The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows for the ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
Amounts included in restricted cash represent those required to be set aside in escrow by contractual agreement with various lenders for the payment of specific items such as property insurance, property tax, and capital expenditures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” and words of similar import. Such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this and other reports filed by us with the SEC, including, but not limited to those discussed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018,2019 and in our subsequent Quarterly Reports on Form 10-Q, that could cause actual results to differ. Statements regarding the following subjects are forward-looking by their nature:
● our business or investment strategy;
● our projected operating results;
● our distribution policy;
● our liquidity;
● completion of any pending transactions;
● our ability to maintain existing financing arrangements and our ability to obtain future financing arrangements or refinance or extend the maturity of existing financing arrangements as they come due;
● our ability to repurchase shares on attractive terms from time to time;
● our understanding of our competition;
● market trends; and
● projected capital expenditures.expenditures;
● the impact of and changes to various government programs, including in response to novel coronavirus, or COVID-19;
● the timing of the development of any effective cure or treatment for COVID-19;
● our access to capital on the terms and timing we expect;
● the restoration of public confidence in domestic and international travel;
● permanent structural changes in demand for conference centers by business and leisure clientele;
● our ability to dispose of selected hotel properties on the terms and timing we expect, if at all; and
● our ability to reopen our nonoperational hotels on the terms and timing we expect, if at all;
Forward-looking statements are based on our beliefs, assumptions and expectations, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Readers should not place undue reliance on forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements.
Important factors that we think could cause our actual results to differ materially from expected results are summarized below. One of the most significant factors, however, is the ongoing impact of the current outbreak of the novel coronavirus on the United States, regional and global economies, the broader financial markets, our customers and employees, governmental responses thereto and the operation changes we have and may implement in response thereto. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many of the other important factors below.
New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local governments’ efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity.
The following non-exclusive list of factors could also cause actual results to vary from our forward-looking statements:
● general volatility of the capital markets and the market price of our common shares;
● changes in our business or investment strategy;
● availability, terms and deployment of capital;
● availability of qualified personnel;
● changes in our industry and the market in which we operate, interest rates, or the general economy;
● decreased international travel because of geopolitical events, including terrorism and current U.S. government policies;policies such as immigration policies, border closings, and travel bans related to COVID-19;
● the degree and nature of our competition;
● financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and potential inability to refinance or extend the maturity of existing indebtedness;
● levels of spending in the business, travel and leisure industries, as well as consumer confidence;
● declines in occupancy, average daily rate and RevPAR and other hotel operating metrics;
● hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
● financial condition of, and our relationships with, our joint venture partners, third-party property managers, franchisors and hospitality joint venture partners;
● increased interest rates and operating costs;
● ability to complete development and redevelopment projects;
● risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;
● availability of and our ability to retain qualified personnel;
● decreases in tourism due to pandemics, geopolitical instability or changes in foreign exchange rates;
● our failure to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended;
● environmental uncertainties and risks related to natural disasters and increases in costs to insure against those risks;
● changes in real estate and zoning laws and increases in real property tax rates;
● the uncertainty and economic impact of pandemics, epidemics, or other public health emergencies or fear of such events, such as the recent outbreak of COVID-19;
● the current COVID-19 pandemic had, and will continue to have, adverse effects on our financial conditions, results of operations, cash flows, and performance for an indefinite period of time. Future pandemics may also have adverse effects on our financial condition, results of operations, cash flows, and performance;
people to travel may lead to a decline in demand for hotels; and
● the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20182019 under the heading “Risk Factors”Factors,” in our subsequent Quarterly Reports on Form 10-Q and in other reports we file with the SEC from time to time.
These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.
All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
BACKGROUND
As of SeptemberJune 30, 2019,2020, we owned interests in 48 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles, Seattle, and Miami, including 38 wholly-owned hotels, 1 hotel through our interest in a consolidated joint venture, and interests in 9 hotels owned through unconsolidated joint ventures. We also entered into a joint venture during the third quarter of 2018 that is constructing a new hotel adjacent to two existing hotels partially owned by us through separate, unconsolidated joint venture interests. We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 1999. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of SeptemberJune 30, 2019,2020, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS.
The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.
OVERVIEW
We believeAt the repositioningbeginning of the year, we expected that we would achieve operating results for 2020 that would outperform other market participants due to the strong performance anticipated from newly renovated and upgraded hotels in our portfolio, over the past few years has better enabled us to capitalize on further improvement in lodging fundamentals. During the first nine months of 2019, we continued to see improvements overall inprimarily led by our key metrics for our consolidated hotels. Our results for the first nine months of 2019 were positively impacted by having our two hurricane impacted hotels in South Florida fully operational. OutsideFlorida. We started 2020 off on solid footing with our comparable portfolio achieving RevPAR growth through the end of February 2020 but this impactwas quickly erased as a result of the global economic slowdown caused by the COVID-19 pandemic. As a result of the pandemic and subsequent government mandates and health official recommendations, hotel demand was substantially reduced across the United States.
Following the government mandates and health official recommendations, and after evaluating the cost of running our portfoliorespective properties at low occupancy levels versus closing the properties, we originally closed 21 of our 48 hotels properties and dramatically reduced staffing. As of June 30, 2020, we had 32 hotels operating performance was positively impactedwhile 16 hotels remained closed. We had 21 of our wholly-owned hotels that have been opened for the entirety of the second quarter of 2020, and these hotels experienced increased occupancy levels during the second quarter of 2020, including our open New York City hotels, which generated 61% occupancy. While travel restrictions have slowly eased in a few markets and leisure demand began to recover late in the second quarter, group and business travel are unlikely to rebound quickly. As of August 1, 2020 we had 33 hotels open and by prior year hotel renovationsthe end of the third quarter 2020, we anticipate having 44 of our 48 hotels open assuming there is no significant increase in COVID-19 cases or government mandated closures.
In addition to our focus on strategically reopening hotels and repositionings. Whiledriving occupancy at these hotels, we have remained focused on executing expense mitigation measures and shoring up our liquidity position as we continue to explore acquisition opportunities in coastal gateway urban centers and select resort destinations, we remain focused onface a challenging operating efficiencies within our portfolio and asset repositioning opportunities to drive earnings and cash flow growth over the next year to de-lever our balance sheet. In addition, we will continue to look for attractive opportunities to divest certain properties at favorable prices, potentially redeploying capital in markets that offer higher growth, reducing our leverage, or opportunistically repurchasingenvironment. The suspension of our common shares. and preferred dividends, which is expected to last through at least the end of 2020, is expected to reduce our cash expenditures by $72.5 million on an annualized basis when compared to dividends we declared in 2019. We have also deferred certain planned capital expenditures for 2020 with an anticipated cash savings of between $10.0 million to $15.0 million for 2020. In April 2020, we amended our existing Credit Facility, which granted us a waiver of our covenants under the Credit Facility through March 31, 2021 and provided us with additional availability under the Credit Facility of $100 million, of which $25,000 was drawn in April 2020 and $10,000 during July 2020.
The manner in which the ongoing COVID-19 pandemic will be resolved or the manner that the hospitality and tourism industries will return to historical performance norms, and whether the economy will continue tocontract or grow if at all, isare not reasonably predictable. In addition, the availability of hotel-level financing for the acquisition of new hotels is not within our control. As a result, there can be no assurances that we will be able to growachieve the hotel revenues, occupancy, ADRoperating metrics or RevPARthe results at our properties per our forecasts.we have forecasted. Factors that might contribute to less-than-anticipated performance include those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20182019 in our subsequent Quarterly Reports on Form 10-Q, and other documents that we may file with the SEC in the future.future, including this Quarterly Report on Form 10-Q. We will continue to cautiously monitor lodging demand and rates, our third-party hotel managers, and our performance generally.
SUMMARY OF OPERATING RESULTS
The table below outlines operating results for the Company’s portfolio of hotels consolidated within our financial statements for the three and nine months ended September 30, 2019 and 2018.
We define a comparable consolidated hotel as one that is currently consolidated, that we have owned in whole or in part during the periods being presented, and is deemed fully operational. Based on this definition, for the three and nine months ended September 30, 2019 and 2018, there are 37 comparable consolidated hotels. The comparable key hotel operating statistics presented in the table below have been computed using pro forma methodology to compute the operating results for the portion of time prior to our ownership of hotels purchased during the comparable period for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 for our comparable hotels.
For the comparison of the three and nine months ended September 30, 2019 to the three and nine months ended September 30, 2018, comparable hotel operating results contain results from our consolidated hotels owned as of September 30, 2019, excluding: (1) the Cadillac Hotel and Beach Club, Miami, FL and the Parrot Key Hotel & Villas because both hotels had not been operating during the first three quarters of 2018 while the damage from Hurricane Irma was being remediated; and (2) the results of all hotels sold since December 31, 2017. The comparison of the nine months ended September 30, 2019 to September 30, 2018 also includes results as reported by the prior owners of the Annapolis Waterfront Hotel, which was acquired by the Company on March 28, 2018.
COMPARABLE CONSOLIDATED HOTELS:
(includes 37 hotels in both periods)
($'s in 000's except ADR and RevPAR)
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended, | | |
| | September 30, | | | | September 30, | | |
| | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
Occupancy | | 86.3% | | 85.6% | | 77 bps | | 84.0% | | 82.2% | | 174 bps |
Average Daily Rate (ADR) | | $ | 228.17 |
| | $ | 227.55 |
| | 0.3% | | $ | 225.96 |
| | $ | 225.73 |
| | 0.1% |
Revenue Per Available Room (RevPAR) | | $ | 196.97 |
| | $ | 194.70 |
| | 1.2% | | $ | 189.69 |
| | $ | 185.57 |
| | 2.2% |
| | |
| | | | | | | | | | |
Room Revenues | | $ | 103,535 |
| | $ | 102,331 |
| | 1.2% | | $ | 295,862 |
| | $ | 289,418 |
| | 2.2% |
Total Revenues | | $ | 127,331 |
| | $ | 125,494 |
| | 1.5% | | $ | 366,654 |
| | $ | 357,164 |
| | 2.7% |
For the three and nine months ended September 30, 2019 when compared to the same periods in 2018, we experienced growth in occupancy while ADR remained relatively flat, resulting in RevPAR growth of 1.2% and 2.2%, respectively. For the three months ended September 30, 2019, our hotels in Washington D.C. and Boston contributed to our overall RevPAR growth by delivering RevPAR growth of 9.1% and 4.2%, respectivley. While both our New York City and West Coast properties experienced decreases in RevPAR of 2.9% and 2.2%, respectivley. For the nine months ended September 30, 2019, our hotels in Philadelphia, Boston, and Washington D.C. contributed to our overall RevPAR growth by delivering RevPAR growth of 8.3%, 4.7%, and 3.0%, respectivley. Our New York City properties experienced a decrease in RevPAR of 2.8% over the first nine months of 2019 compared to 2018, while the remaining markets maintained relatively stable metrics over that comparative period.
The table below outlines operating results for the Company’s portfolio of hotels we own through interests in unconsolidated joint ventures for the three and nine months ended September 30, 2019 and 2018.
We define a comparable unconsolidated joint venture hotel as one that is currently owned by our unconsolidated joint ventures in whole or in part for the entirety of the periods being presented, and is deemed fully operational. Based on this definition, for the three and nine months ended September 30, 2019 and 2018, there are 9 comparable unconsolidated joint venture hotels.
COMPARABLE UNCONSOLIDATED JOINT VENTURES:
(includes 9 hotels in both periods)
($'s in 000's except ADR and RevPAR)
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended, | | |
| | September 30, | | | | September 30, | | |
| | 2019 | | 2018 | | Variance | | 2019 | | 2018 | | Variance |
Occupancy | | 94.1 | % | | 94.1 | % | | -7 bps | | 92.3 | % | | 92.5 | % | | -20 bps |
Average Daily Rate (ADR) | | $ | 206.34 |
| | $ | 215.47 |
| | (4.2)% | | $ | 191.49 |
| | $ | 200.04 |
| | (4.3)% |
Revenue Per Available Room (RevPAR) | | $ | 194.06 |
| | $ | 202.81 |
| | (4.3)% | | $ | 176.82 |
| | $ | 185.11 |
| | (4.5)% |
| | | | | | | | | | | | |
Room Revenues | | $ | 25,442 |
| | $ | 26,579 |
| | (4.3)% | | $ | 68,788 |
| | $ | 69,993 |
| | (1.7)% |
Total Revenues | | $ | 26,041 |
| | $ | 27,185 |
| | (4.2)% | | $ | 70,629 |
| | $ | 71,563 |
| | (1.3)% |
The properties held within our unconsolidated joint ventures collectively experienced decreases in key operating metrics for the three and nine months ended September 30, 2019 compared to the same periods in 2018. The properties within our unconsolidated joint ventures, on a comparable basis, experienced a decrease of 4.3% and 4.5% in RevPAR for the three and nine months ended September 30, 2019, respectively. The hotel properties located in Boston had a RevPAR decrease of 1.8% for the three months ended September 30, 2019 and a decrease of 4.3% for the nine months ended September 30, 2019, compared to the same periods in 2018. The properties within our Cindat joint venture in New York City had decreases in RevPAR of 4.9% and 4.0% for the three and nine months ended September 30, 2019, respectively, when compared to 2018.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBERJUNE 30, 20192020 AND 20182019
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the three months ended SeptemberJune 30, 20192020 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the three months ended SeptemberJune 30, 20192020 and 2018.2019. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues increased $7,190,decreased $130,101, or 5.6%88.2%, to $134,919$17,412 for the three months ended SeptemberJune 30, 20192020 compared to $127,729$147,513 for the same period in 2018.2019. This increasedecrease is attributable to the reduction in operations across our portfolio due to the decrease in demand caused by the COVID-19 pandemic. Management expects hotel operating revenues can be explained by the following table:to remain at a decreased level until business and leisure activities return to pre-pandemic levels, which we have no way to predict at this time.
|
| | | | | | | | | |
Hotel Operating Revenue for the three months ended September 30, 2018 | | | | $ | 127,729 |
|
Revenue Reductions from Dispositions (1/1/2018 - 9/30/2019): | | | | |
| | Residence Inn - Tysons Corner, VA | | (1,053 | ) | | |
| | Total Revenue Reductions from Dispositions | | | | (1,053 | ) |
Change in Hotel Operating Revenue for Remaining Hotels | | | | 8,243 |
|
Hotel Operating Revenue for the three months ended September 30, 2019 | | | | $ | 134,919 |
|
Expenses
As noted in the table above, our properties, exclusive of recently disposed hotels, experienced a $8,243 increase inTotal hotel operating revenue. This increase is primarily attributableexpenses decreased 77.8% to the Cadillac Hotel and Beach Club and Parrot Key Hotel & Villas, both of which were closed for all or a significant portion of the third quarter of 2018 and fully operational for the third quarter of 2019. The Cadillac Hotel and Beach Club was damaged during Hurricane Irma in 2017 while it was branded as a Courtyard by Marriott. As a result of the hurricane damage, we accelerated our plan to convert this hotel to an Autograph Collection hotel causing it to be closed until the end of the third quarter of 2018. The Parrot Key Hotel & Villas incurred significant damage during Hurricane Irma in 2017, remaining closed for repairs until it re-opened during the fourth quarter of 2018. Collectively, these two hotels accounted for an increase in hotel operating revenueapproximately $18,378 for the three months ended SeptemberJune 30, 2019 of $6,209. The remaining hotels contributed a net increase in revenue for the third quarter of 2019 of approximately $2,034 when compared to the same period in 2018.
Expenses
Total hotel operating expenses increased 5.0% to approximately $80,0812020 from $82,610 for the three months ended SeptemberJune 30, 2019 from $76,295 for the three months ended September 30, 2018.2019. The increasedecrease in hotel operating expenses can be explained by the following table:
|
| | | | | | | | | |
Hotel Operating Expenses for the three months ended September 30, 2018 | | | | $ | 76,295 |
|
Expense Reductions from Dispositions (1/1/2018 - 9/30/2019): | | | | |
| | Residence Inn - Tysons Corner, VA | | (614 | ) | | |
| | Total Expense Reductions from Dispositions | | | | (614 | ) |
Change in Hotel Operating Expenses for Remaining Hotels | | | | 4,400 |
|
Hotel Operating Expenses for the three months ended September 30, 2019 | | | | $ | 80,081 |
|
As noted intemporary closure of certain of our hotels and reduced operations at the table above, our properties, exclusive of recently disposedremaining hotels experiencedas a $4,400 increase in hotel operating expenses. As mentioned in the revenue section above, the Cadillac Hotel and Beach Club and Parrot Key Hotel & Villas were closed for all or a significant portionresult of the third quarter of 2018 and fully operational fordecrease in demand caused by the third quarter of 2019 resulting in an increase in hotel operating expenses related to these two properties of $2,400, collectively. The remaining hotels contributed a net increase in expense for the third quarter of 2019 of approximately $2,000 when compared to the same period in 2018.COVID-19 pandemic.
Depreciation and amortization increased by 5.8%1.5%, or $1,328,$358, to $24,092$24,322 for the three months ended SeptemberJune 30, 20192020 from $22,764$23,964 for the three months ended SeptemberJune 30, 2018. The increase in depreciation and amortization was primarily attributable to the depreciation and amortization recorded on the hotels recently renovated, partially offset by properties sold. 2019.
Real estate and personal property tax and property insurance increased $1,785,$972, or 20.0%10.8%, for the three months ended SeptemberJune 30, 20192020 when compared to the same period in 2018. The majority of this2019. This increase is mostly related to increased real estate taxes on five propertiestax that had been re-assessed by the applicable taxing authority, resulting in higher than usual increases in real estate tax expense for the quarter as we had to cumulatively catch up, in certain instances, our estimated tax accruals at the time of the new assessment receipt during the quarter. The total increase to expense during the quarter to adjust our estimated real estate tax to actual was $607. When taking this into account, our quarter over quarter increase would have equated to approximately 13%. We typically experience increases in tax assessments and tax rates as the economy improves which could be offset by reductions resulting from successful real estate tax appeals.
General and administrative expense decreased by 3.9%48.3%, or approximately $228,$3,913, from $5,841$8,100 in the three months ended SeptemberJune 30, 20182019 to $5,613$4,187 for the same period in 2019.2020. General and administrative expense includes expenseexpenses related to payroll, rents, and other corporate level administrative costs as well as non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Execution of our cost containment strategies resulted in a decrease of $2,235 in our payroll and other administrative costs. Expenses related to non-cash share based compensation decreased $59$1,675 when comparing the three months ended SeptemberJune 30, 20192020 to the same period in 2018.2019. Please refer to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our share based compensation.
Operating Income
Operating incomeLoss
Operating Loss for the three months ended SeptemberJune 30, 20192020 was $13,264$41,542 compared to operating income of $17,486$22,716 during the same period in 2018. The decrease in our2019. Our operating loss for the second quarter 2020 compared to operating income of $4,222 for the third quarter 2019 compared to the same period in 20182019 was largely the result of the thirdsecond quarter of 2018 containing2020 hotel operating revenues decreasing at a net gain on insurance settlementlarger rate than hotel operating expenses, both of $4,778 whilewhich are the third quarterresult of 2019 contained no such gain.decreased operations across our portfolio due to the COVID-19 pandemic. Additionally, we experienced increases in depreciation expense, and real estate taxes and insurance, and depreciation and amortization expense during the thirdsecond quarter of 20192020 compared to 2018. These items were partially offset by growth in hotel operating revenues exceeding our increases in hotel operating expenses during the quarter.2019.
Interest Expense
Interest expense increased $528$156 from $12,407$13,325 for the three months ended SeptemberJune 30, 20182019 to $12,935$13,481 for the three months ended SeptemberJune 30, 2019.2020. The balance of our borrowings, excluding discounts and deferred costs, have increased by $19,062$57,036 in total between SeptemberJune 30, 20182019 and SeptemberJune 30, 2019,2020, as we drew $20,000,$58,000, net on our lineLine of creditCredit and had a net decrease in mortgages payable of $938.$963. The primary driver of our increased interest expense is due to increases in rates and balances onoverall balance; however, the credit facility as well as a decrease in capitalizedweighted average interest rates related to our Credit Facility almost offset the increase due to balance growth.
Loss from Impairment of $270 as our hotel development projects from Hurricane Irma restoration have been completed.Assets
Income Tax Expense
During the three months ended SeptemberJune 30, 2019,2020, the Company recorded an impairment charge of $1,069 related to the Duane Street Hotel, which is held for sale as of June 30, 2020. During the second quarter of 2020, the Company amended the purchase and sale agreement with the buyer of the hotel to reduce the purchase price by $2,000. As a result of the reduced sales price and after consideration of selling costs to the Company, management determined that the carrying value of the hotel exceeded the anticipated net proceeds from sale, resulting in the impairment charge.
Income Tax Expense
During the three months ended June 30, 2020, the Company recorded an income tax benefitexpense of $551$15,872 compared to an income tax expense of $2,685$4,031 for the three months ended SeptemberJune 30, 2018.2019. After considering various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies, we believe it is no longer more likely than not that we will realize our deferred tax assets.During the three months ended June 30, 2020 we recorded a valuation allowance of $19,866 resulting in net deferred tax assets of $0 as of June 30, 2020. The amount of
income tax expense or benefit that the Company typically records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”).
Net Loss Applicable to Common Shareholders
Net loss applicable to common shareholders for the three months ended SeptemberJune 30, 20192020 was $5,435$67,464 compared to net loss of $3,235$443 during the same period in 2018, resulting2019. This increase in a decrease of $2,200. This decrease in incomeloss was primarily related to the decreased operating income and increased income tax expense during the three months ended June 30, 2020, as discussed above, and increased interest expense. Also contributing toabove. Partially offsetting the decrease in incomeincrease is the reduction in loss being absorbed by the noncontrolling interest in our consolidated joint venture for the three months ended September 30, 2019 compared to 2018. Partially offsetting this increased loss is a decrease in income tax expense.interests.
COMPARISON OF THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20192020 AND 20182019
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the ninesix months ended SeptemberJune 30, 20192020 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues increased $36,069,decreased $154,806, or 10.0%59.1%, to $397,075$107,350 for the ninesix months ended SeptemberJune 30, 20192020 compared to $361,006$262,156 for the same period in 2018.2019. This increasedecrease is attributable to the reduction in operations across our portfolio due to the decrease in demand caused by the COVID-19 pandemic. During the six months ended June 30, 2020, our hotel portfolio experienced a decrease in RevPAR as a result of local stay-at-home orders and business restrictions implemented by local governments and national restrictions on travel. Management expects hotel operating revenues can be explained by the following table:to remain at a decreased level until business and leisure activities return to pre-pandemic levels, which we have no way to predict at this time.
|
| | | | | | | | | |
Hotel Operating Revenue for the nine months ended September 30, 2018 | | | | $ | 361,006 |
|
Incremental Revenue Additions from Acquisitions (1/1/2018 - 9/30/2019): | | | | |
| | The Annapolis Waterfront Hotel - Annapolis, MD | | 2,533 |
| | |
| | Total Incremental Revenue from Acquisitions | | | | 2,533 |
|
Revenue Reductions from Dispositions (1/1/2018 - 9/30/2019): | | | | |
| | Residence Inn - Tysons Corner, VA | | (3,301 | ) | | |
| | Hampton inn - Pearl Street, New York, NY | | (530 | ) | | |
| | Total Revenue Reductions from Dispositions | | | | (3,831 | ) |
Change in Hotel Operating Revenue for Remaining Hotels | | | | 37,367 |
|
Hotel Operating Revenue for the nine months ended September 30, 2019 | | | | $ | 397,075 |
|
As noted in the table above, our properties, exclusive of recently acquired and disposed hotels, experienced a $37,367 increase in hotel operating revenue. This increase is primarily attributable to the Cadillac Hotel and Beach Club and Parrot Key Hotel & Villas, both of which were closed for all or a significant portion of the first nine months of 2018 and fully operational for the first nine months of 2019. The Cadillac Hotel and Beach Club was damaged during Hurricane Irma in 2017 while it was branded as a Courtyard by Marriott. As a result of the hurricane damage, we accelerated our plan to convert this hotel to an Autograph Collection hotel causing it to be closed until the end of the third quarter of 2018. The Parrot Key Hotel & Villas incurred significant damage during Hurricane Irma in 2017, remaining closed for repairs until it re-opened during the fourth quarter of 2018. Collectively, these two hotels accounted for an increase in hotel operating revenue for the nine months ended September 30, 2019 of $28,115. The remaining hotels contributed a net increase in revenue for the nine months ended September 30, 2019 of approximately $9,252 when compared to the same period in 2018.
Expenses
Total hotel operating expenses increased 8.2%decreased 46.8% to approximately $237,803$83,897 for the ninesix months ended SeptemberJune 30, 20192020 from $219,736$157,721 for the ninesix months ended SeptemberJune 30, 2018.2019. The increasedecrease in hotel operating expenses can be explained by the following table:
|
| | | | | | | | | |
Hotel Operating Expenses for the nine months ended September 30, 2018 | | | | $ | 219,736 |
|
Incremental Expense Additions from Acquisitions (1/1/2018 - 9/30/2019): | | | | |
| | The Annapolis Waterfront Hotel - Annapolis, MD | | 1,334 |
| | |
| | Total Incremental Expenses from Acquisitions | | | | 1,334 |
|
Expense Reductions from Dispositions (1/1/2018 - 9/30/2019): | | | | |
| | Residence Inn - Tysons Corner, VA | | (1,848 | ) | | |
| | Hampton inn - Pearl Street, New York, NY | | (602 | ) | | |
| | Total Expense Reductions from Dispositions | | | | (2,450 | ) |
Change in Hotel Operating Expenses for Remaining Hotels | | | | 19,182 |
|
Hotel Operating Expenses for the nine months ended September 30, 2019 | | | | $ | 237,802 |
|
As noted intemporary closure of certain of our hotels and reduced operations at the table above, our properties, exclusive of recently acquired and disposedremaining hotels experiencedas a $19,182 increase in hotel operating expenses. As mentioned in the revenue section above, the Cadillac Hotel and Beach Club and Parrot Key Hotel & Villas were closed for all or a significant portionresult of the first nine months of 2018 and fully operational fordecrease in demand caused by the first nine months of 2019 resulting in an increase in hotel operating expenses related to these two properties of $13,194, collectively. The remaining hotels contributed a net increase in expense for the nine months ended September 30, 2019 of approximately $5,988 when compared to the same period in 2018.COVID-19 pandemic.
Depreciation and amortization increased by 8.8%0.9%, or $5,820,$418, to $72,184$48,510 for the ninesix months ended SeptemberJune 30, 20192020 from $66,364$48,092 for the ninesix months ended SeptemberJune 30, 2018. The increase in depreciation and amortization was primarily attributable to the depreciation and amortization recorded on the hotels recently acquired or renovated, partially offset by properties sold. 2019.
Real estate and personal property tax and property insurance increased $3,758,$1,517, or 14.8%8.2%, for the ninesix months ended SeptemberJune 30, 20192020 when compared to the same period in 2018. Approximately $1,252 of the2019. This increase relates to higher property insurance costs for the first nine months of 2019 compared to 2018. The majority of this increase in insurance expense is attributable to increased insurance costs at our Florida hotel properties with the largest increases affecting the Cadillac Hotel and Beach Club and the Parrot Key Hotel & Villas. The remaining $2,506 increase relatesmostly related to increased real estate tax costs. The majority of this increase is related to real estate taxes on five properties that had been re-assessed by the applicable taxing authority, resulting in higher than usual increases in real estate tax expense. The total increaseexpense for the quarter as we had to expensecumulatively catch up, in certain instances, our estimated tax accruals at the time of the new assessment receipt during the first nine months of 2019 to adjust our estimated real estate tax to the actual assessment was $459. The effect of the three properties sold during 2018 versus the one property purchased in 2018 was a net decrease of expense of $181. The impact of real estate and personal property tax refunds during first nine months of 2019 compared to the same period in 2018 was a net decrease in expense of $107. When taking this into account, our year over year increase would have equated to approximately 14%.quarter. We otherwise typically experience increases in tax assessments and tax rates as the economy improves which could be offset by reductions resulting from successful real estate tax appeals.
General and administrative expense increaseddecreased by 4.3%26.9%, or approximately $798,$3,679, from $18,515$13,700 in the ninesix months ended SeptemberJune 30, 20182019 to $19,313$10,021 for the same period in 2019.2020. General and administrative expense includes expenseexpenses related to payroll, rents, and other corporate level administrative costs as well as non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Executives elected 100%Execution of their annual cash incentive payments, if earned,our cost containment strategies resulted in shares or LTIP Units. As a result expensesdecrease of $2,517 in our payroll and other administrative costs. Expenses related to non-cash share based compensation increased $644decreased $1,177 when comparing the ninesix months ended SeptemberJune 30, 20192020 to the same period in 2018.2019. Please refer to “Note 9 – Share Based Payments” of the notes to the consolidated financial statements for more information about our share based compensation.
Operating Income
Operating incomeLoss
Operating Loss for the ninesix months ended SeptemberJune 30, 20192020 was $35,426$57,951 compared to operating income of $38,885$22,163 during the same period in 2018. The decrease in our2019. Our operating income of $3,459loss for the first nine monthshalf of 20192020 compared to operating income during the same period in 20182019 was largely the result of hotel operating revenues for the six months ended June 30, 2020 decreasing at a larger rate than hotel operating expenses, both of which are the result of decreased operations across our portfolio due to the
COVID-19 pandemic. Additionally, we experienced increases in depreciation expense, real estate taxes and insurance, and generaldepreciation and administrative expensesamortization expense during the nine months ended September 30, 2019first half of 2020 compared to 2018. Additionally, the nine months ended September 30, 2018 contained a net gain on insurance settlement of $11,141 while the comparable period in 2019 contained no such gain. Partially offsetting these increased expenses was the result of our growth in hotel operating revenues exceeding our increases in hotel operating expenses for the nine months ended September 30, 2019 compared to 2018, which added $18,002 to operating income.2019.
Interest Expense
Interest expense increased $3,500$265 from $35,658$26,223 for the ninesix months ended SeptemberJune 30, 20182019 to $39,158$26,488 for the ninesix months ended SeptemberJune 30, 2019.2020. The balance of our borrowings, excluding discounts and deferred costs, have increased by $19,062$57,036 in total between SeptemberJune 30, 20182019 and SeptemberJune 30, 2019,2020, as we drew $20,000,$58,000, net on our lineLine of creditCredit and had a net decrease in mortgages payable of $938.$963. The primary driver of our increased interest expense is due to increasingincreases in overall balance; however, the decrease in weighted average interest rates andrelated to our Credit Facility almost fully offset the increase due to balance growth.
Loss from Impairment of Assets
During the six months ended June 30, 2020, the Company recorded an increased balance. The mortgage debt onimpairment charge of $1,069 related to the Annapolis WaterfrontDuane Street Hotel, which was originated inis held for sale as of June 30, 2020. During the second quarter of 2018 also added $451 of interest expense when comparing2020, the first nine months of 2019Company amended the purchase and sale agreement with the same periodbuyer of the hotel to reduce the purchase price by $2,000. As a result of the reduced sales price and after consideration of selling costs to the Company, management determined that the carrying value of the hotel exceeded the anticipated net proceeds from sale, resulting in 2018.the impairment charge.
Income Tax BenefitExpense
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company recorded an income tax benefitexpense of $1,784$11,374 compared to an income tax expensebenefit of $1,200$1,233 for the ninesix months ended SeptemberJune 30, 2018.2019. After considering various factors, including future reversals of existing taxable temporary differences, future taxable income and tax planning strategies, we believe it is no longer more likely than not that we will realize our deferred tax assets.During the three months ended June 30, 2020 we recorded a valuation allowance of $19,866 resulting in net deferred tax assets of $0 as of June 30, 2020. The amount of income tax expense or benefit that the Company typically records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”).
Net Loss Applicable to Common Shareholders
Net loss applicable to common shareholders for the ninesix months ended SeptemberJune 30, 20192020 was $18,581$96,583 compared to $10,829net loss of $13,146 during the same period in 2018,2019, resulting in an increased loss of $7,752.$83,437. This increase in loss was primarily related to increased interest expense, decreased gain on hotel dispositions, andthe decreased operating income. Also contributing toincome and increased income tax expense during the first half of 2020, as discussed above. Partially offsetting the increase in net loss is the reductionincrease in loss being absorbed by the noncontrolling interests for the nine months ended September 30, 2019 compared to 2018. Partially offsetting these increases in loss is a reduction in income tax expense.
interests.
LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)
We started 2020 off on solid footing with our comparable portfolio achieving RevPAR growth through the end of February 2020, but this was quickly erased as a result of the global economic slowdown caused by the COVID-19 pandemic. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand was substantially reduced across the United States. Following the government mandates and health official recommendations, and after evaluating the cost of running our respective properties at low occupancy levels versus closing the properties, we initially closed 21 of our 48 hotel properties and dramatically reduced staffing. As of June 30, 2020, we had 32 hotels open while 16 hotels remained closed. For 21 of our wholly-owned hotels that have been open for the entirety of the second quarter, we experienced increased occupancy levels during the second quarter of 2020 with our New York City hotels generating 61% occupancy during the second quarter. While travel restrictions have slowly eased in a few markets and leisure demand began to recover late in the second quarter, group and business travel are unlikely to rebound quickly. As of August 1, 2020 we had 33 hotels open and by the end of the third quarter 2020, we anticipate having 44 of our 48 hotels open assuming there is no significant increase in COVID-19 cases or government-mandated closures.
Potential Sources of Capital
Our organizational documents do not limit the amount of indebtedness that we may incur. Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of leverage and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market conditions for REITs and market perceptions related to the Company’s ability to generate cash flow and positive returns on its investments.
In addition, our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, nonrecourse financing arrangements. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. We have determined that all covenants contained in the loan agreements securing our hotel properties were met as of SeptemberJune 30, 2019.2020, with the exception of one mortgage. This covenant failure was the result of a failure to maintain a minimum debt service coverage ratio at the mortgaged hotel. This covenant failure does not result in an event of default; rather, it triggers certain cash escrow requirements at the property.
We have unsecured debt facilities in the aggregate of $950,900 which is comprised of a $457,000 senior unsecured credit facility and two unsecured term loans totaling $493,900. The unsecured credit facility (“Credit Facility”) contains a $207,000 unsecured term loan (“First Term Loan”) and a $250,000 unsecured revolving line of credit (“Line of Credit”). This Credit Facility expires on August 10, 2022 and, provided no event of default has occurred, we may request that the lenders renew the credit facility for an additional one-year period. The Credit Facility is also expandable by $400,000 at our request, subject to the satisfaction of certain conditions. Our two additional unsecured term loans are $300,000 (“Second Term Loan”) and $193,900 (“Third Term Loan”), which mature on September 10, 2024 and August 2, 2021, respectively.
On April 2, 2020, we amended our existing Credit Agreement and received $100,000 in available funds on our Line of Credit, of which we drew $25,000 during April 2020 and $10,000 during July 2020.The amendment provided a waiver of covenants under our Credit Facility through March 31, 2021 and changed the Credit Facility from an unsecured borrowing facility to a secured borrowing facility. If we would breach certain of our Credit Facility covenants when measured for the period ended June 30, 2021,Management’s primary mitigation plan to avoid a default is to obtain a further waiver from its creditors or amend the Credit Facility in a manner to avoid an event of default. As of SeptemberJune 30, 2019,2020, the outstanding balance under the First Term Loan was $207,000, under the Second Term Loan was $300,000, under the Third Term Loan was $193,900 and we had $46,000$95,000 outstanding under the Line of Credit. As of September 30, 2019, our remaining borrowing capacity under the Credit Facility, Second Term Loan and Third Term Loan was $120,466 which is based on certain operating metrics of unencumbered hotel properties designated as borrowing base assets.
We will continue to monitor our debt maturities to manage our liquidity needs. However, no assurances can be given that we will be successful in refinancing all or a portion of our future debt obligations due to factors beyond our control or that, if refinanced, the terms of such debt will not vary from the existing terms. As of SeptemberJune 30, 2019,2020, we have $0 of mortgage indebtedness maturing on or before December 31, 2019.2020. We have one mortgage borrowing in the amount of $25,000 that will mature within the next twelve months, which we expect to be able to extend the maturity based on the provisions within the existing mortgage or refinance the mortgage. We currently expect that cash requirements for all debt that is not refinanced by our existing lenders for which the maturity date is not extended will be met through a combination of cash on hand, refinancing the existing debt with new lenders, draws on the Line of Credit and the issuance of our securities.
In addition to the incurrence of debt and the offering of equity securities, dispositions of property may serve as additional capital resources and sources of liquidity. We may recycle capital from stabilized assets as evidenced by our transaction involving the Cindat JV properties, or from sales of non-core hotels in secondary and tertiary markets.hotels. Capital from these types of transactions is intended to be redeployed into high growth acquisitions, share buybacks, orutilized to pay down existing debt. As of June 30, 2020, we are not under any requirement to sell any properties as a matter of meeting debt obligations.
Common Share Repurchase Plan
In December 2018, our Board of Trustees authorized a share repurchase program for up to $50,000 of common shares which commenced upon the completion of the prior repurchase program. The program will expire on December 31, 2019, unless extended by our Board of Trustees. For the nine months ended September 30, 2019, the Company repurchased 933,436 common shares for an average price of $15.21.
Acquisitions
During the ninesix months ended SeptemberJune 30, 2019,2020, we acquired no hotel properties. Given the current economic downturn and challenging operating environment facing the lodging industry, we are not currently exploring hotel acquisition opportunities as we focus on maintaining liquidity or reducing debt obligations, when possible. We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in hotels will depend upon and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of common or preferred shares, proceeds from the sale of assets, issuances of Common Units, issuances of preferred units or other securities or borrowings secured by hotel assets and under our Line of Credit.
Operating Liquidity and Capital Expenditures
WeAs we find ourselves operating in a severely reduced capacity with 16 of our hotels temporarily closed due to decreased demand as a result of the COVID-19 pandemic, we expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and if necessary, short-term borrowings under the Line of Credit. WeThe ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material negative impact on our financial results and liquidity, and such negative impact may continue beyond the containment of the pandemic. While we believe that the net cash provided by operations in the coming year and borrowings drawn on the Line of Credit and any cash provided by operations in the coming year will be adequate to fund the Company’s operating requirements and monthly recurring debt service, we cannot assure you that our assumptions used to estimate our liquidity requirements will be correct because we have not previously experienced such an abrupt and drastic reduction in hotel demand.The magnitude, duration, and speed of the pandemic is uncertain and, as a consequence, our ability to be predictive is uncertain and we cannot estimate the impact on our business, financial condition, or operating results with reasonable certainty. We have cancelled the payment of dividends in accordancefor the first and second quarter of 2020 and anticipate not paying dividends for the remainder of 2020. Based on remaining funds available to us on our Line of Credit, along with REIT requirementscost savings measures throughout our operations, we believe that we will be able to generate sufficient liquidity to satisfy our obligations for the next twelve months, absent a breach of the Internal Revenue Code of 1986, as amended.Credit Facility covenants.
To qualify as a REIT, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability to retain earnings and requires us to raise additional capital in order to grow our business and acquire additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. In addition, we cannot guarantee thatif and when we will continue to make distributions to our shareholders at the current rate of $0.28 per common share per quarter or at all.shareholders. Due to the seasonality of our business, cash provided by operating activities fluctuates significantly from quarter to quarter. However, we believe that, based on our current estimates, which include the addition of cash from operations provided by the continued ramp up of the hotel acquired during 2018 and newly renovated hotels, our cash provided byquarter in a normal operating activities will be sufficient over the next 12 months to fund the payment of our dividend at its current level. However, ourperiod. Our Board of Trustees continues to evaluate the dividend policy in the context of our overall liquidity and market conditions and may electwill determine when we are able to reduce or suspend these distributions.reinstate the dividend. Net cash providedused by operating activities for the ninesix months ended SeptemberJune 30, 20192020 was $74,474$16,357 and cash used for the payment of distributions and dividends for the ninesix months ended SeptemberJune 30, 20192020 was $54,660.$18,051, which related to the dividend declared during the fourth quarter of 2019.
We also project that our operating cash flow and available borrowings under the Line of Credit will be sufficient to satisfy our liquidity and other capital needs over the next twelve to eighteen months.
Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovation and other non-recurring capital expenditures that need to be made periodically with respect to hotel properties and scheduled debt repayments. We will seek to satisfy these long-term liquidity requirements through various sources of capital, including borrowings under the Line of Credit and through secured, non-recourse mortgage financings with respect to our unencumbered hotel properties. In addition, we may seek to raise capital through public or private offerings of our securities. Certain factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel properties and borrowing restrictions imposed by lenders or franchisors. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all.
Spending on capital improvements during the ninesix months ended SeptemberJune 30, 20192020 decreased when compared to spending on capital improvements during the ninesix months ended SeptemberJune 30, 2018.2019. During the ninesix months ended SeptemberJune 30, 2019,2020, we spent $33,706$15,612 on capital expenditures to renovate, improve or replace assets at our hotels. This compares to $53,573$21,230 during the same period in 2018.2019. These capital expenditures were undertaken to comply with brand mandated improvements and to initiate projects that we believe will generate a return on investment. ConstructionIn an effort to replace assets damaged by recent hurricanes is discussedproperly manage liquidity in the paragraph below.
current operating environment we are completing projects previously commenced and have deferred all other capital expenditure projects for the remainder of the year.
We may spend additional amounts, if necessary, to comply with the requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be prudent. Currently, all brand mandated improvements have been deferred by the respective franchisors for the remainder of 2020. We are also obligated to fund the cost of certain capital improvements to our hotels. In addition to capital reserves required under certain loan agreements and capital expenditures to renovate, improve or replace assets at our hotels, we have opportunistically engaged in hotel development projects. DuringIn an effort to properly manage liquidity in the nine months ended September 30, 2019,current operating environment we spent $149 on hotel development projects comparedhave sought or are currently in negotiations with our mortgage lenders to $29,606 during the samedefer all payments into capital expenditure escrow accounts for a period of 2018, which consisted mostly of construction on hurricane impacted hotels. Other than the equity contributions required6 months to be made for the hotel being constructed by one of our unconsolidated joint ventures, we do not expect significant cash outlays for hotel development projects in the near term.a year.
CASH FLOW ANALYSIS
(dollars in thousands, except per share data)
Comparison of the NineSix Months Ended SeptemberJune 30, 20192020 and 20182019
Net cash provided by operating activities decreased $8,593$63,228 from $83,067$46,871 for the ninesix months ended SeptemberJune 30, 20182019 to $74,474cash used by operating activities of $16,357 for the comparable period in 2019. Net2020. In addition to the change in net income adjusted for non-cash items, reflected in the consolidated statements of cash flowsfollowing items are the other contributing factors for the nine months ended September 30, 2019 and 2018, increased by $10,647 for the nine months ended September 30, 2019 when compared to 2018. Additional decreaseschange in operating cash from operating activities was due to decreased distributionsflow.
•Distributions received from unconsolidated joint ventures of $444,operations totaled $478 for the six months ended June 30, 2019 with no such proceeds in 2020.
•The remaining change in operating cash flows related to net changes in working capital assets and a decrease in business interruption insurance proceeds of $8,614.liabilities.
Net cash used in investing activities for the ninesix months ended SeptemberJune 30, 20192020 was $36,513$16,191 compared to net cash used in investing activities of $14,467$24,675 for the ninesix months ended SeptemberJune 30, 2018. During2019. The following items are the ninemajor contributing factors for the change in investing cash flows:
•An increase in comparative cash flows of $5,618 related to a decrease in spending on capital expenditures for the six months ended SeptemberJune 30, 2019, we received $02020 compared to 2019.
•An increase in proceeds from the dispositioncomparative cash flows of hotel properties and $0 in insurance proceeds$3,400 related to claimsa contribution of $600 to unconsolidated joint ventures for property losses as a resultthe six months ended June 30, 2020 compared to contributions of Hurricane Irma. Additionally, we$4,000 made for the comparative period in 2019.
•A decrease in comparative cash flows of $1,022 related to distributions received $1,342 in proceeds from unconsolidated joint ventures as a return of our investment. Duringduring the ninesix months ended SeptemberJune 30, 2018 we2019. No such distributions were received $49,580 in proceeds from the disposition of two hotels and $13,624 in insurance proceeds related to claims for property losses as a result of Hurricane Irma. Additionally, we received $47,738 in proceeds from the redemption of our preferred equity investment in Cindat. Offsetting these sources of funds were $0 for no purchases of hotel property and $33,855 spent on capital expenditures and development projects during the nine months ended September 30, 2019 compared to $41,230 for the purchase of one hotel property and $83,179 spent on capital expenditures and development projects during the nine months ended September 30, 2018. 2020.
Net cash used inprovided by financing activities for the ninesix months ended SeptemberJune 30, 20192020 was $36,583$26,165 compared to net cash used in financing activities for the ninesix months ended SeptemberJune 30, 20182019 of $47,174. We had net$15,432. The following items are the major contributing factors for the change in financing cash outflowsflows:
•An increase in comparative cash flows as we drew $20,000 more on our Line of $564 in repayments of mortgage borrowingsCredit during the ninesix months ended SeptemberJune 30, 2019. During the nine months ended September 30, 2018, we had net increased borrowings on the unsecured term loan, and mortgages payable of $8,763. During the nine months ended September 30, 2019, we borrowed $36,000 net, from our line of credit. During the nine months ended September 30, 2018 we borrowed $9,900 net, from our line of credit. Also during the nine months ended September 30, 2019, we repurchased $14,196 of our Class A Common Shares compared with $10,833 in the nine months ended September 30, 2018. In addition, dividends and distributions paid during the nine months ended September 30, 2019 increased $2582020 when compared to the same period in 2018.2019.
•An increase in comparative cash flows of $4,624 related to the repurchase on common shares. During the six months ended June 30, 2019, we repurchased $4,624 in common shares. We had no such repurchases during 2020.
•An increase in comparative cash flows of $18,387 related to dividends paid. During the six months ended June 30, 2020 we paid $18,051 in dividends compared to $36,438 for the comparative period in 2019.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Common Units in accordance with the December 2018 Financial Standards White Paper of NAREIT, which we refer to as the White Paper. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by an entity. Our interpretation of the NAREIT definition is that noncontrolling interest in net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.
The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shareholders, includes loss from the impairment of certain depreciable assets, our investment in unconsolidated joint ventures and land, depreciation and amortization expenses, gains or losses on property sales, noncontrolling interest and preferred dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations. We determined that the loss from the impairment of certain depreciable assets including investments in unconsolidated joint ventures and land, was driven by a measurable decrease in the fair value of certain hotel properties and other assets as determined by our analysis of those assets in accordance with applicable GAAP. As such, these impairments have been eliminated from net loss to determine FFO.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Common Units because our Common Units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO applicable to all common shares and Common Units.