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, ~~2019~~2020

☐

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 Incorporation or Organization)		(I.R.S. Employer Identification Number)

200 Spectrum Center Drive, 21st Floor Irvine, California		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.


Large accelerated filer ☒	Accelerated filer ☐

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 ☒


~~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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

~~228,639,287~~As 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, 2019~~per share, outstanding.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

~~Item 1.Financial Statements~~

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE ~~SHEETS~~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

March 31,

December 31,

2019

2018

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$
683,995

$
809,316
Restricted cash

50,746

53,053
Accounts receivable, net

42,306

33,844
Prepaid expenses and other current assets

15,342

12,261
Total current assets

792,389

908,474
Investment in hotel properties, net

2,946,796

3,030,998
Finance lease right-of-use assets, net

55,359

—
Operating lease right-of-use assets, net

63,235

—
Deferred financing costs, net

3,338

3,544
Other assets, net

29,540

29,817
Total assets

$
3,890,657

$
3,972,833
LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued expenses

$
34,668

$
30,425
Accrued payroll and employee benefits

17,102

25,039
Dividends and distributions payable

14,636

126,461
Other current liabilities

39,912

44,962
Current portion of notes payable, net

6,064

5,838
Total current liabilities

112,382

232,725
Notes payable, less current portion, net

969,657

971,225
Finance lease obligations, less current portion

27,064

27,009
Operating lease obligations, less current portion

53,276

—
Other liabilities

17,991

30,703
Total liabilities

1,180,370

1,261,662
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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, stated at liquidation preference of $25.00 per share

75,000

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

2,286

2,282
Additional paid in capital

2,726,466

2,728,684
Retained earnings

1,199,039

1,182,722
Cumulative dividends and distributions

(1,454,838)

(1,440,202)
Total stockholders’ equity

2,662,953

2,663,486
Noncontrolling interest in consolidated joint venture

47,334

47,685
Total equity

2,710,287

2,711,171
Total liabilities and equity

$
3,890,657

$
3,972,833

See accompanying notes to consolidated financial statements.

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Three Months Ended March 31,

2019

2018
REVENUES

Room

$
171,858

$
180,276
Food and beverage

69,113

74,266
Other operating

16,709

16,904
Total revenues

257,680

271,446
OPERATING EXPENSES

Room

48,246

51,095
Food and beverage

46,822

50,154
Other operating

3,965

3,941
Advertising and promotion

13,564

13,906
Repairs and maintenance

10,282

11,103
Utilities

6,665

7,475
Franchise costs

6,839

7,853
Property tax, ground lease and insurance

20,348

21,781
Other property-level expenses

32,840

33,907
Corporate overhead

7,516

7,102
Depreciation and amortization

36,387

36,688
Total operating expenses

233,474

245,005
Interest and other income

4,924

1,491
Interest expense

(14,326)

(8,876)
Gain on sale of assets

—

15,659
Income before income taxes

14,804

34,715
Income tax benefit, net

3,112

3,740
NET INCOME

17,916

38,455
Income from consolidated joint venture attributable to noncontrolling interest

(1,599)

(2,439)
Preferred stock dividends

(3,207)

(3,207)
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$
13,110

$
32,809

Basic and diluted per share amounts:

Basic and diluted income attributable to common stockholders per common share

$
0.06

$
0.15
Basic and diluted weighted average common shares outstanding

227,219

224,282

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

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.

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except share and per share data)

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 year to date

—

—

—

—

—

—

—

—

(11,429)

—

(11,429)
Series E preferred stock dividends and dividends payable at $0.434375 per share year to date

—

—

—

—

—

—

—

—

(1,998)

—

(1,998)
Series F preferred stock dividends and dividends payable at $0.403125 per share year to date

—

—

—

—

—

—

—

—

(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

Preferred Stock

Noncontrolling

Series E

Series F

Common Stock

Cumulative

Interest in

Number of

Number of

Number of

Additional

Retained

Dividends and

Consolidated

Shares

Amount

Shares

Amount

Shares

Amount

Paid in Capital

Earnings

Distributions

    Joint Venture

Total Equity
Balance at December 31, 2017 (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

—

—

—

—

—

—

2,113

—

—

—

2,113
Issuance of restricted common stock, net

—

—

—

—

297,013

3

(4,235)

—

—

—

(4,232)
Forfeiture of restricted common stock

—

—

—

—

(3,961)

—

—

—

—

—

—
Common stock distributions and distributions payable at $0.05 per share year to date

—

—

—

—

—

—

—

—

(11,281)

—

(11,281)
Series E preferred stock dividends and dividends payable at $0.434375 per share year to date

—

—

—

—

—

—

—

—

(1,998)

—

(1,998)
Series F preferred stock dividends and dividends payable at $0.403125 per share year to date

—

—

—

—

—

—

—

—

(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.

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~EQUITY

(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.

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.

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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, ~~2019~~2020 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, ~~2019~~2020 and ~~2018~~2019 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.

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
	~~Number of Hotels~~
Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”)	8
~~Interstate Hotels & Resorts, Inc.~~	3
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, ~~2019~~2020	2120

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

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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, ~~2019~~2020 and December 31, ~~2018,~~2019, and for the three months ended March 31, ~~2019~~2020 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, ~~2019~~2020 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.

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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.

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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, ~~2019~~2020 and ~~2018,~~2019, as their inclusion would have been anti-dilutive.

~~Noncontrolling Interest~~Restricted Cash

~~The Company’s consolidated financial statements include~~Restricted 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 which~~account for the ~~Company has~~benefit of a ~~controlling financial interest. Noncontrolling interest is the portion~~lender. 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 statements~~lenders 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.~~

~~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 interest~~hotels and held in escrow until the ~~Hilton San Diego Bayfront.~~sale is completed.

~~Investment~~Investments in Hotel Properties

Investments in hotel properties, including land, buildings, furniture, fixtures and equipment (“FF&E”) and identifiable intangible assets are recorded at fair value upon acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation is removed from the Company’s accounts and any resulting gain or loss is included in the 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

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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 are~~a 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 ~~its~~the hotel, ~~properties,~~ taking into account ~~each property’s~~the hotel’s expected cash flow from operations, the Company’s estimate of how long it will continue to own ~~each property~~the 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 ~~judgement~~judgment 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 Cash~~Finance and Operating Leases

~~Restricted cash~~The Company determines if a contract is ~~comprised~~a lease at inception. Leases with an initial term of ~~reserve accounts~~12 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, ground~~method for finance leases.

Operating lease ROU assets are recognized at the lease commencement date, and include the amount of the initial operating lease obligation, any lease payments made at or before the commencement date, excluding any lease incentives received, and any initial direct costs incurred. For leases ~~and property taxes. These restricted funds are subject~~that have extension options that the Company can exercise at its discretion, management uses judgment to ~~supervision and disbursement approval by~~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 ~~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

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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

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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):


	March 31,		December 31,
	2019		2018
	(unaudited)

					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 ~~both~~either other current liabilities ~~and~~or other liabilities on the accompanying consolidated balance sheets. ~~Of the amount outstanding at December 31, 2018, approximately $12.9 million was recognized in revenue during the three months ended March 31, 2019.~~

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.

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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:

Lessees: 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 lessee. This classification determines whether the lease expense is recognized on a straight-line basis over the term of the lease (for operating leases) or based on an effective interest method (for finance leases). A lessee is required to record a right-of-use asset and a lease liability on its balance sheet for all leases with a term of greater than 12 months regardless of their classification as operating or finance leases.

Lessors: Leases are accounted for using an approach that is substantially equivalent to existing guidance for operating, sales-type and financing leases, but aligned with the FASB’s revenue standard.

~~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.~~

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~~The Company adopted ASU No. 2016-02 on January 1, 2019, along with its related clarifications and amendments, and made the following elections:~~

to not separate lease components from nonlease components by underlying asset. By making this election, the Company is required to account for the nonlease components together with the related lease components as a single lease component (ASU No. 2016-02);

~~to not reassess whether a land easement not previously accounted for as a lease would now be a lease (ASU No. 2018-01);~~

~~to not reassess whether an expired or existing contract meets the definition of a lease (ASU No. 2018-11)~~;

~~to not reassess the lease classification at the adoption date for existing leases (ASU No. 2018-11)~~;

~~to not reassess whether costs previously capitalized as initial direct costs would continue to be amortized~~ ~~(ASU No. 2018-11);~~

~~to apply the optional modified retrospective transition approach, allowing companies to initially apply the standard at the adoption date without revising comparable periods~~ (~~ASU No. 2018-11); and~~

to not evaluate whether sales taxes and other similar taxes imposed by a governmental authority on a specific lease revenue-producing transaction are the primary obligation of the lessor as owner of the underlying leased asset (ASU No. 2018-20).

~~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):

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

$
45,677

Operating lease obligations, current and noncurrent

$
—

$
58,663

$
58,663
Other liabilities (deferred rent)

$
12,986

(12,986)

$
—
Total liability adjustments

$
45,677

~~Upon adoption of the new standard, the Company reclassified amounts related to its finance leases as follows (in thousands):~~

Balance Pre-Adoption

Adjustments

Balance Post-Adoption

(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

$
—

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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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’s~~replaced 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”), ~~which~~in 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 the~~adopted 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.

~~Table of Contents~~

3. Investment in Hotel Properties

Investment in hotel properties, net for the 20 Hotels consisted of the following (in thousands):



	March 31,		December 31,
	2019		2018
	(unaudited)


					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, ~~2019~~2020 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.

Table of Contents

As of both March 31, ~~2019~~2020 and December 31, ~~2018, the only financial instruments that~~2019, the Company ~~measures~~measured 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 ~~estimates~~estimated 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 policy~~first 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).

~~Table of Contents~~

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):

Fair Value Measurements at Reporting Date


Total

Level 1

Level 2

Level 3

March 31, 2019 (unaudited):

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:

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)

~~Includes~~The fair market value of the ~~split life insurance policy for a former Company associate. These amounts~~Hilton Times Square is comprised of $63.5 million included in investment in hotel properties, net, $12.5 million included in operating lease right-of-use assets, net and $(14.7) million included in operating lease obligations on the Company’s consolidated balance sheets at March 31, 2020. The fair market values of the Renaissance Westchester and the Renaissance Harborplace are included in ~~other assets,~~investment in hotel properties, net on the ~~accompanying~~Company’s consolidated balance sheets at March 31, 2020 and will be used to reimburse the Company for payments made to the former associate from the related retirement benefit agreement, which is included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

December 31, 2019, respectively.

The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):

Fair Value Measurements at Reporting Date


Total

Level 1

Level 2

Level 3

March 31, 2019 (unaudited):

Retirement benefit agreement (1)

$
398

$
—

$
398

$
—
Total liabilities measured at fair value at March 31, 2019

$
398

$
—

$
398

$
—

December 31, 2018:

Retirement benefit agreement (1)

$
386

$
—

$
386

$
—
Total liabilities measured at fair value at December 31, 2018

$
386

$
—

$
386

$
—


			Fair Value Measurements at Reporting Date
	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	$	—

~~(1)~~

Includes the retirement benefit agreement for a former Company associate. The agreement calls for the balance of the retirement benefit to be paid out to the former associate in ten annual installments, beginning in 2011. As such, the Company has paid the former associate a total of $1.6 million through March 31, 2019, which was reimbursed to the Company using funds from the related split life insurance policy noted above. These amounts are included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

Table of Contents

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, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 (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 ~~the cap and~~both swap agreements are included in other ~~assets, net~~liabilities on the accompanying consolidated balance sheets as of both March 31, ~~2019~~2020 and December 31, ~~2018.~~

2019.

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, ~~2019~~2020 and ~~2018~~2019 as follows (unaudited and in thousands):

Three Months Ended March 31,

2019

2018

Noncash interest on derivatives

$
2,064

$
(3,187)

Fair Value of Debt

As of ~~both~~ March 31, ~~2019~~2020 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, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 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.

Table of Contents

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 under~~was in compliance with all of its ~~credit facility.~~debt covenants (see Note 12).

Table of Contents

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.

8. Leases

~~Lessee Accounting~~

The Company has both ~~operating~~finance and ~~finance~~operating 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

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

~~(1)~~

~~Calculated using the appropriate discount rate for each lease.~~

~~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.

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 ~~share~~stock repurchase ~~plan~~program to acquire up to an aggregate of $300.0 million of the Company’s common and preferred stock. In February 2020, the Company’s board of directors increased the Company’s stock repurchase program to acquire up to an aggregate of $500.0 million of the Company’s common and preferred stock. During 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, no~~2020, 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 ~~purchases~~repurchases 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, ~~2019~~2020 and ~~2018~~2019 were as follows (unaudited and in thousands):

Three Months Ended March 31,

2019

2018

Amortization expense, including forfeitures

$
2,122

$
2,000

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, ~~2019~~2020 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 with~~and incentive management fees incurred by the Company during the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 were included in other property-level expenses on the Company’s consolidated statements of operations as follows (unaudited and in thousands):


	Three Months Ended March 31,
	2019		2018


					Three Months Ended March 31,
					2020		2019
Basic management fees	$	7,151	$	7,534	$	5,391	$	7,151
Incentive management fees		3,152		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, ~~2019~~2020 and ~~2018~~2019 were included in franchise costs on the Company’s consolidated statements of operations as follows (unaudited and in thousands):


	Three Months Ended March 31,
	2019		2018


					Three Months Ended March 31,
					2020		2019
Franchise assessments (1)	$	5,295	$	5,908	$	4,418	$	5,295
Franchise royalties		1,544		1,945		918		1,544
Total franchise costs	$	6,839	$	7,853	$	5,336	$	6,839

(1)

Includes advertising, reservation and frequent guest ~~club~~program assessments.

Renovation and Construction Commitments

At March 31, ~~2019,~~2020, the Company had various contracts outstanding with third parties in connection with the ~~renovation~~ongoing renovations of certain of its hotel properties. The remaining commitments under these contracts at March 31, ~~2019~~2020 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, 16~~2020, 15 of the ~~21 hotels~~20 Hotels were geographically concentrated as follows (unaudited):


				Trailing 12-Month
		Percentage of		Total
	Number of Hotels	Total Rooms		Consolidated Revenue


									Trailing 12-Month
							Percentage of		Total
						Number of Hotels	Total Rooms		Consolidated Revenue
California	6	32	%	34	%	5	30	%	32	%
Florida	2	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

~~Table~~During the first quarter of ~~Contents~~

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:


Hotel		Suspension Date
Embassy Suites Chicago		April 1, 2020
Renaissance Westchester		April 4, 2020
Hyatt Centric Chicago Magnificent Mile		April 6, 2020

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.

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 ~~expenses,~~costs due to labor costs, workers’ compensation and health-care related costs, including the impact of the Patient Protection and Affordable Care Act or its potential replacement, ~~increases in minimum wages, changes in work rules or additional~~utility costs, ~~incurred from new or renegotiated labor contracts;~~

insurance and unanticipated costs such as acts of nature and their consequences and other factors that may not be offset by increased room rates;

●

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 ~~air~~airspace leases for ~~five~~four of the 2120 hotels ~~held for investment~~we have interests in as of March 31, ~~2019;~~

2020;

●

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 ~~and related goodwill~~ may become impaired, or our hotels which have previously become impaired may become further impaired in the future, which may adversely affect our financial condition and results of operations;

●

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.

Item ~~2.Management’s~~2.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 ~~513~~531 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 hotels~~the 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 ~~build~~establish awareness with both group and transient customers.

~~Our mission~~COVID-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:


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 for~~negatively affect our ~~stockholders by producing superior long-term returns~~business 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 ~~ownership~~end 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 communication~~construction work and ~~discipline. As demand~~stemming 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 fluctuates~~the 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 seek~~anticipated 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 goal~~our 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 leverage~~accurately forecast is uncertain. In addition, the magnitude and ~~financial flexibility to position the Company to create value throughout all phases~~duration of the ~~operating and~~COVID-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 ~~amortization on~~ our noncash operating lease ~~right-of-use assets;~~

expenses, general excise tax assessed by Hawaii and city taxes imposed by San Francisco;

●

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; ~~and~~

●

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 ~~office.~~

office; and

●

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;

●

~~Gain on sale of assets, which includes the gains we recognized on our hotel sales that do not qualify as discontinued operations;~~

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;

●

~~Income~~Loss (income) from consolidated joint venture attributable to noncontrolling interest, which includes net ~~income~~loss (income) attributable to a third-party’s 25.0% ownership interest in the joint venture that owns the Hilton San Diego Bayfront; and

●

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, ~~our~~we do not have a Comparable Portfolio ~~is comprised~~due to the temporary suspension of operations at certain hotels and the ~~21 hotels;~~

incurrence of various extraordinary and non-recurring items. Comparisons between the first quarter of 2020 and the first quarter of 2019 are not meaningful;

~~Table of Contents~~

●

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 ~~assets;~~assets and liabilities; the cash component of ground lease expense for our finance lease obligations that has been included in interest expense; the impact of any gain or loss from undepreciated asset sales or property damage from natural disasters; any lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; property-level restructuring, severance and management transition costs; and any other nonrecurring identified adjustments;

●

Funds from operations (“FFO”) attributable to common stockholders, which is net income (loss), excluding: preferred stock dividends; ~~the noncontrolling partner’s pro rata share of any FFO components;~~ gains and losses from sales of property; real estate-related depreciation and amortization (excluding amortization of deferred financing costs and right-of-use assets); ~~and~~ any real estate-related impairment losses; and

the noncontrolling partner’s pro rata share of net income (loss) and any FFO components; and

●

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 ~~assets;~~assets and liabilities; noncash interest on our derivative and finance lease obligations; ~~prior year property tax assessments or credits;~~ income tax benefits or provisions associated with any changes to deferred tax assets, liabilities or valuation allowances, the application of net operating loss carryforwards and uncertain tax positions; gains or losses due to property damage from natural disasters; any lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; non-real estate-related impairment losses; property-level restructuring, severance and management transition costs; the noncontrolling interest’s pro rata share of any Adjusted FFO components; ~~non-real estate-related impairment losses; gains or losses due to property damage from natural disasters; the write-off of development costs associated with abandoned projects;~~ and any other nonrecurring identified adjustments.

Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.

●

Demand. The demand for lodging generally fluctuates with the overall economy. ~~In 2018, Comparable Portfolio~~During the first two months of 2020, demand remained stable, with RevPAR ~~which was impacted by renovations~~ at the ~~Hyatt Regency San Francisco,~~20 Hotels declining by 0.1% due to a 0.1% decline in the JW Marriott New Orleans, the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport, increased 2.8% as compared to 2017, with a 30 basis point decrease in occupancy. Our first quarter 2019 Comparable Portfolio RevPAR, which was impacted by renovationsaverage daily rate, while occupancy remained steady at ~~the Hilton San Diego Bayfront and the Renaissance Harborplace, increased 4.3% in 2019~~75.7% as compared to the ~~same period~~first two months of 2019. In March 2020, however, COVID-19 and the related government and health official mandates in ~~2018. Occupancy remained~~many markets virtually eliminated demand across our portfolio. RevPAR at ~~79.2%~~the 20 Hotels declined 66.8% in March 2020 as compared to March 2019, with a 5.5% decline in the average daily rate and a 5,510 basis point decline in occupancy. While it appears that the rate of new COVID-19 cases may be declining, we cannot predict when or if the demand for ~~both the three months ended March 31, 2019 and 2018.~~

our hotel rooms will return to pre-COVID-19 levels.

●

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. ~~In aggregate, we expect~~Prior to the COVID-19 global pandemic, U.S. hotel supply continued to ~~increase over the near term.~~increase. On a market-by-market basis, some markets ~~may experience~~experienced new hotel room openings at or greater than historic levels, including in Boston, Los Angeles, New York City, Orlando and ~~Portland where there are currently higher-than-average new hotel room openings.~~Portland. Additionally, an increase in the supply of vacation rental or sharing services such as Airbnb also affects the ability of existing hotels to drive RevPAR and profits.

We believe that both new hotel construction and new hotel openings will be delayed or even cancelled in the near-term due to COVID-19’s effect on the economy.

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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), ~~increase~~increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, eliminating waste and selectively ~~combine~~combining 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, ~~2019~~2020 and ~~2018,~~2019, including the amount and percentage change in the results between the two periods.

Three Months Ended March 31,

2019

2018

Change $

Change %

(in thousands, except statistical data)

REVENUES

Room

$
171,858

$
180,276

$
(8,418)

(4.7)
%
Food and beverage

69,113

74,266

(5,153)

(6.9)
%
Other operating

16,709

16,904

(195)

(1.2)
%
Total revenues

257,680

271,446

(13,766)

(5.1)
%
OPERATING EXPENSES

Hotel operating

156,731

167,308

(10,577)

(6.3)
%
Other property-level expenses

32,840

33,907

(1,067)

(3.1)
%
Corporate overhead

7,516

7,102

414

5.8
%
Depreciation and amortization

36,387

36,688

(301)

(0.8)
%
Total operating expenses

233,474

245,005

(11,531)

(4.7)
%
Interest and other income

4,924

1,491

3,433

230.2
%
Interest expense

(14,326)

(8,876)

(5,450)

(61.4)
%
Gain on sale of assets

—

15,659

(15,659)

(100.0)
%
Income before income taxes

14,804

34,715

(19,911)

(57.4)
%
Income tax benefit, net

3,112

3,740

(628)

(16.8)
%
NET INCOME

17,916

38,455

(20,539)

(53.4)
%
Income from consolidated joint venture attributable to noncontrolling interest

(1,599)

(2,439)

840

34.4
%
Preferred stock dividends

(3,207)

(3,207)

—

—
%
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$
13,110

$
32,809

$
(19,699)

(60.0)
%


	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)	%

Operating Statistics. The following table includes comparisons of the key operating metrics for ~~our Comparable Portfolio.~~the 20 Hotels.

Three Months Ended March 31,

2019

2018

Change


Occ%

ADR

RevPAR

Occ%

ADR

RevPAR

Occ%

ADR

RevPAR

Comparable Portfolio

79.2
%
$
223.78

$
177.23

79.2
%
$
214.63

$
169.99

—
bps
4.3
%
4.3
%


	Two Months Ended February 29,
	2020						2019						Change
	Occ%		ADR		RevPAR		Occ%		ADR		RevPAR		Occ%		ADR		RevPAR
20 Hotels	75.7	%	$	218.95	$	165.75	75.7	%	$	219.06	$	165.83	—	bps	(0.1)	%	(0.1)	%

	One Month Ended March 31,
	2020						2019						Change
	Occ%		ADR		RevPAR		Occ%		ADR		RevPAR		Occ%		ADR		RevPAR
20 Hotels	29.9	%	$	222.39	$	66.49	85.0	%	$	235.39	$	200.08	(5,510)	bps	(5.5)	%	(66.8)	%

	Three Months Ended March 31,
	2020						2019						Change
	Occ%		ADR		RevPAR		Occ%		ADR		RevPAR		Occ%		ADR		RevPAR
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. ~~The~~As 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 ~~changes~~our 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 at~~October 2019. Due to the ~~Hilton San Diego Bayfront and the Renaissance Harborplace (the “Two 2019 Renovation Hotels”) negatively impacted our operating results during~~first quarter of 2020’s noncomparability to the first quarter of 2019, we are also presenting our portfolio’s results for January and ~~renovations at~~February 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 impacted~~trend of our ~~operating~~first quarter of 2020 results ~~during~~would 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, ~~2019~~2020 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.
● The sale of the Courtyard caused room revenue to decrease by $2.5 million in ~~the first quarter of 2019 as compared to the same period in 2018.~~
Room revenue generated by the 21 hotels increased $7.0 million during the first quarter of 2019 as compared to the same period in 2018, all of which was due to increases in ADR as occupancy remained flat. The overall increase in ADR was primarily driven by increases net of decreases in the average daily rate at the following hotels:
~~ADR~~
~~Increases~~
~~Decreases~~
~~Hyatt Regency San Francisco (1)~~
~~Chicago hotels~~
~~JW Marriott New Orleans~~
~~Boston hotels (1)~~
~~Oceans Edge Resort & Marina~~
~~Renaissance Washington DC~~
~~Wailea Beach Resort~~
~~(1)~~
~~ADR was both positively and negatively impacted by two of the Three 2018 Renovation Hotels during~~ the first quarter of 2020 as compared to the first quarter of 2019.
● Prior to the COVID-19 outbreak, room revenue at the 20 Hotels increased $1.8 million, or 1.8%, in January and February 2020 as compared to the same period in 2019, $1.9 million due to occupancy, slightly offset by a $0.1 million decrease in ADR. The increase in occupancy was due to the extra day contained in February 2020 due to the leap year, and to 22,011 additional transient room nights, partially offset by 13,231 fewer group room nights.

Room revenue generated by the 21 hotels was negatively impacted during the first quarter of 2019 as compared to the same period in 2018 by the Two 2019 Renovation Hotels, where a combined total of 9,400 room nights were out of service at the hotels, displacing approximately $2.1 million in room revenue based on the hotels achieving a combined potential 69.8% occupancy rate and RevPAR of $163.26 without the renovations.
Food and beverage revenue. Food and beverage revenue decreased ~~$5.2~~$21.1 million, or ~~6.9%~~30.6%, for the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~ 2019.

~~The Six Sold Hotels caused food and beverage revenue to decrease by $7.0 million in the first quarter of 2019~~
● March 2020 food and beverage revenue decreased $18.0 million, or 72.4%, as compared to March 2019.
● The sale of the Courtyard caused food and beverage revenue to decrease by $0.3 million in the first quarter of 2020 as compared to ~~the same period in 2018.~~
28
~~Table of Contents~~
Food and beverage revenue generated by our 21 hotels increased $1.8 million during the first quarter of 2019 as compared to the same period in 2018 primarily due to a net increase in banquet and event technology revenue along with a net increase in outlet revenue at the following hotels:
~~Banquet and Event Technology Revenue~~
~~Increases~~
~~Decreases~~
~~Boston hotels (1)~~
~~Hilton San Diego Bayfront (2)~~
~~Hyatt Centric Chicago Magnificent Mile~~
~~Renaissance Harborplace (2)~~
~~Hyatt Regency San Francisco (1)~~
~~Renaissance Orlando at SeaWorld®~~
~~JW Marriott New Orleans~~
~~Renaissance Washington DC~~
~~Wailea Beach Resort~~
~~Outlet Revenue~~
~~Increases~~
~~Decreases~~
~~Boston hotels (1)~~
~~Hilton San Diego Bayfront (2)~~
~~Oceans Edge Resort & Marina~~
~~Hyatt Regency San Francisco (1)~~
~~Wailea Beach Resort~~
~~Renaissance Orlando at SeaWorld®~~
~~(1)~~
~~Food and beverage revenue was both positively and negatively impacted by two of the Three 2018 Renovation Hotels during~~ the first quarter of 2019.
~~(2)~~
●
~~Renovation-related disruption at~~Prior to the ~~Two 2019 Renovation Hotels negatively impacted~~COVID-19 outbreak, food and beverage revenue ~~during~~at the ~~first quarter of 2019.~~
20 Hotels decreased $2.8 million, or 6.4%, in January and February 2020 as compared to the same period in 2019, primarily due to decreased banquet and event technology revenue at the Boston Park Plaza, Hyatt Regency San Francisco, Renaissance Orlando at SeaWorld® and the Wailea Beach Resort, resulting from a decrease in group room nights at these hotels. The decrease in banquet and event technology revenue was partially offset by an increase in outlet revenue, primarily at the Marriott Boston Long Wharf and the Wailea Beach Resort, resulting from an increase in transient room nights.

Other operating revenue. Other operating revenue decreased ~~$0.2~~$0.9 million, or ~~1.2%~~5.3%, for the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019.

~~The Six Sold Hotels caused other operating revenue to decrease by $1.2~~
● March 2020 other operating revenue decreased $2.4 million, or 38.8%, as compared to March 2019.
● The sale of the Courtyard caused other operating revenue to decrease by $0.2 million in the first quarter of 2020 as compared to the first quarter of 2019.
● Prior to the COVID-19 outbreak, other operating revenue at the 20 Hotels increased $1.8 million, or 17.7%, in January and February 2020 as compared to the same period in 2019 due to increased facility and resort fees and parking revenue.

29
Table of ~~2019 as compared to the same period in 2018.~~Contents
Other operating revenue generated by the 21 hotels increased $1.0 million during the three months ended March 31, 2019 as compared to the same period in 2018, primarily due to increased facility fees, tenant lease revenue, marina and watersports revenue and other miscellaneous revenues. These increases were partially offset as we recognized $0.8 million in business interruption proceeds related to Hurricane Irma at the Oceans Edge Resort & Marina during the first quarter of 2018, with no corresponding revenue recognized during the first quarter of 2019.
Hotel operating expenses. Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance, and other hotel operating expenses decreased ~~$10.6~~$13.2 million, or ~~6.3%~~8.4%, ~~during~~for the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019.

● March 2020 hotel operating expenses decreased $14.0 million, or 26.1%, as compared to March 2019. Hotel operating expenses in March 2020 includes $7.2 million of COVID-19-related expenses consisting of additional wages and benefits for furloughed or laid off hotel employees.
● The sale of the Courtyard caused hotel operating expenses to decrease by $1.6 million in the first quarter of 2020 as compared to the first quarter of 2019.
● Prior to the COVID-19 outbreak, other operating expenses at the 20 Hotels increased $2.4 million, or 2.4%, in January and February 2020 as compared to the same period in 2019, primarily due to the corresponding increase in room revenue and parking revenue. In addition, hotel operating expenses increased at the 20 Hotels due to the following increased expenses: advertising and promotion due to increased general advertising expenses; repairs and maintenance due to increased payroll and related expenses, as well as increased contract and professional fees; franchise costs due to the increase in room and other operating revenue; property and liability insurance due to increased rates; and property taxes due to increased rates and assessments received at several of our hotels. These increases in other operating expenses were partially offset by decreased food and beverage expense corresponding to the decrease in food and beverage revenue and decreased utilities expense.

~~The Six Sold Hotels caused hotel operating~~Other property-level expenses ~~to decrease by $15.2~~. Other property-level expenses decreased $4.0 million, ~~in the first quarter of 2019 as compared to the same period in 2018.~~
~~Hotel operating expenses generated by the 21 hotels increased $4.6 million during~~or 12.2%, for the three months ended March 31, 2019 as compared to the same period in 2018. This increase is primarily related to the corresponding increases in room revenue, food and beverage revenue and other operating revenue. In addition, hotel operating expenses increased in the first quarter of 2019 as compared to the same period in 2018 due to the following increased expenses: advertising and promotion due to increased payroll and related expenses in this department; repairs and maintenance due to increased payroll and related expenses in this department, as well as increased building repairs; property and liability insurance due to increased rates; property taxes due to increased rates and assessments received at several of our hotels; taxes at the Hyatt Regency San Francisco due to new taxes imposed by the city; and Hawaii general excise tax due to higher revenue at the Wailea Beach Resort. Slightly offsetting these increases, the following expenses decreased: rent expense at the Renaissance Washington DC due to our May 2018 purchase of the exclusive perpetual rights to a small portion of the hotel’s meeting space, restaurant and fitness center that were previously leased; ground lease expense at the JW Marriott New Orleans due to our purchase of the land underlying the hotel in July 2018; and utility expenses.
~~Other property-level expenses~~. ~~Other property-level expenses decreased $1.1 million, or 3.1%, during the three months ended March 31, 2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019.

● March 2020 other property-level expenses decreased $3.9 million, or 32.4%, as compared to March 2019. Other property-level expenses in March 2020 includes $2.9 million of COVID-19-related expenses consisting of additional wages and benefits for furloughed or laid off hotel employees.
● The sale of the Courtyard caused other property-level expenses to decrease by $0.3 million in the first quarter of 2020 as compared to the first quarter of 2019.
● Prior to the COVID-19 outbreak, other property-level expenses at the 20 Hotels increased $0.3 million, or 1.4%, in January and February 2020 as compared to the same period in 2019, primarily due to increased contract and professional fees, credit and collection expenses, employee relations expenses, legal fees and payroll and related expenses. These increases were partially offset by decreased incentive management fees.
29
~~Table of Contents~~

~~The Six Sold Hotels caused other property-level expenses to decrease by $3.8 million in the first quarter of 2019 as compared to the same period in 2018.~~
Other property-level expenses generated by our 21 hotels increased $2.7 million in the first quarter of 2019 as compared to the same period in 2018, primarily due increases in the following expenses caused by higher revenue: payroll and related expenses; basic and incentive management fees; credit and collection; computer hardware and software; and other expenses.
Corporate overhead expense. Corporate overhead expense ~~increased $0.4~~decreased $0.1 million, or ~~5.8%~~1.6%, during the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018, primarily~~2019, due to ~~increased~~decreased payroll and related expenses, partially offset by increased deferred stock compensation and ~~office rent, partially offset by~~legal fees. Excluding deferred stock compensation, corporate overhead decreased ~~due diligence expenses.~~ $0.2 million, or 3.9%, in the first quarter of 2020 as compared to the same period in 2019.

Depreciation and amortization expense. Depreciation and amortization expense ~~decreased $0.3~~increased $0.4 million, or ~~0.8%~~1.0%, during the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~2019.

~~The Six Sold Hotels caused depreciation~~Depreciation and amortization ~~to decrease~~expense generated by ~~$2.1~~the 20 Hotels increased $0.6 million in the first quarter of ~~2019~~2020 as compared to the same period in ~~2018.~~
~~Depreciation and amortization expense generated by our 21 hotels increased $1.8 million in the first quarter of~~ 2019, ~~as compared to the same period in 2018,~~ due to increased depreciation and amortization at our newly renovated hotels, ~~and corporate office space. These increases were~~ partially offset by decreases ~~in the amortization of intangible assets, consisting of advanced deposits related~~due to ~~our purchases of the Boston Park Plaza and the Wailea Beach Resort, which were fully amortized in June 2018 and July 2018, respectively, as well as by~~ assets at our hotels being fully depreciated.

The sale of the Courtyard caused depreciation and amortization to decrease by $0.2 million in the first quarter of 2020 as compared to the same period in 2019.

Impairment losses. Impairment losses totaled $115.4 million and zero for the three months ended March 31, 2020 and 2019, respectively. During the first quarter of 2020, we recorded impairment losses of $107.9 million on the Hilton Times Square and $5.2 million on the Renaissance Westchester. In addition, we recorded an impairment loss of $2.3 million related to the abandonment of a potential project to expand one of our hotels.

Interest and other income. Interest and other income ~~increased $3.4~~decreased $2.6 million, or ~~230.2%~~53.2%, during the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~ 2019, due to a decline in interest rates. During the first quarter of 2020, we recognized $2.1 million in interest income and $0.2 million in energy rebates due to energy efficient renovations at our hotels.

During the first quarter of 2019, we recognized $3.8 million in interest and miscellaneous income, $1.0 million related to an area of protection agreement with Hyatt Corporation for the Hyatt Regency San Francisco and $0.1 million in energy ~~rebates due to energy efficient renovations at our hotels. During the first quarter~~rebates.
30
Table of ~~2018, we recognized $1.5 million in interest and miscellaneous income.~~Contents

Interest expense. We incurred interest expense as follows (in thousands):

Three Months Ended March 31,

2019

2018
Interest expense on debt and finance lease obligations

$
11,509

$
11,266
Noncash interest on derivatives and finance lease obligations, net

2,119

(3,137)
Amortization of deferred financing costs

698

747
Total interest expense

$
14,326

$
8,876

Three Months Ended March 31,

2020

2019

Interest expense on debt and finance lease obligations

$
10,728

$
11,509

Noncash interest on derivatives and finance lease obligations, net

6,080

2,119

Amortization of deferred financing costs

699

698

Total interest expense

$
17,507

$
14,326

Interest expense increased ~~$5.5~~$3.2 million, or ~~61.4%~~22.2%, during the three months ended March 31, ~~2019~~2020 as compared to the three months ended March 31, ~~2018.~~
~~Interest expense on our debt and finance lease obligations increased $0.2 million during the three months ended March 31,~~ 2019 ~~as compared~~primarily due to the ~~same period~~noncash changes in ~~2018 due to higher interest on~~the fair market value of our ~~variable rate debt. This increase was partially offset by decreases in~~derivatives, which caused interest expense ~~resulting~~to increase $4.0 million.

Excluding the noncash impact from ~~lower debt balances due to monthly amortization and lower interest expense on our term loans, which we amended and repriced in October 2018.~~
~~Noncash interest on derivatives and finance lease obligations, net increased $5.3 million during the three months ended March 31, 2019 as compared to the same period in 2018, due primarily to~~ changes in the fair market values of our derivatives, ~~as noncash interest on our finance lease obligations remained relatively flat.~~
~~Finally, amortization of deferred financing costs decreased~~ interest expense ~~by a nominal amount during~~would have decreased $0.8 million in the first quarter of 2020 as compared to the first quarter of 2019, ~~as compared~~due to ~~the same period in 2018 resulting from the October 2018 amendment~~lower debt balances and ~~extension of~~lower interest on our variable rate debt, partially offset by increased interest expense on our $300.0 million draw down on our credit ~~facility.~~facility in March 2020.

Our weighted average interest rate per annum, including our variable rate debt ~~obligation,~~obligations, was approximately ~~4.2%~~3.6% and ~~4.1%~~4.2% at March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Approximately ~~77.6%~~59.2% and ~~77.7%~~77.6% of our outstanding notes payable had fixed interest rates at March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.

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~~Gain on sale of assets~~. Gain on sale of assets totaled zero and $15.7 million for the three months ended March 31, 2019 and 2018, respectively. During the first three months of 2018, we recognized a $15.7 million gain on sale of the Marriott Philadelphia and the Marriott Quincy.
Income tax (provision) benefit, net. Income tax (provision) benefit, net ~~totaled $3.1 million and $3.7 million for the three months ended March 31, 2019 and 2018, respectively.~~ was incurred as follows (in thousands):

Three Months Ended March 31,

2020

2019
Current income tax benefit (provision), net

$
745

$
(172)
Deferred income tax benefit

—

3,284
Change in deferred tax asset valuation allowance

(7,415)

—
Total income tax (provision) benefit, net

$
(6,670)

$
3,112

We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and the Operating Partnership may also be subject to various state and local income taxes.

During the first quarter of 2020, we recorded a full valuation allowance of $7.4 million on our deferred tax assets because, due to uncertainties regarding how long the COVID-19 outbreak will last or what the long-term impact will be on our hotel operations, we can no longer be assured that we will be able to realize these assets. The income tax provision caused by the full valuation allowance was slightly offset by a net current income tax benefit resulting from tax credits and refunds, net of combined current federal and state income tax expense.

During the first quarter of 2019, we recognized a deferred income tax benefit of $3.3 million related to an increase in our deferred tax assets, net. Our earnings are seasonal, resulting in quarterly fluctuations in our taxable income. We anticipate our deferred tax assets will decrease during 2019 as our earnings increase based on the historical seasonal earnings pattern of our hotels. The deferred income tax benefit was slightly reduced in the first quarter of 2019 as we recognized combined current federal and state income tax expense of $0.2 million based on 2019 projected taxable income net of operating loss carryforwards for our taxable entities.

During the first quarter of 2018, we recognized a deferred income tax benefit of $4.0 million related to an increase in our deferred tax assets, net. This benefit was slightly reduced as we recognized combined current federal and state income tax expense of $0.2 million based on 2018 projected taxable income net of operating loss carryforwards for our taxable entities.
~~Income~~Loss (income) from consolidated joint venture attributable to noncontrolling interest. ~~Income~~Loss (income) from consolidated joint venture attributable to noncontrolling interest, ~~totaled $1.6 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively, and~~which represents the outside 25.0% interest in the entity that owns the Hilton San Diego ~~Bayfront.~~Bayfront, totaled a loss of $0.5 million and income of $1.6 million for the three months ended March 31, 2020 and 2019, respectively.

Preferred stock dividends. Preferred stock dividends ~~were as follows (in thousands):~~totaled $3.2 million for both the three months ended March 31, 2020 and 2019.

Three Months Ended March 31,

2019

2018
Series E preferred stock

$
1,998

$
1,998
Series F preferred stock

1,209

1,209
Total preferred stock dividends

$
3,207

$
3,207

Non-GAAP Financial Measures. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDAre; Adjusted EBITDAre, excluding noncontrolling interest; FFO attributable to common stockholders; and Adjusted FFO attributable to common ~~stockholders; and Comparable Portfolio revenues.~~stockholders. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. In addition, our calculation of these measures may not be comparable to other companies that do not define such terms exactly the same as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to net income (loss), cash flow from operations, or any other operating performance measure prescribed by
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GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. For example, we believe that Comparable Portfolio revenues are useful to both us and investors in evaluating our operating performance by removing the impact of non-hotel results such as the amortization of favorable and unfavorable tenant lease contracts. We also believe that our use of Comparable Portfolio revenues is useful to both us and our investors as it facilitates the comparison of our operating results from period to period by removing fluctuations caused by any acquisitions or dispositions, as well as by those hotels that we classify as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

We present EBITDAre in accordance with guidelines established by the National Association of Real Estate Investment Trusts (“NAREIT”), as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate.” We believe EBITDAre is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates.

We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the
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presentation of Adjusted EBITDAre, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions. We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre, excluding noncontrolling interest:

·
●
Amortization of deferred stock compensation: we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels.

·
●
Amortization of favorable and unfavorable contracts: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Wailea Beach Resort. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period.

·
●
Amortization of right-of-use assets and liabilities: we exclude the amortization of our right-of-use assets ~~which includes the amortization of our operating lease intangible, as well as the noncash expense incurred from straight-lining our lease obligations,~~and liabilities, as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels.

·
●
Finance lease obligation interest – cash ground rent: Wewe include an adjustment for the cash finance lease expenses recorded on the building lease at the Hyatt Centric Chicago Magnificent Mile and the ground lease at the Courtyard by Marriott Los Angeles ~~and~~(prior to the ~~building lease at the Hyatt Centric Chicago Magnificent Mile.~~hotel’s sale in October 2019). We determined that both of these leases are finance leases, and, therefore, we include a portion of the lease payments each month in interest expense. We adjust EBITDAre for these two finance leases in order to more accurately reflect the actual rent due to both hotels’ lessors in the current period, as well as the operating performance of both hotels.

·
●
Undepreciated asset transactions: we exclude the effect of gains and losses on the disposition of ~~undepreciable~~undepreciated assets because we believe that including them in Adjusted EBITDAre, excluding noncontrolling interest is not consistent with reflecting the ongoing performance of our assets.

·
●
Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure.

·
●
Acquisition costs: under GAAP, costs associated with completed acquisitions that meet the definition of a business are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels.

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Table of Contents
·
●
Noncontrolling interest: we exclude the noncontrolling partner’s pro rata share of the net ~~income (loss)~~(income) loss allocated to the Hilton San Diego Bayfront partnership, as well as the noncontrolling partner’s pro rata share of any EBITDAre and Adjusted EBITDAre components.

·
●
Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period.

·
●
Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; property-level restructuring, severance and management transition costs; lease terminations; and property insurance proceeds or uninsured losses.

32
~~Table of Contents~~
The following table reconciles our unaudited net (loss) income to EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest for our total portfolio for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


Three Months Ended March 31,

2019

2018
Net income

$
17,916

$
38,455
Operations held for investment:

Depreciation and amortization

36,387

36,688
Interest expense

14,326

8,876
Income tax benefit, net

(3,112)

(3,740)
Gain on sale of assets

—

(15,669)
EBITDAre

65,517

64,610

Operations held for investment:

Amortization of deferred stock compensation

2,122

2,000
Amortization of favorable and unfavorable contracts, net

—

3
Amortization of right-of-use assets (1)

(19)

(218)
Finance lease obligation interest — cash ground rent

(589)

(589)
Hurricane-related uninsured losses

—

69
Prior year property tax adjustments, net

189

(19)
Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(1,599)

(2,439)
Depreciation and amortization

(639)

(638)
Interest expense

(560)

(435)
Amortization of right-of-use asset (1)

72

72

(1,023)

(2,194)
Adjusted EBITDAre, excluding noncontrolling interest

$
64,494

$
62,416


Three Months Ended March 31,

2020

2019
Net (loss) income

$
(162,519)

$
17,916
Operations held for investment:

Depreciation and amortization

36,746

36,387
Interest expense

17,507

14,326
Income tax provision (benefit), net

6,670

(3,112)
Impairment loss - hotel properties

113,064

—
EBITDAre

11,468

65,517

Operations held for investment:

Amortization of deferred stock compensation

2,207

2,122
Amortization of right-of-use assets and liabilities

(261)

(19)
Finance lease obligation interest — cash ground rent

(351)

(589)
Prior year property tax adjustments, net

(81)

189
Impairment loss - abandoned development costs

2,302

—
Noncontrolling interest:

Loss (income) from consolidated joint venture attributable to noncontrolling interest

458

(1,599)
Depreciation and amortization

(804)

(639)
Interest expense

(420)

(560)
Amortization of right-of-use asset and liability

72

72
Impairment loss - abandoned development costs

(449)

—
Adjustments to EBITDAre, net

2,673

(1,023)
Adjusted EBITDAre, excluding noncontrolling interest

$
14,141

$
64,494
~~(1)~~
Amounts originally reported for the three months ended March 31, 2018 for amortization of lease intangibles and noncash ground rent have been reclassified to amortization of right-of-use assets to conform to the current year’s reporting.

Adjusted EBITDAre, excluding noncontrolling interest ~~was $64.5~~decreased $50.4 million, ~~and $62.4 million for~~or 78.1%, in the ~~three months ended March 31, 2019 and 2018, respectively. Adjusted EBITDA~~re~~, excluding noncontrolling interest increased during the three months ended March 31, 2019~~first quarter of 2020 as compared to the same period in ~~2018,~~2019 primarily due to ~~additional earnings generated by~~ the ~~21 hotels, including the Three 2018 Renovation Hotels, partially offset by the sale of the Six Sold Hotels, as well as renovation-related disruption at the Two 2019 Renovation Hotels.~~ following:
● March 2020 Adjusted EBITDAre at the 20 Hotels decreased $46.6 million, or 149.9%, as compared to March 2019. The Company recorded $10.1 million in COVID-19-related expenses during March 2020 consisting of additional wages and benefits for furloughed or laid off hotel employees.
● The sale of the Courtyard caused Adjusted EBITDAre to decrease by $0.9 million in the first quarter of 2020 as compared to the first quarter of 2019.
● Prior to the COVID-19 outbreak, Adjusted EBITDAre at the 20 Hotels decreased $2.1 million, or 5.8%, in January and February 2020 as compared to the same period in 2019.

We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the NAREIT definition of “FFO applicable to common shares.” Our presentation
33
Table of Contents
may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.

We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:

·
●
Amortization of favorable and unfavorable contracts: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Wailea Beach Resort. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period.

33
~~Table of Contents~~
·
●
Real estate amortization of right-of-use assets and liabilities: we exclude the amortization of our real estate right-of-use assets and liabilities, which includes the amortization of both our finance and operating lease intangibles ~~as well as the noncash expense incurred from straight-lining our lease obligations~~ (with the exception of our corporate operating lease), as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels.

·
●
Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired, as well as the noncash interest on our derivatives and finance lease obligations. We believe that these items are not reflective of our ongoing finance costs.

·
●
Acquisition costs: under GAAP, costs associated with completed acquisitions that meet the definition of a business are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels.

·
●
Noncontrolling interest: we deduct the noncontrolling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership.

·
●
Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period.

·
●
Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; changes to deferred tax assets, liabilities or valuation allowances; property-level restructuring, severance and management transition costs; lease terminations; property insurance proceeds or uninsured losses; and income tax benefits or provisions associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets other than real estate investments.

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Table of Contents
The following table reconciles our unaudited net (loss) income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our total portfolio for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):


Three Months Ended March 31,

2019

2018
Net income

$
17,916

$
38,455
Preferred stock dividends

(3,207)

(3,207)
Operations held for investment:

Real estate depreciation and amortization (1)

35,770

36,228
Gain on sale of assets

—

(15,669)
Noncontrolling interest:

Income from consolidated joint venture attributable to noncontrolling interest

(1,599)

(2,439)
Real estate depreciation and amortization

(639)

(638)
FFO attributable to common stockholders

48,241

52,730

Operations held for investment:

Amortization of favorable and unfavorable contracts, net

—

3
Real estate amortization of right-of-use assets (1)

151

148
Noncash interest on derivatives and finance lease obligations, net

2,119

(3,137)
Hurricane-related uninsured losses

—

69
Prior year property tax adjustments, net

189

(19)
Noncash income tax benefit, net

(3,284)

(3,966)
Noncontrolling interest:

Real estate amortization of right-of-use asset (1)

72

72
Noncash interest on derivative, net

—

3

(753)

(6,827)
Adjusted FFO attributable to common stockholders

$
47,488

$
45,903


Three Months Ended March 31,

2020

2019
Net (loss) income

$
(162,519)

$
17,916
Preferred stock dividends

(3,207)

(3,207)
Operations held for investment:

Real estate depreciation and amortization

36,122

35,770
Impairment loss - hotel properties

113,064

—
Noncontrolling interest:

Loss (income) from consolidated joint venture attributable to noncontrolling interest

458

(1,599)
Real estate depreciation and amortization

(804)

(639)
FFO attributable to common stockholders

(16,886)

48,241

Operations held for investment:

Real estate amortization of right-of-use assets and liabilities

146

151
Noncash interest on derivatives and finance lease obligations, net

6,080

2,119
Prior year property tax adjustments, net

(81)

189
Impairment loss - abandoned development costs

2,302

—
Noncash income tax provision (benefit), net

7,415

(3,284)
Noncontrolling interest:

Real estate amortization of right-of-use asset and liability

72

72
Impairment loss - abandoned development costs

(449)

—
Adjustments to FFO attributable to common stockholders, net

15,485

(753)
Adjusted FFO attributable to common stockholders

$
(1,401)

$
47,488
~~(1)~~
Amounts originally reported for the three months ended March 31, 2018 for real estate depreciation and amortization related to finance leases, amortization of lease intangibles and noncash ground rent have been reclassified to real estate amortization of right-of-use assets to conform to the current year’s reporting.

Adjusted FFO attributable to common stockholders ~~was $47.5~~decreased $48.9 million, ~~and $45.9 million for the three months ended March 31, 2019 and 2018, respectively. Adjusted FFO attributable to common stockholders increased~~or 103.0%, in the first quarter of ~~2019~~2020 as compared to the same period in ~~2018,~~2019 primarily due to the same reasons noted in the discussion above regarding Adjusted EBITDAre, excluding noncontrolling interest.

Liquidity and Capital Resources

During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from ~~sales of hotels and other assets.~~our credit facility. Our primary uses of cash were for capital expenditures for hotels and other assets, acquisitions of assets, operating expenses, repurchases of our common stock, repayment of notes payable, dividends and distributions on our common and preferred stock and distributions to our joint venture partner. We cannot be certain that traditional sources of funds will be available in the future.

Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in hotel revenue and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash ~~provided by~~used in operating activities was ~~$31.6 million and $30.6~~$2.5 million for the three months ended March 31, ~~2019 and 2018, respectively.~~2020, as compared to net cash provided of $31.6 million for the three months ended March 31, 2019. The net ~~increase~~decrease to cash provided by operating activities during the first three months of ~~2019~~2020 as compared to the same period in ~~2018~~2019 was primarily due to ~~increased operating cash generated~~the temporary suspensions and reduced operations at the 20 Hotels caused by the ~~21 hotels, including the Three 2018 Renovation Hotels, partially offset by the sale of the Six Sold Hotels and renovation-related disruption at the Two 2019 Renovation Hotels.~~ COVID-19 outbreak.

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~~Table of Contents~~
Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels and other assets. Net cash used in ~~or provided by~~ investing activities during the first three months of ~~2019~~2020 as compared to the first three months of ~~2018~~2019 was as follows (in thousands):

Three Months Ended March 31,

2020

2019

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)

Three Months Ended March 31,

2019

2018

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

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During the first three months of 2020, we received a nonrefundable deposit of $3.5 million from a potential buyer of one of our hotels. In April 2020, the potential buyer determined it was unable to complete the transaction. This cash inflow was offset as we paid $0.3 million to purchase an additional wet boat slip at the Oceans Edge Resort & Marina and invested $17.0 million for renovations and additions to our portfolio and other assets.

During the first three months of 2019, we invested $24.5 million for renovations and additions to our portfolio and other assets.

During the first three months of 2018, we received proceeds of $137.0 million from our sales of the Marriott Philadelphia, the Marriott Quincy and surplus FF&E. These cash inflows were partially offset as we invested $39.3 million for renovations and additions to our portfolio and other assets.
Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our distributions paid, issuance and repurchase of common stock, issuance and repayment of notes payable and our credit facility, and our issuance and redemption of other forms of capital, including preferred equity. Net cash provided by or used in financing activities during the first three months of ~~2019~~2020 as compared to the first three months of ~~2018~~2019 was as follows (in thousands):

Three Months Ended March 31,

2019

2018
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)

Three Months Ended March 31,

2020

2019
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)

During the first three months of 2020, we drew $300.0 million from our credit facility. This cash inflow was partially offset as we paid the following: $103.9 million to repurchase 9,770,081 shares of our outstanding common stock; $4.0 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees; $1.9 million in principal payments on our notes payable; $135.9 million in dividends and distributions to our common and preferred stockholders; and $2.0 million in distributions to the noncontrolling interest in the Hilton San Diego Bayfront.

During the first three months of 2019, we paid the following: $4.4 million to repurchase common ~~shares~~stock to satisfy the tax obligations in connection with the vesting of restricted common ~~shares~~stock issued to employees; $1.8 million in principal payments on our notes payable; $126.5 million in dividends and distributions to our common and preferred stockholders; and $2.0 million in distributions to the noncontrolling interest in the Hilton San Diego Bayfront.

~~During~~Future. We believe the ~~first three months~~ongoing effects of ~~2018, we paid~~COVID-19 on our operations will continue to have a material negative impact on our financial results and liquidity throughout the ~~following: $4.2 million to repurchase common shares to satisfy~~remainder of 2020 and possibly into 2021. As previously noted, operations at 14 of the ~~tax obligations in connection~~20 Hotels are currently suspended with the ~~vesting of restricted common shares issued~~remainder operating at reduced capacities due to ~~employees; $1.9 million in principal payments on~~COVID-19, therefore, our notes payable; $5,000 in deferred financing costs related to refinancing the loan secured by the Hilton San Diego Bayfront; $133.9 million in dividends and distributions to our common and preferred stockholders; and $1.2 million in distributions to the noncontrolling interest in the Hilton San Diego Bayfront.
~~Future.~~ ~~We expect our primary uses~~traditional source of cash ~~to be for~~from operating expenses, capital investments in our hotels, repayment of principal on our notes payable and possibly our credit facility, interest expense, dividends and distributions on our common and preferred stock, potential repurchases of our common stock, potential purchases of debt or other securities in other hotels, and acquisitions of hotels or interests in hotels, including possibly hotel portfolios.activities has been significantly reduced. We expect our primary sources of cash will continue to be our ~~operating activities,~~ working capital, notes payable and our credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the maintenance of our credit ratios, appropriate levels of liquidity and continued balance sheet strength. Consistent with maintaining our low leverage and balance sheet strength, in the near-term, we expect to fund future acquisitions, if any, largely through cash on hand, appropriate amounts of newly-issued debt, the issuance of common or preferred equity, providedHowever, there can be no assurance that our stock price is at an attractive level, or by proceeds received from sales of existing assets in order to selectively grow the quality and scale of our portfolio. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility, including under the ATM agreements we entered into in February 2017. Under the terms of the agreements, we may issue and sell from time to time through or to the managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $300.0 million. Through March 31, 2019, we have received $122.3 million in net proceeds from the issuance of 7,467,709 shares of our common stock in connection with the ATM Agreements, leaving $175.5 million available for sale under the ATM Agreements. However, when needed, the capital markets ~~may not~~will be available to us on favorable terms or at all.

We expect our primary uses of cash to be for operating expenses, capital investments in our hotels (albeit reduced from pre-COVID-19 levels for the remainder of 2020), repayment of principal on our notes payable and our credit facility, interest expense and dividends on our preferred stock. At this time, we do not expect to pay a quarterly common stock dividend through the 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 have taken additional steps to preserve our liquidity, including the deferral of a portion of our planned 2020 non-essential capital improvements into our portfolio, as well as the temporary suspension of our stock repurchase program.

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. 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 two six-month periods to April 2024, upon the payment of applicable fees and satisfaction of certain customary conditions.

Following such borrowing, we have $200.0 million of capacity available for additional borrowing under the revolving portion of the amended credit agreement. In addition, we have the right to increase the revolving portion of the amended credit agreement, or to
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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.

We are subject to various financial covenants on our credit facility, secured debt, corporate-level unsecured term loans and corporate-level unsecured senior notes. As of March 31, 2020, we were in compliance with all of our debt financial covenants. It is likely COVID-19 will continue to negatively affect our business 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 end of the first quarter of 2021. There can be no assurance that we will be able to obtain waivers in a timely manner or on acceptable terms. 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.

We believe that the steps we have taken to increase our cash position and preserve our financial flexibility, combined with the anticipated waiver or amendment to our amended credit facility, our already strong balance sheet and our low leverage, will be sufficient to allow us to navigate through this crisis. Given the unprecedented impact of COVID-19 on the global market and our hotel operations, we cannot, however, assure you that our forecast or the assumptions we used to estimate our liquidity requirements will be correct. In addition, the magnitude and duration of the COVID-19 pandemic is uncertain. We cannot accurately estimate the impact on our business, financial condition or operational results with reasonable certainty; however, we expect a net loss on our operations for the year ending December 31, 2020.

Cash Balance. As of March 31, ~~2019,~~2020, our unrestricted cash balance was ~~$684.0~~$847.4 million. ~~By minimizing~~We believe that our ~~need~~current unrestricted cash balance and our ability to ~~access external capital~~draw the remaining $200.0 million of capacity available for borrowing under the unsecured revolving credit facility will enable us to successfully manage our Company while operations at our 20 Hotels are either temporarily suspended or greatly reduced.

Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. During 2019, these provisions were triggered for the loan secured by ~~maintaining higher than typical~~the Hilton Times Square, and, as of March 31, 2020, $1.1 million in excess cash ~~balances, our financial security~~generated by the hotel was held in a lockbox account for the benefit of the lender and ~~flexibility are meaningfully enhanced because we are able to fund our business needs (including payment of~~included in restricted cash ~~distributions~~ on our ~~common stock, if declared) and near-term debt maturities with our cash on hand.~~consolidated balance sheet.

Debt. As of March 31, ~~2019,~~2020, we had ~~$981.0 million~~$1.3 billion of consolidated debt, ~~$734.7~~$900.9 million of cash and cash equivalents, including restricted cash, and total assets of ~~$3.9~~$3.8 billion.

The $77.3 million mortgage secured by the Hilton Times Square matures in November 2020, and is available to be repaid without penalty beginning in August 2020. We ~~believe that~~are working with the lender to explore various options in advance of the upcoming maturity, which could include surrendering the hotel to the lender. In addition, the $220.0 million mortgage secured by ~~controlling debt levels, staggering~~the Hilton San Diego Bayfront initially matures in December 2020, but has three one-year options to extend. At this time, we intend to exercise all three of our available one-year options to extend the maturity ~~dates and maintaining a highly flexible capital structure, we will have lower capital costs than more highly leveraged companies, or companies with limited flexibility due~~ to ~~restrictive corporate-level financial covenants.~~December 2023.

As of March 31, ~~2019,~~2020, all of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, except the $220.0 million non-recourse mortgage on the Hilton San Diego Bayfront, which is subject to an interest rate cap agreement that caps the interest rate at 6.0% until December ~~2020.~~2020, and the $300.0 million outstanding on our credit facility, which interest is based upon 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%. Our remaining mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to our mortgage debt and the amount outstanding on our credit facility, as of March 31, ~~2019,~~2020, we have two unsecured corporate-level term loans as well as the Senior Notes. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt.two unsecured corporate-level senior notes.
~~As of March 31, 2019, we have no outstanding amounts due under our credit facility.~~

We may in the future seek to obtain mortgages on one or ~~all~~more of our 1615 unencumbered hotels (subject to certain stipulations under our unsecured term loans and unsecured senior notes), 14 of which are currently held by subsidiaries whose interests are pledged to our credit facility. Our 1615 unencumbered hotels include: Boston Park Plaza; ~~Courtyard by Marriott Los Angeles;~~ Embassy Suites Chicago; Hilton Garden Inn Chicago Downtown/Magnificent Mile; Hilton New Orleans St. Charles; Hyatt Centric Chicago Magnificent Mile; Hyatt Regency San Francisco; Marriott Boston Long Wharf; Marriott Portland; Oceans Edge Resort & Marina; Renaissance Harborplace; Renaissance Long Beach; Renaissance Los Angeles Airport; Renaissance Orlando at SeaWorld®; Renaissance Westchester; and Wailea Beach Resort. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility may be reduced.

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Contractual Obligations. The following table summarizes our payment obligations and commitments as of March 31, ~~2019~~2020 (in thousands):

Payment due by period

Less Than

1 to 3

3 to 5

More than

Total

1 year

years

years

5 years

Notes payable

$
980,996

$
8,030

$
414,192

$
192,098

$
366,676

Interest obligations on notes payable (1)

184,637

42,459

64,473

39,308

38,397

Finance lease obligations, including imputed interest (2)

147,640

2,357

4,770

4,906

135,607

Operating lease obligations, including imputed interest (2) (3)

117,708

7,480

15,115

15,324

79,789

Payments-in-lieu of taxes obligation

64,297

892

1,789

1,789

59,827

Construction commitments

55,952

55,952

—

—

—

Employment obligations

2,651

2,651

—

—

—

Total

$
1,553,881

$
119,821

$
500,339

$
253,425

$
680,296

Payment due by period

Less Than

1 to 3

3 to 5

More than

Total

1 year

years

years

5 years

Notes payable (1)

$
1,272,965

$
83,724

$
298,949

$
650,292

$
240,000

Interest obligations on notes payable (2)

177,890

44,607

72,268

38,143

22,872

Finance lease obligation, including imputed interest

109,065

1,403

2,806

2,806

102,050

Operating lease obligations, including imputed interest (3)

110,228

7,532

15,218

15,435

72,043

Payments-in-lieu of taxes obligation (4)

63,405

894

1,789

1,789

58,933

Construction commitments

32,716

32,716

—

—

—

Employment obligations

2,704

2,704

—

—

—

Total

$
1,768,973

$
173,580

$
391,030

$
708,465

$
495,898

(1)
Notes payable includes the $220.0 million mortgage secured by the Hilton San Diego Bayfront, which initially matures in December 2020 with three one-year options to extend. At this time, we expect to exercise all three of our available one-year options to extend the maturity to December 2023.
(2)
Interest on our variable-rate debt ~~obligation~~obligations is calculated based on the variable rate at March 26, 2020 (the date our credit facility was funded) or at March 31, ~~2019,~~2020, and includes the effect of our interest rate derivative agreements.
~~(2)~~
(3)
~~See Note 8 – Leases~~Operating lease obligations on one of our ground leases expiring in 2091 contains provisions for determining scheduled rent increases after April 2020 based on the fair market value of the land. We are currently negotiating with the landlord to agree on the fair market value of the land; therefore, no increased rent amounts are currently included in the ~~Notes to the Unaudited Consolidated Financial Statements (Item 1 of this Form 10-Q).~~
~~(3)~~
~~Operating~~above table. In addition, operating lease obligations on one of our ground leases expiring in 2071 requires a reassessment of rent payments due after 2025, agreed upon by both us and the lessor; therefore, no amounts are included in the above table for this ground lease after 2025.
(4) Under the terms of a sublease agreement at the Hilton Times Square, sublease rent payments are currently considered to be property taxes under a payment-in-lieu of taxes (“PILOT”) program, with installments due beginning in 2020 through 2029.

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Capital Expenditures and Reserve Funds

We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground, building and ~~air~~airspace leases, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested ~~$24.5~~$17.0 million in our portfolio and other assets during the first three months of ~~2019.~~2020. As of March 31, ~~2019,~~2020, we have contractual construction commitments totaling ~~$56.0~~$32.7 million for ongoing renovations. As noted above, in light of the COVID-19 global pandemic, we have elected to conserve cash by deferring a portion of our planned 2020 non-essential capital improvements into our portfolio. If we renovate or develop additional hotels or other assets in the future, our capital expenditures will likely increase.

With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel’s applicable annual revenue. As of March 31, ~~2019,~~2020, our balance sheet includes restricted cash of ~~$48.6~~$47.6 million, which was held in FF&E reserve accounts for future capital expenditures at the majority of the ~~21 hotels.~~20 Hotels. According to certain loan agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year. In light of the COVID-19 global pandemic, some of our managers have suspended the requirement to fund into the FF&E reserves for the remainder of 2020. Additionally, some managers are permitting owners the ability to draw from the FF&E reserve to fund operating expenses, subject to certain conditions including a future repayment to the reserve.

Seasonality and Volatility

As is typical of the lodging industry, we experience some seasonality in our ~~business as indicated in the table below.~~business. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Hawaii, Key West and Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for Hawaii, Key West and New York City). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as the COVID-19 outbreak and other public health concerns, extreme weather conditions, natural
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disasters, terrorist attacks or alerts, civil unrest, ~~public health concerns,~~ government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. ~~Revenues for our Comparable Portfolio by quarter for 2018 and 2019 were as follows (dollars in thousands):~~


First

Second

Third

Fourth


Revenues

Quarter

Quarter

Quarter

Quarter

Total

2018:

Total revenues

$
271,446

$
317,447

$
289,308

$
280,852

$
1,159,053

Sold hotel revenues (1)

(23,610)

(24,514)

(12,440)

(6,501)

(67,065)

Non-hotel revenues (2)

(832)

(21)

(25)

(4,987)

(5,865)

Total Comparable Portfolio revenues (3)

$
247,004

$
292,912

$
276,843

$
269,364

$
1,086,123

Quarterly Comparable Portfolio revenues as a percentage of total annual revenues

22.7
%

27.0
%

25.5
%

24.8
%

100.0
%

2019:

Total revenues

$
257,680

Non-hotel revenues (2)

(23)

Total Comparable Portfolio revenues (3)

$
257,657

~~(1)~~
~~Sold hotel revenues include those generated by the Six Sold Hotels, which we sold in January 2018, July 2018, October 2018 and December 2018.~~
~~(2)~~
Non-hotel revenues include the amortization of favorable and unfavorable tenant lease contracts received in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Wailea Beach Resort. Non-hotel revenues for the first quarter and fourth quarter of 2018 also include business interruption insurance proceeds of $0.8 million and $5.0 million, respectively, for the Oceans Edge Resort & Marina.
~~(3)~~
~~Total Comparable Portfolio revenues include those generated by our 21 hotel Comparable Portfolio.~~

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Inflation
~~Inflation~~

Inflation may affect our expenses, including, without limitation, by increasing such costs as labor, employee-related benefits, food, commodities, taxes, property and casualty insurance and utilities.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.

We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.

·
●
Impairment of long-lived assets. ~~We periodically review each property for possible impairment. Recoverability of~~Impairment losses are recorded on long-lived assets to be held and used ~~is measured~~ by ~~a comparison~~us when indicators of impairment are present and the ~~carrying amount of an asset to~~ future undiscounted net cash flows, including potential sale proceeds, expected to be generated by those assets, based on our anticipated investment horizon, are less than the ~~asset.~~assets’ carrying amount. No single indicator would necessarily result in us preparing an estimate to determine if a hotel’s future undiscounted cash flows are less than the book value of the hotel. We use 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 are~~a 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. We perform a fair value assessment, using a discounted cash flow analysis to estimate the fair value of ~~our properties,~~the hotel, taking into account ~~each property’s~~the hotel’s expected cash flow from operations, our estimate of how long we ~~plan to~~will own ~~each property~~the 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. Our judgment 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.

·
●
Acquisition related assets and liabilities. Accounting for the acquisition of a hotel property or other entity requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective relative fair values for an asset acquisition or at their estimated fair values for a business combination. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment and intangible assets, together with any finance or operating lease right-of-use assets and ~~finance lease obligations that are assumed as part of the acquisition of a leasehold interest.~~their related obligations. When we acquire a hotel property or other entity, we use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, we believe that the recording of acquired assets and liabilities is a critical accounting policy.

In addition, the acquisition of a hotel property or other entity requires an analysis to determine if it qualifies as the purchase of a business or an asset. If the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the transaction is an asset acquisition. Transaction costs associated with asset acquisitions are capitalized and subsequently depreciated over the life of the related asset, while the same costs associated with a business combination are expensed as incurred and included in corporate overhead on our consolidated statements of operations. Also, asset acquisitions are not subject to a measurement period, as are business combinations.

·
●
Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties ~~including related assets under finance leases,~~ 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 the length of the
39
Table of Contents
related agreement. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels. We have not changed the estimated useful lives of any of our assets during the periods discussed.

·
●
Income Taxes. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to our stockholders. As a REIT, we generally will not be subject to federal corporate income tax on that portion of our taxable income that is currently distributed to stockholders. We are subject to certain state and local taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income. In addition, our wholly owned TRS, which leases our hotels from the Operating Partnership, is subject to federal and state income taxes. We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the
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differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We review any uncertain tax positions and, if necessary, we will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
~~Item 3.Quantitative and Qualitative Disclosures About Market Risk~~

To the extent that we incur debt with variable interest rates, our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have no derivative financial instruments held for trading purposes. We use derivative financial instruments, which are intended to manage interest rate risks on our floating rate debt.

As of March 31, ~~2019, 77.6%~~2020, 59.2% of our debt obligations are fixed in nature, which ~~largely~~ mitigates the effect of changes in interest rates on our cash interest payments. If the market rate of interest on our variable-rate debt increases or decreases by 100 basis points, interest expense would increase or decrease, respectively, our future consolidated earnings and cash flows by approximately ~~$2.2~~$5.1 million based on the variable rate at March 31, ~~2019.~~2020. After adjusting for the noncontrolling interest in the Hilton San Diego Bayfront, this increase or decrease in interest expense would increase or decrease, respectively, our future consolidated earnings and cash flows by $1.7 million, based on the variable ~~rates~~rate at March 31, ~~2019.~~ 2020.
Item 4.
Controls and Procedures
~~Item 4.Controls and Procedures~~

Attached as exhibits to this Form 10-Q are the certifications required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This section includes information concerning the controls and control evaluations referred to in the certifications.

Evaluation of Disclosure Controls and Procedures. Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. During our fiscal quarter to which this Quarterly Report on Form 10-Q relates, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Table of Contents
PART II—OTHER INFORMATION

~~Item 1.~~
Item 1.
Legal Proceedings

None.

~~None.~~
~~Item 1A.~~
Item 1A.
Risk Factors

The Company is providing this additional risk factor to supplement the risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2019.

COVID-19 has had, and is expected to continue to have, a significant impact on our financial condition and results of operations. The current, and uncertain future, impact of the COVID-19 outbreak, including its effect on the ability or desire of people to travel for leisure or for business, is expected to continue to impact our financial condition, results of operations, cash flows, liquidity, business plans, distributions to our common and preferred stockholders and their respective stock prices.

The COVID-19 global pandemic, along with federal, state and local government mandates have disrupted and are expected to continue to disrupt our business. In the United States, individuals are being encouraged to practice social distancing, are restricted from gathering in groups, and in some areas, 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, as of May 8, 2020, we have temporarily suspended operations at 14 of the 20 Hotels. The remaining six hotels are currently operating at limited capacity with significantly reduced staffing, limited food and beverage operations and materially reduced amenity offerings. We may determine in the future that it is in the best interest of our Company, guests and employees to temporarily suspend operations at some or all of the remaining six hotels. With hotel operations temporarily suspended or reduced, we may be required to use a substantial portion of our available cash to pay hotel payroll expenses, maintenance expenses, fixed hotel costs such as ground rent, insurance expenses, property taxes and scheduled debt payments. Use of the Company’s cash will reduce the amount of cash available for hotel capital expenditures, future business opportunities and other purposes, including distributions to our common and preferred stockholders. We have suspended paying dividends on our common stock in order to conserve cash. We cannot predict how long the COVID-19 pandemic will last or what the long-term impact will be on hotel operations and our cash position.

To date we have incurred, and expect to continue to incur, significant costs directly related to COVID-19. In the first quarter of 2020, we incurred $10.1 million in costs related to additional 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. 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. 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 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 our 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 negatively affect our business 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 lenders and expect to obtain waivers of the covenants on the revolving portion of our amended credit agreement, our unsecured term loans totaling $185.0 million and our unsecured senior notes totaling $240.0 million through the end of the first quarter of 2021. There can be no assurance that we will be able to obtain waivers in a timely manner or on acceptable terms. If we are unable to obtain waivers and we 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. In addition, due to the suspension of operations at certain hotels and the reduced cash flows at other hotels, our mortgage loans will likely require a cash sweep be put in place, restricting the use of that cash until the cash sweep requirement is terminated. Failure to meet any financial covenants of our secured and unsecured debt would adversely affect our financial conditions and results from operations.

~~None.~~We are unable to predict when any of our hotels with temporarily suspended operations will resume operations. Moreover, once travel advisories and restrictions, which may be continued or reinstituted due to the continued outbreak or a resurgent outbreak of COVID-19, are lifted, travel demand may remain weak for a significant length of time as individuals may fear traveling, and we are unable to predict if and when occupancy and the average daily rate at each of the 20 Hotels will return to pre-pandemic levels. Additionally, our hotels may be negatively impacted by adverse changes in the economy, including higher unemployment rates, declines in income levels, loss of personal wealth and possibly, a national and/or global recession resulting from the impact of COVID-19. Declines in demand trends, occupancy and the average daily rate at our hotels may indicate that one or more of our hotels is impaired, which would adversely affect our financial condition and results of operations.

41
Table of Contents
To preserve additional liquidity, we have temporarily suspended both our stock repurchase program and our common stock quarterly dividend, and deferred a portion of our portfolio’s planned first and second quarter 2020 non-essential capital improvements. We believe that the steps we have taken to increase our cash position and preserve our financial flexibility, combined with the anticipated waiver or amendment to our amended credit agreement, our already strong balance sheet and our low leverage, will be sufficient to allow us to navigate through this crisis. Given the unprecedented impact of COVID-19 on the global market and our hotel operations, we cannot, however, assure you that our forecast or the assumptions we used to estimate our liquidity requirements will be correct. In addition, the magnitude and duration of the COVID-19 pandemic is uncertain. We cannot accurately estimate the impact on our business, financial condition or operational results with reasonable certainty; however, we expect a net loss on our operations for the year ending December 31, 2020.

The market price of our common stock has been and may continue to be negatively affected by the impact of the COVID-19 pandemic on our hotel operations and future earnings. The extent of the effects of the pandemic on our business and the hotel industry at large is significant but highly uncertain and will ultimately depend on future developments, including, but not limited to, the duration and severity of the pandemic, the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume. To the extent COVID-19 adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described in Item 1A. “Risk Factors” included in our Form 10-K.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

~~Item 2.Unregistered Sales of Equity Securities and Use of Proceeds~~
(c)Issuer Purchases of Equity ~~Securities:~~Securities

In February 2017, the Company’s board of directors authorized a stock repurchase program to acquire up to an aggregate of $300.0 million of the Company’s common and preferred stock. In February 2020, the Company’s board of directors authorized an increase to the existing 2017 stock repurchase program to acquire up to $500.0 million of the Company’s common and preferred stock. During the three months ended March 31, 2020, the Company repurchased 9,770,081 shares of its common stock for a total purchase price of $103.9 million, including fees and commissions, of which $3.7 million was repurchased under the 2017 stock repurchase program and $100.2 million was repurchased under the 2020 stock repurchase program, leaving $400.0 million remaining under the 2020 stock repurchase program. The 2020 stock repurchase program has no stated expiration date. Future repurchases will depend on various factors, including the Company’s capital needs, as well as the price of the Company’s common and preferred stock.

In February 2020, the Company withheld 301,966 shares of its restricted common stock at an average market value of $13.22 per share and used the proceeds to satisfy the tax obligations in connection with the vesting of restricted common shares issued to employees.

Period

Total Number
of Shares
Purchased (1)

Average Price
Paid per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

Maximum Number
(or Appropriate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or Programs

January 1, 2019 — January 31, 2019

—

—

—

February 1, 2019 — February 28, 2019

304,782

$
14.55

—

March 1, 2019 — March 31, 2019

—

—

—

Total

304,782

—

$    300,000,000
(2)

Maximum Number (or

Total Number of

Appropriate Dollar

Shares Purchased

Value) of Shares that

Total Number

as Part of Publicly

May Yet Be Purchased

of Shares

Average Price Paid

Announced Plans

Under the Plans or
Period

Purchased

per Share

or Programs

Programs
January 1, 2020 - January 31, 2020

—

$
—

—

$
250,000,000
February 1, 2020 - February 29, 2020

1,677,426

$
12.49

1,375,460

$
486,746,468
March 1, 2020 - March 31, 2020

8,394,621

$
10.33

8,394,621

$
400,000,001
Total

10,072,047

$
10.69

9,770,081

$
400,000,001

~~(1)~~
Reflects shares of restricted common stock withheld and used for purposes of remitting the statutory minimum federal and state tax obligations in connection with the vesting of restricted common shares issued to employees. The average price paid reflects the average market value of shares withheld for tax purposes.
~~(2)~~
On February 17, 2017, the Company’s board of directors authorized a share repurchase plan to acquire up to $300.0 million of the Company’s common and preferred stock. As of March 31, 2019, no shares of either the Company’s common or preferred stock have been repurchased. Future purchases will depend on various factors, including the Company’s capital needs, as well as the Company’s common and preferred stock price.

Item 3.
Defaults Upon Senior Securities
~~Item 3.Defaults Upon Senior Securities~~

None.

Item 4.
Mine Safety Disclosures
~~Item 4.Mine Safety Disclosures~~

None.

Item 5.
Other Information
~~Item 5.Other Information~~

None.
4142
Table of Contents
Item 6.
Exhibits
~~Item 6.Exhibits~~

The following Exhibits are filed as a part of this report:

Exhibit
Number

Description
Exhibit
Number3.1

~~Description~~
~~3.1~~

Articles of Amendment and Restatement of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 3.1 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company).

3.2

Second Amended and Restated Bylaws of Sunstone Hotel Investors, Inc. effective as of November 15, 2018 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on November 15, 2018).

3.3

Articles Supplementary Prohibiting the Company From Electing to be Subject to Section 3-803 of the Maryland General Corporation Law Absent Shareholder Approval (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on April 29, 2013).

3.4

Articles Supplementary for Series E preferred stock (incorporated by reference to Exhibit 3.5 to the registration statement on Form 8-A, filed by the Company on March 10, 2016).

3.5

Articles Supplementary for Series F preferred stock (incorporated by reference to Exhibit 3.5 to the registration statement on Form 8-A, filed by the Company on May 16, 2016).

31.1

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.*

101.SCH

Inline XBRL Taxonomy Extension Schema ~~Document~~Document. *

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document~~Document. *

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase ~~Document~~Document. *

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase ~~Document~~Document. *

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase ~~Document~~Document. *

104

Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 formatted in Inline XBRL (included in Exhibit 101).

*

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at March 31, 2019 and December 31, 2018; (ii) the Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018; (iii) the Consolidated Statements of Equity for the three months ended March 31, 2019 and 2018; (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018; and (v) Notes to Unaudited Consolidated Financial Statements that have been detail tagged.Filed herewith.

4243
Table of Contents
SIGNATURES
~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Sunstone Hotel Investors, Inc.

Date: May ~~8, 2019~~11, 2020
By:
/s/ Bryan A. Giglia

Bryan A. Giglia
(Chief Financial Officer and Duly Authorized Officer)

4344


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of March 31, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	2

	Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	3

	Unaudited Consolidated Statements of Equity for the Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	4

	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019	56

	Notes to Unaudited Consolidated Financial Statements	78

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

Item 4.	Controls and Procedures	40

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

~~Item 3.~~	~~Defaults Upon Senior Securities~~	41

~~Item 4.~~	~~Mine Safety Disclosures~~	41

~~Item 5.~~	~~Other Information~~	41

~~Item 6.~~	~~Exhibits~~	42

~~SIGNATURES~~Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

SIGNATURES		44


	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 year to date	—		—	—		—	—		—		—		—		(11,429)		—		(11,429)
Series E preferred stock dividends and dividends payable at $0.434375 per share year to date	—		—	—		—	—		—		—		—		(1,998)		—		(1,998)
Series F preferred stock dividends and dividends payable at $0.403125 per share year to date	—		—	—		—	—		—		—		—		(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


	Preferred Stock															Noncontrolling
	Series E			Series F			Common Stock							Cumulative		Interest in
	Number of			Number of			Number of			Additional		Retained		Dividends and		Consolidated
	Shares	Amount		Shares	Amount		Shares	Amount		Paid in Capital		Earnings		Distributions		Joint Venture		Total Equity
Balance at December 31, 2017 (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	—		—	—		—	—		—		2,113		—		—		—		2,113
Issuance of restricted common stock, net	—		—	—		—	297,013		3		(4,235)		—		—		—		(4,232)
Forfeiture of restricted common stock	—		—	—		—	(3,961)		—		—		—		—		—		—
Common stock distributions and distributions payable at $0.05 per share year to date	—		—	—		—	—		—		—		—		(11,281)		—		(11,281)
Series E preferred stock dividends and dividends payable at $0.434375 per share year to date	—		—	—		—	—		—		—		—		(1,998)		—		(1,998)
Series F preferred stock dividends and dividends payable at $0.403125 per share year to date	—		—	—		—	—		—		—		—		(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


	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			$	45,677

Operating lease obligations, current and noncurrent	$	—	$	58,663	$	58,663
Other liabilities (deferred rent)	$	12,986		(12,986)	$	—
Total liability adjustments			$	45,677


									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


	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


	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

Three Months Ended March 31,

Noncash interest on derivatives