| Management Agreements and Leases | Note 6. Management Agreements and Leases As of September 30, 2020, we owned 329 hotels which were included in six operating agreements and 804 service orientated retail properties net leased to 183 tenants. We do not operate any of our properties. Hotel agreements As of September 30, 2020, 328 of our hotels were leased to our TRSs and managed by independent hotel operating companies and one hotel was leased to a third party. As of September 30, 2020, our hotel properties were managed by or leased to IHG, Marriott, Sonesta, Hyatt, Radisson and Wyndham, under six agreements. These hotel agreements have initial terms expiring between 2020 and 2037. Each of these agreements is for between nine and 122 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between 15 to 60 years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, funding of the FF&E reserves, payment of our minimum returns, payment of certain management fees, reimbursement of working capital advances and replenishment of security deposits or guarantees, as applicable. Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us. IHG agreement. Our management agreement with IHG for 103 hotels, or the IHG agreement, provides that, as of September 30, 2020, we are to be paid annual minimum returns and rents of $216,551. Pursuant to the IHG agreement, IHG provided us with a security deposit to cover minimum payment shortfalls, if any. Under this agreement, IHG is required to maintain a minimum security deposit of $37,000 and this security deposit may be replenished and increased up to $100,000 from a share of future cash flows from the hotels in excess of our minimum returns and rents, working capital advances and certain management fees, if any. During the nine months ended September 30, 2020, we fully utilized the $75,717 security deposit we held to cover shortfalls in hotel cash flows available to pay the minimum returns due to us for the period. The IHG agreement requires 5% of gross revenues from hotel operations be placed in an FF&E reserve. Pursuant to a letter agreement with IHG, during the period from March 1, 2020 through September 30, 2020, IHG was not required to deposit any amounts into its FF&E reserve with respect to certain of our hotels that it manages. In addition to our minimum return, this management agreement provides for an annual additional return payment to us of $12,067 from the hotels' available cash flows after payment of hotel operating expenses, funding of the required FF&E reserve, payment of our minimum return, working capital advances, payment of certain management fees and replenishment and expansion of the security deposit, if any. In addition, the agreement provides for payment to us of 50% of the hotels' available cash flows after payment to us of the annual additional return amount. We funded $3,900 for capital improvements to certain of the hotels included in the IHG agreement during the nine months ended September 30, 2020, which resulted in increases in our contractual annual minimum returns of $312. We did not fund any capital improvements for hotels included in the IHG agreement during the nine months ended September 30, 2019. In April 2020, we funded $37,000 of working capital advances under the IHG agreement to cover projected operating losses at our hotels managed by IHG. Working capital advances are reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us, if any, pursuant to the terms of the IHG agreement. We realized minimum returns and rents of $9,654 and $51,853 during the three months ended September 30, 2020 and 2019, respectively, and $117,874 and $153,053 during the nine months ended September 30, 2020 and 2019, respectively, under this agreement. During July 2020, we applied the then remaining $8,992 of security deposit securing IHG’s obligation under the agreement. We sent notices of default and termination to IHG for failure to pay minimum returns and rents due to us of $36,776 for the third quarter of 2020 and that we will transfer the branding and management of 102 of the 103 hotels to Sonesta on December 1, 2020. Marriott agreement . Our management agreement with Marriott for 122 hotels, or the Marriott agreement, provides that, as of September 30, 2020, we are to be paid annual minimum returns of $194,613. Pursuant to the Marriott agreement, Marriott had provided us with a security deposit to cover minimum return payment shortfalls, if any. Under this agreement, this security deposit, if utilized, may be replenished and increased up to $64,700 from 60% of the cash flows realized from operations of the 122 hotels after payment of the aggregate annual minimum returns, Marriott’s base management fees and working capital advances, if any. Marriott had also provided us with a $30,000 limited guaranty to cover payment shortfalls up to 85% of our minimum returns after the available security deposit balance has been depleted. During the nine months ended September 30, 2020, we fully utilized the $33,423 security deposit we then held and exhausted the $30,000 limited guaranty to cover shortfalls in hotel cash flows available to pay the minimum returns due to us for the period. This limited guaranty expired when it was exhausted. The Marriott agreement requires 5.5% to 6.5% of gross revenues from hotel operations be placed in an FF&E reserve. As a result of current market conditions, we and Marriott have agreed to suspend contributions to the FF&E reserve under the Marriott agreement for the remainder of 2020. We funded $50,415 and $34,378 for capital improvements to certain of the hotels included in the Marriott agreement during the nine months ended September 30, 2020 and 2019, respectively, which resulted in increases in our contractual annual minimum returns of $4,039 and $3,252, respectively. We and Marriott identified 33 of the 122 hotels covered by the Marriott agreement that will be sold or rebranded, at which time we will retain the proceeds of any such sales and the aggregate annual minimum returns due to us would decrease by the amount allocated to the applicable hotel. As of September 30, 2020, 24 of these hotels with 2,989 rooms requiring annual minimum returns of $31,359 with an aggregate carrying value of $140,798 are under agreement to be sold. During the nine months ended September 30, 2020, we funded $30,000 of working capital advances under the Marriott agreement to cover projected operating losses at our hotels managed by Marriott. These working capital advances are reimbursable to us from shares of future cash flows from the hotel operations in excess of the minimum returns due to us and Marriott’s base management fees, if any, pursuant to the terms of the Marriott agreement. We realized minimum returns of $14,369 and $47,794 during the three months ended September 30, 2020 and 2019, respectively, and $91,076 and $142,562 during the nine months ended September 30, 2020 and 2019, respectively, under this agreement. We sent notices to Marriott terminating our agreement for its failure to cover the $23,952 cumulative shortfall between the payments we have received to date and 80% of the cumulative priority returns due to us for the nine months ended September 30, 2020. The effective date of the termination is January 31, 2021 and we currently plan to transfer to Sonesta the branding and management of the 98 hotels to the extent not sold. We also expect to transfer to Sonesta in December 2020 the branding and management of nine hotels we previously expected to sell. Sonesta agreement. As of September 30, 2020, Sonesta managed 16 of our full-service hotels and 40 of our extended stay hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a related pooling agreement, which combines certain of those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us. On February 27, 2020, we entered into a transaction agreement with Sonesta pursuant to which we and Sonesta restructured our existing business arrangements as follows: • We and Sonesta had agreed to sell, rebrand or repurpose our 39 extended stay hotels then managed by Sonesta. Based on current market conditions, we have decided not to pursue the sale of these 39 hotels at this time; • The annual minimum returns due for the 14 full-service hotels that Sonesta continues to manage were reduced from $99,013 to $69,013 as of that date; • Sonesta issued to us a number of its shares of common stock representing approximately (but not more than) 34% of its outstanding shares of common stock (post-issuance) and we entered into a stockholders agreement with Sonesta, Adam Portnoy and the other stockholder of Sonesta and a registration rights agreement with Sonesta; • We and Sonesta modified our then existing Sonesta agreement and pooling agreement so that 5% of the hotel gross revenues of each of our 14 full-service hotels managed by Sonesta will be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the annual minimum returns due to us under the Sonesta agreement; • We and Sonesta modified our then existing Sonesta agreement and pooling agreement so that (1) our termination rights under those agreements for our 14 full-service hotels managed by Sonesta are generally limited to performance and for “cause,” casualty and condemnation events, (2) a portfolio wide performance test now applies for determining whether the management agreement for any of our full-service hotels managed by Sonesta may be terminated for performance reasons, and (3) the provisions included in our historical pooling agreement that allowed either us or Sonesta to require the marketing for sale of non-economic hotels were removed; and • We and Sonesta extended the initial expiration date of the then existing management agreements for our full-service hotels managed by Sonesta located in Chicago, IL and Irvine, CA to January 2037 to align with the initial expiration date for our other full-service hotels managed by Sonesta. Except as described above, the economic terms of our amended and restated Sonesta agreement and amended and restated pooling agreement are consistent with the historical Sonesta agreement and pooling agreement. We previously leased 48 vacation units to Wyndham Destinations, Inc. (NYSE: WYND), or Destinations, at our full service hotel located in Chicago, IL, which Sonesta began managing in November 2019 and which had previously been managed by Wyndham. Effective March 1, 2020, Sonesta commenced managing those units and those units were added to our Sonesta agreement for that Chicago hotel. Between September 18, 2020 and October 1, 2020, Sonesta assumed management of four hotels previously managed by Wyndham. We entered into management agreements with Sonesta with respect to these four hotels on terms substantially consistent with our other applicable management agreements with Sonesta in effect following the restructuring of our business arrangement with Sonesta on February 27, 2020, except that the management agreements are scheduled to terminate on December 31, 2021. The management agreements for these hotels have not been added to our pooling agreement with Sonesta. As noted above, our management agreements with IHG for 103 of our hotels are scheduled to terminate effective November 30, 2020, and our management agreements with Marriott for 122 of our hotels are scheduled to terminate effective January 31, 2021. Management of 200 of these hotels, to the extent not previously sold, is expected to be assumed by Sonesta. As we transition management of these hotels, we expect that we will enter management agreements with Sonesta on terms similar to those for four hotels formerly managed by Wyndham that were transitioned to Sonesta management between September 18, 2020 and October 1, 2020, as further described above. Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to 8% of our invested capital, as defined therein, if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. Our fixed annual minimum return under our Sonesta agreement was $124,795 as of September 30, 2020. Our Sonesta agreement further provides that we are paid an additional return based upon operating profits, as defined therein, after reimbursement of owner or manager advances, FF&E reserve escrows and Sonesta’s incentive fee, if applicable. Our Sonesta hotels generated net operating losses of $6,155 and returns of $15,629 during the three months ended September 30, 2020 and 2019, respectively, and net operating losses of $31,969 and returns of $57,794 during the nine months ended September 30, 2020 and 2019, respectively, under our Sonesta agreement. We do not have any security deposits or guarantees for our Sonesta hotels. Accordingly, the returns we receive from our Sonesta hotels are limited to the hotels’ available cash flows, if any, after payment of operating expenses, including management and related fees. In addition to our minimum returns, the management agreement provides for payment of 80% of hotel cash flows after payment of hotel operating expenses including certain management fees to Sonesta, our minimum return, working capital advances and any FF&E reserves. During the three and nine months ended September 30, 2020, we funded $6,836 and $14,187, respectively, of working capital advances under our Sonesta agreement to cover projected operating losses at our hotels managed by Sonesta. These working capital advances are reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us, if any, pursuant to the terms of the Sonesta agreement. Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third-party reservation transmission fees of $3,831 and $9,313 for the three months ended September 30, 2020 and 2019, respectively, and $12,756 and $28,016 for the nine months ended September 30, 2020 and 2019, respectively. In addition, we incurred procurement and construction supervision fees of $184 and $928 for the three months ended September 30, 2020 and 2019, respectively, and $1,087 and $1,914 for the nine months ended September 30, 2020 and 2019, respectively, pursuant to our Sonesta agreement. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. Our Sonesta agreement does not require FF&E escrow deposits for our extended stay hotels managed by Sonesta and, prior to February 27, 2020, did not require FF&E escrow deposits for our full-service hotels managed by Sonesta, but does and did, as applicable, require us to fund capital expenditures that we approve or approved at our Sonesta hotels. No FF&E escrow deposits were required during the three and nine months ended September 30, 2020. We funded $48,119 and $67,495 for renovations and other capital improvements to certain hotels included in our Sonesta agreement during the nine months ended September 30, 2020 and 2019, respectively, which resulted in increases in our contractual annual minimum returns of $3,622 and $4,140, respectively. We owed Sonesta $3,564 and $15,537 for capital expenditure and other reimbursements at September 30, 2020 and December 31, 2019, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our condensed consolidated balance sheets. Accounting for Investment in Sonesta: We account for our 34% non-controlling interest in Sonesta under the equity method of accounting. As of September 30, 2020, our investment in Sonesta had a carrying value of $43,073. This amount is included in other assets in our condensed consolidated balance sheets. The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total shareholders’ equity book value on the date of acquisition, February 27, 2020, by an aggregate of $8,000. As required under GAAP, we are amortizing this difference to equity in earnings of an investee over 31 years, the weighted average remaining useful life of the real estate assets and intangible assets and liabilities owned by Sonesta as of the date of our acquisition. We recorded amortization of the basis difference of $65 and $151 in the three and nine months ended September 30, 2020, respectively. We recognized losses of $1,369 and $4,305 related to our investment in Sonesta for the three and nine months ended September 30, 2020, respectively. These amounts are included in equity in earnings (losses) of an investee in our condensed consolidated statements of comprehensive income. We recorded a liability for the fair value of our initial investment in Sonesta, as no cash consideration was exchanged related to the modification of our management agreement with, and investment in, Sonesta. This liability for our investment in Sonesta is included in accounts payable and other liabilities in our condensed consolidated balance sheet and is being amortized on a straight-line basis through January 31, 2037, the remaining term of the Sonesta agreement as a reduction to hotel operating expenses in our condensed consolidated statements of comprehensive income. We reduced hotel operating expenses by $621 and $1,448 for the three and nine months ended September 30, 2020, respectively, for amortization of this liability. As of September 30, 2020, the unamortized balance of this liability was $40,552. See Note 10 for further information regarding our relationship, agreements and transactions with Sonesta. Hyatt agreement . Our management agreement with Hyatt for 22 hotels, or our Hyatt agreement, provides that, as of September 30, 2020, we are to be paid an annual minimum return of $22,037. We realized minimum returns of $5,509 during each of the three months ended September 30, 2020 and 2019 and minimum returns of $16,528 during each of the nine months ended September 30, 2020 and 2019 under this agreement. Pursuant to our Hyatt agreement, Hyatt has provided us with a guaranty, which is limited to $50,000. During the nine months ended September 30, 2020, the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period, and Hyatt made $16,539 of guaranty payments to cover the shortfall. The available balance of the guaranty was $3,116 as of September 30, 2020. In addition to our minimum returns, this management agreement provides for payment to us of 50% of the hotels’ available cash flows after payment of operating expenses, funding required FF&E reserves, payment of our minimum return, our working capital advances and reimbursement to Hyatt of working capital and guaranty advances. During the nine months ended September 30, 2020, we funded $3,700 of working capital advances under our Hyatt agreement to cover projected operating losses at our hotels managed by Hyatt. Working capital advances are reimbursable to us from a share of future cash flows from the hotel operations in excess of the minimum returns due to us, if any, pursuant to the terms of the Hyatt agreement. Our Hyatt agreement requires 5% of gross revenues from hotel operations be placed in an FF&E reserve, subject to available cash flow. Radisson agreement. Our management agreement with Radisson for nine hotels, or our Radisson agreement, provides that, as of September 30, 2020, we are to be paid annual minimum returns of $20,442. We realized minimum returns of $5,111 and $5,099 during the three months ended September 30, 2020 and 2019, respectively, and minimum returns of $15,332 and $14,945 during the nine months ended September 30, 2020 and 2019, respectively, under this agreement. Pursuant to our Radisson agreement, Radisson has provided us with a guaranty, which is limited to $47,523. During the nine months ended September 30, 2020, the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period and Radisson made $21,729 of guaranty payments to cover the shortfall. The available balance of the guaranty was $19,487 as of September 30, 2020. In addition to our minimum returns, our Radisson agreement provides for payment to us of 50% of the hotels’ available cash flows after payment of operating expenses, funding the required FF&E reserve, payment of our minimum returns, our working capital advances and reimbursement to Radisson of working capital and guaranty advances, if any. Our Radisson agreement requires 5% of gross revenues from hotel operations be placed in an FF&E reserve. As a result of current market conditions, effective April 1, 2020, we and Radisson have agreed to suspend contributions to the FF&E reserve under our Radisson agreement for the remainder of 2020. Wyndham agreements . As of September 30, 2020, 17 of our hotels were operated under a management agreement with Wyndham. In September 2020, we amended the management agreement with Wyndham so that it will continue as the manager of these Wyndham branded hotels for a limited period. Under the amended terms of this agreement, we will pay Wyndham a management fee of 7% of hotel revenues, subject to certain minimums. In September 2020, we rebranded three hotels previously managed by Wyndham to Sonesta and on October 1, 2020, one additional hotel previously managed by Wyndham was rebranded to Sonesta. We expect to sell 15 Wyndham branded hotels in the fourth quarter of 2020. Our Wyndham hotels generated a net operating losses of $4,413 and returns of $5,944 during the three months ended September 30, 2020 and 2019, respectively, and a net operating losses of $8,160 and net operating losses of $17,780 during the nine months ended September 30, 2020 and 2019, respectively. We funded $1,540 and $2,283 for capital improvements at certain of the hotels included in our Wyndham agreement during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 we have funded $6,316 of working capital advances under our Wyndham agreement to cover projected operating losses at our hotels managed by Wyndham. Net lease portfolio As of September 30, 2020, we owned 804 net lease service-oriented retail properties with 13.7 million square feet with leases requiring annual minimum rents of $369,803 with a weighted (by annual minimum rents) average remaining lease term of 11.0 years. The portfolio was 98% leased by 183 tenants operating under 129 brands in 22 distinct industries. TA leases TA is our largest tenant. As of September 30, 2020, we leased to TA a total of 179 travel centers under five leases that expire between 2029 and 2035 and require annual minimum rents of $246,110 which represented approximately 25.6% of our total annual minimum returns and rents as of September 30, 2020. In addition, TA is required to pay us previously deferred rent obligations in quarterly installments of $4,404 through January 31, 2023. TA paid $4,404 and $13,212 of deferred rent to us for the three and nine months ended September 30, 2020, respectively. The remaining balance of previously deferred rents was $44,036 as of September 30, 2020. We recognized rental income from TA of $61,528 and $62,537 for the three months ended September 30, 2020 and 2019, respectively, and $184,583 and $188,227 for the nine months ended September 30, 2020 and 2019, respectively. Rental income for the three months ended September 30, 2020 and 2019 includes $3,250 and $3,390 respectively, and for the nine months ended September 30, 2020 and 2019, includes $9,834 and $7,880, respectively, of adjustments to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight-line basis. As of September 30, 2020 and December 31, 2019, we had receivables for current rent amounts owed to us by TA and straight-line rent adjustments of $58,648 and $68,653, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets. Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to 8.5% of the amounts funded. We did not fund any capital improvements to our properties that we leased to TA during the nine months ended September 30, 2020 or 2019. In addition to the rental income that we recognized during the three months ended September 30, 2020 and 2019 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $893 and $1,020 for the three months ended September 30, 2020 and 2019, respectively, and $1,742 and $3,047 for the nine months ended September 30, 2020 and 2019, respectively. See Note 10 for further information regarding our relationship with TA. Other net lease agreements Our net lease agreements generally provide for minimum rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight-line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We recognized rental income from our 625 other net lease properties of $34,574 and $106,804 for the three and nine months ended September 30, 2020, respectively, which included $5,620 and $11,433, respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis. We recognized rental income of $5,485 for the three and nine months ended September 30, 2019, which included $258 of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis. As a result of the COVID-19 pandemic, some of our tenants have requested rent assistance. During the three months ended September 30, 2020, we collected 87.2% of rents from our other net lease tenants. In October 2020, we collected 87.4% of rents due to us from our other net lease tenants. We have entered into rent deferral agreements with 51 net lease retail tenants with leases requiring an aggregate of $53,413 of annual minimum rents. These amounts do not include tenants that have withdrawn previously approved deferral requests. Generally these rent deferrals are for one We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as the original lease. Because the deferred rents referenced above will be repaid over a 12 to 24 month period, the cash flows from the respective leases are substantially the same as before the rent deferrals. We continually review receivables related to rent, straight-line rent and property operating expense reimbursements and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The |
