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 |
For the quarterly period ended June 30, 2021March 31, 2022
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32319
Sunstone Hotel Investors, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland | | 20-1296886 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
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200 Spectrum Center Drive, 21st Floor | | 92618 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (949) 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 H Cumulative Redeemable Preferred Stock, $0.01 par value | SHO.PRH | New York Stock Exchange |
Series I Cumulative Redeemable Preferred Stock, $0.01 par value | SHO.PRI | 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 ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 2, 2021,April 28, 2022, there were 219,042,657215,210,303 shares of Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value per share, outstanding.
SUNSTONE HOTEL INVESTORS, INC.
QUARTERLY REPORT ON
FORM 10-Q
For the Quarterly Period Ended June 30, 2021March 31, 2022
TABLE OF CONTENTS
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| Consolidated Balance Sheets as of | 2 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
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PART I—FINANCIAL INFORMATION
Item 1. | Financial Statements |
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | | | | |
| | | | | | |
| | June 30, | | December 31, | ||
|
| 2021 |
| 2020 | ||
| | (unaudited) | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 162,898 | | $ | 368,406 |
Restricted cash | | | 47,490 | | | 47,733 |
Accounts receivable, net | | | 25,044 | | | 8,566 |
Prepaid expenses and other current assets | | | 7,413 | | | 10,440 |
Total current assets | | | 242,845 | | | 435,145 |
Investment in hotel properties, net | | | 2,687,395 | | | 2,461,498 |
Finance lease right-of-use asset, net | | | 45,447 | | | 46,182 |
Operating lease right-of-use assets, net | | | 24,939 | | | 26,093 |
Deferred financing costs, net | | | 3,403 | | | 4,354 |
Other assets, net | | | 11,333 | | | 12,445 |
Total assets | | $ | 3,015,362 | | $ | 2,985,717 |
LIABILITIES AND EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable and accrued expenses | | $ | 41,046 | | $ | 37,326 |
Accrued payroll and employee benefits | | | 17,429 | | | 15,392 |
Dividends and distributions payable | | | 2,225 | | | 3,208 |
Other current liabilities | | | 50,693 | | | 32,606 |
Current portion of notes payable, net | | | 2,331 | | | 2,261 |
Total current liabilities | | | 113,724 | | | 90,793 |
Notes payable, less current portion, net | | | 741,337 | | | 742,528 |
Finance lease obligation, less current portion | | | 15,568 | | | 15,569 |
Operating lease obligations, less current portion | | | 27,816 | | | 29,954 |
Other liabilities | | | 13,612 | | | 17,494 |
Total liabilities | | | 912,057 | | | 896,338 |
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, zero shares and 4,600,000 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share | | | — | | | 115,000 |
6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at June 30, 2021 and December 31, 2020, stated at liquidation preference of $25.00 per share | | | 75,000 | | | 75,000 |
Series G Cumulative Redeemable Preferred Stock, 2,650,000 shares and zero shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share | | | 66,250 | | | — |
6.125% Series H Cumulative Redeemable Preferred Stock, 4,600,000 shares and zero shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share | | | 115,000 | | | — |
Common stock, $0.01 par value, 500,000,000 shares authorized, 219,043,105 shares issued and outstanding at June 30, 2021 and 215,593,401 shares issued and outstanding at December 31, 2020 | | | 2,190 | | | 2,156 |
Additional paid in capital | | | 2,626,582 | | | 2,586,108 |
Retained earnings | | | 833,132 | | | 913,766 |
Cumulative dividends and distributions | | | (1,654,388) | | | (1,643,386) |
Total stockholders’ equity | | | 2,063,766 | | | 2,048,644 |
Noncontrolling interest in consolidated joint venture | | | 39,539 | | | 40,735 |
Total equity | | | 2,103,305 | | | 2,089,379 |
Total liabilities and equity | | $ | 3,015,362 | | $ | 2,985,717 |
| | | | | | |
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
| | (unaudited) | | | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 214,905 | | $ | 120,483 |
Restricted cash | | | 39,484 | | | 42,234 |
Accounts receivable, net | | | 35,346 | | | 28,733 |
Prepaid expenses and other current assets | | | 18,137 | | | 14,338 |
Assets held for sale, net | | | — | | | 76,308 |
Total current assets | | | 307,872 | | | 282,096 |
Investment in hotel properties, net | | | 2,613,428 | | | 2,720,016 |
Operating lease right-of-use assets, net | | | 19,879 | | | 23,161 |
Deferred financing costs, net | | | 2,080 | | | 2,580 |
Other assets, net | | | 9,609 | | | 13,196 |
Total assets | | $ | 2,952,868 | | $ | 3,041,049 |
LIABILITIES AND EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable and accrued expenses | | $ | 55,902 | | $ | 47,701 |
Accrued payroll and employee benefits | | | 14,800 | | | 19,753 |
Dividends payable | | | 3,773 | | | 3,513 |
Other current liabilities | | | 65,671 | | | 58,884 |
Current portion of notes payable, net | | | 109,741 | | | 20,694 |
Liabilities of assets held for sale | | | — | | | 25,213 |
Total current liabilities | | | 249,887 | | | 175,758 |
Notes payable, less current portion, net | | | 464,601 | | | 588,741 |
Operating lease obligations, less current portion | | | 21,228 | | | 25,120 |
Other liabilities | | | 9,143 | | | 11,656 |
Total liabilities | | | 744,859 | | | 801,275 |
Commitments and contingencies (Note 12) | | | | | | |
Equity: | | | | | | |
Stockholders’ equity: | | | | | | |
Preferred stock, $0.01 par value, 100,000,000 shares authorized: | | | | | | |
Series G Cumulative Redeemable Preferred Stock, 2,650,000 shares issued and outstanding at both March 31, 2022 and December 31, 2021, stated at liquidation preference of $25.00 per share | | | 66,250 | | | 66,250 |
6.125% Series H Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at both March 31, 2022 and December 31, 2021, stated at liquidation preference of $25.00 per share | | | 115,000 | | | 115,000 |
5.70% Series I Cumulative Redeemable Preferred Stock, 4,000,000 shares issued and outstanding at both March 31, 2022 and December 31, 2021, stated at liquidation preference of $25.00 per share | | | 100,000 | | | 100,000 |
Common stock, $0.01 par value, 500,000,000 shares authorized, 215,667,937 shares issued and outstanding at March 31, 2022 and 219,333,783 shares issued and outstanding at December 31, 2021 | | | 2,157 | | | 2,193 |
Additional paid in capital | | | 2,588,405 | | | 2,631,484 |
Retained earnings | | | 962,053 | | | 948,064 |
Cumulative dividends and distributions | | | (1,667,797) | | | (1,664,024) |
Total stockholders’ equity | | | 2,166,068 | | | 2,198,967 |
Noncontrolling interest in consolidated joint venture | | | 41,941 | | | 40,807 |
Total equity | | | 2,208,009 | | | 2,239,774 |
Total liabilities and equity | | $ | 2,952,868 | | $ | 3,041,049 |
See accompanying notes to consolidated financial statements.
2
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
REVENUES | | | | | | | | | | | | | | | | | | |
Room | | $ | 84,597 | | $ | 3,869 | | $ | 118,816 | | $ | 131,269 | | $ | 108,772 | | $ | 34,219 |
Food and beverage | | | 15,238 | | | 213 | | | 20,209 | | | 48,203 | | | 39,583 | | | 4,971 |
Other operating | | | 17,375 | | | 6,342 | | | 28,818 | | | 22,164 | | | 23,960 | | | 11,443 |
Total revenues | | | 117,210 | | | 10,424 | | | 167,843 | | | 201,636 | | | 172,315 | | | 50,633 |
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | |
Room | | | 22,946 | | | 7,077 | | | 34,586 | | | 51,322 | | | 30,461 | | | 11,640 |
Food and beverage | | | 15,669 | | | 5,025 | | | 21,648 | | | 46,785 | | | 32,319 | | | 5,979 |
Other operating | | | 3,486 | | | 1,224 | | | 5,291 | | | 4,988 | | | 5,436 | | | 1,805 |
Advertising and promotion | | | 7,042 | | | 4,090 | | | 11,917 | | | 16,552 | | | 10,474 | | | 4,875 |
Repairs and maintenance | | | 7,132 | | | 5,375 | | | 12,677 | | | 15,424 | | | 9,714 | | | 5,545 |
Utilities | | | 4,683 | | | 3,226 | | | 8,834 | | | 9,068 | | | 5,705 | | | 4,151 |
Franchise costs | | | 2,296 | | | 338 | | | 3,287 | | | 5,674 | | | 3,004 | | | 991 |
Property tax, ground lease and insurance | | | 15,632 | | | 19,124 | | | 30,293 | | | 39,175 | | | 15,991 | | | 14,661 |
Other property-level expenses | | | 16,067 | | | 8,736 | | | 26,544 | | | 37,581 | | | 23,910 | | | 10,477 |
Corporate overhead | | | 9,467 | | | 8,438 | | | 16,644 | | | 15,832 | | | 10,714 | | | 7,177 |
Depreciation and amortization | | | 32,729 | | | 34,539 | | | 63,499 | | | 71,285 | | | 31,360 | | | 30,770 |
Impairment losses | | | — | | | 18,100 | | | — | | | 133,466 | ||||||
Total operating expenses | | | 137,149 | | | 115,292 | | | 235,220 | | | 447,152 | | | 179,088 | | | 98,071 |
Interest and other income (loss) | | | 21 | | | 306 | | | (358) | | | 2,612 | | | 4,380 | | | (379) |
Interest expense | | | (8,065) | | | (12,950) | | | (15,714) | | | (30,457) | | | (5,081) | | | (7,649) |
Gain on extinguishment of debt | | | 88 | | | — | | | 310 | | | — | ||||||
Loss before income taxes | | | (27,895) | | | (117,512) | | | (83,139) | | | (273,361) | ||||||
Income tax (provision) benefit, net | | | (23) | | | 12 | | | (66) | | | (6,658) | ||||||
NET LOSS | | | (27,918) | | | (117,500) | | | (83,205) | | | (280,019) | ||||||
Loss from consolidated joint venture attributable to noncontrolling interest | | | 596 | | | 2,162 | | | 2,571 | | | 2,620 | ||||||
Preferred stock dividends and redemption charge | | | (7,795) | | | (3,207) | | | (11,002) | | | (6,414) | ||||||
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (35,117) | | $ | (118,545) | | $ | (91,636) | | $ | (283,813) | ||||||
Gain on sale of assets | | | 22,946 | | | — | ||||||||||||
(Loss) gain on extinguishment of debt | | | (213) | | | 222 | ||||||||||||
Income (loss) before income taxes | | | 15,259 | | | (55,244) | ||||||||||||
Income tax provision | | | (136) | | | (43) | ||||||||||||
NET INCOME (LOSS) | | | 15,123 | | | (55,287) | ||||||||||||
(Income) loss from consolidated joint venture attributable to noncontrolling interest | | | (1,134) | | | 1,975 | ||||||||||||
Preferred stock dividends | | | (3,773) | | | (3,207) | ||||||||||||
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | 10,216 | | $ | (56,519) | ||||||||||||
| | | | | | | | | | | | | | | | | | |
Basic and diluted per share amounts: | | | | | | | | | | | | | | | | | | |
Basic and diluted loss attributable to common stockholders per common share | | $ | (0.16) | | $ | (0.55) | | $ | (0.43) | | $ | (1.30) | ||||||
Basic and diluted income (loss) attributable to common stockholders per common share | | $ | 0.05 | | $ | (0.26) | ||||||||||||
Basic and diluted weighted average common shares outstanding | | | 215,113 | | | 214,225 | | | 214,778 | | | 217,631 | | | 217,271 | | | 214,438 |
| | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
3
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Noncontrolling | | | | |
| | Preferred Stock | | Common Stock | | | | | | | | Cumulative | | Interest in | | | | ||||||||
| | Number of | | | | Number of | | | | Additional | | Retained | | Dividends and | | Consolidated | | | | ||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Earnings |
| Distributions |
| Joint Venture |
| Total Equity | |||||||
Balance at December 31, 2020 (audited) | | 7,600,000 | | $ | 190,000 | | 215,593,401 | | $ | 2,156 | | $ | 2,586,108 | | $ | 913,766 | | $ | (1,643,386) | | $ | 40,735 | | $ | 2,089,379 |
Amortization of deferred stock compensation | | — | | | — | | — | | | — | | | 2,869 | | | — | | | — | | | — | | | 2,869 |
Issuance of restricted common stock, net | | — | | | — | | 581,683 | | | 6 | | | (3,522) | | | — | | | — | | | — | | | (3,516) |
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) |
Contribution from noncontrolling interest | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 1,375 | | | 1,375 |
Net loss | | — | | | — | | — | | | — | | | — | | | (53,312) | | | — | | | (1,975) | | | (55,287) |
Balance at March 31, 2021 | | 7,600,000 | | | 190,000 | | 216,175,084 | | | 2,162 | | | 2,585,455 | | | 860,454 | | | (1,646,593) | | | 40,135 | | | 2,031,613 |
Amortization of deferred stock compensation | | — | | | — | | — | | | — | | | 4,784 | | | — | | | — | | | — | | | 4,784 |
Repurchase of common stock for employee tax obligations net of restricted common stock issued | | — | | | — | | (45,661) | | | (1) | | | (1,360) | | | — | | | — | | | — | | | (1,361) |
Net proceeds from issuance of common stock | | — | | | — | | 2,913,682 | | | 29 | | | 37,630 | | | — | | | — | | | — | | | 37,659 |
Net issuance of Series G preferred stock in connection with hotel acquisition | | 2,650,000 | | | 66,250 | | — | | | — | | | (142) | | | — | | | — | | | — | | | 66,108 |
Net proceeds from issuance of Series H preferred stock | | 4,600,000 | | | 115,000 | | — | | | — | | | (3,801) | | | — | | | — | | | — | | | 111,199 |
Redemption of Series E preferred stock | | (4,600,000) | | | (115,000) | | — | | | — | | | 4,016 | | | — | | | (4,016) | | | — | | | (115,000) |
Series E preferred stock dividends at $0.337847 per share through redemption date | | — | | | — | | — | | | — | | | — | | | — | | | (1,554) | | | — | | | (1,554) |
Series F preferred stock dividends and dividends payable at $0.403125 per share | | — | | | — | | — | | | — | | | — | | | — | | | (1,209) | | | — | | | (1,209) |
Series G preferred stock dividends and dividends payable at $0.110259 per share | | — | | | — | | — | | | — | | | — | | | — | | | (292) | | | — | | | (292) |
Series H preferred stock dividends and dividends payable at $0.157378 per share | | — | | | — | | — | | | — | | | — | | | — | | | (724) | | | — | | | (724) |
Net loss | | — | | | — | | — | | | — | | | — | | | (27,322) | | | — | | | (596) | | | (27,918) |
Balance at June 30, 2021 | | 10,250,000 | | $ | 256,250 | | 219,043,105 | | $ | 2,190 | | $ | 2,626,582 | | $ | 833,132 | | $ | (1,654,388) | | $ | 39,539 | | $ | 2,103,305 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Noncontrolling | | | | |
| | Preferred Stock | | Common Stock | | | | | | | | Cumulative | | Interest in | | | | ||||||||
| | Number of | | | | Number of | | | | Additional | | Retained | | Dividends and | | Consolidated | | | | ||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Earnings |
| Distributions |
| Joint Venture |
| Total Equity | |||||||
Balance at December 31, 2021 (audited) | | 11,250,000 | | $ | 281,250 | | 219,333,783 | | $ | 2,193 | | $ | 2,631,484 | | $ | 948,064 | | $ | (1,664,024) | | $ | 40,807 | | $ | 2,239,774 |
Amortization of deferred stock compensation | | — | | | — | | — | | | — | | | 3,701 | | | — | | | — | | | — | | | 3,701 |
Issuance of restricted common stock, net | | — | | | — | | 213,179 | | | 2 | | | (3,353) | | | — | | | — | | | — | | | (3,351) |
Series G preferred stock dividends and dividends payable at $0.221475 per share | | — | | | — | | — | | | — | | | — | | | — | | | (587) | | | — | | | (587) |
Series H preferred stock dividends and dividends payable at $0.382813 per share | | — | | | — | | — | | | — | | | — | | | — | | | (1,761) | | | — | | | (1,761) |
Series I preferred stock dividends and dividends payable at $0.356250 per share | | — | | | — | | — | | | — | | | — | | | — | | | (1,425) | | | — | | | (1,425) |
Repurchase of outstanding common stock | | — | | | — | | (3,879,025) | | | (38) | | | (43,427) | | | — | | | — | | | — | | | (43,465) |
Net income | | — | | | — | | — | | | — | | | — | | | 13,989 | | | — | | | 1,134 | | | 15,123 |
Balance at March 31, 2022 | | 11,250,000 | | $ | 281,250 | | 215,667,937 | | $ | 2,157 | | $ | 2,588,405 | | $ | 962,053 | | $ | (1,667,797) | | $ | 41,941 | | $ | 2,208,009 |
See accompanying notes to consolidated financial statements.
4
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Noncontrolling | | | | | | | | | | | | | | | | | | | | | | Noncontrolling | | | | ||||||
| | Preferred Stock | | Common Stock | | | | | | | | Cumulative | | Interest in | | | | | Preferred Stock | | Common Stock | | | | | | | | Cumulative | | Interest in | | | | ||||||||||||||||
| | Number of | | | | Number of | | | | Additional | | Retained | | Dividends and | | Consolidated | | | | | Number of | | | | Number of | | | | Additional | | Retained | | Dividends and | | Consolidated | | | | ||||||||||||
| | Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Earnings |
| Distributions |
| Joint Venture |
| Total Equity | | Shares |
| Amount |
| Shares |
| Amount |
| Paid in Capital |
| Earnings |
| Distributions |
| Joint Venture |
| Total Equity | ||||||||||||||
Balance at December 31, 2019 (audited) | | 7,600,000 | | $ | 190,000 | | 224,855,351 | | $ | 2,249 | | $ | 2,683,913 | | $ | 1,318,455 | | $ | (1,619,779) | | $ | 46,233 | | $ | 2,621,071 | |||||||||||||||||||||||||
Balance at December 31, 2020 (audited) | | 7,600,000 | | $ | 190,000 | | 215,593,401 | | $ | 2,156 | | $ | 2,586,108 | | $ | 913,766 | | $ | (1,643,386) | | $ | 40,735 | | $ | 2,089,379 | |||||||||||||||||||||||||
Amortization of deferred stock compensation | | — | | | — | | — | | | — | | | 2,324 | | | — | | | — | | | — | | | 2,324 | | — | | | — | | — | | | — | | | 2,869 | | | — | | | — | | | — | | | 2,869 |
Issuance of restricted common stock, net | | — | | | — | | 456,219 | | | 4 | | | (3,996) | | | — | | | — | | | — | | | (3,992) | | — | | | — | | 581,683 | | | 6 | | | (3,522) | | | — | | | — | | | — | | | (3,516) |
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 | | 7,600,000 | | | 190,000 | | 215,541,134 | | | 2,155 | | | 2,578,445 | | | 1,156,394 | | | (1,633,763) | | | 43,775 | | | 2,337,006 | |||||||||||||||||||||||||
Amortization of deferred stock compensation | | — | | | — | | — | | | — | | | 3,193 | | | — | | | — | | | — | | | 3,193 | |||||||||||||||||||||||||
Issuance of restricted common stock | | — | | | — | | 94,416 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |||||||||||||||||||||||||
Series E preferred stock dividends and dividends payable at $0.434375 per share | | — | | | — | | — | | | — | | | — | | | — | | | (1,998) | | | — | | | (1,998) | | — | | | — | | — | | | — | | | — | | | — | | | (1,998) | | | — | | | (1,998) |
Series F preferred stock dividends and dividends payable at $0.403125 per share | | — | | | — | | — | | | — | | | — | | | — | | | (1,209) | | | — | | | (1,209) | | — | | | — | | — | | | — | | | — | | | — | | | (1,209) | | | — | | | (1,209) |
Contribution from noncontrolling interest | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 500 | | | 500 | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 1,375 | | | 1,375 |
Net loss | | — | | | — | | — | | | — | | | — | | | (115,338) | | | — | | | (2,162) | | | (117,500) | | — | | | — | | — | | | — | | | — | | | (53,312) | | | — | | | (1,975) | | | (55,287) |
Balance at June 30, 2020 | | 7,600,000 | | $ | 190,000 | | 215,635,550 | | $ | 2,156 | | $ | 2,581,637 | | $ | 1,041,056 | | $ | (1,636,970) | | $ | 42,113 | | $ | 2,219,992 | |||||||||||||||||||||||||
Balance at March 31, 2021 | | 7,600,000 | | $ | 190,000 | | 216,175,084 | | $ | 2,162 | | $ | 2,585,455 | | $ | 860,454 | | $ | (1,646,593) | | $ | 40,135 | | $ | 2,031,613 |
See accompanying notes to consolidated financial statements.
5
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | ||||
| | | | | | | | | ||||
| | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
Net loss | | $ | (83,205) | | $ | (280,019) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | ||||||
Net income (loss) | | $ | 15,123 | | $ | (55,287) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | ||||||
Bad debt expense | | | 157 | | | 367 | | | 64 | | | 16 |
Loss on sale of assets | | | 70 | | | — | ||||||
Gain on extinguishment of debt | | | (310) | | | — | ||||||
Noncash interest on derivatives | | | (1,578) | | | 6,296 | ||||||
(Gain) loss on sale of assets | | | (22,946) | | | 70 | ||||||
Loss (gain) on extinguishment of debt | | | 213 | | | (222) | ||||||
Noncash interest on derivatives, net | | | (1,842) | | | (869) | ||||||
Depreciation | | | 63,478 | | | 71,264 | | | 31,288 | | | 30,760 |
Amortization of franchise fees and other intangibles | | | 21 | | | 21 | | | 66 | | | 10 |
Amortization of deferred financing costs | | | 1,472 | | | 1,396 | | | 680 | | | 735 |
Amortization of deferred stock compensation | | | 7,411 | | | 5,271 | | | 3,578 | | | 2,752 |
Impairment losses | | | — | | | 133,466 | ||||||
Deferred income taxes, net | | | — | | | 7,415 | ||||||
Gain on hurricane-related damage | | | (4,369) | | | — | ||||||
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (16,771) | | | 30,394 | | | (5,931) | | | (4,613) |
Prepaid expenses and other assets | | | 4,426 | | | 6,447 | | | (136) | | | (776) |
Accounts payable and other liabilities | | | 10,191 | | | (6,497) | | | 3,319 | | | (8,463) |
Accrued payroll and employee benefits | | | 1,384 | | | (10,157) | | | (5,613) | | | (1,957) |
Operating lease right-of-use assets and obligations | | | (669) | | | (593) | | | (346) | | | (331) |
Net cash used in operating activities | | | (13,923) | | | (34,929) | ||||||
Net cash provided by (used in) operating activities | | | 13,148 | | | (38,175) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | |
Disposition deposit | | | — | | | 3,500 | ||||||
Proceeds from sale of assets | | | 191,291 | | | — | ||||||
Proceeds from property insurance | | | 3,910 | | | — | ||||||
Acquisition of hotel properties and other assets | | | (195,646) | | | (1,346) | | | (546) | | | — |
Renovations and additions to hotel properties and other assets | | | (16,785) | | | (32,849) | | | (30,299) | | | (6,526) |
Payment for interest rate derivative | | | — | | | (111) | ||||||
Net cash used in investing activities | | | (212,431) | | | (30,806) | ||||||
Net cash provided by (used in) investing activities | | | 164,356 | | | (6,526) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
Proceeds from preferred stock offerings | | | 115,000 | | | — | ||||||
Payment of preferred stock offering costs | | | (3,943) | | | — | ||||||
Redemption of preferred stock | | | (115,000) | | | — | ||||||
Proceeds from common stock offerings | | | 38,443 | | | — | ||||||
Payment of common stock offering costs | | | (784) | | | — | ||||||
Repurchases of outstanding common stock | | | — | | | (103,894) | | | (43,465) | | | — |
Repurchases of common stock for employee tax obligations | | | (4,877) | | | (3,992) | | | (3,351) | | | (3,516) |
Proceeds from credit facility | | | — | | | 300,000 | ||||||
Payment on credit facility | | | — | | | (250,000) | ||||||
Payments on notes payable | | | (1,642) | | | (3,616) | | | (35,503) | | | (832) |
Dividends and distributions paid | | | (7,969) | | | (149,856) | ||||||
Distributions to noncontrolling interest | | | — | | | (2,000) | ||||||
Contributions from noncontrolling interest | | | 1,375 | | | 500 | ||||||
Net cash provided by (used in) financing activities | | | 20,603 | | | (212,858) | ||||||
Net decrease in cash and cash equivalents and restricted cash | | | (205,751) | | | (278,593) | ||||||
Dividends paid | | | (3,513) | | | (3,208) | ||||||
Contribution from noncontrolling interest | | | — | | | 1,375 | ||||||
Net cash used in financing activities | | | (85,832) | | | (6,181) | ||||||
Net increase (decrease) in cash and cash equivalents and restricted cash | | | 91,672 | | | (50,882) | ||||||
Cash and cash equivalents and restricted cash, beginning of period | | | 416,139 | | | 864,973 | | | 162,717 | | | 416,139 |
Cash and cash equivalents and restricted cash, end of period | | $ | 210,388 | | $ | 586,380 | | $ | 254,389 | | $ | 365,257 |
See accompanying notes to consolidated financial statements.
6
SUNSTONE HOTEL INVESTORS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental Disclosure of Cash Flow Information
| | | | | | | | | ||||
| | June 30, | | March 31, | ||||||||
| | 2021 | | 2020 | | 2022 | | 2021 | ||||
Cash and cash equivalents | | $ | 162,898 | | $ | 540,420 | | $ | 214,905 | | $ | 320,275 |
Restricted cash | | | 47,490 | | | 45,960 | | | 39,484 | | | 44,982 |
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows | | $ | 210,388 | | $ | 586,380 | | $ | 254,389 | | $ | 365,257 |
| | | | | | | | | ||||
| | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||
| | 2021 | | 2020 | | 2022 | | 2021 | ||||
Cash paid for interest | | $ | 15,699 | | $ | 20,912 | | $ | 9,761 | | $ | 10,696 |
Cash paid for income taxes, net | | $ | 5 | | $ | 90 | ||||||
Cash paid (refunds) for income taxes, net | | $ | 103 | | $ | (28) | ||||||
Operating cash flows used for operating leases | | $ | 3,364 | | $ | 4,054 | | $ | 1,730 | | $ | 1,664 |
| | | | | | | | | ||||
Changes in operating lease right-of-use assets | | $ | 1,836 | | $ | 1,892 | | $ | 1,007 | | $ | 897 |
Changes in operating lease obligations | | | (2,505) | | | (2,485) | | | (1,353) | | | (1,228) |
Changes in operating lease right-of-use assets and lease obligations, net | | $ | (669) | | $ | (593) | | $ | (346) | | $ | (331) |
Supplemental Disclosure of Noncash Investing and Financing Activities
| | | | | | |
| | Six Months Ended June 30, | ||||
| | 2021 | | 2020 | ||
Accrued renovations and additions to hotel properties and other assets | | $ | 7,114 | | $ | 10,219 |
Issuance of preferred stock in connection with hotel acquisition | | $ | 66,250 | | $ | — |
Preferred stock redemption charge | | $ | 4,016 | | $ | — |
Amortization of deferred stock compensation — construction activities | | $ | 242 | | $ | 246 |
Dividends and distributions payable | | $ | 2,225 | | $ | 3,207 |
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2022 | | 2021 | ||
Accrued renovations and additions to hotel properties and other assets | | $ | 19,049 | | $ | 5,402 |
Disposition deposit received in prior year in connection with sale of hotel | | $ | 4,000 | | $ | — |
Assignment of finance lease right-of-use asset in connection with sale of hotel | | $ | 44,712 | | $ | — |
Assignment of finance lease obligation in connection with sale of hotel | | $ | 15,569 | | $ | — |
Assignment of operating lease right-of-use asset in connection with sale of hotel | | $ | 2,275 | | $ | — |
Assignment of operating lease obligation in connection with sale of hotel | | $ | 2,609 | | $ | — |
Amortization of deferred stock compensation — construction activities | | $ | 123 | | $ | 117 |
Dividends payable | | $ | 3,773 | | $ | 3,207 |
See accompanying notes to consolidated financial statements.
7
SUNSTONE HOTEL INVESTORS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004. The Company elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with its taxable year ended on December 31, 2004. The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in acquiring, owning, asset managing and renovating or repositioning hotel properties, and may also selectively sell hotels that no longer fit its stated strategy.
As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. The Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels, in transactions that are intended to generate qualifying income.
As of June 30, 2021,March 31, 2022, the Company had interests in 1814 hotels (the “18“14 Hotels”), currently held for investment. The Company’s third-party managers included the following:
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| Number of Hotels | |
Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”) | | 6 | |
| | 2 | |
Four Seasons Hotels Limited | | 1 | |
Highgate Hotels L.P. and an affiliate | |
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Hilton Worldwide | |
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Hyatt Hotels Corporation | | 1 | |
Montage North America, LLC | | 1 | |
Singh Hospitality, LLC | | 1 | |
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Total hotels owned as of | |
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In March 2020,COVID-19 Operational Update
COVID-19 and its variants have had and continue to have a detrimental effect on the novel coronavirus (“COVID-19”) pandemic was declared a National Public Health Emergency, which led tohotel industry and the Company’s business, including significant room and event cancellations, corporate and government travel restrictions and an unprecedented decline in hotel demand. AsWhile operations have gradually improved since the onset of the COVID-19 pandemic in 2020, the Omicron variant in December 2021 led to a resultslowdown in demand recovery at the Company’s hotels. However, demand began to recover again in February 2022 as Omicron-related case counts subsided and travel patterns re-accelerated.
During the first quarter of these cancellations, restrictions2022, corporate transient and group demand accelerated and reduced the health concerns related to COVID-19,Company’s reliance on leisure demand, which was the Company determined that it was in the best interestdominant source of its hotel employees and the communities in which its hotels operate to temporarily suspend operationsbusiness at 14many of the Company’s hotels 13during 2021. The amount of which have since resumed operations:
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8
its overall demand as the year progresses. In addition, demand at the Company’s group-oriented hotels is increasing as corporate and association groups return to the Company’s hotels. The Company is unable to predict whenanticipates that group demand will compose a much more meaningful component of its remaining temporarily suspended hotel will resume its operations, or if those hotels that have resumed operations will be temporarily suspended again. The extenttotal room nights during the remainder of 2022. However, the negative effects of the COVID-19 pandemic on the Company’s businesshotel industry have been unprecedented, and the hotel industry at large, however, will ultimately depend onCompany has limited visibility to predict future developments, including, but not limited to, the duration and severity of the pandemic, how quickly and successfully effective vaccines and therapies are distributed and administered, as well as the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume.operations.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2021March 31, 2022 and December 31, 2020,2021, and for the three and six months ended June 30,March 31, 2022 and 2021, and 2020, 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
8
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 year ended December 31, 2020,2021, filed with the Securities and Exchange Commission on February 12, 2021.23, 2022. Operating results for the three and six months ended June 30, 2021March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.2022.
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.
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 units, using the more dilutive of either the two-class method or the treasury stock method.
The following table sets forth the computation of basic and diluted earnings (loss) per common share (unaudited and in thousands, except per share data):
| | | | | | |
| | Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Numerator: | | | | | | |
Net income (loss) | | $ | 15,123 | | $ | (55,287) |
(Income) loss from consolidated joint venture attributable to noncontrolling interest | | | (1,134) | | | 1,975 |
Preferred stock dividends | | | (3,773) | | | (3,207) |
Undistributed income allocated to unvested restricted stock compensation | | | (67) | | | — |
Numerator for basic and diluted income (loss) attributable to common stockholders | | $ | 10,149 | | $ | (56,519) |
Denominator: | | | | | | |
Weighted average basic and diluted common shares outstanding | | | 217,271 | | | 214,438 |
Basic and diluted income (loss) attributable to common stockholders per common share | | $ | 0.05 | | $ | (0.26) |
9
The following table sets forthDuring the computationthree months ended March 31, 2022 and 2021, the Company excluded 1,323,953 and 1,589,336 anti-dilutive unvested time-based restricted stock awards that generally vest over periods ranging from three years to five years from its calculation of basic and diluted loss per common share (unaudited and in thousands, except per share data):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Numerator: | | | | | | | | | | | | |
Net loss | | $ | (27,918) | | $ | (117,500) | | $ | (83,205) | | $ | (280,019) |
Loss from consolidated joint venture attributable to noncontrolling interest | | | 596 | | | 2,162 | | | 2,571 | | | 2,620 |
Preferred stock dividends and redemption charge | | | (7,795) | | | (3,207) | | | (11,002) | | | (6,414) |
Distributions paid on unvested restricted stock compensation | | | — | | | — | | | — | | | (69) |
Numerator for basic and diluted loss attributable to common stockholders | | $ | (35,117) | | $ | (118,545) | | $ | (91,636) | | $ | (283,882) |
Denominator: | | | | | | | | | | | | |
Weighted average basic and diluted common shares outstanding | | | 215,113 | | | 214,225 | | | 214,778 | | | 217,631 |
Basic and diluted loss attributable to common stockholders per common share | | $ | (0.16) | | $ | (0.55) | | $ | (0.43) | | $ | (1.30) |
The Company’s unvested restricted shares associated with its long-term incentive plan have been excluded from the above calculation of earnings per share, forrespectively. In addition, during the three and six months ended June 30, 2021March 31, 2022, the Company excluded the following anti-dilutive unvested performance-based restricted stock units from its calculation of diluted earnings per share: 169,832 shares that vest based on the achievement of the Company’s total relative shareholder return following a two year performance period; 254,748 shares that vest based on the achievement of the Company’s total relative shareholder return following a three year performance period; and 2020, as their inclusion would have been anti-dilutive.188,004 shares that vest based on the achievement of pre-determined stock price targets during a five year performance period.
Restricted Cash
Restricted cash is comprised of reserve accounts forprimarily includes lender reserves required by our debt service, interest, seasonality, capital replacements, ground leases, property taxes and hotel-generated cash that is held in accounts for the benefit of lenders. These restricted funds are subject to disbursement approval based on in-place agreements and policiesreserves for capital expenditures required by certain of the Company’s lenders, ground lessors and/or hotel managers.our management and franchise agreements. At times, restricted cash also includes hotel acquisition or disposition-related earnest money either paid to a seller or potential seller of a hotel or received from a buyer or potential buyer of one of the Company’s hotels and held in escrow until either the purchase or sale is completed or subject to the termsreserves pending completion of the related purchase and sale agreement.associated transaction. In addition, restricted cash as of June 30, 2021March 31, 2022 and December 31, 2020 includes $10.92021 included $10.3 million and $11.6$10.4 million, respectively, held in escrow related to certain current and potential employee-related obligations in accordance with the assignment-in-lieu agreement between the Company and the mortgage holder of one of the Company’s former hotels, $3.1 million held in escrow as of both March 31, 2022 and December 31, 2021 for the purpose of satisfying any severance or similar obligations that arise in connection with the termination of hotel personnel and any employment claim by hotel personnel at the Four Seasons Resort Napa Valley and $0.2 million held as collateral for certain letters of credit as of both March 31, 2022 and December 31, 2021 (see Note 11)12).
Investments in Hotel Properties
Investments in hotel properties, including land, buildings, furniture, fixtures and equipment (“FF&E”) and identifiable intangible assets are recorded at their respective relative fair values for an asset acquisition or at their estimated fair values for a business 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 of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish the Company’s hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 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.
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 1415 to 2720 years. All other franchise fees that are based on the Company’s results of operations are expensed as incurred.
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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. The Company evaluates its long-lived assets to determine if there are indicators of impairment on a quarterly basis. No single indicator would necessarily result in the Company preparing an estimate to determine if a hotel’s future undiscounted cash flows are less than the book value of the hotel. The Company uses judgment to determine if the severity of any single indicator, or the fact there are a number of indicators of less severity that when combined, would result in an indication that a hotel requires an estimate of the undiscounted cash flows to determine if an impairment has occurred. If 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 one or more discounted cash flow analyses to estimate the fair value of the hotel, taking into account the hotel’s expected cash flow from operations, the Company’s estimate of how long it will own the hotel and the estimated proceeds from the disposition of the hotel. When multiple cash flow analyses are prepared, a probability is assigned to each cash flow analysis based upon the estimated likelihood of each scenario occurring. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company’s judgment is required in determining the discount rate applied to
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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, 0no hotels were impaired during either the first sixthree months ofended March 31, 2022 or 2021.
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.
Finance and Operating Leases
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 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. The Company has elected to not separate lease components from nonlease components, resulting in the Company accounting for lease and nonlease components as one single lease component.
Leases are accounted for using a dual approach, classifying leases as either operating or financing based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the Company. This classification determines whether the lease expense is recognized on a straight-line basis over the term of the lease for operating leases or based on an effective interest method for finance leases.
Operating leaseLease ROU assets are recognized at the lease commencement date and include the amount of the initial operating lease obligation, any lease payments made at or before the commencement date, excluding any lease incentives received, and any initial direct costs incurred. For leases that have extension options that the Company can exercise at its discretion, management uses judgment to determine if it is reasonably certain that the Company will in fact exercise such option. If the extension option is reasonably certain to occur, the Company includes the extended term’s lease payments in the calculation of the respective lease liability. None of the Company’s leases contain any material residual value guarantees or material restrictive covenants.
Operating leaseLease 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.
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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, no operating or finance lease ROU assets were impaired during either the first sixthree months ofended March 31, 2022 or 2021.
Noncontrolling Interest
The Company’s consolidated financial statements include an entity in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interest is reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from the less-than-wholly owned subsidiary are reported at their consolidated amounts, including both the amounts attributable to the Company and the noncontrolling interest. Income or loss is allocated to the noncontrolling interest based on its weighted average ownership percentage for the applicable period. The consolidated statements of equity include beginning balances, activity for the period and ending balances for each component of stockholders’ equity, noncontrolling interest and total equity.
At both June 30, 2021March 31, 2022 and December 31, 2020,2021, 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.
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Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to hotel guests, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Room revenue and other occupancy based fees are recognized over a guest’s stay at the previously agreed upon daily rate. 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 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. Cancellation fees and attrition fees, which are charged to groups when they do not fulfill their contracted minimum number of room nights or minimum food and beverage spending requirements, are typically recognized as revenue in the period the Company determines it is probable that a significant reversal in the amount of revenue recognized will not occur, which is generally the period in which these fees are collected.
Food and beverage revenue and other ancillary services revenue are generated when a customer chooses to purchase goods or services separately from a hotel room. The revenue is recognized when 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 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 from customers at its hotels at the time of purchase, which 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):
| | | | | | | | | | | ||
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
| | 2021 | | 2020 | | 2022 | | 2021 | ||||
| | (unaudited) | | | | | (unaudited) | | | | ||
Trade receivables, net (1) | | $ | 12,841 | | $ | 8,110 | | $ | 19,290 | | $ | 16,055 |
Contract liabilities (2) | | $ | 28,260 | | $ | 16,815 | | $ | 55,762 | | $ | 40,226 |
(1) | Trade receivables are included in accounts receivable, net on the accompanying consolidated balance sheets. |
(2) | Contract liabilities consist of advance deposits and are included in either other current liabilities or other liabilities on the accompanying consolidated balance sheets. |
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During the three and six months ended June 30,March 31, 2022 and 2021, the Company recognized approximately $0.3$13.8 million and $1.1$0.8 million, respectively, in revenue related to its outstanding contract liabilities. During the three and six months ended June 30, 2020, the Company recognized zero and approximately $10.2 million, respectively, in revenue 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 1 single reportable segment, hotel ownership.
New Accounting Standards and Accounting Changes
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU No. 2020-04”), which provides temporary optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). Contracts that meet the following criteria are eligible for relief from the modification accounting requirements in GAAP: the contract references LIBOR or another rate that is expected to be discontinued due to reference rate reform; the modified terms directly replace or have the potential to replace the reference rate that is expected to be discontinued due to reference rate reform; and any contemporaneous changes to other terms that change or have the potential to change the amount and timing of contractual cash flows must be related to the replacement of the reference rate. For a
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contract that meets the criteria, the guidance generally allows an entity to account for and present modifications as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. That is, the modified contract is accounted for as a continuation of the existing contract. ASU No. 2020-04 wasis effective upon issuance, and is applied prospectively from any date beginning March 12, 2020. The relief is temporary and generally cannot be applied to contract modifications that occur after December 31, 2022. The Company intends to take advantage of the expedients offered by ASU No. 2020-04 when it modifies its variable rate debt and interest rate cap and swap derivatives, which will affect the Company’s $220.0 million loan secured by the Hilton San Diego Bayfront, its credit facility and its unsecured term loans. The adoption of ASU No. 2020-04 is not expected to have a material impact on the Company’s consolidated financial statements.
3. Investment in Hotel Properties
Investment in hotel properties, net consisted of the following (in thousands):
| | | | | | | | | | | ||
| | | | | | | | | | | ||
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (unaudited) | | | | (unaudited) | | | ||||
Land | | $ | 611,538 | | $ | 571,212 | | $ | 584,740 | | $ | 604,692 |
Buildings and improvements | | | 2,725,893 | | | 2,523,750 | | | 2,579,854 | | | 2,729,461 |
Furniture, fixtures and equipment | | | 452,610 | | | 431,918 | | | 401,559 | | | 431,780 |
Intangible assets | | | 34,891 | | | 21,192 | | | 41,884 | | | 43,117 |
Franchise fees | | | 743 | | | 743 | ||||||
Construction in progress | | | 27,082 | | | 15,831 | | | 76,707 | | | 41,260 |
Investment in hotel properties, gross | | | 3,852,757 | | | 3,564,646 | | | 3,684,744 | | | 3,850,310 |
Accumulated depreciation and amortization | | | (1,165,362) | | | (1,103,148) | | | (1,071,316) | | | (1,130,294) |
Investment in hotel properties, net | | $ | 2,687,395 | | $ | 2,461,498 | | $ | 2,613,428 | | $ | 2,720,016 |
In April 2021, the Company purchased the fee simple interest in the newly-developed 130-room Montage Healdsburg, California for $265.0 million, excluding acquisition costs and prorations. The acquisition was funded through the issuance of 2,650,000 shares of Series G Cumulative Redeemable Preferred Stock (the “Series G preferred stock”) with an aggregate liquidation preference of $66.3 million (see Note 9), as well as cash on hand.
4. Disposals
As partIn February 2022, the Company sold the Hyatt Centric Chicago Magnificent Mile for net proceeds of $67.2 million, including a $4.0 million deposit received from the buyer of the purchase price allocation for the Montage Healdsburg,hotel in December 2021, and recorded a gain of $11.3 million. In March 2022, the Company allocatedsold the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile for combined net proceeds of $128.1 million and recorded a totalcombined gain of $13.7 million to intangible assets related to$11.6 million. None of these sales represented a strategic shift that had a major impact on the hotel’s residential rental and social membership programs, whereby future ownersCompany’s business plan or its primary markets; therefore none of the adjacent separately owned Montage Residences Healdsburg will be eligible to participate in an optional rental programhotels qualified as well as become social members of the Montage Healdsburg to access use of the hotel’s facilities. The $13.7 million will be amortized over the life of the related remaining 25-year resort management agreement once the hotel begins to recognize revenue related to the programs.a discontinued operation.
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4.5. Fair Value Measurements and Interest Rate Derivatives
Fair Value Measurements
As of June 30, 2021March 31, 2022 and December 31, 2020,2021, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The 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. |
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As of both June 30, 2021March 31, 2022 and December 31, 2020,2021, the Company measured its interest rate derivatives at fair value on a recurring basis. The Company 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.
The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at June 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date | |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
June 30, 2021 (unaudited): | | | | | | | | | | | | |
Interest rate cap derivative | | $ | — | | $ | — | | $ | — | | $ | — |
Total assets measured at fair value at June 30, 2021 | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | |
December 31, 2020: | | | | | | | | | | | | |
Renaissance Westchester (1) | | $ | 14,125 | | $ | — | | $ | 14,125 | | $ | — |
Interest rate cap derivative | | | — | | | — | | | — | | | — |
Total assets measured at fair value at December 31, 2020 | | $ | 14,125 | | $ | — | | $ | 14,125 | | $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date | |||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
March 31, 2022 (unaudited): | | | | | | | | | | | | |
Interest rate cap derivative | | $ | 11 | | $ | — | | $ | 11 | | $ | — |
Total assets measured at fair value at March 31, 2022 | | $ | 11 | | $ | — | | $ | 11 | | $ | — |
| | | | | | | | | | | | |
December 31, 2021: | | | | | | | | | | | | |
Interest rate cap derivative | | $ | 3 | | $ | — | | $ | 3 | | $ | — |
Total assets measured at fair value at December 31, 2021 | | $ | 3 | | $ | — | | $ | 3 | | $ | — |
The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at June 30, 2021March 31, 2022 and December 31, 20202021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at Reporting Date | | | | | Fair Value Measurements at Reporting Date | |||||||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||
June 30, 2021 (unaudited): | | | | | | | | | | | | | ||||||||||||
March 31, 2022 (unaudited): | | | | | | | | | | | | | ||||||||||||
Interest rate swap derivatives | | $ | 4,132 | | $ | — | | $ | 4,132 | | $ | — | | $ | 394 | | $ | — | | $ | 394 | | $ | — |
Total liabilities measured at fair value at June 30, 2021 | | $ | 4,132 | | $ | — | | $ | 4,132 | | $ | — | ||||||||||||
Total liabilities measured at fair value at March 31, 2022 | | $ | 394 | | $ | — | | $ | 394 | | $ | — | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020: | | | | | | | | | | | | |||||||||||||
December 31, 2021: | | | | | | | | | | | | | ||||||||||||
Interest rate swap derivatives | | $ | 5,710 | | $ | — | | $ | 5,710 | | $ | — | | $ | 2,228 | | $ | — | | $ | 2,228 | | $ | — |
Total liabilities measured at fair value at December 31, 2020 | | $ | 5,710 | | $ | — | | $ | 5,710 | | $ | — | ||||||||||||
Total liabilities measured at fair value at December 31, 2021 | | $ | 2,228 | | $ | — | | $ | 2,228 | | $ | — |
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, 2022 (unaudited) and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Estimated Fair Value of Assets (Liabilities) (1) | ||||
| | Strike / Capped | | Effective | Maturity | | Notional | | March 31, | | December 31, | ||||
Hedged Debt | Type | Rate | Index | Date | Date | | Amount | | 2022 | | 2021 | ||||
Hilton San Diego Bayfront | Cap | 6.000 | % | 1-Month LIBOR | December 9, 2021 | December 15, 2022 | | $ | 220,000 | | $ | 11 | | $ | 3 |
Term Loan 1 | Swap | 1.591 | % | 1-Month LIBOR | October 29, 2015 | September 2, 2022 | | $ | 85,000 | | | (201) | | | (744) |
Term Loan 2 | Swap | 1.853 | % | 1-Month LIBOR | January 29, 2016 | January 31, 2023 | | $ | 100,000 | | | (193) | | | (1,484) |
| | | | | | | | | | | $ | (383) | | $ | (2,225) |
(1) | The fair values of the cap agreement are included in prepaid expenses and other current assets on the accompanying consolidated balance sheets as of both March 31, 2022 and December 31, 2021. The fair values of both swap agreements are included in other current liabilities on the accompanying consolidated balance sheet as of March 31, 2022. As of December 31, 2021, the fair values of Term Loan 1’s swap agreement and Term Loan 2’s swap agreement are included in other current liabilities and other liabilities, respectively, on the accompanying consolidated balance sheet. |
Noncash changes in the fair values of the Company’s interest rate derivatives resulted in decreases to interest expense for the three months ended March 31, 2022 and 2021 as follows (unaudited and in thousands):
| | | | | | | |
| | Three Months Ended March 31, | | ||||
| | 2022 | | 2021 | | ||
Noncash interest on derivatives, net | | $ | (1,842) | | $ | (869) | |
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Interest Rate Derivatives
The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at June 30, 2021 (unaudited) and December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Estimated Fair Value of Assets (Liabilities) (1) | ||||
| | Strike / Capped | | Effective | Maturity | | Notional | | June 30, | | December 31, | ||||
Hedged Debt | Type | Rate | Index | Date | Date | | Amount | | 2021 | | 2020 | ||||
Hilton San Diego Bayfront | Cap | 6.000 | % | 1-Month LIBOR | December 9, 2020 | December 15, 2021 | | $ | 220,000 | | $ | — | | $ | — |
$85.0 million term loan | Swap | 1.591 | % | 1-Month LIBOR | October 29, 2015 | September 2, 2022 | | $ | 85,000 | | | (1,468) | | | (2,100) |
$100.0 million term loan | Swap | 1.853 | % | 1-Month LIBOR | January 29, 2016 | January 31, 2023 | | $ | 100,000 | | | (2,664) | | | (3,610) |
| | | | | | | | | | | $ | (4,132) | | $ | (5,710) |
Noncash changes in the fair values of the Company’s interest rate derivatives resulted in (decreases) increases to interest expense for the three and six months ended June 30, 2021 and 2020 as follows (unaudited and in thousands):
| | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | ||||
Noncash interest on derivatives | | $ | (709) | | $ | 216 | | $ | (1,578) | | $ | 6,296 | |
Fair Value of Debt
As of June 30, 2021March 31, 2022 and December 31, 2020, 70.5%2021, 61.8% and 70.6%64.0%, 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 June 30, 2021March 31, 2022 (unaudited) and December 31, 20202021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |||
| June 30, 2021 | | December 31, 2020 | March 31, 2022 | | December 31, 2021 | ||||||||||||||||
| Carrying Amount (1) | | Fair Value (2) | | Carrying Amount (1) | | Fair Value (2) | Carrying Amount (1) | | Fair Value (2) | | Carrying Amount (1) | | Fair Value (2) | ||||||||
Debt | $ | 746,303 | | $ | 720,551 | | $ | 747,945 | | $ | 715,042 | $ | 575,934 | | $ | 558,428 | | $ | 611,437 | | $ | 590,359 |
| | | | | | | | | | | | | | | | | | | |
(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. |
5.6. Other Assets
Other assets, net consisted of the following (in thousands):
| | | | | | | | | | | ||
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (unaudited) | | | | (unaudited) | | | ||||
Property and equipment, net | | $ | 6,256 | | $ | 6,767 | | $ | 5,655 | | $ | 5,912 |
Deferred rent on straight-lined third-party tenant leases | | | 2,567 | | | 2,819 | | | 2,320 | | | 2,455 |
Other receivables | | | 2,077 | | | 2,633 | | | 692 | | | 3,914 |
Other | | | 433 | | | 226 | | | 942 | | | 915 |
Total other assets, net | | $ | 11,333 | | $ | 12,445 | | $ | 9,609 | | $ | 13,196 |
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6.7. Notes Payable
Notes payable consisted of the following (in thousands):
| | | | | | | | | | | ||
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (unaudited) | | | | (unaudited) | | | ||||
Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% to 4.15%; maturing at dates ranging from December 11, 2024 through January 6, 2025. The notes are collateralized by first deeds of trust on 2 hotel properties at both June 30, 2021 and December 31, 2020. | | $ | 136,303 | | $ | 137,945 | ||||||
Note payable requiring payments of interest only, bearing a blended rate of one-month LIBOR plus 105 basis points, resulting in effective interest rates of 1.144% and 1.192% at June 30, 2021 and December 31, 2020, respectively; matures on December 9, 2021 with 2 one-year options to extend, which the Company intends to exercise. The note is collateralized by a first deed of trust on 1 hotel property. | |
| 220,000 | |
| 220,000 | ||||||
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.591%, resulting in an effective interest rate of 3.941%. Matures on September 3, 2022. | | | 85,000 | | | 85,000 | ||||||
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.853%, resulting in an effective interest rate of 4.203%. Matures on January 31, 2023. | | | 100,000 | | | 100,000 | ||||||
Note payable requiring payments of interest only, bearing a blended rate of one-month LIBOR plus 105 basis points, resulting in effective interest rates of 1.174% and 1.140% at March 31, 2022 and December 31, 2021, respectively; matures on December 9, 2022 with 1 remaining one-year option to extend, which the Company intends to exercise. The note is collateralized by a first deed of trust on 1 hotel property. | | $ | 220,000 | | $ | 220,000 | ||||||
Note payable requiring payments of interest and principal, with a fixed rate of 4.15%; matures on December 11, 2024. The note is collateralized by a first deed of trust on 1 hotel property. | |
| 77,634 | |
| 78,137 | ||||||
Unsecured Term Loan 1 requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 235 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.591%, resulting in an effective interest rate of 3.941%. Matures on September 3, 2022. | | | 19,400 | | | 19,400 | ||||||
Unsecured Term Loan 2 requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 235 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.853%, resulting in an effective interest rate of 4.203%. Matures on January 31, 2023. | | | 88,900 | | | 88,900 | ||||||
Unsecured Series A Senior Notes requiring semi-annual payments of interest only, bearing interest at 5.94%. Matures on January 10, 2026. | | | 90,000 | | | 90,000 | | | 65,000 | | | 90,000 |
Unsecured Series B Senior Notes requiring semi-annual payments of interest only, bearing interest at 6.04%. Matures on January 10, 2028. | |
| 115,000 | |
| 115,000 | |
| 105,000 | |
| 115,000 |
Total notes payable | | $ | 746,303 | | $ | 747,945 | | $ | 575,934 | | $ | 611,437 |
| | | | | | | | | | | ||
Current portion of notes payable | | $ | 3,375 | | $ | 3,305 | | $ | 110,321 | | $ | 21,401 |
Less: current portion of deferred financing costs | | | (1,044) | | | (1,044) | | | (580) | | | (707) |
Carrying value of current portion of notes payable | | $ | 2,331 | | $ | 2,261 | | $ | 109,741 | | $ | 20,694 |
| | | | | | | | | | | ||
Notes payable, less current portion | | $ | 742,928 | | $ | 744,640 | | $ | 465,613 | | $ | 590,036 |
Less: long-term portion of deferred financing costs | |
| (1,591) | |
| (2,112) | |
| (1,012) | |
| (1,295) |
Carrying value of notes payable, less current portion | | $ | 741,337 | | $ | 742,528 | | $ | 464,601 | | $ | 588,741 |
In February 2022, the Company used a portion of the proceeds received from the disposition of the Hyatt Centric Chicago Magnificent Mile to repay $25.0 million of its unsecured Series A Senior Notes and $10.0 million of its unsecured Series B Senior Notes, resulting in remaining balances of $65.0 million and $105.0 million, respectively, as of March 31, 2022. In conjunction with the repayments, the Company recorded a $0.2 million loss on extinguishment of debt related to the write-off of deferred financing costs.
Certain of the Company’s loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. These provisions were triggered in January 2021 for the loansloan secured by the Embassy Suites La Jolla and the JW Marriott New Orleans and in JanuaryMay 2021 and atfor the loan secured by the Hilton San Diego Bayfront in May 2021.Bayfront. As of June 30, 2021, a nominal amount ofMarch 31, 2022, no excess cash was held in lockbox accounts for the benefit of the lenders and included in restrictedlenders. In April 2022, the Company informed the lender for the loan secured by the Hilton San Diego Bayfront that it had met the criteria to exit the cash on the accompanying consolidated balance sheet.trap. The cash trap provisionsprovision triggered on these three loansthe loan secured by the JW Marriott New Orleans will remain until the hotels reachhotel reaches profitability levels that terminate the cash traps.trap.
As of June 30, 2021,March 31, 2022, the Company had no amount outstanding on the revolving portion of its credit facility, with $500.0 million of capacity available for additional borrowing under the facility. The Company’s ability to draw on the revolving portion of the credit facility may be subject to the Company’s compliance with various financial covenants on its secured and unsecured debt.
TheIn March 2022, the Company is subjectelected to variousearly terminate the covenant relief period related to its unsecured debt, having satisfied the financial covenants on its securedstipulated in the 2020 and unsecured debt. In July and December 2020, the Company completed2021 amendments to its unsecured debt consisting of its revolving credit facility, term loans and senior notesagreements (the “Unsecured Debt Amendments”). Among other provisions, for the quarter ended December 31, 2021. The Unsecured Debt Amendments include a waiver of required financial covenantswere scheduled to provide covenant relief through the end of the firstthird quarter of 2022, with quarterly testing resuming for the period ending March 31, 2022 (see Note 12). The Company can elect to terminate the covenant relief period early, subject to the achievement of the original financial covenants at the end of any quarterly measurement period.September 30, 2022.
16
Following the Company’s early termination of the covenant relief period in March 2022, the original financial covenants on its unsecured debt agreements will be phased-in over the following five quarters to ease compliance. By exiting the covenant relief period, the Company is no longer subject to the additional restrictions on debt issuance and repayment, capital investment, share repurchases and dividend distributions that were imposed as part of the Unsecured Debt Amendments.
Interest Expense
Total interest incurred and expensed on the notes payable and finance lease obligation was as follows (unaudited and in thousands):
| | | | | | | | | | | | | ||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
Interest expense on debt and finance lease obligation | | $ | 8,037 | | $ | 12,037 | | $ | 15,820 | | $ | 22,765 | | $ | 6,243 | | $ | 7,783 |
Noncash interest on derivatives | | | (709) | | | 216 | | (1,578) | | | 6,296 | |||||||
Noncash interest on derivatives, net | | | (1,842) | | | (869) | ||||||||||||
Amortization of deferred financing costs | | | 737 | | | 697 | | | 1,472 | | | 1,396 | | | 680 | | | 735 |
Total interest expense | | $ | 8,065 | | $ | 12,950 | | $ | 15,714 | | $ | 30,457 | | $ | 5,081 | | $ | 7,649 |
7.8. Other Current Liabilities and Other Liabilities
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
| | | | | | | | | ||||
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (unaudited) | | | | (unaudited) | | | ||||
Property, sales and use taxes payable | | $ | 14,676 | | $ | 10,134 | | $ | 7,966 | | $ | 12,591 |
Accrued interest | | | 7,033 | | | 6,914 | | | 3,342 | | | 6,858 |
Advance deposits | | | 26,167 | | | 13,341 | | | 49,430 | | | 33,750 |
Interest rate swap derivatives | | | 394 | | | 744 | ||||||
Management fees payable | | | 598 | | | 169 | | | 1,670 | | | 1,691 |
Other | | | 2,219 | | | 2,048 | | | 2,869 | | | 3,250 |
Total other current liabilities | | $ | 50,693 | | $ | 32,606 | | $ | 65,671 | | $ | 58,884 |
Other Liabilities
Other liabilities consisted of the following (in thousands):
| | | | | | | | | ||||
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
|
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||
| | (unaudited) | | | | (unaudited) | | | ||||
Deferred revenue | | $ | 6,385 | | $ | 7,911 | | $ | 6,447 | | $ | 6,598 |
Interest rate swap derivatives | | | 4,132 | | | 5,710 | ||||||
Interest rate swap derivative | | | — | | | 1,484 | ||||||
Other | | | 3,095 | | | 3,873 | | | 2,696 | | | 3,574 |
Total other liabilities | | $ | 13,612 | | $ | 17,494 | | $ | 9,143 | | $ | 11,656 |
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8.9. Leases
TheAs of both March 31, 2022 and December 31, 2021, the Company has both finance andhad operating leases for ground, building, office, equipment and airspace leases maturing inwith maturity dates ranging from 20252024 through 2097, including expectedexcluding renewal options. Including all renewal options available to the Company, the lease maturity date extends to 2147.
LeasesOperating leases were included on the Company’s consolidated balance sheets as follows (in thousands):
| | | | | | | |
| | June 30, | | December 31, | | ||
| | 2021 | | 2020 | | ||
| | (unaudited) | | | | | |
Finance Lease: | | | | | | | |
Right-of-use asset, gross (buildings and improvements) | | $ | 58,799 | | $ | 58,799 | |
Accumulated amortization | | | (13,352) | | | (12,617) | |
Right-of-use asset, net | | $ | 45,447 | | $ | 46,182 | |
| | | | | | | |
Accounts payable and accrued expenses | | $ | 2 | | $ | 1 | |
Lease obligation, less current portion | | | 15,568 | | | 15,569 | |
Total lease obligation | | $ | 15,570 | | $ | 15,570 | |
| | | | | | | |
Remaining lease term | | | 77 years | | | | |
Discount rate | | | 9.0 | % | | | |
| | | | | | | |
Operating Leases: | | | | | | | |
Right-of-use assets, net | | $ | 24,939 | | $ | 26,093 | |
| | | | | | | |
Accounts payable and accrued expenses | | $ | 5,344 | | $ | 5,028 | |
Lease obligations, less current portion | | | 27,816 | | | 29,954 | |
Total lease obligations | | $ | 33,160 | | $ | 34,982 | |
| | | | | | | |
Weighted average remaining lease term, including reasonably certain extension options (1) | | | 6 years | | | | |
Weighted average discount rate | | | 5.1 | % | | | |
| | | | | | | |
| | March 31, | | December 31, | | ||
| | 2022 | | 2021 | | ||
| | (unaudited) | | | | | |
Right-of-use assets, net | | $ | 19,879 | | $ | 23,161 | |
| | | | | | | |
Accounts payable and accrued expenses | | $ | 5,516 | | $ | 5,586 | |
Lease obligations, less current portion | | | 21,228 | | | 25,120 | |
Total lease obligations | | $ | 26,744 | | $ | 30,706 | |
| | | | | | | |
Weighted average remaining lease term | | | 34 years | | | | |
Weighted average discount rate | | | 5.0 | % | | | |
As of December 31, 2021, the Company had an operating lease related to certain office and parking space at the Hilton Garden Inn Chicago Downtown/Magnificent Mile. Upon the hotel’s sale in March 2022 (see Note 4), the Company was no longer obligated under the operating lease and the related $2.3 million right-of-use asset, net and $2.6 million lease obligation were removed from the Company’s consolidated balance sheet as of March 31, 2022.
As of December 31, 2021, the Company also had a finance lease related to the building occupied by the Hyatt Centric Chicago Magnificent Mile. The related lease obligation and right-of-use asset, net were classified as held for sale on the accompanying consolidated balance sheet as of December 31, 2021. Upon the hotel’s sale in February 2022 (see Note 4), the Company was no longer obligated under the building lease and the related $44.7 million right-of-use asset, net and $15.6 million finance lease obligation were removed from the Company’s consolidated balance sheet as of March 31, 2022.
The components of lease expense were as follows (unaudited and in thousands):
| | | | | | | | | | | | | | | | | ||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | ||||||
Finance lease cost: | | | | | | | | | | | | | ||||||
Finance lease cost (1): | | | | | ||||||||||||||
Amortization of right-of-use asset | | $ | 367 | | $ | 367 | | $ | 735 | | $ | 735 | | $ | — | | $ | 368 |
Interest on lease obligation | | | 351 | | | 351 | | | 702 | | | 702 | | 117 | | 351 | ||
Operating lease cost | | | 1,366 | | | 2,341 | | | 2,686 | | | 4,070 | | 1,389 | | 1,320 | ||
Variable lease cost | | | 13 | | | (689) | | | 13 | | | 24 | | | 881 | | | — |
Total lease cost | | $ | 2,097 | | $ | 2,370 | | $ | 4,136 | | $ | 5,531 | | $ | 2,387 | | $ | 2,039 |
(1) | Finance lease cost for the three months ended March 31, 2022 and 2021 included expenses for the Hyatt Centric Chicago Magnificent Mile’s finance lease obligation before the hotel’s sale in February 2022 (see Note 4). |
(2) | Several of the Company’s hotels pay percentage rent, which is calculated on operating revenues above certain thresholds. |
9.10. Stockholders’ Equity
Series E Cumulative Redeemable Preferred Stock
In June 2021, the Company redeemed all 4,600,000 shares of its 6.95% Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. An additional redemption charge of $4.0 million was recognized related to the original issuance costs of the Series E preferred stock, which were previously included in additional paid in capital. After the redemption date, the Company has no outstanding shares of Series E preferred stock, and all rights of the holders of such shares were terminated. Because the redemption of the Series E preferred stock was a redemption in full, trading of the Series E preferred stock on the New York Stock Exchange ceased on the June 11, 2021 redemption date.
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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. As of May 17, 2021, the Series F preferred stock is 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 (see Note 12). 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.
Series G Cumulative Redeemable Preferred Stock
Contemporaneous with the Company’s April 2021 purchase of the Montage Healdsburg, the Company issued 2,650,000 shares of its Series G Cumulative Redeemable Preferred Stock (“Series G preferred stockstock”) to the hotel’s seller as partial payment of the hotel (see Note 3).hotel. The Series G preferred stock, which is callable at its $25.00 liquidation preferenceredemption price plus accrued and unpaid dividends by the Company at any time, accrues dividends at an initial rate equal to the Montage Healdsburg’s annual net operating income yield on the Company’s investment in the hotel.resort. The annual dividend rate is expected to increase in 2023 to the greater of 3.0% or the rate equal to the Montage Healdsburg’s annual net operating income yield on the Company’s total investment in the resort. The Series G preferred stock is not convertible into any other security.
18
Series H Cumulative Redeemable Preferred Stock
In May 2021, the Company issued 4,600,000 shares of its 6.125% Series H Cumulative Redeemable Preferred Stock (“Series H preferred stock”) with a liquidation preference of $25.00. On or after May 24, 2026, the Series H 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 H preferred stock, the Company may at its option redeem the Series H preferred stock for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. If the Company chooses not to redeem the Series H preferred stock upon the occurrence of a change of control, holders of the Series H preferred stock may under certain circumstances,convert their preferred shares into shares of the Company’s common stock.
Series I Cumulative Redeemable Preferred Stock
In July 2021, the Company issued 4,000,000 shares of its 5.70% Series I Cumulative Redeemable Preferred Stock (“Series I preferred stock”) with a liquidation preference of $25.00. On or after July 16, 2026, the Series I 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 I preferred stock, the Company may at its option redeem the Series I preferred stock for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. If the Company chooses not to redeem the Series I preferred stock upon the occurrence of a change of control, holders of the Series I preferred stock may convert their preferred shares into shares of the Company’s common stock.
Common Stock
Stock Repurchase Program. In February 2021, the Company’s board of directors reauthorized the Company’s existing stock repurchase program, allowing the Company to acquire up to $500.0 million of the Company’s common and preferred stock. The 2021 stock repurchase program has no stated expiration date. AsDuring the first quarter of June 30, 2021,2022, the Company has not repurchased any 3,879,025 shares of its common or preferred stock under the 2021 stock repurchase program. The redemption of the Series E preferred stock in June 2021 was completed through a separate authorization by the Company’s board of directors,for $43.5 million, including fees and commissions, leaving $500.0$456.6 million remaining for repurchase under the 2021 stock repurchase program.program (see Note 13). Future repurchases will depend on various factors, including the Company’s capital needs and restrictions under its various financing agreements, andas well as the price of the Company’s common and preferred stock.
ATM Agreements. In February 2017, the Company entered into separate “At the Market” Agreements (the “ATM Agreements”) with each of BofA Securities, Inc., 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. In June 2021,February 2022, the Company issued 2,913,682 sharesCompany’s board of directors reauthorized the $300.0 million ATM Agreements, or new similar agreements. No common stock was issued under the ATM Agreements for gross proceedsduring the first quarter of $38.4 million,2022, leaving $137.0$300.0 million available for sale under the ATM Agreements.sale.
10.11. Long-Term Incentive Plan
Restricted shares granted pursuant to theThe Company’s Long-Term Incentive Plan (“LTIP”) provides for granting awards to directors, officers and eligible employees. The awards may be in the form of incentive or nonqualified stock options, restricted shares or units, performance shares or units, share appreciation rights, or any combination thereof. As of March 31, 2022, the Company’s issued and outstanding awards consist of both time-based and performance-based restricted stock grants. Time-based restricted shares generally vest over a period of periods ranging from three years to five years from the date of grant. Performance-based restricted shares generally vest based on the Company’s total relative shareholder return and achievement of pre-determined stock price targets during performance periods ranging from two years to five years.
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.
19
The Company’s amortization expense and forfeitures related to restricted shares for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 were as follows (unaudited and in thousands):
| | | | | | | | | | | | | | | | | ||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
Amortization expense, including forfeitures | | $ | 4,659 | | $ | 3,064 | | $ | 7,411 | | $ | 5,271 | | $ | 3,578 | | $ | 2,752 |
| | | | | | | | | | | | | | | | | ||
Capitalized compensation cost (1) | | $ | 125 | | $ | 129 | | $ | 242 | | $ | 246 | | $ | 123 | | $ | 117 |
(1) | 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. |
11.12. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers currently require the Company to pay between 1.75%2.0% 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 and incentive management fees incurred by the Company during the three and six months ended June 30,March 31, 2022 and 2021 and 2020 were included in other property-level expenses on the Company’s consolidated statements of operations as follows (unaudited and in thousands):
| | | | | | | | | | | | | | | | | ||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
Basic management fees | | $ | 3,073 | | $ | 164 | | $ | 4,376 | | $ | 5,555 | | $ | 4,669 | | $ | 1,303 |
Incentive management fees | | | — | | | — | | | — | | | — | | | 1,558 | | | — |
Total basic and incentive management fees | | $ | 3,073 | | $ | 164 | | $ | 4,376 | | $ | 5,555 | | $ | 6,227 | | $ | 1,303 |
License and Franchise Agreements
The Company has entered into license and franchise agreements related to certain of its hotels. The license and franchise agreements require the Company to, among other things, pay monthly fees that are calculated based on specified percentages of certain revenues. The license and franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage and protection of trademarks. Compliance with such standards may from time to time require the Company to make significant expenditures for capital improvements.
Total license and franchise fees incurred by the Company during the three and six months ended June 30,March 31, 2022 and 2021 and 2020 were included in franchise costs on the Company’s consolidated statements of operations as follows (unaudited and in thousands):
| | | | | | | | | | | | | | | | |||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2022 |
| 2021 | ||||||
Franchise assessments (1) | | $ | 1,852 | | $ | 376 | | $ | 2,720 | | $ | 4,794 | | $ | 2,718 | | $ | 868 |
Franchise royalties (2) | | | 444 | | | (38) | | | 567 | | | 880 | | | 286 | | | 123 |
Total franchise costs | | $ | 2,296 | | $ | 338 | | $ | 3,287 | | $ | 5,674 | | $ | 3,004 | | $ | 991 |
(1) | Includes advertising, reservation and frequent guest program assessments. |
(2) |
Renovation and Construction Commitments
At June 30, 2021, the Company had various contracts outstanding with third parties in connection with the ongoing renovations of certain of its hotel properties. The remaining commitments under these contracts at June 30, 2021 totaled $36.5 million.
20
Renovation and Construction Commitments
At March 31, 2022, the Company had various contracts outstanding with third parties in connection with the ongoing renovations of certain of its hotel properties. The remaining commitments under these contracts at March 31, 2022 totaled $75.2 million.
Concentration of Risk
The concentration of the Company’s hotels in California, Florida, 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 June 30, 2021, 13March 31, 2022, 10 of the 1814 Hotels were geographically concentrated as follows (unaudited):
| | | | | | | | | | | | | | |
| | | | | | Trailing 12-Month | | | | | | | Trailing 12-Month | |
| | | | Percentage of | | Total | | | | | Percentage of | | Total Consolidated | |
|
| Number of Hotels |
| Total Rooms |
| Consolidated Revenue |
|
| Number of Hotels |
| Total Rooms |
| Revenue |
|
California | | 5 | | 31 | % | 34 | % | | 5 | | 35 | % | 37 | % |
Florida | | 2 | | 10 | % | 16 | % | | 2 | | 13 | % | 14 | % |
Hawaii | | 1 | | 6 | % | 21 | % | | 1 | | 7 | % | 24 | % |
Illinois | | 3 | | 13 | % | 5 | % | |||||||
Massachusetts | | 2 | | 16 | % | 11 | % | | 2 | | 20 | % | 14 | % |
Hurricane Ida
During the third quarter of 2021, the Company’s New Orleans hotels were impacted to varying degrees by Hurricane Ida. While both hotels remained open during the storm, they sustained wind-driven damage, rain infiltration and water damage. The Company maintains customary property, casualty, environmental, flood and business interruption insurance at all of its hotels, the coverage of which is subject to certain limitations including higher deductibles in the event of a named storm. The Company is working with its insurers to identify and settle a property damage claim and a business interruption claim at the Hilton New Orleans St. Charles for portions of the costs related to Hurricane Ida. The Company has concluded that the cost to restore damages at the JW Marriott New Orleans will not exceed the hotel’s deductible.
During the first quarter of 2022, the Company incurred Hurricane Ida-related restoration expenses of $1.4 million at the Hilton New Orleans St. Charles and $0.1 million at the JW Marriott New Orleans, both of which are included in repairs and maintenance expense in the accompanying consolidated statement of operations for the three months ended March 31, 2022. Through March 31, 2022, the Company has incurred total Hurricane Ida-related restoration expenses of $4.4 million at the Hilton New Orleans St. Charles and $1.4 million at the JW Marriott New Orleans. Though the property damage claim has not been finalized, the Company recognized an advance payment of $4.4 million from its insurers in the first quarter of 2022 for Hurricane Ida-related property expenses previously incurred, which is included in interest and other income (loss) on the accompanying consolidated statement of operations for the three months ended March 31, 2022. In addition, during the first quarter of 2022, the Company recognized an advance payment of $1.0 million from its insurers related to its ongoing business interruption claim at the Hilton New Orleans St. Charles, which is included in other operating revenue on the accompanying consolidated statement of operations for the three months ended March 31, 2022.
The Company may incur additional Hurricane Ida-related expenses at both New Orleans hotels in the future. Any additional expenses will be recognized as incurred, and any additional property damage or business interruption recoveries will not be recognized until final settlements have been reached with the Company’s insurers.
Other
In accordance with the assignment-in-lieu agreement executed in December 2020 between the Company and the mortgage holder of the Hilton Times Square, the Company was required to retain approximately $11.6 million related to certain current and potential employee-related obligations (the “potential obligation”), which was included in restricted cash on the accompanying consolidated balance sheet at December. As of March 31, 2020. During the first six months of 2021, $0.52022, $0.9 million of the potential obligation washas been paid to the hotel’s employees.employees, including $0.1 million paid during the first quarter of 2022. In addition, the potential obligation wasis reassessed at both March 31, 2021 and June 30, 2021,the end of every quarter, resulting in a gain on extinguishment of debt of $0.1zero and $0.2 million and $0.3 million recognized duringincluded on the accompanying consolidated statements of operations for the three and six months ended June 30,March 31, 2022 and 2021, respectively. As of June 30,March 31, 2022 and December 31, 2021, $10.9 million remains in restricted cash on the accompanying consolidated balance sheet,sheets included $10.3 million and $10.4 million, respectively, which will continue to be held in escrow until the potential obligation is resolved. Other current liabilities on the accompanying consolidated balance sheets as of June 30, 2021March 31, 2022 and December 31, 2020,2021, included the potential obligation balances of $10.8$10.4 million and $11.6$10.5 million, respectively.
21
Coterminous with the Company’s acquisition of the Four Seasons Resort Napa Valley in 2021, the Company was required to deposit $3.1 million into a restricted bank account owned by the Company, but to which the hotel’s management company, Four Seasons, has sole and unrestricted access to withdraw funds for the purpose of satisfying any severance or similar obligations that arise in connection with the termination of hotel personnel and any employment claim by hotel personnel (“severance obligations”). Prior to Four Seasons withdrawing funds from the restricted account, the Company has the option to pay the severance obligations using its cash on hand. Should amounts in the restricted bank account be used to fund the severance obligations, the Company will be required to deposit additional funds into the restricted bank account so that the amount in the account totals any estimated future severance obligations. Currently, the estimated future severance obligations total $3.1 million, which is included in restricted cash on the accompanying consolidated balance sheets as of March 31, 2022 and December 31, 2021; however, the estimated future severance obligations may increase up to a maximum of $5.0 million.
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 June 30, 2021,March 31, 2022, the Company had $0.2 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 the letters of credit in the event of a contractual default by the Company relating to each respective obligation. No draws have been made through June 30,March 31, 2022. The letters of credit are collateralized with $0.2 million held in a restricted bank account owned by the Company, which is included in restricted cash on the accompanying consolidated balance sheets as of March 31, 2022 and December 31, 2021.
The Company is subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of its hotels, its managers and other Company matters. While it is not possible to ascertain the ultimate outcome of such matters, the Company believes that the aggregate identifiable amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on its financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings, including any potential COVID-19-related litigation, brought against the Company, however, is subject to significant uncertainties.
12.13. Subsequent Events
On July 2, 2021,In April 2022, the Company amendedrepurchased 457,634 shares of its Unsecured Debt Agreements, which removed certain restrictions in place duringcommon stock for $5.0 million, including fees and commissions, leaving $451.6 million remaining for repurchase under the covenant waiver period ending March 31, 2022. The restrictions removed include the limitation on the aggregate value of unencumbered hotel acquisitions the Company can complete and, provided that an event of default has not occurred, the requirement to prepay the Company’s unsecured debt using net proceeds received from asset sales or equity issuances.program.
On July 16, 2021,May 3, 2022, the Company issued 4,000,000 sharesentered into a definitive agreement with an affiliate of its 5.70% Series I Cumulative Redeemable Preferred Stock (“Series I preferred stock”) with a liquidation preference of $25.00. On or after July 16, 2026, the Series I 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
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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 I preferred stock, holders of the Series I preferred stock may, under certain circumstances, convert their preferred shares into shares of the Company’s common stock.
On July 13, 2021, the Company provided a notice of redemption to the holders of its Series F preferred stock. On August 12, 2021, proceeds received from the Company’s issuance of the Series I preferred stock will be used to redeem all 3,000,000 shares of the Series F preferred stock for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends of $0.183646 per share, for a total payment of $25.183646 per share. After the redemption date, the Series F preferred stock will no longer be deemed outstanding and all the rights of the holders of the Series F preferred stock will terminate, except the right to receive the redemption price. In addition, because all issued and outstanding shares of the Series F preferred stock will be redeemed, the Series F preferred stock will no longer trade on the New York Stock Exchange after the redemption date.
The Company is under contractHyatt Hotels Corporation to acquire a West Coast hotelthe 339-room The Confidante Miami Beach for a gross purchase price of less than $200$232.0 million. The Company currently anticipates closing the transaction by the end of the second quarter 2022. The acquisition of the hotel is subject to standard due diligence,the satisfaction of customary closing conditions, and as of the date hereof, the Company can cancel the contract without penalty. The Company would expect to finance the acquisition with cash on hand and borrowings under its revolving credit facility. The Company can give no assurancesassurance that the acquisition of the hotel will be completed.
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Cautionary Statement
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies 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 12, 2021,23, 2022, under the caption “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, including but not limited to the following factors:
● | the significant impact |
● | increased risks related to employee matters, including increased employment litigation and claims for severance or other benefits tied to termination or furloughs as a result of temporary hotel suspensions or reduced hotel operations due to |
● | general economic and business conditions, including a U.S. recession or increased inflation, trade conflicts and tariffs, regional or global economic slowdowns and any type of flu or disease-related pandemic that impacts travel or the ability to travel, including |
● | system security risks, data protection breaches, cyber-attacks and systems integration issues, including those impacting our suppliers, our third-party hotel managers or our franchisors; |
● | risks associated with the physical effects of climate change, which can include more frequent or severe storms, hurricanes, flooding, droughts and wildfires adversely affecting our hotels; |
● | the need for business-related transient and group travel, including the increased use of business-related technology; |
● | rising hotel operating costs due to labor costs, workers’ compensation and health-care related costs, utility costs, property and liability insurance costs, unanticipated costs such as acts of nature and their consequences and other costs that may not be offset by increased room rates; |
● | the ground |
● | the need for renovations, repositionings and other capital expenditures for our hotels; |
● | the impact, including any delays, of renovations and repositionings on hotel operations; |
● | 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; |
● | relationships with, and the requirements, performance and reputation of, the managers of our hotels; |
● | relationships with, and the requirements and reputation of, our franchisors and hotel brands; |
● | our hotels 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; |
● | competition for the acquisition of hotels, and our ability to complete acquisitions and dispositions; |
● | performance of hotels after they are acquired; |
● | 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 on our debt and preferred stock; |
● | the impact on our business of potential defaults by us on our debt agreements or leases; |
● | volatility in the capital markets and the effect on lodging demand or our ability to obtain capital on favorable terms or at all; |
● | 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; |
● | 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; |
● | other events beyond our control, including |
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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
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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 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 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.
We own hotels that we consider to be Long-Term Relevant Real Estate® (or LTRR®) in the United States, specifically hotels in urban and resort destination locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As part of our ongoing portfolio management strategy, on an opportunistic basis, we may also selectively sell hotel properties that we believe do not meet our criteria of LTRR®. As of June 30, 2021,March 31, 2022, we had interests in 1814 hotels (the “18“14 Hotels”) currently held for investment,, which average 508528 rooms in size. All but two of our hotels (the Boston Park Plaza and the Oceans Edge Resort & Marina) of the 18 Hotels are operated under nationally recognized brands. Our two unbranded hotels are located in top urban and resort destination markets that have enabled them to establish awareness with both group and transient customers.
COVID-19 Impact and ResponseOperational Update
In March 2020,COVID-19 and its variants have had and continue to have a detrimental effect on the COVID-19 pandemic was declared a National Public Health Emergency, which led tohotel industry and our business, including significant room and event cancellations, corporate and government travel restrictions and an unprecedented decline in hotel demand. AsWhile operations have gradually improved since the onset of the COVID-19 pandemic in 2020, the Omicron variant in December 2021 led to a result of these cancellations, restrictionsslowdown in demand recovery at our hotels. However, demand began to recover again in February 2022 as Omicron-related case counts subsided and the health concerns related to COVID-19, we determined that it was in the best interest of our hotel employees and the communities in which our hotels operate to temporarily suspend operations at the majority of our hotels.travel patterns re-accelerated.
In response toDuring the COVID-19 pandemic, we temporarily suspended operationsfirst quarter of 2022, corporate transient and group demand accelerated and reduced our reliance on leisure demand, which was the dominant source of business at 14many of our hotels during March2021. The amount of corporate negotiated business at our hotels continues to grow and April 2020, 13we expect business travel to become a more significant portion of whichour overall demand as the year progresses. In addition, demand at our group-oriented hotels is increasing as corporate and association groups return to our hotels. We anticipate that group demand will compose a much more meaningful component of our total room nights during the remainder of 2022. However, the negative effects of the COVID-19 pandemic on the hotel industry have since resumed operations:been unprecedented, and we have limited visibility to predict future operations.
Our hotels continue to be challenged as they attempt to recall previously furloughed employees and hire new staff, including managers. Significant progress has been made over the last six months towards alleviating the labor shortages at our hotels, however, new challenges such as appropriate training and retaining talented staff have arisen. These challenges, along with bonus programs, flexibility and other benefits will likely add to payroll and related expenses throughout 2022 and beyond. |
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ThreeYear-To-Date 2022 Overview
Demand. We continue to experience steady improvements in hotel demand. Occupancy during the first three months of our hotels remained open throughout2022 and 2021 at the pandemic: the Boston Park Plaza; the Embassy Suites La Jolla; and the Renaissance Long Beach. As a result of the COVID-19-related temporary hotel suspensions and the reduced occupancy at our open12 hotels we in conjunction with our third-party managers, decreasedowned during both reporting periods (the “Existing Portfolio”) was as follows:
operating expenses to preserve liquidity by implementing stringent operational cost containment measures, including significantly reduced staffing levels, limited food and beverage offerings, elimination of non-essential hotel services and the temporary closure of various parts of the hotels. In addition, enhanced cleaning procedures and revised operating standards were developed and implemented.
| | | | | | |
| January | February | March | |||
2022 | 37.9 | % | 53.6 | % | 67.9 | % |
2021 | 14.0 | % | 24.5 | % | 31.7 | % |
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The following representsDispositions. During the statusfirst three months of 2022, we sold three hotels. In February 2022, we sold the Hyatt Centric Chicago Magnificent Mile for gross proceeds of $67.5 million, excluding closing costs, and recorded a gain of $11.3 million. In March 2022, we sold the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile for combined gross proceeds of $129.5 million, excluding closing costs, and recorded a combined gain of $11.6 million.
Significant Renovations. During the first quarter of 2022, our significant renovations primarily consisted of additional progress on the renovation of the hotelsRenaissance Washington DC in preparation for its conversion to the Westin brand in 2023, and a room renovation at the Hyatt Regency San Francisco which we had interestsexpect to complete later this year.
Debt Transactions. In February 2022, we used a portion of the proceeds received from the disposition of the Hyatt Centric Chicago Magnificent Mile to repay $25.0 million of our unsecured Series A Senior Notes and $10.0 million of our unsecured Series B Senior Notes, resulting in remaining balances of $65.0 million and $105.0 million, respectively, as of March 31, and June 30, 2021 and 2020:
| | | | | | | | |
| | As of March 31, | | As of June 30, | ||||
| | 2021 | | 2020 (1) | | 2021 (2) | | 2020 (1) |
Number of hotels open | | 15 | | 9 | | 17 | | 6 |
Number of rooms in open hotels | | 8,308 | | 4,511 | | 8,799 | | 3,073 |
Number of hotels with temporarily suspended operations | | 2 | | 11 | | 1 | | 14 |
Number of rooms in hotels with temporarily suspended operations | | 709 | | 6,099 | | 348 | | 7,537 |
Total number of hotels | | 17 | | 20 | | 18 | | 20 |
Total number of rooms | | 9,017 | | 10,610 | | 9,147 | | 10,610 |
Our asset management team has worked closely with each hotel’s third-party manager to create detailed operating plans, including adherence to safety precautions developed by the Center for Disease Control and Prevention and other public health experts. We continue to closely monitor the safety measures at our hotels, including frequent and enhanced cleaning and sanitation, contactless check-in, the use of personal protective equipment by hotel employees and guests in areas with low vaccination rates and/or the prevalence of COVID-19 variants and increased physical distancing throughout each hotel.
Year-To-Date 2021 Overview
Since our COVID-19-related occupancy low point of 1.6% in April 2020, we have experienced slow but steady improvements in hotel demand. During the first six months of 2021, occupancy accelerated as the number of COVID-19 cases decreased and the vaccine distribution program increased. Occupancy during the first six months of 2021 and 2020 at the same 17 hotels we owned during this time (the “17 Hotels”) was as follows:
| | | | | | | | | | | | |
| January | February | March | April | May | June | ||||||
2021 | 13.3 | % | 22.4 | % | 29.1 | % | 37.8 | % | 44.2 | % | 48.8 | % |
2020 | 72.2 | % | 78.6 | % | 29.1 | % | 1.6 | % | 2.6 | % | 3.9 | % |
During the first six months of 2021, leisure demand was the dominant source of business at many our hotels, driven by a pent-up COVID-19 pandemic induced desire to travel along with increased disposable income. Business transient demand remained well below pre-pandemic levels, but it is increasing at a rapid pace and is expected to accelerate further as companies return to the office in the second half of 2021. Group demand, which was minimal in 2020, began to return during the second quarter of 2021 and is expected to continue to grow. While the preponderance of recent group business has been composed primarily of government, emergency management and medical-related groups, several of our hotels are beginning to host traditional group business, including corporate groups. We are beginning to see events with more guests and events that take place over longer periods of time. A significant portion of the group business on-the-books for the second half of 2021 continues to hold to their contractual dates, anticipating a continued improvement in conditions allowing for groups to meet. We believe that the return of traditional business transient and group business will ultimately depend on the speed and efficacy of the vaccine distribution, the management and control of COVID-19 and its variants and the degree to which normalcy returns. We expect the demand recovery to extend past 2021, and we are encouraged by the recent pace of future group bookings, which leads us to believe that our portfolio will perform significantly better in the second half of 2021 and specifically in the fourth quarter of 2021.
Following widespread layoffs and furloughs, our hotels are hiring again; however, some of our hotels (specifically those in Florida) are having trouble finding labor. We expect the labor supply to improve in the second half of the year as children of working parents return to school, enhanced unemployment benefits from the government expire and people feel safe returning to the workplace.2022.
In April 2021,March 2022, we purchasedelected to early terminate the fee-simple interestcovenant relief period related to our unsecured debt, having satisfied the financial covenants stipulated in the Montage Healdsburg, located in California,2020 and 2021 amendments to our unsecured debt agreements (the “Unsecured Debt Amendments”) for $265.0 million, excluding closing costs. We funded this acquisitionthe quarter ended December 31, 2021. The Unsecured Debt Amendments were scheduled to provide covenant relief through the issuanceend of 2,650,000 sharesthe third quarter of Series G Cumulative Redeemable Preferred Stock (the “Series G preferred stock”)2022, with an aggregate liquidation preferencequarterly testing resuming for the period ending September 30, 2022. Following our early termination of $66.3 million, as well as $198.8 million of cash on hand. The Series G preferred stock, which is callable at the liquidation preference plus accrued and unpaid dividends by us at any time, accrues dividends at an initial rate equal tocovenant relief period in March 2022, the Montage Healdsburg’s annual net operating income yieldoriginal financial covenants on our unsecured debt agreements will be phased-in over the following five quarters to ease compliance. By exiting the covenant relief period, we are no longer subject to additional restrictions on debt issuance and repayment, capital investment, in the hotel. The Series G preferred stock is not convertible into any other security.
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In May 2021, we issued 4,600,000 shares of our 6.125% Series H Cumulative Redeemable Preferred Stock (the “Series H preferred stock”) for gross proceeds of $115.0 million. The Series H preferred stock has a redemption price of $25.00 per share repurchases and can be redeemed by us on or after May 24, 2026. We used the proceeds received from this issuance to redeem all 4,600,000 shares of our 6.950% Series E Cumulative Redeemable Preferred Stock (the “Series E preferred stock”). Because the redemption of the Series E preferred stock was a redemption in full, trading of the Series E preferred stock on the New York Stock Exchange ceased on the June 11, 2021 redemption date.dividend distributions.
Capital Transactions. In June 2021,March 2022, we utilized our February 2017 ATM Program to issue 2,913,682repurchased 3,879,025 shares of our common stock for gross proceeds of $38.4 million, leaving $137.0 million available for sale under the February 2017 ATM Program.
During the first six months of 2021, we continued our temporary suspensions of both our stock repurchase program and our common stock quarterly dividend to preserve additional liquidity. In anticipationat an average purchase price of a return to normalcy post-COVID-19, our board of directors reauthorized our existing stock repurchase program in February 2021, allowing us to acquire up to $500.0$11.19 per share. Approximately $456.6 million of our common and preferred stock. The redemption of our Series E preferred stock in June 2021 was completed through a separate authorization by our board of directors, leaving $500.0 million remaining for repurchaseauthorized capacity remains under our stock repurchase program. Future repurchases, however, will depend on the effects of the COVID-19 pandemic 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. At this time, we do not expect to pay a quarterly dividend on our common stock for 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, compliance with our debt covenants, long-term operating projections, expected capital requirements and risks affecting our business.
We believe that the strong balance sheet we had going into the pandemic combined with the steps we have taken to preserve our financial flexibility, 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 assure you that our forecast or the assumptions we used to estimate our liquidity requirements will be correct. The magnitude and duration of the COVID-19 pandemic is uncertain, and we cannot accurately estimate its impact on our business, financial condition or operational results with reasonable certainty.
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 comprised of revenue realized from the sale of rooms at our |
● | 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, winery revenue, any business interruption proceeds and any performance guarantee or reimbursements to offset net losses. |
Expenses. Our expenses consist of the following:
● | Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room |
● | Food and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage |
● | Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities and franchise |
● | Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, however property tax is subject to regular |
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revaluations based on the specific tax regulations and practices of each municipality, along with our cash and noncash operating lease 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 |
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recruitment, relocation and training expenses, labor dispute expenses, consulting fees, management fees and other |
● | 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 asset (prior to the related hotel’s sale in February 2022), franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to FF&E for our corporate |
Other Revenue and Expense. Other revenue and expense consists of the following:
● | Interest and other income (loss), which includes interest we have earned on our restricted and unrestricted cash accounts, as well as any energy or other rebates, property insurance proceeds we have received, miscellaneous income, contingency payments related to sold hotels and 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 obligation (prior to the related hotel’s sale in February 2022), gains or losses on interest rate derivatives, amortization of deferred financing costs, and any loan or waiver fees incurred on our debt; |
● | Gain |
● | (Loss) gain on extinguishment of debt, which includes |
● | Income tax |
● |
● | Preferred stock dividends, |
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
● | Occupancy, which is the quotient of total rooms sold divided by total rooms available; |
● | Average daily room rate, 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; |
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● | Comparable RevPAR, which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale, those hotels that are undergoing a material renovation or repositioning, those hotels whose operations have either been temporarily suspended or significantly reduced and those hotels whose room counts have materially changed during either the current or prior year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. |
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“Comparable Portfolio.” |
● | 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 contract intangibles; amortization of right-of-use assets and |
● | Funds from operations (“FFO”) attributable to common stockholders, which is net income (loss) and preferred stock dividends and any redemption charges, excluding: 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 |
● | Adjusted FFO attributable to common stockholders, which is FFO attributable to common stockholders adjusted to exclude: amortization of deferred stock compensation; amortization of contract intangibles; real estate-related amortization of right-of-use assets and |
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 |
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● | 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. Prior to the COVID-19 pandemic, U.S. hotel supply continued to increase. On a market-by-market basis, some markets experienced new hotel room openings at or greater than historic levels, including in Boston, |
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both new full-service 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. |
● | 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. |
Operating Results. The following table presents our unaudited operating results for our total portfolio for the three months ended June 30,March 31, 2022 and 2021, and 2020, including the amount and percentage change in the results between the two periods.
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, |
| Three Months Ended March 31, | ||||||||||||||||||||
| | 2021 | | 2020 | | Change $ | | Change % | | 2022 | | 2021 | | Change $ | | Change % | ||||||||
| | (in thousands, except statistical data) | | (in thousands, except statistical data) | ||||||||||||||||||||
REVENUES | | | | | | | | | | | | | | | | | | | | | | | | |
Room | | $ | 84,597 | | $ | 3,869 | | $ | 80,728 | | 2,086.5 | % | | $ | 108,772 | | $ | 34,219 | | $ | 74,553 | | 217.9 | % |
Food and beverage | | | 15,238 | |
| 213 | | | 15,025 | | 7,054.0 | % | | | 39,583 | |
| 4,971 | | | 34,612 | | 696.3 | % |
Other operating | | | 17,375 | |
| 6,342 | | | 11,033 | | 174.0 | % | | | 23,960 | |
| 11,443 | | | 12,517 | | 109.4 | % |
Total revenues | | | 117,210 | |
| 10,424 | | | 106,786 | | 1,024.4 | % | | | 172,315 | |
| 50,633 | | | 121,682 | | 240.3 | % |
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | |
Hotel operating | | | 78,886 | |
| 45,479 | | | 33,407 | | 73.5 | % | | | 113,104 | |
| 49,647 | | | 63,457 | | 127.8 | % |
Other property-level expenses | | | 16,067 | |
| 8,736 | | | 7,331 | | 83.9 | % | | | 23,910 | |
| 10,477 | | | 13,433 | | 128.2 | % |
Corporate overhead | | | 9,467 | |
| 8,438 | | | 1,029 | | 12.2 | % | | | 10,714 | |
| 7,177 | | | 3,537 | | 49.3 | % |
Depreciation and amortization | | | 32,729 | | | 34,539 | | | (1,810) | | (5.2) | % | | | 31,360 | | | 30,770 | | | 590 | | 1.9 | % |
Impairment losses | | | — | | | 18,100 | | | (18,100) | | (100.0) | % | ||||||||||||
Total operating expenses | | | 137,149 | |
| 115,292 | | | 21,857 | | 19.0 | % | | | 179,088 | |
| 98,071 | | | 81,017 | | 82.6 | % |
Interest and other income | | | 21 | |
| 306 | | | (285) | | (93.1) | % | ||||||||||||
Interest and other income (loss) | | | 4,380 | |
| (379) | | | 4,759 | | 1,255.7 | % | ||||||||||||
Interest expense | | | (8,065) | | | (12,950) | | | 4,885 | | 37.7 | % | | | (5,081) | | | (7,649) | | | 2,568 | | 33.6 | % |
Gain on extinguishment of debt | | | 88 | | | — | | | 88 | | 100.0 | % | ||||||||||||
Loss before income taxes | | | (27,895) | |
| (117,512) | | | 89,617 | | 76.3 | % | ||||||||||||
Income tax (provision) benefit, net | | | (23) | |
| 12 | |
| (35) | | (291.7) | % | ||||||||||||
NET LOSS | | | (27,918) | | | (117,500) | | | 89,582 | | 76.2 | % | ||||||||||||
Loss from consolidated joint venture attributable to noncontrolling interest | | | 596 | |
| 2,162 | |
| (1,566) | | (72.4) | % | ||||||||||||
Preferred stock dividends and redemption charge | | | (7,795) | |
| (3,207) | | | (4,588) | | (143.1) | % | ||||||||||||
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (35,117) | | $ | (118,545) | | $ | 83,428 | | 70.4 | % | ||||||||||||
Gain on sale of assets | | | 22,946 | | | — | | | 22,946 | | 100.0 | % | ||||||||||||
(Loss) gain on extinguishment of debt | | | (213) | | | 222 | | | (435) | | (195.9) | % | ||||||||||||
Income (loss) before income taxes | | | 15,259 | |
| (55,244) | | | 70,503 | | 127.6 | % | ||||||||||||
Income tax provision | | | (136) | |
| (43) | |
| (93) | | (216.3) | % | ||||||||||||
NET INCOME (LOSS) | | | 15,123 | | | (55,287) | | | 70,410 | | 127.4 | % | ||||||||||||
(Income) loss from consolidated joint venture attributable to noncontrolling interest | | | (1,134) | |
| 1,975 | |
| (3,109) | | (157.4) | % | ||||||||||||
Preferred stock dividends | | | (3,773) | |
| (3,207) | | | (566) | | (17.6) | % | ||||||||||||
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | 10,216 | | $ | (56,519) | | $ | 66,735 | | 118.1 | % |
29
Operating Results. The following table presents our unaudited operating results for our total portfolio for the six months ended June 30, 2021 and 2020, including the amount and percentage change in the results between the two periods.
| | | | | | | | | | | | |
|
| Six Months Ended June 30, | ||||||||||
| | 2021 | | 2020 | | Change $ | | Change % | | |||
| | (in thousands, except statistical data) |
| |||||||||
REVENUES | | | | | | | | | | | | |
Room | | $ | 118,816 | | $ | 131,269 | | $ | (12,453) | | (9.5) | % |
Food and beverage | | | 20,209 | |
| 48,203 | | | (27,994) | | (58.1) | % |
Other operating | | | 28,818 | |
| 22,164 | | | 6,654 | | 30.0 | % |
Total revenues | | | 167,843 | |
| 201,636 | | | (33,793) | | (16.8) | % |
OPERATING EXPENSES | | | | | | | | | | | | |
Hotel operating | | | 128,533 | |
| 188,988 | | | (60,455) | | (32.0) | % |
Other property-level expenses | | | 26,544 | |
| 37,581 | | | (11,037) | | (29.4) | % |
Corporate overhead | | | 16,644 | |
| 15,832 | | | 812 | | 5.1 | % |
Depreciation and amortization | | | 63,499 | | | 71,285 | | | (7,786) | | (10.9) | % |
Impairment losses | | | — | | | 133,466 | | | (133,466) | | (100.0) | % |
Total operating expenses | | | 235,220 | |
| 447,152 | | | (211,932) | | (47.4) | % |
Interest and other income (loss) | | | (358) | |
| 2,612 | | | (2,970) | | (113.7) | % |
Interest expense | | | (15,714) | | | (30,457) | | | 14,743 | | 48.4 | % |
Gain on extinguishment of debt | | | 310 | | | — | | | 310 | | 100.0 | % |
Loss before income taxes | | | (83,139) | |
| (273,361) | | | 190,222 | | 69.6 | % |
Income tax provision, net | | | (66) | |
| (6,658) | |
| 6,592 | | 99.0 | % |
NET LOSS | | | (83,205) | | | (280,019) | | | 196,814 | | 70.3 | % |
Loss from consolidated joint venture attributable to noncontrolling interest | | | 2,571 | |
| 2,620 | |
| (49) | | (1.9) | % |
Preferred stock dividends and redemption charge | | | (11,002) | |
| (6,414) | | | (4,588) | | (71.5) | % |
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | (91,636) | | $ | (283,813) | | $ | 192,177 | | 67.7 | % |
Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:
● | COVID-19: |
● | Hotel |
● | Hotel Dispositions: |
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Room revenue. Room revenue increased $80.7$74.6 million, or 2,086.5%217.9%, for the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020March 31, 2021 as follows:
● | Room revenue at the |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | Three Months Ended March 31, |
| ||||||||||||||||||||||||||||||||||||||||
| | 2021 | | 2020 | | Change | | | 2022 | | 2021 | | Change | | ||||||||||||||||||||||||||||||||
|
| Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
|
| Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
| ||||||||
17 Hotels | | 43.6 | % | $ | 219.82 | | $ | 95.84 |
| 2.7 | % | $ | 108.27 | | $ | 2.92 | | 4,090 | bps | 103.0 | % | 3,182.2 | % | |||||||||||||||||||||||
Existing Portfolio | | 53.1 | % | $ | 279.95 | | $ | 148.65 |
| 23.4 | % | $ | 206.44 | | $ | 48.31 | | 2,970 | bps | 35.6 | % | 207.7 | % | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Open Hotels | | 45.4 | % | $ | 219.82 | | $ | 99.80 |
| 2.8 | % | $ | 108.28 | | $ | 3.03 | | 4,260 | bps | 103.0 | % | 3,193.7 | % | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Montage Healdsburg (1) | | 61.1 | % | $ | 1,008.94 | | $ | 616.46 |
| N/A | | | N/A | | | N/A | | N/A | | N/A | | N/A | | |||||||||||||||||||||||
Two Recently Acquired Hotels (1) | | 47.4 | % | $ | 1,100.47 | | $ | 521.62 |
| N/A | | | N/A | | | N/A | | N/A | | N/A | | N/A | |
(1) |
● | The |
● | The dispositions of the |
For the six months ended June 30, 2021, room revenue decreased $12.5 million, or 9.5%, as compared to the six months ended June 30, 2020 as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| ||||||||||||||||||||
| | 2021 | | 2020 | | Change | | ||||||||||||||||
| | Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
| Occ% |
| ADR |
| RevPAR |
| ||||
17 Hotels | | 32.7 | % | $ | 211.77 | | $ | 69.25 |
| 31.1 | % | $ | 227.06 | | $ | 70.62 | | 160 | bps | (6.7) | % | (1.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Open Hotels | | 34.0 | % | $ | 211.77 | | $ | 72.00 |
| 31.3 | % | $ | 229.80 | | $ | 71.93 | | 270 | bps | (7.8) | % | 0.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Montage Healdsburg (1) | | 40.8 | % | $ | 975.75 | | $ | 398.11 |
| N/A | | | N/A | | | N/A | | N/A | | N/A | | N/A | |
Food and beverage revenue. Food and beverage revenue increased $15.0$34.6 million, or 7,054.0%696.3%, for the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020March 31, 2021 as follows:
● | Food and beverage revenue at the |
● | The |
● | The dispositions of the |
For the six months ended June 30, 2021, food and beverage revenue decreased $28.0 million, or 58.1%, as compared to the six months ended June 30, 2020 as follows:
Other operating revenue. Other operating revenue increased $11.0$12.5 million, or 174.0%109.4%, for the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020March 31, 2021 as follows:
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● | Other operating revenue at the |
● | The |
● | The dispositions of the |
For the six months ended June 30, 2021, other operating revenue increased $6.7 million, or 30.0%, as compared to the six months ended June 30, 2020 as follows:
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 increased $33.4$63.5 million, or 73.5%127.8%, for the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020March 31, 2021 as follows:
● | Hotel operating expenses at the |
● | The |
● | The dispositions of the |
For the six months ended June 30, 2021, hotel operating expenses decreased $60.5 million, or 32.0%, as compared to the six months ended June 30, 2020 as follows:
Other property-level expenses. Other property-level expenses increased $7.3$13.4 million, or 83.9%128.2%, for the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020March 31, 2021 as follows:
● | Other property-level expenses at the |
● | The |
● | The dispositions of the |
ForCorporate overhead expense. Corporate overhead expense increased $3.5 million, or 49.3%, during the sixthree months ended June 30, 2021, other property-level expenses decreased $11.0 million, or 29.4%,March 31, 2022 as compared to the sixthree months ended June 30, 2020 as follows:March 31, 2021, due to increased deferred stock amortization expense, due diligence expenses, legal fees and payroll expenses related to our CEO transition.
3229
Corporate overhead expense. Corporate overhead expense increased $1.0 million, or 12.2%, during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, due to increased amortization of deferred stock compensation related to the retirement of our chief operating officer, audit fees and travel expenses, partially offset by decreased due diligence expenses, legal fees and salary and wage expenses. Excluding the amortization of deferred stock compensation, corporate overhead expense decreased $0.6 million, or 10.6%, in the second quarter of 2021 as compared to the same period in 2020.
For the six months ended June 30, 2021, corporate overhead expense increased $0.8 million, or 5.1%, as compared to the six months ended June 30, 2020, due to increased amortization of deferred stock compensation related to the retirement of our chief operating officer and audit fees, partially offset by decreased due diligence expenses, legal fees and payroll and related expenses, including the recognition of $0.3 million in available Tax Credits. Excluding the amortization of deferred stock compensation, corporate overhead expense decreased $1.3 million, or 12.6%, in the first six months of 2021 as compared to the same period in 2020.
Depreciation and amortization expense. Depreciation and amortization expense decreased $1.8increased $0.6 million, or 5.2%1.9%, during the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020March 31, 2021 as follows:
● | Depreciation and amortization expense related to the |
● | The |
● | The dispositions of the |
For the six months ended June 30, 2021, depreciation and amortization expense decreased $7.8 million, or 10.9%, as compared to the six months ended June 30, 2020 as follows:
Impairment losses. Impairment losses were zero for both the three and six months ended June 30, 2021, and $18.1 million and $133.5 million for the three and six months ended June 30, 2020, respectively. During the second quarter of 2020, we recorded an impairment loss of $18.1 million on the Renaissance Harborplace. During the first quarter of 2020, we recorded impairment losses of $107.9 million on the Hilton Times Square, $5.2 million on the Renaissance Westchester, and $2.3 million related to the abandonment of a potential project to expand one of our hotels.
Interest and other income (loss). Interest and other income (loss) totaled interest income of $21,000$4.4 million and $0.3a loss of $0.4 million for the three months ended June 30,March 31, 2022 and 2021, as compared torespectively. During the three months ended June 30, 2020. Interest income in the secondfirst quarter of 2021 decreased as compared to the same period2022, we recognized $4.4 million in 2020 due to declines in bothinsurance proceeds for Hurricane Ida-related property damage at our New Orleans hotels and a nominal amount of interest rates and cash balances.
Interest and other income (loss) for the six months ended June 30, 2021 totaled a loss of $0.4 million as compared to income of $2.6 million for the six months ended June 30, 2020.income. During the six months ended June 30,first quarter of 2021, we accrued a post-closing contingency of $0.4 million to the current owner of a hotel we sold in 2018, which was partially offset by the recognition ofand we recognized a nominal amount of interest income. During the first six months of 2020, we recognized $2.4 million in interest income and $0.2 million in energy rebates due to energy efficient renovations at our hotels.
33
Interest expense. We incurred interest expense as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | ||||||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | ||||||
Interest expense on debt and finance lease obligation | | $ | 8,037 | | $ | 12,037 | | $ | 15,820 | | $ | 22,765 | | | $ | 6,243 | | $ | 7,783 |
Noncash interest on derivatives | |
| (709) | |
| 216 | |
| (1,578) | |
| 6,296 | | ||||||
Noncash interest on derivatives, net | |
| (1,842) | |
| (869) | |||||||||||||
Amortization of deferred financing costs | |
| 737 | |
| 697 | |
| 1,472 | |
| 1,396 | | |
| 680 | |
| 735 |
Total interest expense | | $ | 8,065 | | $ | 12,950 | | $ | 15,714 | | $ | 30,457 | | | $ | 5,081 | | $ | 7,649 |
Interest expense decreased $4.9$2.6 million, or 37.7%33.6%, during the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020, and $14.7 million, or 48.4%, during the six months ended June 30,March 31, 2021, as compared to the six months ended June 30, 2020.follows:
Interest expense on our debt and finance lease obligation decreased $4.0 million and $6.9$1.5 million in the secondfirst quarter and first six months of 2021, respectively,2022 as compared to the same periodsperiod in 20202021 primarily due to our 20202022 and 2021 debt transactions, including the repayment of the loan secured by the Renaissance Washington DC, our partial repayments of the senior notes, and ourthe assignment of the loan secured by the Hilton Times SquareEmbassy Suites La Jolla to the hotel’s mortgage holder, along with decreasedbuyer and our partial repayments of the term loans. In addition, interest expense on our variable rate debt. These decreases were partially offset byfinance lease obligation decreased in the amendments onfirst quarter of 2022 as compared to the same period in 2021 due to our unsecured debt, which increased the interest rate on our term loans and senior notes and increased the amortizationsale of our deferred financing costs. In addition, noncashHyatt Centric Chicago Magnificent Mile in February 2022.
Noncash changes in the fair market value of our derivatives caused interest expense to decrease $0.9 million and $7.9$1.0 million in the secondfirst quarter and first six months of 2021, respectively,2022 as compared to the same periodsperiod in 2020.2021.
The amortization of deferred financing costs caused interest expense to decrease $0.1 million in the first quarter of 2022 as compared to the same period in 2021.
Our weighted average interest rate per annum, including our variable rate debt obligation, was approximately 3.6% and 3.8% at March 31, 2022 and 3.6% at June 30, 2021, and 2020, respectively. Approximately 70.5%61.8% and 73.6%70.6% of our outstanding notes payable had fixed interest rates at June 30,March 31, 2022 and 2021, and 2020, respectively.
Gain on sale of assets. Gain on sale of assets totaled $22.9 million and zero for the three months ended March 31, 2022 and 2021, respectively. In the first quarter of 2022, we recognized an $11.3 million gain on the sale of the Hyatt Centric Chicago Magnificent Mile and an $11.6 million gain on the combined sale of the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile.
(Loss) gain on extinguishment of debt. Gain( Loss) gain on extinguishment of debt totaled $0.1a loss of $0.2 million and $0.3a gain of $0.2 million for the three and six months ended June 30,March 31, 2022 and 2021, respectively, and zero for both the three and six months ended June 30, 2020.respectively. During the secondfirst quarter andof 2022, we recognized a loss of $0.2 million related to the write-off of deferred financing fees associated with the repayment of a portion of our senior notes. During the first six monthsquarter of 2021, we recognized gainsa gain of $0.1$0.2 million and $0.3 million, respectively, associated with the assignment of the Hilton Times Square to the hotel’s mortgage holder due to reassessments of the potential employee-related obligations currently held in escrow.
Income tax (provision) benefit, netprovision. Income tax (provision) benefit, net was incurred as follows (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Current income tax (provision) benefit, net | | $ | (23) | | $ | 12 | | $ | (66) | | $ | 757 |
Change in deferred tax asset valuation allowance | | | — | | | — | | | — | | | (7,415) |
Total income tax (provision) benefit, net | | $ | (23) | | $ | 12 | | $ | (66) | | $ | (6,658) |
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 second quarterthree months ended March 31, 2022 and first six months of 2021, we recognized net current income tax provisions of $23,000$0.1 million and $0.1 million,$43,000, respectively, resulting from current state income tax expense.
During the second quarter and first six months30
Loss(Income) loss from consolidated joint venture attributable to noncontrolling interest. Loss(Income) loss from consolidated joint venture attributable to noncontrolling interest, which represents the outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront, totaled $0.6income of $1.1 million and $2.2a loss of $2.0 million for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively, and $2.6 million for both the six months ended June 30, 2021 and 2020.respectively.
Preferred stock dividends and redemption charge. Preferred stock dividends and redemption charge increased $4.6$0.6 million, or 143.1%17.6%, during the three months ended June 30, 2021March 31, 2022 as compared to the three months ended June 30, 2020, and $4.6 million, or 71.5%, for the six months ended June 30,March 31, 2021, as compared to the six months ended June 30, 2020 due to the issuances of our Series
34
G preferred stock, Series H preferred stock and Series H Preferred Stock,I preferred stock, as well as the redemptionredemptions of our Series E preferred stock and Series F preferred stock.
Preferred stock dividends and redemption charge were incurred as follows (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Series E preferred stock | | $ | 5,570 | (1) | $ | 1,998 | |
| 7,568 | (1) |
| 3,996 |
Series F preferred stock | | | 1,209 | | | 1,209 | | | 2,418 | | | 2,418 |
Series G preferred stock | | | 292 | | | — | | | 292 | | | — |
Series H preferred stock | | | 724 | | | — | | | 724 | | | — |
Total preferred stock dividends and redemption charge | | $ | 7,795 | | $ | 3,207 | | $ | 11,002 | | $ | 6,414 |
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2022 | | 2021 | ||
Series E preferred stock | | $ | — | | $ | 1,998 |
Series F preferred stock | | | — | | | 1,209 |
Series G preferred stock | | | 587 | | | — |
Series H preferred stock | | | 1,761 | | | — |
Series I preferred stock | | | 1,425 | | | — |
Total preferred stock dividends | | $ | 3,773 | | $ | 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. 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 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. 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 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 contract intangibles: we exclude the noncash amortization of |
● | Amortization of right-of-use assets and |
31
● | Finance lease obligation interest – cash ground rent: we include an adjustment for the cash finance lease expense recorded on the building lease at the Hyatt Centric Chicago Magnificent |
35
finance lease, and, therefore, we include a portion of the lease payment each month in interest expense. We adjust EBITDAre for the finance lease in order to more accurately reflect the actual rent due to the hotel’s lessor in the current period, as well as the operating performance of the hotel. |
● | Undepreciated asset transactions: we exclude the effect of gains and losses on the disposition of 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 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 exclude the noncontrolling partner’s pro rata share of the net (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 the 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; debt resolution costs; lease terminations; |
3632
The following table reconciles our unaudited net lossincome (loss) to EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest for our total portfolio for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
| Three Months Ended March 31, | ||||||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | ||||||
Net loss | | $ | (27,918) | | $ | (117,500) | | $ | (83,205) | | $ | (280,019) | ||||||
Net income (loss) | | $ | 15,123 | | $ | (55,287) | ||||||||||||
Operations held for investment: | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 32,729 | |
| 34,539 | |
| 63,499 | |
| 71,285 | | | 31,360 | |
| 30,770 |
Interest expense | | | 8,065 | |
| 12,950 | |
| 15,714 | |
| 30,457 | | | 5,081 | |
| 7,649 |
Income tax provision (benefit), net | | | 23 | |
| (12) | |
| 66 | |
| 6,658 | ||||||
Loss on sale of assets | | | — | | | — | | | 70 | | | — | ||||||
Impairment losses - hotel properties | | | — | | | 18,100 | | | — | | | 131,164 | ||||||
Income tax provision | | | 136 | |
| 43 | ||||||||||||
(Gain) loss on sale of assets | | | (22,946) | | | 70 | ||||||||||||
EBITDAre | | | 12,899 | |
| (51,923) | |
| (3,856) | |
| (40,455) | | | 28,754 | |
| (16,755) |
| | | | | | | | | | | | | | | | | | |
Operations held for investment: | | | | | | | | | | | | | | | | | | |
Amortization of deferred stock compensation | | | 4,659 | |
| 3,064 | |
| 7,411 | |
| 5,271 | | | 3,578 | |
| 2,752 |
Amortization of right-of-use assets and liabilities | | | (338) | |
| (332) | |
| (669) | |
| (593) | ||||||
Amortization of right-of-use assets and obligations | | | (346) | |
| (331) | ||||||||||||
Amortization of contract intangibles, net | | | (6) | | | — | ||||||||||||
Finance lease obligation interest — cash ground rent | | | (351) | |
| (351) | |
| (702) | |
| (702) | | | (117) | |
| (351) |
Property-level severance | | | — | | | 1,113 | | | — | | | 1,113 | ||||||
Gain on extinguishment of debt | | | (88) | | | — | | | (310) | | | — | ||||||
Loss (gain) on extinguishment of debt | | | 213 | | | (222) | ||||||||||||
Prior year property tax adjustments, net | | | (1,162) | |
| 307 | | | (1,989) | |
| 226 | | | — | |
| (827) |
Impairment loss - abandoned development costs | | | — | | | — | | | — | | | 2,302 | ||||||
Hurricane-related insurance proceeds net of losses | | | (2,893) | | | — | ||||||||||||
Noncontrolling interest: | | | | | | | | | | | | | | | | | | |
Loss from consolidated joint venture attributable to noncontrolling interest | | | 596 | |
| 2,162 | |
| 2,571 | |
| 2,620 | ||||||
(Income) loss from consolidated joint venture attributable to noncontrolling interest | | | (1,134) | |
| 1,975 | ||||||||||||
Depreciation and amortization | | | (806) | |
| (806) | |
| (1,616) | |
| (1,610) | | | (790) | |
| (810) |
Interest expense | | | (159) | | | (306) | | | (320) | | | (726) | | | (168) | | | (161) |
Amortization of right-of-use asset and liability | | | 73 | | | 73 | | | 145 | | | 145 | ||||||
Impairment loss - abandoned development costs | | | — | | | — | | | — | | | (449) | ||||||
Amortization of right-of-use asset and obligation | | | 72 | | | 72 | ||||||||||||
Adjustments to EBITDAre, net | | | 2,424 | |
| 4,924 | |
| 4,521 | |
| 7,597 | | | (1,591) | |
| 2,097 |
Adjusted EBITDAre, excluding noncontrolling interest | | $ | 15,323 | | $ | (46,999) | | $ | 665 | | $ | (32,858) | | $ | 27,163 | | $ | (14,658) |
Adjusted EBITDAre, excluding noncontrolling interest increased $62.3$41.8 million, or 132.6%285.3%, in the secondfirst quarter of 20212022 as compared to the same period in 2020, and $33.5 million, or 102.0% in the first six months of 2021 as compared to the same period in 2020 primarily due to the following:
● |
● | The |
● | The |
● | Corporate-level Adjusted EBITDAre decreased $8.1 million. |
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 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.
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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 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 contract intangibles: we exclude the noncash amortization of |
33
intangibles because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period. |
● | Real estate amortization of right-of-use assets and |
● | 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 obligation. We believe that these items are not reflective of our ongoing finance costs. |
● | Acquisition costs: under GAAP, costs associated with 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; debt resolution costs; preferred stock redemption charges; lease terminations; property insurance proceeds or uninsured losses; |
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The following table reconciles our unaudited net lossincome (loss) to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our total portfolio for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended June 30, | | Six Months Ended June 30, |
|
| Three Months Ended March 31, | ||||||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | ||||||
Net loss | | $ | (27,918) | | $ | (117,500) | | $ | (83,205) | | $ | (280,019) | | ||||||
Preferred stock dividends and redemption charge | |
| (7,795) | |
| (3,207) | |
| (11,002) | |
| (6,414) | | ||||||
Net income (loss) | | $ | 15,123 | | $ | (55,287) | |||||||||||||
Preferred stock dividends | |
| (3,773) | |
| (3,207) | |||||||||||||
Operations held for investment: | | | | | | | | | | | | | | | | | | | |
Real estate depreciation and amortization | |
| 32,104 | |
| 33,917 | |
| 62,247 | |
| 70,039 | | |
| 31,027 | |
| 30,143 |
Loss on sale of assets | | | — | | | — | | | 70 | | | — | | ||||||
Impairment losses - hotel properties | | | — | | | 18,100 | | | — | | | 131,164 | | ||||||
(Gain) loss on sale of assets | | | (22,946) | | | 70 | |||||||||||||
Noncontrolling interest: | | | | | | | | | | | | | | | | | | | |
Loss from consolidated joint venture attributable to noncontrolling interest | |
| 596 | |
| 2,162 | |
| 2,571 | |
| 2,620 | | ||||||
(Income) loss from consolidated joint venture attributable to noncontrolling interest | |
| (1,134) | |
| 1,975 | |||||||||||||
Real estate depreciation and amortization | | | (806) | | | (806) | | | (1,616) | | | (1,610) | | | | (790) | | | (810) |
FFO attributable to common stockholders | |
| (3,819) | |
| (67,334) | |
| (30,935) | |
| (84,220) | | |
| 17,507 | |
| (27,116) |
| | | | | | | | | | | | | | | | | | | |
Operations held for investment: | | | | | | | | | | | | | | | | | | | |
Real estate amortization of right-of-use assets and liabilities | |
| 77 | | | 72 | |
| 162 | |
| 218 | | ||||||
Amortization of deferred stock compensation (1) | | | 3,578 | | | 2,752 | |||||||||||||
Real estate amortization of right-of-use assets and obligations | |
| (286) | | | 85 | |||||||||||||
Amortization of contract intangibles, net | | | 60 | | | — | |||||||||||||
Noncash interest on derivatives, net | |
| (709) | | | 216 | |
| (1,578) | |
| 6,296 | | |
| (1,842) | | | (869) |
Property-level severance | | | — | | | 1,113 | | | — | | | 1,113 | | ||||||
Gain on extinguishment of debt | | | (88) | | | — | | | (310) | | | — | | ||||||
Loss (gain) on extinguishment of debt | | | 213 | | | (222) | |||||||||||||
Prior year property tax adjustments, net | |
| (1,162) | | | 307 | |
| (1,989) | |
| 226 | | |
| — | | | (827) |
Preferred stock redemption charge | | | 4,016 | | | — | | | 4,016 | | | — | | ||||||
Impairment loss - abandoned development costs | | | — | | | — | | | — | | | 2,302 | | ||||||
Noncash income tax provision, net | | | — | | | — | | | — | | | 7,415 | | ||||||
Hurricane-related insurance proceeds net of losses | | | (2,893) | | | — | |||||||||||||
Noncontrolling interest: | | | | | | | | | | | | | | | | | | | |
Real estate amortization of right-of-use asset and liability | | | 73 | | | 73 | | | 145 | | | 145 | | ||||||
Real estate amortization of right-of-use asset and obligation | | | 72 | | | 72 | |||||||||||||
Noncash interest on derivatives, net | | | — | | | (26) | | | — | | | (26) | | | | 2 | | | — |
Impairment loss - abandoned development costs | | | — | | | — | | | — | | | (449) | | ||||||
Adjustments to FFO attributable to common stockholders, net | |
| 2,207 | |
| 1,755 | |
| 446 | |
| 17,240 | | |
| (1,096) | |
| 991 |
Adjusted FFO attributable to common stockholders | | $ | (1,612) | | $ | (65,579) | | $ | (30,489) | | $ | (66,980) | | | $ | 16,411 | | $ | (26,125) |
(1) | Amortization of deferred stock compensation has been added to the adjustments to FFO attributable to common stockholders, net for the three months ended March 31, 2021 to conform to the current year’s presentation. |
Adjusted FFO attributable to common stockholders increased $64.0$42.5 million, or 97.5%, and $36.5 million, or 54.5%162.8%, in the secondfirst quarter of 2021 and first six months of 2021, respectively,2022 as compared to the same periodsperiod in 20202021 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 hotel disposition deposits, our credit facility, issuances of both common and preferred stockdispositions, property insurance and contributions from our joint venture partner. Our primary uses of cash were for capital expenditures for hotels and other assets, acquisitions of hotels and other assets, operating expenses, including funding the negative cash flow at our hotels, repurchases of our common stock, a redemption of our preferred stock, repayments of notes payable dividends and distributionsdividends on our common and preferred stock and distributions to our joint venture partner.stock. 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 used inprovided by operating activities was $13.9 million and $34.9$13.1 million for the sixthree months ended June 30, 2021 and 2020, respectively. TheMarch 31, 2022 as compared to net decrease in cash used in operating activities of $38.2 million for the three months ended March 31, 2021. The net increase in cash provided by operating activities during the first six monthsquarter of 20212022 as compared to the same period in 20202021 was primarily due to the resumption in operations at the majority of our hotels during the first six months of 2021, combined with an increase in travel demand duringbenefiting our hotels and additional operating cash provided by the first halfTwo Recently Acquired Hotels, partially offset by a decrease in operating cash caused by the sales of 2021 as compared to the same period in 2020.Five Disposed Hotels.
3935
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 inprovided by (used in) investing activities during the first sixthree months of 20212022 as compared to the first sixthree months of 20202021 was as follows (in thousands):
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | Three Months Ended March 31, |
| ||||||||
| | 2021 | | 2020 |
| | 2022 | | 2021 |
| ||||
Disposition deposit | | $ | — | | $ | 3,500 | | |||||||
Proceeds from sale of assets | | $ | 191,291 | | $ | — | | |||||||
Proceeds from property insurance | | | 3,910 | | | — | | |||||||
Acquisition of hotel properties and other assets | | | (195,646) | | | (1,346) | | | | (546) | | | — | |
Renovations and additions to hotel properties and other assets | | | (16,785) | | | (32,849) | | | | (30,299) | | | (6,526) | |
Payment for interest rate derivative | | | — | | | (111) | | |||||||
Net cash used in investing activities | | $ | (212,431) | | $ | (30,806) | | |||||||
Net cash provided by (used in) investing activities | | $ | 164,356 | | $ | (6,526) | |
During the first sixthree months of 2021,2022, we received total proceeds of $191.3 million from our sales of three hotels, consisting of $63.2 million for the Hyatt Centric Chicago Magnificent Mile (having already received a $4.0 million disposition deposit in December 2021) and $128.1 million for the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile. In addition, we received insurance proceeds of $3.9 million for hurricane-related property damage at the Hilton New Orleans St. Charles. These cash inflows were partially offset by $0.5 million paid $195.6 million to acquire additional wet and dry boat slips at the Montage Healdsburg, including closing costsOceans Edge Resort & Marina and prorations, and$30.3 million invested $16.8 million for renovations and additions to our portfolio and other assets.
During the first sixthree months of 2020,2021, we received a nonrefundable deposit of $3.5 million from the buyer of the Renaissance Harborplace, which we sold in July 2020. This cash inflow was offset as we paid $1.3 million to purchase additional wet boat and dry boat slips at the Oceans Edge Resort & Marina, invested $32.8$6.5 million for renovations and additions to our portfolio and other assets and paid $0.1 million for an interest rate cap derivative on debt secured by the Hilton San Diego Bayfront.assets.
Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our dividends and distributions paid, issuance and repurchase of common stock, issuance and repayment of notes payable and our credit facility, debt restructurings and issuance and redemption of other forms of capital, including preferred equity. Net cash provided by (used in)used in financing activities during the first sixthree months of 20212022 as compared to the first sixthree months of 20202021 was as follows (in thousands):
| | | | | | |
| | Six Months Ended June 30, | ||||
| | 2021 | | 2020 | ||
Proceeds from preferred stock offerings | | $ | 115,000 | | $ | — |
Payment of preferred stock offering costs | | | (3,943) | | | — |
Redemption of preferred stock | | | (115,000) | | | — |
Proceeds from common stock offerings | | | 38,443 | | | — |
Payment of common stock offering costs | | | (784) | | | — |
Repurchases of outstanding common stock | | | — | | | (103,894) |
Repurchases of common stock for employee tax obligations | | | (4,877) | | | (3,992) |
Proceeds from credit facility | | | — | | | 300,000 |
Payment on credit facility | | | — | | | (250,000) |
Payments on notes payable | | | (1,642) | | | (3,616) |
Dividends and distributions paid | | | (7,969) | | | (149,856) |
Distributions to noncontrolling interest | | | — | | | (2,000) |
Contributions from noncontrolling interest | |
| 1,375 | |
| 500 |
Net cash provided by (used in) financing activities | | $ | 20,603 | | $ | (212,858) |
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2022 | | 2021 | ||
Repurchases of outstanding common stock | | $ | (43,465) | | $ | — |
Repurchases of common stock for employee tax obligations | | | (3,351) | | | (3,516) |
Payments on notes payable | | | (35,503) | | | (832) |
Dividends paid | | | (3,513) | | | (3,208) |
Contribution from noncontrolling interest | |
| — | |
| 1,375 |
Net cash used in financing activities | | $ | (85,832) | | $ | (6,181) |
,
During the first sixthree months of 2021,2022, we received gross proceeds of $115.0paid $43.5 million from the issuance of 4,600,000to repurchase 3,879,025 shares of our Series H preferred stock, and paid a total of $3.9 million in offering costs on our Series G preferred stock and Series H preferred stock. We used the proceeds received from our Series H preferred stock issuance to redeem in full all 4,600,000 shares of our Series E preferredoutstanding common stock. In addition, we received gross proceeds of $38.4paid $35.5 million from the issuance of 2,913,682 sharesin principal payments on our notes payable, including $35.0 million to repay a portion of our common stock under our ATM Program,senior notes and paid $0.8$0.5 million in related offering costs.scheduled principal payments on our notes payable. We also received a $1.4 million contribution from our joint venture partner. These net cash inflows were partially offset as we paid the following: $4.9$3.4 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees; $1.6 million in principal payments on our notes payable;employees and $8.0$3.5 million in dividends to our preferred stockholders.
During the first sixthree months of 2020, we drew $300.0 million from our credit facility and received a $0.5 million contribution from our joint venture partner. These cash inflows were offset as2021, we paid the following: $103.9 million to repurchase 9,770,081 shares of our outstanding common stock; $4.0$3.5 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees; $250.0 million to repay a portion of the amount outstanding on our credit facility; $3.6employees, $0.8 million in principal payments on our notes payable; $149.9payable and $3.2 million in dividends and distributions to our common and preferred stockholders; and $2.0stockholders. These cash outflows were partially offset by a $1.4 million in distributions tocontribution from our joint venture partner.
Future. While operations are beginninghave improved in the first three months of 2022 as compared to improve, wethe same period in 2021, our hotels continue to operate below pre-pandemic levels. We believe the ongoing effects of the COVID-19 pandemic, including the spread of variants and the recent economic downturnlabor challenges, on our operations willcould continue to have a material negative impact on our financial results and liquidity through at
40
least the third quarter of 2021. As previously noted, operations continue to be suspended at one of the 18 Hotels, with the remainder operating at reduced, albeit increasing, capacities due to COVID-19; therefore, our traditional source of cash from operating activities has been significantly reduced.in 2022. Despite these challenges, we believe that we have sufficient liquidity, as well as access to our credit facility and capital markets, to withstand the current decline in our operating cash flow. We expect our primary sources of cash will continue to be our working capital and credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. However, there can be no assurance that the capital markets will be available to us in the future on favorable terms or at all.
We expect our primary uses of cash to be for operating expenses, including funding the cash flow needs at our hotels, capital investments in our hotels, repayment of principal on our notes payable and possibly on our unsecured debt, interest expense, dividends on our preferred stock and acquisitions of hotels or interests in hotels.
At this time, we do not expect to pay a quarterly common stock dividend in 2021. The resumption in quarterly common stock dividends will be determined by our board of directors after considering our obligations under our various financing agreements, projected taxable income, compliance with our debt covenants, long-term operating projections, expected capital requirements and risks affecting our business. We have taken additional steps to preserve our liquidity, including the deferral of portions of our planned 2021 non-essential capital improvements into our portfolio, as well as the temporary suspension of our stock repurchase program.
In April 2021, we acquired the Montage Healdsburg for $265.0 million. We funded the acquisition with $198.8 million of cash on hand and through the issuance of 2,650,000 shares of our Series G preferred stock with an aggregate liquidation preference of $66.3 million. The SeriesG preferredstock, whichiscallable attheliquidationpreferenceplusaccruedand unpaid dividendsby us atanytime,accruesdividendsat aninitialrate equal totheMontage Healdsburg’sannualnet operating income yieldon ourinvestmentinthe hotel.TheSeriesG preferredstockisnotconvertible intoanyothersecurity.
In May 2021, we issued 4,600,000 shares of our 6.125% Series H preferred stock for gross proceeds of $115.0 million. The Series H preferred stock has a redemption price of $25.00 per share, and can be redeemed by us on or after May 24, 2026. We used the proceeds received from this issuance to redeem all 4,600,000 shares of our 6.950% Series E preferred stock. Because the redemption of the Series E preferred stock was a redemption in full, trading of the Series E preferred stock on the New York Stock Exchange ceased on the June 11, 2021 redemption date.
In June 2021, we utilized our February 2017 ATM Program to issue 2,913,682 shares of our common stock for gross proceeds of $38.4 million, leaving $137.0 million available for sale under the February 2017 ATM Program.
In July 2021, we issued 4,000,000 shares of our 5.70% Series I Cumulative Redeemable Preferred Stock (the “Series I preferred stock”) for gross proceeds of $100.0 million. The Series I preferred stock has a redemption price of $25.00 per share, and can be redeemed by us on or after July 16, 2026. We expect to use $75.0 million of the proceeds received from this issuance to redeem all 3,000,000 shares of our 6.450% Series F preferred stock in August 2021.
We believe that the steps we have taken to maintain an appropriate cash position and preserve our financial flexibility, combined with the amendments to our unsecured debt, our already strong balance sheet and our low leverage will be sufficient to allow us to navigate through this crisis. Given the unprecedented impact of COVID-19 on the global market and our hotel operations, we cannot, however, assure you that our forecast or the assumptions we used to estimate our liquidity requirements will be correct. In 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.
We expect our primary sources of cash will continue to be our working capital and credit facility, dispositions of hotel properties and proceeds from public and private offerings of debt securities and common and preferred stock. However, there can be no assurance that our future asset sales will be successfully completed or that the capital markets will be available to us in the future on favorable terms or at all.
36
We expect our primary uses of cash to be for operating expenses, including funding the cash flow needs at our hotels if necessary, capital investments in our hotels, repayment of principal on our notes payable and possibly on our unsecured debt, interest expense, repurchases of our common stock, dividends on our preferred stock and acquisitions of hotels or interests in hotels, including our anticipated acquisition during the second quarter 2022 of The Confidante Miami Beach for $232.0 million using cash on hand and proceeds received from our currently undrawn revolving credit facility. The acquisition of the hotel is subject to the satisfaction of customary closing conditions, and we can give no assurance that the acquisition of the hotel will be completed.
At this time, we have not reinstated our common stock dividend and may not need to pay a quarterly common stock dividend in 2022. The resumption in quarterly common stock dividends will be determined by our board of directors after considering our obligations under our various financing agreements, projected taxable income, compliance with our debt covenants, long-term operating projections, expected capital requirements and risks affecting our business.
Cash Balance. As of June 30, 2021,March 31, 2022, our unrestricted cash balance was $162.9$214.9 million. We believe that our current unrestricted cash balance and our ability to draw the $500.0 million of capacity available for borrowing under the unsecured revolving credit facility will enable us to successfully manage our Company while operations at the 18 Hotelsour hotels are either reduced or temporarily suspended.reduced.
Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. These provisions were triggered in January 2021 for the loansloan secured by the Embassy Suites La Jolla and the JW Marriott New Orleans and in JanuaryMay 2021 and atfor the loan secured by the Hilton San Diego Bayfront in May 2021.Bayfront. As of June 30, 2021, only a nominal amount ofMarch 31, 2022, no excess cash generated by the hotels was held in lockbox accounts for the benefit of the lenders and included in restrictedlenders. In April 2022, we informed the lender for the loan secured by the Hilton San Diego Bayfront that we have met the criteria to exit the cash on our consolidated balance sheet.trap. The cash trap provisionsprovision triggered on these three loansthe loan secured by the JW Marriott New Orleans will remain until the hotels reachhotel reaches profitability levels that terminate the cash traps.trap.
Debt. As of June 30, 2021,March 31, 2022, we had $746.3$575.9 million of consolidated debt, $210.4$254.4 million of cash and cash equivalents, including restricted cash, and total assets of $3.0 billion. We believe that by maintaining appropriate debt levels, staggering maturity dates and maintaining a highly flexible structure, we will have lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants.
41
As of June 30, 2021,March 31, 2022, we havehad no amount outstanding on the revolving portion of our credit facility, with $500.0 million of capacity available for additional borrowing under the facility. Our ability to draw on the revolving portion of the credit facility may be subject to our compliance with various financial covenants on our secured and unsecured debt. The revolving portion of the credit facility agreement matures in April 2023, but may be extended for two six-month periods to April 2024, upon the payment of applicable fees and satisfaction of certain customary conditions.
In JulyFebruary 2022, we used a portion of the proceeds received from the disposition of the Hyatt Centric Chicago Magnificent Mile to repay $25.0 million of our unsecured Series A Senior Notes and $10.0 million of our unsecured Series B Senior Notes, resulting in remaining balances of $65.0 million and $105.0 million on our Series A Senior Notes and Series B Senior Notes, respectively, as of March 31, 2022.
In March 2022, we elected to early terminate the covenant relief period related to our unsecured debt, having satisfied the financial covenants stipulated in the 2020 and 2021 we amendedUnsecured Debt Amendments for the quarter ended December 31, 2021. The Unsecured Debt Amendments were scheduled to provide covenant relief through the end of the third quarter of 2022, with quarterly testing resuming for the period ending September 30, 2022. Following our early termination of the covenant relief period in March 2022, the original financial covenants on our unsecured debt agreements which removed certain restrictions in place duringwill be phased-in over the following five quarters to ease compliance. By exiting the covenant waiverrelief period, which period ends March 31, 2022. Thewe are no longer subject to additional restrictions removed includeon debt issuance and repayment, capital investment, share repurchases and dividend distributions that were imposed as part of the limitation on the aggregate value of unencumbered hotel acquisitions we can complete and, provided that an event of default has not occurred, the requirement to prepay our unsecured debt using net proceeds received from asset sales or equity issuances.Unsecured Debt Amendments.
DueThe Unsecured Debt Amendments provide us the option to COVID-19’s expected negative impactextend the applicable maturity dates of our term loans by one year each upon payment of applicable fees and satisfaction of certain customary conditions. Currently, our term loans are both classified as current liabilities on our operations through at least the third quarterconsolidated balance sheet as of 2021, it is possible thatMarch 31, 2022; however, we may not meetexercise the termsoptions on both of our unsecured debt financial covenants once such covenants are effective again in 2022. As noted above, dueterm loans, which would extend the maturity dates of Term Loan 1 and Term Loan 2 to COVID-19, operations continue to be suspended at one of the 18 Hotels, with the remainder operating at reduced, albeit increasing, capacities. Our future liquidity will depend on the gradual return of guests, particularly group business, to our hotelsSeptember 2023 and the stabilization of demand throughout our portfolio.January 2024, respectively.
As of June 30, 2021,March 31, 2022, 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 floating interest rate at 6.0% until December 2021. Our remaining mortgage debt is in2022. As of March 31, 2022, we also have a loan secured by the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to our mortgage debt, as of June 30, 2021, we haveJW Marriott New Orleans, two unsecured corporate-level term loans as well asand two unsecured corporate-level senior notes.
We may in the future seek to obtain mortgages on one or more of our 1512 unencumbered hotels (subject to certain stipulations under our unsecured term loans and senior notes), 14all of which are currentlywere held by subsidiaries whose interests arewere pledged to our credit facility.facility as of March 31, 2022. Our 1512 unencumbered hotels include: Boston Park Plaza; Embassy Suites Chicago;Four Seasons Resort Napa Valley; Hilton Garden Inn Chicago Downtown/Magnificent Mile; Hilton New
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Orleans St. Charles; Hyatt Centric Chicago Magnificent Mile; Hyatt Regency San Francisco; Marriott Boston Long Wharf; Montage Healdsburg; Oceans Edge Resort & Marina; Renaissance Long Beach; Renaissance Orlando at SeaWorld®; Renaissance Washington DC; Renaissance Westchester; The Bidwell Marriott Portland; 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 or future unsecured borrowings may be reduced.
Contractual Obligations. The following table summarizes our payment obligations and commitments as of June 30, 2021March 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payment due by period |
| | Payment due by period |
| ||||||||||||||||||||||||||
| | | | | Less Than | | 1 to 3 | | 3 to 5 | | More than | | | | | | Less Than | | 1 to 3 | | 3 to 5 | | More than | | ||||||||
| | Total | | 1 year | | years | | years | | 5 years |
| | Total | | 1 year | | years | | years | | 5 years |
| ||||||||||
Notes payable (1) | | $ | 746,303 | | $ | 3,375 | | $ | 412,173 | | $ | 215,755 | | $ | 115,000 | | | $ | 575,934 | | $ | 110,321 | | $ | 295,613 | | $ | 65,000 | | $ | 105,000 | |
Interest obligations on notes payable (2) | | | 103,446 | | | 29,425 | | | 40,732 | | | 22,272 | | | 11,017 | | | | 65,198 | | | 22,567 | | | 24,494 | | | 13,107 | | | 5,030 | |
Finance lease obligation, including imputed interest | | | 107,311 | | | 1,403 | | | 2,806 | | | 2,806 | | | 100,296 | | ||||||||||||||||
Operating lease obligations, including imputed interest (3) | | | 39,204 | | | 6,882 | | | 13,926 | | | 11,483 | | | 6,913 | | | | 30,763 | | | 6,711 | | | 13,450 | | | 7,100 | | | 3,502 | |
Construction commitments | | | 36,495 | | | 36,495 | |
| — | |
| — | |
| — | | | | 75,216 | | | 75,216 | |
| — | |
| — | |
| — | |
Employment obligations | |
| 2,277 | |
| 2,277 | |
| — | |
| — | |
| — | | ||||||||||||||||
Total | | $ | 1,035,036 | | $ | 79,857 | | $ | 469,637 | | $ | 252,316 | | $ | 233,226 | | | $ | 747,111 | | $ | 214,815 | | $ | 333,557 | | $ | 85,207 | | $ | 113,532 | |
(1) | Notes payable includes the $220.0 million mortgage secured by the Hilton San Diego Bayfront, which |
(2) | Interest on our variable rate debt is calculated based on the variable rate at |
(3) | 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. |
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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 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 $16.8$30.3 million in our portfolio and other assets during the first sixthree months of 2021.2022. As of June 30, 2021,March 31, 2022, we have contractual construction commitments totaling $36.5$75.2 million for ongoing renovations. As noted above, in light of the COVID-19 pandemic, we elected to conserve cash by deferring a portion of our planned 2020 and 2021 non-essential capital improvements into our portfolio. In February 2021, however, we entered into an agreement with Marriott to rebrand the Renaissance Washington DC to The Westin Washington DC, upon substantial completion of a repositioning of the hotel. If we renovate or develop additional hotels or other assets in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel’s applicable annual revenue. As of June 30, 2021,March 31, 2022, our balance sheet includes restricted cash of $31.9$25.1 million, which was held in FF&E reserve accounts for future capital expenditures at the majority of the 18 Hotels.our 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 pandemic, some of our third-party managers have suspended the requirement to fund into the FF&E reserves throughout 2021. Additionally, some of our third-party managers are permitting owners the ability to draw from the FF&E reserve to fund operating expenses, subject to certain conditions including a future repayment to the reserve.
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Hawaii, Key West, New Orleans and Orlando, the second quarter is strong for the Mid-Atlantic business hotels and the fourth quarter is strong for Hawaii, Key West and Key West)the California counties of Napa and Sonoma). 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 economic and business conditions, including a U.S. recession or increased inflation, trade conflicts and tariffs, changes impacting global travel, regional or global economic slowdowns, any flu or disease-related pandemic that impacts travel or the ability to travel, including the COVID-19 pandemic, the adverse effects of climate change, the threat of terrorism, terrorist events, civil unrest, government shutdowns, events that reduce the capacity or availability of air travel, increased competition from other hotels in our markets, new hotel supply or alternative lodging options and unexpected changes in business, commercial travel, leisure travel and tourism.
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Inflation
Inflation may affectaffects our expenses, including, without limitation, by increasing such costs as labor,wages, employee-related benefits, food, commodities, including those used to renovate or reposition our hotels, taxes, property and liability insurance, utilities and utilities.borrowing costs. In addition, our hotel expenses may increase at higher rates than hotel revenue.
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. Impairment losses are recorded on long-lived assets to be held and used by us 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 our anticipated investment horizon, are less than the assets’ carrying amount. We evaluate our long-lived assets to determine if there are indicators of impairment on a quarterly basis. 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. |
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● | 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 their related obligations. When we acquire a hotel property or other entity, we use all available information to make these fair value determinations, including discounted cash flow analyses, market comparable data and replacement cost data. In addition, we make significant estimations regarding capitalization rates, discount rates, average daily rates, revenue growth rates and occupancy. We also engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. |
In addition, the acquisition of a hotel property or other entity requires an analysis of the transaction to determine if it qualifies as the purchase of a business or an asset. If the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the transaction is an asset acquisition. Transaction costs associated with asset acquisitions are capitalized and subsequently depreciated over the life of the related asset, while the same costs associated with a business combination are expensed as incurred and included in corporate overhead on our consolidated statements of operations. Also, asset acquisitions are not subject to a measurement period, as are business combinations.
● | Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and |
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refurbish our hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 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 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 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 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”
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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 |
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 June 30, 2021, 70.5%March 31, 2022, 61.8% of our debt obligations are fixed in nature, which 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 million based on the variable rate at June 30, 2021.March 31, 2022. After adjusting for the noncontrolling interest in the Hilton San Diego Bayfront, this increase or decrease in interest expense would increase or decrease, respectively, our future consolidated earnings and cash flows by $1.7 million, based on the variable rate at June 30, 2021.March 31, 2022.
| 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.
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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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PART II—OTHER INFORMATION
| Item 1. Legal Proceedings |
None.
| Item 1A. Risk Factors |
None.
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
(c)Issuer Purchases of Equity Securities
In February 2021, the Company’s board of directors reauthorized the Company’s existing stock repurchase program, allowing the Company 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, 2022, the Company repurchased 3,879,025 shares of its common stock for a total purchase price of $43.5 million, including fees and commissions, leaving $456.6 million remaining under the stock repurchase program. The 2021 stock repurchase program has no stated expiration date. Future repurchases will depend on various factors, including the Company’s capital needs and restrictions under its various financing agreements, as well as the price of the Company’s common and preferred stock.
In May 2021,February 2022 and March 2022, the Company withheld 108,905219,823 shares and 68,883 shares of its restricted common stock, respectively, at an average market valuevalues of $12.49$11.69 per share and $11.33 per share, respectively, and used the proceeds to satisfy the tax obligations in connection with the vesting of restricted common shares issued to an employee.employees.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Maximum Number (or | | | | | | | | | Maximum Number (or | ||
| | | | | | | Total Number of | | Appropriate Dollar | | | | | | | Total Number of | | Appropriate Dollar | ||
| | | | | | | Shares Purchased | | Value) of Shares that | | | | | | | Shares Purchased | | Value) of Shares that | ||
| | Total Number | | | | | as Part of Publicly | | May Yet Be Purchased | | Total Number | | | | | as Part of Publicly | | May Yet Be Purchased | ||
| | of Shares | | Average Price Paid | | Announced Plans | | Under the Plans or | | of Shares | | Average Price Paid | | Announced Plans | | Under the Plans or | ||||
Period | | Purchased | | per Share | | or Programs | | Programs | | Purchased | | per Share | | or Programs | | Programs | ||||
April 1, 2021 - April 30, 2021 | | — | | $ | — | | — | | $ | 500,000,000 | ||||||||||
May 1, 2021 - May 31, 2021 | | 108,905 | | $ | 12.49 | | — | | $ | 500,000,000 | ||||||||||
June 1, 2021 - June 30, 2021 | | — | | $ | — | | — | | $ | 500,000,000 | ||||||||||
January 1, 2022 - January 31, 2022 | | — | | $ | — | | — | | $ | 500,000,000 | ||||||||||
February 1, 2022 - February 28, 2022 | | 219,823 | | $ | 11.69 | | — | | $ | 500,000,000 | ||||||||||
March 1, 2022 - March 31, 2022 | | 3,947,908 | | $ | 11.19 | | 3,879,025 | | $ | 456,612,271 | ||||||||||
Total | | 108,905 | | $ | 12.49 | | — | | $ | 500,000,000 | | 4,167,731 | | $ | 11.21 | | 3,879,025 | | $ | 456,612,271 |
| Item 3. Defaults Upon Senior Securities |
None.
| Item 4. Mine Safety Disclosures |
None.
| Item 5. Other Information |
None.
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| Item 6. Exhibits |
The following Exhibits are filed as a part of this report:
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Exhibit Number | | Description | |
3.1 | | | |
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3.2 | | | |
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3.3 | | | |
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3.4 | | | |
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3.5 | | | |
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3.6 | | | |
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3.7 | | | |
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3.8 | | | |
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3.9 | | | |
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10.1 | | | |
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10.2 | | | |
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10.3 | | | |
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10.4 | | | |
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10.5 | | | |
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10.6 | | | |
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10.7 | | | |
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10.8 | | | |
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10.9 | | | |
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10.10 | | | |
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31.1 | | | |
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31.2 | | | |
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32.1 | | | |
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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. * |
| | | |
101.CAL | | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. * |
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101.LAB | | | Inline XBRL Taxonomy Extension Label Linkbase Document. * |
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101.PRE | | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. * |
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101.DEF | | | Inline XBRL Taxonomy Extension Definition Linkbase Document. * |
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104 | | | Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
| | |
* | | Filed herewith. |
# | | Management contract or compensatory plan or arrangement. |
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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: | By: | /s/ |
| |
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