SUNSTONE HOTEL INVESTORS, INC. Overview
Sunstone Hotel Investors, Inc. (the "Company," "we," "our" or "us") is aMaryland 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 ofSunstone 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 theOperating 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®) inthe United States , specifically hotels in urban and resort locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As part of our ongoing portfolio management strategy, on an opportunistic basis, we may also selectively sell hotel properties that we believe do not meet our criteria of LTRR®. As ofJune 30, 2020 , we had interests in 20 hotels (the "20 Hotels"), including the Renaissance Harborplace which we classified as held for sale and subsequently sold inJuly 2020 , leaving 19 hotels (the "19 Hotels") currently held for investment. The 19 Hotels average 526 rooms in size. All but two (theBoston Park Plaza and theOceans Edge Resort & Marina) of the 19 Hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. Our two unbranded hotels are located in top urban and resort markets that have enabled them to establish awareness with both group and transient customers. COVID-19
InMarch 2020 , the COVID-19 outbreak was declared aNational Public Health Emergency, which led to material group cancellations, corporate and government travel restrictions and a significant decline in transient demand. As a result of these cancellations, restrictions and the health concerns related to COVID-19, we determined that it was in the best interest of our hotel employees and the communities in which our hotels operate to temporarily suspend operations at the majority of our hotels. In response to the COVID-19 pandemic, we temporarily suspended operations at the following 15 hotels during the first six months of 2020, six of which have since resumed operations: Hotel Suspension Date Resumption Date Marriott Boston Long Wharf March 12, 2020 July 7, 2020 Renaissance Orlando at SeaWorld® March 20, 2020 Hyatt Regency San Francisco March 22, 2020 Oceans Edge Resort & Marina March 22, 2020 June 4, 2020 Hilton San Diego Bayfront March 23, 2020 Wailea Beach Resort March 25, 2020 Renaissance Washington DC March 26, 2020
March 27, 2020
Hilton New Orleans St. Charles March 28, 2020 July 13, 2020
JW Marriott New Orleans March 28, 2020 July 14, 2020
Embassy Suites Chicago April 1, 2020 July 1, 2020
Renaissance Westchester April 4, 2020
Hyatt Centric Chicago Magnificent Mile April 6, 2020 July 13, 2020
Hilton Times Square June 30, 2020
The hotels that remained in operation during the second quarter and first six months of 2020, experienced a significant decrease in occupancy due to the COVID-19 outbreak. As a result, we, in conjunction with our third-party managers, materially reduced operating expenses to preserve liquidity by implementing stringent operational cost containment measures, including significantly reduced staffing levels, limited food and beverage offerings, elimination of non-essential hotel services and the temporary closure of unoccupied floors. In addition, enhanced cleaning procedures and revised operating standards were developed and implemented.
The Company incurred$7.5 million and$17.6 million of additional expenses as a result of the COVID-19 outbreak during the second quarter and first six months of 2020, respectively, related to wages and benefits for furloughed or laid off hotel employees, which included$1.1 million in severance accrued in the second quarter of 2020. 27 Table of Contents As our hotels slowly begin to recover from the impact of the COVID-19 outbreak, our asset management team is working closely with each hotel's third-party manager to create a detailed path to reopening, which includes the following protocols:
Local/Government Direction: The hotel is eligible to resume operations based on
health metrics or reopening phases adopted by authorities in both the local
? area and the state in which the hotel operates, as well as by guidance from the
Staff and Guest Safety Plan: The hotel has developed a detailed plan to promote
? the safety of all hotel staff and guests, including frequent and enhanced
cleaning and sanitation, contactless check in, and increased physical
distancing throughout the hotel;
? Training: The hotel's operating procedures have been updated, and all hotel
staff have been trained to comply with the new protocols;
Financial: The hotel has updated its financial model to include the additional
? costs for cleaning equipment, personal protective equipment, hand sanitizer
dispensers and signage to inform and direct its guests; and
? Equipment: The hotel has installed enhanced cleaning supplies and equipment to
comply with state and local guidelines. In addition to approving the above COVID-19 protocols, we also determine whether enough demand exists in a hotel's market before we authorize the hotel to resume operations. After reaching a trough in April, we began to see hotel demand slightly improve in May and June, most significantly in leisure travel, which benefited our hotels in drive-to leisure markets such as the Embassy Suites La Jolla, the RenaissanceLong Beach and theOceans Edge Resort & Marina. We also experienced a modest demand increase at our hotels in certain urban markets after resuming operations inBoston ,Chicago andNew Orleans . InJuly 2020 , however, hotel demand moderated as COVID-19 cases surged and some areas began to re-implement mandatory shelter-in-place orders and the shutdown of nonessential businesses. In addition, as hotels begin to resume operations, we are experiencing more competition for hotel guests. At this point, we believe the majority of our group business for 2020 has cancelled or will eventually cancel. Of the group business that has cancelled to date, approximately 23% has rebooked into future periods. While a recovery timeline is highly uncertain, we expect to cautiously resume operations at additional hotels throughout the remainder of 2020. The extent of the effects of the pandemic on our business and the hotel industry at large, however, will ultimately depend on future developments, including, but not limited to, the duration and severity of the pandemic, the development, distribution and administration of a successful vaccine or therapy, the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume. In response to this challenging economic environment, we have focused on maximizing our liquidity. To increase liquidity, we deferred a portion of our planned 2020 non-essential capital improvements to our portfolio. However, we did accelerate specific capital investment projects in order to take advantage of the suspended operations and the low demand environment to perform otherwise extremely disruptive capital projects. During the second quarter of 2020, these projects took place at the Renaissance Orlando at SeaWorld®, the RenaissanceWashington DC and theMarriott Portland , all while adhering to the relevant government regulations and social distancing mandates aimed at both protecting those involved in the construction work and stemming the spread of COVID-19. At the Renaissance Orlando at SeaWorld®, the hotel's closure allowed us to demolish and redesign the hotel's atrium and lobby. At the Renaissance Washington DC, we remodeled the porte-cochere, which will improve traffic flow and the guest's arrival experience. Additionally, at the Renaissance Washington DC, we replaced the escalators that connect all levels of the hotel's meeting space with the lobby, a project that would not be possible with group business in the hotel. At theMarriott Portland , we took advantage of the hotel's closure by completely remodeling the guest rooms, gym, meeting rooms, public space and theM Club . We also converted a majority of the guestroom baths to showers, and will add seven new guestrooms. We expect to complete these capital projects at the three hotels during the third quarter of 2020. InMarch 2020 , we drew$300.0 million under the revolving portion of our amended credit agreement as a precautionary measure to increase our cash position and preserve financial flexibility. We repaid$250.0 million of the outstanding credit facility balance inJune 2020 , after determining that we had sufficient cash on hand in addition to access to our credit facility. AtJune 30, 2020 ,$50.0 million remains outstanding on the revolving portion of our amended credit agreement, with$450.0 million of capacity available for additional borrowing under the agreement. The revolving portion of the amended credit agreement matures onApril 14, 2023 , but may be extended for two six-month periods toApril 2024 , upon the payment of applicable fees and satisfaction of certain customary conditions. As ofJune 30, 2020 , we were not in compliance with our unsecured debt covenants, but had received a temporary waiver of financial covenants pending the completion of a formal amendment. InJuly 2020 , we finalized the amendments to our credit agreement, unsecured term loans and unsecured senior notes, providing covenant relief through the first quarter of 2021, with the first quarterly covenant test as of the period endedJune 30, 2021 . See "Liquidity and Capital Resources" below for additional details. To preserve additional liquidity, we have temporarily suspended both our stock repurchase program and our common stock quarterly dividend. During the first quarter of 2020, we repurchased 9,770,081 shares of our common stock under
our
stock
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repurchase program at an average purchase price of $10.61 per share.
Approximately $400.0 million of authorized capacity remains under our stock
repurchase program. Future repurchases will depend on the effects of COVID-19
and various other factors, including our obligations under our various financing
agreements and capital needs, as well as the price of our common and preferred
stock. On April 15, 2020 , we paid our previously announced first quarter
dividends and distributions which totaled $14.0 million , including $10.8 million
paid to our common stockholders. At this time, we do not expect to pay a
quarterly dividend on our common stock for the remainder of the year. The
resumption in quarterly common dividends will be determined by our Board of
Directors after considering our obligations under our various financing
agreements, projected taxable income, long-term operating projections, expected
capital requirements and risks affecting our business.
We believe that the steps we have taken to increase our cash position and
preserve our financial flexibility, combined with our already strong balance
sheet and our low leverage, will be sufficient to allow us to navigate through
this crisis. We cannot, however, assure you that the assumptions we used to
estimate our liquidity requirements will be correct given that the impact of
COVID-19 on the global market and our hotel operations is unprecedented, and the
magnitude and duration of the COVID-19 pandemic is uncertain. We cannot
accurately estimate its impact on our business, financial condition or
operational results with reasonable certainty; however, we anticipate a net loss
on our operations for the year ending December 31, 2020 .
Operating Activities
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
? Room revenue, which is the product of the number of rooms sold and the average
daily room rate, or "ADR," as defined below;
? Food and beverage revenue, which is comprised of revenue realized in the hotel
food and beverage outlets as well as banquet and catering events; and
Other operating revenue, which includes ancillary hotel revenue and other items
primarily driven by occupancy such as telephone/internet, parking, spa,
facility and resort fees, entertainment and other guest services. Additionally,
? this category includes, among other things, attrition and cancellation revenue,
tenant revenue derived from hotel space and marina slips leased by third
parties, any business interruption proceeds and any performance guarantee or
shortfall payments.
Expenses. Our expenses consist of the following:
? Room expense, which is primarily driven by occupancy and, therefore, has a
significant correlation with room revenue;
Food and beverage expense, which is primarily driven by food and beverage sales
? and banquet and catering bookings and, therefore, has a significant correlation
with food and beverage revenue;
Other operating expense, which includes the corresponding expense of other
? operating revenue, advertising and promotion, repairs and maintenance,
utilities, and franchise 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 noncash operating lease expenses, general excise
tax assessed byHawaii and city taxes imposed bySan 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;
Corporate overhead expense, which includes our corporate-level expenses, such
as payroll, benefits and other employee-related expenses, amortization of
? deferred stock compensation, business acquisition and due diligence expenses,
legal expenses, association, contract and professional fees, board of director
expenses, entity-level state franchise and minimum taxes, travel expenses,
office rent and other customary expenses;
Depreciation and amortization expense, which includes depreciation on our hotel
? buildings, improvements, furniture, fixtures and equipment ("FF&E"), along with
amortization on our finance lease right-of-use assets, franchise fees and
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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-off of any
development costs associated with abandoned projects.
Other Revenue and Expense. Other revenue and expense consists of the following:
Interest and other income, which includes interest we have earned on our
restricted and unrestricted cash accounts, as well as any energy or other
? rebates or property insurance proceeds we have received, miscellaneous income
or any gains or losses we have recognized on sales or redemptions of assets
other than real estate investments;
Interest expense, which includes interest expense incurred on our outstanding
? fixed and variable rate debt and finance lease obligations, gains or losses on
interest rate derivatives, amortization of deferred financing costs, and any
loan fees incurred on our debt;
Income tax benefit (provision), net, which includes federal and state income
taxes related to continuing operations charged to the Company net of any
? refunds received, any adjustments to deferred tax assets, liabilities or
valuation allowance, and any adjustments to unrecognized tax positions, along
with any related interest and penalties incurred;
Loss (income) from consolidated joint venture attributable to noncontrolling
? interest, which includes net loss (income) attributable to a third-party's
25.0% ownership interest in the joint venture that owns the
Bayfront; and
Preferred stock dividends, which includes dividends accrued on our Series E
? Cumulative Redeemable Preferred Stock ("Series E preferred stock") and our
Series F Cumulative Redeemable Preferred Stock ("Series F preferred stock").
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
? Occupancy, which is the quotient of total rooms sold divided by total rooms
available;
? Average daily room rate, or ADR, which is the quotient of room revenue divided
by total rooms sold;
Revenue per available room, or RevPAR, which is the product of occupancy and
? ADR, and does not include food and beverage revenue, or other operating
revenue;
Comparable RevPAR, which we define as the RevPAR generated by hotels we owned
as of the end of the reporting period, but excluding those hotels that we
classified as held for sale, those hotels that are undergoing a material
renovation or repositioning, those hotels whose operations have either been
temporarily suspended or significantly reduced and those hotels whose room
counts have materially changed during either the current or prior year. For
? hotels that were not owned 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 second quarter and first six months of 2020 to the second quarter
and first six months of 2019 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 the
? Bayfront, along with the noncontrolling partner's pro rata share of any
EBITDAre components; amortization of deferred stock compensation; amortization
of favorable and unfavorable contracts; amortization of right-of-use assets and
liabilities; the cash component of ground lease expense for our finance lease
obligations that has been included in interest expense; the
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impact of any gain or loss from undepreciated asset sales or property damage
from natural disasters; any lawsuit settlement costs; prior year property tax
assessments or credits; the write-off of development costs associated with
abandoned projects; property-level restructuring, severance and management
transition costs; and any other nonrecurring identified adjustments;
Funds from operations ("FFO") attributable to common stockholders, which is net
income (loss), excluding: preferred stock dividends; gains and losses from
? sales of property; real estate-related depreciation and amortization (excluding
amortization of deferred financing costs and right-of-use assets); any real
estate-related impairment losses; and the noncontrolling partner's pro rata
share of net income (loss) and any FFO components; and
Adjusted FFO attributable to common stockholders, which is FFO attributable to
common stockholders adjusted to exclude: amortization of favorable and
unfavorable contracts; real estate-related amortization of right-of-use assets
and liabilities; noncash interest on our derivative and 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; the noncontrolling interest's pro rata share of any Adjusted FFO components; and any other nonrecurring identified adjustments.
Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
Demand. The demand for lodging generally fluctuates with the overall economy.
During the first two months of 2020, demand remained stable, with RevPAR at the
20 Hotels declining by 0.1% due to a 0.1% decline in the average daily rate,
while occupancy remained steady at 75.7% as compared to the first two months of
2019. During
and health official mandates in many markets virtually eliminated demand across
? our portfolio. RevPAR at the 20 Hotels declined 98.1% in the second quarter of
2020 as compared to the same period in 2019, with a 56.0% decline in the
average daily rate and an 8,360 basis point decline in occupancy. For the six
months ended
decline in the average daily rate and a 5,120 basis point decline in occupancy.
We cannot predict when or if the demand for our hotel rooms will return to
pre-COVID-19 levels.
Supply. The addition of new competitive hotels affects the ability of existing
hotels to absorb demand for lodging and, therefore, impacts the ability to
drive RevPAR and profits. The development of new hotels is largely driven by
construction costs and expected performance of existing hotels. Prior to the
COVID-19 global pandemic,
? market-by-market basis, some markets experienced new hotel room openings at or
greater than historic levels, including in
rental or sharing services such as Airbnb also affects the ability of existing
hotels to drive RevPAR and profits. We believe that both new hotel construction
and new hotel openings will be delayed or even cancelled in the near-term due
to COVID-19's effect on the economy.
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.
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Operating Results. The following table presents our unaudited operating results
for our total portfolio for the three months ended June 30, 2020 and 2019,
including the amount and percentage change in the results between the two
periods.
Three Months Ended June 30,
2020 2019 Change $ Change %
(in thousands, except statistical data)
REVENUES
Room $ 3,869 $ 208,735 $ (204,866) (98.1) %
Food and beverage 213 75,704 (75,491) (99.7) %
Other operating 6,342 18,457 (12,115) (65.6) %
Total revenues 10,424 302,896 (292,472) (96.6) %
OPERATING EXPENSES
Hotel operating 45,479 164,680 (119,201) (72.4) %
Other property-level expenses 8,736 34,015 (25,279) (74.3) %
Corporate overhead 8,438 8,078 360 4.5 %
Depreciation and amortization 34,539 36,524 (1,985) (5.4) %
Impairment loss 18,100 - 18,100 100.0 %
Total operating expenses 115,292 243,297 (128,005) (52.6) %
Interest and other income 306 4,811 (4,505) (93.6) %
Interest expense (12,950) (15,816) 2,866 18.1 %
(Loss) income before income taxes (117,512) 48,594 (166,106) (341.8) %
Income tax benefit (provision), net 12 (2,676) 2,688 100.4 %
NET (LOSS) INCOME (117,500) 45,918 (163,418) (355.9) %
Loss (income) from consolidated joint
venture attributable to noncontrolling
interest 2,162 (1,955) 4,117 210.6 %
Preferred stock dividends (3,207) (3,207) - - %
(LOSS) INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (118,545) $ 40,756 $ (159,301) (390.9) %
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The following table presents our unaudited operating results for our total
portfolio for the six months ended
Six Months Ended June 30,
2020 2019 Change $ Change %
(in thousands, except statistical data)
REVENUES
Room $ 131,269 $ 380,593 $ (249,324) (65.5) %
Food and beverage 48,203 144,817 (96,614) (66.7) %
Other operating 22,164 35,166 (13,002) (37.0) %
Total revenues 201,636 560,576 (358,940) (64.0) %
OPERATING EXPENSES
Hotel operating 188,988 321,411 (132,423) (41.2) %
Other property-level expenses 37,581 66,855 (29,274) (43.8) %
Corporate overhead 15,832 15,594 238 1.5 %
Depreciation and amortization 71,285 72,911 (1,626) (2.2) %
Impairment losses 133,466 - 133,466 100.0 %
Total operating expenses 447,152 476,771 (29,619) (6.2) %
Interest and other income 2,612 9,735 (7,123) (73.2) %
Interest expense (30,457) (30,142) (315) (1.0) %
(Loss) income before income taxes (273,361) 63,398 (336,759) (531.2) %
Income tax (provision) benefit, net (6,658) 436 (7,094) (1,627.1) %
NET (LOSS) INCOME (280,019) 63,834 (343,853) (538.7) %
Loss (income) from consolidated
joint venture attributable to
noncontrolling interest 2,620 (3,554) 6,174 173.7 %
Preferred stock dividends (6,414) (6,414) - - %
(LOSS) INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (283,813) $ 53,866 $ (337,679) (626.9) %
Operating Statistics. The following table includes comparisons of the key operating metrics for the 20 Hotels.
Three Months Ended June 30,
2020 2019 Change
Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR
20 Hotels 3.7 % $ 107.78 $ 3.99 87.3 % $ 244.99 $ 213.88 (8,360) bps (56.0) % (98.1) %
Six Months Ended June 30,
2020 2019 Change
Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR
20 Hotels 31.9 % $ 213.03 $ 67.96 83.1 % $ 235.61 $ 195.79 (5,120) bps (9.6) % (65.3) %
Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:
COVID-19: In response to the COVID-19 outbreak, we temporarily suspended
operations at 11 of the 20 Hotels in
2020, we temporarily suspended operations at an additional four hotels. As of
?
hotels are running at significantly reduced capacity, with limited food and
beverage and ancillary offerings. As a result, our revenues and operating
expenses for the three and six months ended
impacted as hotel demand has been decimated by the COVID-19 outbreak.
Property Disposition: We sold the Courtyard by
? "Courtyard") in
decreased for the three and six months ended
same periods in 2019. Room revenue. Room revenue decreased$204.9 million , or 98.1%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 as follows:
? Room revenue at the 20 Hotels decreased
? The sale of the Courtyard caused room revenue to decrease by
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Room revenue decreased
? Room revenue at the 20 Hotels decreased
? The sale of the Courtyard caused room revenue to decrease by
Food and beverage revenue. Food and beverage revenue decreased$75.5 million , or 99.7%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 as follows:
? Food and beverage revenue at the 20 Hotels decreased
? The sale of the Courtyard caused food and beverage revenue to decrease by
million.
Food and beverage revenue decreased
? Food and beverage revenue at the 20 Hotels decreased
decrease,
? The sale of the Courtyard caused food and beverage revenue to decrease by
million. Other operating revenue. Other operating revenue decreased$12.1 million , or 65.6%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 as follows:
Other operating revenue at the 20 Hotels decreased
? in other operating revenue at the 20 Hotels was partially offset by a
million shortfall payment to offset net losses at the
Francisco as stipulated by the hotel's operating agreement.
? The sale of the Courtyard caused other operating revenue to decrease by
million.
Other operating revenue decreased
Other operating revenue at the 20 Hotels decreased
decrease,
? in other operating revenue at the 20 Hotels was partially offset by a
million shortfall payment to offset net losses at the
Francisco as stipulated by the hotel's operating agreement.
? The sale of the Courtyard caused other operating revenue to decrease by
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 decreased$119.2 million , or 72.4%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 as follows:
Hotel operating expenses at the 20 Hotels decreased
? operating expenses in the second quarter of 2020 include
COVID-19-related expenses consisting of additional wages, benefits and
severance for furloughed or laid off hotel employees.
? The sale of the Courtyard caused hotel operating expenses to decrease by
million.
Hotel operating expenses decreased
Hotel operating expenses at the 20 Hotels decreased
decrease,
? operating expenses in the first six months of 2020 include
COVID-19-related expenses consisting of additional wages, benefits and
severance for furloughed or laid off hotel employees.
? The sale of the Courtyard caused hotel operating expenses to decrease by
million. Other property-level expenses. Other property-level expenses decreased$25.3 million , or 74.3%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 as follows:
Other property-level expenses at the 20 Hotels decreased
property-level expenses in the second quarter of 2020 include a
? labor dispute expense at the
a total net reduction of
the 20 Hotels, consisting of additional wages, benefits and severance for
furloughed or laid off hotel employees.
? The sale of the Courtyard caused other property-level expenses to decrease by$0.4 million . 34 Table of Contents Other property-level expenses decreased$29.3 million , or 43.8%, for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 as follows:
Other property-level expenses at the 20 Hotels decreased
decrease,
? property-level expenses in the first six months of 2020 include a
labor dispute expense at the
COVID-19-related expenses at the 20 Hotels, consisting of additional wages,
benefits and severance for furloughed or laid off hotel employees.
? The sale of the Courtyard caused other property-level expenses to decrease by
$0.7 million . Corporate overhead expense. Corporate overhead expense increased$0.4 million , or 4.5%, during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 , due to increased payroll and related expenses, deferred stock compensation, due diligence expenses and legal fees, partially offset by decreased travel expenses. Excluding due diligence expenses related to the sale of the Renaissance Harborplace, corporate overhead expense increased$0.2 million , or 2.2%, in the second quarter of 2020 as compared to the same period in 2019. For the six months endedJune 30, 2020 , corporate overhead expense increased$0.2 million , or 1.5%, as compared to the six months endedJune 30, 2019 , due to increased deferred stock compensation, due diligence expenses and legal fees, partially offset by decreased payroll and related expenses and travel expenses. Excluding deferred stock compensation and due diligence expenses related to the sale of the Renaissance Harborplace, corporate overhead expense decreased$0.2 million , or 2.0%, in the first six months of 2020 as compared to the same period in 2019. Depreciation and amortization expense. Depreciation and amortization expense decreased$2.0 million , or 5.4%, during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 as follows:
Depreciation and amortization expense generated by the 20 Hotels decreased
? million as we impaired the depreciable assets at two of our hotels by
million during the first quarter of 2020. This decrease was partially offset by
increased depreciation and amortization at our newly renovated hotels.
? The sale of the Courtyard caused depreciation and amortization to decrease by
$0.3 million . Depreciation and amortization expense decreased$1.6 million , or 2.2%, during the six months endedJune 30, 2020 as compared to the six months ended June
30, 2019 as follows:
Depreciation and amortization expense generated by the 20 Hotels decreased
? million due to the same reasons noted above in the discussion regarding the
second quarter.
? The sale of the Courtyard caused depreciation and amortization to decrease by
$0.5 million . Impairment losses. Impairment losses totaled$18.1 million and$133.5 million for the three and six months endedJune 30, 2020 , respectively, and zero for both the three and six months endedJune 30, 2019 . During the second quarter of 2020, we recorded an impairment loss of$18.1 million on the Renaissance Harborplace. During the first quarter of 2020, we recorded impairment losses of$107.9 million on theHilton Times Square and$5.2 million on the RenaissanceWestchester . In addition, we recorded an impairment loss of$2.3 million related to the abandonment of a potential project to expand one of our hotels. Interest and other income. Interest and other income decreased$4.5 million , or 93.6%, during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 , due to declines in both interest rates and other income. During the second quarter of 2020, we recognized$0.3 million in interest income. During the second quarter of 2019, we recognized$3.8 million in interest and miscellaneous income,$0.9 million related to a contingency funding payment received from the prior owner of one of our hotels and$0.1 million in vendor rebates and other miscellaneous income. For the six months endedJune 30, 2020 , interest and other income decreased$7.1 million , or 73.2%, as compared to the six months endedJune 30, 2019 , due to declines in both interest rates and other income. During the first six months of 2020, we recognized$2.4 million in interest income and$0.2 million in energy rebates due to energy efficient renovations at our hotels.
During the first six months of 2019, we recognized
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Interest expense. We incurred interest expense as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Interest expense on debt and
finance lease obligations $ 12,037 $ 11,484 $ 22,765 $ 22,993
Noncash interest on derivatives
and finance lease obligations,
net 216 3,634 6,296 5,753
Amortization of deferred
financing costs 697 698 1,396 1,396
Total interest expense $ 12,950 $ 15,816 $ 30,457 $ 30,142 Interest expense decreased$2.9 million , or 18.1%, during the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 , and increased$0.3 million , or 1.0%, during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . Noncash changes in the fair market value of our derivatives caused interest expense to decrease$3.4 million in the second quarter of 2020 as compared to the same period in 2019. Excluding the noncash impact from changes in the fair market values of our derivatives, interest expense would have increased$0.5 million in the second quarter of 2020 as compared to the same period in 2019 due to$0.8 million in default interest recorded in the second quarter of 2020 on the debt secured by theHilton Times Square combined with increased interest due to the draw on our credit facility, partially offset by decreased interest on our lower debt balances and lower interest on our variable rate debt. While we are required to record such default interest, recovery of default interest is non-recourse to the Company, and thus we do not intend to actually fund default interest as part of the ultimate resolution with the lender. Noncash changes in the fair market value of our derivatives caused interest expense to increase$0.5 million in the first six months of 2020 as compared to the same period in 2019. Excluding the noncash impact from changes in the fair market values of our derivatives, interest expense would have decreased$0.2 million in the first six months of 2020 as compared to the same period in 2019 due to lower debt balances and lower interest on our variable rate debt, partially offset by$0.8 million in default interest recorded in the second quarter of 2020 on the debt secured by theHilton Times Square combined with increased interest due to the draw on our credit facility. While we are required to record such default interest, recovery of default interest is non-recourse to the Company, and thus we do not intend to actually fund default interest as part of the ultimate resolution with the lender. Our weighted average interest rate per annum, including our variable rate debt obligations, was approximately 3.6% and 4.2% atJune 30, 2020 and 2019, respectively. Approximately 73.6% and 77.5% of our outstanding notes payable had fixed interest rates atJune 30, 2020 and 2019, respectively.
Income tax benefit (provision), net. Income tax benefit (provision), net was incurred as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019Current income tax benefit (provision), net$ 12 $ (28) $ 757$ (200) Deferred income tax (provision) benefit, net - (2,648) - 636 Change in deferred tax asset valuation allowance - - (7,415) -
Total income tax benefit (provision), net
(2,676)$ (6,658) $ 436 We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and theOperating Partnership may also be subject to various state and local income taxes. During the second quarter and first six months of 2020, we recognized a nominal amount 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 six months endedJune 30, 2020 , we recorded a full valuation allowance of$7.4 million on our deferred tax assets because, due to uncertainties regarding how long the COVID-19 outbreak will last or what the long-term impact will be on our hotel operations, we can no longer be assured that we will be able to realize these assets. During the second quarter and first six months of 2019, we recognized a deferred income tax provision of$2.6 million and a deferred income tax benefit of$0.6 million , respectively, related to adjustments to our deferred tax assets, net. During the second quarter and first six months of 2019, we also recognized a nominal amount and$0.2 million , respectively, of combined current federal and state income tax expense based on 2019 projected taxable income net of operating loss carryforwards for our taxable entities. 36 Table of Contents Loss (income) from consolidated joint venture attributable to noncontrolling interest. Loss (income) from consolidated joint venture attributable to noncontrolling interest, which represents the outside 25.0% interest in the entity that owns theHilton San Diego Bayfront , totaled a loss of$2.2 million and income of$2.0 million for the three months endedJune 30, 2020 and 2019, respectively, and a loss of$2.6 million and income of$3.6 million for the six months endedJune 30, 2020 and 2019, respectively. Preferred stock dividends. Preferred stock dividends totaled$3.2 million for both the three months endedJune 30, 2020 and 2019, and$6.4 million for both the six months endedJune 30, 2020 and 2019. 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 theNational Association of Real Estate Investment Trusts ("NAREIT"), as defined in itsSeptember 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate." We believe EBITDAre is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates. We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDAre, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor's complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions. We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre, excluding noncontrolling interest:
Amortization of deferred stock compensation: we exclude the noncash expense
? incurred with the amortization of deferred stock compensation as this expense
is based on historical stock prices at the date of grant to our corporate
employees and does not reflect the underlying performance of our hotels.
Amortization of favorable and unfavorable contracts: we exclude the noncash
amortization of the favorable management contract asset recorded in conjunction
with our acquisition of the
Mile, along with the favorable and unfavorable tenant lease contracts, as
? applicable, recorded in conjunction with our acquisitions of the
Plaza, the
Regency
amortization of favorable and unfavorable contracts because it is based on
historical cost accounting and is of lesser significance in evaluating our
actual performance for the current period.
Amortization of right-of-use assets and liabilities: we exclude the
? amortization of our right-of-use assets and liabilities, as these expenses are
based on historical cost accounting and do not reflect the actual rent amounts
due to the respective lessors or the underlying performance of our hotels.
Finance lease obligation interest - cash ground rent: we include an adjustment
for the cash finance lease expenses recorded on the building lease at the Hyatt
Centric Chicago Magnificent Mile and the ground lease at the Courtyard by
? that both of these leases are finance leases, and, therefore, we include a
portion of the lease payments each month in interest expense. We adjust
EBITDAre for these two finance leases in order to more accurately reflect the
actual rent due to both hotels' lessors in the current period, as well as the
operating performance of both hotels.
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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 completed acquisitions
? that meet the definition of a business are expensed in the year incurred. We
exclude the effect of these costs because we believe they are not reflective of
the ongoing performance of the Company or our hotels.
Noncontrolling interest: we exclude the noncontrolling partner's pro rata share
? of the net (income) loss allocated to the
partnership, as well as the noncontrolling partner's pro rata share of any
EBITDAre and Adjusted EBITDAre components.
Cumulative effect of a change in accounting principle: from time to time, the
FASB promulgates new accounting standards that require the consolidated
? statement of operations to reflect the cumulative effect of a change in
accounting principle. We exclude these one-time adjustments, which include the
accounting impact from prior periods, because they do not reflect our actual
performance for that period.
Other adjustments: we exclude other adjustments that we believe are outside the
ordinary course of business because we do not believe these costs reflect our
actual performance for that period and/or the ongoing operations of our hotels.
? Such items may include: lawsuit settlement costs; prior year property tax
assessments or credits; the write-off of development costs associated with
abandoned projects; property-level restructuring, severance and management
transition costs; lease terminations; and property insurance proceeds or uninsured losses.
The following table reconciles our unaudited net (loss) income to EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest for our total portfolio for the three and six months endedJune 30, 2020 and 2019 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net (loss) income$ (117,500) $ 45,918 $ (280,019) $ 63,834 Operations held for investment: Depreciation and amortization 34,539 36,524 71,285 72,911 Interest expense 12,950 15,816 30,457 30,142 Income tax (benefit) provision, net (12) 2,676 6,658 (436) Impairment loss - hotel properties 18,100 - 131,164 - EBITDAre (51,923)
100,934 (40,455) 166,451
Operations held for investment: Amortization of deferred stock compensation 3,064 2,900 5,271 5,022 Amortization of right-of-use assets and liabilities (332) (251) (593) (270) Finance lease obligation interest - cash ground rent (351) (590) (702) (1,179) Property-level severance 1,113 - 1,113 - Prior year property tax adjustments, net 307 109 226 298 Prior owner contingency funding - (900) - (900) Impairment loss - abandoned development costs - - 2,302 - Noncontrolling interest: Loss (income) from consolidated joint venture attributable to noncontrolling interest 2,162 (1,955) 2,620 (3,554) Depreciation and amortization (806) (640) (1,610) (1,279) Interest expense (306) (558) (726) (1,118) Amortization of right-of-use asset and liability 73 73 145 145 Impairment loss - abandoned development costs - - (449) - Adjustments to EBITDAre, net 4,924 (1,812) 7,597 (2,835) Adjusted EBITDAre, excluding noncontrolling interest$ (46,999) $ 99,122 $ (32,858) $ 163,616 38 Table of Contents Adjusted EBITDAre, excluding noncontrolling interest decreased$146.1 million , or 147.4%, and$196.5 million , or 120.1%, in the second quarter and first six months of 2020, respectively, as compared to the same periods in 2019 primarily due to the following:
For the second quarter and first six months of 2020 Adjusted EBITDAre at the 20
Hotels decreased
respectively, as compared to the same periods in 2019. The Company recorded
quarter and first six months of 2020, respectively, consisting of additional
? wages, benefits and severance for furloughed or laid off hotel employees. In
addition, during the second quarter of 2020, the Company recorded a
million labor dispute expense at the
expenses were partially offset by a
net losses at the
operating agreement.
The sale of the Courtyard caused Adjusted EBITDAre to decrease by
? and
respectively, as compared to the same periods of 2019.
Prior to the COVID-19 outbreak, Adjusted EBITDAre at the 20 Hotels decreased
?
period in 2019.
We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the NAREIT definition of "FFO applicable to common shares." Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
Amortization of favorable and unfavorable contracts: we exclude the noncash
amortization of the favorable management contract asset recorded in conjunction
with our acquisition of the
Mile, along with the favorable and unfavorable tenant lease contracts, as
? applicable, recorded in conjunction with our acquisitions of the
Plaza, the
Regency
amortization of favorable and unfavorable contracts because it is based on
historical cost accounting and is of lesser significance in evaluating our
actual performance for the current period.
Real estate amortization of right-of-use assets and liabilities: we exclude the
amortization of our real estate right-of-use assets and liabilities, which
? includes the amortization of both our finance and operating lease intangibles
(with the exception of our corporate operating lease), as these expenses are
based on historical cost accounting and do not reflect the actual rent amounts
due to the respective lessors or the underlying performance of our hotels.
Gains or losses from debt transactions: we exclude the effect of finance
charges and premiums associated with the extinguishment of debt, including the
? acceleration of deferred financing costs from the original issuance of the debt
being redeemed or retired, as well as the noncash interest on our derivatives
and finance lease obligations. We believe that these items are not reflective
of our ongoing finance costs.
Acquisition costs: under GAAP, costs associated with completed acquisitions
? that meet the definition of a business are expensed in the year incurred. We
exclude the effect of these costs because we believe they are not reflective of
the ongoing performance of the Company or our hotels.
Noncontrolling interest: we deduct the noncontrolling partner's pro rata share
? of any FFO adjustments related to our consolidated
partnership.
Cumulative effect of a change in accounting principle: from time to time, the
FASB promulgates new accounting standards that require the consolidated
? statement of operations to reflect the cumulative effect of a change in
accounting principle. We exclude these one-time adjustments, which include the
accounting impact from prior periods, because they do not reflect our actual
performance for that period.
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Other adjustments: we exclude other adjustments that we believe are outside the
ordinary course of business because we do not believe these costs reflect our
actual performance for that period and/or the ongoing operations of our hotels.
Such items may include: lawsuit settlement costs; prior year property tax
assessments or credits; the write-off of development costs associated with
? abandoned projects; changes to deferred tax assets, liabilities or valuation
allowances; property-level restructuring, severance and management transition
costs; lease terminations; property insurance proceeds or uninsured losses; and
income tax benefits or provisions associated with the application of net
operating loss carryforwards, uncertain tax positions or with the sale of
assets other than real estate investments.
The following table reconciles our unaudited net (loss) income to FFO
attributable to common stockholders and Adjusted FFO attributable to common
stockholders for our total portfolio for the three and six months ended
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