UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20192020
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)
| | |
Maryland | | 20-1296886 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
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200 Spectrum Center Drive, 21st Floor | | 92618 |
(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: | | |
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 |
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 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 every Interactive Data File required to be submitted 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 such files). Yes ☒⌧ No ☐◻
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” and “emerging growth company” in Rule 12b-2 of the Exchange 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
228,639,287As of May 8, 2020, there were 215,635,550 shares of Common Stock,Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value as of May 6, 2019per share, outstanding.
SUNSTONE HOTEL INVESTORS, INC.
QUARTERLY REPORT ON
FORM 10-Q
For the Quarterly Period Ended March 31, 20192020
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| Consolidated Balance Sheets as of March 31, | 2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
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i
PART I—FINANCIAL INFORMATION
Item 1. | Financial Statements |
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| | | | | | |
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2020 |
| 2019 | ||
| | (unaudited) | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 847,445 | | $ | 816,857 |
Restricted cash | | | 53,485 | | | 48,116 |
Accounts receivable, net | | | 23,134 | | | 35,209 |
Prepaid expenses and other current assets | | | 14,192 | | | 13,550 |
Total current assets | | | 938,256 | | | 913,732 |
Investment in hotel properties, net | | | 2,756,412 | | | 2,872,353 |
Finance lease right-of-use asset, net | | | 47,284 | | | 47,652 |
Operating lease right-of-use assets, net | | | 41,198 | | | 60,629 |
Deferred financing costs, net | | | 2,511 | | | 2,718 |
Other assets, net | | | 13,879 | | | 21,890 |
Total assets | | $ | 3,799,540 | | $ | 3,918,974 |
LIABILITIES AND EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable and accrued expenses | | $ | 39,072 | | $ | 35,614 |
Accrued payroll and employee benefits | | | 17,142 | | | 25,002 |
Dividends and distributions payable | | | 13,984 | | | 135,872 |
Other current liabilities | | | 33,831 | | | 46,955 |
Current portion of notes payable, net | | | 82,189 | | | 82,109 |
Total current liabilities | | | 186,218 | | | 325,552 |
Notes payable, less current portion, net | | | 1,187,468 | | | 888,954 |
Finance lease obligation, less current portion | | | 15,570 | | | 15,570 |
Operating lease obligations, less current portion | | | 48,460 | | | 49,691 |
Other liabilities | | | 24,818 | | | 18,136 |
Total liabilities | | | 1,462,534 | | | 1,297,903 |
Commitments and contingencies (Note 11) | | | | | | |
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 March 31, 2020 and December 31, 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 March 31, 2020 and December 31, 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, 215,541,134 shares issued and outstanding at March 31, 2020 and 224,855,351 shares issued and outstanding at December 31, 2019 | | | 2,155 | | | 2,249 |
Additional paid in capital | | | 2,578,445 | | | 2,683,913 |
Retained earnings | | | 1,156,394 | | | 1,318,455 |
Cumulative dividends and distributions | | | (1,633,763) | | | (1,619,779) |
Total stockholders’ equity | | | 2,293,231 | | | 2,574,838 |
Noncontrolling interest in consolidated joint venture | | | 43,775 | | | 46,233 |
Total equity | | | 2,337,006 | | | 2,621,071 |
Total liabilities and equity | | $ | 3,799,540 | | $ | 3,918,974 |
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| March 31, |
| December 31, | ||
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| 2019 |
| 2018 | ||
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| (unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 683,995 |
| $ | 809,316 |
Restricted cash |
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| 50,746 |
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| 53,053 |
Accounts receivable, net |
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| 42,306 |
|
| 33,844 |
Prepaid expenses and other current assets |
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| 15,342 |
|
| 12,261 |
Total current assets |
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| 792,389 |
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| 908,474 |
Investment in hotel properties, net |
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| 2,946,796 |
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| 3,030,998 |
Finance lease right-of-use assets, net |
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| 55,359 |
|
| — |
Operating lease right-of-use assets, net |
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| 63,235 |
|
| — |
Deferred financing costs, net |
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| 3,338 |
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| 3,544 |
Other assets, net |
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| 29,540 |
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| 29,817 |
Total assets |
| $ | 3,890,657 |
| $ | 3,972,833 |
LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
| $ | 34,668 |
| $ | 30,425 |
Accrued payroll and employee benefits |
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| 17,102 |
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| 25,039 |
Dividends and distributions payable |
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| 14,636 |
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| 126,461 |
Other current liabilities |
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| 39,912 |
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| 44,962 |
Current portion of notes payable, net |
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| 6,064 |
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| 5,838 |
Total current liabilities |
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| 112,382 |
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| 232,725 |
Notes payable, less current portion, net |
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| 969,657 |
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| 971,225 |
Finance lease obligations, less current portion |
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| 27,064 |
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| 27,009 |
Operating lease obligations, less current portion |
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| 53,276 |
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| — |
Other liabilities |
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| 17,991 |
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| 30,703 |
Total liabilities |
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| 1,180,370 |
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| 1,261,662 |
Commitments and contingencies (Note 11) |
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Equity: |
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Stockholders’ equity: |
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Preferred stock, $0.01 par value, 100,000,000 shares authorized: |
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6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at March 31, 2019 and December 31, 2018, stated at liquidation preference of $25.00 per share |
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| 115,000 |
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| 115,000 |
6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at March 31, 2019 and December 31, 2018, stated at liquidation preference of $25.00 per share |
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| 75,000 |
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| 75,000 |
Common stock, $0.01 par value, 500,000,000 shares authorized, 228,587,447 shares issued and outstanding at March 31, 2019 and 228,246,247 shares issued and outstanding at December 31, 2018 |
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| 2,286 |
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| 2,282 |
Additional paid in capital |
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| 2,726,466 |
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| 2,728,684 |
Retained earnings |
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| 1,199,039 |
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| 1,182,722 |
Cumulative dividends and distributions |
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| (1,454,838) |
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| (1,440,202) |
Total stockholders’ equity |
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| 2,662,953 |
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| 2,663,486 |
Noncontrolling interest in consolidated joint venture |
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| 47,334 |
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| 47,685 |
Total equity |
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| 2,710,287 |
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| 2,711,171 |
Total liabilities and equity |
| $ | 3,890,657 |
| $ | 3,972,833 |
See accompanying notes to consolidated financial statements.
2
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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| Three Months Ended March 31, | ||||
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| 2019 |
| 2018 | ||
REVENUES |
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Room |
| $ | 171,858 |
| $ | 180,276 |
Food and beverage |
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| 69,113 |
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| 74,266 |
Other operating |
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| 16,709 |
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| 16,904 |
Total revenues |
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| 257,680 |
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| 271,446 |
OPERATING EXPENSES |
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Room |
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| 48,246 |
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| 51,095 |
Food and beverage |
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| 46,822 |
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| 50,154 |
Other operating |
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| 3,965 |
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| 3,941 |
Advertising and promotion |
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| 13,564 |
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| 13,906 |
Repairs and maintenance |
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| 10,282 |
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| 11,103 |
Utilities |
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| 6,665 |
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| 7,475 |
Franchise costs |
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| 6,839 |
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| 7,853 |
Property tax, ground lease and insurance |
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| 20,348 |
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| 21,781 |
Other property-level expenses |
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| 32,840 |
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| 33,907 |
Corporate overhead |
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| 7,516 |
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| 7,102 |
Depreciation and amortization |
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| 36,387 |
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| 36,688 |
Total operating expenses |
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| 233,474 |
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| 245,005 |
Interest and other income |
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| 4,924 |
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| 1,491 |
Interest expense |
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| (14,326) |
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| (8,876) |
Gain on sale of assets |
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| — |
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| 15,659 |
Income before income taxes |
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| 14,804 |
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| 34,715 |
Income tax benefit, net |
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| 3,112 |
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| 3,740 |
NET INCOME |
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| 17,916 |
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| 38,455 |
Income from consolidated joint venture attributable to noncontrolling interest |
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| (1,599) |
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| (2,439) |
Preferred stock dividends |
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| (3,207) |
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| (3,207) |
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | 13,110 |
| $ | 32,809 |
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Basic and diluted per share amounts: |
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Basic and diluted income attributable to common stockholders per common share |
| $ | 0.06 |
| $ | 0.15 |
Basic and diluted weighted average common shares outstanding |
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| 227,219 |
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| 224,282 |
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Distributions declared per common share |
| $ | 0.05 |
| $ | 0.05 |
| | | | | | |
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2020 |
| 2019 | ||
REVENUES | | | | | | |
Room | | $ | 127,400 | | $ | 171,858 |
Food and beverage | | | 47,990 | | | 69,113 |
Other operating | | | 15,822 | | | 16,709 |
Total revenues | | | 191,212 | | | 257,680 |
OPERATING EXPENSES | | | | | | |
Room | | | 44,245 | | | 48,246 |
Food and beverage | | | 41,760 | | | 46,822 |
Other operating | | | 3,764 | | | 3,965 |
Advertising and promotion | | | 12,462 | | | 13,564 |
Repairs and maintenance | | | 10,049 | | | 10,282 |
Utilities | | | 5,842 | | | 6,665 |
Franchise costs | | | 5,336 | | | 6,839 |
Property tax, ground lease and insurance | | | 20,051 | | | 20,348 |
Other property-level expenses | | | 28,845 | | | 32,840 |
Corporate overhead | | | 7,394 | | | 7,516 |
Depreciation and amortization | | | 36,746 | | | 36,387 |
Impairment losses | | | 115,366 | | | — |
Total operating expenses | | | 331,860 | | | 233,474 |
Interest and other income | | | 2,306 | | | 4,924 |
Interest expense | | | (17,507) | | | (14,326) |
(Loss) income before income taxes | | | (155,849) | | | 14,804 |
Income tax (provision) benefit, net | | | (6,670) | | | 3,112 |
NET (LOSS) INCOME | | | (162,519) | | | 17,916 |
Loss (income) from consolidated joint venture attributable to noncontrolling interest | | | 458 | | | (1,599) |
Preferred stock dividends | | | (3,207) | | | (3,207) |
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (165,268) | | $ | 13,110 |
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Basic and diluted per share amounts: | | | | | | |
Basic and diluted (loss) income attributable to common stockholders per common share | | $ | (0.75) | | $ | 0.06 |
Basic and diluted weighted average common shares outstanding | | | 221,036 | | | 227,219 |
| | | | | | |
See accompanying notes to consolidated financial statements.
3
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
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| Preferred Stock |
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| Noncontrolling |
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| Series E |
| Series F |
| Common Stock |
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| Cumulative |
| Interest in |
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| Number of |
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| Number of |
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| Number of |
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| Additional |
| Retained |
| Dividends and |
| Consolidated |
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| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Earnings |
| Distributions |
| Joint Venture |
| Total Equity | ||||||||
Balance at December 31, 2018 (audited) |
| 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 |
| — |
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| — |
| — |
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| — |
| — |
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| — |
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| 2,221 |
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| — |
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| — |
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| — |
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| 2,221 |
Issuance of restricted common stock, net |
| — |
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| — |
| — |
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| — |
| 345,132 |
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| 4 |
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| (4,439) |
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| — |
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| — |
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| — |
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| (4,435) |
Forfeiture of restricted common stock |
| — |
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| — |
| — |
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| — |
| (3,932) |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
Common stock distributions and distributions payable at $0.05 per share year to date |
| — |
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| — |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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| (11,429) |
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| — |
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| (11,429) |
Series E preferred stock dividends and dividends payable at $0.434375 per share year to date |
| — |
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| — |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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| (1,998) |
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| — |
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| (1,998) |
Series F preferred stock dividends and dividends payable at $0.403125 per share year to date |
| — |
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| — |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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| (1,209) |
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| — |
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| (1,209) |
Distributions to noncontrolling interest |
| — |
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| — |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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| — |
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| (1,950) |
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| (1,950) |
Net income |
| — |
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| — |
| — |
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| — |
| — |
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| — |
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| — |
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| 16,317 |
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| — |
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| 1,599 |
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| 17,916 |
Balance at March 31, 2019 |
| 4,600,000 |
| $ | 115,000 |
| 3,000,000 |
| $ | 75,000 |
| 228,587,447 |
| $ | 2,286 |
| $ | 2,726,466 |
| $ | 1,199,039 |
| $ | (1,454,838) |
| $ | 47,334 |
| $ | 2,710,287 |
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| Preferred Stock |
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| Noncontrolling |
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| Series E |
| Series F |
| Common Stock |
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| Cumulative |
| Interest in |
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| Number of |
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| Number of |
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| Number of |
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| Additional |
| Retained |
| Dividends and |
| Consolidated |
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| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Earnings |
| Distributions |
| Joint Venture |
| Total Equity | ||||||||
Balance at December 31, 2017 (audited) |
| 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 |
| — |
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| — |
| — |
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| — |
| — |
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| — |
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| 2,113 |
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| — |
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| — |
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| — |
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| 2,113 |
Issuance of restricted common stock, net |
| — |
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| — |
| — |
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| — |
| 297,013 |
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| 3 |
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| (4,235) |
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| — |
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| — |
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| — |
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| (4,232) |
Forfeiture of restricted common stock |
| — |
|
| — |
| — |
|
| — |
| (3,961) |
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| — |
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| — |
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| — |
|
| — |
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| — |
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| — |
Common stock distributions and distributions payable at $0.05 per share year to date |
| — |
|
| — |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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| (11,281) |
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| — |
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| (11,281) |
Series E preferred stock dividends and dividends payable at $0.434375 per share year to date |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (1,998) |
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| — |
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| (1,998) |
Series F preferred stock dividends and dividends payable at $0.403125 per share year to date |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
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| (1,209) |
|
| — |
|
| (1,209) |
Distributions to noncontrolling interest |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,169) |
|
| (1,169) |
Net income |
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 36,016 |
|
| — |
|
| 2,439 |
|
| 38,455 |
Balance at March 31, 2018 |
| 4,600,000 |
| $ | 115,000 |
| 3,000,000 |
| $ | 75,000 |
| 225,614,712 |
| $ | 2,256 |
| $ | 2,677,099 |
| $ | 968,293 |
| $ | (1,284,501) |
| $ | 49,710 |
| $ | 2,602,857 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2019 (audited) | | 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 | | — | | | — | | — | | | — | | — | | | — | | | 2,324 | | | — | | | — | | | — | | | 2,324 |
Issuance of restricted common stock, net | | — | | | — | | — | | | — | | 456,219 | | | 4 | | | (3,996) | | | — | | | — | | | — | | | (3,992) |
Forfeiture of restricted common stock | | — | | | — | | — | | | — | | (355) | | | — | | | — | | | — | | | — | | | — | | | — |
Common stock distributions and distributions payable at $0.05 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (10,777) | | | — | | | (10,777) |
Series E preferred stock dividends and dividends payable at $0.434375 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (1,998) | | | — | | | (1,998) |
Series F preferred stock dividends and dividends payable at $0.403125 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (1,209) | | | — | | | (1,209) |
Distributions to noncontrolling interest | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (2,000) | | | (2,000) |
Repurchases of outstanding common stock | | — | | | — | | — | | | — | | (9,770,081) | | | (98) | | | (103,796) | | | — | | | — | | | — | | | (103,894) |
Net loss | | — | | | — | | — | | | — | | — | | | — | | | — | | | (162,061) | | | — | | | (458) | | | (162,519) |
Balance at March 31, 2020 | | 4,600,000 | | $ | 115,000 | | 3,000,000 | | $ | 75,000 | | 215,541,134 | | $ | 2,155 | | $ | 2,578,445 | | $ | 1,156,394 | | $ | (1,633,763) | | $ | 43,775 | | $ | 2,337,006 |
See accompanying notes to consolidated financial statements.
4
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWSEQUITY
(In thousands)thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2019 |
| 2018 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
Net income |
| $ | 17,916 |
| $ | 38,455 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Bad debt expense |
|
| 180 |
|
| 82 |
Gain on sale of assets |
|
| — |
|
| (15,669) |
Noncash interest on derivatives and finance lease obligations, net |
|
| 2,119 |
|
| (3,137) |
Depreciation |
|
| 36,345 |
|
| 36,008 |
Amortization of franchise fees and other intangibles |
|
| 42 |
|
| 746 |
Amortization of right-of-use assets |
|
| (19) |
|
| — |
Amortization of deferred financing costs |
|
| 698 |
|
| 747 |
Amortization of deferred stock compensation |
|
| 2,122 |
|
| 2,000 |
Deferred income taxes, net |
|
| (3,284) |
|
| (3,966) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
| (8,642) |
|
| (13,096) |
Prepaid expenses and other assets |
|
| (2,131) |
|
| (3,575) |
Accounts payable and other liabilities |
|
| (5,837) |
|
| 514 |
Accrued payroll and employee benefits |
|
| (7,937) |
|
| (8,513) |
Net cash provided by operating activities |
|
| 31,572 |
|
| 30,596 |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
Proceeds from sales of assets |
|
| — |
|
| 136,993 |
Renovations and additions to hotel properties and other assets |
|
| (24,520) |
|
| (39,321) |
Net cash (used in) provided by investing activities |
|
| (24,520) |
|
| 97,672 |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
Repurchase of common stock for employee withholding obligations |
|
| (4,435) |
|
| (4,232) |
Payments on notes payable |
|
| (1,834) |
|
| (1,893) |
Payments of deferred financing costs |
|
| — |
|
| (5) |
Dividends and distributions paid |
|
| (126,461) |
|
| (133,894) |
Distributions to noncontrolling interest |
|
| (1,950) |
|
| (1,169) |
Net cash used in financing activities |
|
| (134,680) |
|
| (141,193) |
Net decrease in cash and cash equivalents and restricted cash |
|
| (127,628) |
|
| (12,925) |
Cash and cash equivalents and restricted cash, beginning of period |
|
| 862,369 |
|
| 559,311 |
Cash and cash equivalents and restricted cash, end of period |
| $ | 734,741 |
| $ | 546,386 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2018 (audited) | | 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 | | — | | | — | | — | | | — | | — | | | — | | | 2,221 | | | — | | | — | | | — | | | 2,221 |
Issuance of restricted common stock, net | | — | | | — | | — | | | — | | 345,132 | | | 4 | | | (4,439) | | | — | | | — | | | — | | | (4,435) |
Forfeiture of restricted common stock | | — | | | — | | — | | | — | | (3,932) | | | — | | | — | | | — | | | — | | | — | | | — |
Common stock distributions and distributions payable at $0.05 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (11,429) | | | — | | | (11,429) |
Series E preferred stock dividends and dividends payable at $0.434375 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (1,998) | | | — | | | (1,998) |
Series F preferred stock dividends and dividends payable at $0.403125 per share | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (1,209) | | | — | | | (1,209) |
Distributions to noncontrolling interest | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (1,950) | | | (1,950) |
Net income | | — | | | — | | — | | | — | | — | | | — | | | — | | | 16,317 | | | — | | | 1,599 | | | 17,916 |
Balance at March 31, 2019 | | 4,600,000 | | $ | 115,000 | | 3,000,000 | | $ | 75,000 | | 228,587,447 | | $ | 2,286 | | $ | 2,726,466 | | $ | 1,199,039 | | $ | (1,454,838) | | $ | 47,334 | | $ | 2,710,287 |
See accompanying notes to consolidated financial statements.
5
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | |
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2020 |
| 2019 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net (loss) income | | $ | (162,519) | | $ | 17,916 |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | |
Bad debt expense | | | 318 | | | 180 |
Noncash interest on derivatives and finance lease obligations, net | | | 6,080 | | | 2,119 |
Depreciation | | | 36,736 | | | 36,345 |
Amortization of franchise fees and other intangibles | | | 10 | | | 42 |
Amortization of deferred financing costs | | | 699 | | | 698 |
Amortization of deferred stock compensation | | | 2,207 | | | 2,122 |
Impairment losses | | | 115,366 | | | — |
Deferred income taxes, net | | | 7,415 | | | (3,284) |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | | | 11,757 | | | (8,642) |
Prepaid expenses and other assets | | | (247) | | | (2,131) |
Accounts payable and other liabilities | | | (12,226) | | | (5,837) |
Accrued payroll and employee benefits | | | (7,860) | | | (7,937) |
Operating lease right-of-use assets and obligations | | | (261) | | | (19) |
Net cash (used in) provided by operating activities | | | (2,525) | | | 31,572 |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | |
Disposition deposit | | | 3,500 | | | — |
Acquisition of hotel property | | | (346) | | | — |
Renovations and additions to hotel properties and other assets | | | (17,016) | | | (24,520) |
Net cash used in investing activities | | | (13,862) | | | (24,520) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | |
Repurchases of outstanding common stock | | | (103,894) | | | — |
Repurchases of common stock for employee tax obligations | | | (3,992) | | | (4,435) |
Proceeds from credit facility | | | 300,000 | | | — |
Payments on notes payable | | | (1,898) | | | (1,834) |
Dividends and distributions paid | | | (135,872) | | | (126,461) |
Distributions to noncontrolling interest | | | (2,000) | | | (1,950) |
Net cash provided by (used in) financing activities | | | 52,344 | | | (134,680) |
Net increase (decrease) in cash and cash equivalents and restricted cash | | | 35,957 | | | (127,628) |
Cash and cash equivalents and restricted cash, beginning of period | | | 864,973 | | | 862,369 |
Cash and cash equivalents and restricted cash, end of period | | $ | 900,930 | | $ | 734,741 |
See accompanying notes to consolidated financial statements.
6
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental Disclosure of Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amount shown in the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
| March 31, | ||||
|
| 2019 |
| 2018 | ||
Cash and cash equivalents |
| $ | 683,995 |
| $ | 467,050 |
Restricted cash |
|
| 50,746 |
|
| 79,336 |
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows |
| $ | 734,741 |
| $ | 546,386 |
| | | | | | |
| | March 31, | ||||
| | 2020 | | 2019 | ||
Cash and cash equivalents | | $ | 847,445 | | $ | 683,995 |
Restricted cash | | | 53,485 | | | 50,746 |
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows | | $ | 900,930 | | $ | 734,741 |
The Company paid the following amounts for interest and income taxes, during the three months ended March 31, 20192020 and 2018:2019:
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2019 |
| 2018 | ||
Cash paid for interest |
| $ | 14,292 |
| $ | 13,618 |
Cash paid for income taxes |
| $ | 137 |
| $ | 35 |
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2020 | | 2019 | ||
Cash paid for interest | | $ | 13,091 | | $ | 14,292 |
Cash paid for income taxes, net | | $ | 77 | | $ | 137 |
Supplemental Disclosure of Noncash Investing and Financing Activities
The Company’s noncash investing and financing activities during the three months ended March 31, 20192020 and 20182019 consisted of the following:
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2019 |
| 2018 | ||
Accrued renovations and additions to hotel properties and other assets |
| $ | 11,639 |
| $ | 17,214 |
Amortization of deferred stock compensation — construction activities |
| $ | 99 |
| $ | 113 |
Dividends and distributions payable |
| $ | 14,636 |
| $ | 14,488 |
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2020 | | 2019 | ||
Accrued renovations and additions to hotel properties and other assets | | $ | 9,382 | | $ | 11,639 |
Amortization of deferred stock compensation — construction activities | | $ | 117 | | $ | 99 |
Dividends and distributions payable | | $ | 13,984 | | $ | 14,636 |
See accompanying notes to consolidated financial statements.
6
7
SUNSTONE HOTEL INVESTORS, INC.
NOTES TO UNAUDITED 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, and may also selectively sell 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 March 31, 2019,2020, the Company had interests in 2120 hotels (the “21 hotels”“20 Hotels”), currently held for 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”) | | 8 | |
|
| ||
Highgate Hotels L.P. and an affiliate | | 3 | |
Crestline Hotels & Resorts | | 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 March 31, | |
|
The novel coronavirus (“COVID-19”) global 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, 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 the following 11 hotels during March 2020:
| | |
Hotel | | Suspension Date |
Marriott Boston Long Wharf | | March 12, 2020 |
Renaissance Orlando at SeaWorld® | | March 20, 2020 |
Hyatt Regency San Francisco | | March 22, 2020 |
Oceans Edge Resort & Marina | | March 22, 2020 |
Hilton San Diego Bayfront | | March 23, 2020 |
Wailea Beach Resort | | March 25, 2020 |
Renaissance Washington DC | | March 26, 2020 |
Hilton Garden Inn Chicago Downtown/Magnificent Mile | | March 27, 2020 |
Marriott Portland | | March 27, 2020 |
Hilton New Orleans St. Charles | | March 28, 2020 |
JW Marriott New Orleans | | March 28, 2020 |
In April 2020, the Company temporarily suspended operations at an additional 3 hotels (see Note 12). The Company is unable to predict when any of its hotels with temporarily suspended operations will resume their operations. The extent of the effects of the COVID-19 pandemic on the Company’s business and the hotel industry at large is significant but highly uncertain and will
8
ultimately depend on future developments, including, but not limited to, the duration and severity of the outbreak, 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 March 31, 20192020 and December 31, 2018,2019, and for the three months ended March 31, 20192020 and 2018,2019, 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, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity.
The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the Securities and Exchange Commission on February 14, 2019. 19, 2020. Operating results for the three months ended March 31, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
The Company does not have any comprehensive income other than what is included 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 continuous consolidated statement of operations.
Certain prior year amounts in these financial statements have been reclassified to conform to the presentation for the three months ended March 31, 2019.2020.
7
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 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.
Earnings Per Share
The Company applies the two-class method when computing its earnings per share. Net income per share for each class of 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.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and are included in the computation of earnings per share.
Basic 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 (before their expiration in April 2018), using the more dilutive of either the two-class method or the treasury stock method.
9
The following table sets forth the computation of basic and diluted (loss) earnings per common share (unaudited and in thousands, except per share data):
|
|
|
|
|
| |||||||
|
| Three Months Ended March 31, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
|
|
|
| ||||||||
| | | | | ||||||||
| | Three Months Ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
Numerator: |
|
|
|
|
|
| | | | | | |
Net income |
| $ | 17,916 |
| $ | 38,455 | ||||||
Income from consolidated joint venture attributable to noncontrolling interest |
|
| (1,599) |
|
| (2,439) | ||||||
Net (loss) income | | $ | (162,519) | | $ | 17,916 | ||||||
Loss (income) from consolidated joint venture attributable to noncontrolling interest | | | 458 | | | (1,599) | ||||||
Preferred stock dividends |
|
| (3,207) |
|
| (3,207) | | | (3,207) | | | (3,207) |
Distributions paid on unvested restricted stock compensation |
|
| (61) |
|
| (59) | | | (69) | | | (61) |
Undistributed income allocated to unvested restricted stock compensation |
|
| (9) |
|
| (117) | | | — | | | (9) |
Numerator for basic and diluted income attributable to common stockholders |
| $ | 13,040 |
| $ | 32,633 | ||||||
Numerator for basic and diluted (loss) income attributable to common stockholders | | $ | (165,337) | | $ | 13,040 | ||||||
Denominator: |
|
|
|
|
|
| | | | | | |
Weighted average basic and diluted common shares outstanding |
|
| 227,219 |
|
| 224,282 | | | 221,036 | | | 227,219 |
Basic and diluted income attributable to common stockholders per common share |
| $ | 0.06 |
| $ | 0.15 | ||||||
Basic and diluted (loss) income attributable to common stockholders per common share | | $ | (0.75) | | $ | 0.06 |
The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options, as applicable, have been excluded from the above calculation of earnings per share for the three months ended March 31, 20192020 and 2018,2019, as their inclusion would have been anti-dilutive.
Noncontrolling InterestRestricted Cash
The Company’s consolidated financial statements includeRestricted cash is comprised of reserve accounts for debt service, interest reserves, seasonality reserves, capital replacements, ground leases, property taxes and excess hotel-generated cash that is held in an entity in whichaccount for the Company hasbenefit of a controlling financial interest. Noncontrolling interest is the portionlender. These restricted funds are subject to disbursement approval based on in-place agreements and policies by certain 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 statementslenders and/or hotel managers. Restricted cash may also include earnest money received from a buyer or potential buyer 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 statementsone of equity include beginning balances, activity for the period and ending balances for each component of stockholders’ equity, noncontrolling interest and total equity.
8
At both March 31, 2019 and December 31, 2018, the noncontrolling interest reported in the Company’s consolidated financial statements consisted of a third-party’s 25.0% ownership interesthotels and held in escrow until the Hilton San Diego Bayfront.sale is completed.
InvestmentInvestments 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 consolidated statements of operations.
Depreciation expense is based on the estimated life of the Company’s assets. The life 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 40 years for buildings and improvements and three to 12 years for 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 terms 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.
Impairment losses are 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. 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
10
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 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 fair value assessment, using a discounted cash flow analysis 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 continue to own each propertythe hotel and the estimated proceeds from the disposition of the property.hotel. 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 appropriate discount rate applied to estimated cash flows, the estimated growth of revenues and expenses, net operating income and margins, the need for capital expenditures, as well as specific market and economic conditions. Based on the Company’s review, 2 hotels were impaired during the three months ended March 31, 2020 (see Note 4).
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 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.
Restricted CashFinance and Operating Leases
Restricted cashThe Company determines if a contract is compriseda lease at inception. Leases with an initial term of reserve accounts12 months or less are not recorded on the balance sheet. Expense for debt service,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 a corresponding lease obligation. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease obligations represent the Company’s obligation to make fixed lease payments as stipulated by the lease.
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 reserves, seasonality reserves, capital replacements, groundmethod 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 and property taxes. These restricted funds are subjectthat have extension options that the Company can exercise at its discretion, management uses judgment to supervision and disbursement approval bydetermine 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 lenders and/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 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 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 managers.was impaired during the three months ended March 31, 2020 (see Note 4).
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
11
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 both March 31, 2020 and December 31, 2019, 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 is 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. If the guest pays the independent internet travel intermediary directly, revenue for the room is recognized by the Company at the price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays the Company directly, revenue for the room is recognized by the Company on a gross basis, with the related discount or commission recognized in room 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
9
expenses charges associated with these programs as incurred, and recognizes revenue at the amount it will receive from the brand when a guest redeems their loyalty points by staying at one of the Company’s hotels. In addition, some 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.
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 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.
Trade receivables and contract liabilities consisted of the following (in thousands):
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| |||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (unaudited) |
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|
| |||||||
| | | | | | |||||||
| | March 31, | | December 31, | ||||||||
| | 2020 | | 2019 | ||||||||
| | (unaudited) | | | | |||||||
Trade receivables, net (1) |
| $ | 20,566 |
| $ | 18,982 | | $ | 14,135 | | $ | 21,201 |
Contract liabilities (2) |
| $ | 16,911 |
| $ | 16,711 | | $ | 14,650 | | $ | 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 |
During the three months ended March 31, 2020 and 2019, the Company recognized revenue of approximately $10.2 million and $12.9 million, respectively, related to its outstanding contract liabilities.
Segment Reporting
The Company considers each of its hotels to be an operating segment, and allocates resources and assesses the operating performance for each hotel. Because all of the Company’s hotels have similar economic characteristics, facilities and services, the hotels have been aggregated into a single reportable segment, hotel ownership.
12
New Accounting Standards and Accounting Changes
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which requires companies to record a right-of-use asset and a lease liability on the balance sheet for all leases with a term greater than 12 months regardless of their classification. All entities will classify leases as either operating or finance to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessees and lessors record on the balance sheet. The new standard requires the following:
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|
Subsequent to the issuance of ASU No. 2016-02, the FASB issued several clarifications and updates, including Accounting Standards Update No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU No. 2018-01”) in January 2018, Accounting Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU No. 2018-10”) and Accounting Standards Update No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU No. 2018-11”) in July 2018, Accounting Standards Update No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors” (“ASU No. 2018-20”) in December 2018 and Accounting Standards Update No. 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU No. 2019-01”) in March 2019.
10
The Company adopted ASU No. 2016-02 on January 1, 2019, along with its related clarifications and amendments, and made the following elections:
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Lessee Perspective: Adoption of the new standard resulted in the Company recording net balance sheet adjustments for right-of-use (“ROU”) assets and related lease obligations totaling $45.7 million for its operating leases. The Company also reclassified an $18.4 million ground lease intangible asset, net of accumulated amortization, from investment in hotel properties, net to operating lease ROU assets, net, and reclassified its existing deferred rent liabilities related to its operating leases totaling $13.0 million from other liabilities to operating lease obligations. The adjustments related to operating leases affected the Company’s January 1, 2019 consolidated balance sheet as follows (in thousands):
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|
|
|
|
|
| Balance Pre-Adoption |
| Adjustments |
| Balance Post-Adoption | |||
|
|
|
|
| (unaudited) |
| (unaudited) | ||
Operating lease right-of-use assets, net |
| $ | — |
| $ | 64,075 |
| $ | 64,075 |
Investment in hotel properties, net (intangible assets) |
| $ | 50,889 |
|
| (18,398) |
| $ | 32,491 |
Total asset adjustments |
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|
|
| $ | 45,677 |
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|
|
|
|
|
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|
|
Operating lease obligations, current and noncurrent |
| $ | — |
| $ | 58,663 |
| $ | 58,663 |
Other liabilities (deferred rent) |
| $ | 12,986 |
|
| (12,986) |
| $ | — |
Total liability adjustments |
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|
|
| $ | 45,677 |
|
|
|
Upon adoption of the new standard, the Company reclassified amounts related to its finance leases as follows (in thousands):
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|
|
| Balance Pre-Adoption |
| Adjustments |
| Balance Post-Adoption | |||
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|
|
| (unaudited) |
| (unaudited) | ||
Finance lease right-of-use assets, net |
| $ | — |
| $ | 55,727 |
| $ | 55,727 |
Investment in hotel properties, net (land) |
| $ | 611,993 |
|
| (6,605) |
| $ | 605,388 |
Investment in hotel properties, net (buildings and improvements, net of accumulated depreciation) |
| $ | 2,167,680 |
|
| (49,122) |
| $ | 2,118,558 |
Total asset adjustments |
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|
|
| $ | — |
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|
|
Finance lease obligations, current and noncurrent |
| $ | — |
| $ | 27,010 |
| $ | 27,010 |
Capital lease obligations, current and noncurrent |
| $ | 27,010 |
|
| (27,010) |
| $ | — |
Total liability adjustments |
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|
|
| $ | — |
|
|
|
11
The 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 ROU asset and a corresponding lease obligation. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease obligations represent the Company’s obligation to make fixed lease payments as stipulated by the lease. 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 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 well as consultations with leading national financial institutions that are active in the issuance of both secured and unsecured notes.
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 judgement 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. 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.
Lessor Perspective: For lease agreements in which the Company is the lessor, the Company analyzed the impact of the standard and determined that there was no material impact to the recognition, measurement, or presentation of these revenues. Upon adoption, the Company analyzed the lease and nonlease components, including real estate taxes and common area maintenance expenses, of its lease agreements and determined that the timing and pattern of transfer for both components are the same. In addition, the Company determined that the predominate component was the lease component and, as such, the leases will continue to qualify as operating leases and the Company will account for and present the lease component and the nonlease component as a single component. The Company will continue to collect nonlease amounts directly from its tenants, including real estate taxes and other expenses, and remit these amounts directly to third-parties. None of the Company’s tenants pay third-parties directly. The Company believes that all of its tenant receivables are probable of collection as of March 31, 2019.
See Note 8 for additional lease disclosures.
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, including Accounting Standards Update No. 2019-11 (“ASU No. 2019-11”) in 2019 and Accounting Standards Update No. 2018-19 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses” (“ASU No. 2018-19”), whichin 2018. ASU No. 2019-11 includes an amendment requiring entities to include certain expected recoveries of the amortized cost basis previously written 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 in the scope of ASU No. 2016-13. Both ASU No. 2016-13 and ASU No. 2018-19 are effective during the first quarter of 2020. Both standards will require a modified retrospective approach, with early adoption permitted during the first quarter of 2019. The Company is currently evaluating theadopted all three of these ASUs on January 1, 2020, with no material impact that ASU No. 2016-13 and ASU No. 2018-19 will have on its consolidated financial statements.
3. Investment in Hotel Properties
Investment in hotel properties, net for the 20 Hotels consisted of the following (in thousands):
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| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (unaudited) |
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|
| |||||||
| | | | | | |||||||
| | | | | | |||||||
| | March 31, | | December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | (unaudited) | | | ||||||||
Land |
| $ | 605,388 |
| $ | 611,993 | | $ | 600,649 | | $ | 601,181 |
Buildings and improvements |
|
| 2,950,723 |
|
| 2,983,308 | | | 2,800,187 | | | 2,950,534 |
Furniture, fixtures and equipment |
|
| 492,317 |
|
| 486,441 | | | 496,312 | | | 506,754 |
Intangible assets |
|
| 33,161 |
|
| 56,021 | | | 26,802 | | | 32,610 |
Franchise fees |
|
| 778 |
|
| 778 | | | 743 | | | 743 |
Construction in progress |
|
| 54,366 |
|
| 60,744 | | | 43,782 | | | 40,639 |
Investment in hotel properties, gross |
|
| 4,136,733 |
|
| 4,199,285 | | | 3,968,475 | | | 4,132,461 |
Accumulated depreciation and amortization |
|
| (1,189,937) |
|
| (1,168,287) | | | (1,212,063) | | | (1,260,108) |
Investment in hotel properties, net |
| $ | 2,946,796 |
| $ | 3,030,998 | | $ | 2,756,412 | | $ | 2,872,353 |
During the first quarter of 2020, the Company wrote down its investment in hotel properties and recorded impairment losses of $89.4 million on the Hilton Times Square and $5.2 million on the Renaissance Westchester (see Note 4). In addition, during 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 the 20 Hotels.
4. Fair Value Measurements and Interest Rate Derivatives
Fair Value Measurements
As of March 31, 20192020 and December 31, 2018,2019, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, 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 hierarchy for inputs used in measuring fair value 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. |
13
As of both March 31, 20192020 and December 31, 2018, 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.basis. 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
During the life insurance policyfirst quarter of 2020, the Company identified indicators of impairment at the Hilton Times Square and the Renaissance Westchester related retirement benefit agreement,to deteriorating profitability exacerbated by the effects of the COVID-19 outbreak on the Company’s expected future operating cash flows. The Company prepared estimates of the future undiscounted cash flows expected to be generated by the two hotels during their anticipated holding periods, using assumptions for forecasted revenue and operating expenses as well as the estimated market values of the hotels. Based on this analysis, the Company concluded the Hilton Times Square and the Renaissance Westchester should be impaired as the estimated future undiscounted cash flows for each was less than such 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 flow 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. To determine the impairment loss for the Renaissance Westchester, the Company used Level 2 measurements to estimate the fair value of the hotel, using appraisal techniques to estimate its market value. The Company concluded that the estimated fair value of each hotel was less than its carrying value, resulting in the Company recording impairment charges of $107.9 million on the Hilton Times Square and $5.2 million on the Renaissance Westchester, which are included in impairment losses on the Company’s consolidated statements of operations for the three months ended March 31, 2020. The $107.9 million impairment on the Hilton Times Square is comprised 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 8). The $5.2 million impairment on the Renaissance Westchester consisted solely of a former Company associate, are valued using Level 2 measurements.$5.2 million write down of the Company’s investment in hotel properties, net (see Note 3).
13
The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at March 31, 20192020 and December 31, 20182019 (in thousands):
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| Fair Value Measurements at Reporting Date | |||||||
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| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
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March 31, 2019 (unaudited): |
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|
|
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|
|
|
|
|
|
|
|
Interest rate cap derivatives |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Interest rate swap derivatives |
|
| 2,725 |
|
| — |
|
| 2,725 |
|
| — |
Life insurance policy (1) |
|
| 398 |
|
| — |
|
| 398 |
|
| — |
Total assets measured at fair value at March 31, 2019 |
| $ | 3,123 |
| $ | — |
| $ | 3,123 |
| $ | — |
December 31, 2018: |
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|
|
|
|
|
|
|
|
|
|
|
Interest rate cap derivatives |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Interest rate swap derivatives |
|
| 4,789 |
|
| — |
|
| 4,789 |
|
| — |
Life insurance policy (1) |
|
| 386 |
|
| — |
|
| 386 |
|
| — |
Total assets measured at fair value at December 31, 2018 |
| $ | 5,175 |
| $ | — |
| $ | 5,175 |
| $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date | |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
March 31, 2020 (unaudited): | | | | | | | | | | | | |
Hilton Times Square (1) | | $ | 61,261 | | $ | — | | $ | — | | $ | 61,261 |
Renaissance Westchester (1) | | | 29,500 | | | — | | | 29,500 | | | — |
Total assets measured at fair value at March 31, 2020 | | $ | 90,761 | | $ | — | | $ | 29,500 | | $ | 61,261 |
| | | | | | | | | | | | |
December 31, 2019: | | | | | | | | | | | | |
Renaissance Harborplace (1) | | $ | 96,725 | | $ | — | | $ | — | | $ | 96,725 |
Total assets measured at fair value at December 31, 2019 | | $ | 96,725 | | $ | — | | $ | — | | $ | 96,725 |
(1) |
|
The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at March 31, 20192020 and December 31, 20182019 (in thousands):
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| Fair Value Measurements at Reporting Date | |||||||
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| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
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|
March 31, 2019 (unaudited): |
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|
|
|
|
|
|
|
|
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|
|
Retirement benefit agreement (1) |
| $ | 398 |
| $ | — |
| $ | 398 |
| $ | — |
Total liabilities measured at fair value at March 31, 2019 |
| $ | 398 |
| $ | — |
| $ | 398 |
| $ | — |
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|
|
|
|
|
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|
|
|
|
|
|
December 31, 2018: |
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|
|
|
|
|
|
|
|
|
|
|
Retirement benefit agreement (1) |
| $ | 386 |
| $ | — |
| $ | 386 |
| $ | — |
Total liabilities measured at fair value at December 31, 2018 |
| $ | 386 |
| $ | — |
| $ | 386 |
| $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date | |||||||
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| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
March 31, 2020 (unaudited): | | | | | | | | | | | | |
Interest rate swap derivatives | | $ | 7,161 | | $ | — | | $ | 7,161 | | $ | — |
Total liabilities measured at fair value at March 31, 2020 | | $ | 7,161 | | $ | — | | $ | 7,161 | | $ | — |
| | | | | | | | | | | | |
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 | | $ | — |
|
|
14
Interest Rate Derivatives
The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at March 31, 20192020 (unaudited) and December 31, 20182019 (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Estimated Fair Value of Liabilities (1) | ||||
| | Strike / Capped | | Effective | Maturity | | Notional | | March 31, | | December 31, | ||||
Hedged Debt | Type | Rate | Index | Date | Date | | Amount | | 2020 | | 2019 | ||||
Hilton San Diego Bayfront | Cap | 6.000 | % | 1-Month LIBOR | November 10, 2017 | December 9, 2020 | | $ | 220,000 | | $ | — | | $ | — |
$85.0 million term loan | Swap | 1.591 | % | 1-Month LIBOR | October 29, 2015 | September 2, 2022 | | $ | 85,000 | | | (2,706) | | | (132) |
$100.0 million term loan | Swap | 1.853 | % | 1-Month LIBOR | January 29, 2016 | January 31, 2023 | | $ | 100,000 | | | (4,455) | | | (949) |
| | | | | | | | | | | $ | (7,161) | | $ | (1,081) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Estimated Fair Value of Assets (1) | ||||
|
| Strike / Capped |
| Effective | Maturity |
| Notional |
| March 31, |
| December 31, | ||||
Hedged Debt | Type | Rate | Index | Date | Date |
| Amount |
| 2019 |
| 2018 | ||||
Hilton San Diego Bayfront | Cap | 4.250 | % | 1-Month LIBOR | May 1, 2017 | May 1, 2019 |
| $ | 107,515 |
| $ | — |
| $ | — |
Hilton San Diego Bayfront | Cap | 6.000 | % | 1-Month LIBOR | November 10, 2017 | December 9, 2020 |
| $ | 220,000 |
|
| — |
|
| — |
$85.0 million term loan | Swap | 1.591 | % | 1-Month LIBOR | October 29, 2015 | September 2, 2022 |
| $ | 85,000 |
|
| 1,616 |
|
| 2,521 |
$100.0 million term loan | Swap | 1.853 | % | 1-Month LIBOR | January 29, 2016 | January 31, 2023 |
| $ | 100,000 |
|
| 1,109 |
|
| 2,268 |
|
|
|
|
|
|
|
|
|
|
| $ | 2,725 |
| $ | 4,789 |
(1) | The fair values of |
Noncash changes in the fair values of the Company’s interest rate derivatives resulted in increases (decreases) to interest expense for the three months ended March 31, 20192020 and 20182019 as follows (unaudited and in thousands):
|
|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2019 |
| 2018 | ||
|
|
|
|
| ||
Noncash interest on derivatives |
| $ | 2,064 |
| $ | (3,187) |
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2020 | | 2019 | ||
Noncash interest on derivatives | | $ | 6,080 | | $ | 2,064 |
Fair Value of Debt
As of both March 31, 20192020 and December 31, 2018, 77.6%2019, 59.2% and 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 March 31, 20192020 (unaudited) and December 31, 20182019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2019 |
| December 31, 2018 | ||||||||
| Carrying Amount (1) |
| Fair Value |
| Carrying Amount (1) |
| Fair Value | ||||
Debt | $ | 980,996 |
| $ | 972,535 |
| $ | 982,828 |
| $ | 971,082 |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 | ||||||||
| Carrying Amount (1) | | Fair Value (2) | | Carrying Amount (1) | | Fair Value | ||||
Debt | $ | 1,272,965 | | $ | 1,247,507 | | $ | 974,863 | | $ | 976,012 |
| | | | | | | | | | | |
(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. |
5. Other Assets
Other assets, net consisted of the following (in thousands):
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2020 |
| 2019 | ||
| | (unaudited) | | | | |
Property and equipment, net | | $ | 7,442 | | $ | 7,642 |
Deferred rent on straight-lined third-party tenant leases | | | 3,497 | | | 3,542 |
Deferred income tax assets, net (1) | | | — | | | 7,415 |
Other receivables | | | 2,636 | | | 2,984 |
Other | | | 304 | | | 307 |
Total other assets, net | | $ | 13,879 | | $ | 21,890 |
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
|
| (unaudited) |
|
|
| |
Property and equipment, net |
| $ | 8,183 |
| $ | 8,426 |
Goodwill |
|
| 990 |
|
| 990 |
Deferred rent on straight-lined third-party tenant leases |
|
| 3,117 |
|
| 3,177 |
Deferred income tax asset, net |
|
| 11,387 |
|
| 8,407 |
Interest rate derivatives |
|
| 2,725 |
|
| 4,789 |
Other receivables |
|
| 2,331 |
|
| 3,209 |
Other |
|
| 807 |
|
| 819 |
Total other assets, net |
| $ | 29,540 |
| $ | 29,817 |
(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. |
15
6. Notes Payable
Notes payable consisted of the following (in thousands):
|
|
|
|
| ||||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (unaudited) |
|
| ||||||||
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 both March 31, 2019 and December 31, 2018. |
| $ | 335,996 |
| $ | 337,828 | ||||||
Note payable requiring payments of interest only, bearing a blended rate of one-month LIBOR plus 105 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 |
|
| 220,000 | ||||||
| | | | | ||||||||
| | March 31, | | December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | (unaudited) | | | ||||||||
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 4 hotel properties at both March 31, 2020 and December 31, 2019. | | $ | 327,965 | | $ | 329,863 | ||||||
Note payable requiring payments of interest only, bearing a blended rate of one-month LIBOR plus 105 basis points; initial maturity in December 2020 with 3 one-year extensions, 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 over one-month 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 2.941%. Matures in September 2022. |
|
| 85,000 |
|
| 85,000 | | | 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 over one-month 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 3.203%. Matures in January 2023. |
|
| 100,000 |
|
| 100,000 | | | 100,000 | | | 100,000 |
Unsecured credit facility requiring payments of interest only, bearing a blended rate based on a pricing grid with a range of 140 to 225 basis points over one-month LIBOR, depending on the Company's leverage ratios. Matures in April 2023. The interests of 14 hotel subsidiaries are pledged to the credit facility. | | | 300,000 | | | — | ||||||
Unsecured Senior Notes requiring semi-annual payments of interest only, bearing interest at 4.69%; maturing in January 2026. |
|
| 120,000 |
|
| 120,000 | | | 120,000 | | | 120,000 |
Unsecured Senior Notes requiring semi-annual payments of interest only, bearing interest at 4.79%; maturing in January 2028. |
|
| 120,000 |
|
| 120,000 | |
| 120,000 | |
| 120,000 |
Total notes payable |
| $ | 980,996 |
| $ | 982,828 | | $ | 1,272,965 | | $ | 974,863 |
|
|
|
|
|
|
| ||||||
| | | | | ||||||||
Current portion of notes payable |
| $ | 8,030 |
| $ | 7,804 | | $ | 83,724 | | $ | 83,975 |
Less: current portion of deferred financing costs |
|
| (1,966) |
|
| (1,966) | | | (1,535) | | | (1,866) |
Carrying value of current portion of notes payable |
| $ | 6,064 |
| $ | 5,838 | | $ | 82,189 | | $ | 82,109 |
|
|
|
|
|
|
| ||||||
| | | | | ||||||||
Notes payable, less current portion |
| $ | 972,966 |
| $ | 975,024 | | $ | 1,189,241 | | $ | 890,888 |
Less: long-term portion of deferred financing costs |
|
| (3,309) |
|
| (3,799) | |
| (1,773) | |
| (1,934) |
Carrying value of notes payable, less current portion |
| $ | 969,657 |
| $ | 971,225 | | $ | 1,187,468 | | $ | 888,954 |
In March 2020, the Company drew $300.0 million under the revolving portion of its amended credit agreement as a precautionary measure to increase the Company’s cash position and preserve financial flexibility. Pursuant to the terms of the amended credit agreement, interest is based upon one-month LIBOR plus an applicable margin determined by the Company’s ratio of net indebtedness to EBITDA. At the time of the borrowing, the applicable margin was 1.40%, resulting in an effective rate of 2.32%. The revolving portion of the amended credit agreement matures in April 2023, but may be extended for 2 six-month periods to April 2024, upon the payment of applicable fees and satisfaction of certain customary conditions.
Following such borrowing, the Company has $200.0 million of capacity available for additional borrowing under the revolving portion of its amended credit agreement. In addition, the Company has the right to increase the revolving portion of the amended credit agreement, or to add term loans, in an amount up to $115.0 million, subject in each case, to a lender’s willingness to provide such increase or such term loans.
As of March 31, 2019,2020, the Company has no outstanding amounts due underwas in compliance with all of its credit facility.debt covenants (see Note 12).
16
Interest Expense
Total interest incurred and expensed on the notes payable was as follows (unaudited and in thousands):
|
|
|
|
| ||||||||
|
| Three Months Ended March 31, | ||||||||||
|
| 2019 |
| 2018 | ||||||||
|
|
|
|
| ||||||||
| | | | | | | ||||||
| | Three Months Ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
Interest expense on debt and finance lease obligations |
| $ | 11,509 |
| $ | 11,266 | | $ | 10,728 | | $ | 11,509 |
Noncash interest on derivatives and finance lease obligations, net |
|
| 2,119 |
|
| (3,137) | | | 6,080 | | | 2,119 |
Amortization of deferred financing costs |
|
| 698 |
|
| 747 | | | 699 | | | 698 |
Total interest expense |
| $ | 14,326 |
| $ | 8,876 | | $ | 17,507 | | $ | 14,326 |
7. Other Current Liabilities and Other Liabilities
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (unaudited) |
|
|
| |||||||
| | | | | ||||||||
| | March 31, | | December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | (unaudited) | | | ||||||||
Property, sales and use taxes payable |
| $ | 13,959 |
| $ | 15,684 | | $ | 11,844 | | $ | 16,074 |
Income tax payable |
|
| 136 |
|
| 125 | ||||||
Accrued interest |
|
| 4,367 |
|
| 7,306 | | | 4,200 | | | 6,735 |
Advance deposits |
|
| 16,551 |
|
| 16,711 | | | 13,899 | | | 18,001 |
Management fees payable |
|
| 1,163 |
|
| 1,142 | | | 488 | | | 1,527 |
Other |
|
| 3,736 |
|
| 3,994 | | | 3,400 | | | 4,618 |
Total other current liabilities |
| $ | 39,912 |
| $ | 44,962 | | $ | 33,831 | | $ | 46,955 |
Other Liabilities
Other liabilities consisted of the following (in thousands):
|
|
|
|
|
| |||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| (unaudited) |
|
|
| |||||||
| | | | | ||||||||
| | March 31, | | December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | (unaudited) | | | ||||||||
Deferred revenue |
| $ | 5,305 |
| $ | 5,017 | | $ | 5,405 | | $ | 5,225 |
Deferred rent |
|
| — |
|
| 12,986 | ||||||
Deferred property taxes payable |
|
| 9,541 |
|
| 9,284 | ||||||
Deferred income tax liability |
|
| — |
|
| 304 | ||||||
Deferred property taxes payable (1) | | | 9,162 | | | 8,887 | ||||||
Interest rate derivatives | | | 7,161 | | | 1,081 | ||||||
Other |
|
| 3,145 |
|
| 3,112 | | | 3,090 | | | 2,943 |
Total other liabilities |
| $ | 17,991 |
| $ | 30,703 | | $ | 24,818 | | $ | 18,136 |
(1) | Under the terms of a sublease agreement at the Hilton Times Square, sublease rent amounts are currently considered to be property taxes under a payment-in-lieu of taxes (“PILOT”) program, with installments due beginning in 2020 through 2029. At March 31, 2020, an additional $1.4 million of deferred property taxes payable is included in accounts payable and accrued expenses on the Company’s consolidated balance sheet. |
17
8. Leases
Lessee Accounting
The Company has both operatingfinance and financeoperating leases for ground, building, office and air leases, maturing in dates ranging from 2028 through 2097, including expected renewal options. Including all renewal options available to the Company, the lease maturity date extends to 2147.
Leases were included on the Company’s consolidated balance sheet as follows (in(unaudited and in thousands):
|
|
|
|
|
|
| March 31, |
| |
|
| 2019 |
| |
|
| (unaudited) |
| |
Finance Leases: |
|
|
|
|
Right-of-use assets, net (land) |
| $ | 6,605 |
|
Right-of-use assets, net (buildings and improvements) |
|
| 58,799 |
|
Accumulated amortization |
|
| (10,045) |
|
Right-of-use assets, net |
| $ | 55,359 |
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 1 |
|
Lease obligations, less current portion |
|
| 27,064 |
|
Total lease obligations |
| $ | 27,065 |
|
|
|
|
|
|
|
|
|
|
|
Operating Leases: |
|
|
|
|
Right-of-use assets, net |
| $ | 63,235 |
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 4,528 |
|
Lease obligations, less current portion |
|
| 53,276 |
|
Total lease obligations |
| $ | 57,804 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term: |
|
|
|
|
Finance leases |
|
| 53.2 years |
|
Operating leases |
|
| 24.5 years |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate: |
|
|
|
|
Finance leases |
|
| 9.5 | % |
Operating leases |
|
| 5.3 | % |
| | | | | | | |
| | March 31, | | December 31, | | ||
| | 2020 | | 2019 | | ||
Finance Lease: | | | | | | | |
Right-of-use asset, net (buildings and improvements) | | $ | 58,799 | | $ | 58,799 | |
Accumulated depreciation | | | (11,515) | | | (11,147) | |
Right-of-use asset, net | | $ | 47,284 | | $ | 47,652 | |
| | | | | | | |
Accounts payable and accrued expenses | | $ | 1 | | $ | 1 | |
Lease obligation, less current portion | | | 15,570 | | | 15,570 | |
Total lease obligation | | $ | 15,571 | | $ | 15,571 | |
| | | | | | | |
Remaining lease term | | | 78 years | | | | |
Discount rate | | | 9.0 | % | | | |
| | | | | | | |
Operating Leases: | | | | | | | |
Right-of-use assets, net (1) | | $ | 41,198 | | $ | 60,629 | |
| | | | | | | |
Accounts payable and accrued expenses | | $ | 4,816 | | $ | 4,743 | |
Lease obligations, less current portion | | | 48,460 | | | 49,691 | |
Total lease obligations | | $ | 53,276 | | $ | 54,434 | |
| | | | | | | |
Weighted average remaining lease term | | | 25 years | | | | |
Weighted average discount rate | | | 5.4 | % | | | |
(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 4). |
The components of lease expense were as follows (in(unaudited and in thousands):
|
|
| |||||||
|
| Three Months Ended | |||||||
|
| March 31, 2019 | |||||||
|
| (unaudited) | |||||||
| | | | | | | |||
| | Three Months Ended March 31, | |||||||
| | 2020 | | 2019 | |||||
Finance lease cost: |
|
| | | | | | | |
Amortization of right-of-use assets |
| $ | 368 | ||||||
Amortization of right-of-use asset | | $ | 368 | | $ | 368 | |||
Interest on lease obligations |
|
| 644 | | | 350 | | | 644 |
Total finance lease cost |
| $ | 1,012 | | $ | 718 | | $ | 1,012 |
|
|
| |||||||
| | | | | | | |||
Operating lease cost (1) |
| $ | 3,149 | | $ | 2,442 | | $ | 3,149 |
|
|
|
(1) | Several of the Company’s hotels pay percentage rent, which is calculated on operating revenues above certain thresholds. During the three months ended March 31, 2020 and 2019, the Company recorded $0.7 million and $1.4 million, respectively, in percentage rent related to its operating leases. |
18
Supplemental cash flow information related to leases was as follows (in(unaudited and in thousands):
|
|
|
| |
|
| Three Months Ended | ||
|
| March 31, 2019 | ||
|
| (unaudited) | ||
Cash paid for amounts included in the measurement of lease obligations: |
|
|
| |
Operating cash flows from operating leases |
| $ | 1,632 | |
Operating cash flows from finance leases |
| $ | — | |
Finance cash flows from finance leases |
| $ | — | |
|
|
|
| |
Right-of-use assets obtained in exchange for lease obligations upon adoption of ASU No. 2016-02: |
|
|
| |
Operating leases |
| $ | 45,677 | |
Finance leases |
| $ | — |
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2020 | | 2019 | ||
Operating cash flows used for operating leases | | $ | 1,875 | | $ | 1,632 |
| | | | | | |
Changes in operating lease right-of-use assets | | $ | 897 | | $ | 841 |
Changes in operating lease obligations | | | (1,158) | | | (860) |
Changes in operating lease right-of-use assets and lease obligations, net | | $ | (261) | | $ | (19) |
| | | | | | |
Operating right-of-use assets obtained in exchange for operating lease obligations | | $ | — | | $ | 45,677 |
Future maturities of the Company’s operating and finance lease obligations at March 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
| Operating Leases |
| Finance Leases | ||
|
| (unaudited) |
| (unaudited) | ||
2019 |
| $ | 7,480 |
| $ | 2,357 |
2020 |
|
| 7,532 |
|
| 2,357 |
2021 |
|
| 7,583 |
|
| 2,413 |
2022 |
|
| 7,635 |
|
| 2,453 |
2023 |
|
| 7,689 |
|
| 2,453 |
Thereafter |
|
| 79,789 |
|
| 135,607 |
Total lease payments |
|
| 117,708 |
|
| 147,640 |
Less: interest (1) |
|
| (59,904) |
|
| (120,575) |
Present value of lease obligations |
| $ | 57,804 |
| $ | 27,065 |
|
|
Lessor Accounting
During the three months ended March 31, 2019, the Company recognized $2.6 million in lease-related revenue, which is included in other operating revenue on the Company’s unaudited statement of operations.
9. Stockholders’ Equity
Series E Cumulative Redeemable Preferred Stock
In March 2016, the Company issued 4,600,000 shares of its 6.95% Series E Cumulative Redeemable Preferred Stock (“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 6.45% Series F Cumulative Redeemable Preferred Stock (“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.$25.00. 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.
19
Common Stock
In February 2017, the Company 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 terms of the 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. The Company did not issue any shares of its common stock in connection with the ATM agreements during the three months ended March 31, 2019. During 2017 and 2018, the Company issued a total of 7,467,709 shares of its common stock in connection with the ATM Agreements for gross proceeds of $124.5 million, leaving $175.5 million available for sale under the ATM Agreements. The Company paid a total of $2.3 million in costs during 2017 and 2018 in connection with common stock issued under the ATM Agreements.
In February 2017, the Company’s board of directors authorized a sharestock repurchase planprogram 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 the three months ended March 31, 2020, the Company repurchased 9,770,081 shares of its common stock for $103.9 million, including fees and commissions, leaving approximately $400.0 million of remaining authorized capacity under the program. As of March 31, 2019, no2020, 0 shares of either the Company’s common or preferred stock have been repurchased. 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 purchasesrepurchases will depend on various factors, including the Company’s capital needs, as well as the Company’s common and preferred stock price.
10. Long-Term Incentive Plan
Stock Grants
Restricted shares granted pursuant to the Company’s Long-Term Incentive Plan (“LTIP”) generally vest over a period of three 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.
The Company has elected to account for forfeitures as they occur.
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The Company’s amortization expense and forfeitures related to restricted shares for the three months ended March 31, 20192020 and 20182019 were as follows (unaudited and in thousands):
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Amortization expense, including forfeitures |
| $ | 2,122 |
| $ | 2,000 |
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| 2019 | ||
Amortization expense, including forfeitures | | $ | 2,207 | | $ | 2,122 |
In addition, the Company capitalizes compensation costs related to restricted shares granted to certain employees whose work is directly related to the Company’s capital investment in its hotels. These capitalized costs totaled $0.1 million during both the three months ended March 31, 20192020 and 2018.2019.
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11. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers require the Company to pay between 1.75% and 3.0% 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 three months ended March 31, 20192020 and 20182019 were included in other property-level expenses on the Company’s consolidated statements of operations as follows (unaudited and in thousands):
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Basic management fees |
| $ | 7,151 |
| $ | 7,534 | | $ | 5,391 | | $ | 7,151 |
Incentive management fees |
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| 3,152 |
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| 2,720 | | | — | | | 3,152 |
Total basic and incentive management fees |
| $ | 10,303 |
| $ | 10,254 | | $ | 5,391 | | $ | 10,303 |
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.
Total license and franchise fees incurred by the Company during the three months ended March 31, 20192020 and 20182019 were included in franchise costs on the Company’s consolidated statements of operations as follows (unaudited and in thousands):
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Franchise assessments (1) |
| $ | 5,295 |
| $ | 5,908 | | $ | 4,418 | | $ | 5,295 |
Franchise royalties |
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| 1,544 |
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| 1,945 | | | 918 | | | 1,544 |
Total franchise costs |
| $ | 6,839 |
| $ | 7,853 | | $ | 5,336 | | $ | 6,839 |
(1) | Includes advertising, reservation and frequent guest |
Renovation and Construction Commitments
At March 31, 2019,2020, 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 March 31, 20192020 totaled $56.0$32.7 million.
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Concentration of Risk
The concentration of the Company’s hotels in California, Florida, the greater Washington DC area, Hawaii, Illinois and Massachusetts 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 March 31, 2019, 162020, 15 of the 21 hotels20 Hotels were geographically concentrated as follows (unaudited):
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California |
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| 32 | % | 34 | % | | 5 | | 30 | % | 32 | % |
Florida |
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| 9 | % | 10 | % | | 2 | | 9 | % | 9 | % |
Greater Washington DC area |
| 2 |
| 13 | % | 12 | % | | 2 | | 13 | % | 11 | % |
Hawaii |
| 1 |
| 5 | % | 10 | % | | 1 | | 5 | % | 12 | % |
Illinois |
| 3 |
| 11 | % | 8 | % | | 3 | | 11 | % | 7 | % |
Massachusetts |
| 2 |
| 14 | % | 15 | % | | 2 | | 14 | % | 15 | % |
Other
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2020, the Company accrued $10.1 million of additional wages and benefits for furloughed or laid off hotel employees as a result of the COVID-19 pandemic. The amount is included in accrued payroll and employee benefits on the Company’s consolidated balance sheet and in the appropriate employee-specific expense category on the Company’s consolidated statement of operations.
Other
The Company has provided customary unsecured indemnities to certain 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 March 31, 2019,2020, the Company had $0.4 million of outstanding irrevocable letters of credit to guarantee 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. No draws have been made through March 31, 2019.2020.
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 brought against the Company, however, is subject to significant uncertainties.
12. Subsequent Events
In response to the COVID-19 pandemic, the Company temporarily suspended operations at the following hotels during April 2020, bringing the total number of suspended hotels to 14:
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Hotel | | Suspension Date |
Embassy Suites Chicago | | April 1, 2020 |
Renaissance Westchester | | April 4, 2020 |
Hyatt Centric Chicago Magnificent Mile | | April 6, 2020 |
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The Company is unable to predict when any of its hotels with temporarily suspended operations will resume their operations. While the Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business, the situation is rapidly evolving and the Company cannot predict how long the COVID-19 pandemic will last or what the long term impact will be on the Company’s hotel operations. As a result, the Company has experienced and continues to experience a significant negative impact on its liquidity, and could experience additional material impacts including, but not limited to, charges from potential adjustments of the
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carrying amount of receivables and additional asset impairment charges. The Company anticipates this will have a material impact on its business, results of operations and cash flows in 2020.
Due to COVID-19’s continued negative impact on the Company’s business throughout 2020 and possibly longer, the Company anticipates it may not meet the terms of its unsecured debt financial covenants during either the second or third quarter of 2020. The Company is currently working with its lenders and expects to obtain waivers of its covenants through the end of the first quarter of 2021. There can be no assurance that the Company will be able to obtain waivers in a timely manner, or on acceptable terms. If the Company is unable to obtain waivers on its covenants and does not meet its covenants, the lenders on the Company’s line of credit, unsecured term loans and unsecured senior notes may require the Company to repay the loans.
The Hilton Times Square ground leases require monthly rental payments be paid to the respective landlords. The Company did not make its April 2020 rent payment, but received a deferral for such payment until October 2020. Likewise, the Company did not make its May 2020 rent payment. The Company has not yet received, and is uncertain if it will receive, a deferral for its May 2020 rent payment. Additionally, the Company has not made its May 2020 debt payment for the hotel.
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Cautionary Statement
This report 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, opinions and expectations, are generally identifiable by use of the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “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. Accordingly, there is no assurance that the Company’s expectations will be realized. In evaluating these statements, you should specifically consider the risks outlined in detail in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 14, 2019,19, 2020, under the caption “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, including but not limited to the following factors:
| The short-term and long-term impact on our business of the novel coronavirus (COVID-19) global pandemic and the response of governments and us to the outbreak; |
● | general economic and business conditions, including a U.S. recession, trade conflicts and tariffs between the U.S. and its trading partners, changes in the European Union or global economic slowdown, 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 or the adverse effects of climate change, affecting the lodging and travel industry, internationally, nationally and locally; |
| our need to operate as a REIT and comply with other applicable laws and regulations, including new laws, interpretations or court decisions that may change the federal or state tax laws or the federal or state income tax consequences of our qualification as a REIT; |
| rising hotel operating |
| relationships with, and the requirements and reputation of, our franchisors and hotel brands; |
| relationships with, and the requirements, performance and reputation of, the managers of our hotels; |
| the ground, building or |
| competition for the acquisition of hotels, and our ability to complete acquisitions and dispositions; |
| performance of hotels after they are acquired; |
| 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; |
| competition from hotels not owned by us; |
| the need for renovations, repositionings and other capital expenditures for our hotels; |
| the impact, including any delays, of renovations and repositionings on hotel operations; |
| changes in our business strategy or acquisition or disposition plans; |
| our level of debt, including secured, unsecured, fixed and variable rate debt; |
| financial and other covenants in our debt and preferred stock; |
| our hotels |
| volatility in the capital markets and the effect on lodging demand or our ability to obtain capital on favorable terms or at all; |
| potential adverse tax consequences in the event that our operating leases with our taxable REIT subsidiaries are not held to have been made on an arm’s-length basis; |
| system security risks, data protection breaches, cyber-attacks, including those impacting our hotel managers or other third parties, and systems integration issues; and |
| other events beyond our control, including natural disasters, terrorist attacks or civil unrest. |
These factors may cause our actual events to differ materially from the expectations expressed or implied by any forward-looking statement. Except as otherwise required by 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.
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Item 2.Management’s2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Sunstone Hotel Investors, Inc. (the “Company,” “we,” “our” or “us”) is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust (“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. (the “TRS Lessee”), which, directly or indirectly, leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.
Our business is to acquire,We own asset manage and renovate primarily hotels that we consider to be Long-Term Relevant Real Estate® (or LTRR®) in the United States, specifically hotels in urban and resort 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.properties that we believe do not meet our criteria of LTRR®. As of March 31, 2019,2020, we had interests in 2120 hotels currently held for investment (the “21 hotels”“20 Hotels”), which average 513531 rooms in size. Of the 21 hotels, we classify 18 as upper upscale, two as upscale and one as luxury as defined by STR, Inc. All but two (the Boston Park Plaza and the Oceans Edge Resort & Marina) of our 21 hotelsthe 20 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.
Our missionCOVID-19
In March 2020, the COVID-19 outbreak was declared a National Public Health Emergency, which led to increased group cancellations, corporate and government travel restrictions and declining transient demand. As a result of these cancellations, restrictions and the health risks 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 some hotels. As of March 31, 2020, 11 of the 20 Hotels had temporarily suspended operations, with operations at an additional three hotels temporarily suspended as of May 8, 2020. Hotels whose operations have been temporarily suspended include the following:
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Hotel | | Suspension Date |
Marriott Boston Long Wharf | | March 12, 2020 |
Renaissance Orlando at SeaWorld® | | March 20, 2020 |
Hyatt Regency San Francisco | | March 22, 2020 |
Oceans Edge Resort & Marina | | March 22, 2020 |
Hilton San Diego Bayfront | | March 23, 2020 |
Wailea Beach Resort | | March 25, 2020 |
Renaissance Washington DC | | March 26, 2020 |
Hilton Garden Inn Chicago Downtown/Magnificent Mile | | March 27, 2020 |
Marriott Portland | | March 27, 2020 |
Hilton New Orleans St. Charles | | March 28, 2020 |
JW Marriott New Orleans | | March 28, 2020 |
Embassy Suites Chicago | | April 1, 2020 |
Renaissance Westchester | | April 4, 2020 |
Hyatt Centric Chicago Magnificent Mile | | April 6, 2020 |
At the nine hotels that remained open during the entire first quarter of 2020, occupancy was greatly reduced due to the COVID-19 outbreak. As a result, we, in conjunction with our third-party managers, materially 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 closure of unoccupied floors.
The Company incurred $10.1 million of additional expenses as a result of the COVID-19 pandemic during the first quarter of 2020, related to wages and benefits for furloughed or laid off hotel employees.
In March 2020, we drew $300.0 million under the revolving portion of our amended credit agreement as a precautionary measure to increase our cash position and preserve financial flexibility. The revolving portion of the amended credit agreement matures on April 14, 2023, but may be extended for two six-month periods to April 2024, upon the payment of applicable fees and
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satisfaction of certain customary conditions. Following our $300.0 million draw, we have $200.0 million of capacity available for additional borrowing under the revolving portion of the amended credit agreement. As of March 31, 2020, we were in compliance with all of our debt financial covenants. It is likely COVID-19 will continue to create meaningful value fornegatively affect our stockholders by producing superior long-term returnsbusiness throughout 2020 and possibly longer, and, therefore, we anticipate we may not meet the terms of our unsecured debt financial covenants during either the second or third quarter of 2020. We are currently working with our unsecured lenders and expect to obtain waivers of our covenants through the ownershipend of LTRR®the first quarter of 2021. We may elect to repay a portion or all of the $300.0 million outstanding on our amended credit agreement in connection with any waiver or amendment to the amended credit agreement. If we are unable to obtain waivers on our covenants and do not meet our covenants, the lenders on our line of credit, unsecured term loans and unsecured senior notes may require us to repay the loans. There can be no assurance that we will be able to obtain waivers in a timely manner or on acceptable terms. See “Liquidity and Capital Resources” below for additional details.
In response to the new economic environment resulting from the COVID-19 pandemic, we have elected a strategy of capital preservation. We deferred a portion of our planned 2020 non-essential capital improvements into our portfolio. Additionally, we expect to accelerate or initiate capital investment projects at certain hotels in order to opportunistically take advantage of the suspended operations and current demand environment to perform otherwise disruptive renovations. These projects will take place at the Marriott Portland, Renaissance Orlando at SeaWorld®, Renaissance Washington DC and the Wailea Beach Resort, and will adhere to the relevant government regulations and social distancing mandates aimed at both protecting those involved in the hospitality sector. Our values include transparency, trust, ethical conduct, honest communicationconstruction work and discipline. As demandstemming the spread of COVID-19.
To preserve additional liquidity, we have temporarily suspended both our stock repurchase program and our common stock quarterly dividend. During the first quarter of 2020, we repurchased 9,770,081 of our 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 stock repurchase program. Future repurchases will depend on the effects of COVID-19 and various other factors, including our obligations under our various financing agreements and capital needs, as well as the price of our common and preferred stock. 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. At this time, we do not expect to pay a quarterly dividend on our common stock for lodging generally fluctuatesthe remainder of the year. 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, long-term operating projections, expected capital requirements and risks affecting our business.
We believe that the steps we have taken to increase our cash position and preserve our financial flexibility, combined with the overall economy, we seekanticipated waiver or amendment to own hotels that will maintain a high appeal with travelers over long periods of time and will generate economic earnings 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 maintainingour amended credit agreement, our already strong balance sheet flexibility and strength. Our goalour low leverage will be sufficient to allow us to navigate through this crisis. We cannot, however, assure you that the assumptions we used to estimate our liquidity requirements will be correct given the impact of COVID-19 on the global market and our hotel operations is unprecedented, and as a consequence, our ability to maintain appropriate leverageaccurately forecast is uncertain. In addition, the magnitude and financial flexibility to position the Company to create value throughout all phasesduration of the operating andCOVID-19 pandemic is uncertain. We cannot accurately estimate the impact on our business, financial cycles.condition or operational results with reasonable certainty; however, we expect a net loss on our operations for the year ending December 31, 2020.
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; |
| 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, facility and resort fees, entertainment and other guest services. Additionally, this category includes, among other things, attrition and cancellation revenue, tenant revenue derived from hotel space and marina slips leased by third parties and any business interruption proceeds or performance guarantee payments received. |
Expenses. Our expenses consist of the following:
| Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue; |
| 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 revenue; |
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| Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise costs; |
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| 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 municipality, along with |
| Other property-level expenses, which includes our property-level general and administrative expenses, such as payroll, benefits and other employee-related expenses, contract and professional fees, credit and collection expenses, employee recruitment, relocation and training expenses, consulting fees, management fees and other expenses; |
| Corporate overhead expense, which includes our corporate-level expenses, such as payroll, benefits and other employee-related expenses, amortization of deferred stock compensation, business acquisition and due diligence expenses, legal expenses, association, contract and professional fees, board of director expenses, entity-level state franchise and minimum taxes, travel expenses, office rent and other customary expenses; |
| Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment (“FF&E”), along with amortization on our finance lease right-of-use assets, franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to FF&E for our corporate |
● | Impairment losses, which includes the charges we have recognized to reduce the carrying values of certain hotels on our balance sheet to their fair values in association with our impairment evaluations, along with the write-off of any development costs associated with abandoned projects. |
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, as well as any energy or other rebates or property insurance proceeds we have received, miscellaneous income or any gains or losses we have recognized on sales or redemptions of assets other than real estate investments; |
| Interest expense, which includes interest expense incurred on our outstanding fixed and variable rate debt and finance lease obligations, gains or losses on interest rate derivatives, amortization of deferred financing costs, and any loan fees incurred on our debt; |
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| Income tax (provision) benefit, net, which includes federal and state income taxes related to continuing operations charged to the Company net of any refunds received, any adjustments to deferred tax assets, liabilities or valuation allowance, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred; |
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| Preferred stock dividends, which includes dividends accrued on our Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) and our Series F Cumulative Redeemable Preferred Stock (“Series F preferred stock”). |
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, or ADR, which is the quotient of room revenue divided by total rooms sold; |
| Revenue per available room, or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue; |
| 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 |
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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, |
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| 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; |
| EBITDAre, which is net income (loss) excluding: interest expense; benefit or provision for income taxes, including any changes to deferred tax assets, liabilities or valuation allowances and income taxes applicable to the sale of assets; depreciation and amortization; gains or losses on disposition of depreciated property (including gains or losses on change in control); and any impairment write-downs of depreciated property; |
| Adjusted EBITDAre, excluding noncontrolling interest, which is EBITDAre adjusted to exclude: the net income (loss) allocated to a third-party’s 25.0% ownership interest in the joint venture that owns the Hilton San Diego Bayfront, along with the noncontrolling partner’s pro rata share of any EBITDAre components; amortization of deferred stock compensation; amortization of favorable and unfavorable contracts; amortization of right-of-use |
| Funds from operations (“FFO”) attributable to common stockholders, which is net income (loss), excluding: preferred stock dividends; |
| Adjusted FFO attributable to common stockholders, which is FFO attributable to common stockholders adjusted to exclude: amortization of favorable and unfavorable contracts; real estate-related amortization of right-of-use |
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. |
| 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 expenses. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators’ effectiveness in maximizing revenues. Similarly, we also evaluate our operators’ effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues. |
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
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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, guest supplies, labor and utilities expense. Our Comparable Portfolio RevPAR index increased 450 basis points during the first three months of 2019 as compared to the same period in 2018. The increase in our Comparable Portfolio RevPAR index was primarily due to increases in the RevPAR index at the Wailea Beach Resort post-repositioning, the Hilton Times Square, which benefited from the temporary closure of a nearby Hilton hotel, and at the Hyatt Regency San Francisco, the JW Marriott New Orleans, the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport, which were under renovation during various times in 2018. These increases were partially offset by decreases in the RevPAR index at the Hilton San Diego Bayfront and the Renaissance Harborplace, which were under renovation during the first quarter of 2019.
We continue to work with our operators to identify operational efficiencies designed to reduce expenses and our impact on the environment while minimally affecting guest experience and hotel employee satisfaction. Key asset management initiatives include working with our operators to optimize hotel staffing levels (albeit ultimate staffing levels are determined by our operators), increaseincreasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, eliminating waste and selectively combinecombining certain food and beverage outlets. Our operators may have difficulty implementing certain operational efficiency initiatives and success levels may vary, 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. Our operators 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, our operators are limited in their ability to reduce expenses without affecting brand standards or the competitiveness of our hotels.
Operating Results. The following table presents our unaudited operating results for our total portfolio for the three months ended March 31, 20192020 and 2018,2019, including the amount and percentage change in the results between the two periods.
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| Change $ |
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REVENUES |
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Room |
| $ | 171,858 |
| $ | 180,276 |
| $ | (8,418) |
| (4.7) | % |
Food and beverage |
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| 69,113 |
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| 74,266 |
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| (5,153) |
| (6.9) | % |
Other operating |
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| 16,709 |
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| 16,904 |
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| (195) |
| (1.2) | % |
Total revenues |
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| 257,680 |
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| 271,446 |
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| (13,766) |
| (5.1) | % |
OPERATING EXPENSES |
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Hotel operating |
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| 156,731 |
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| 167,308 |
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| (10,577) |
| (6.3) | % |
Other property-level expenses |
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| 32,840 |
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| 33,907 |
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| (1,067) |
| (3.1) | % |
Corporate overhead |
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| 7,516 |
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| 7,102 |
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| 414 |
| 5.8 | % |
Depreciation and amortization |
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| 36,387 |
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| 36,688 |
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| (301) |
| (0.8) | % |
Total operating expenses |
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| 233,474 |
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| 245,005 |
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| (11,531) |
| (4.7) | % |
Interest and other income |
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| 4,924 |
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| 1,491 |
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| 3,433 |
| 230.2 | % |
Interest expense |
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| (14,326) |
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| (8,876) |
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| (5,450) |
| (61.4) | % |
Gain on sale of assets |
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| — |
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| 15,659 |
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| (15,659) |
| (100.0) | % |
Income before income taxes |
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| 14,804 |
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| 34,715 |
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| (19,911) |
| (57.4) | % |
Income tax benefit, net |
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| 3,112 |
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| 3,740 |
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| (628) |
| (16.8) | % |
NET INCOME |
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| 17,916 |
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| 38,455 |
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| (20,539) |
| (53.4) | % |
Income from consolidated joint venture attributable to noncontrolling interest |
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| (1,599) |
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| (2,439) |
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| 840 |
| 34.4 | % |
Preferred stock dividends |
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| (3,207) |
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| (3,207) |
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| — |
| — | % |
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
| $ | 13,110 |
| $ | 32,809 |
| $ | (19,699) |
| (60.0) | % |
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| Three Months Ended March 31, | ||||||||||
| | 2020 | | 2019 | | Change $ | | Change % | ||||
| | (in thousands, except statistical data) | ||||||||||
REVENUES | | | | | | | | | | | | |
Room | | $ | 127,400 | | $ | 171,858 | | $ | (44,458) | | (25.9) | % |
Food and beverage | | | 47,990 | |
| 69,113 | | | (21,123) | | (30.6) | % |
Other operating | | | 15,822 | |
| 16,709 | | | (887) | | (5.3) | % |
Total revenues | | | 191,212 | |
| 257,680 | | | (66,468) | | (25.8) | % |
OPERATING EXPENSES | | | | | | | | | | | | |
Hotel operating | | | 143,509 | |
| 156,731 | | | (13,222) | | (8.4) | % |
Other property-level expenses | | | 28,845 | |
| 32,840 | | | (3,995) | | (12.2) | % |
Corporate overhead | | | 7,394 | |
| 7,516 | | | (122) | | (1.6) | % |
Depreciation and amortization | | | 36,746 | | | 36,387 | | | 359 | | 1.0 | % |
Impairment losses | | | 115,366 | | | — | | | 115,366 | | 100.0 | % |
Total operating expenses | | | 331,860 | |
| 233,474 | | | 98,386 | | 42.1 | % |
Interest and other income | | | 2,306 | |
| 4,924 | | | (2,618) | | (53.2) | % |
Interest expense | | | (17,507) | | | (14,326) | | | (3,181) | | (22.2) | % |
(Loss) income before income taxes | | | (155,849) | |
| 14,804 | | | (170,653) | | (1,152.7) | % |
Income tax (provision) benefit, net | | | (6,670) | |
| 3,112 | |
| (9,782) | | (314.3) | % |
NET (LOSS) INCOME | | | (162,519) | | | 17,916 | | | (180,435) | | (1,007.1) | % |
Loss (income) from consolidated joint venture attributable to noncontrolling interest | | | 458 | |
| (1,599) | |
| 2,057 | | 128.6 | % |
Preferred stock dividends | | | (3,207) | |
| (3,207) | | | — | | — | % |
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (165,268) | | $ | 13,110 | | $ | (178,378) | | (1,360.6) | % |
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Operating Statistics. The following table includes comparisons of the key operating metrics for our Comparable Portfolio.the 20 Hotels.
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| RevPAR |
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Comparable Portfolio |
| 79.2 | % | $ | 223.78 |
| $ | 177.23 |
| 79.2 | % | $ | 214.63 |
| $ | 169.99 |
| — | bps | 4.3 | % | 4.3 | % |
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| | Two Months Ended February 29, |
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| | 2020 | | 2019 | | Change | | ||||||||||||||||
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| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
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20 Hotels | | 75.7 | % | $ | 218.95 | | $ | 165.75 |
| 75.7 | % | $ | 219.06 | | $ | 165.83 | | — | bps | (0.1) | % | (0.1) | % |
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| | One Month Ended March 31, |
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| | 2020 | | 2019 | | Change | | ||||||||||||||||
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| ADR |
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| RevPAR |
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20 Hotels | | 29.9 | % | $ | 222.39 | | $ | 66.49 |
| 85.0 | % | $ | 235.39 | | $ | 200.08 | | (5,510) | bps | (5.5) | % | (66.8) | % |
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| | Three Months Ended March 31, |
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| | 2020 | | 2019 | | Change | | ||||||||||||||||
| | Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
| Occ% |
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| RevPAR |
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20 Hotels | | 60.1 | % | $ | 219.54 | | $ | 131.94 |
| 78.9 | % | $ | 225.12 | | $ | 177.62 | | (1,880) | bps | (2.5) | % | (25.7) | % |
Summary of Operating Results. TheAs noted above, in March 2020, we temporarily suspended operations at 11 of the 20 Hotels, and significantly reduced operations at our remaining nine hotels, negatively affecting the year-over-year comparability of our operations. In addition, the year-over-year comparability of our operations is affected by changesour sale of the Courtyard by Marriott Los Angeles (the “Courtyard”) in our portfolio resulting from hotel acquisitions, dispositions or renovations. We sold six hotels in 2018 (the “Six Sold Hotels”). In addition, renovations atOctober 2019. Due to the Hilton San Diego Bayfront and the Renaissance Harborplace (the “Two 2019 Renovation Hotels”) negatively impacted our operating results duringfirst quarter of 2020’s noncomparability to the first quarter of 2019, we are also presenting our portfolio’s results for January and renovations atFebruary 2020 as compared to the Hyatt Regency San Francisco,same period in 2019, as we believe this comparison is more indicative of what the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport (the “Three 2018 Renovation Hotels”) negatively impactedtrend of our operatingfirst quarter of 2020 results duringwould have been as compared to the first quarter of 2018.2019 had hotel demand not been decimated by the COVID-19 outbreak.
Room revenue. Room revenue decreased $8.4$44.5 million, or 4.7%25.9%, for the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019.
The Six Sold Hotels caused room revenue to decrease by $15.4
● | March 2020 room revenue decreased $43.8 million, or 66.7%, as compared to March 2019. |