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 September 30, ~~2021~~2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-32319

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Maryland		20-1296886
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

200 Spectrum Center Drive, 21st Floor Irvine, California		92618
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (949) 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 November ~~2, 2021,~~1, 2022, there were ~~219,333,783~~210,399,520 shares of Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value per share, outstanding.

Table of Contents

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended September 30, ~~2021~~2022

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Consolidated Balance Sheets as of September 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021	2

	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	3

	Unaudited Consolidated Statements of Equity for the Three ~~Quarters~~ and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	4

	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021	6

	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4645

Item 4.	Controls and Procedures	4645

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	4746

Item 1A.	Risk Factors	4746

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4746

Item 3.	Defaults Upon Senior Securities	4746

Item 4.	Mine Safety Disclosures	4746

Item 5.	Other Information	4746

Item 6.	Exhibits	4847

SIGNATURES		5048

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

September 30,

December 31,

2021

2020

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$
179,487

$
368,406
Restricted cash

42,124

47,733
Accounts receivable, net

28,349

8,566
Prepaid expenses and other current assets

18,512

10,440
Assets held for sale, net

13,759

—
Total current assets

282,231

435,145
Investment in hotel properties, net

2,669,169

2,461,498
Finance lease right-of-use asset, net

45,079

46,182
Operating lease right-of-use assets, net

23,971

26,093
Deferred financing costs, net

2,928

4,354
Other assets, net

11,217

12,445
Total assets

$
3,034,595

$
2,985,717
LIABILITIES AND EQUITY

Current liabilities:

Accounts payable and accrued expenses

$
48,740

$
37,326
Accrued payroll and employee benefits

18,057

15,392
Dividends and distributions payable

3,112

3,208
Other current liabilities

57,129

32,606
Current portion of notes payable, net

87,396

2,261
Liabilities of assets held for sale

5,490

—
Total current liabilities

219,924

90,793
Notes payable, less current portion, net

655,713

742,528
Finance lease obligation, less current portion

15,568

15,569
Operating lease obligations, less current portion

26,432

29,954
Other liabilities

14,495

17,494
Total liabilities

932,132

896,338
Commitments and contingencies (Note 12)

Equity:

Stockholders’ equity:

Preferred stock, $0.01 par value, 100,000,000 shares authorized:

6.95% Series E Cumulative Redeemable Preferred Stock, zero shares and 4,600,000 shares issued and outstanding at September 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, zero shares and 3,000,000 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

—

75,000
Series G Cumulative Redeemable Preferred Stock, 2,650,000 shares and zero shares issued and outstanding at September 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 September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

115,000

—
5.70% Series I Cumulative Redeemable Preferred Stock, 4,000,000 shares and zero shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively, stated at liquidation preference of $25.00 per share

100,000

—
Common stock, $0.01 par value, 500,000,000 shares authorized, 219,333,783 shares issued and outstanding at September 30, 2021 and 215,593,401 shares issued and outstanding at December 31, 2020

2,193

2,156
Additional paid in capital

2,629,148

2,586,108
Retained earnings

810,075

913,766
Cumulative dividends and distributions

(1,660,675)

(1,643,386)
Total stockholders’ equity

2,061,991

2,048,644
Noncontrolling interest in consolidated joint venture

40,472

40,735
Total equity

2,102,463

2,089,379
Total liabilities and equity

$
3,034,595

$
2,985,717



	September 30,		December 31,
	2022		2021
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	117,588	$	120,483
Restricted cash		50,253		42,234
Accounts receivable, net		45,750		28,733
Prepaid expenses and other current assets		14,374		14,338
Assets held for sale, net		—		76,308
Total current assets		227,965		282,096
Investment in hotel properties, net		2,850,225		2,720,016
Operating lease right-of-use assets, net		17,866		23,161
Deferred financing costs, net		5,382		2,580
Other assets, net		8,945		13,196
Total assets	$	3,110,383	$	3,041,049
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	60,512	$	47,701
Accrued payroll and employee benefits		22,413		19,753
Dividends and distributions payable		13,961		3,513
Other current liabilities		68,920		58,884
Current portion of notes payable, net		2,088		20,694
Liabilities of assets held for sale		—		25,213
Total current liabilities		167,894		175,758
Notes payable, less current portion, net		810,909		588,741
Operating lease obligations, less current portion		18,349		25,120
Other liabilities		9,575		11,656
Total liabilities		1,006,727		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 September 30, 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 September 30, 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 September 30, 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, 211,570,211 shares issued and outstanding at September 30, 2022 and 219,333,783 shares issued and outstanding at December 31, 2021		2,116		2,193
Additional paid in capital		2,487,931		2,631,484
Retained earnings		1,017,890		948,064
Cumulative dividends and distributions		(1,685,531)		(1,664,024)
Total stockholders’ equity		2,103,656		2,198,967
Noncontrolling interest in consolidated joint venture		—		40,807
Total equity		2,103,656		2,239,774
Total liabilities and equity	$	3,110,383	$	3,041,049

See accompanying notes to consolidated financial statements.

Table of Contents

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Three Months Ended September 30,

Nine Months Ended September 30,


2021

2020

2021

2020
REVENUES

Room

$
118,061

$
16,266

$
236,877

$
147,535
Food and beverage

27,338

2,109

47,547

50,312
Other operating

22,022

10,535

50,840

32,699
Total revenues

167,421

28,910

335,264

230,546
OPERATING EXPENSES

Room

32,106

13,715

66,692

65,037
Food and beverage

27,440

7,748

49,088

54,533
Other operating

4,643

1,295

9,934

6,283
Advertising and promotion

8,883

3,895

20,800

20,447
Repairs and maintenance

10,001

6,075

22,678

21,499
Utilities

6,164

4,170

14,998

13,238
Franchise costs

4,181

663

7,468

6,337
Property tax, ground lease and insurance

17,528

20,800

47,821

59,975
Other property-level expenses

21,633

9,528

48,177

47,109
Corporate overhead

15,422

6,582

32,066

22,414
Depreciation and amortization

32,585

33,005

96,084

104,290
Impairment losses

1,014

—

1,014

133,466
Total operating expenses

181,600

107,476

416,820

554,628
Interest and other income (loss)

2

139

(356)

2,751
Interest expense

(7,983)

(12,742)

(23,697)

(43,199)
Gain on sale of assets

—

189

—

189
Gain (loss) on extinguishment of debt

61

(210)

371

(210)
Loss before income taxes

(22,099)

(91,190)

(105,238)

(364,551)
Income tax (provision) benefit, net

(25)

83

(91)

(6,575)
NET LOSS

(22,124)

(91,107)

(105,329)

(371,126)
(Income) loss from consolidated joint venture attributable to noncontrolling interest

(933)

1,816

1,638

4,436
Preferred stock dividends and redemption charges

(6,287)

(3,208)

(17,289)

(9,622)
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

$
(29,344)

$
(92,499)

$
(120,980)

$
(376,312)

Basic and diluted per share amounts:

Basic and diluted loss attributable to common stockholders per common share

$
(0.13)

$
(0.43)

$
(0.56)

$
(1.74)
Basic and diluted weighted average common shares outstanding

217,709

214,257

215,765

216,498



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
REVENUES
Room	$	158,400	$	118,061	$	428,893	$	236,877
Food and beverage		63,476		27,338		174,717		47,547
Other operating		22,438		22,022		64,299		50,840
Total revenues		244,314		167,421		667,909		335,264
OPERATING EXPENSES
Room		38,791		32,106		106,594		66,692
Food and beverage		47,181		27,440		125,959		49,088
Other operating		6,440		4,643		17,965		9,934
Advertising and promotion		12,325		8,883		34,420		20,800
Repairs and maintenance		9,382		10,001		27,369		22,678
Utilities		7,708		6,164		19,652		14,998
Franchise costs		4,145		4,181		11,429		7,468
Property tax, ground lease and insurance		19,714		17,528		53,160		47,821
Other property-level expenses		29,032		21,633		83,333		48,177
Corporate overhead		7,879		15,422		27,310		32,066
Depreciation and amortization		31,750		32,585		94,003		96,084
Impairment loss		—		1,014		—		1,014
Total operating expenses		214,347		181,600		601,194		416,820
Interest and other income (loss)		270		2		4,766		(356)
Interest expense		(9,269)		(7,983)		(20,288)		(23,697)
Gain on sale of assets		—		—		22,946		—
(Loss) gain on extinguishment of debt, net		(770)		61		(962)		371
Income (loss) before income taxes		20,198		(22,099)		73,177		(105,238)
Income tax benefit (provision), net		290		(25)		126		(91)
NET INCOME (LOSS)		20,488		(22,124)		73,303		(105,329)
(Income) loss from consolidated joint venture attributable to noncontrolling interest		—		(933)		(3,477)		1,638
Preferred stock dividends and redemption charges		(3,351)		(6,287)		(10,897)		(17,289)
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	17,137	$	(29,344)	$	58,929	$	(120,980)

Basic and diluted per share amounts:
Basic income (loss) attributable to common stockholders per common share	$	0.08	$	(0.13)	$	0.27	$	(0.56)
Diluted income (loss) attributable to common stockholders per common share	$	0.08	$	(0.13)	$	0.27	$	(0.56)

Basic weighted average common shares outstanding		211,010		217,709		213,799		215,765
Diluted weighted average common shares outstanding		211,289		217,709		213,869		215,765

See accompanying notes to consolidated financial statements.

Table of Contents

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
Amortization of deferred stock compensation

—

—

—

—

3,289

—

—

—

3,289
Issuance of restricted common stock

—

—

526,084

5

(5)

—

—

—

—
Forfeiture of restricted common stock

—

—

(235,406)

(2)

2

—

—

—

—
Net proceeds from issuance of Series I preferred stock

4,000,000

100,000

—

—

(3,344)

—

—

—

96,656
Redemption of Series F preferred stock

(3,000,000)

(75,000)

—

—

2,624

—

(2,624)

—

(75,000)
Series F preferred stock dividends at $0.183646 per share through redemption date

—

—

—

—

—

—

(551)

—

(551)
Series G preferred stock dividends and dividends payable at $0.061713 per share

—

—

—

—

—

—

(164)

—

(164)
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 $0.296875 per share

—

—

—

—

—

—

(1,187)

—

(1,187)
Net (loss) income

—

—

—

—

—

(23,057)

—

933

(22,124)
Balance at September 30, 2021

11,250,000

$
281,250

219,333,783

$
2,193

$
2,629,148

$
810,075

$
(1,660,675)

$
40,472

$
2,102,463


													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
Amortization of deferred stock compensation	—		—	—		—		2,971		—		—		—		2,971
Issuance of restricted common stock	—		—	53,616		1		(92)		—		—		—		(91)
Forfeiture of restricted common stock	—		—	(34,807)		—		—		—		—		—		—
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	—		—	(3,235,958)		(33)		(34,482)		—		—		—		(34,515)
Distribution to noncontrolling interest	—		—	—		—		—		—		—		(5,500)		(5,500)
Acquisition of noncontrolling interest, net	—		—	—		—		(62,564)		—		—		(38,784)		(101,348)
Net income	—		—	—		—		—		35,349		—		2,343		37,692
Balance at June 30, 2022	11,250,000	$	281,250	212,450,788	$	2,125	$	2,494,238	$	997,402	$	(1,671,570)	$	—	$	2,103,445
Amortization of deferred stock compensation	—		—	—		—		2,350		—		—		—		2,350
Common stock distributions and distributions payable at $0.05 per share	—		—	—		—		—		—		(10,610)		—		(10,610)
Series G preferred stock dividends and dividends payable at $0.062081 per share	—		—	—		—		—		—		(165)		—		(165)
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	—		—	(880,577)		(9)		(8,657)		—		—		—		(8,666)
Net income	—		—	—		—		—		20,488		—		—		20,488
Balance at September 30, 2022	11,250,000	$	281,250	211,570,211	$	2,116	$	2,487,931	$	1,017,890	$	(1,685,531)	$	—	$	2,103,656

See accompanying notes to consolidated financial statements.

Table of Contents

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, 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
Amortization of deferred stock compensation

—

—

—

—

2,324

—

—

—

2,324
Issuance of restricted common stock, net

—

—

456,219

4

(3,996)

—

—

—

(3,992)
Forfeiture of restricted common stock

—

—

(355)

—

—

—

—

—

—
Common stock distributions and distributions payable at $0.05 per share

—

—

—

—

—

—

(10,777)

—

(10,777)
Series E preferred stock dividends and dividends payable at $0.434375 per share

—

—

—

—

—

—

(1,998)

—

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

—

—

—

—

—

—

(1,209)

—

(1,209)
Distributions to noncontrolling interest

—

—

—

—

—

—

—

(2,000)

(2,000)
Repurchases of outstanding common stock

—

—

(9,770,081)

(98)

(103,796)

—

—

—

(103,894)
Net loss

—

—

—

—

—

(162,061)

—

(458)

(162,519)
Balance at March 31, 2020

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)
Series F preferred stock dividends and dividends payable at $0.403125 per share

—

—

—

—

—

—

(1,209)

—

(1,209)
Contribution from noncontrolling interest

—

—

—

—

—

—

—

500

500
Net loss

—

—

—

—

—

(115,338)

—

(2,162)

(117,500)
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
Amortization of deferred stock compensation

—

—

—

—

2,368

—

—

—

2,368
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

—

—

—

—

—

—

(1,210)

—

(1,210)
Net loss

—

—

—

—

—

(89,291)

—

(1,816)

(91,107)
Balance at September 30, 2020

7,600,000

$
190,000

215,635,550

$
2,156

$
2,584,005

$
951,765

$
(1,640,178)

$
40,297

$
2,128,045


													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
Amortization of deferred stock compensation	—		—	—		—		3,289		—		—		—		3,289
Issuance of restricted common stock	—		—	526,084		5		(5)		—		—		—		—
Forfeiture of restricted common stock	—		—	(235,406)		(2)		2		—		—		—		—
Net proceeds from issuance of Series I preferred stock	4,000,000		100,000	—		—		(3,344)		—		—		—		96,656
Redemption of Series F preferred stock	(3,000,000)		(75,000)	—		—		2,624		—		(2,624)		—		(75,000)
Series F preferred stock dividends at $0.183646 per share through redemption date	—		—	—		—		—		—		(551)		—		(551)
Series G preferred stock dividends and dividends payable at $0.061713 per share	—		—	—		—		—		—		(164)		—		(164)
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 $0.296875 per share	—		—	—		—		—		—		(1,187)		—		(1,187)
Net (loss) income	—		—	—		—		—		(23,057)		—		933		(22,124)
Balance at September 30, 2021	11,250,000	$	281,250	219,333,783	$	2,193	$	2,629,148	$	810,075	$	(1,660,675)	$	40,472	$	2,102,463

See accompanying notes to consolidated financial statements.

Table of Contents

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Nine Months Ended September 30,

2021

2020
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$
(105,329)

$
(371,126)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Bad debt expense

322

305
Loss (gain) on sale of assets

82

(189)
(Gain) loss on extinguishment of debt

(371)

210
Noncash interest on derivatives

(2,194)

5,534
Depreciation

96,053

104,259
Amortization of franchise fees and other intangibles

31

31
Amortization of deferred financing costs

2,207

2,288
Amortization of deferred stock compensation

10,576

7,509
Impairment losses

1,014

133,466
Deferred income taxes, net

—

7,415
Changes in operating assets and liabilities:

Accounts receivable

(20,241)

30,173
Prepaid expenses and other assets

(3,228)

75
Accounts payable and other liabilities

23,403

2,923
Accrued payroll and employee benefits

7,083

(9,255)
Operating lease right-of-use assets and obligations

(1,004)

(923)
Net cash provided by (used in) operating activities

8,404

(87,305)
CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from sale of assets

—

76,855
Acquisition and disposition deposits, net

(3,900)

—
Acquisition of hotel properties and other assets

(195,706)

(1,398)
Renovations and additions to hotel properties and other assets

(41,910)

(44,043)
Payment for interest rate derivative

(80)

(111)
Net cash (used in) provided by investing activities

(241,596)

31,303
CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from preferred stock offerings

215,000

—
Payment of preferred stock offering costs

(7,287)

—
Redemptions of preferred stock

(190,000)

—
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
Payments on credit facility

—

(300,000)
Payments on notes payable

(2,461)

(40,190)
Payments of deferred financing costs

—

(2,698)
Dividends and distributions paid

(10,745)

(153,063)
Distributions to noncontrolling interest

—

(2,000)
Contributions from noncontrolling interest

1,375

500
Net cash provided by (used in) financing activities

38,664

(305,337)
Net decrease in cash and cash equivalents and restricted cash

(194,528)

(361,339)
Cash and cash equivalents and restricted cash, beginning of period

416,139

864,973
Cash and cash equivalents and restricted cash, end of period

$
221,611

$
503,634



	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	73,303	$	(105,329)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Bad debt expense		846		322
(Gain) loss on sale of assets		(22,946)		82
Loss (gain) on extinguishment of debt, net		962		(371)
Noncash interest on derivatives, net		(2,904)		(2,194)
Depreciation		93,573		96,053
Amortization of franchise fees and other intangibles		387		31
Amortization of deferred financing costs		1,940		2,207
Amortization of deferred stock compensation		8,661		10,576
Gain on hurricane-related damage		(4,369)		—
Impairment loss		—		1,014
Changes in operating assets and liabilities:
Accounts receivable		(16,279)		(20,241)
Prepaid expenses and other assets		5,465		(3,228)
Accounts payable and other liabilities		10,831		23,403
Accrued payroll and employee benefits		1,278		7,083
Operating lease right-of-use assets and obligations		(1,050)		(1,004)
Net cash provided by operating activities		149,698		8,404
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets		191,291		—
Acquisition and disposition deposits, net		—		(3,900)
Proceeds from property insurance		4,369		—
Acquisitions of hotel properties and other assets		(232,506)		(195,706)
Renovations and additions to hotel properties and other assets		(97,539)		(41,910)
Payment for interest rate derivative		—		(80)
Net cash used in investing activities		(134,385)		(241,596)
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition of noncontrolling interest, including transaction costs		(101,348)		—
Proceeds from preferred stock offerings		—		215,000
Payment of preferred stock offering costs		—		(7,287)
Redemptions of preferred stock		—		(190,000)
Proceeds from common stock offerings		—		38,443
Payment of common stock offering costs		(91)		(784)
Repurchases of outstanding common stock		(86,646)		—
Repurchases of common stock for employee tax obligations		(3,351)		(4,877)
Proceeds from credit facility		230,000		—
Payment on credit facility		(230,000)		—
Proceeds from notes payable		243,615		—
Payments on notes payable		(38,405)		(2,461)
Payments of deferred financing costs		(7,404)		—
Dividends and distributions paid		(11,059)		(10,745)
Distribution to noncontrolling interest		(5,500)		—
Contribution from noncontrolling interest		—		1,375
Net cash (used in) provided by financing activities		(10,189)		38,664
Net increase (decrease) in cash and cash equivalents and restricted cash		5,124		(194,528)
Cash and cash equivalents and restricted cash, beginning of period		162,717		416,139
Cash and cash equivalents and restricted cash, end of period	$	167,841	$	221,611

See accompanying notes to consolidated financial statements.

Table of Contents

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Supplemental Disclosure of Cash Flow Information


	September 30,				September 30,
	2021		2020		2022		2021
Cash and cash equivalents	$	179,487	$	461,288	$	117,588	$	179,487
Restricted cash		42,124		42,346		50,253		42,124
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows	$	221,611	$	503,634	$	167,841	$	221,611


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2022		2021
Cash paid for interest	$	26,629	$	34,118	$	24,279	$	26,629
Cash paid for income taxes, net	$	45	$	18	$	218	$	45
Operating cash flows used for operating leases	$	5,077	$	4,923	$	5,080	$	5,077

Changes in operating lease right-of-use assets	$	2,804	$	2,606	$	3,020	$	2,804
Changes in operating lease obligations		(3,808)		(3,529)		(4,070)		(3,808)
Changes in operating lease right-of-use assets and lease obligations, net	$	(1,004)	$	(923)	$	(1,050)	$	(1,004)

Supplemental Disclosure of Noncash Investing and Financing Activities

Nine Months Ended September 30,

2021

2020
Accrued renovations and additions to hotel properties and other assets

$
9,932

$
7,195
Issuance of preferred stock in connection with hotel acquisition

$
66,250

$
—
Preferred stock redemption charges

$
6,640

$
—
Amortization of deferred stock compensation — construction activities

$
366

$
376
Dividends and distributions payable

$
3,112

$
3,208


	Nine Months Ended September 30,
	2022		2021
Accrued renovations and additions to hotel properties and other assets	$	17,630	$	9,932
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	$	—
Issuance of preferred stock in connection with hotel acquisition	$	—	$	66,250
Amortization of deferred stock compensation — construction activities	$	361	$	366
Preferred stock redemption charges	$	—	$	6,640
Dividends and distributions payable	$	13,961	$	3,112

See accompanying notes to consolidated financial statements.

Table of Contents

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 September 30, ~~2021,~~2022, the Company ~~had interests in 18 hotels, one of which was considered held for sale, leaving 17~~owned 15 hotels (the ~~“17~~“15 Hotels”) currently held for investment. The Company’s third-party managers included the following:



	Number of Hotels		Number of Hotels
Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”)	6		6
Crestline Hotels & Resorts	2
Hyatt Hotels Corporation			2
Interstate Hotels & Resorts, Inc.			2	(1)
Four Seasons Hotels Limited			1
Highgate Hotels L.P. and an affiliate	2	(1)	1
Hilton Worldwide	2		1
Interstate Hotels & Resorts, Inc.	2
Davidson Hotels & Resorts	1
Hyatt Corporation	1
Montage North America, LLC	1		1
Singh Hospitality, LLC	1		1

Total hotels owned as of September 30, 2021	18
Total hotels owned as of September 30, 2022			15

(1)

In October 2022, Sage Hospitality Group commenced management of The ~~Renaissance Westchester was considered held for sale as of September 30, 2021, and subsequently sold on October 15, 2021 (see Note 13).~~Bidwell Portland Marriott.

COVID-19 ~~Impact~~Operational Update

~~In March 2020,~~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 to~~hotel 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 ~~result of these cancellations, restrictions and the health concerns related to COVID-19, the Company determined that it was~~slowdown in t~~he best interest of its hotel employees and the communities in which its hotels operate to~~ ~~temporarily suspend operations~~demand recovery at ~~14 of~~ the Company’s hotels. ~~As of September 30, 2021, all of the Company’s hotels were open~~However, demand began to recover again in February 2022 as Omicron-related case counts subsided and ~~operating except the Renaissance Westchester (see Note 13).~~travel patterns re-accelerated.

During the first nine months of ~~2021,~~2022, corporate transient and group demand accelerated, reducing the Company’s reliance on leisure demand, which was the dominant source of business at many of the Company’s hotels ~~while~~during 2021. While leisure demand continued to be robust, the greatest demand growth during the second and third quarters of 2022 was at the Company’s urban and group-oriented hotels which experienced increased near-term booking activity, higher than expected attendance at group events and increased business transient ~~demand~~demand. The amount of corporate business at the Company’s hotels continues to grow and the Company expects business travel to continue to increase as the year progresses. The Company anticipates that group demand ~~both improved as compared to 2020, but remained well below pre-pandemic levels. The Company believes that~~will compose a more meaningful component of its total room nights during the ~~return~~remainder of ~~traditional business transient and group business will ultimately depend on~~2022. However, the ~~speed of vaccine distribution, the management and control of COVID-19 and its variants, including the Delta variant, and the degree and speed to which business returns. The~~negative effects of the COVID-19 pandemic on the hotel industry have been ~~significant and~~ unprecedented, and the Company ~~has~~continues to have limited visibility to predict future operations.

Table of Contents

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, and for the three and nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity.

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the 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 nine months ended September 30, ~~2021~~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), which include the Company’s time-based restricted stock awards, 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.

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The following table sets forth the computation of basic and diluted ~~loss~~earnings (loss) per common share (unaudited and in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Numerator:
Net loss	$	(22,124)	$	(91,107)	$	(105,329)	$	(371,126)
Net income (loss)									$	20,488	$	(22,124)	$	73,303	$	(105,329)
(Income) loss from consolidated joint venture attributable to noncontrolling interest		(933)		1,816		1,638		4,436		—		(933)		(3,477)		1,638
Preferred stock dividends and redemption charges		(6,287)		(3,208)		(17,289)		(9,622)		(3,351)		(6,287)		(10,897)		(17,289)
Distributions paid on unvested restricted stock compensation		—		—		—		(69)
Numerator for basic and diluted loss attributable to common stockholders	$	(29,344)	$	(92,499)	$	(120,980)	$	(376,381)
Distributions paid to participating securities										(64)		—		(64)		—
Undistributed income allocated to participating securities										(40)		—		(301)		—
Numerator for basic and diluted income (loss) attributable to common stockholders									$	17,033	$	(29,344)	$	58,564	$	(120,980)
Denominator:
Weighted average basic and diluted common shares outstanding		217,709		214,257		215,765		216,498
Basic and diluted loss attributable to common stockholders per common share	$	(0.13)	$	(0.43)	$	(0.56)	$	(1.74)
Weighted average basic common shares outstanding										211,010		217,709		213,799		215,765
Unvested restricted stock units										279		—		70		—
Weighted average diluted common shares outstanding										211,289		217,709		213,869		215,765

Basic income (loss) attributable to common stockholders per common share									$	0.08	$	(0.13)	$	0.27	$	(0.56)
Diluted income (loss) attributable to common stockholders per common share									$	0.08	$	(0.13)	$	0.27	$	(0.56)

~~The Company’s~~At September 30, 2022 and 2021, the Company excluded 1,289,146 and 1,463,315 anti-dilutive unvested time-based restricted ~~shares associated with~~stock awards, respectively, from its ~~long-term incentive plan have been excluded from the above~~ calculation of diluted earnings per ~~share for~~share. The unvested time-based restricted stock awards generally vest over periods ranging from three years to five years.

The Company also had unvested performance-based restricted stock units as of September 30, 2022 that were granted based on target market condition thresholds as follows: 169,832 shares that vest based on the achievement of the Company’s total relative shareholder return following a two year performance period (the “Two Year Performance Period Shares”); 254,748 shares that vest based on the achievement of the Company’s total relative shareholder return following a three year performance period (the “Three Year Performance Period Shares”); and 188,004 shares that vest based on the achievement of pre-determined stock price targets during a five year performance period (the “Five Year Performance Period Shares”). Based on the Company’s common stock performance during the nine months ended September 30, ~~2021 and 2020, as~~2022, the Company excluded the Five Year Performance Period Shares from its September 30, 2022 calculations of diluted earnings per share because their ~~inclusion~~effect would have been anti-dilutive.

Restricted Cash

Restricted cash ~~is comprised of reserve accounts for~~primarily includes lender reserves required by the Company’s 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 ~~policies~~reserves for operating expenses and capital expenditures required by certain of the Company’s ~~lenders, ground lessors and/or hotel managers.~~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 terms~~reserves pending completion of the ~~related purchase and sale agreement.~~associated transaction. In addition, restricted cash as of September 30, ~~2021~~2022 and December 31, ~~2020 includes $10.6~~2021 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 September 30, 2022 and December 31, 2021 for the purpose of satisfying any potential employee-related 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 September 30, 2022 and December 31, 2021 (see Note 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,

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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 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, no hotels were impaired during either the three or nine months ended September 30, 2022. In September 2021, the Company recognized a $1.0 million impairment loss on the Hilton New Orleans St. Charles due to Hurricane Ida-related damage at the hotel (see Note 12).

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 lease~~11

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Lease ROU assets are recognized at the lease commencement date and include the amount of the initial operating lease obligation, any lease payments made at or before the commencement date, excluding any lease incentives received, and any initial direct costs incurred. For leases that have extension options that the Company can exercise at its discretion, management uses judgment to determine if it is reasonably certain that the Company will in fact exercise such option. If the extension option is reasonably certain to occur, the Company includes the extended term’s lease payments in the calculation of the respective lease liability. None of the Company’s leases contain any material residual value guarantees or material restrictive covenants.

~~Operating lease~~Lease obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based on information available at the commencement date in determining the present value of lease payments over the lease term. The IBR is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In order to estimate the Company’s IBR, the Company first looks to its own unsecured debt offerings, and adjusts the rate for both length of term and secured borrowing using available market data as well as consultations with leading national financial institutions that are active in the issuance of both secured and unsecured notes.

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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 three or nine months ended September 30, 2022 or 2021.

Noncontrolling Interest

~~The Company’s~~In June 2022, the Company acquired the 25.0% outside equity interest in the Hilton San Diego Bayfront (see Note 3). Prior to this acquisition, the noncontrolling interest reported in the accompanying consolidated financial statements ~~include an entity~~consisted of a third-party’s 25.0% ownership interest in ~~which~~ the ~~Company has a controlling financial interest.~~Hilton San Diego Bayfront. 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 September 30, 2021 and December 31, 2020, the noncontrolling interest reported in the Company’s consolidated financial statements consisted of a third-party’s 25.0% ownership interest in the Hilton San Diego Bayfront.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to hotel guests, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Room revenue and other occupancy based fees are recognized over a guest’s stay at 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.

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Trade receivables and contract liabilities consisted of the following (in thousands):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
	(unaudited)				(unaudited)
Trade receivables, net (1)	$	13,596	$	8,110	$	28,487	$	16,055
Contract liabilities (2)	$	36,316	$	16,815	$	51,648	$	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 months ended September 30, 2022 and 2021, the Company recognized approximately $3.0 million and $0.2 million, respectively, in revenue related to its outstanding contract liabilities. During the nine months ended September 30, 2022 and 2021, the Company recognized approximately ~~$0.2~~$25.4 million and $1.3 million, respectively, in revenue related to its outstanding contract liabilities. ~~During the three and nine months ended September 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 1one 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 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 ~~was~~is 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~~In June 2022, the FASB proposed an accounting standards update to ~~take advantage~~defer the sunset date from December 31, 2022 to December 31, 2024.

Under the terms of the ~~expedients offered by ASU No. 2020-04 when it modifies its variable rate debt~~Amended Credit Agreement (see Note 7), the Company’s credit facility, Term Loan 1 and Term Loan 2 are now subject to SOFR rather than LIBOR. The Company’s two interest rate ~~cap and~~ swap derivatives ~~which~~on its term loans either expired in September 2022 or will ~~affect~~expire in January 2023. Currently, the Company’s $220.0 million loan secured by the Hilton San Diego Bayfront ~~its credit facility~~ and its ~~unsecured term loans.~~related interest rate cap derivative are subject to LIBOR. The loan matures in December 2022; however, the Company has notified the lenders of its election to exercise its remaining one-year option to extend the loan’s maturity to December 2023. The interest rate cap derivative expires in December 2022, and the Company will be required to obtain a new interest rate cap derivative in order to secure the one-year extension on the loan. The adoption of ASU No. 2020-04 is not expected to have a material impact on the Company’s consolidated financial statements.

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3. Investment in Hotel Properties

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



	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
	(unaudited)				(unaudited)
Land	$	609,078	$	571,212	$	672,531	$	604,692
Buildings and improvements		2,723,520		2,523,750		2,780,117		2,729,461
Furniture, fixtures and equipment		452,294		431,918		423,546		431,780
Intangible assets		34,952		21,192		42,408		43,117
Franchise fees		654		743
Construction in progress		44,736		15,831		65,121		41,260
Investment in hotel properties, gross		3,865,234		3,564,646		3,983,723		3,850,310
Accumulated depreciation and amortization		(1,196,065)		(1,103,148)		(1,133,498)		(1,130,294)
Investment in hotel properties, net	$	2,669,169	$	2,461,498	$	2,850,225	$	2,720,016

In ~~April 2021,~~June 2022, the Company purchased the ~~fee simple~~fee-simple interest in the ~~newly-developed 130-room Montage Healdsburg, California~~339-room The Confidante Miami Beach, Florida for ~~$265.0 million, excluding acquisition costs and prorations.~~ a contractual purchase price of $232.0 million. The acquisition was funded ~~through~~from available cash and with $140.0 million of proceeds received from 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~~Company’s revolving credit facility (see Note ~~10), as well as cash on hand.~~

7). As part of the purchase price allocation for ~~the Montage Healdsburg,~~The Confidante Miami Beach, the Company allocated ~~a total of $13.7~~$0.5 million to intangible assets related to ~~the hotel’s residential rental and social membership programs, whereby future owners of the adjacent separately owned Montage Residences Healdsburg will be eligible to participate in~~ an ~~optional rental program as well as become social members of the Montage Healdsburg to access use of the hotel’s facilities.~~in-place lease agreement. The ~~$13.7~~$0.5 million will be amortized over the remaining five-year life of the ~~related remaining~~ ~~25-year~~ ~~resort management agreement once the hotel begins to recognize revenue related to the programs.~~lease.

13In June 2022, the Company acquired the 25.0% noncontrolling partner’s ownership interest in the Hilton San Diego Bayfront for a contractual purchase price of $102.0 million plus 25.0% of closing date working capital and cash. The Company paid a preliminary purchase price of $101.3 million on the closing date based on estimated working capital and cash amounts, with the actual amounts to be determined in the fourth quarter of 2022. Following this acquisition, the Company owns 100% of the hotel. The acquisition was funded from available cash and with $90.0 million of proceeds received from the Company’s revolving credit facility (see Note 7). The transaction was accounted for as an equity transaction. The acquisition date noncontrolling interest balance of $38.8 million was reclassified to additional paid in capital. In addition, the $62.5 million of excess cash paid to acquire the 25.0% noncontrolling partner’s ownership interest was classified as additional paid in capital. No gain or loss was recognized in the accompanying consolidated statements of operations for either the three or nine months ended September 30, 2022 related to the acquisition.

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4. ~~Disposal~~Disposals

~~The~~In February 2022, the Company ~~classified~~sold the ~~Renaissance Westchester as held~~Hyatt Centric Chicago Magnificent Mile for ~~sale at September 30, 2021, and subsequently sold~~net proceeds of $67.2 million, including a $4.0 million deposit received from the buyer of the hotel in ~~October~~December 2021, ~~(see Note 13). The sale did not represent~~and recorded a gain of $11.3 million. In March 2022, the Company sold the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile for combined net proceeds of $128.1 million and recorded a combined gain of $11.6 million. None of these sales represented a strategic shift that had a major impact on the Company’s business plan or its primary markets; therefore none of the ~~hotel did not qualify~~hotels qualified as a discontinued operation.

~~The Company classified the assets and liabilities of the Renaissance Westchester as held for sale at September 30, 2021 as follows (in thousands):~~

September 30,

2021

Prepaid expenses and other current assets

$
372

Investment in hotel properties, net

13,321

Other assets, net

66

Assets held for sale, net

$
13,759

Accounts payable and accrued expenses

$
135

Accrued payroll and employee benefits

5,071
(1)
Other current liabilities

284

Liabilities of assets held for sale

$
5,490

~~(1)~~

~~Accrued payroll and employee benefits includes severance of $4.6 million.~~

5. Fair Value Measurements and Interest Rate Derivatives

Fair Value Measurements

As of September 30, ~~2021~~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.

As of both September 30, 2021 and December 31, 2020, 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.

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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.

~~The following table presents~~

As of both September 30, 2022 and December 31, 2021, the ~~Company’s assets~~Company measured its interest rate derivatives at fair value on a recurring ~~and nonrecurring basis at September 30, 2021 and December 31, 2020 (in thousands):~~

Fair Value Measurements at Reporting Date


Total

Level 1

Level 2

Level 3
September 30, 2021 (unaudited):

Interest rate cap derivatives

$
—

$
—

$
—

$
—
Total assets measured at fair value at September 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

$
—

~~(1)~~

~~The fair market value of~~basis. The Company estimated the ~~Renaissance Westchester is included in investment in hotel properties, net on the Company’s consolidated balance sheet at December 31, 2020.~~

~~The following table presents the Company’s liabilities measured at~~ fair value ~~on a recurring and nonrecurring basis at September 30, 2021 and December 31, 2020 (in thousands):~~

Fair Value Measurements at Reporting Date


Total

Level 1

Level 2

Level 3
September 30, 2021 (unaudited):

Interest rate swap derivatives

$
3,436

$
—

$
3,436

$
—
Total liabilities measured at fair value at September 30, 2021

$
3,436

$
—

$
3,436

$
—

December 31, 2020:

Interest rate swap derivatives

$
5,710

$
—

$
5,710

$
—
Total liabilities measured at fair value at December 31, 2020

$
5,710

$
—

$
5,710

$
—

~~Interest Rate Derivatives~~

~~The Company’s~~of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are ~~not designated as effective cash flow hedges, consisted of~~based upon the ~~following at September 30, 2021 (unaudited) and December 31, 2020 (in thousands):~~

Estimated Fair Value of Assets (Liabilities) (1)

Strike / Capped

Effective
Maturity

Notional

September 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

$
—

$
—
Hilton San Diego Bayfront
Cap
6.000
%
1-Month LIBOR
December 9, 2021
December 15, 2022

$
220,000

—

—
$85.0 million term loan
Swap
1.591
%
1-Month LIBOR
October 29, 2015
September 2, 2022

$
85,000

(1,169)

(2,100)
$100.0 million term loan
Swap
1.853
%
1-Month LIBOR
January 29, 2016
January 31, 2023

$
100,000

(2,267)

(3,610)

$
(3,436)

$
(5,710)

~~(1)~~

The fair values of the cap agreements are included in other assets, net on the accompanying consolidated balance sheets as of both September 30, 2021 and December 31, 2020. The fair value of the $85.0 million swap agreement is included in other current liabilities on the accompanying consolidated balance sheets as of September 30, 2021 and in other liabilities as of December 31, 2020. The fair value of the $100.0 million swap agreement is included in other liabilities on the accompanying consolidated balance sheets as of both September 30, 2021 and December 31, 2020.

~~Noncash changes in~~consideration that would be required to terminate the fair values of the Company’s interest rate derivatives resulted in (decreases) increases to interest expense for the three and nine months ended September 30, 2021 and 2020 as follows (unaudited and in thousands):agreements.

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020

Noncash interest on derivatives

$
(616)

$
(762)

$
(2,194)

$
5,534

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Fair Value of Debt

As of September 30, ~~2021~~2022 and December 31, ~~2020, 70.5%~~2021, 42.4% 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 September 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021 were as follows (in thousands):


	September 30, 2021				December 31, 2020				September 30, 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	$	745,484	$	721,862	$	747,945	$	715,042	$	816,647	$	798,323	$	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.

Interest Rate Derivatives

The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at September 30, 2022 (unaudited) and December 31, 2021 (in thousands):


									Estimated Fair Value of Assets (Liabilities) (1)
		Strike / Capped			Effective	Maturity	Notional		September 30,		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	$	—	$	3
Term Loan 1	Swap	1.591	%	1-Month LIBOR	October 29, 2015	September 2, 2022	$	85,000		N/A		(744)
Term Loan 2	Swap	1.853	%	1-Month LIBOR	January 29, 2016	January 31, 2023	$	100,000		679		(1,484)
									$	679	$	(2,225)

(1)

The fair values of the cap derivative are included in prepaid expenses and other current assets on the accompanying consolidated balance sheets as of both September 30, 2022 and December 31, 2021. The Term Loan 1 swap derivative expired in September 2022. The fair value of the Term Loan 2 swap derivative is included in prepaid expenses and other current assets on the accompanying consolidated balance sheet as of September 30, 2022. As of December 31, 2021, the fair values of both swap derivatives 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 and nine months ended September 30, 2022 and 2021 as follows (unaudited and in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Noncash interest on derivatives, net	$	(39)	$	(616)	$	(2,904)	$	(2,194)

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6. Other Assets

Other assets, net consisted of the following (in thousands):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
	(unaudited)				(unaudited)
Property and equipment, net	$	6,022	$	6,767	$	5,113	$	5,912
Deferred rent on straight-lined third-party tenant leases		2,988		2,819		2,103		2,455
Liquor licenses						928		826
Other receivables		1,840		2,633		715		3,914
Other		367		226		86		89
Total other assets, net	$	11,217	$	12,445	$	8,945	$	13,196

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7. Notes Payable

Notes payable consisted of the following (in thousands):


	September 30,		December 31,		September 30,		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 September 30, 2021 and December 31, 2020.	$	135,484	$	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 1.147% and 1.192% at September 30, 2021 and December 31, 2020, respectively; maturity on December 9, 2021 with notice provided to the lender of intent to exercise second available one-year extension; an additional one-year option to extend remains, which the Company also 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 3.824% and 1.140% at September 30, 2022 and December 31, 2021, respectively; matures on December 9, 2022 with notice provided to the lenders of intent to exercise remaining one-year option to extend (subject to a 25 basis point increase in the LIBOR spread). The note is collateralized by a first deed of trust on one 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 one hotel property.						76,647		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 220 basis points, depending on the Company's leverage ratios, plus SOFR and 10 basis points, resulting in an effective interest rate of 4.597% at September 30, 2022, and 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 as of December 31, 2021. LIBOR was swapped to a fixed rate of 1.591%, resulting in an effective interest rate of 3.941% at December 31, 2021. Matures on July 25, 2027.						175,000		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 220 basis points, depending on the Company's leverage ratios, plus SOFR and 10 basis points as of September 30, 2022, and 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 as of December 31, 2021. LIBOR was swapped to a fixed rate of 1.853%, resulting in effective interest rates of 3.628% and 4.203% at September 30, 2022 and December 31, 2021, respectively. Matures on January 25, 2028.						175,000		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	$	745,484	$	747,945	$	816,647	$	611,437

Current portion of notes payable	$	88,410	$	3,305	$	2,145	$	21,401
Less: current portion of deferred financing costs		(1,014)		(1,044)		(57)		(707)
Carrying value of current portion of notes payable	$	87,396	$	2,261	$	2,088	$	20,694

Notes payable, less current portion	$	657,074	$	744,640	$	814,502	$	590,036
Less: long-term portion of deferred financing costs		(1,361)		(2,112)		(3,593)		(1,295)
Carrying value of notes payable, less current portion	$	655,713	$	742,528	$	810,909	$	588,741

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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 September 30, 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.

In March 2022, the Company elected to early terminate the covenant relief period related to its unsecured debt, having satisfied the financial covenants stipulated in the 2020 and 2021 amendments to its unsecured debt agreements (the “Unsecured 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 the Company’s early termination of the covenant relief period in March 2022, the original financial covenants on its unsecured debt agreements were to 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.

In June 2022, the Company drew a total of $230.0 million under the revolving portion of its credit facility to fund the acquisitions of The Confidante Miami Beach and the 25.0% noncontrolling interest in the Hilton San Diego Bayfront (see Note 3).

In July 2022, the Company entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) which expanded its unsecured borrowing capacity and extended the maturity of the Company’s two unsecured term loans. The Amended Credit Agreement increased the balances of both Term Loan 1 and Term Loan 2 to $175.0 million each from $19.4 million and $88.9 million, respectively. In addition, the maturity dates were extended to July 2027 and January 2028 for Term Loan 1 and Term Loan 2, respectively. Under the Amended Credit Agreement, the term loans bear interest pursuant to a leverage-based pricing grid ranging from 135 basis points to 220 basis points over the applicable adjusted term SOFR.

In July 2022, the Company utilized the proceeds received from the incremental borrowing on the term loans to fully repay the $230.0 million that was outstanding on its revolving credit facility. The Amended Credit Agreement continues to provide for a $500.0 million revolving credit facility, with two six-month extension options, which would result in an extended maturity of July 2027. Under the Amended Credit Agreement, the revolving credit facility bears interest pursuant to a leverage-based pricing grid ranging from 140 basis points to 225 basis points over the applicable adjusted term SOFR. As of September 30, 2022, the Company had no amount outstanding on its credit facility, with $500.0 million of capacity available for borrowing under the facility. The Company’s ability to draw on the credit facility is subject to the Company’s compliance with various financial covenants.

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 ~~loans~~loan secured by ~~the Embassy Suites La Jolla and~~ the JW Marriott New Orleans and in ~~January~~May 2021 ~~and at~~for the loan secured by the Hilton San Diego Bayfront. In April 2022, the loan secured by the Hilton San Diego Bayfront exited the cash trap, and in ~~May 2021.~~October 2022, the Company notified the lender for the loan secured by the JW Marriott New Orleans that it had met the criteria to exit the cash trap. As of September 30, ~~2021, a nominal amount of~~2022, no excess cash generated by the JW Marriott New Orleans was held in a lockbox ~~accounts~~account for the benefit of the lenders and included in restricted cash on the accompanying consolidated balance sheet. The cash trap provisions triggered on these three loans will remain until the hotels reach profitability levels that terminate the cash traps.

~~As of September 30, 2021, 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.

The Company is subject to various financial covenants on its secured and unsecured debt. In July and December 2020, the Company completed amendments to its unsecured debt, consisting of its revolving credit facility, term loans and senior notes (the “Unsecured Debt Amendments”). Among other provisions, the Unsecured Debt Amendments include a waiver of required financial covenants through the end of the first quarter of 2022, with quarterly testing resuming for the period ending March 31, 2022. In July 2021, the Company amended its Unsecured Debt Amendments, which removed certain restrictions in place during the covenant waiver period ending March 31, 2022. The restrictions removed include the limitation on the aggregate value of unencumbered hotel

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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.

~~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.~~lender.

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 September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Interest expense on debt and finance lease obligation	$	7,864	$	12,612	$	23,684	$	35,377	$	8,719	$	7,864	$	21,252	$	23,684
Noncash interest on derivatives		(616)		(762)		(2,194)		5,534
Noncash interest on derivatives, net										(39)		(616)		(2,904)		(2,194)
Amortization of deferred financing costs		735		892		2,207		2,288		589		735		1,940		2,207
Total interest expense	$	7,983	$	12,742	$	23,697	$	43,199	$	9,269	$	7,983	$	20,288	$	23,697

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8. Other Current Liabilities and Other Liabilities

Other Current Liabilities

Other current liabilities consisted of the following (in thousands):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
	(unaudited)				(unaudited)
Property, sales and use taxes payable	$	16,798	$	10,134	$	14,538	$	12,591
Accrued interest		3,965		6,914		3,832		6,858
Advance deposits		31,429		13,341		44,673		33,750
Interest rate swap derivative		1,169		—		—		744
Management fees payable		655		169		1,297		1,691
Other		3,113		2,048		4,580		3,250
Total other current liabilities	$	57,129	$	32,606	$	68,920	$	58,884

Other Liabilities

Other liabilities consisted of the following (in thousands):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2022		2021
	(unaudited)				(unaudited)
Deferred revenue	$	9,106	$	7,911	$	7,076	$	6,598
Interest rate swap derivative		2,267		5,710		—		1,484
Other		3,122		3,873		2,499		3,574
Total other liabilities	$	14,495	$	17,494	$	9,575	$	11,656

9. Leases

As of both September 30, 2022 and December 31, 2021, the Company had operating leases for ground, office, equipment and airspace leases with maturity dates ranging from 2024 through 2097, excluding renewal options. Including renewal options available to the Company, the lease maturity date extends to 2147.

Operating leases were included on the Company’s consolidated balance sheets as follows (in thousands):


	September 30,			December 31,
	2022			2021
	(unaudited)
Right-of-use assets, net	$	17,866		$	23,161

Accounts payable and accrued expenses	$	5,678		$	5,586
Lease obligations, less current portion		18,349			25,120
Total lease obligations	$	24,027		$	30,706

Weighted average remaining lease term		33 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 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

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~~9. Leases~~

~~The Company has both~~obligated under the building lease and the related $44.7 million right-of-use asset, net and $15.6 million finance ~~and operating leases for ground, building, office, equipment and airspace leases, maturing in dates ranging~~lease obligation were removed from ~~2025 through 2097, including expected renewal options. Including all renewal options available to the Company, the lease maturity date extends to 2147.~~

~~Leases were included on~~ the Company’s consolidated balance ~~sheets as follows (in thousands):~~sheet.

September 30,

December 31,

2021

2020

(unaudited)

Finance Lease:

Right-of-use asset, gross (buildings and improvements)

$
58,799

$
58,799

Accumulated amortization

(13,720)

(12,617)

Right-of-use asset, net

$
45,079

$
46,182

Accounts payable and accrued expenses

$
1

$
1

Lease obligation, less current portion

15,568

15,569

Total lease obligation

$
15,569

$
15,570

Remaining lease term

76 years

Discount rate

9.0
%

Operating Leases:

Right-of-use assets, net

$
23,971

$
26,093

Accounts payable and accrued expenses

$
5,424

$
5,028

Lease obligations, less current portion

26,432

29,954

Total lease obligations

$
31,856

$
34,982

Weighted average remaining lease term, including reasonably certain extension options (1)

6 years

Weighted average discount rate

5.1
%

~~(1)~~

~~The weighted average remaining term including all available extension options is approximately 33 years.~~

The components of lease expense were as follows (unaudited and in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Finance lease cost:
Finance lease cost (1):
Amortization of right-of-use asset	$	368	$	368	$	1,103	$	1,103	$	—	$	368	$	—	$	1,103
Interest on lease obligation		351		351		1,053		1,053		—		351		117		1,053
Operating lease cost		1,382		2,681		4,068		6,751		1,325		1,382		4,041		4,068
Variable lease cost ~~(1)~~(2)		—		15		13		39		2,241		—		5,100		13
Total lease cost	$	2,101	$	3,415	$	6,237	$	8,946	$	3,566	$	2,101	$	9,258	$	6,237

(1)

Finance lease cost for the nine months ended September 30, 2022 and the three and nine months ended September 30, 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.

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 August 2021, the Company redeemed all 3,000,000 shares of its 6.45% Series F Cumulative Redeemable Preferred Stock (“Series F 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 $2.6 million was recognized related to the original issuance costs of the Series F preferred stock, which were previously included in additional paid in capital. After the redemption date, the Company has no outstanding shares of Series F preferred stock, and all rights of the holders of such shares were terminated. Because the redemption of the Series F preferred stock was a redemption in full, trading of the Series F preferred stock on the New York Stock Exchange ceased on the August 12, 2021 redemption date.

~~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 ~~stock~~stock”) 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 preference~~redemption 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.

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 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 third quarter and first nine months of ~~September 30, 2021,~~2022, the Company ~~has not~~ repurchased ~~any~~

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880,577 shares and 7,995,560 shares of its common or ~~preferred~~ stock, ~~under the 2021 stock repurchase program. The redemptions of the Series E preferred stock~~respectively, for $8.7 million and ~~the Series F preferred stock in June 2021~~$86.6 million, respectively, including fees and ~~August 2021, respectively, were completed through separate authorizations by the Company’s board of directors,~~commissions, leaving ~~$500.0~~$413.5 million remaining for repurchase under the ~~2021 stock repurchase~~ program. Future repurchases will depend on various factors, including the Company’s capital needs and restrictions under its various financing agreements, ~~and~~as 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 shares~~Company’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 proceeds~~during the first nine months of ~~$38.4 million,~~2022, leaving ~~$137.0~~$300.0 million available for ~~sale under the ATM Agreements.~~sale.

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11. Long-Term Incentive Plan

~~Restricted shares granted pursuant to the~~The 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 September 30, 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.

The Company’s amortization expense, ~~and~~including forfeitures related to restricted shares ~~for the three and nine months ended September 30, 2021 and 2020 were~~was as follows (unaudited and in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Amortization expense, including forfeitures ~~(1)~~	$	3,165	$	2,238	$	10,576	$	7,509	$	2,230	$	3,165	$	8,661	$	10,576

Capitalized compensation cost ~~(2)~~(1)	$	124	$	130	$	366	$	376	$	120	$	124	$	361	$	366

(1)

~~In September 2021, the Company recognized $1.1 million in amortization of deferred stock compensation expense related to the departure of its former Chief Executive Officer.~~

~~(2)~~

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.

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 nine months ended September 30, 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 September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Basic management fees	$	4,391	$	624	$	8,767	$	6,179	$	6,695	$	4,391	$	18,310	$	8,767
Incentive management fees		687		—		687		—		736		687		5,361		687
Total basic and incentive management fees	$	5,078	$	624	$	9,454	$	6,179	$	7,431	$	5,078	$	23,671	$	9,454

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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.

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Total license and franchise fees ~~incurred by the Company during the three and nine months ended September 30, 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 September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Franchise assessments (1)	$	3,241	$	555	$	5,961	$	5,349	$	3,877	$	3,241	$	10,564	$	5,961
Franchise royalties (2)		940		108		1,507		988		268		940		865		1,507
Total franchise costs	$	4,181	$	663	$	7,468	$	6,337	$	4,145	$	4,181	$	11,429	$	7,468

(1)

Includes advertising, reservation and frequent guest program assessments.

(2)

~~Includes~~Prior to the sale of the Hyatt Centric Chicago Magnificent Mile in February 2022 (see Note 4), franchise royalties included key money received from ~~one of~~ the ~~Company’s franchisors,~~hotel’s franchisor, which the Company iswas amortizing over the term of the hotel’s franchise agreement.

Renovation and Construction Commitments

At September 30, ~~2021,~~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 September 30, ~~2021~~2022 totaled ~~$68.6~~$66.7 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 September 30, ~~2021, 13~~2022, 11 of the 1715 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	32	%	34	%	5	34	%	39	%
Florida	2	11	%	16	%	3	17	%	14	%
Hawaii	1	6	%	21	%	1	7	%	19	%
Illinois	3	13	%	5	%
Massachusetts	2	17	%	11	%	2	19	%	16	%

~~Hurricane~~Hurricanes Ida and Ian

During the third quarter of 2021, the Company’s two 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 ~~may also pursue a business interruption insurance claim at the Hilton New Orleans St. Charles. Currently, the Company anticipates~~has concluded that the cost to restore damages at the JW Marriott New Orleans will not exceed the hotel’s deductible.

During the ~~third quarter~~first nine months of ~~2021,~~2022, the Company incurred Hurricane Ida-related restoration ~~expense~~expenses of ~~$1.2~~$1.5 million and $0.1 million at the Hilton New Orleans St. Charles and ~~$0.4 million at~~ the JW Marriott New Orleans, ~~both~~respectively, with only a nominal amount incurred at the Hilton New Orleans St. Charles during the third quarter of ~~which~~2022. During the three and nine months ended September 30, 2021, the Company incurred Hurricane Ida-related restoration expenses of $1.2 million and $0.4 million at the Hilton New Orleans St. Charles

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and the JW Marriott New Orleans, respectively. All restoration expenses are included in repairs and maintenance expense in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021. Through September 30, 2022, the Company has incurred total Hurricane Ida-related restoration expenses of $4.5 million at the Hilton New Orleans St. Charles and $1.4 million at the JW Marriott New Orleans. In addition, in the third quarter of 2021, the Company wrote-off $1.0 million in assets at the Hilton New Orleans St. Charles due to Hurricane Ida-related damage, which is included in impairment losses in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2021. 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 nine months of 2022 for Hurricane Ida-related property damage expenses previously incurred, which is included in interest and other income (loss) on the accompanying consolidated statement of operations for the nine months ended September 30, 2022. During the first nine months of 2022, the Company also 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 nine months ended September 30, 2022.

In late September 2022, two of the Company’s Florida hotels, the Oceans Edge Resort & Marina and the Renaissance Orlando at SeaWorld® were immaterially impacted by Hurricane Ian. The Company expects to incur approximately $0.6 million in Hurricane Ian-related restoration expenses at the two Florida hotels in the fourth quarter of 2022, and anticipates that the costs to restore the damages will not exceed either of the hotel’s property insurance deductible.

The Company may incur additional expenses related to Hurricane ~~Ida-related expenses~~Ida and Hurricane Ian at ~~both~~the New Orleans and Florida hotels in the ~~future, which may exceed the hotels’ deductibles.~~future. Any additional expenses will be recognized as incurred, and any additional property damage or business interruption ~~recovery~~recoveries will not be recognized until a final ~~settlement has~~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~~. As of September 30, 2022, $0.9 million of the ~~accompanying consolidated balance sheet at December 31, 2020. During~~potential obligation has been paid to the hotel’s employees, including $0.1 million paid during the first nine months of ~~2021, $0.6 million of the potential obligation was paid to the hotel’s employees.~~2022. In addition, the potential obligation ~~was~~is reassessed at the end of every quarter, resulting in nominal gains on extinguishment of debt included on the accompanying consolidated statements of operations for the three and nine months ended September 30, ~~2021, resulting in a gain~~2022, and gains on

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extinguishment of debt of $0.1 million and $0.4 million ~~recognized during~~for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022 and December 31, 2021, ~~$10.6 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 September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, included the potential obligation balances of ~~$10.6~~$10.3 million and ~~$11.6~~$10.5 million, respectively.

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 potential employee-related 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 September 30, 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 September 30, ~~2021,~~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 September 30, 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 September 30, 2022 and December 31, 2021.

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The Company is subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of its hotels, its managers and other Company matters. While it is not possible to ascertain the ultimate outcome of such matters, the Company believes that the aggregate identifiable amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on its financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings, including any potential COVID-19-related litigation, brought against the Company, however, is subject to significant uncertainties.

13. Subsequent Events

~~On October 15, 2021,~~Subsequent to the end of the third quarter of 2022 and through the date of issuance of these financial statements, the Company ~~sold~~repurchased 1,170,791 shares of its common stock for $11.3 million, including fees and commissions, increasing the ~~Renaissance Westchester~~year to date amount repurchased to 9,166,351 shares of its common stock for ~~a gross sale price of $18.8~~$98.0 million, ~~excluding closing costs.~~

~~On October 7, 2021,~~including fees and commissions, and leaving $402.2 million remaining for repurchase under the Company made a non-refundable deposit of earnest money in connection with its agreement to acquire the fee-simple interest in the 85-room Four Seasons Resort Napa Valley. The newly constructed luxury resort recently opened in October 2021, and will be acquired for a gross purchase price of $177.5 million. The acquisition includes nearly 4.5 acres of vineyards and the Elusa Winery along with the inventory of prior wine vintages. The acquisition is expected to be funded through a combination of cash on hand and from borrowings on the Company’s currently undrawn $500.0 million revolving credit facility. The Company expects to close the transaction in the fourth quarter of 2021, but can give no assurances that the acquisition will be completed.

On October 18, 2021, the Company entered into an agreement to sell the 340-room Embassy Suites La Jolla for a contractual sale price of $226.7 million. The Company expects the sale to close during the fourth quarter of 2021, subject to customary closing conditions, but the Company can give no assurances that the disposition will be completed.

program.

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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 ~~the novel coronavirus (COVID-19) pandemic has~~COVID-19 and its variants have had, and are expected to continue to have, on our business and the economy, as well as the response of governments to manage and uscontrol COVID-19 and its variants and the degree and speed to ~~the pandemic,~~which traditional transient and ~~how quickly and successfully effective vaccines and therapies are distributed and administered~~;group business returns to our hotels;

●

increased risks related to employee matters, including increased employment litigation and claims for severance or other benefits tied to termination or furloughs as a result of temporary hotel suspensions or reduced hotel operations due to ~~COVID-19;~~COVID-19 or its variants;

●

general economic and business conditions, including a U.S. recession or increased and ongoing 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 ~~COVID-19;~~COVID-19 and its variants;

●

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 ~~building, or airspace leases~~lease for ~~three~~one of ~~the 18 hotels we had interests in as of September 30, 2021;~~our hotels;

●

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 and the corresponding interest expense associated with our 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;

●

~~system security risks, data protection breaches, cyber-attacks, including those impacting our hotel managers or other third parties, and systems integration issues;~~ and

●

other events beyond our control, including ~~climate change,~~ natural disasters, terrorist attacks or civil unrest.

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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 dowill not ~~meet~~satisfy our ~~criteria of LTRR®.~~long-term return requirements. As of September 30, ~~2021,~~2022, we ~~had interests in 18~~owned 15 hotels, ~~(the “18 Hotels”), one of which was considered held for sale (the Renaissance Westchester), leaving 17 hotels currently held for investment~~ which average ~~518~~516 rooms in size. All but two of our hotels (the Boston Park Plaza and the Oceans Edge Resort & Marina) ~~of our 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 Response~~Operational 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 to~~hotel 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, restrictions and the health concerns related to COVID-19, we determined that it was~~slowdown in ~~the best interest of our hotel employees and the communities in which our hotels operate to temporarily suspend operations at 14 of our hotels.~~ ~~As of September 30, 2021, all of our hotels were open and operating except the Renaissance Westchester, which we subsequently sold in October 2021.~~

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 measuresdemand recovery at our ~~hotels, including frequent~~hotels. However, demand began to recover again in February 2022 as Omicron-related case counts subsided 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.travel patterns re-accelerated.

During the first nine months of ~~2021,~~2022, corporate transient and group demand accelerated, reducing our reliance on leisure demand, which was the dominant source of business at many of our hotels ~~while~~during 2021. While leisure demand continued to be robust, the greatest demand growth during the second and third quarters of 2022 was at our urban and group-oriented hotels which experienced increased near-term booking activity, higher than expected attendance at group events and increased business transient ~~demand~~demand. The amount of corporate business at our hotels continues to grow and we expect business travel to continue to increase as the year progresses. We anticipate that group demand ~~both improved as compared to 2020, but remained well below pre-pandemic levels. We believe that~~will compose a more meaningful component of our total room nights during the ~~return~~remainder of ~~traditional business transient and group business will ultimately depend on~~2022. However, the ~~speed of vaccine distribution, the management and control of COVID-19 and its variants, including the Delta variant, and the degree and speed to which business returns. The~~negative effects of the COVID-19 pandemic on the hotel industry have been ~~significant and~~ unprecedented, and we continue to have limited visibility to predict future operations.

~~Year-To-Date 2021~~Year To Date 2022 Overview

~~Since our COVID-19-related occupancy low point of 1.6% in April 2020, we have experienced steady~~Demand. We continue to experience improvements in hotel demand. ~~Following strong demand over most~~Occupancy during the first nine months of 2022 and 2021 at the 12 hotels we owned during all reporting periods (the “Existing Portfolio”) was as follows:


	January		February		March		April		May		June		July		August		September
2022	37.9	%	53.6	%	67.9	%	75.7	%	73.4	%	75.1	%	74.7	%	70.1	%	72.7	%
2021	14.0	%	24.5	%	31.7	%	42.0	%	47.3	%	50.7	%	60.7	%	50.6	%	48.3	%

Acquisitions. In June 2022, we purchased the 339-room The Confidante Miami Beach for a contractual purchase price of $232.0 million. Also in June 2022, we purchased the 25.0% noncontrolling partner’s ownership interest in the Hilton San Diego Bayfront for a contractual purchase price of $102.0 million plus 25.0% of closing date working capital and cash and the effective assumption of the ~~summer, leisure travel moderated in August and September 2021 due to concerns regarding the Delta variant, extreme weather conditions across the country and the beginning~~25.0% noncontrolling partner’s share of the ~~school year. As~~existing mortgage loan on the ~~summertime travel season ended, we began to see an improvement~~hotel, which was already fully consolidated in ~~business transient demand, and we expect to see increasing levels of business travel in the coming months as companies return to the office. In addition, group demand is improving as events at~~ our hotels are increasing across our portfolio and are becoming a more meaningful contributor to occupancy. We are beginning to see events with more guests and events that take place over longer periods of time. 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 2022 and 2023.financial

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~~Occupancy during~~statements. We paid a preliminary purchase price of $101.3 million on the ~~first nine months~~closing date based on estimated working capital and cash amounts, with actual amounts to be determined in the fourth quarter of ~~2021 and 2020 at~~2022. Following this acquisition, we own 100% of the ~~same 17 hotels we owned during this time (the “Existing Portfolio”) was as follows:~~

Hilton San Diego Bayfront.

January
February
March
April
May
June
July
August
September
2021
13.3
%
22.4
%
29.1
%
37.8
%
44.2
%
48.8
%
60.4
%
49.0
%
48.4
%
2020
72.2
%
78.6
%
29.1
%
1.6
%
2.6
%
3.9
%
7.1
%
11.4
%
17.2
%

Following widespread layoffs and furloughs, our hotels are hiring again; however, some of our hotels have experienced challenges recalling workers. To attract and retain talented workers, many of our hotels are holding hiring events and offering sign-on or retention bonuses. In select competitive areas, our hotels are offering increased wages in line with the market. In addition, some of our hotels have increased flexibility and benefits to help attract and retain leadership talent. While hiring improved slightly in September 2021, we expect the labor challenges will continue for the remainder of 2021 and potentially into 2022.

In April 2021, we purchased the fee-simple interest in the Montage Healdsburg, located in California, for $265.0 million, excluding closing costs. We funded this acquisition 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, 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 to the Montage Healdsburg’s annual net operating income yield on our investment in the hotel. The Series G preferred stock is not convertible into any other security.

Dispositions

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, 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 6.95% 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.~~

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 used the proceeds received from this issuance to redeem all 3,000,000 shares of our 6.45% Series F Cumulative Redeemable Preferred Stock (the “Series F preferred stock”). Because the redemption of the Series F preferred stock was a redemption in full, trading of the Series F preferred stock on the New York Stock Exchange ceased on the August 12, 2021 redemption date.

During the first nine 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 nine months of 2022, our significant renovations primarily consisted of additional progress on the renovation of the Renaissance Washington DC in preparation for its conversion to the Westin brand in 2023, and the completion of the room renovation at the Hyatt Regency San Francisco.

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 September 30, 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 amendments to our unsecured debt agreements (the “Unsecured 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 were to be phased-in over the following five quarters to ease compliance. By exiting the covenant relief period, we ~~continued~~are no longer subject to additional restrictions on debt issuance and repayment, capital investment, share repurchases and dividend distributions.

In June 2022, we drew a total of $230.0 million under the revolving portion of our ~~temporary suspensions~~credit facility to fund the acquisitions of The Confidante Miami Beach and the noncontrolling partner’s 25.0% interest in the Hilton San Diego Bayfront.

In July 2022, we entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) which expanded our unsecured borrowing capacity and extended the maturity of our two unsecured term loans. The Amended Credit Agreement increased the balances of both Term Loan 1 and Term Loan 2 to $175.0 million each from $19.4 million and $88.9 million, respectively. In addition, the maturity dates were extended to July 2027 and January 2028 for Term Loan 1 and Term Loan 2, respectively. Under the Amended Credit Agreement, the term loans bear interest pursuant to a leverage-based pricing grid ranging from 135 basis points to 220 basis points over the applicable adjusted term SOFR.

In July 2022, we utilized the proceeds received from the incremental borrowing on the term loans to fully repay the $230.0 million that was outstanding on our revolving credit facility. The Amended Credit Agreement continues to provide for a $500.0 million revolving credit facility, with two six-month extension options, which would result in an extended maturity of July 2027. Under the Amended Credit Agreement, the revolving credit facility bears interest pursuant to a leverage-based pricing grid ranging from 140 basis points to 225 basis points over the applicable adjusted term SOFR. As of September 30, 2022, we had no amount outstanding on our credit facility, with $500.0 million of capacity available for borrowing under the facility.

Capital Transactions. During the third quarter and first nine months of 2022, we repurchased 880,577 shares and 7,995,560 shares of our common stock, respectively, under our stock repurchase program at average purchase prices of $9.82 per share and ~~our common stock quarterly dividend to preserve additional liquidity. In anticipation~~$10.82 per share, respectively. As 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~~September 30, 2022, approximately $413.5 million of our common and preferred stock. The redemptions of the Series E preferred stock and the Series F preferred stock in June 2021 and August 2021, respectively, were completed through separate authorizations 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 the need to pay a quarterly dividend on our common stock in 2021. 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:

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●

Room revenue, which is comprised of revenue realized from the sale of rooms at our ~~hotels and is driven by occupancy and the average daily room rate, or “ADR,” as defined below;~~hotels;

●

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

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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 ~~revenue. Additionally, this category includes COVID-19-related wages and benefits for furloughed or laid off hotel employees;~~revenue;

●

Food and beverage expense, which is primarily driven by hotel food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage ~~revenue. Additionally, this category includes COVID-19-related wages and benefits for furloughed or laid off hotel employees;~~revenue;

●

Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities and franchise ~~costs. Additionally, this category includes COVID-19-related wages and benefits for furloughed or laid off hotel employees;~~costs;

●

Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, however property tax is subject to regular revaluations based on the specific tax regulations and practices of each municipality, along with 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 recruitment, relocation and training expenses, labor dispute expenses, consulting fees, management fees and other expenses. Additionally, this category includes COVID-19-related wages and benefits for furloughed or laid off hotel employees, net of employee retention tax credits and industry grants received by our hotels;expenses;

●

Corporate overhead expense, which includes our corporate-level expenses, such as payroll, benefits and other employee-related expenses, amortization of deferred stock compensation, business acquisition and due diligence expenses, legal expenses, association, contract and professional fees, board of director expenses, entity-level state franchise and minimum taxes, travel expenses, office rent and other customary expenses; and

●

Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment (“FF&E”), along with amortization on our finance lease right-of-use 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 ~~office; and~~

●

~~Impairment losses~~, which includes the charges we have recognized to reduce the carrying values of certain hotels on our balance sheet to their fair values in association with our impairment evaluations, along with the write-offs of any development costs associated with abandoned projects or any hurricane-related property damage.office.

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;

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●

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

●

~~Gain (loss)~~(Loss) gain on extinguishment of debt, net, which includes ~~gains related to the resolution of contingencies on extinguished debt, or~~ losses recognized on amendments or early repayments of mortgages or other debt obligations from the accelerated amortization of deferred financing costs, along with any other costs, ~~incurred;~~or gains related to the resolution of contingencies on extinguished debt;

●

Income tax benefit (provision) ~~benefit,~~, net, which includes federal and state income taxes related to continuing operations charged to the Company net of any refundable credits or refunds received, any adjustments to deferred tax assets, liabilities or valuation allowances, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred;

●

(Income) loss from consolidated joint venture attributable to noncontrolling interest, which includes the net (income) loss attributable to a third-party’s 25.0% ownership interest in the joint venture that ~~owns~~owned the Hilton San Diego ~~Bayfront;~~Bayfront prior to our acquisition of the interest in June 2022; and

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●

Preferred stock dividends and redemption charges, which includes dividends accrued on our Series E Cumulative Redeemable Preferred Stock (“Series E preferred ~~stock~~stock”) and Series F Cumulative Redeemable Preferred Stock (“Series F preferred ~~stock~~stock”) until their redemptions in June 2021 and August 2021, respectively, as well as dividends accrued on our Series G Cumulative Redeemable Preferred Stock (“Series G preferred ~~stock,~~ stock”), Series H Cumulative Redeemable Preferred Stock (“Series H preferred ~~stock~~stock”) and Series I Cumulative Redeemable Preferred Stock (“Series I preferred ~~stock,~~stock”), along with any redemption charges on preferred stock redemptions made in excess of net carrying values.

Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:

●

Occupancy, which is the quotient of total rooms sold divided by total rooms available;

●

Average daily room rate, or ADR, which is the quotient of room revenue divided by total rooms sold;

●

Revenue per available room, or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue;

●

~~Comparable RevPAR,~~ which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale, those hotels that are undergoing a material renovation or repositioning, those hotels whose operations have either been temporarily suspended or significantly reduced and those hotels whose room counts have materially changed during either the current or prior year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our “Comparable Portfolio.” Currently, we do not have a Comparable Portfolio due to the temporary suspension of operations at certain hotels and the incurrence of various extraordinary and non-recurring items. Comparisons between the third quarter and first nine months of 2021 to the same periods in 2020 are not meaningful;

●

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~~owned the Hilton San Diego Bayfront prior to our acquisition of the interest in June 2022, 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 ~~liabilities;~~obligations; the cash component of ground lease expense for ~~our~~any finance lease obligation that has been included in interest expense; the impact of any gain or loss from undepreciated asset sales or property damage from natural disasters; any lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; property-level restructuring, severance and management transition costs; debt resolution costs; and any other nonrecurring identified adjustments;

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●

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 ~~liabilities)~~obligations); any real estate-related impairment losses; and the noncontrolling partner’s pro rata share of net income (loss) and any FFO ~~components;~~components prior to our acquisition of the noncontrolling partner’s interest in June 2022; 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 ~~liabilities;~~obligations; noncash interest on our derivative and any finance lease obligations; income tax benefits or provisions associated with any changes to deferred tax assets, liabilities or valuation allowances, the application of net operating loss carryforwards and uncertain tax positions; gains or losses due to property damage from natural disasters; any lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; non-real estate-related impairment losses; property-level restructuring, severance and management transition costs; debt resolution costs; preferred stock redemption charges; the noncontrolling partner’s pro rata share of any Adjusted FFO ~~components;~~components prior to our acquisition of the noncontrolling partner’s interest in June 2022; and any other nonrecurring identified adjustments.

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

●

Demand. The demand for lodging ~~generally fluctuates~~has traditionally been closely linked with the ~~overall~~performance of the general economy. During 2020, COVID-19 and the related government and health official mandates in many markets virtually eliminated demand across our portfolio. Since our Existing Portfolio’s COVID-19-related occupancy low pointOur hotels are classified as either upper upscale or luxury hotels. In an economic downturn, these types of ~~1.6% in April 2020, hotel demand steadily improved~~hotels may be more susceptible to a ~~high point~~decrease in revenue, as compared to hotels in other categories that have lower room rates in part because

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they generally target business and high-end leisure travelers. In periods of ~~60.4%~~economic difficulty, including those caused by global pandemics and inflation, business and leisure travelers may reduce costs by limiting travel or by using lower cost accommodations. In addition, operating results in ~~July 2021 as vaccination rates accelerated,~~key gateway markets may be negatively affected by reduced demand from international travelers due to pandemic-related travel restrictions, ~~decreased~~financial conditions in their home countries or a material strengthening of the U.S. dollar in relation to other currencies. Also, volatility in transportation fuel costs, increases in air and ~~people released their pent up desire to travel. During August~~ground travel costs and September 2021, demand at our Existing Portfolio moderated to 49.0% and 48.4%, respectively, due to concerns regarding the Delta variant, extreme weather conditions across the country and as the summertime travel season came to an end. Demand remains significantly lower than pre-COVID-19 levels. We cannot predict when or ifdecreases in airline capacity may reduce the demand for our hotel ~~rooms will return to pre-COVID-19 levels.~~rooms.

●

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~~generate growth in 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, Orlando and Portland. Additionally, an increase in the supply of vacation rental or sharing services such as Airbnb also affects the ability of existing hotels to ~~drive~~generate growth in RevPAR and profits. We believe that both new full-service hotel construction and new hotel openings will be delayed ~~or even cancelled~~ in the near-term due to several factors, including COVID-19’s effect on the ~~economy.~~economy, increased borrowing costs and an increase in materials and construction costs.

●

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. Inflationary pressures could increase operating costs, which could limit our operators’ effectiveness in minimizing expenses.

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Operating Results. The following table presents our unaudited operating results for our total portfolio for the three months ended September 30, ~~2021~~2022 and ~~2020,~~2021, including the amount and percentage change in the results between the two periods.


	Three Months Ended September 30,								Three Months Ended September 30,
	2021		2020		Change $		Change %		2022		2021		Change $		Change %

	(in thousands, except statistical data)								(in thousands, except statistical data)
REVENUES
Room	$	118,061	$	16,266	$	101,795	625.8	%	$	158,400	$	118,061	$	40,339	34.2	%
Food and beverage		27,338		2,109		25,229	1,196.3	%		63,476		27,338		36,138	132.2	%
Other operating		22,022		10,535		11,487	109.0	%		22,438		22,022		416	1.9	%
Total revenues		167,421		28,910		138,511	479.1	%		244,314		167,421		76,893	45.9	%
OPERATING EXPENSES
Hotel operating		110,946		58,361		52,585	90.1	%		145,686		110,946		34,740	31.3	%
Other property-level expenses		21,633		9,528		12,105	127.0	%		29,032		21,633		7,399	34.2	%
Corporate overhead		15,422		6,582		8,840	134.3	%		7,879		15,422		(7,543)	(48.9)	%
Depreciation and amortization		32,585		33,005		(420)	(1.3)	%		31,750		32,585		(835)	(2.6)	%
Impairment loss		1,014		—		1,014	100.0	%		—		1,014		(1,014)	(100.0)	%
Total operating expenses		181,600		107,476		74,124	69.0	%		214,347		181,600		32,747	18.0	%
Interest and other income		2		139		(137)	(98.6)	%		270		2		268	13,400.0	%
Interest expense		(7,983)		(12,742)		4,759	37.3	%		(9,269)		(7,983)		(1,286)	(16.1)	%
Gain on sale of assets		—		189		(189)	(100.0)	%
Gain (loss) on extinguishment of debt		61		(210)		271	129.0	%
Loss before income taxes		(22,099)		(91,190)		69,091	75.8	%
Income tax (provision) benefit, net		(25)		83		(108)	(130.1)	%
NET LOSS		(22,124)		(91,107)		68,983	75.7	%
(Income) loss from consolidated joint venture attributable to noncontrolling interest		(933)		1,816		(2,749)	(151.4)	%
Preferred stock dividends and redemption charges		(6,287)		(3,208)		(3,079)	(96.0)	%
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(29,344)	$	(92,499)	$	63,155	68.3	%
(Loss) gain on extinguishment of debt, net										(770)		61		(831)	(1,362.3)	%
Income (loss) before income taxes										20,198		(22,099)		42,297	191.4	%
Income tax benefit (provision), net										290		(25)		315	1,260.0	%
NET INCOME (LOSS)										20,488		(22,124)		42,612	192.6	%
Income from consolidated joint venture attributable to noncontrolling interest										—		(933)		933	100.0	%
Preferred stock dividends and redemption charge										(3,351)		(6,287)		2,936	46.7	%
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS									$	17,137	$	(29,344)	$	46,481	158.4	%

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~~Operating Results.~~ The following table presents our unaudited operating results for our total portfolio for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, including the amount and percentage change in the results between the two periods.


	Nine Months Ended September 30,								Nine Months Ended September 30,
	2021		2020		Change $		Change %		2022		2021		Change $		Change %

	(in thousands, except statistical data)								(in thousands, except statistical data)
REVENUES
Room	$	236,877	$	147,535	$	89,342	60.6	%	$	428,893	$	236,877	$	192,016	81.1	%
Food and beverage		47,547		50,312		(2,765)	(5.5)	%		174,717		47,547		127,170	267.5	%
Other operating		50,840		32,699		18,141	55.5	%		64,299		50,840		13,459	26.5	%
Total revenues		335,264		230,546		104,718	45.4	%		667,909		335,264		332,645	99.2	%
OPERATING EXPENSES
Hotel operating		239,479		247,349		(7,870)	(3.2)	%		396,548		239,479		157,069	65.6	%
Other property-level expenses		48,177		47,109		1,068	2.3	%		83,333		48,177		35,156	73.0	%
Corporate overhead		32,066		22,414		9,652	43.1	%		27,310		32,066		(4,756)	(14.8)	%
Depreciation and amortization		96,084		104,290		(8,206)	(7.9)	%		94,003		96,084		(2,081)	(2.2)	%
Impairment losses		1,014		133,466		(132,452)	(99.2)	%
Impairment loss										—		1,014		(1,014)	(100.0)	%
Total operating expenses		416,820		554,628		(137,808)	(24.8)	%		601,194		416,820		184,374	44.2	%
Interest and other income (loss)		(356)		2,751		(3,107)	(112.9)	%		4,766		(356)		5,122	1,438.8	%
Interest expense		(23,697)		(43,199)		19,502	45.1	%		(20,288)		(23,697)		3,409	14.4	%
Gain on sale of assets		—		189		(189)	(100.0)	%		22,946		—		22,946	100.0	%
Gain (loss) on extinguishment of debt		371		(210)		581	276.7	%
Loss before income taxes		(105,238)		(364,551)		259,313	71.1	%
Income tax provision, net		(91)		(6,575)		6,484	98.6	%
NET LOSS		(105,329)		(371,126)		265,797	71.6	%
Loss from consolidated joint venture attributable to noncontrolling interest		1,638		4,436		(2,798)	(63.1)	%
(Loss) gain on extinguishment of debt, net										(962)		371		(1,333)	(359.3)	%
Income (loss) before income taxes										73,177		(105,238)		178,415	169.5	%
Income tax benefit (provision), net										126		(91)		217	238.5	%
NET INCOME (LOSS)										73,303		(105,329)		178,632	169.6	%
(Income) loss from consolidated joint venture attributable to noncontrolling interest										(3,477)		1,638		(5,115)	(312.3)	%
Preferred stock dividends and redemption charges		(17,289)		(9,622)		(7,667)	(79.7)	%		(10,897)		(17,289)		6,392	37.0	%
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(120,980)	$	(376,312)	$	255,332	67.9	%
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS									$	58,929	$	(120,980)	$	179,909	148.7	%

Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:

●

COVID-19: ~~In response~~Our operations have been and continue to be affected by COVID-19 and its variants. Since our portfolio’s pandemic-induced occupancy low point in April 2020, our hotels have generated RevPAR improvements driven by demand growth and continued rate strength across our portfolio. Consequently, the results of our operations for the third quarter and first nine months of 2022 are not comparable to the ~~COVID-19 pandemic, we temporarily suspended operations at 14 of our hotels~~same periods in March and April 2020. As a result, our revenues and operating expenses for the three and nine months ended September 30, 2020 were severely impacted as hotel demand was decimated by the COVID-19 pandemic. As of September 30, 2021, we have resumed operations at all of our hotels except the Renaissance Westchester (the “Open Existing Portfolio”); however, several of our hotels are running at reduced capacity, with select offerings and amenities depending on demand.2021.

●

Hotel ~~Acquisition~~Acquisitions: In April 2021, December 2021 and June 2022, we purchased the Montage Healdsburg, the Four Seasons Resort Napa Valley and The Confidante Miami Beach (the “Three Recently Acquired Hotels”), respectively, resulting in increased revenues, operating expenses and depreciation expense for the ~~three~~third quarter and first nine months ~~ended September 30, 2021~~of 2022 as compared to the same periods in ~~2020.~~2021.

●

Hotel Dispositions: WeIn February 2022, we sold the Hyatt Centric Chicago Magnificent Mile, and in March 2022, we sold both the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile. In addition, in October 2021 and December 2021, we sold the Renaissance ~~Harborplace~~Westchester and the ~~Renaissance Los Angeles Airport in July 2020 and December 2020,~~Embassy Suites La Jolla, respectively. ~~In addition, we assigned our leasehold interest in the Hilton Times Square to the hotel’s mortgage holder in December 2020.~~ As a result of these ~~three~~five hotel dispositions (the ~~“Three~~“Five Disposed Hotels”), our revenues, ~~and~~ operating expenses ~~decreased~~and depreciation expense for the ~~three~~third quarter and first nine months ~~ended September 30, 2021 as compared~~of 2022 are not comparable to the same periods in ~~2020.~~2021.

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Room revenue. Room revenue increased ~~$101.8~~$40.3 million, or ~~625.8%~~34.2%, for the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020~~2021 as follows:

●

Room revenue at the Existing Portfolio increased ~~$93.8~~$47.0 million. Occupancy increased ~~4,080~~1,930 basis points and the average daily room rate increased ~~65.9%~~11.0%, resulting in a ~~635.0%~~51.2% increase in RevPAR:

Three Months Ended September 30,

2021

2020

Change


Occ%

ADR

RevPAR

Occ%

ADR

RevPAR

Occ%

ADR

RevPAR

Existing Portfolio

52.7
%
$
248.40

$
130.91

11.9
%
$
149.70

$
17.81

4,080
bps
65.9
%
635.0
%

Open Existing Portfolio (16 hotels)

54.8
%
$
248.40

$
136.12

12.4
%
$
149.70

$
18.56

4,240
bps
65.9
%
633.4
%

Montage Healdsburg (1)

63.9
%
$
1,246.45

$
796.48

N/A

N/A

N/A

N/A

N/A

N/A

~~(1)~~

~~The newly-developed Montage Healdsburg opened in December 2020; therefore, there is no prior year information.~~


	Three Months Ended September 30,
	2022						2021						Change
	Occ%		ADR		RevPAR		Occ%		ADR		RevPAR		Occ%		ADR		RevPAR
Existing Portfolio	72.5	%	$	290.42	$	210.55	53.2	%	$	261.72	$	139.24	1,930	bps	11.0	%	51.2	%

Three Recently Acquired Hotels	57.2	%	$	656.33	$	375.42	N/A			N/A		N/A	N/A		N/A		N/A

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused room revenue to increase by ~~$9.5~~$9.8 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused room revenue to decrease by ~~$1.5~~$16.5 million.

For the nine months ended September 30, ~~2021,~~2022, room revenue increased ~~$89.3~~$192.0 million, or ~~60.6%~~81.1%, as compared to the nine months ended September 30, ~~2020~~2021 as follows:

●

Room revenue at the Existing Portfolio increased ~~$90.8~~$185.4 million. Occupancy increased ~~1,470~~2,560 basis points and the average daily room rate increased ~~6.4%~~20.7%, resulting in a ~~69.7%~~95.7% increase in RevPAR:


	Nine Months Ended September 30,																			Nine Months Ended September 30,
	2021						2020						Change							2022							2021							Change
	Occ%		ADR		RevPAR		Occ%		ADR		RevPAR			Occ%		ADR		RevPAR			Occ%		ADR		RevPAR			Occ%		ADR		RevPAR			Occ%		ADR		RevPAR
Existing Portfolio	39.4	%	$	228.27	$	89.94	24.7	%	$	214.55	$	52.99		1,470	bps	6.4	%	69.7	%		66.8	%	$	289.10	$	193.12		41.2	%	$	239.52	$	98.68		2,560	bps	20.7	%	95.7	%

Open Existing Portfolio (16 hotels)	41.0	%	$	228.27	$	93.59	24.9	%	$	216.47	$	53.90		1,610	bps	5.5	%	73.6	%

Montage Healdsburg (1)	48.6	%	$	1,095.70	$	532.51	N/A			N/A		N/A		N/A		N/A		N/A
Three Recently Acquired Hotels																					56.7	%	$	829.25	$	470.18		N/A			N/A		N/A		N/A		N/A		N/A

~~(1)~~

Operating statistics for the Montage Healdsburg, which we acquired in April 2021, include prior ownership results obtained by us from the prior owner of the hotel during the due diligence period before our acquisition was completed. We performed a limited review of the information as part of our analysis of the acquisition. The newly developed hotel opened in December 2020; therefore, there is no prior year information.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused room revenue to increase by ~~$15.4~~$32.1 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused room revenue to decrease by ~~$16.9~~$25.5 million.

Food and beverage revenue. Food and beverage revenue increased ~~$25.2~~$36.1 million, or ~~1,196.3%~~132.2%, for the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020~~2021 as follows:

●

Food and beverage revenue at the Existing Portfolio increased ~~$20.9~~$32.7 million.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused food and beverage revenue to increase by ~~$4.4~~$4.6 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused food and beverage revenue to decrease by ~~$0.1~~$1.2 million.

For the nine months ended September 30, ~~2021,~~2022, food and beverage revenue ~~decreased $2.8~~increased $127.2 million, or ~~5.5%~~267.5%, as compared to the nine months ended September 30, ~~2020~~2021 as follows:

●

Food and beverage revenue at the Existing Portfolio ~~decreased $6.7~~increased $111.4 million.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused food and beverage revenue to increase by ~~$7.7~~$17.2 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused food and beverage revenue to decrease by ~~$3.8~~$1.4 million.

Other operating revenue. Other operating revenue increased ~~$11.5~~$0.4 million, or ~~109.0%~~1.9%, for the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020~~2021 as follows:

●

Other operating revenue at the Existing Portfolio decreased $0.2 million as a $1.7 million decrease in the reimbursement amount to offset net losses at the Hyatt Regency San Francisco was mostly offset by increased internet, parking, retail, facility and resort fees, spa, marina, tenant rent and contract commissions. During the third quarter of 2021, we recognized a $1.7 million reimbursement to offset net losses at the Hyatt Regency San Francisco as stipulated by the hotel’s operating lease agreement, with no corresponding reimbursement recognized in the third quarter of 2022.

●

The Three Recently Acquired Hotels caused other operating revenue to increase by $2.5 million.

●

The dispositions of the Five Disposed Hotels caused other operating revenue to decrease by $1.9 million.

For the nine months ended September 30, 2022, other operating revenue increased $13.5 million, or 26.5%, as compared to the nine months ended September 30, 2021 as follows:

●

Other operating revenue at the Existing Portfolio increased ~~$10.4 million. Increases~~$10.6 million, which includes $1.0 million in business interruption proceeds recognized in the first quarter of 2022 at the Hilton New Orleans St. Charles related to Hurricane Ida disruption in 2021. In addition, other operating revenue ~~such as~~at the Existing Portfolio increased due to increases in internet, parking, retail, facility and resort fees, spa, marina, cancellation fees, tenant rent and ~~spa were partially offset by a $1.7 million reimbursement in the third quarter of 2021 to~~contract commissions.

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These increases were partially offset ~~net losses at the Hyatt Regency San Francisco as stipulated~~ by ~~the hotel’s operating lease agreement, compared to a corresponding reimbursement of $4.6 million in the third quarter of 2020.~~

●

~~The Montage Healdsburg caused other operating revenue to increase by $1.4 million.~~

●

~~The dispositions of the Three Disposed Hotels caused other operating revenue to decrease by $0.3 million.~~

~~For the nine months ended September 30, 2021, other operating revenue increased $18.1 million, or 55.5%, as compared to the nine months ended September 30, 2020 as follows:~~

●

~~Other operating revenue at the Existing Portfolio increased $17.9 million. Increases in other operating revenue as noted above in the discussion regarding the third quarter also include~~ an $8.8 million reimbursement recognized in the first nine months of 2021 to offset net losses at the Hyatt Regency San Francisco as stipulated by the hotel’s operating lease agreement, ~~compared to a~~with no corresponding reimbursement ~~of $7.0 million~~recognized in the first nine months of ~~2020.~~2022.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused other operating revenue to increase by ~~$2.3~~$6.2 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused other operating revenue to decrease by ~~$2.1~~$3.3 million.

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 ~~$52.6~~$34.7 million, or ~~90.1%~~31.3%, for the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020~~2021 as follows:

●

Hotel operating expenses at the Existing Portfolio increased ~~$55.2~~$37.0 million, primarily corresponding to the increases in the Existing Portfolio’s ~~revenues.~~revenues and occupancy rates, along with increased property and liability insurance. In addition, ~~hotel operating~~utility expenses ~~for~~at the Existing Portfolio increased due to increases in the cost of natural gas. These increased expenses were partially offset by decreased Hurricane Ida-related restoration expenses. During the third quarter of 2021, ~~includes $4.6 million in union-related severance expenses at the Renaissance Westchester and~~we recognized $1.6 million in Hurricane Ida-related ~~repairs~~restoration expenses at our New Orleans ~~hotels. The Existing Portfolio’s increase~~hotels, with nominal corresponding expense recognized in hotel operating expenses was partially offset by a decrease in COVID-19-related expenses consisting of additional wages and benefits for furloughed or laid off hotel employees which totaled $0.1 million and $5.0 million for the third ~~quarters~~quarter of ~~2021 and 2020, respectively.~~2022.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused hotel operating expenses to increase by ~~$9.7~~$14.4 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused hotel operating expenses to decrease by ~~$12.3 million, which includes $5.5 million of COVID-19-related expenses recognized in the third quarter of 2020 consisting of additional wages and benefits for furloughed or laid off hotel employees.~~$16.7 million.

For the nine months ended September 30, ~~2021,~~2022, hotel operating expenses ~~decreased $7.9~~increased $157.1 million, or ~~3.2%~~65.6%, as compared to the nine months ended September 30, ~~2020~~2021 as follows:

●

Hotel operating expenses at the Existing Portfolio increased ~~$16.7~~$144.4 million, primarily corresponding to the increases in the Existing Portfolio’s ~~revenues.~~revenues and occupancy rates, along with increased property and liability insurance and property taxes. In addition, ~~hotel operating~~utility expenses ~~for~~at the Existing Portfolio increased due to increases in the cost of natural gas. Hurricane Ida-related restoration expenses recognized by our New Orleans hotels totaled $1.6 million in both the first nine months of ~~2021 includes $4.6~~2022 and 2021. While our hotels were not significantly impacted by Hurricane Ian in late September 2022, we expect to incur approximately $0.6 million in ~~union-related severance~~related restoration expenses at two of our Florida hotels in the Renaissance Westchester and $1.6 million in Hurricane Ida-related repairs at our New Orleans hotels. The Existing Portfolio’s increase in hotel operating expenses was partially offset by a decrease in COVID-19-related expenses consistingfourth quarter of ~~additional wages and benefits for furloughed or laid off hotel employees~~2022, which ~~totaled $0.5 million and $18.3 million for~~will not exceed the ~~nine months ended September 30, 2021 and 2020, respectively.~~hotels’ property insurance deductibles.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused hotel operating expenses to increase by ~~$16.8~~$42.9 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused hotel operating expenses to decrease by $41.4 million, which includes $1.8 million in prior year property tax refunds net of appeal fees recognized in the first nine months of 2021, and $7.9 million of COVID-19-related expenses recognized in the first nine months of 2020 consisting of additional wages and benefits for furloughed or laid off hotel employees.$30.2 million.

Other property-level expenses. Other property-level expenses increased ~~$12.1~~$7.4 million, or ~~127.0%~~34.2%, for the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020~~2021 as follows:

●

Other property-level expenses at the Existing Portfolio increased ~~$10.9~~$6.9 million, including a ~~$4.2~~$2.3 million increase in management fees related to the increases in the Existing Portfolio’s ~~revenues and $0.7 million in lawsuit settlement costs at the Hilton San Diego Bayfront. The increase in the Existing Portfolio’s~~revenues. Additional increases to other property-level expenses ~~was~~at the Existing Portfolio included payroll and related expenses, credit card commissions, employee recruiting and training expenses, dues and subscriptions, travel expenses and supply expenses, partially offset by ~~a decrease in COVID-19-related wages~~decreased contract and ~~benefits for furloughed or laid off hotel employees, which totaled zero and $0.4 million for the third quarters of 2021 and 2020, respectively.~~professional fees.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused other property-level expenses to increase by ~~$2.0~~$2.8 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused other property-level expenses to decrease by ~~$0.8 million, which includes $0.4 million of COVID-19-related expenses recognized in the third quarter of 2020 consisting of additional wages and benefits for furloughed or laid off hotel employees.~~$2.3 million.

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For the nine months ended September 30, ~~2021,~~2022, other property-level expenses increased ~~$1.1~~$35.2 million, or ~~2.3%~~73.0%, as compared to the nine months ended September 30, ~~2020~~2021 as follows:

●

Other property-level expenses at the Existing Portfolio increased ~~$5.1~~$30.9 million, including a ~~$3.5~~$13.6 million increase in management fees related to the increases in the Existing Portfolio’s ~~revenues and $0.7 million in lawsuit settlement costs at the Hilton San Diego Bayfront. The increase in the Existing Portfolio’s~~revenues. Additional increases to other property-level expenses ~~was partially offset by a decrease in COVID-19-related wages~~at the Existing Portfolio included payroll and ~~benefits for furloughed or laid off hotel employees. For the first nine months of 2021, other property-level~~related expenses, ~~includes a~~ credit ~~of $1.0 million, consisting of $1.2 million in~~card commissions, employee ~~retention tax credits available under the Coronavirus Aid, Relief,~~recruiting and ~~Economic Security Act (the “Tax Credits”) received by our hotels, net of additional COVID19-related wages~~training expenses, dues and ~~benefits for furloughed or laid off hotel employees. Other property-level~~subscriptions, contract and professional fees, travel expenses ~~in the first nine months of 2020 includes $1.9 million of COVID-19-related expenses consisting of additional wages~~ and ~~benefits for furloughed or laid off hotel employees.~~supply expenses.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused other property-level expenses to increase by ~~$3.4~~$9.1 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels caused other property-level expenses to decrease by ~~$7.4 million, which includes $0.8 million of COVID-19-related expenses consisting of additional wages and benefits for furloughed or laid off hotel employees.~~$4.8 million.

Corporate overhead expense. Corporate overhead expense ~~increased $8.8~~decreased $7.5 million, or ~~134.3%~~48.9%, during the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020, including $9.1 million~~2021 primarily due to decreased payroll expenses, deferred stock amortization expense and board of director expenses related to ~~CEO~~chief executive officer transition costs recognized in September 2021. ~~Excluding transition costs, corporate overhead expense~~These decreased ~~$0.3 million in the third quarter of 2021 as compared to the same period in 2020 as decreased payroll and related~~ expenses ~~amortization of deferred stock compensation and legal fees~~ were partially offset by increased due diligence expenses and ~~recruitment expenses.~~professional fees.

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For the nine months ended September 30, ~~2021,~~2022, corporate overhead expense ~~increased $9.7~~decreased $4.8 million, or ~~43.1%~~14.8%, as compared to the nine months ended September 30, ~~2020, including $10.3 million~~2021, due to decreased payroll expenses, deferred stock amortization expense and board of director expenses related to ~~CEO~~chief executive officer transition costs ~~as well as costs~~recognized in September 2021. In addition, deferred stock amortization expense decreased due to the second quarter 2021 retirement of our former chief operating ~~officer recognized in September 2021 and May 2021, respectively. Excluding transition and retirement costs, corporate overhead expense~~officer. These decreased ~~$0.7 million in the first nine months of 2021 as compared to the same period in 2020 as decreased payroll and related~~ expenses ~~and legal fees~~ were partially offset by increased ~~amortization of deferred stock compensation, recruitment~~due diligence expenses, professional fees and ~~audit fees.~~travel expenses.

Depreciation and amortization expense. Depreciation and amortization expense decreased ~~$0.4~~$0.8 million, or ~~1.3%~~2.6%, during the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020~~2021 as follows:

●

Depreciation and amortization expense related to the Existing Portfolio ~~decreased $0.7~~increased $0.1 million ~~as reduced expenses~~ due to ~~our $15.4 million impairment of the depreciable assets at one of our hotels during 2020 and from fully depreciated assets were partially offset by~~ increased depreciation and amortization at our newly renovated ~~hotels.~~hotels, partially offset by decreased expense due to fully depreciated assets.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused depreciation and amortization to increase by ~~$2.2~~$2.7 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels resulted in a decrease in depreciation and amortization of ~~$1.9~~$3.6 million.

For the nine months ended September 30, ~~2021,~~2022, depreciation and amortization expense decreased ~~$8.2~~$2.1 million, or ~~7.9%~~2.2%, as compared to the nine months ended September 30, ~~2020~~2021 as follows:

●

Depreciation and amortization expense related to the Existing Portfolio ~~decreased $2.7~~increased $0.1 million ~~as reduced expenses~~primarily due to ~~our $15.4 million impairment of~~ the ~~depreciable assets at one of our hotels during 2020 and from fully depreciated assets were partially offset by increased depreciation and amortization at our newly renovated hotels.~~same reasons noted above in the discussion regarding the third quarter.

●

The ~~Montage Healdsburg~~Three Recently Acquired Hotels caused depreciation and amortization to increase by ~~$4.4~~$8.1 million.

●

The dispositions of the ~~Three~~Five Disposed Hotels resulted in a decrease in depreciation and amortization of ~~$9.9~~$10.2 million.

Impairment ~~losses~~loss. Impairment ~~losses were~~loss totaled zero for both the three and nine months ended September 30, 2022, and $1.0 million for both the three and nine months ended September 30, ~~2021, and zero and $133.5 million for the three and nine months ended September 30, 2020, respectively.~~2021. In September 2021, we recorded an impairment loss of $1.0 million on the Hilton New Orleans St. Charles due to Hurricane Ida-related damage atto the hotel. During the first nine months of 2020, we recorded impairment losses of $126.0 million on two of the Three Disposed Hotels, $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 income of $2,000 as compared to income of $0.1 million~~ for the three months ended September 30, 2022 totaled income of $0.3 million as compared to $2,000 for the three months ended September 30, 2021. During the three months ended September 30, 2022 and 2021, we recognized interest income of $0.3 million and ~~2020,~~$2,000, respectively. ~~During~~Interest income increased in the third quarter of 2022 as compared to the same period in 2021 ~~we recognized a nominal amount of~~due to higher interest ~~income. During the third quarter of 2020, we recognized $0.1 million in interest income.~~rates.

Interest and other income (loss) for the nine months ended September 30, ~~2021~~2022 totaled income of $4.8 million as compared to a loss of $0.4 ~~million as compared to income of $2.8~~ million for the nine months ended September 30, ~~2020.~~2021. During the first nine months ~~ended September 30,~~of 2022, we recognized $4.4 million in insurance proceeds for Hurricane Ida-related property damage at our New Orleans hotels and $0.4 million in interest income. During the first nine months of 2021, we accrued a post-closing contingency of $0.4 million to the current owner of a hotel we sold in 2018, ~~and we recognized~~which was slightly offset by the recognition of a nominal

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amount of interest income. ~~During~~As noted above, interest income increased during the first nine months of ~~2020, we recognized $2.5 million~~2022 as compared to the same period in ~~interest income and $0.2 million in energy rebates~~2021 due to ~~energy efficient renovations at our hotels.~~higher interest rates.

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Interest expense on debt and finance lease obligation	$	7,864	$	12,612	$	23,684	$	35,377	$	8,719	$	7,864	$	21,252	$	23,684
Noncash interest on derivatives		(616)		(762)		(2,194)		5,534
Noncash interest on derivatives, net										(39)		(616)		(2,904)		(2,194)
Amortization of deferred financing costs		735		892		2,207		2,288		589		735		1,940		2,207
Total interest expense	$	7,983	$	12,742	$	23,697	$	43,199	$	9,269	$	7,983	$	20,288	$	23,697

Interest expense ~~decreased $4.8~~increased $1.3 million, or ~~37.3%~~16.1%, during the three months ended September 30, ~~2021~~2022 as compared to the three months ended September 30, ~~2020,~~2021, and ~~$19.5~~decreased $3.4 million, or ~~45.1%~~14.4%, during the nine months ended September 30, ~~2021~~2022 as compared to the nine months ended September 30, ~~2020.~~2021 as follows:

Interest expense on our debt and finance lease obligation ~~decreased $4.7 million and $11.7~~increased $0.9 million in the third quarter ~~and first nine months~~ of ~~2021, respectively,~~2022 as compared to the same ~~periods~~period in ~~2020~~2021 primarily due to the additional amounts borrowed under our ~~2020 debt transactions, including~~term loans in July 2022, as well as increased interest on our variable rate debt. These increases were partially offset by decreased interest due to the ~~repayment~~assignment of the loan secured by the ~~Renaissance Washington DC,~~Embassy Suites La Jolla to the hotel’s buyer in December 2021. In addition, interest expense on our finance lease obligation decreased due to our sale of the Hyatt Centric Chicago Magnificent Mile in February 2022.

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Interest expense on our debt and finance lease obligation decreased $2.4 million in the first nine months of 2022 as compared to the same period in 2021 primarily due to our 2022 and 2021 debt transactions, including our partial repayments of the senior notes and ~~our~~term loans in February 2022 and December 2021, respectively, and the assignment of the loan secured by the ~~Hilton Times Square~~Embassy Suites La Jolla to the hotel’s ~~mortgage holder, along with~~buyer in December 2021. In addition, interest expense on our finance lease obligation decreased due to our sale of the Hyatt Centric Chicago Magnificent Mile in February 2022. These decreases were partially offset by increased interest due to our second quarter 2022 draws on our credit facility and the additional amounts borrowed under our term loans in July 2022, as well as increased interest on our variable rate debt. ~~These decreases were partially offset by the amendments on our unsecured debt, which increased the interest rate on our term loans and senior notes.~~

Noncash changes in the fair market value of our derivatives caused interest expense to increase ~~$0.1~~$0.6 million and to decrease ~~$7.7~~$0.7 million in the third quarter and first nine months of ~~2021,~~2022, respectively, as compared to the same periods in ~~2020.~~2021.

The amortization of deferred financing costs caused interest expense to decrease ~~$0.2~~$0.1 million and ~~$0.1~~$0.3 million in the third quarter and first nine months of ~~2021,~~2022, respectively, as compared to the same periods in ~~2020.~~2021.

Our weighted average interest rate per annum, including our variable rate debt obligation, was approximately ~~3.8%~~4.4% and ~~4.0%~~3.8% at September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Approximately ~~70.5%~~42.4% and ~~76.5%~~70.5% of our outstanding notes payable had fixed interest rates at September 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Gain on sale of assets. Gain on sale of assets totaled zero and $22.9 million for the three and nine months ended September 30, 2022, respectively, and zero for both the three and nine months ended September 30, ~~2021, and $0.2 million for both~~2021. In the ~~three and~~first nine months ~~ended September 30, 2020. In July 2020,~~of 2022, we recognized ~~a $0.2~~an $11.3 million gain on the sale of the ~~Renaissance Harborplace.~~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.

~~Gain (loss)~~(Loss) gain on extinguishment of debt, net. ~~Gain (loss)~~(Loss) gain on extinguishment of debt, net totaled ~~gains~~a loss of $0.8 million and a gain of $0.1 ~~million and $0.4~~ million for the three months ended September 30, 2022 and 2021, respectively. During the third quarter of 2022, we recognized a loss of $0.8 million related to lender fees and the write-off of deferred financing costs associated with our July 2022 Amended Credit Agreement. During the third quarter of 2021, we recognized a gain of $0.1 million 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.

(Loss) gain on extinguishment of debt, net for the nine months ended September 30, ~~2021, respectively, and~~2022 totaled a loss of ~~$0.2~~$1.0 million as compared to a gain of $0.4 million for ~~both~~ the ~~three and~~ nine months ended September 30, ~~2020.~~2021. During the ~~third quarter and~~ first nine months of 2022, we recognized a loss of $1.0 million related to lender fees and the write-off of deferred financing costs associated with our July 2022 Amended Credit Agreement and the February 2022 repayments of a portion of our senior notes. During the first nine months of 2022 and 2021, we recognized ~~gains of $0.1 million~~a nominal gain and $0.4 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. ~~In September 2020, we recognized a loss of $0.2 million related to the write-off of deferred financing fees associated with repayments of a portion of our unsecured senior notes.~~

~~Income tax (provision) benefit, net~~. ~~Income tax (provision) benefit, net was incurred as follows (in thousands):~~

Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020
Current income tax (provision) benefit, net

$
(25)

$
83

$
(91)

$
840
Change in deferred tax asset valuation allowance

—

—

—

(7,415)
Total income tax (provision) benefit, net

$
(25)

$
83

$
(91)

$
(6,575)

Income tax benefit (provision), net.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 ~~third quarter~~three and nine months ended September 30, 2022, we recognized net current income tax benefits of $0.3 million and $0.1 million, respectively. In September 2022, we recognized a state tax credit of $0.4 million associated with solar improvements at the Wailea Beach Resort. This credit was partially offset by $0.1 million in current state income tax expense. During the first nine months of September 2022, the Wailea Beach Resort solar state tax credit of $0.4 million was partially offset by $0.3 million in current state income tax expense.

During the three and nine months ended September 30, 2021, we recognized net current income tax provisions of $25,000 and $0.1 million, respectively, resulting from current state income tax expense.

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During the third quarter and first nine months of 2020, we recognized $0.1 million and $0.8 million, respectively, of net current income tax benefits, resulting from tax credits and refunds, net of combined current federal and state income tax expense. In addition, during the nine months ended September 30, 2020, we recorded a full valuation allowance of $7.4 million on our deferred tax assets because we were no longer assured that we would be able to realize these assets due to uncertainties regarding how long the COVID-19 pandemic would last or what the long-term impact would be on our hotel operations.

~~Income (loss)~~(Income) loss from consolidated joint venture attributable to noncontrolling interest. ~~Income (loss)~~(Income) loss from consolidated joint venture attributable to noncontrolling interest, which represents the outside 25.0% interest in the entity that ~~owns~~owned the Hilton San Diego Bayfront, totaled zero and income of $3.5 million for the three and nine months ended September 30, 2022, respectively, and income of $0.9 million and a loss of ~~$1.8~~$1.6 million for the three ~~months ended September 30, 2021~~ and ~~2020, respectively, and losses of $1.6 million and $4.4 million for the~~ nine months ended September 30, 2021, ~~and 2020,~~ respectively.

In June 2022, we acquired the outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront, resulting in our owning 100% of the hotel.

Preferred stock dividends and redemption charges. Preferred stock dividends and redemption charges ~~increased $3.1~~decreased $2.9 million, or ~~96.0%~~46.7%, during the three months ended September 30, ~~2021~~2022 as compared to the ~~three months ended September 30, 2020,~~same period in 2021, and ~~$7.7~~$6.4 million, or ~~79.7%~~37.0%, ~~for~~during the nine months ended September 30, ~~2021~~2022 as compared to the ~~nine months ended September 30, 2020~~same period in 2021 due to the redemptions of our Series E

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preferred stock and Series F preferred stock, partially offset by the issuances of our Series G preferred stock, Series H preferred stock and Series I ~~preferred stock, as well as the redemptions of our Series E preferred stock and Series F~~ preferred stock.

Preferred stock dividends and redemption charges were incurred as follows (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	2021			2020		2021			2020		2022		2021			2022		2021
Series E preferred stock	$	—		$	1,998	$	7,568	(1)	$	5,994	$	—	$	—		$	—	$	7,568	(1)
Series F preferred stock		3,175	(1)		1,210		5,593	(1)		3,628		—		3,175	(1)		—		5,593	(1)
Series G preferred stock		164			—		456			—		165		164			1,339		456
Series H preferred stock		1,761			—		2,485			—		1,761		1,761			5,283		2,485
Series I preferred stock		1,187			—		1,187			—		1,425		1,187			4,275		1,187
Total preferred stock dividends and redemption charges	$	6,287		$	3,208	$	17,289		$	9,622	$	3,351	$	6,287		$	10,897	$	17,289

(1)

Includes redemption charges of $4.0 million and $2.6 million related to the original issuance costs of the Series E preferred stock and the Series F preferred stock, respectively, which were previously included in additional paid in capital.

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:

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●

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 ~~the~~any favorable ~~management~~or unfavorable contract ~~asset~~intangibles recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the unfavorable tenant lease contracts recorded in conjunction with our acquisitions of the Boston Park Plaza and the Hilton Garden Inn Chicago Downtown/Magnificent Mile.hotel acquisitions. We exclude the noncash amortization of contract intangibles because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period.

●

Amortization of right-of-use assets and ~~liabilities~~obligations: we exclude the amortization of our right-of-use assets and ~~liabilities,~~related lease obligations, as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels.

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●

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 ~~Mile.~~Mile (prior to the hotel’s sale in February 2022). We determined that the building lease is a 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 prior to our acquisition of the noncontrolling partner’s interest in June 2022, 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.

●

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The following table reconciles our unaudited net ~~loss~~income (loss) to EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest for our total portfolio for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Net loss	$	(22,124)	$	(91,107)	$	(105,329)	$	(371,126)
Net income (loss)									$	20,488	$	(22,124)	$	73,303	$	(105,329)
Operations held for investment:
Depreciation and amortization		32,585		33,005		96,084		104,290		31,750		32,585		94,003		96,084
Interest expense		7,983		12,742		23,697		43,199		9,269		7,983		20,288		23,697
Income tax provision (benefit), net		25		(83)		91		6,575
Income tax (benefit) provision, net										(290)		25		(126)		91
Loss (gain) on sale of assets		12		(189)		82		(189)		—		12		(22,946)		82
Impairment losses - hotel properties		1,014		—		1,014		131,164
Impairment loss										—		1,014		—		1,014
EBITDAre		19,495		(45,632)		15,639		(86,087)		61,217		19,495		164,522		15,639

Operations held for investment:
Amortization of deferred stock compensation		3,165		2,238		10,576		7,509		2,230		3,165		8,661		10,576
Amortization of right-of-use assets and liabilities		(335)		(330)		(1,004)		(923)
Amortization of right-of-use assets and obligations										(350)		(335)		(1,050)		(1,004)
Amortization of contract intangibles, net										(19)		—		(43)		—
Finance lease obligation interest — cash ground rent		(351)		(351)		(1,053)		(1,053)		—		(351)		(117)		(1,053)
Property-level severance		—		1,242		—		2,117
Property-level severance related to held for sale/sold hotels		4,562		5,602		4,562		5,840
(Gain) loss on extinguishment of debt		(61)		210		(371)		210
Loss (gain) on extinguishment of debt, net										770		(61)		962		(371)
Prior year property tax adjustments, net		605		(12)		(1,384)		214		—		605		—		(1,384)
Hurricane-related losses net of (insurance restoration proceeds)										—		1,621		(2,755)		1,621
Property-level severance related to sold hotel										—		4,562		—		4,562
Lawsuit settlement cost		691		—		691		—		—		691		—		691
CEO transition costs		7,976		—		7,976		—		—		7,976		—		7,976
Hurricane-related losses		1,621		—		1,621		—
Impairment loss - abandoned development costs		—		—		—		2,302
Noncontrolling interest:
(Income) loss from consolidated joint venture attributable to noncontrolling interest		(933)		1,816		1,638		4,436		—		(933)		(3,477)		1,638
Depreciation and amortization		(791)		(808)		(2,407)		(2,418)		—		(791)		(1,456)		(2,407)
Interest expense		(181)		(244)		(501)		(970)		—		(181)		(374)		(501)
Amortization of right-of-use asset and liability		72		72		217		217
Amortization of right-of-use asset and obligation										—		72		132		217
Lawsuit settlement cost		(173)		—		(173)		—		—		(173)		—		(173)
Impairment loss - abandoned development costs		—		—		—		(449)
Adjustments to EBITDAre, net		15,867		9,435		20,388		17,032		2,631		15,867		483		20,388
Adjusted EBITDAre, excluding noncontrolling interest	$	35,362	$	(36,197)	$	36,027	$	(69,055)	$	63,848	$	35,362	$	165,005	$	36,027

Adjusted EBITDAre, excluding noncontrolling interest increased ~~$71.6~~$28.5 million, or ~~197.7%~~80.6%, in the third quarter of ~~2021~~2022 as compared to the same period in ~~2020,~~2021, and ~~$105.1~~$129.0 million, or ~~152.2%~~358.0%, in the first nine months of ~~2021~~2022 as compared to the same period in ~~2020~~2021 primarily due to the following:

●

~~For the third quarter and first nine months of 2021,~~ Adjusted EBITDAre at the Existing Portfolio increased ~~$68.2~~$34.4 million, or ~~214.5%~~108.6%, and ~~$82.9~~$141.6 million, or ~~180.4%~~351.2%, in the third quarter and first nine months of 2022, respectively, as compared to the same periods in ~~2020,~~2021 primarily due to the changes in the Existing Portfolio’s revenues and expenses included in the discussion above regarding the operating results for the third quarter and first nine months of ~~2021.~~2022.

●

The ~~Montage Healdsburg caused~~Three Recently Acquired Hotels recorded Adjusted EBITDAre ~~to increase by~~of $3.3 million and $8.8 million in the third quarter and first nine months of 2022, respectively. The Montage Healdsburg, acquired in April 2021, recorded Adjusted EBITDAre of $3.6 million and $5.2 million for the third quarter and ~~the~~ first nine months of 2021, respectively.

●

The ~~Three~~Five Disposed Hotels recorded net negative Adjusted EBITDAre of ~~$5.7~~$2.2 million in the first nine months of 2022 as compared to net positive Adjusted EBITDAre of $4.7 million and ~~$17.3~~net negative Adjusted EBITDAre of $3.4 million in the third quarter and first nine months of ~~2020,~~2021, respectively.

●

Corporate-level Adjusted EBITDAre decreased $0.9 million and $17.4 million in the third quarter and first nine months of 2022 as compared to the same periods in 2021, respectively.

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

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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:

●

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

●

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

●

Noncontrolling interest: we deduct the noncontrolling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront ~~partnership.~~partnership prior to our acquisition of the noncontrolling partner’s interest in June 2022.

●

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 restoration proceeds or uninsured losses; income tax benefits or provisions associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets other than real estate investments; and other nonrecurring identified adjustments.

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The following table reconciles our unaudited net ~~loss~~income (loss) to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our total portfolio for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Net loss	$	(22,124)	$	(91,107)	$	(105,329)	$	(371,126)
Net income (loss)									$	20,488	$	(22,124)	$	73,303	$	(105,329)
Preferred stock dividends and redemption charges		(6,287)		(3,208)		(17,289)		(9,622)		(3,351)		(6,287)		(10,897)		(17,289)
Operations held for investment:
Real estate depreciation and amortization		31,959		32,383		94,206		102,422		31,313		31,959		92,796		94,206
Loss (gain) on sale of assets		12		(189)		82		(189)		—		12		(22,946)		82
Impairment losses - hotel properties		1,014		—		1,014		131,164
Impairment loss										—		1,014		—		1,014
Noncontrolling interest:
(Income) loss from consolidated joint venture attributable to noncontrolling interest		(933)		1,816		1,638		4,436		—		(933)		(3,477)		1,638
Real estate depreciation and amortization		(791)		(808)		(2,407)		(2,418)		—		(791)		(1,456)		(2,407)
FFO attributable to common stockholders		2,850		(61,113)		(28,085)		(145,333)		48,450		2,850		127,323		(28,085)

Operations held for investment:
Real estate amortization of right-of-use assets and liabilities		87		80		249		298
Amortization of deferred stock compensation (1)										2,230		3,165		8,661		10,576
Real estate amortization of right-of-use assets and obligations										(288)		87		(868)		249
Amortization of contract intangibles, net										141		—		344		—
Noncash interest on derivatives, net		(616)		(762)		(2,194)		5,534		(39)		(616)		(2,904)		(2,194)
Property-level severance		—		1,242		—		2,117
Property-level severance related to held for sale/sold hotels		4,562		5,602		4,562		5,840
(Gain) loss on extinguishment of debt		(61)		210		(371)		210
Loss (gain) on extinguishment of debt, net										770		(61)		962		(371)
Prior year property tax adjustments, net		605		(12)		(1,384)		214		—		605		—		(1,384)
Hurricane-related losses net of (insurance restoration proceeds)										—		1,621		(2,755)		1,621
Property-level severance related to sold hotel										—		4,562		—		4,562
Lawsuit settlement cost		691		—		691		—		—		691		—		691
CEO transition costs										—		7,976		—		7,976
Preferred stock redemption charges		2,624		—		6,640		—		—		2,624		—		6,640
CEO transition costs		7,976		—		7,976		—
Amortization of deferred stock compensation associated with CEO transition costs		1,117		—		1,117		—
Hurricane-related losses		1,621		—		1,621		—
Impairment loss - abandoned development costs		—		—		—		2,302
Noncash income tax provision, net		—		—		—		7,415
Noncontrolling interest:
Real estate amortization of right-of-use asset and liability		72		72		217		217
Real estate amortization of right-of-use asset and obligation										—		72		132		217
Lawsuit settlement cost										—		(173)		—		(173)
Noncash interest on derivatives, net		(20)		(1)		(20)		(27)		—		(20)		—		(20)
Lawsuit settlement cost		(173)		—		(173)		—
Impairment loss - abandoned development costs		—		—		—		(449)
Adjustments to FFO attributable to common stockholders, net		18,485		6,431		18,931		23,671		2,814		20,533		3,572		28,390
Adjusted FFO attributable to common stockholders	$	21,335	$	(54,682)	$	(9,154)	$	(121,662)	$	51,264	$	23,383	$	130,895	$	305

(1)

Amortization of deferred stock compensation has been added to the adjustments to FFO attributable to common stockholders, net for the three and nine months ended September 30, 2021 to conform to the current year’s presentation.

Adjusted FFO attributable to common stockholders increased ~~$76.0~~$27.9 million, or ~~139.0%, and $112.5 million, or 92.5%~~119.2%, in the third quarter of ~~2021 and first nine months of 2021, respectively,~~2022 as compared to the same ~~periods~~period in ~~2020~~2021, and $130.6 million, or 42,816.4%, in the first nine months of 2022 as compared to the same period in 2021 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 dispositions, our credit facility and term loans, issuances of both common and preferred stock, property insurance and contributions from our former 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, redemptions of our preferred stock, repayments of notes payable and our credit facility, dividends and distributions on our ~~common~~preferred and ~~preferred~~common stock and distributions to our former joint venture partner. We cannot be certain that traditional sources of funds will be available in the future.

Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in hotel revenue and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $149.7 million for the nine months ended September 30, 2022 as compared to $8.4 million for the nine months ended September 30, ~~2021 as compared to net cash used in operating activities of $87.3 million for the nine months ended September 30, 2020.~~2021. The net increase in cash provided by operating activities during the first nine months of 2022 as compared to the same period in

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2021 ~~as compared to the same period in 2020~~ was primarily due to the ~~resumption in operations at the majority of our hotels during the first nine months of 2021, combined with an~~ increase in travel ~~demand.~~demand benefiting our hotels and additional operating cash provided by the Three Recently Acquired Hotels, partially offset by a decrease in operating cash caused by the sales of the Five Disposed Hotels.

Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels and other assets. Net cash ~~(used in) provided by~~used in investing activities during the first nine months of ~~2021~~2022 as compared to the first nine months of ~~2020~~2021 was as follows (in thousands):


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2022		2021
Proceeds from sale of assets	$	—	$	76,855	$	191,291	$	—
Acquisition and disposition deposits, net		(3,900)		—		—		(3,900)
Acquisition of hotel properties and other assets		(195,706)		(1,398)
Proceeds from property insurance						4,369		—
Acquisitions of hotel properties and other assets						(232,506)		(195,706)
Renovations and additions to hotel properties and other assets		(41,910)		(44,043)		(97,539)		(41,910)
Payment for interest rate derivative		(80)		(111)		—		(80)
Net cash (used in) provided by investing activities	$	(241,596)	$	31,303
Net cash used in investing activities					$	(134,385)	$	(241,596)

During the first nine months of 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 $4.4 million for hurricane-related property damage at the Hilton New Orleans St. Charles. These cash inflows were partially offset by $232.5 million paid to acquire hotel properties and other assets, consisting of $232.0 million for The Confidante Miami Beach, including closing costs and prorations, and $0.5 million paid to acquire additional wet and dry boat slips at the Oceans Edge Resort & Marina. In addition, we invested $97.5 million for renovations and additions to our portfolio and other assets.

During the first nine months of 2021, we paid a deposit of $4.0 million towards our December 2021 acquisition of the Four Seasons Resort Napa Valley, ~~which we expect to complete in the fourth quarter of 2021,~~ and we received a deposit of $0.1 million from the buyer of the Renaissance Westchester, which we sold in October 2021. In addition, during the first nine months of 2021, we paid a total of $195.7 million to acquire hotel properties and other assets, including $195.6 million to acquire the Montage Healdsburg and $0.1 million to acquire an additional dry boat slip at the Oceans Edge Resort & Marina. We also invested $41.9 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.

During the first nine months of 2020, we received proceeds of $76.9 million from our sale of the Renaissance Harborplace. In addition, we paid $1.4 million to purchase additional wet boat and dry boat slips at the Oceans Edge Resort & Marina, invested $44.0 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.

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 used in financing activities during the first nine months of 2022 as compared to net cash provided by ~~(used in)~~ financing activities during the first nine months of 2021 ~~as compared to the first nine months of 2020~~ was as follows (in thousands):


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2022		2021
Acquisition of noncontrolling interest, including transaction costs					$	(101,348)	$	—
Proceeds from preferred stock offerings	$	215,000	$	—		—		215,000
Payment of preferred stock offering costs		(7,287)		—		—		(7,287)
Redemptions of preferred stock		(190,000)		—		—		(190,000)
Proceeds from common stock offerings		38,443		—		—		38,443
Payment of common stock offering costs		(784)		—		(91)		(784)
Repurchases of outstanding common stock		—		(103,894)		(86,646)		—
Repurchases of common stock for employee tax obligations		(4,877)		(3,992)		(3,351)		(4,877)
Proceeds from credit facility		—		300,000		230,000		—
Payments on credit facility		—		(300,000)
Payment on credit facility						(230,000)		—
Proceeds from notes payable						243,615		—
Payments on notes payable		(2,461)		(40,190)		(38,405)		(2,461)
Payments of deferred financing costs		—		(2,698)		(7,404)		—
Dividends and distributions paid		(10,745)		(153,063)		(11,059)		(10,745)
Distributions to noncontrolling interest		—		(2,000)
Contributions from noncontrolling interest		1,375		500
Net cash provided by (used in) financing activities	$	38,664	$	(305,337)
Distribution to noncontrolling interest						(5,500)		—
Contribution from noncontrolling interest						—		1,375
Net cash (used in) provided by financing activities					$	(10,189)	$	38,664

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During the first nine months of 2022, we paid $101.3 million to acquire the outside 25.0% equity interest in the entity that owns the Hilton San Diego Bayfront, $86.6 million to repurchase 7,995,560 shares of our outstanding common stock and $0.1 million in common stock offering costs related to restricted common stock issued to employees. We also paid $3.4 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees, $11.1 million in dividends and distributions to our preferred and common stockholders and $5.5 million in distributions to our former joint venture partner. In July 2022, we entered into the Amended Credit Agreement and received $243.6 million in proceeds associated with additional borrowing on our two term loans. We utilized the proceeds received from the incremental borrowing on the term loans to fully repay the $230.0 million we drew on our credit facility in the second quarter of 2022. In addition, we paid $38.4 million in principal payments on our notes payable, including $35.0 million to repay a portion of our senior notes, $1.5 million in scheduled principal payments on our notes payable and $1.9 million in principal payments associated with our Amended Credit Agreement, and we paid $7.4 million in deferred financing costs related to the Amended Credit Agreement.

During the first nine months of 2021, we received total gross proceeds of $215.0 million on our preferred stock offerings, including $115.0 million from the issuance of 4,600,000 shares of our Series H preferred stock and $100.0 million from the issuance of 4,000,000 shares of our Series I preferred stock, and we paid a total of $7.3 million in offering costs on our Series G preferred stock, Series H preferred stock and Series I preferred stock. We used $190.0 million of the proceeds received from our preferred stock ~~offerings~~issuances to redeem in full all 4,600,000 shares of our Series E preferred stock and all 3,000,000 shares of our Series F preferred stock. In addition, we received gross proceeds of $38.4 million from the issuance of 2,913,682 shares of our common stock under our ATM Program, and paid $0.8 million in related offering costs. We also received a $1.4 million contribution from our former joint venture partner. These net cash inflows were partially offset as we paid ~~the following:~~ $4.9 ~~million to repurchase common stock to satisfy the tax~~

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obligations in connection with the vesting of restricted common stock issued to employees; $2.5 million in principal payments on our notes payable; and $10.7 million in dividends to our preferred stockholders.

During the first nine 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 as we paid the following: $103.9 million to repurchase 9,770,081 shares of our outstanding common stock; $4.0 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to ~~employees; $300.0 million to repay all amounts outstanding on our credit facility; $40.2~~employees, $2.5 million in principal payments on our notes payable ~~including $35.0 million to repay a portion of our senior notes~~ and ~~$5.2 million in scheduled principal payments on our notes payable; $2.7 million in deferred financing costs related to the amendments on our unsecured debt; $153.1~~$10.7 million in dividends ~~and distributions~~ to our ~~common and~~ preferred ~~stockholders; and $2.0 million in distributions to our joint venture partner.~~stockholders.

Future. While operations have improved in ~~2021~~the first nine months of 2022 as compared to ~~2020,~~the same period in 2021, certain of our hotels continue to operate ~~well~~ below pre-pandemic levels. We believe the ongoing effects of the COVID-19 pandemic ~~including the spread of variants such as the Delta variant and labor challenges,~~ on our operations ~~will~~could continue to have a ~~material~~ negative impact on our financial results and liquidity ~~into~~in 2022. As previously noted, several of our hotels are operating at reduced, albeit increasing, capacities due to COVID-19; therefore, our traditional source of cash from operating activities has been significantly reduced. 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~~any potential declines in our operating cash flow. 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 expect our primary sources of cash will continue to be our working capital, ~~and~~ credit facility, dispositions of hotel properties ~~including our sale of the Renaissance Westchester in October 2021 for gross proceeds of $18.8 million~~ and ~~the expected sale of the Embassy Suites La Jolla in the fourth quarter of 2021 for a contractual sale price of $226.7 million, as well as~~ 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.

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~~credit facility, interest expense, repurchases of our common stock, distributions on our ~~unsecured debt, interest expense,~~common stock, dividends on our preferred stock and acquisitions of hotels or interests in hotels, including our acquisition of the Four Seasons Resort Napa Valley for a gross purchase price of $177.5 million, which we expect to complete in the fourth quarter of 2021; however, we can give no assurances that the acquisition will be completed.hotels.

~~At this time, we do not expect~~In the ~~need to pay~~third quarter of 2022, our board of directors declared a ~~quarterly~~cash dividend of $0.05 per share of common stock ~~dividend~~that was paid in ~~2021. The resumption in quarterly~~October 2022. Any future 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.

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.

Cash Balance. As of September 30, ~~2021,~~2022, our unrestricted cash balance was ~~$179.5~~$117.6 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 our hotels are 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 ~~loans~~loan secured by ~~the Embassy Suites La Jolla and~~ the JW Marriott New Orleans and in ~~January~~May 2021 ~~and at~~for the loan secured by the Hilton San Diego Bayfront. In April 2022, the loan secured by the Hilton San Diego Bayfront exited the cash trap, and in ~~May 2021.~~October 2022 we notified the lender for the loan secured by the JW Marriott New Orleans that we have met the criteria to exit the cash trap. As of September 30, ~~2021, only a nominal amount of~~2022, no excess cash generated by the JW Marriott New Orleans was held in a lockbox ~~accounts~~account for the benefit of the lenders and included in restricted cash on our consolidated balance sheet. The cash trap provisions triggered on these three loans will remain until the hotels reach profitability levels that terminate the cash traps.lender.

Debt. As of September 30, ~~2021,~~2022, we had ~~$745.5~~$816.6 million of ~~consolidated~~ debt, ~~$221.6~~$167.8 million of cash and cash equivalents, including restricted cash, and total assets of ~~$3.0~~$3.1 billion. We believe that by maintaining appropriate debt levels, staggering maturity dates and

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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.

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 on our Series A Senior Notes and Series B Senior Notes, respectively, as of September 30, 2022.

~~Table~~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 Unsecured Debt Amendments for the quarter ended December 31, 2021. The Unsecured Debt Amendments were scheduled to provide covenant relief through the end of ~~Contents~~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 were to 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, share repurchases and dividend distributions that were imposed as part of the Unsecured Debt Amendments.

In May 2022 and June 2022, we drew $140.0 million and $90.0 million, respectively, under our credit facility to acquire The Confidante Miami Beach and the outside 25.0% equity interest in the entity that owns the Hilton San Diego Bayfront.

In July 2022, we entered into the Amended Credit Agreement which expanded our unsecured borrowing capacity and extended the maturity of the in-place term loans. The Amended Credit Agreement continues to provide for a $500.0 million revolving credit facility and increased the aggregate amount of our two term loans from $108.3 million to $350.0 million. The facilities bear interest pursuant to a leverage-based pricing grid ranging from 1.35% to 2.25% over the applicable adjusted term SOFR. The $500.0 million revolving credit facility has two six-month extension options, which would result in an extended maturity of July 2027. The two term loan facilities each have a balance of $175.0 million and mature in July 2027 and January 2028. We utilized the proceeds received from the incremental borrowing on the term loans to fully repay the $230.0 million that was outstanding on our revolving credit facility. As of September 30, ~~2021,~~2022, we have no amount outstanding onunder the revolving portion of our credit facility, with $500.0 million of capacity available for additional borrowing under the facility. ~~Our~~The Company’s ability to draw on the ~~revolving portion of the~~ credit facility ~~may be~~is subject to ~~our~~the Company’s 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 July and December 2020, we completed amendments to our unsecured debt, consisting of the revolving portion of our credit facility, term loans and senior notes (the “Unsecured Debt Amendments”). Among other provisions, the Unsecured Debt Amendments include a waiver of required financial covenants through the end of the first quarter of 2022, with quarterly testing resuming for the period ending March 31, 2022. In July 2021, we amended the Unsecured Debt Amendments, which removed certain restrictions in place during the covenant waiver period ending March 31, 2022. The restrictions removed include 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.

In October 2021, we provided notice to the lender of our intent to exercise our second option to extend the maturity of the $220.0 million loan secured by the Hilton San Diego Bayfront from December 2021 to December 2022. In conjunction with this notice, we purchased an interest rate cap derivative for $0.1 million that will continue to cap the floating rate interest on the loan at 6.0% until December 2022.

Due to COVID-19’s expected negative impact on our operations through at least the remainder of 2021, it is possible that we may not meet the terms of our unsecured debt financial covenants once such covenants are effective again in 2022. As noted above, due to COVID-19, several of our hotels are operating at reduced, albeit increasing, capacities. Our future liquidity will depend on the gradual return of guests, particularly group business, to our hotels and the stabilization of demand throughout our portfolio.covenants.

As of September 30, ~~2021, all~~2022, 42.4% of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, ~~except~~including the loan secured by the JW Marriott New Orleans, a portion of our unsecured corporate-level Term Loan 2 and two unsecured corporate-level senior notes. The Company’s floating rate debt includes the $220.0 million non-recourse mortgage on the Hilton San Diego Bayfront, which is subject to an interest rate cap ~~agreements~~derivative that ~~cap~~caps the floating interest rate at 6.0% until December ~~2022. Our remaining mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to~~2022, our ~~mortgage debt, as of September 30, 2021, we have two~~$175.0 million unsecured corporate-level ~~term loans as well as two~~Term Loan 1, which was subject to an interest rate swap derivative until the derivative matured in September 2022, and a portion of our $175.0 million unsecured corporate-level ~~senior notes.~~Term Loan 2.

We may in the future seek to obtain mortgages on one or more of our 13 unencumbered hotels (subject to certain stipulations under our unsecured term loans and senior notes), 14all of which were held by subsidiaries whose interests were pledged to our credit facility as of September 30, ~~2021. Subsequent to the sale of the Renaissance Westchester in October 2021, we have 14 unencumbered hotels,~~2022. Our 13 ~~of which are currently held by subsidiaries whose interests are pledged to our credit facility. Our 14~~ unencumbered hotels include: Boston Park Plaza; ~~Embassy Suites Chicago; Hilton Garden Inn Chicago Downtown/Magnificent Mile;~~Four Seasons Resort Napa Valley; Hilton New 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; The Bidwell Marriott Portland; The Confidante Miami Beach; 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.

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Contractual Obligations. The following table summarizes our payment obligations and commitments as of September 30, ~~2021~~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)	$	745,484	$	88,410	$	327,249	$	214,825	$	115,000	$	816,647	$	2,145	$	294,502	$	240,000	$	280,000
Interest obligations on notes payable (2)		93,775		29,829		36,848		18,835		8,263		134,395		35,428		53,115		40,455		5,397
Finance lease obligation, including imputed interest		106,960		1,403		2,806		2,806		99,945
Operating lease obligations, including imputed interest (3)		37,491		6,895		13,954		10,233		6,409		27,414		6,734		13,391		4,656		2,633
Construction commitments		68,633		68,633		—		—		—		66,701		66,701		—		—		—
Employment obligations		3,727		3,727		—		—		—
Total	$	1,056,070	$	198,897	$	380,857	$	246,699	$	229,617	$	1,045,157	$	111,008	$	361,008	$	285,111	$	288,030

(1)

Notes payable includes the $220.0 million mortgage secured by the Hilton San Diego ~~Bayfront. In October 2021, we provided notice~~Bayfront, which is scheduled to mature in December 2022. We have notified the ~~lender~~lenders of our intent ~~to exercise our second option to extend the maturity from December 2021 to December 2022. We intend~~ to exercise the remaining one-year option to extend the maturity to December 2023.

(2)

Interest ~~on our variable rate debt~~ is calculated based on the loan balances and variable ~~rate~~rates, as applicable, at September 30, ~~2021,~~2022, and includes the effect of our interest rate ~~derivative agreements. Interest on our unsecured debt is calculated based on a return to the original contracted interest rates once the covenant waiver period ends on March 31, 2022.~~derivatives.

(3)

Operating lease obligations ~~on one of our~~include a ground ~~leases expiring~~lease that expires in 2071 and 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.

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,~~lease, 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 ~~$41.9~~$97.5 million in our portfolio and other assets during the first nine months of ~~2021.~~2022. As of September 30, ~~2021,~~2022, we have contractual construction commitments totaling ~~$68.6~~$66.7 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~~2.0% and 5.0% of the respective hotel’s applicable annual revenue. As of September 30, ~~2021,~~2022, our balance sheet includes restricted cash of ~~$30.9~~$36.2 million, which was held in FF&E reserve accounts for future capital expenditures at the majority of 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, both the second and third quarters are strong for the California counties of Napa and Sonoma and the fourth quarter is strong for Hawaii and Key ~~West and Sonoma)~~West). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as 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

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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 affect~~affects 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. We rely on our hotel operators to adjust room rates and pricing for hotel services to reflect the effects of inflation. However, previously contracted rates, competitive pressures or other factors may limit the ability of our operators to respond to inflation. As a result, 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. 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. We perform 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, our estimate of how long we 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. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. Our judgment is required in determining the discount rate applied to estimated cash flows, the estimated growth of revenues and expenses, net operating income (loss) and margins, the need for capital expenditures, as well as specific market and economic conditions.

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. We perform 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, our estimate of how long we 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. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and the terminal capitalization rate. Our judgment is required in determining the discount rate applied to estimated cash flows, the estimated growth of revenues and expenses, net operating income (loss) and margins, the need for capital expenditures, as well as specific market and economic conditions.

●

Acquisition related assets and liabilities. Accounting for the acquisition of a hotel property or other entity requires ~~an allocation of~~either allocating 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 recording the assets and liabilities at their estimated fair values with any excess consideration above net assets going to goodwill 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. The determination of fair value is subjective and is based in part on assumptions and estimates that could differ materially from actual results in future periods. Given the subjectivity, business combinations are provided a one-year measurement period to adjust the provisional amounts recognized if the necessary information is not available by the end of the reporting period in which the acquisition occurs.

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

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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” 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.~~

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 September 30, ~~2021, 70.5%~~2022, 69.4% of our debt obligations are fixed in nature or are subject to an interest rate cap agreement, 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~~50 basis points, interest expense would increase or decrease, respectively, our future consolidated annual earnings and cash flows by approximately ~~$2.2~~$2.4 million based on the variable ~~rate~~rates at September 30, 2021. 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 September 30, 2021.2022.

~~Item 4.~~

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 ~~Interim~~ Chief Executive Officer (“~~Interim~~ 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

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periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the ~~Interim~~ 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.

PART II—OTHER INFORMATION

~~Item 1.~~

Item 1. Legal Proceedings

None.

~~Item 1A.~~

Item 1A. Risk Factors

None.

~~Item 2.~~

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 September 30, 2022, the Company repurchased 880,577 shares of its common stock for a total purchase price of $8.7 million, including fees and commissions, leaving $413.5 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.


					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
July 1, 2021 - July 31, 2021	—	$	—	—	$	500,000,000
August 1, 2021 - August 31, 2021	—	$	—	—	$	500,000,000
September 1, 2021 - September 30, 2021	—	$	—	—	$	500,000,000
July 1, 2022 - July 31, 2022							134,444	$	9.77	134,444	$	420,849,319
August 1, 2022 - August 31, 2022							—	$	—	—	$	420,849,319
September 1, 2022 - September 30, 2022							746,133	$	9.83	746,133	$	413,513,729
Total	—	$	—	—	$	500,000,000	880,577	$	9.82	880,577	$	413,513,729

~~Item 3.~~

Item 3. Defaults Upon Senior Securities

None.

~~Item 4.~~

Item 4. Mine Safety Disclosures

None.

~~Item 5.~~

Item 5. Other Information

None.

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~~Item 6.~~

Item 6. Exhibits

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


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

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

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

3.4			Articles Supplementary for Series EG preferred stock (incorporated by reference to Exhibit ~~3.5~~3.1 to ~~the registration statement on~~ Form ~~8-A,~~8-K, filed by the Company on ~~March 10, 2016)~~April 28, 2021).

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

~~3.6~~			~~Articles Supplementary for Series G preferred stock (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on April 28, 2021.~~

~~3.7~~			Articles Supplementary for Series H preferred stock (incorporated by reference to Exhibit 3.3 to the registration statement on Form 8-A, filed by the Company on May 20, ~~2021.~~2021).

~~3.8~~3.6			Articles Supplementary for Series I preferred stock (incorporated by reference to Exhibit 3.3 to the registration statement on Form 8-A, filed by the company on July 15, 2021).

~~3.9~~3.7			Eighth Amended and Restated Limited Liability Agreement of Sunstone Hotel Partnership LLC (incorporated by reference to Exhibit 3.2 to Form 8-K, filed by the Company on July 16, 2021).

1010.1			~~Third Amendment to~~Second Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on July ~~8, 2021).~~27, 2022)

~~10.1~~			~~Third Amendment to Note and Guarantee Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on July 8, 2021)~~.

10.2			Fourth Amended and Restated Employment Agreement, dated as of August 29, 2022, by and among Sunstone Hotel Investors, Inc. ~~Incentive Bonus Plan (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on August 10, 2021).~~, Sunstone Hotel Partnership, LLC and Bryan A. Giglia. * #

10.3			~~Form~~Fourth Amended and Restated Employment Agreement, dated as of ~~Retention Letter with Named Executive Officers (incorporated~~August 29, 2022, by ~~reference to Exhibit 10.1 to Form 8-K, filed by the Company on September 13, 2021).~~and among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Robert C. Springer. * #

10.4			~~Form of~~Fifth Amended and Restated Employment Agreement, dated as of August 29, 2022, by and ~~between~~among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and ~~Douglas~~David M. ~~Pasquale (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on September 13, 2021)~~Klein.. * #

10.5			~~Form~~Amended and Restated Employment Agreement, dated as of ~~Letter~~August 29, 2022, by and among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Christopher Ostapovicz. * #

10.6			Employment Agreement, ~~with Named Executive Officers (incorporated~~dated as of August 29, 2022, by ~~reference to Exhibit 10.1 to Form 8-K, filed by the Company on October 1, 2021).~~and among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Aaron R. Reyes. * #

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

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

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

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

101.SCH			Inline XBRL Taxonomy Extension Schema Document. *

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document. *

101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document. *

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document. *

104			Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021~~2022 formatted in Inline XBRL (included in Exhibit 101).

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*		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: November ~~4, 2021~~8, 2022	By:	/s/ ~~Bryan A. Giglia~~Aaron R. Reyes
		~~Bryan A. Giglia~~Aaron R. Reyes (Chief Financial Officer and Duly Authorized Officer)

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			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
September 30, 2021 (unaudited):
Interest rate cap derivatives	$	—	$	—	$	—	$	—
Total assets measured at fair value at September 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	$	—