appropriate classification of cash flows as operating, investing or financing activities. In addition,expedients offered by ASU No. 2016-15 clarifies how2020-04 when it modifies its variable rate debt, which includes the predominance principle should be applied when cash receiptsCompany’s $220.0 million loan secured by the Hilton San Diego Bayfront, its credit facility and cash payments have aspects of more than one class of cash flows. ASU No. 2016-15 is effective during the first quarter of 2018, and will generally require a retrospective approach. Early adoption is permitted.its unsecured term loans. The Company does not believe that the adoption of ASU No. 2016-15 will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2016-18”), which will require entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU No. 2016-18 is effective in the first quarter of 2018, and will require a retrospective approach. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. Upon adoption of this standard, amounts included in restricted cash on the Company’s consolidated balance sheets will be included with cash and cash equivalents when reconciling the beginning period and ending period total amounts shown on its
F-13
consolidated statements of cash flows. As a result of the adoption of ASU No. 2016-18, the Company will no longer present the changes within restricted cash in the consolidated statements of cash flows. The adoption of this standard will not change the Company’s balance sheet presentation.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU No. 2017-01”), which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities2020-04 is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contributeexpected to the ability to create outputs. ASU No. 2017-01 is effective in the first quarter of 2018, and the guidance is to be applied prospectively. Early adoption is permitted. Once adopted, the Company will be required to analyze future hotel acquisitions to determine if the transaction qualifies as the purchase of a business or an asset. Transaction costs associated with asset acquisitions will be capitalized, while the same costs associated with a business combination will continue to be expensed as incurred. In addition, asset acquisitions will not be subject to a measurement period, as are business combinations. Depending on the Company’s conclusion on future hotel acquisitions, ASU No. 2017-01 may have an effect on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU No. 2017-04”), which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. ASU No. 2017-04 will become effective in the first quarter of 2019, and the guidance is to be applied prospectively. Early adoption is permitted. The Company does not believe that the adoption of ASU No. 2017-04 will have a material impact on itsthe Company’s consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU No. 2017-09”), which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will allow companies to make certain changes to awards without accounting for them as modifications, but it does not change the accounting for modifications. Under ASU No. 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: the award’s fair value (or calculated or intrinsic value, if those measurement methods are used); the award’s vesting conditions; and the award’s classification as an equity or liability instrument. ASU No. 2017-09 will become effective in the first quarter of 2018, with early adoption permitted. The Company does not believe that the adoption of ASU No. 2017-09 will have an impact on its consolidated financial statements unless it changes the terms or conditions of its grants in the future.
3. Investment in Hotel Properties
Investment in hotel properties, net consisted of the following (in thousands):
|
|
|
|
|
|
|
| ||||||||
|
| December 31, |
| ||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||
| | | | | | | |||||||||
| | December 31, |
| ||||||||||||
|
| 2020 |
| 2019 |
| ||||||||||
Land |
| $ | 605,054 |
| $ | 531,660 |
| | $ | 571,212 | | $ | 601,181 | | |
Buildings and improvements |
|
| 3,049,569 |
|
| 3,135,806 |
| |
| 2,523,750 | |
| 2,950,534 | | |
Furniture, fixtures and equipment |
|
| 484,749 |
|
| 512,372 |
| |
| 431,918 | |
| 506,754 | | |
Intangible assets |
|
| 48,371 |
|
| 49,015 |
| |
| 21,192 | |
| 32,610 | | |
Franchise fees |
|
| 980 |
|
| 1,021 |
| |
| 743 | |
| 743 | | |
Construction in process |
|
| 54,280 |
|
| 65,449 |
| ||||||||
Construction in progress | |
| 15,831 | |
| 40,639 | | ||||||||
Investment in hotel properties, gross |
|
| 4,243,003 |
|
| 4,295,323 |
| |
| 3,564,646 | |
| 4,132,461 | | |
Accumulated depreciation and amortization |
|
| (1,136,937) |
|
| (1,137,104) |
| |
| (1,103,148) | |
| (1,260,108) | | |
Investment in hotel properties, net |
| $ | 3,106,066 |
| $ | 3,158,219 |
| | $ | 2,461,498 | | $ | 2,872,353 | |
Acquisitions - 2017
In July 2017,2020, the Company purchased the newly-developed 175-room Oceans Edge Hotel & Marina in Key West, Florida for a net purchase price of $173.9 million, including prorations. The purchase of the hotel included a marina, wet and dry boat slips and other customary marina amenities. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated towrote down its investment in hotel properties and hotel working capital assets. The Company recognized acquisition
F-14
related costs of $0.7$18.7 million in 2017, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Oceans Edge Hotel & Marina have been included in the Company’s consolidated statements of operations from the acquisition date of July 25, 2017 through the year ended December 31, 2017.
The fair values of the assets acquiredRenaissance Westchester and liabilities assumed at the Oceans Edge Hotel & Marina’s acquisition date were allocated as follows (in thousands):
|
|
|
|
|
Assets: |
|
|
|
|
Investment in hotel properties |
| $ | 174,971 |
|
Accounts receivable |
|
| 15 |
|
Inventories |
|
| 50 |
|
Prepaid expenses |
|
| 41 |
|
Other assets |
|
| 84 |
|
Total assets acquired |
|
| 175,161 |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Accounts payable and accrued expenses |
|
| 210 |
|
Accrued payroll and employee benefits |
|
| 256 |
|
Other current liabilities |
|
| 752 |
|
Other liabilities |
|
| 26 |
|
Total liabilities assumed |
|
| 1,244 |
|
|
|
|
|
|
Total cash paid for acquisition |
| $ | 173,917 |
|
Investment in hotel properties was allocated to land ($92.5 million), buildings and improvements ($74.4 million), furniture, fixtures and equipment ($6.4 million), and intangibles ($1.7 million) related to air rights and in-place lease agreements. The air rights have a value of $1.6 $2.3 million and an indefinite life. The in-place lease agreements, which are related to the wet and dry boat slips, haveabandonment of a valuepotential project to expand one of $0.1 million and a weighted average life of nine months.
Acquisitions - 2016
its hotels (see Note 5). In June 2016,addition, prior to their dispositions, the Company purchased the air rights intangible asset associated withwrote down its Renaissance Harborplace for $2.4 million, including closing costs. In 2017, the Company received a $0.2 million refund of closing costs, reducing its air rights intangible asset to $2.3 million. The air rights intangible asset, which has an indefinite useful life, and therefore, is not amortized, is included with intangibles in the Company’s investment in hotel properties on its consolidated balance sheet. This non-amortizable asset will be reviewed annually forand recorded impairment and more frequently if events or circumstances indicate that the asset may be impaired. If the non-amortizable intangible asset is subsequently determined to have a finite useful life, the intangible asset will be written down to the lowerlosses of its fair value or carrying amount, and then amortized prospectively, based$89.4 million on the remaining useful life ofHilton Times Square and $18.1 million on the intangible asset.
Acquisitions - 2015
TheRenaissance Harborplace (see Note 4 and Note 5). In 2019, the Company did not acquire anywrote down its investment in hotel properties or other assets during 2015.
F-15
Unaudited Pro Forma Results
Acquired properties are included in the Company’s results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisition of the Oceans Edge Hotel & Marina had occurred on January 1, 2017. The information is not necessarily indicative of the results that actually would have occurred, nor does it indicate future operating results. Since the newly-developed hotel opened in mid-January 2017, the results presented for 2017 are slightly less than a full year, and there are no prior year results. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisition have been made (in thousands, except per share data):
|
|
|
|
|
|
| 2017 |
| |
Revenues |
| $ | 1,202,887 |
|
|
|
|
|
|
Income attributable to common stockholders |
| $ | 133,939 |
|
|
|
|
|
|
Income per diluted share attributable to common stockholders |
| $ | 0.60 |
|
For the year ended December 31, 2017, the Company included $5.1 million of revenues, and a netrecorded an impairment loss of $1.4$24.7 million which includes $0.8 million in hurricane-related restoration expenses, in its consolidated statements of operations related to the Company’s acquisition of the Oceans Edge Hotel & Marina.
Hurricanes Harvey and Irma
During 2017, four of the Company’s 25 hotels were impacted to varying degrees by Hurricanes Harvey and Irma: the Hilton North Houston; the Marriott Houston; the Oceans Edge Hotel & Marina; andon the Renaissance Orlando at SeaWorld®. For more information regarding the impact of the hurricanes on the Company’s hotels, please see the Hurricanes Harvey and Irma discussion in Note 12.
Impairments
In the aftermath of Hurricane Harvey, combined with continued operational declines due to weakness in the Houston market, and in accordance with the Property, Plant and Equipment Topic of the FASB ASC, the Company identified indicators of impairment and reviewed its Houston hotels for possible impairment. During 2017, the Company recorded a total impairment charge of $40.1 million, including $31.0 million for the Hilton North Houston and $9.1 million for the Marriott Houston, which is included in impairment loss on the Company’s consolidated statements of operations for the year ended December 31, 2017Harborplace (see Note 5). No impairments were necessary for either the years ended December 31, 2016 or 2015.
F-16
Intangible Assets
Intangible assets included in the Company’s investment in hotel properties, net consisted of the following (in thousands):
| | | | | | | |
|
| December 31, |
| ||||
| | | 2020 | | | 2019 | |
Easement/Element agreements (1) | | $ | 18,436 | | $ | 28,163 | |
Airspace agreements (2) | |
| 1,795 | |
| 3,486 | |
Below market management agreement (3) | |
| 961 | |
| 961 | |
| |
| 21,192 | |
| 32,610 | |
Accumulated amortization | |
| (777) | |
| (685) | |
| | $ | 20,415 | | $ | 31,925 | |
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
|
| 2017 |
|
| 2016 |
|
Advanced bookings (1) |
| $ | 10,621 |
| $ | 10,621 |
|
Easement agreement (2) |
|
| 9,727 |
|
| 9,727 |
|
Ground lease/air rights agreements (3) |
|
| 25,478 |
|
| 24,107 |
|
In-place lease agreements (4) |
|
| 1,517 |
|
| 1,616 |
|
Above market lease agreements (5) |
|
| 67 |
|
| 94 |
|
Below market management agreement (6) |
|
| 961 |
|
| 2,850 |
|
|
|
| 48,371 |
|
| 49,015 |
|
Accumulated amortization |
|
| (14,233) |
|
| (13,192) |
|
|
| $ | 34,138 |
| $ | 35,823 |
|
F-16
Amortization expense on these intangible assets for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Advanced bookings (1) |
| $ | 2,340 |
| $ | 2,340 |
| $ | 2,340 |
|
Ground lease/air rights agreements (3) |
|
| 255 |
|
| 255 |
|
| 3,794 |
|
In-place lease agreements (4) |
|
| 276 |
|
| 697 |
|
| 1,455 |
|
Above market lease agreements (5) |
|
| 16 |
|
| 301 |
|
| 90 |
|
Below market management agreement (6) |
|
| 299 |
|
| 469 |
|
| 469 |
|
|
| $ | 3,186 |
| $ | 4,062 |
| $ | 8,148 |
|
(1) |
|
|
|
|
(2) |
|
|
(3) | The |
|
|
|
|
|
|
For the next five years, amortization expense for the intangible assets noted above is expected to be as follows (in thousands):
|
|
|
|
|
2018 |
| $ | 1,792 |
|
2019 |
| $ | 382 |
|
2020 |
| $ | 347 |
|
2021 |
| $ | 347 |
|
2022 |
| $ | 347 |
|
4. Disposals
Disposals - 2020
In July 2020 and Discontinued Operations
TheDecember 2020, the Company classified bothsold the Marriott PhiladelphiaRenaissance Harborplace, located in Maryland, and the Marriott Quincy as held for sale as of December 31, 2017, and subsequently sold the hotelsRenaissance Los Angeles Airport, located in January 2018 (see Note 14).California, respectively. Neither of these sales represented a strategic shiftsshift that had a major impact on the Company’s business plan or its primary markets, andmarkets; therefore, neither of these salesthe hotels qualified as a discontinued operation.
The Company has classifieddetails of the assets and liabilities related to the Marriott Philadelphia and the Marriott Quincy as held for sale as of December 31, 2017sales were as follows (in thousands):
|
|
|
|
|
| December 31, | |
|
|
| 2017 |
Accounts receivable |
| $ | 1,676 |
Prepaid expenses |
|
| 193 |
Investment in hotel properties, net |
|
| 120,916 |
Other assets |
|
| 22 |
Assets held for sale, net |
| $ | 122,807 |
|
|
|
|
Accounts payable and accrued expenses |
| $ | 69 |
Other current liabilities |
|
| 41 |
Other liabilities |
|
| 79 |
Liabilities of assets held for sale |
| $ | 189 |
| | | | | | |
| | Net Proceeds | | Net Gain | ||
Renaissance Harborplace (1) | | $ | 76,855 | | $ | 189 |
Renaissance Los Angeles Airport | | | 89,882 | | | 34,109 |
| | $ | 166,737 | | $ | 34,298 |
(1) | During 2020, the Company wrote down the hotel’s assets and recorded an impairment loss of $18.1 million (see Note 5). |
In December 2020, an assignment-in-lieu agreement was filed in the Office of the City Register of the City of New York, and the Company transferred possession and control of its leasehold interest in the Hilton Times Square to the lender of the hotel’s non-recourse mortgage (see Notes 7 and 8). As such, and in conjunction with the FASB ASC Subtopic (610-20) Gains and Losses from the Derecognition of Nonfinancial Assets, the Company concluded that it lost control of the hotel and removed the hotel’s net assets and liabilities from its balance sheet at December 31, 2020. The disposition of the Hilton Times Square did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets; therefore, the hotel did not qualify as a discontinued operation.
F-17
Disposals - 20172019
In February 2017, theThe Company sold the 444-room Fairmont Newport BeachCourtyard by Marriott Los Angeles, located in Newport Beach, California, in October 2019, for net proceeds of $122.8 million. The Company recognized$49.5 million, recording a net gain of $42.9 million on the sale of $44.3 million.sale. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, andmarkets; therefore, the sale of the hotel did not qualify as a discontinued operation. The Company classified the assets and liabilities of the Fairmont Newport Beach as held for sale as of December 31, 2016 as follows (in thousands):
|
|
|
|
|
| December 31, | |
|
| 2016 | |
Accounts receivable, net |
| $ | 452 |
Inventories |
|
| 126 |
Prepaid expenses |
|
| 386 |
Investment in hotel property, net |
|
| 77,971 |
Other assets |
|
| 178 |
Assets held for sale, net |
| $ | 79,113 |
|
|
|
|
Accounts payable and accrued expenses |
| $ | 781 |
Accrued payroll and employee benefits |
|
| 751 |
Other current liabilities |
|
| 1,473 |
Other liabilities |
|
| 148 |
Liabilities of assets held for sale |
| $ | 3,153 |
In June 2017, theDisposals - 2018
The Company sold the 199-room Marriott Park CityPhiladelphia and the Marriott Quincy, located in Park City, Utah for net proceedsPennsylvania and Massachusetts, respectively, in January 2018, the Hyatt Regency Newport Beach, located in California, in July 2018, the Marriott Houston and the Hilton North Houston (the “Houston hotels”), located in Texas, in October 2018 and the Marriott Tysons Corner, located in Virginia, in December 2018. None of $27.0 million. The Company recognized a net gain on the sale of $1.2 million. The sale did not representthese sales represented a strategic shift that had a major impact on the Company’s business plan or its primary markets, andmarkets; therefore, the salenone of the hotel did not qualifythese hotels qualified as a discontinued operation.
Disposals - 2016
In May 2016, the Company sold the leasehold interest in the 203-room Sheraton Cerritos located in Cerritos, California for net proceeds of $41.2 million. The Company recognized a net gain on the sale of $18.2 million. The sale did not represent a strategic shift
F-18
that had a major impact on the Company’s business plan or its primary markets, and therefore, the saledetails of the hotel did not qualifysales were as a discontinued operation.follows (in thousands):
| | | | | | |
| | Net Proceeds | | Net Gain | ||
Marriott Philadelphia and Marriott Quincy | | $ | 136,983 | | $ | 15,659 |
Hyatt Regency Newport Beach | | | 94,043 | | | 53,128 |
Houston hotels | | | 32,421 | | | 336 |
Marriott Tysons Corner | | | 84,526 | | | 47,838 |
| | $ | 347,973 | | $ | 116,961 |
Disposals - 2015
In September 2015, the Company sold BuyEfficient for net proceeds of $26.4 million. The Company recognized a net gain on the sale of $11.7 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of BuyEfficient did not qualify as a discontinued operation. Coterminous with the sale of BuyEfficient, the Company wrote off $8.4 million of goodwill, along with net intangible assets of $6.2 million related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software, both of which reduced the Company’s gain on the sale of BuyEfficient.
In December 2015, the Company sold its interests in the 468-room Doubletree Guest Suites Times Square located in New York City, New York for net proceeds of $522.7 million. The Company recognized a net gain on the sale of $214.5 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of the hotel did not qualify as a discontinued operation. Concurrent with the sale, the Company wrote off $83.9 million of net intangible assets (see Note 3), which reduced the Company’s gain on the sale. In addition, the Company repaid the remaining $175.0 million balance of the mortgage secured by the hotel, and wrote off $1.7 million in related deferred financing fees.
The following table provides summary results of operations for the Fairmont Newport Beach, the Marriott Park City, the Sheraton Cerritos, BuyEfficienthotels disposed of in 2020, 2019 and the Doubletree Guest Suites Times Square,2018, which are included in continuing operationsnet (loss) income for their respective ownership periods (in thousands):
| | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |||
Total revenues | | $ | 24,096 | | $ | 135,688 | | $ | 208,373 |
| | | | | | | | | |
(Loss) income before income taxes (1) | | $ | (42,828) | | $ | 1,297 | | $ | 16,159 |
| | | | | | | | | |
Gain on sale of assets | | $ | 34,298 | | $ | 42,935 | | $ | 116,961 |
|
|
|
|
|
|
|
|
|
| |||||
|
| 2017 |
| 2016 |
| 2015 | ||||||||
Total revenues |
| $ | 9,981 |
| $ | 48,116 |
| $ | 125,920 | |||||
Income before income taxes and discontinued operations (1) |
| $ | 2,466 |
| $ | 5,087 |
| $ | 8,702 | |||||
Gain on sale of assets |
| $ | 45,474 |
| $ | 18,223 |
| $ | 226,217 |
(1) |
|
|
Discontinued Operations
The following table sets forth the discontinued operations for the years ended December 31, 2017, 2016 and 2015 related to the Company’s 2013 sale of four hotels and a commercial laundry facility located in Rochester, Minnesota (the “Rochester Portfolio”) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Gain on sale of hotels and other assets, net |
| $ | 7,000 |
| $ | — |
| $ | 16,000 |
|
Income tax provision |
|
| — |
|
| — |
|
| (105) |
|
Income from discontinued operations, net of tax |
| $ | 7,000 |
| $ | — |
| $ | 15,895 |
|
Upon sale of the Rochester Portfolio, the Company retained a liability not to exceed $14.0 million. The recognition of the $14.0 million liability reduced the Company’s gain on the sale of the Rochester Portfolio. In 2014, the Company was released from $7.0 million of its liability, and the Company recorded additional gain on the sale, which was included in discontinued operations, net of tax. During 2017, the Company determined that its remaining obligation for the liability was remote based on the requirements of the Contingencies Topic of the FASB ASC. As such, the Company reversed the remaining $7.0 million (see Note 8), and recorded additional gain on the sale of the Rochester Portfolio of $7.0 million, which is included in discontinued operations, net of tax for the year ended December 31, 2017. In January 2018, the Company was officially released from all liability.
In 2015, the Company sold a $25.0 million preferred equity investment that the Company had retained upon sale of the Rochester Portfolio, and settled a working capital loan that the Company had provided to the buyer of the Rochester Portfolio for an aggregate payment of $16.0 million, plus accrued interest. In accordance with the Real Estate Subtopic of the FASB ASC, the Company recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with related income tax expense of $0.1 million, in discontinued operations, net of tax during the year ended December 31, 2015, as these additional sales proceeds could not be recognized until realized.
F-19
5. Fair Value Measurements and Interest Rate Derivatives
Fair Value Measurements
As of December 31, 20172020 and 2016,2019, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The Company follows the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, which establishes a frameworkhierarchy for inputs used in measuring fair value and disclosing fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:is as follows:
| |
Level 1 | Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| |
Level 2 | Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| |
Level 3 | Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
F-18
As of both December 31, 20172020 and 2016, the only financial instruments that2019, the Company measuresmeasured its interest rate derivatives at fair value on a recurring bases are its interest rate derivatives, along with a life insurance policy and a related retirement benefit agreement. In accordance with the Fair Value Measurement and Disclosure Topic of the FASB ASC, thebasis. The Company estimatesestimated the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Both
The Company recorded the life insurance policyfollowing impairment losses during 2020, 2019 and 2018, each of which is discussed below, as follows (in thousands):
| | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |||
Renaissance Harborplace | | $ | 18,100 | | $ | 24,713 | | $ | — |
Hilton Times Square | | | 107,857 | | | — | | | — |
Renaissance Westchester | | | 18,685 | | | — | | | — |
Abandoned development costs | | | 2,302 | | | — | | | — |
Houston hotels | | | — | | | — | | | 1,394 |
| | $ | 146,944 | | $ | 24,713 | | $ | 1,394 |
Renaissance Harborplace.The Company sold the Renaissance Harborplace in July 2020 (see Note 4). During the second quarter of 2020 and the fourth quarter of 2019, the Company recorded impairment losses of $18.1 million and $24.7 million, respectively, related retirement benefit agreement,to the hotel, which are included in impairment losses on the Company’s consolidated statements of operations for a formerthe years ended December 31, 2020 and 2019.
In 2020, the Company associate, are valueddetermined that the fair value of the Renaissance Harborplace less costs to sell the hotel was lower than the carrying value of the hotel. The 2020 impairment loss was determined using Level 2 measurements.measurements, consisting of the third-party offer price less estimated costs to sell the hotel.
In 2019, the Company reviewed the operational performance and management’s estimated hold period for the Renaissance Harborplace. During this review, the Company identified indicators of impairment related to declining demand trends at both the hotel and in the Baltimore market, along with management’s plan for the hotel’s estimated hold period. These indicators were significant so that, in accordance with the Company’s policy, the Company prepared an estimate of the future undiscounted cash flows expected to be generated by the hotel during its anticipated holding period, using assumptions for forecasted revenue and operating expenses as well as the estimated market value of the hotel. Based on this analysis, the Company concluded the hotel should be impaired as the estimated future undiscounted cash flows were less than the hotel’s carrying value. To determine the impairment loss to be recognized in 2019, the Company applied Level 3 measurements to estimate the fair value of the Renaissance Harborplace, using a discounted cash flow analysis, taking into account the hotel’s expected cash flow and its estimated market value based upon the hotel’s anticipated holding period.
Hilton Times Square. The Company disposed of the Hilton Times Square in December 2020 (see Notes 4 and 7). During the first quarter of 2020, the Company recorded an impairment loss of $107.9 million related to the hotel, which is included in impairment losses on the Company’s consolidated statements of operations for the year ended December 31, 2020. The $107.9 million impairment loss on the Hilton Times Square consisted of an $89.4 million write-down of the Company’s investment in hotel properties, net (see Note 3), and an $18.5 million write-down of the Company’s operating lease right-of-use assets, net (see Note 9).
In the aftermathfirst quarter of Hurricane Harvey, combined with continued operational declines2020, the Company identified indicators of impairment at the Hilton Times Square related to deteriorating profitability exacerbated by the effects of the COVID-19 pandemic on the Company’s expected future operating cash flows. The Company prepared an estimate of the future undiscounted cash flows expected to be generated by the hotel during its anticipated holding period, using assumptions for forecasted revenue and operating expenses as well as the estimated market value of the hotel. Based on this analysis, the Company concluded the hotel should be impaired as the estimated future undiscounted cash flows were less than the hotel’s carrying value. To determine the impairment loss for the Hilton Times Square, the Company applied Level 3 measurements to estimate the fair value of the hotel, using a discounted cash flow analysis, taking into account the hotel’s expected cash flows and its estimated market value based upon a market participant’s holding period. The valuation approach included significant unobservable inputs, including revenue growth projections and prevailing market multiples. Following the first quarter 2020 impairment, the fair market value of the Hilton Times Square was $61.3 million.
Renaissance Westchester. During the first and fourth quarters of 2020, the Company recorded impairment losses of $5.2 million and $13.5 million, respectively, on the Renaissance Westchester, both of which are included in impairment losses on the Company’s consolidated statements of operations for the year ended December 31, 2020.
In both the first and fourth quarters of 2020, the Company identified indicators of impairment at the Renaissance Westchester related to deteriorating profitability exacerbated by the effects of the COVID-19 pandemic on the Company’s expected future operating cash flows. The Company prepared estimates in March 2020 and December 2020 of the future undiscounted cash flows expected to be generated by the hotel during its anticipated holding period, using assumptions for forecasted revenue and operating
F-19
expenses as well as the estimated market values of the hotel. Based on these analyses, the Company concluded the Renaissance Westchester should be impaired as the estimated future undiscounted cash flows were less than the hotel’s carrying value. To determine the impairment losses for the Renaissance Westchester in both the first and fourth quarters of 2020, the Company used Level 2 measurements to estimate the fair values of the hotel, using appraisal techniques to estimate its market values. Following the impairments recorded in the first and fourth quarters of 2020, as of March 31 and December 31, 2020, the fair market values of the Renaissance Westchester were $29.5 million and $14.1 million, respectively.
Abandoned development costs.In the first quarter of 2020, the Company recorded an impairment loss of $2.3 million related to the abandonment of a potential project to expand one of its hotels, which is included in impairment losses on the Company’s consolidated statements of operations for the year ended December 31, 2020.
Houston hotels.The Company sold the Houston hotels in October 2018 (see Note 4). In 2018, the Company recorded an impairment loss of $1.4 million, which is included in impairment losses on the Company’s consolidated statements of operations for the year ended December 31, 2018.
In 2018, the Company identified indicators of impairment due to continued weakness in the Houston market, and in accordance withreviewed theProperty, Plant and Equipment Topic of the FASB ASC, the Company identified indicators of impairment and reviewed both of its Houston hotels for possible impairment. Using Level 3 measurements, including each hotel’s undiscounted cash flow, which took into account each hotel’s expected cash flow from operations, anticipated holding period and estimated proceeds from disposition, the Company determined that neither hotel’s carrying value was fully recoverable. As such, during 2017, the Company recorded a total impairment charge of $40.1 million, including $31.0 million for the Hilton North Houston and $9.1 million for the Marriott Houston, which is included in impairment loss on the Company’s consolidated statements of operations for the year ended December 31, 2017.
F-20
The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at December 31, 20172020 and 20162019 (in thousands):
| | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date |
| |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
December 31, 2020: | | | | | | | | | | | | | |
Renaissance Westchester (1) | | $ | 14,125 | | $ | — | | $ | 14,125 | | $ | — | |
Interest rate cap derivatives | | | — | | | — | | | — | | | — | |
Total assets measured at fair value at December 31, 2020 | | $ | 14,125 | | $ | — | | $ | 14,125 | | $ | — | |
| | | | | | | | | | | | | |
December 31, 2019: | | | | | | | | | | | | | |
Renaissance Harborplace (1) | | $ | 96,725 | | $ | — | | $ | — | | $ | 96,725 | |
Total assets measured at fair value at December 31, 2019 | | $ | 96,725 | | $ | — | | $ | — | | $ | 96,725 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at Reporting Date |
| |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
December 31, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston hotels, net (1) |
| $ | 34,473 |
| $ | — |
| $ | — |
| $ | 34,473 |
|
Interest rate cap derivatives |
|
| 4 |
|
| — |
|
| 4 |
|
| — |
|
Interest rate swap derivatives |
|
| 3,390 |
|
| — |
|
| 3,390 |
|
| — |
|
Life insurance policy (2) |
|
| 645 |
|
| — |
|
| 645 |
|
| — |
|
Total assets measured at fair value at December 31, 2017 |
| $ | 38,512 |
| $ | — |
| $ | 4,039 |
| $ | 34,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap derivative |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Interest rate swap derivatives |
|
| 1,749 |
|
| — |
|
| 1,749 |
|
| — |
|
Life insurance policy (2) |
|
| 861 |
|
| — |
|
| 861 |
|
| — |
|
Total assets measured at fair value at December 31, 2016 |
| $ | 2,610 |
| $ | — |
| $ | 2,610 |
| $ | — |
|
(1) |
|
|
|
|
The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at December 31, 20172020 and 20162019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at Reporting Date |
| |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
December 31, 2017: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit agreement (1) |
| $ | 645 |
| $ | — |
| $ | 645 |
| $ | — |
|
Total liabilities measured at fair value at December 31, 2017 |
| $ | 645 |
| $ | — |
| $ | 645 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit agreement (1) |
| $ | 861 |
| $ | — |
| $ | 861 |
| $ | — |
|
Total liabilities measured at fair value at December 31, 2016 |
| $ | 861 |
| $ | — |
| $ | 861 |
| $ | — |
|
| | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date |
| |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
December 31, 2020: | | | | | | | | | | | | | |
Interest rate swap derivatives | | $ | 5,710 | | $ | — | | $ | 5,710 | | $ | — | |
Total liabilities measured at fair value at December 31, 2020 | | $ | 5,710 | | $ | — | | $ | 5,710 | | $ | — | |
| | | | | | | | | | | | | |
December 31, 2019: | | | | | | | | | | | | | |
Interest rate swap derivatives | | $ | 1,081 | | $ | — | | $ | 1,081 | | $ | — | |
Total liabilities measured at fair value at December 31, 2019 | | $ | 1,081 | | $ | — | | $ | 1,081 | | $ | — | |
F-20
|
|
Interest Rate Derivatives
The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at December 31, 20172020 and 20162019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Estimated Fair Value Asset |
| |||||||||||||||||||||||
|
| Strike / Capped |
| Effective | Maturity |
| Notional |
| December 31, |
| |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||||||||
| | | | | | | | | | Estimated Fair Value of Assets (Liabilities) (1) | | ||||||||||||||||||||||||
| | Strike / Capped | | Effective | Maturity | | Notional | | December 31, | | |||||||||||||||||||||||||
Hedged Debt | Type | Rate | Index | Date | Date |
| Amount |
| 2017 |
| 2016 |
| Type | LIBOR Rate | Index | Date | Date | | Amount | | 2020 | | 2019 | | |||||||||||
Hilton San Diego Bayfront | Cap | 6.000 | % | 1-Month LIBOR | November 10, 2017 | December 9, 2020 | | | N/A | | $ | N/A | | $ | — | | |||||||||||||||||||
Hilton San Diego Bayfront (1) | Cap | 4.250 | % | 1-Month LIBOR | April 15, 2015 | May 1, 2017 |
| $ | N/A |
| $ | N/A |
| $ | — |
| Cap (2) | 6.000 | % | 1-Month LIBOR | December 9, 2020 | December 15, 2021 | | $ | 220,000 | | | — | | | — | | |||
Hilton San Diego Bayfront | Cap | 4.250 | % | 1-Month LIBOR | May 1, 2017 | May 1, 2019 |
| $ | 109,681 |
|
| — |
|
| N/A |
| |||||||||||||||||||
Hilton San Diego Bayfront (1) | Cap | 6.000 | % | 1-Month LIBOR | November 10, 2017 | December 9, 2020 |
| $ | 220,000 |
|
| 4 |
|
| N/A |
| |||||||||||||||||||
$85.0 million term loan (2) | Swap | 3.391 | % | 1-Month LIBOR | October 29, 2015 | September 2, 2022 |
| $ | 85,000 |
|
| 2,010 |
| 1,336 |
| ||||||||||||||||||||
$100.0 million term loan (3) | Swap | 3.653 | % | 1-Month LIBOR | January 29, 2016 | January 31, 2023 |
| $ | 100,000 |
|
| 1,380 |
|
| 413 |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| $ | 3,394 |
| $ | 1,749 |
| |||||||||||||||||||
$85.0 million term loan | Swap | 1.591 | % | 1-Month LIBOR | October 29, 2015 | September 2, 2022 | | $ | 85,000 | | | (2,100) | | | (132) | | |||||||||||||||||||
$100.0 million term loan | Swap | 1.853 | % | 1-Month LIBOR | January 29, 2016 | January 31, 2023 | | $ | 100,000 | | | (3,610) | | | (949) | | |||||||||||||||||||
| | | | | | | | | | $ | (5,710) | | $ | (1,081) | |
(1) |
|
(2) | In |
F-21
agreement, effectively |
|
|
|
|
Noncash changes in the fair values of the Company’s interest rate derivatives resulted in decreasesincreases (decreases) to interest expense for the years ended December 31, 2017, 20162020, 2019 and 20152018 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Noncash interest on derivatives |
| $ | (1,520) |
| $ | (1,426) |
| $ | (309) |
|
| | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | |||
Noncash interest on derivatives | | $ | 4,740 | | $ | 5,870 | | $ | (1,395) | |
Fair Value of Debt
As of December 31, 20172020 and 2016, 77.8%2019, 70.6% and 76.2%77.4%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap agreements. The Company uses Level 3 measurements to estimate the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates.
The Company’s principal balances and fair market values of its consolidated debt as of December 31, 20172020 and 20162019 were as follows (in thousands):
| | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | | ||||||||
| | Carrying Amount (1) | | Fair Value (2) | | Carrying Amount (1) | | Fair Value | | ||||
Debt | | $ | 747,945 | | $ | 715,042 | | $ | 974,863 | | $ | 976,012 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2016 |
| ||||||||
|
| Carrying Amount |
| Fair Value |
| Carrying Amount |
| Fair Value |
| ||||
Debt |
| $ | 990,402 |
| $ | 997,922 |
| $ | 935,944 |
| $ | 930,665 |
|
(1) | The principal balance of debt is presented before any unamortized deferred financing costs. |
(2) | Due to prevailing market conditions and the uncertain economic environment caused by the COVID-19 pandemic, actual interest rates could vary materially from those estimated, which would result in variances in the Company’s calculations of the fair market value of its debt. |
F-21
6. Other Assets
Other assets, net consisted of the following (in thousands):
| | | | | | | |
| | December 31, |
| ||||
|
| 2020 |
| 2019 |
| ||
Property and equipment, net | | $ | 6,767 | | $ | 7,642 | |
Deferred rent on straight-lined third-party tenant leases | |
| 2,819 | |
| 3,542 | |
Deferred income tax assets, net (1) | | | — | | | 7,415 | |
Other receivables | |
| 2,633 | |
| 2,984 | |
Other | |
| 226 | |
| 307 | |
Total other assets, net | | $ | 12,445 | | $ | 21,890 | |
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2017 |
| 2016 |
| ||
Property and equipment, net |
| $ | 584 |
| $ | 779 |
|
Goodwill |
|
| 990 |
|
| 990 |
|
Deferred expense on straight-lined third-party tenant leases |
|
| 3,351 |
|
| 2,876 |
|
Deferred income tax asset |
|
| 9,492 |
|
| — |
|
Interest rate derivatives |
|
| 3,394 |
|
| 1,749 |
|
Other receivables |
|
| 3,136 |
|
| 1,673 |
|
Other |
|
| 1,370 |
|
| 1,322 |
|
Total other assets, net |
| $ | 22,317 |
| $ | 9,389 |
|
(1) | During the first quarter of 2020, the Company recorded a full valuation allowance on its deferred income tax assets, net. The Company can no longer be assured that it will be able to realize these assets due to uncertainties regarding how long the COVID-19 pandemic will last or what the long-term impact will be on the Company’s hotel operations. |
During 2017, the Company released its full valuation allowance, which was previously held against all of its net U.S. federal and state deferred tax assets, consisting of a deferred tax asset related to federal and state net operating losses, reserves and other deferred tax assets of the TRS Lessee and a deferred tax liability related to timing differences associated with amortization and deferred revenue of the TRS Lessee (see Note 8 and Note 9).
F-22
7. Notes Payable
Notes payable consisted of the following at December 31 (in thousands):
| | | | | | | |
|
| December 31, |
| ||||
| | 2020 |
| 2019 | | ||
Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% to 4.15% in 2020, and 4.12% to 5.95% in 2019; maturing at dates ranging from December 11, 2024 through January 6, 2025. The notes are collateralized by first deeds of trust on 2 hotel properties and 4 hotel properties at December 31, 2020 and 2019, respectively. | | $ | 137,945 | | $ | 329,863 | |
Note payable requiring payments of interest only, bearing a blended rate of one-month LIBOR plus 105 basis points; matures on December 9, 2021 with 2 one-year options to extend, which the Company intends to exercise. The note is collateralized by a first deed of trust on 1 hotel property. | |
| 220,000 | |
| 220,000 | |
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.591%, resulting in an effective interest rate of 3.941%. Matures on September 3, 2022. (1) | | | 85,000 | | | 85,000 | |
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.853%, resulting in an effective interest rate of 4.203%. Matures on January 31, 2023. (1) | |
| 100,000 | |
| 100,000 | |
Unsecured Series A Senior Notes requiring semi-annual payments of interest only, bearing interest at 5.94%. Matures on January 10, 2026. (2) | | | 90,000 | | | 120,000 | |
Unsecured Series B Senior Notes requiring semi-annual payments of interest only, bearing interest at 6.04% Matures on January 10, 2028. (2) | | | 115,000 | | | 120,000 | |
Total notes payable | | $ | 747,945 | | $ | 974,863 | |
| | | | | | | |
Current portion of notes payable | | $ | 3,305 | | $ | 83,975 | |
Less: current portion of deferred financing costs | | | (1,044) | | | (1,866) | |
Carrying value of current portion of notes payable | | $ | 2,261 | | $ | 82,109 | |
| | | | | | | |
Notes payable, less current portion | | $ | 744,640 | | $ | 890,888 | |
Less: long-term portion of deferred financing costs | |
| (2,112) | |
| (1,934) | |
Carrying value of notes payable, less current portion | | $ | 742,528 | | $ | 888,954 | |
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| ||
Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% to 5.95%; maturing at dates ranging from November 2020 through January 2025. The notes are collateralized by first deeds of trust on four hotel properties at December 31, 2017, and five hotel properties at December 31, 2016. |
| $ | 345,402 |
| $ | 528,604 |
|
Note payable requiring payments of interest only as of December 31, 2017, bearing a blended rate of one-month LIBOR plus 105 basis points, and interest and principal as of December 31, 2016, bearing a blended rate of one-month LIBOR plus 225 basis points; maturing in December 2020 with three one-year extensions. The note is collateralized by a first deed of trust on one hotel property. |
|
| 220,000 |
|
| 222,340 |
|
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company's leverage ratios. LIBOR has been swapped to a fixed rate of 1.591%, resulting in an effective interest rate of 3.391% based on the Company's current leverage. Matures in September 2022. |
|
| 85,000 |
|
| 85,000 |
|
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company's leverage ratios. LIBOR has been swapped to a fixed rate of 1.853%, resulting in an effective interest rate of 3.653% based on the Company's current leverage. Matures in January 2023. |
|
| 100,000 |
|
| 100,000 |
|
Unsecured Senior Notes requiring semi-annual payments of interest only, bearing interest at 4.69%; maturing in January 2026. |
|
| 120,000 |
|
| — |
|
Unsecured Senior Notes requiring semi-annual payments of interest only, bearing interest at 4.79%; maturing in January 2028. |
|
| 120,000 |
|
| — |
|
Total notes payable |
| $ | 990,402 |
| $ | 935,944 |
|
|
|
|
|
|
|
|
|
Current portion of notes payable |
| $ | 7,420 |
| $ | 186,034 |
|
Less: current portion of deferred financing fees |
|
| (1,943) |
|
| (1,105) |
|
Carrying value of current portion of notes payable |
| $ | 5,477 |
| $ | 184,929 |
|
|
|
|
|
|
|
|
|
Notes payable, less current portion |
| $ | 982,982 |
| $ | 749,910 |
|
Less: long-term portion of deferred financing fees |
|
| (5,700) |
|
| (3,536) |
|
Carrying value of notes payable, less current portion |
| $ | 977,282 |
| $ | 746,374 |
|
(1) | As described below, the Company entered into the Unsecured Debt Amendments (defined below) in July and December 2020. The July 2020 amendment added a 25-basis point LIBOR floor for the remaining term of the facilities and increased the applicable LIBOR margin for the term loan facilities to 220 basis points, the high point of the pricing grid. The December 2020 amendment fixed the applicable LIBOR margin at 240 basis points for the revolving credit facility and 235 basis points for the term loan facilities. After the Covenant Relief Period (defined below), the applicable LIBOR margins will revert back to the original terms of the pricing grid with a range of 135 to 220 basis points for the term loan facilities, depending on the Company’s leverage ratio. The effective interest rate of the $85.0 million term loan increased from 2.941% to 3.941%, and the effective interest rate of the $100.0 million term loan increased from 3.203% to 4.203%, in each case at December 31, 2019 and December 31, 2020, respectively. |
(2) | As described below, the Company entered into the Unsecured Debt Amendments (defined below) in July and December 2020. The July and December 2020 amendments increased the annual interest rate on both of the senior notes by 1.00% and an additional 0.25%, respectively. As a result, the interest rate of the Series A Senior Notes increased from 4.69% to 5.94%, and the interest rate of the Series B Senior Notes increased from 4.79% to 6.04%, in each case at December 31, 2019 and December 31, 2020, respectively. After the Covenant Relief Period (defined below), the interest rates on the senior notes will decrease by 0.25%, depending on the Company’s leverage ratio, until the rates return to their original amounts. |
F-23
Aggregate future principal maturities and amortization of notes payable at December 31, 2017,2020, are as follows (in thousands):
| | | | |
2021 |
| $ | 3,305 | (1) |
2022 | |
| 88,446 | |
2023 | |
| 323,593 | (1) |
2024 | |
| 75,614 | |
2025 | |
| 51,987 | |
Thereafter | |
| 205,000 | |
Total | | $ | 747,945 | |
|
|
|
|
|
2018 |
| $ | 7,420 |
|
2019 |
|
| 7,957 |
|
2020 |
|
| 304,137 |
|
2021 |
|
| 111,247 |
|
2022 |
|
| 88,446 |
|
Thereafter |
|
| 471,195 |
|
Total |
| $ | 990,402 |
|
(1) | Reflects the intended exercise of the remaining 2 one-year options to extend the maturity date of the $220.0 million loan secured by the Hilton San Diego Bayfront from December 2021 to December 2023. |
Notes Payable Transactions - 20172020
Secured Debt. In January 2017, the Company received proceeds of $240.0 million in a private placement of senior unsecured notes. The private placement consisted of $120.0 million of notes bearing interest at a fixed rate of 4.69%, maturing in January 2026 (the “Series A Senior Notes”), and $120.0 million of notes bearing interest at a fixed rate of 4.79%, maturing in January 2028 (the “Series B Senior Notes,” together the “Senior Notes”).
In January 2017,December 2020, the Company used proceeds received from its sale of the Senior NotesRenaissance Los Angeles Airport to repay the loan$107.9 million mortgage secured by the Marriott Boston Long Wharf, which had a balance of $176.0 million and an interest rate of 5.58%.Renaissance Washington DC. The Marriott Boston Long Wharf loanmortgage was scheduledset to mature in April 2017, andMay 2021, but was available to be repaid without penalty beginning in January 2017.November 2020.
F-23
In November 2017,Additionally, in December 2020, the Company refinancedexercised its existing $219.6 million loanfirst option to extend the maturity date of the mortgage secured by the Hilton San Diego Bayfront with a new $220.0 million loan. The new loan has an initial maturity date offrom December 2020 to December 2021. The Company intends to exercise the remaining 2 one-year options to extend the maturity to December 2023.
Finally, in December 2020, the Company executed an assignment-in-lieu agreement with the holder of the $77.2 million mortgage secured by the Hilton Times Square (see Note 4). As stipulated by the agreement, the Company satisfied all outstanding debt obligations, including regular and three one-year extension options,default interest or late charges that were assessed, in exchange for a $20.0 million payment, the credit of $3.2 million of restricted cash held by the noteholder and $0.8 million of the hotel’s unrestricted cash, the assignment of the Company’s leasehold interest in the Hilton Times Square, and the retention of certain potential employee-related obligations. In conjunction with this agreement, the Company wrote off approximately $22.2 million of various accrued expenses related to the hotel’s operating lease and sublease, including, but not limited to, accrued property taxes, recapture of deferred taxes due from a prior deferral period, accrued ground rent and accrued easement payments (see Notes 8 and 9). The Company removed the net assets and liabilities related to the hotel from its December 31, 2020 balance sheet; however, the Company retained approximately $11.6 million in certain current and potential employee-related obligations, which is currently held in escrow until those obligations are resolved (see Note 13). The Company recorded a $6.4 million gain on extinguishment of debt as a result of this transaction.
Unsecured Debt.In March 2020, the Company drew $300.0 million under the revolving portion of its credit facility as a precautionary measure to increase the Company’s cash position and preserve financial flexibility. In June 2020 and August 2020, the Company repaid $250.0 million and $11.2 million, respectively, of the outstanding credit facility balance after determining that it had sufficient cash on hand in addition to access to its credit facility. In addition, in August 2020, the Company used a portion of the proceeds it received from the sale of the Renaissance Harborplace to repay $38.8 million of the outstanding credit facility balance as stipulated in the Unsecured Debt Amendments described below.
At December 31, 2020, the Company has no amount outstanding on the revolving portion of its amended credit facility, with $500.0 million of capacity available for additional borrowing under the facility. The Company’s ability to draw on the revolving portion of the amended credit facility may be subject to the Company’s compliance with various financial covenants on its secured and unsecured debt. The revolving portion of the amended credit agreement matures on April 14, 2023, but may be extended for 2 six-month periods to April 14, 2024, upon the payment of applicable fees and satisfaction of certain customary conditions. The new loan is interest only and provides for a floating interest rate of one-month LIBOR plus 105 basis points with a 25 basis point increase during the final one-year extension period, if extended. The new loan replaced the existing loan that was scheduled to mature in August 2019 and had a floating interest rate of one-month LIBOR plus 225 basis points. The Company purchased a new interest rate cap agreement in November 2017 for $0.1 million, with a strike rate of 6.0% and an expiration date in December 2020 (see Note 5).
Notes Payable Transactions - 2016
In January 2016, the Company drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds in February 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company’s leverage ratios. The Company entered into a forward swap agreement in December 2015 that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan (see Note 5). Based on the Company’s current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In May 2016,September 2020, the Company repaid $72.6$35.0 million of debt secured byits senior notes, comprising $30.0 million to the Series A note holders and $5.0 million to the Series B note holders, using a portion of the proceeds the Company received from the sale of the Renaissance Orlando at SeaWorld®, using proceeds received fromHarborplace as stipulated in the Unsecured Debt Amendments described below. In conjunction with the repayments, the Company recorded a $0.2 million loss on extinguishment of debt related to the write-off of deferred financing costs.
In July and December 2020, the Company completed amendments to its issuanceunsecured debt, consisting of Series F preferred stock in May 2016 (see Note 10)its revolving credit facility, term loans and senior notes (the “Unsecured Debt Amendments”). The Renaissance Orlando at SeaWorld® loan was scheduled to mature in July 2016, and was availableUnsecured Debt Amendments were deemed to be repaid without penalty in May 2016.debt modifications and accounted for accordingly. Key terms of the Unsecured Debt Amendments include:
● | Waiver of required financial covenants through the end of the first quarter of 2022, with quarterly testing resuming for the period ending March 31, 2022 (the “Covenant Relief Period”). The Company can elect to terminate the Covenant |
F-24
Relief Period early, subject to the achievement of the original financial covenants at the end of any quarterly measurement period; |
● | Following the end of the Covenant Relief Period, original financial covenants will be phased-in over the following four quarters to ease compliance; |
● | Continued payment of existing preferred stock dividends and the ability to issue up to $200.0 million of additional preferred stock, subject to the satisfaction of certain conditions; |
● | Unlimited ability to fund future acquisitions with proceeds from the issuance of common equity or through the sale of unencumbered hotels; |
● | Flexibility to invest up to $250.0 million into acquisitions (in addition to acquisitions funded with equity or with hotel sale proceeds) subject to maintaining certain minimum liquidity thresholds; |
● | Ability to invest up to $100.0 million into capital improvements during 2021; |
● | Ability to pay dividends on common stock to the extent required to maintain REIT status and comply with IRS regulations; |
● | Addition of a 25-basis point LIBOR floor for the remaining term of the revolving credit facility and term loan facilities. The applicable LIBOR spread for each of the facilities is fixed during the Covenant Relief Period at 240 basis points for the revolving credit facility and 235 basis points for the term loan facilities, which is the high end of the pricing grid plus 15 basis points; |
● | Addition of 125 basis points to the annual interest rate of the senior notes during the Covenant Relief Period which will decrease by 25 basis points following the Covenant Relief Period until the Company’s leverage ratio is below 5.0x as follows: |
o | Until the Company achieves a leverage ratio less than 6.50x, the interest rate on the senior notes will be increased by 100 basis points; |
o | From the period the leverage ratio is less than 6.50x but greater than 5.00x the interest rate on the senior notes will be increased by 75 basis points; and |
● | Addition of certain restrictions and covenants during the Covenant Relief Period including, but not limited to, restrictions on share repurchases, maintenance of minimum liquidity of at least $180.0 million, certain required mandatory debt prepayments on asset sales and equity issuances (if funds are not used to purchase assets) and restrictions on the incurrence of new indebtedness. |
In December 2016, the Company repaid $66.1 million of debt secured by the Embassy Suites Chicago, using cash on hand. The Embassy Suites Chicago loan was scheduled to mature in March 2017, and was available to be repaid without penalty at the end of December 2016.
Deferred Financing FeesCosts and LossesGain (Loss) on Extinguishment of Debt
Deferred financing feescosts and lossesgain (loss) on extinguishment of debt for the years ended December 31, 2017, 20162020, 2019 and 20152018 were as follows (in thousands):
| | | | | | | | | | |
| | 2020 (1) | | 2019 | | 2018 (2) | | |||
Payments of deferred financing costs | | $ | 4,361 | | $ | — | | $ | 4,012 | |
| | | | | | | | | | |
Gain (loss) on extinguishment of debt | | $ | 6,146 | | $ | — | | $ | (835) | |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 (1) |
| 2016 (2) |
| 2015 (3) |
| |||
Payments of deferred financing costs |
| $ | 3,537 |
| $ | 1,759 |
| $ | 5,861 |
|
Accelerated amortization of deferred financing fees |
| $ | — |
| $ | — |
| $ | 455 |
|
Loss on extinguishment of debt |
| $ | 824 |
| $ | 284 |
| $ | 2,964 |
|
(1) |
| During |
(2) | During 2018, the Company paid a total of $4.0 million in deferred financing costs and incurred a loss on extinguishment of debt totaling $0.8 million related to its |
|
|
|
|
Interest Expense
Total interest incurred and expensed on the notes payable and finance lease obligations for the years ended December 31, 2017, 20162020, 2019 and 20152018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Interest expense on debt and capital lease obligations |
| $ | 46,251 |
| $ | 49,509 |
| $ | 63,677 |
|
Noncash interest on derivatives and capital lease obligations, net |
|
| 3,106 |
|
| (1,426) |
|
| (309) |
|
Amortization of deferred financing fees |
|
| 2,409 |
|
| 2,200 |
|
| 3,148 |
|
Total interest expense |
| $ | 51,766 |
| $ | 50,283 |
| $ | 66,516 |
|
| | | | | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
| |||
Interest expense on debt and finance lease obligations | | $ | 45,441 | | $ | 45,381 | | $ | 45,933 | |
Noncash interest on derivatives and finance lease obligations, net | |
| 4,740 | |
| 6,051 | |
| (1,190) | |
Amortization of deferred financing costs | |
| 3,126 | |
| 2,791 | |
| 2,947 | |
Total interest expense | | $ | 53,307 | | $ | 54,223 | | $ | 47,690 | |
F-24
F-25
8. Other Current Liabilities and Other Liabilities
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
| ||||||||||
|
| December 31, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||
| | | | | | | | ||||||||||
| | December 31, |
| ||||||||||||||
|
| 2020 |
| 2019 |
| ||||||||||||
Property, sales and use taxes payable |
| $ | 17,842 |
| $ | 16,965 |
| | $ | 10,134 | | $ | 16,074 | | |||
Income tax payable |
|
| 160 |
|
| 211 |
| ||||||||||
Accrued interest |
|
| 6,746 |
|
| 1,996 |
| |
| 6,914 | |
| 6,735 | | |||
Advance deposits |
|
| 13,454 |
|
| 14,505 |
| |
| 13,341 | |
| 18,001 | | |||
Management fees payable |
|
| 1,952 |
|
| 1,645 |
| |
| 169 | |
| 1,527 | | |||
Other |
|
| 4,348 |
|
| 4,547 |
| |
| 2,048 | |
| 4,618 | | |||
Total other current liabilities |
| $ | 44,502 |
| $ | 39,869 |
| | $ | 32,606 | | $ | 46,955 | |
Other Liabilities
Other liabilities consisted of the following (in thousands):
| | | | | | | |
| | December 31, |
| ||||
|
| 2020 |
| 2019 |
| ||
Deferred revenue | | $ | 7,911 | | $ | 5,225 | |
Deferred property taxes payable (1) | | | — | | | 8,887 | |
Interest rate swap derivatives | | | 5,710 | | | 1,081 | |
Other | |
| 3,873 | |
| 2,943 | |
Total other liabilities | | $ | 17,494 | | $ | 18,136 | |
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2017 |
| 2016 |
| ||
Deferred revenue |
| $ | 5,589 |
| $ | 6,045 |
|
Deferred rent |
|
| 19,582 |
|
| 19,807 |
|
Deferred gain on sale of asset |
|
| — |
|
| 7,000 |
|
Deferred income tax liability |
|
| 257 |
|
| — |
|
Other |
|
| 3,561 |
|
| 3,798 |
|
Total other liabilities |
| $ | 28,989 |
| $ | 36,650 |
|
(1) | Under the terms of a sublease agreement at the Hilton Times Square, sublease rent amounts were considered to be property taxes under a payment-in-lieu of taxes (“PILOT”) program. The sublease agreement was assigned to the hotel’s mortgage holder in December 2020 as stipulated in the Company’s assignment-in-lieu agreement (see Notes 4 and 7). |
As discussed in Note 4, in 2017, the Company determined that its remaining obligation for the Rochester Portfolio’s liability was remote based on the requirements
F-26
9. Leases
As discussed in Note 6 and Note 9, during 2017, the Company released its full valuation allowance, which was previously held against all of its net U.S. federal and state deferred tax assets, consisting of a deferred tax asset related to federal and state net operating losses, reserves and other deferred tax assets of the TRS Lessee and a deferred tax liability related to timing differences associated with amortization and deferred revenue of the TRS Lessee.Accounting
9. Income Taxes
The Company has electedboth finance and operating leases for ground, building, office, and airspace leases, maturing in dates ranging from 2028 through 2097, including expected renewal options. Including all renewal options available to be taxed as a REIT under the Code. As a REIT, the Company, generally will not be subjectthe lease maturity date extends to corporate level federal income taxes2147.
Leases were included on net income it distributes to its stockholders. The Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company may also be subject to federal and/or state income taxes when using net operating loss carryforwards to offset current taxable income.
The Company leases its hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of the Income Taxes Topic of the FASB ASC, which requires the Company to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases.
In 2017, the Company fully released the $13.6 million valuation allowance primarily related to its federal and state net operating loss carryforwards as the Company determined it was more likely than not that these net deferred tax assets will be realized. The decision to release the valuation allowance was made after management considered all available evidence, both positive and negative, including but not limited to, historical operating results, cumulative income in recent years and forecasted earnings. The income tax benefit caused by the release of the valuation allowance was partially offset as the Company recognized a $4.4 million charge to income tax expense due to the use of net operating losses in the fourth quarter, and a write-down in the value of its net deferred tax assets as of December 31, 2017 as a result of the Tax Cuts and Jobs Act, which lowered the corporate tax rates from a maximum of 35% to a flat rate of 21% effective for tax years beginning after December 31, 2017. In addition, during 2017, the Company recognized combined federal and state income tax expense of $1.4 million, based on 2017 projected taxable income net of operating loss carryforwards for its taxable entities.
F-25
During 2016, the Company reversed a $1.5 million income tax accrual that it had previously recorded during 2013, plus $0.1 million in accrued interest, through the 2016 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset as the Company recognized combined federal and state income tax expense of $1.0 million based on 2016 projected taxable income net of operating loss carryforwards for its taxable entities.
During 2015, the Company recognized combined federal and state income tax expense of $0.7 million related to its sale of BuyEfficient, and $0.7 million based on 2015 projected taxable income net of operating loss carryforwards for its taxable entities. In addition, upon the sale of the preferred equity investment and settlement of the working capital loan associated with the Rochester Portfolio (see Note 4), the Company recorded $0.1 million in income tax expense, which is included in discontinued operations, net of tax in the Company’s consolidated statements of operations.
The Company recognizes penalties and interest related to unrecognized tax benefits in income tax expense. During 2017, the Company did not recognize any penalties or interest related to unrecognized tax benefits in income tax expense. During 2016 and 2015, the Company recognized $42,000 and $55,000 in interest expense related to its tax provisions, respectively.
The income tax benefit (provision) for the Company is included in the consolidated financial statementsbalance sheet as follows (in thousands):
| | | | | | | |
| | December 31, | | December 31, | | ||
| | 2020 | | 2019 | | ||
Finance Lease: | | | | | | | |
Right-of-use asset, gross (buildings and improvements) | | $ | 58,799 | | | 58,799 | |
Accumulated amortization | | | (12,617) | | | (11,147) | |
Right-of-use asset, net | | $ | 46,182 | | $ | 47,652 | |
| | | | | | | |
Accounts payable and accrued expenses | | $ | 1 | | $ | 1 | |
Lease obligation, less current portion | | | 15,569 | | | 15,570 | |
Total lease obligation | | $ | 15,570 | | $ | 15,571 | |
| | | | | | | |
Remaining lease term | | | 77 years | | | | |
Discount rate | | | 9.0 | % | | | |
| | | | | | | |
Operating Leases: | | | | | | | |
Right-of-use assets, net (1) | | $ | 26,093 | | $ | 60,629 | |
| | | | | | | |
Accounts payable and accrued expenses | | $ | 5,028 | | $ | 4,743 | |
Lease obligations, less current portion | | | 29,954 | | | 49,691 | |
Total lease obligations (1) | | $ | 34,982 | | $ | 54,434 | |
| | | | | | | |
Weighted average remaining lease term | | | 7 years | | | | |
Weighted average discount rate | | | 5.1 | % | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Current: |
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | (298) |
| $ | 1,379 |
| $ | (655) |
|
State |
|
| (1,162) |
|
| (763) |
|
| (779) |
|
Current income tax benefit (provision), net |
|
| (1,460) |
|
| 616 |
|
| (1,434) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
| (5,591) |
|
| 3,797 |
|
| 4,856 |
|
State |
|
| (442) |
|
| 1,638 |
|
| 1,254 |
|
Change in valuation allowance |
|
| 15,268 |
|
| (5,435) |
|
| (6,110) |
|
Deferred income tax benefit (provision), net |
|
| 9,235 |
|
| — |
|
| — |
|
Income tax benefit (provision), net |
| $ | 7,775 |
| $ | 616 |
| $ | (1,434) |
|
(1) | During the first quarter of 2020, the Company wrote down its operating lease right-of-use assets, net and recorded an impairment loss of $18.5 million on the Hilton Times Square (see Note 5). In conjunction with the execution of the Company’s December 2020 assignment-in-lieu agreement with the Hilton Times Square’s mortgage holder, the Company wrote off its $12.5 million operating lease right-of-use asset and its $14.7 million operating lease obligation related to the hotel (see Notes 4 and 7). |
ReconciliationsThe components of the Company’s tax provision at the U.S. statutory rate to the benefit (provision) for income taxes, netlease expense were as follows (in thousands):
| | | | | | |
| | 2020 | | 2019 | ||
Finance lease cost: | | | | | | |
Amortization of right-of-use asset | | $ | 1,470 | | $ | 1,470 |
Interest on lease obligations (1) | | | 1,404 | | | 2,357 |
Operating lease cost (2) | | | 9,300 | | | 6,914 |
Variable lease cost (3) | | | 27 | | | 6,142 |
Total lease cost | | $ | 12,201 | | $ | 16,883 |
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 | |||
Expected federal tax expense at statutory rate |
| $ | (44,930) |
| $ | (47,621) |
| $ | (115,960) |
Tax impact of REIT election |
|
| 41,169 |
|
| 44,320 |
|
| 113,278 |
Expected tax expense of TRS |
|
| (3,761) |
|
| (3,301) |
|
| (2,682) |
|
|
|
|
|
|
|
|
|
|
State income tax expense, net of federal benefit |
|
| (318) |
|
| (1,081) |
|
| (483) |
Change in valuation allowance |
|
| 14,340 |
|
| 6,556 |
|
| 2,832 |
Other permanent items |
|
| (381) |
|
| (1,558) |
|
| (1,101) |
Alternative minimum tax credit |
|
| 1,421 |
|
| — |
|
| — |
Effect of rate change |
|
| (3,526) |
|
| — |
|
| — |
Income tax benefit (provision), net |
| $ | 7,775 |
| $ | 616 |
| $ | (1,434) |
(1) | Interest on lease obligations for the year ended December 31, 2019 included interest expense of $1.0 million on the Courtyard by Marriott Los Angeles’s finance lease obligation before the hotel’s sale in October 2019 (see Note 4). |
(2) | Prior to the Company’s December 2020 assignment-in-lieu agreement with the Hilton Times Square’s mortgage holder (see Notes 4 and 7), operating lease cost increased by $2.6 million in 2020 under the terms of the operating lease agreement based on 90% of the landlord’s estimate of the lease land’s fair value. As noted above, the operating lease obligation was written off in conjunction with the Company’s execution of the assignment-in-lieu agreement. |
(3) | Several of the Company’s hotels pay percentage rent, which is calculated on operating revenues above certain thresholds. |
F-26
F-27
Future maturities of the Company’s finance and operating lease obligations at December 31, 2020 were as follows (in thousands):
| | | | | | |
| | Finance Lease | | Operating Leases | ||
2021 | | $ | 1,403 | | $ | 6,676 |
2022 | | | 1,403 | | | 6,728 |
2023 | | | 1,403 | | | 6,781 |
2024 | | | 1,403 | | | 6,837 |
2025 | | | 1,403 | | | 6,894 |
Thereafter | | | 100,997 | | | 7,918 |
Total lease payments | | | 108,012 | | | 41,834 |
Less: interest (1) | | | (92,442) | | | (6,852) |
Present value of lease obligations | | $ | 15,570 | | $ | 34,982 |
(1) | Calculated using the appropriate discount rate for each lease. |
Lessor Accounting
During the years ended December 31, 2020 and 2019, the Company recognized $6.6 million and $10.8 million in lease-related revenue, respectively, which is included in other operating revenue on the accompanying consolidated statements of operations.
10. Income Taxes
The significant components of the Company’s deferred tax assets and liabilities arewere as follows (in thousands):
|
|
|
|
|
| ||||||||
|
| December 31, |
| ||||||||||
|
| 2017 |
| 2016 |
| ||||||||
| | | | | | | |||||||
| | December 31, | |||||||||||
|
| 2020 |
| 2019 | |||||||||
Deferred Tax Assets: |
|
|
|
|
|
|
| | | | | | |
Net operating loss carryover |
| $ | 4,427 |
| $ | 10,270 |
| ||||||
Net operating loss carryforward | | $ | 20,406 | | $ | 2,875 | |||||||
Other reserves |
|
| 1,301 |
|
| 1,945 |
| |
| 761 | |
| 1,090 |
State taxes and other |
|
| 3,232 |
|
| 2,716 |
| |
| 2,628 | |
| 3,322 |
Depreciation |
|
| 532 |
|
| 702 |
| | | 473 | | | 492 |
Total deferred tax assets |
|
| 9,492 |
|
| 15,633 |
| ||||||
|
|
|
|
|
|
|
| ||||||
Total gross deferred tax assets | | | 24,268 | | | 7,779 | |||||||
| | | | | | | |||||||
Deferred Tax Liabilities: |
|
|
|
|
|
|
| | | | | | |
Amortization |
|
| (63) |
|
| (119) |
| | | (34) | | | (38) |
Deferred revenue |
|
| (157) |
|
| (192) |
| | | (191) | | | (284) |
Other |
|
| (37) |
|
| (54) |
| | | (46) | | | (42) |
Total deferred tax liabilities |
|
| (257) |
|
| (365) |
| ||||||
|
|
|
|
|
|
|
| ||||||
Total net deferred tax asset before valuation allowance |
|
| 9,235 |
|
| 15,268 |
| ||||||
Valuation allowance |
|
| — |
|
| (15,268) |
| ||||||
Deferred tax asset net of valuation allowance |
| $ | 9,235 |
| $ | — |
| ||||||
Total gross deferred tax liabilities | | | (271) | | | (364) | |||||||
| | | | | | | |||||||
Less: valuation allowance | | | (23,997) | | | — | |||||||
| | | | | | | |||||||
Deferred tax assets, net | | $ | — | | $ | 7,415 |
As noted above, the Company released its valuation allowance in 2017 as it currently believes that there no longer exists sufficient negative evidence that would prevent it from relying on projections of future taxable income sufficient to realize its deferred tax assets. The Company, however, provided a valuation allowance against its net deferred tax assets at December 31, 2016 and 2015 due to the uncertainty at the time of realizing the Company’s historical operating losses. Accordingly, no provision or benefit for deferred income taxes related to the Company is reflected in the accompanying consolidated statements of operations for either 2016 or 2015.
At December 31, 20172020 and 2016,2019, the net operating loss carryforwards for federal income tax purposes totaled approximately $15.6$89.6 million and $27.1$10.2 million, respectively. These losses, which begin to expire in 2031, are available to offset future income through 2032.2033.
F-27
F-28
The Company’s income tax (provision) benefit, net was included in the consolidated statements of operations as follows (in thousands):
| | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| |||
Current: | | | | | | | | | | |
Federal | | $ | 817 | | $ | 790 | | $ | 4 | |
State | |
| 8 | |
| 49 | |
| (639) | |
Current income tax benefit (provision), net | | | 825 | | | 839 | | | (635) | |
| | | | | | | | | | |
Deferred: | | | | | | | | | | |
Federal | | | 15,724 | | | (1,112) | | | (365) | |
State | |
| 858 | |
| 424 | |
| (767) | |
Change in valuation allowance | |
| (23,997) | |
| — | |
| — | |
Deferred income tax provision, net | | | (7,415) | | | (688) | | | (1,132) | |
| | | | | | | | | | |
Income tax (provision) benefit, net | | $ | (6,590) | | $ | 151 | | $ | (1,767) | |
The differences between the income tax benefit (provision) calculated at the statutory U.S. federal income tax rate of 21% and the actual income tax (provision) benefit, net recorded for continuing operations were as follows (in thousands):
| | | | | | | | | |
| | 2020 | | 2019 | | 2018 | |||
Expected federal tax expense at statutory rate | | $ | (86,369) | | $ | (29,955) | | $ | (54,773) |
Tax impact of REIT election | | | 103,273 | | | 29,810 | | | 54,779 |
Expected tax benefit (provision) of TRS | | | 16,904 | | | (145) | | | 6 |
| | | | | | | | | |
State income tax benefit (provision), net of federal benefit | | | 678 | | | 335 | | | (606) |
Change in valuation allowance | | | (23,997) | | | — | | | — |
Other permanent items | | | 645 | | | 562 | | | (1,167) |
AMT refund receivable | | | (820) | | | (601) | | | — |
Income tax (provision) benefit, net | | $ | (6,590) | | $ | 151 | | $ | (1,767) |
The Company’s tax years from 2016 to 2019 will remain open to examination by the federal and state authorities for three and four years, respectively.
In 2020, the Company recorded a full valuation allowance on its deferred income tax assets, net. The Company can no longer be assured that it will be able to realize these assets due to uncertainties regarding how long the COVID-19 pandemic will last or what the long-term impact will be on the Company’s hotel operations.
F-29
Characterization of Distributions
For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. For the years ended December 31, 2017, 20162020, 2019 and 2015,2018, distributions paid per share were characterized as follows (unaudited):
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| |||||||||
|
| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| |||
Common Stock: | | | | | | | | | | | | | | | | |
Ordinary income (1) | | $ | 0.050 | | 100 | % | $ | 0.606 | | 81.84 | % | $ | 0.634 | | 91.89 | % |
Capital gain | |
| — | | — | |
| 0.134 | | 18.16 | |
| 0.056 | | 8.11 | |
Return of capital | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
Total | | $ | 0.050 |
| 100 | % | $ | 0.740 |
| 100 | % | $ | 0.690 |
| 100 | % |
| | | | | | | | | | | | | | | | |
Preferred Stock — Series E | | | | | | | | | | | | | | | | |
Ordinary income (1) | | $ | 1.738 | | 100 | % | $ | 1.422 | | 81.84 | % | $ | 1.597 | | 91.89 | % |
Capital gain | |
| — | | — | |
| 0.316 | | 18.16 | |
| 0.141 | | 8.11 | |
Return of capital | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
Total | | $ | 1.738 |
| 100 | % | $ | 1.738 |
| 100 | % | $ | 1.738 |
| 100 | % |
| | | | | | | | | | | | | | | | |
Preferred Stock — Series F | | | | | | | | | | | | | | | | |
Ordinary income (1) | | $ | 1.613 | | 100 | % | $ | 1.320 | | 81.84 | % | $ | 1.482 | | 91.89 | % |
Capital gain | |
| — | | — | |
| 0.293 | | 18.16 | |
| 0.131 | | 8.11 | |
Return of capital | |
| — |
| — | |
| — |
| — | |
| — |
| — | |
Total | | $ | 1.613 |
| 100 | % | $ | 1.613 |
| 100 | % | $ | 1.613 |
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||||||||||||||||||||
|
| Amount |
| % |
| Amount |
| % |
| Amount |
| % |
| |||||||||||||||
Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Ordinary income |
| $ | 0.554 |
| 75.95 | % | $ | 0.609 |
| 89.62 | % | $ | 0.661 |
| 46.86 | % | ||||||||||||
Capital gain |
|
| 0.176 |
| 24.05 |
|
| 0.071 |
| 10.38 |
|
| 0.749 |
| 53.14 |
| ||||||||||||
Return of capital |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
| ||||||||||||
Total |
| $ | 0.730 |
| 100 | % | $ | 0.680 |
| 100 | % | $ | 1.410 |
| 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Preferred Stock — Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Ordinary income |
| $ | — |
| — | % | $ | 0.473 |
| 89.62 | % | $ | 0.937 |
| 46.86 | % | ||||||||||||
Capital gain |
|
| — |
| — |
|
| 0.055 |
| 10.38 |
|
| 1.063 |
| 53.14 |
| ||||||||||||
Return of capital |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
| ||||||||||||
Total |
| $ | — |
| — | % | $ | 0.528 |
| 100 | % | $ | 2.000 |
| 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Preferred Stock — Series E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Ordinary income |
| $ | 1.320 |
| 75.95 | % | $ | 1.259 |
| 89.62 | % | $ | — |
| — | % | ||||||||||||
Capital gain |
|
| 0.418 |
| 24.05 |
|
| 0.146 |
| 10.38 |
|
| — |
| — |
| ||||||||||||
Return of capital |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
| ||||||||||||
Total |
| $ | 1.738 |
| 100 | % | $ | 1.405 |
| 100 | % | $ | — |
| — | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Preferred Stock — Series F |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Ordinary income |
| $ | 1.225 |
| 75.95 | % | $ | 0.903 |
| 89.62 | % | $ | — |
| — | % | ||||||||||||
Capital gain |
|
| 0.388 |
| 24.05 |
|
| 0.105 |
| 10.38 |
|
| — |
| — |
| ||||||||||||
Return of capital |
|
| — |
| — |
|
| — |
| — |
|
| — |
| — |
| ||||||||||||
Total |
| $ | 1.613 |
| 100 | % | $ | 1.008 |
| 100 | % | $ | — |
| — | % |
(1) | Ordinary income qualifies for Section 199A treatment per the 2017 Tax Cuts and Jobs Act (“TCJA”). |
10.11. Stockholders’ Equity
Series D Cumulative Redeemable Preferred Stock
In April 2016, the Company redeemed all 4,600,000 shares of its Series D preferred stock at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. In accordance with the FASB’s Emerging Issues Task Force Topic D-42, an additional redemption charge of $4.1 million was recognized related to the original issuance costs of the Series D preferred stock, which were previously included in additional paid in capital. After the redemption date, the Company has no outstanding shares of Series D preferred stock, and all rights of the holders of such shares were terminated. Because the redemption of the Series D preferred stock was a redemption in full, trading of the Series D preferred stock on the New York Stock Exchange ceased on the April 6, 2016 redemption date.
Series E Cumulative Redeemable Preferred Stock
In March 2016, the Company issued 4,600,000 shares of its Series E preferred stock with a liquidation preference of $25.00 per share for gross proceeds of $115.0 million. In conjunction with the offering, the Company incurred $4.0 million in preferred offering costs.share. On or after March 11, 2021, the Series E preferred stock will be redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. Upon the occurrence of a change of control, as defined by the Articles Supplementary for Series E preferred stock, holders of the Series E preferred stock may, under certain circumstances, convert their preferred shares into shares of the Company’s common stock.
Series F Cumulative Redeemable Preferred Stock
In May 2016, the Company issued 3,000,000 shares of its Series F preferred stock with a liquidation preference of $25.00 per share for gross proceeds of $75.0 million. In conjunction with the offering, the Company incurred $2.6 million in preferred offering costs.share. On or after May 17, 2021, the Series F preferred stock will be redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. Upon the occurrence of a change of control, as defined by the Articles Supplementary for Series F preferred stock, holders of the Series F preferred stock may, under certain circumstances, convert their preferred shares into shares of the Company’s common stock.
Common Stock
F-28
In February 2017, the Company’s board of directors authorized a stock repurchase program to acquire up to an aggregate of $300.0 million of the Company’s common and preferred stock. In February 2020, the Company’s board of directors increased the Company’s stock repurchase program to acquire up to an aggregate of $500.0 million of the Company’s common and preferred stock. During 2020, the Company repurchased 9,770,081 shares of its common stock for $103.9 million, including fees and commissions. During 2019, the Company repurchased 3,783,936 shares of its common stock for $50.1 million, including fees and commissions. As of December 31, 2020, no shares of the Company’s preferred stock have been repurchased, and approximately $400.0 million of authorized capacity remains under the program. Due to the negative impact of COVID-19 on the Company’s business, the Company has suspended its stock repurchase program in order to preserve additional liquidity. Future repurchases will depend on various factors, including the Company’s capital needs, compliance with its debt covenants, as well as the Company’s common and preferred stock price.
F-30
Common Stock
In February 2014,2017, the Company entered into separate “At the Market” Agreements (the “ATM Agreements”) with Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Managers”). Under the terms of the ATM Agreements, the Company could issue and sell from time to time through or to the Managers, as sales agents and/or principals, shares of the Company’s common stock having an aggregate offering amount of up to $150.0 million. During 2016, the Company received $55.1 million in gross proceeds, and paid $0.9 million in costs, from the issuance of 3,564,047 shares of its common stock in connection with the ATM Agreements.
In February 2017, the Company entered into separate new ATM Agreements with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and Wells Fargo Securities, LLC. In accordance with the terms of the new ATM Agreements, the Company may from time to time offer and sell shares of its common stock having an aggregate offering price of up to $300.0 million. During 2017,2018, the Company received gross proceeds of $79.4$45.1 million, and paid $1.5$0.8 million in costs, from the issuance of 4,876,8552,590,854 shares of its common stock in connection with the new ATM Agreements. AsNo shares of common stock were issued under the ATM Agreements in 2019. In February 2020, the board of directors reauthorized the Company’s ATM Agreements, or new similar agreements, allowing the Company to issue common stock up to an aggregate offering amount of $300.0 million. No shares of common stock were issued under the ATM Agreements during 2020, and as of December 31, 2017,2020, the Company has $220.6$300.0 million available for sale under the new ATM Agreements.
In February 2017, the Company’s board of directors authorized a share repurchase plan to acquire up to $300.0 million of the Company’s commonDividends and preferred stock. As of December 31, 2017, no shares of either the Company’s common or preferred stock have been repurchased. Future purchases will depend on various factors, including the Company’s capital needs, as well as the Company’s common and preferred stock price.Distributions
Dividends
The Company declared dividends per share on its Series DE preferred stock Series E preferred stock,and Series F preferred stock, andalong with distributions per share on its common stock during 2017, 20162020, 2019 and 20152018 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Series D preferred stock |
| $ | — |
| $ | 0.527778 |
| $ | 2.00 |
|
Series E preferred stock |
|
| 1.7375 |
|
| 1.404450 |
|
| — |
|
Series F preferred stock |
|
| 1.6125 |
|
| 1.007850 |
|
| — |
|
Common stock (1) |
|
| 0.7300 |
|
| 0.680000 |
|
| 1.41 |
|
|
| $ | 4.0800 |
| $ | 3.620078 |
| $ | 3.41 |
|
|
|
| | | | | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
| |||
Series E preferred stock | | $ | 1.7375 | | $ | 1.7375 | | $ | 1.7375 | |
Series F preferred stock | | $ | 1.6125 | | $ | 1.6125 | | $ | 1.6125 | |
Common stock | | $ | 0.0500 | | $ | 0.7400 | | $ | 0.6900 | |
| | | | | | | | | | |
11.12. Long-Term Incentive Plan
Stock Grants
The Company’s Long-Term Incentive Plan (“LTIP”) provides for the granting to directors, officers and eligible employees awards that may be made in the form of incentive or nonqualified sharestock options, restricted shares deferredor units, performance shares share purchase rights andor units, share appreciation rights, in tandem with options, or any combination thereof. The Company has reserved 12,050,000 common shares for issuance under the LTIP, and 4,824,5862,911,865 shares remain available for future issuance as of December 31, 2017.2020. At December 31, 2020, there were 0 stock options, restricted units, performance shares or units, or share appreciation rights issued or outstanding under the LTIP.
Stock Grants
Restricted shares granted pursuant to the Company’s LTIP generally vest over periods froma period of three to five years from the date of grant. Should a stock grant be forfeited prior to its vesting, the shares covered by the stock grant are added back to the LTIP and remain available for future issuance. Shares of common stock tendered or withheld to satisfy the grant or exercise price or tax withholding obligations upon the vesting of a stock grant are not added back to the LTIP.
Compensation expense related to awards of restricted shares are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.
In accordance with the Compensation Topic of the FASB ASC, the The Company has elected to account for forfeitures as they occur.
The Company’s amortization expense and forfeitures related to restricted shares for the years ended December 31, 2017, 20162020, 2019 and 20152018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
| ||
|
| 2017 |
| 2016 |
| 2015 |
| |||||
Amortization expense, including forfeitures |
| $ | 8,042 |
| $ | 7,157 |
| $ | 9,695 |
|
| | | | | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
| |||
Amortization expense, including forfeitures | | $ | 9,576 | | $ | 9,313 | | $ | 9,007 | |
F-29
In January 2015, the Company recognized a total of $2.5 million in stock compensation and amortization expense related to the departure of its former Chief Executive Officer.
In addition, the Company capitalizes compensation costs related to all restricted shares granted to certain employees whowhose work onis directly related to the design and construction ofCompany’s capital investment in its hotels. During 2017,2020, 2019 and 2018, these capitalized costs totaled $0.5$0.4 million. During both 2016 and 2015, these capitalized costs totaled $0.6 million.
F-31
The following is a summary of non-vested restricted stock grant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||||||||||||||||||||||||
|
|
|
| Weighted |
|
|
| Weighted |
|
|
| Weighted |
| |||||||||||||||||||
|
|
|
| Average |
|
|
| Average |
|
|
| Average |
| |||||||||||||||||||
|
| Shares |
| Price |
| Shares |
| Price |
| Shares |
| Price |
| |||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | 2020 | | 2019 | | 2018 |
| |||||||||||||||||||||||||
|
| |
| Weighted |
| |
| Weighted |
| |
| Weighted |
| |||||||||||||||||||
| | | | Average | | | | Average | | | | Average |
| |||||||||||||||||||
| | Shares | | Price | | Shares | | Price | | Shares | | Price |
| |||||||||||||||||||
Outstanding at beginning of year |
| 1,095,908 |
| $ | 13.36 |
| 986,345 |
| $ | 14.33 |
| 1,883,296 |
| $ | 11.24 |
|
| 1,217,850 | | $ | 14.88 |
| 1,177,760 | | $ | 14.89 |
| 1,175,049 | | $ | 14.12 | |
Granted |
| 654,266 |
| $ | 15.11 |
| 816,880 |
| $ | 12.33 |
| 499,787 |
| $ | 17.33 |
|
| 852,601 | | $ | 12.91 |
| 701,754 | | $ | 14.35 |
| 617,595 | | $ | 15.84 | |
Vested |
| (541,827) |
| $ | 13.78 |
| (605,641) |
| $ | 13.39 |
| (1,225,443) |
| $ | 10.75 |
|
| (691,111) | | $ | 14.20 |
| (657,732) | | $ | 14.32 |
| (602,091) | | $ | 14.37 | |
Forfeited |
| (33,298) |
| $ | 14.10 |
| (101,676) |
| $ | 14.32 |
| (171,295) |
| $ | 14.76 |
|
| (42,504) | | $ | 14.05 |
| (3,932) | | $ | 15.48 |
| (12,793) | | $ | 14.39 | |
Outstanding at end of year |
| 1,175,049 |
| $ | 14.12 |
| 1,095,908 |
| $ | 13.36 |
| 986,345 |
| $ | 14.33 |
|
| 1,336,836 | | $ | 14.01 |
| 1,217,850 | | $ | 14.88 |
| 1,177,760 | | $ | 14.89 | |
AtAs of December 31, 2017, there were no deferred shares, share purchase rights, or share appreciation rights issued or outstanding under the LTIP.2020, $10.4 million in compensation expense related to non-vested restricted stock grants remained to be recognized over a weighted-average period of 21 months.
Stock Options
In April 2008, the Compensation Committee of the Company’s board of directors approved a grant of 200,000 non-qualified stock options (the “Options”) to a former Company associate. The Options fully vested in April 2009, and will expire in April 2018. The exercise price of the Options is $17.71 per share.
12.13. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers require the Company to pay between 1.75% and 3.5%3.0% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. In addition to basic management fees, provided that certain operating thresholds are met, the Company may also be required to pay incentive management fees to certain of its third-party managers.
Total basic management fees, net of key money incentives received from third-party hotel managers, along withand incentive management fees incurred by the Company during the years ended December 31, 2017, 20162020, 2019 and 20152018 were included in other property-level expenses on the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| ||||||||||||||
| | | | | | | | | | | |||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| ||||||||||||||
Basic management fees |
| $ | 33,318 |
| $ | 33,109 |
| $ | 34,426 |
| | $ | 7,095 | | $ | 31,061 | | $ | 31,947 | | |
Incentive management fees |
|
| 6,301 |
|
| 6,071 |
|
| 5,020 |
| |
| — | |
| 8,005 | |
| 7,169 | | |
Total basic and incentive management fees |
| $ | 39,619 |
| $ | 39,180 |
| $ | 39,446 |
| | $ | 7,095 | | $ | 39,066 | | $ | 39,116 | |
License and Franchise Agreements
The Company has entered into license and franchise agreements related to certain of its hotel properties.hotels. The license and franchise agreements require the Company to, among other things, pay monthly fees that are calculated based on specified percentages of certain revenues. The license and franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage and protection of trademarks. Compliance with such standards may from time to time require the Company to make significant expenditures for capital improvements.
F-30
Total license and franchise fees incurred by the Company during the years ended December 31, 2017, 20162020, 2019 and 20152018 were included in franchise costs on the Company’s consolidated statements of operations as follows (in thousands):
| | | | | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
| |||
Franchise assessments (1) | | $ | 5,998 | | $ | 24,389 | | $ | 25,966 | |
Franchise royalties (2) | |
| 1,062 | |
| 7,876 | |
| 9,457 | |
Total franchise costs | | $ | 7,060 | | $ | 32,265 | | $ | 35,423 | |
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Franchise assessments (1) |
| $ | 26,902 |
| $ | 26,399 |
| $ | 28,193 |
|
Franchise royalties |
|
| 9,779 |
|
| 10,248 |
|
| 11,903 |
|
Total franchise costs |
| $ | 36,681 |
| $ | 36,647 |
| $ | 40,096 |
|
(1) |
| Includes advertising, reservation, and frequent guest |
(2) | Includes key money received from one of the Company’s franchisors, which the Company is amortizing over the term of the hotel’s franchise agreement. |
F-32
Renovation and Construction Commitments
At December 31, 2017,2020, the Company had various contracts outstanding with third parties in connection with the renovationongoing renovations of certain of its hotel properties. The remaining commitments under these contracts at December 31, 20172020 totaled $60.9$19.8 million.
Capital Leases
The Hyatt Centric Chicago Magnificent Mile is subject to a building lease which expires in December 2097. Upon acquisition of the hotel in June 2012, the Company evaluated the terms of the lease agreement and determined the lease to be a capital lease pursuant to the Leases Topic of the FASB ASC.
During 2017, the Company corrected an immaterial error by reclassifying the Courtyard by Marriott Los Angeles ground lease from an operating lease to a capital lease due to the lease containing a future bargain purchase right option. Upon examination of this future purchase right option, the Company determined that the economic disincentive for continuing to lease the property will be so significant that the Company will likely exercise the option. The Company assessed the cumulative impact of this error on the affected financial statement line items (capital lease assets, capital lease liability, ground lease expense and interest expense) in its previously reported 2015, 2016 and 2017 financial statements pursuant to the guidance in ASC 250 Accounting Changes and Error Corrections ("ASC 250") and SEC Staff Accounting Bulletin ("SAB") No. 99 Materiality. The assessment concluded that the error was not material, individually or in the aggregate, to either the current or any prior period consolidated financial statements. As such, in accordance with ASC 250 (SAB No. 108, Considering Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the $4.5 million cumulative adjustment to reclassify the ground lease from an operating lease to a capital lease was recognized in 2017 as an increase to interest expense, with no revision to prior periods.
The capital lease assets were included in investment in hotel properties, net on the Company’s consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
| December 31, |
| ||||
|
| 2017 |
| 2016 |
| ||
Gross capital lease asset - buildings and improvements |
| $ | 58,799 |
| $ | 58,799 |
|
Gross capital lease asset - land |
|
| 6,605 |
|
| — |
|
Gross capital lease assets |
|
| 65,404 |
|
| 58,799 |
|
Accumulated depreciation |
|
| (8,208) |
|
| (6,738) |
|
Net capital lease assets |
| $ | 57,196 |
| $ | 52,061 |
|
Future minimum lease payments under for the Company’s capital leases together with the present value of the net minimum lease payments as of December 31, 2017 are as follows (in thousands):
|
|
|
|
|
2018 |
| $ | 2,357 |
|
2019 |
|
| 2,357 |
|
2020 |
|
| 2,357 |
|
2021 |
|
| 2,389 |
|
2022 |
|
| 2,453 |
|
Thereafter |
|
| 138,673 |
|
Total minimum lease payments (1) |
|
| 150,586 |
|
Less: Amount representing interest (2) |
|
| (123,781) |
|
Present value of net minimum lease payments (3) |
| $ | 26,805 |
|
|
|
F-31
|
|
|
|
Ground, Building and Air Leases
During 2017, 2016 and 2015, certain of the Company’s hotels were obligated to unaffiliated third parties under the terms of ground, building and air leases as follows:
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
|
Number of hotels with ground, building and/or air leases (1) |
| 6 |
| 6 |
| 8 |
|
|
|
|
|
|
|
|
|
Number of ground leases (1) |
| 6 |
| 6 |
| 7 |
|
Number of building leases (2) |
| 1 |
| 1 |
| 1 |
|
Number of air leases (1) |
| 1 |
| 1 |
| 2 |
|
Total number of ground, building and air leases |
| 8 |
| 8 |
| 10 |
|
|
|
|
|
At December 31, 2017, the ground, building and air lease agreements mature in dates ranging from 2044 through 2097, excluding renewal options. Total rent expense incurred pursuant to ground, building and air operating lease agreements for the years ended December 31, 2017, 2016 and 2015 was included in property tax, ground lease and insurance in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
Minimum rent, including straight-line adjustments |
| $ | 8,929 |
| $ | 9,140 |
| $ | 14,484 |
|
Percentage rent (1) |
|
| 6,351 |
|
| 9,394 |
|
| 3,256 |
|
Total |
| $ | 15,280 |
| $ | 18,534 |
| $ | 17,740 |
|
|
|
At December 31, 2017, the Company was obligated to an unaffiliated party under the terms of a sublease on the corporate facility, which expires in 2018. Rent expense incurred pursuant to leases on the corporate facility, which is included in corporate overhead expense, totaled $0.2 million in both 2017 and 2016, and $0.3 million in 2015. The Company has entered into a new office space lease which begins in September 2018 and expires in August 2028.
Future minimum payments under the terms of the ground and air operating leases, as well as the current sublease on the corporate facility and the new office space lease, in effect at December 31, 2017 are as follows (in thousands):
|
|
|
|
|
2018 |
| $ | 9,278 |
|
2019 |
|
| 10,280 |
|
2020 |
|
| 10,561 |
|
2021 |
|
| 10,605 |
|
2022 |
|
| 10,651 |
|
Thereafter |
|
| 243,144 |
|
Total |
| $ | 294,519 |
|
Employment Agreements
As of December 31, 2017, the Company had employment agreements with certain executive employees, which expire in March 2018. Most of the agreements automatically renew for successive one-year periods. The terms of the agreements stipulate payments of base salaries and bonuses. The Company’s approximate minimum future obligations under employment agreements through their expiration dates totaled $0.9 million as of December 31, 2017.
F-32
401(k) Savings and Retirement Plan
The Company’s corporate employees may participate, subject to eligibility, in the Company’s 401(k) Savings and Retirement Plan (the “401(k) Plan”). Qualified employees are eligible to participate in the 401(k) Plan after attaining 21 years of age and after the first of the month following the completion of six calendar months of employment. ThreeNaN percent of eligible employee annual base earnings are contributed by the Company as a Safe Harbor elective contribution. Safe Harbor contributions made by the Company totaled $0.2 million in each of the years 2017, 20162020, 2019 and 2015,2018, and were included in corporate overhead expense for the Company’s corporate employees and other property-level expenses for the Company’s former BuyEfficient employees.expense.
The Company is also responsible for funding various retirement plans at certain hotels operated by its management companies. Other property-level expenses on the Company’s consolidated statements of operations includes matching contributions into these various retirement plans of $1.5$0.8 million in both 2017 and 2015,2020, $1.4 million in 2019 and $1.6 million in 2016.2018.
Collective Bargaining Agreements
The Company is subject to exposure to collective bargaining agreements at certain hotels operated by its management companies. At December 31, 2017,2020, approximately 28.3%38.3% of workers employed by the Company’s third-party managers were covered by such collective bargaining agreements.
Concentration of Risk
The concentration of the Company’s hotels in California, Florida, Hawaii, Illinois Massachusetts, the greater Washington DC area, Louisiana and FloridaMassachusetts exposes the Company’s business to economic and severe weather conditions, competition and real and personal property tax rates unique to these locales.
As of December 31, 2017, 202020, 12 of the Company’s 25 hotels17 Hotels were geographically concentrated as follows:
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
| Percentage of |
| Total 2017 | ||||||||||
|
| Number of Hotels |
| Total Rooms |
| Consolidated Revenue | ||||||||||
| | | | | | | | | ||||||||
| | | | Percentage of | | Total 2020 | ||||||||||
| | Number of Hotels | | Total Rooms | | Consolidated Revenue | ||||||||||
California |
| 7 |
| 31 | % |
| 35 | % | | 4 | | 30 | % | | 36 | % |
Florida | | 2 | | 11 | % | | 15 | % | ||||||||
Hawaii |
| 1 |
| 4 | % |
| 8 | % | | 1 | | 6 | % | | 15 | % |
Illinois |
| 3 |
| 9 | % |
| 7 | % | | 3 | | 13 | % | | 5 | % |
Massachusetts |
| 2 |
| 12 | % |
| 14 | % | | 2 | | 16 | % | | 13 | % |
Greater Washington DC area |
| 3 |
| 15 | % |
| 14 | % | ||||||||
Louisiana |
| 2 |
| 6 | % |
| 5 | % | ||||||||
Florida |
| 2 |
| 8 | % |
| 8 | % |
Hurricanes Harvey and IrmaOther
During the third quarter of 2017, four of the Company’s 25 hotels were impacted to varying degrees by Hurricanes Harvey and Irma: the Hilton North Houston; the Marriott Houston; the Oceans Edge Hotel & Marina; and the Renaissance Orlando at SeaWorld®. In August 2017, Hurricane Harvey attained Category 4 intensity as it made landfall in the Eastern and Southern United States, inflicting widespread damage in Texas, among other areas. The Company’s Houston hotels remained open during Hurricane Harvey; however, they both sustained wind-driven rain infiltration and water damage within some of the guestrooms, meeting space and public areas. In September 2017, Hurricane Irma attained Category 4 intensity as it made landfall in Florida, inflicting widespread damage, particularly in the Florida Keys, in which the Company’s Oceans Edge Hotel & Marina is located. The hotel closed on September 7, 2017, following a mandatory evacuation order, and partially reopened on September 27, 2017. The property sustained limited damage as a result of Hurricane Irma, and the hotel was able to reopen all guestrooms on October 19, 2017. Finally, the Renaissance Orlando at SeaWorld® hotel in Orlando, Florida remained open and operational during Hurricane Irma and sustained minimal damage.
The Company maintains customary property, casualty, environmental, flood and business interruption insurance at allincurred $29.1 million of its hotels, the coverage of which is subject to certain limitations including higher deductibles in the event of a named storm. The Company is evaluating its ability to submit claims at each of the Houston hotels for portions of the costs related to the hurricane. For its Houston hotels, the Company incurred combined hurricane-related restoration expense of $0.8 million in 2017, which is included in repairs and maintenance expense in the accompanying consolidated statements of operations for the year ended December 31, 2017. The deductibles related to property damage at the Oceans Edge Hotel & Marina are structured on a building by building basis, none of which sustained enough damage to exceed their deductibles. In 2017, the Company incurred hurricane-related restoration expense of $0.8 million for the Oceans Edge Hotel & Marina, along with $0.1 million for the Renaissance Orlando at SeaWorld®, both of which are included in repairs and maintenance expense in the accompanying consolidated statements of operations for the year ended December 31, 2017. Should the Company incur additional hurricane-related costs in the future for any of these four hotels, additional expense will be recognized at that time.
F-33
In addition, the Company filed a claim under its business interruption insurance policy for business profits lost at the Oceans Edge Hotel & Marinaexpenses as a result of the damage sufferedCOVID-19 pandemic during 2020 related to wages and benefits for furloughed or laid off hotel employees, net of $5.2 million in employee retention tax credits and various industry grants received by Hurricane Irma. Once the claim is settledhotels. The $29.1 million of COVID-19-related expenses included severance of $11.0 million.
In accordance with the Company’s insurance carriers,assignment-in-lieu agreement between the payments, if any, will be recordedCompany and the mortgage holder of the Hilton Times Square, the Company is required to retain approximately $11.6 million related to certain current and potential employee-related obligations, which is currently held in escrow until those obligations are resolved. The total liability of $11.6 million is included in other current liabilities on the period or periods in which they are received.accompanying consolidated balance sheet as of December 31, 2020.
Other
The Company has provided customary unsecured environmental indemnities to certain lenders.lenders, including in particular, environmental indemnities. The Company has performed due diligence on the potential environmental risks, including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate the Company to reimburse the indemnified parties for damages related to certain environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, the Company could have recourse against other previous owners or a claim against its environmental insurance policies.
At December 31, 2017,2020, the Company had $0.5$0.3 million of outstanding irrevocable letters of credit to guarantyguarantee the Company’s financial obligations related to workers’ compensation insurance programs from prior policy years. The beneficiaries of these letters of credit may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. NoNaN draws have been made through December 31, 2017.2020.
F-33
The Company is subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of its hotels, its managers and other Company matters. While it is not possible to ascertain the ultimate outcome of such matters, the Company believes that the aggregate identifiable amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on its financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings, including any potential COVID-19-related litigation, brought against the Company, however, is subject to significant uncertainties.
13.14. Quarterly Operating Results (Unaudited)
The Company’s consolidated quarterly results for the years ended December 31, 20172020 and 20162019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| First |
| Second |
| Third |
| Fourth |
| ||||||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
2017 |
| $ | 280,743 |
| $ | 318,796 |
| $ | 303,909 |
| $ | 290,190 |
| ||||
2016 |
| $ | 274,292 |
| $ | 322,160 |
| $ | 303,304 |
| $ | 289,584 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
2017 |
| $ | 30,282 |
| $ | 62,703 |
| $ | 13,072 |
| $ | 34,948 |
| ||||
2016 |
| $ | 21,079 |
| $ | 63,422 |
| $ | 48,846 |
| $ | 37,068 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
2017 |
| $ | 63,827 |
| $ | 51,415 |
| $ | 17,082 |
| $ | 20,680 |
| ||||
2016 |
| $ | 1,216 |
| $ | 65,736 |
| $ | 39,427 |
| $ | 34,298 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) attributable to common stockholders per share — basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
2017 |
| $ | 0.27 |
| $ | 0.21 |
| $ | 0.05 |
| $ | 0.07 |
| ||||
2016 |
| $ | (0.02) |
| $ | 0.26 |
| $ | 0.16 |
| $ | 0.14 |
|
| | | | | | | | | | | | | |
|
| 2020 Quarter Ended |
| ||||||||||
| | March 31 | | June 30 | | September 30 | | December 31 |
| ||||
Total revenues | | $ | 191,212 | | $ | 10,424 | | $ | 28,910 | | $ | 37,360 | |
Total operating expenses | | | 331,860 | | | 115,292 | | | 107,476 | | | 107,167 | |
Operating loss | | $ | (140,648) | | $ | (104,868) | | $ | (78,566) | | $ | (69,807) | |
Net loss | | $ | (162,519) | | $ | (117,500) | | $ | (91,107) | | $ | (39,380) | |
Loss attributable to common stockholders | | $ | (165,268) | | $ | (118,545) | | $ | (92,499) | | $ | (41,207) | |
Loss attributable to common stockholders per share — basic and diluted | | $ | (0.75) | | $ | (0.55) | | $ | (0.43) | | $ | (0.19) | |
| | | | | | | | | | | | | |
| | 2019 Quarter Ended | | ||||||||||
| | March 31 | | June 30 | | September 30 | | December 31 | | ||||
Total revenues | | $ | 257,680 | | $ | 302,896 | | $ | 281,639 | | $ | 272,952 | |
Total operating expenses | | | 233,474 | | | 243,297 | | | 239,346 | | | 261,677 | |
Operating income | | $ | 24,206 | | $ | 59,599 | | $ | 42,293 | | $ | 11,275 | |
Net income | | $ | 17,916 | | $ | 45,918 | | $ | 33,545 | | $ | 45,414 | |
Income attributable to common stockholders | | $ | 13,110 | | $ | 40,756 | | $ | 27,829 | | $ | 41,208 | |
Income attributable to common stockholders per share — basic and diluted | | $ | 0.06 | | $ | 0.18 | | $ | 0.12 | | $ | 0.18 | |
| | | | | | | | | | | | | |
Income (loss) attributable to common stockholders per share is computed independently for each of the quarters presented and therefore may not sum to the annual amount for the year.
14. Subsequent Event
On January 9, 2018, the Company sold the Marriott Philadelphia and the Marriott Quincy for a combined gross sales price of $139.0 million. The hotels were classified as held for sale as of December 31, 2017, but neither qualified as a discontinued operation as the sales did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets.
F-34
SUNSTONE HOTEL INVESTORS, INC.
SCHEDULE III—III—REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 20172020
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Cost Capitalized | | Gross Amount at | | | | | | | | | | |
| ||||||||
| | | | | Initial costs | | Subsequent to Acquisition | | December 31, 2020 (1) | | | | | | | | | | |
| ||||||||||||
|
| | |
| | |
| Bldg. and |
| | |
| Bldg. and |
| | |
| Bldg. and |
| | |
| Accum. |
| Date |
| Depr. |
| ||||
| | Encmbr. | | Land | | Impr. | | Land | | Impr. | | Land | | Impr. | | Totals | | Depr. | | Acq./Constr. | | Life |
| |||||||||
Boston Park Plaza | | $ | — | (2) | $ | 58,527 | | $ | 170,589 | | $ | — | | $ | 124,530 | | $ | 58,527 | | $ | 295,119 | | $ | 353,646 | | $ | 82,850 |
| 2013 |
| 5-35 | |
Embassy Suites Chicago | |
| — | |
| 79 | |
| 46,886 | |
| 6,348 | |
| 26,360 | |
| 6,427 | |
| 73,246 | |
| 79,673 | |
| 38,972 |
| 2002 |
| 5-35 | |
Embassy Suites La Jolla | |
| 57,890 | |
| 27,900 | |
| 70,450 | |
| — | |
| 17,242 | |
| 27,900 | |
| 87,692 | |
| 115,592 | |
| 41,109 |
| 2006 |
| 5-35 | |
Hilton Garden Inn Chicago Downtown/Magnificent Mile | |
| — | (2) |
| 14,040 | |
| 66,350 | |
| — | |
| 10,795 | |
| 14,040 | |
| 77,145 | |
| 91,185 | |
| 14,835 |
| 2012 |
| 5-50 | |
Hilton New Orleans St. Charles | |
| — | (2) |
| 3,698 | |
| 53,578 | |
| — | |
| 10,495 | |
| 3,698 | |
| 64,073 | |
| 67,771 | |
| 11,419 |
| 2013 |
| 5-35 | |
Hilton San Diego Bayfront | |
| 220,000 | |
| — | |
| 424,992 | |
| — | |
| 24,200 | |
| — | |
| 449,192 | |
| 449,192 | |
| 80,848 |
| 2011 |
| 5-57 | |
Hyatt Centric Chicago Magnificent Mile | |
| — | (2) |
| — | |
| 91,964 | |
| — | |
| (38,974) | |
| — | |
| 52,990 | |
| 52,990 | |
| 21,487 |
| 2012 |
| 5-40 | |
Hyatt Regency San Francisco | |
| — | (2) |
| 116,140 | |
| 131,430 | |
| — | |
| 58,467 | |
| 116,140 | |
| 189,897 | |
| 306,037 | |
| 61,332 |
| 2013 |
| 5-35 | |
JW Marriott New Orleans | |
| 80,055 | |
| — | |
| 73,420 | |
| 15,147 | |
| 38,053 | |
| 15,147 | |
| 111,473 | |
| 126,620 | |
| 28,681 |
| 2011 |
| 5-35 | |
Marriott Boston Long Wharf | |
| — | (2) |
| 51,598 | |
| 170,238 | |
| — | |
| 73,663 | |
| 51,598 | |
| 243,901 | |
| 295,499 | |
| 101,811 |
| 2007 |
| 5-35 | |
Oceans Edge Resort & Marina | | | — | (2) | | 92,510 | | | 74,361 | | | 2,000 | | | 5,945 | | | 94,510 | | | 80,306 | | | 174,816 | | | 7,662 | | 2017 | | 5-40 | |
Renaissance Long Beach | | | — | (2) |
| 10,437 | |
| 37,300 | |
| — | |
| 27,533 | |
| 10,437 | |
| 64,833 | |
| 75,270 | |
| 29,402 |
| 2005 |
| 5-35 | |
Renaissance Orlando at SeaWorld ® | |
| — | (2) |
| — | |
| 119,733 | |
| 30,717 | |
| 67,868 | |
| 30,717 | |
| 187,601 | |
| 218,318 | |
| 83,715 |
| 2005 |
| 5-35 | |
Renaissance Washington DC | |
| — | |
| 14,563 | |
| 132,800 | |
| — | |
| 49,280 | |
| 14,563 | |
| 182,080 | |
| 196,643 | |
| 90,784 |
| 2005 |
| 5-35 | |
Renaissance Westchester | | | — | (2) |
| 5,751 | |
| 17,069 | |
| (3,291) | |
| (6,923) | |
| 2,460 | |
| 10,146 | |
| 12,606 | |
| — |
| 2010 |
| 5-35 | |
The Bidwell Marriott Portland | | | — | (2) |
| 5,341 | |
| 20,705 | |
| — | |
| 26,602 | |
| 5,341 | |
| 47,307 | |
| 52,648 | |
| 17,484 |
| 2000 |
| 5-35 | |
Wailea Beach Resort | | | — | (2) | | 119,707 | | | 194,137 | | | — | | | 112,612 | | | 119,707 | | | 306,749 | | | 426,456 | | | 59,898 | | 2014 | | 5-40 | |
| | $ | 357,945 | | $ | 520,291 | | $ | 1,896,002 | | $ | 50,921 | | $ | 627,748 | | $ | 571,212 | | $ | 2,523,750 | | $ | 3,094,962 | | $ | 772,289 | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost Capitalized |
| Gross Amount at |
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
| Initial costs |
| Subsequent to Acquisition |
| December 31, 2017 (1) |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
| Bldg. and |
|
|
|
| Bldg. and |
|
|
|
| Bldg. and |
|
|
|
| Accum. |
| Date |
| Depr. |
| ||||
|
| Encmbr. |
| Land |
| Impr. |
| Land |
| Impr. |
| Land |
| Impr. |
| Totals |
| Depr. |
| Acq./Constr. |
| Life |
| |||||||||
Boston Park Plaza |
| $ | — | (2) | $ | 58,527 |
| $ | 170,589 |
| $ | — |
| $ | 107,773 |
| $ | 58,527 |
| $ | 278,362 |
| $ | 336,889 |
| $ | 42,064 |
| 2013 |
| 5-35 |
|
Courtyard by Marriott Los Angeles |
|
| — | (2) |
| — |
|
| 8,446 |
|
| 6,605 |
|
| 13,813 |
|
| 6,605 |
|
| 22,259 |
|
| 28,864 |
|
| 11,550 |
| 1999 |
| 5-35 |
|
Embassy Suites Chicago |
|
| — |
|
| 79 |
|
| 46,886 |
|
| 6,348 |
|
| 22,253 |
|
| 6,427 |
|
| 69,139 |
|
| 75,566 |
|
| 31,603 |
| 2002 |
| 5-35 |
|
Embassy Suites La Jolla |
|
| 61,712 |
|
| 27,900 |
|
| 70,450 |
|
| — |
|
| 15,527 |
|
| 27,900 |
|
| 85,977 |
|
| 113,877 |
|
| 31,786 |
| 2006 |
| 5-35 |
|
Hilton Garden Inn Chicago Downtown/Magnificent Mile |
|
| — | (2) |
| 14,040 |
|
| 66,350 |
|
| — |
|
| 9,246 |
|
| 14,040 |
|
| 75,596 |
|
| 89,636 |
|
| 8,999 |
| 2012 |
| 5-50 |
|
Hilton New Orleans St. Charles |
|
| — | (2) |
| 3,698 |
|
| 53,578 |
|
| — |
|
| 8,109 |
|
| 3,698 |
|
| 61,687 |
|
| 65,385 |
|
| 6,424 |
| 2013 |
| 5-35 |
|
Hilton North Houston |
|
| — |
|
| 6,184 |
|
| 35,628 |
|
| (4,348) |
|
| (20,352) |
|
| 1,836 |
|
| 15,276 |
|
| 17,112 |
|
| 3,871 |
| 2002 |
| 5-35 |
|
Hilton San Diego Bayfront |
|
| 220,000 |
|
| — |
|
| 424,992 |
|
| — |
|
| 10,307 |
|
| — |
|
| 435,299 |
|
| 435,299 |
|
| 54,373 |
| 2011 |
| 5-57 |
|
Hilton Times Square |
|
| 81,530 |
|
| — |
|
| 221,488 |
|
| — |
|
| 31,634 |
|
| — |
|
| 253,122 |
|
| 253,122 |
|
| 97,881 |
| 2006 |
| 5-35 |
|
Hyatt Centric Chicago Magnificent Mile |
|
| — | (2) |
| — |
|
| 91,964 |
|
| — |
|
| 19,121 |
|
| — |
|
| 111,085 |
|
| 111,085 |
|
| 21,597 |
| 2012 |
| 5-40 |
|
Hyatt Regency Newport Beach |
|
| — | (2) |
| — |
|
| 30,549 |
|
| — |
|
| 31,340 |
|
| — |
|
| 61,889 |
|
| 61,889 |
|
| 24,494 |
| 2002 |
| 5-35 |
|
Hyatt Regency San Francisco |
|
| — | (2) |
| 116,140 |
|
| 131,430 |
|
| — |
|
| 42,388 |
|
| 116,140 |
|
| 173,818 |
|
| 289,958 |
|
| 32,058 |
| 2013 |
| 5-35 |
|
JW Marriott New Orleans |
|
| 85,341 |
|
| — |
|
| 73,420 |
|
| — |
|
| 14,450 |
|
| — |
|
| 87,870 |
|
| 87,870 |
|
| 16,719 |
| 2011 |
| 5-35 |
|
Marriott Boston Long Wharf |
|
| — | (2) |
| 51,598 |
|
| 170,238 |
|
| — |
|
| 40,323 |
|
| 51,598 |
|
| 210,561 |
|
| 262,159 |
|
| 75,400 |
| 2007 |
| 5-35 |
|
Marriott Houston |
|
| — |
|
| 4,167 |
|
| 19,155 |
|
| (1,441) |
|
| 2,014 |
|
| 2,726 |
|
| 21,169 |
|
| 23,895 |
|
| 7,397 |
| 2002 |
| 5-35 |
|
Marriott Portland |
|
| — | (2) |
| 5,341 |
|
| 20,705 |
|
| — |
|
| 7,606 |
|
| 5,341 |
|
| 28,311 |
|
| 33,652 |
|
| 14,424 |
| 2000 |
| 5-35 |
|
Marriott Tysons Corner |
|
| — |
|
| 3,897 |
|
| 43,528 |
|
| (250) |
|
| 17,001 |
|
| 3,647 |
|
| 60,529 |
|
| 64,176 |
|
| 28,666 |
| 2002 |
| 5-35 |
|
Wailea Beach Resort |
|
| — | (2) |
| 119,707 |
|
| 194,137 |
|
| — |
|
| 96,594 |
|
| 119,707 |
|
| 290,731 |
|
| 410,438 |
|
| 25,088 |
| 2014 |
| 5-40 |
|
Oceans Edge Hotel & Marina |
|
| — |
|
| 92,510 |
|
| 74,361 |
|
| — |
|
| — |
|
| 92,510 |
|
| 74,361 |
|
| 166,871 |
|
| 1,043 |
| 2017 |
| 5-40 |
|
Renaissance Harborplace |
|
| — | (2) |
| 25,085 |
|
| 102,707 |
|
| — |
|
| 25,955 |
|
| 25,085 |
|
| 128,662 |
|
| 153,747 |
|
| 51,561 |
| 2005 |
| 5-35 |
|
Renaissance Los Angeles Airport |
|
| — | (2) |
| 7,800 |
|
| 52,506 |
|
| — |
|
| 12,955 |
|
| 7,800 |
|
| 65,461 |
|
| 73,261 |
|
| 22,174 |
| 2007 |
| 5-35 |
|
Renaissance Long Beach |
|
| — | (2) |
| 10,437 |
|
| 37,300 |
|
| — |
|
| 22,514 |
|
| 10,437 |
|
| 59,814 |
|
| 70,251 |
|
| 21,962 |
| 2005 |
| 5-35 |
|
Renaissance Orlando at SeaWorld ® |
|
| — |
|
| — |
|
| 119,733 |
|
| 30,716 |
|
| 41,419 |
|
| 30,716 |
|
| 161,152 |
|
| 191,868 |
|
| 63,515 |
| 2005 |
| 5-35 |
|
Renaissance Washington DC |
|
| 116,819 |
|
| 14,563 |
|
| 132,800 |
|
| — |
|
| 45,928 |
|
| 14,563 |
|
| 178,728 |
|
| 193,291 |
|
| 70,722 |
| 2005 |
| 5-35 |
|
Renaissance Westchester |
|
| — | (2) |
| 5,751 |
|
| 17,069 |
|
| — |
|
| 21,642 |
|
| 5,751 |
|
| 38,711 |
|
| 44,462 |
|
| 10,706 |
| 2010 |
| 5-35 |
|
|
| $ | 565,402 |
| $ | 567,424 |
| $ | 2,410,009 |
| $ | 37,630 |
| $ | 639,560 |
| $ | 605,054 |
| $ | 3,049,569 |
| $ | 3,654,623 |
| $ | 776,077 |
|
|
|
|
|
(1) |
| The aggregate cost of properties for federal income tax purposes is approximately |
(2) |
| Hotel is pledged as collateral by the Company’s credit facility. As of December 31, |
F-35
The following is a reconciliation of real estate assets and accumulated depreciation (in thousands):
| | | | | | | | | | |
| | Hotel Properties | | |||||||
|
| 2020 |
| 2019 |
| 2018 |
| |||
| | | | | | | | | | |
Reconciliation of land and buildings and improvements: | | | | | | | | | | |
Balance at the beginning of the year | | $ | 3,551,715 | | $ | 3,595,301 | | $ | 3,654,623 | |
Activity during year: | | | | | | | | | | |
Acquisitions | |
| 1,296 | |
| 704 | |
| 15,147 | |
Improvements | |
| 47,547 | |
| 78,579 | |
| 96,481 | |
Impairment losses | | | (252,909) | | | (34,888) | | | (1,797) | |
Changes in reporting presentation (1) | | | — | | | (58,799) | | | 171,675 | |
Dispositions | |
| (252,687) | |
| (29,182) | |
| (340,828) | |
Balance at the end of the year | | $ | 3,094,962 | | $ | 3,551,715 | | $ | 3,595,301 | |
Reconciliation of accumulated depreciation: | | | | | | | | | | |
Balance at the beginning of the year | | $ | 888,378 | | $ | 815,628 | | $ | 776,077 | |
Depreciation | |
| 101,218 | |
| 107,949 | |
| 108,175 | |
Impairment losses | | | (137,292) | | | (12,572) | | | (491) | |
Changes in reporting presentation (1) | | | — | | | (9,677) | | | 57,363 | |
Dispositions | |
| (80,015) | |
| (12,950) | |
| (125,496) | |
Balance at the end of the year | | $ | 772,289 | | $ | 888,378 | | $ | 815,628 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Hotel Properties |
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||
|
|
|
|
|
|
|
|
|
|
|
(1) Reconciliation of land and buildings and improvements: |
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
| $ | 3,667,466 |
| $ | 3,652,222 |
| $ | 3,807,607 |
|
Additions during year: |
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
| 166,871 |
|
| — |
|
| — |
|
Improvements |
|
| 91,067 |
|
| 159,786 |
|
| 86,615 |
|
Impairment loss |
|
| (67,345) |
|
| — |
|
| — |
|
Changes in reporting presentation |
|
| (53,047) |
|
| (112,023) |
|
| — |
|
Dispositions |
|
| (150,389) |
|
| (32,519) |
|
| (242,000) |
|
Balance at the end of the year |
| $ | 3,654,623 |
| $ | 3,667,466 |
| $ | 3,652,222 |
|
(2) Reconciliation of accumulated depreciation: |
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
| $ | 803,913 |
| $ | 707,737 |
| $ | 625,020 |
|
Depreciation |
|
| 112,176 |
|
| 107,409 |
|
| 107,700 |
|
Changes in reporting presentation |
|
| (87,427) |
|
| — |
|
| — |
|
Retirement |
|
| (52,585) |
|
| (11,233) |
|
| (24,983) |
|
Balance at the end of the year |
| $ | 776,077 |
| $ | 803,913 |
| $ | 707,737 |
|
(1) | Changes in reporting presentation in 2019 include the reclasses necessary upon the Company’s implementation of Leases (Topic 842) of the FASB ASC to move the Hyatt Centric Chicago Magnificent Mile’s finance lease asset from investment in hotel properties, net to finance lease right-of-use asset, net. Changes in reporting presentation in 2018 include the net assets for the Marriott Philadelphia and the Marriott Quincy, which the Company classified as held for sale in 2017 and subsequently sold in 2018. |
F-36