DIAMONDROCK HOSPITALITY COMPANY The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements about our business. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in "Special Note About Forward-Looking Statements" and "Risk Factors" contained in this Annual Report on Form 10-K and in our other reports that we file from time to time with theSEC .
Overview
DiamondRock Hospitality Company is a lodging-focused real estate company operating as a REIT for federal income tax purposes that owns a portfolio of premium hotels and resorts. As ofDecember 31, 2021 , we owned a portfolio of 32 premium hotels and resorts that contain 9,349 guest rooms located in 22 different markets inNorth America . OnJanuary 6, 2022 , we acquired theTranquility Bay Beachfront Resort inMarathon, Florida . As an owner, rather than an operator, of lodging properties, we receive all of the operating profits or losses generated by our hotels after the payment of fees due to hotel managers and hotel brands, which are calculated based on the revenues and profitability of each hotel.
Key Indicators of Financial Condition and Operating Performance
We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance withU.S. Generally Accepted Accounting Principles ("U.S. GAAP"), as well as other financial information that is not prepared in accordance withU.S. GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:
•Occupancy percentage;
•Average Daily Rate (or ADR);
•Rooms Revenue per
•Earnings Before Interest, Income Taxes, Depreciation and Amortization (or EBITDA), Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate (or EBITDAre), and Adjusted EBITDA; and
•Funds From Operations (or FFO) and Adjusted FFO.
Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 70% of our total revenues for the year endedDecember 31, 2021 and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms. Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such asU.S. economic conditions generally, regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, increased use of lodging alternatives, new hotel construction and the pricing strategies of competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of our hotels' global brands. -44- -------------------------------------------------------------------------------- Table of Contents We also use EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO as measures of the financial performance of our business. See "Non-GAAP Financial Measures."
COVID-19 Pandemic
COVID-19 has had and continues to have a significant effect on our industry and our business. The demand for lodging materially decreased beginning inMarch 2020 and, as a result of pandemic-induced government mandates and health official recommendations, twenty of our hotels suspended operations for a period of time in 2020. Four of our hotels suspended operations for a period of time in 2021. As ofDecember 31, 2021 , all of our hotels were open. The COVID-19 pandemic showed signs of moderating in the first half of 2021; however, case counts increased in the second half of 2021 with the emergence of the Delta and Omicron variants. Whereas demand at our leisure-focused hotels improved in 2021, demand at our other hotels remains at historically low levels. Therefore, we expect the COVID-19 pandemic will continue to have a material adverse impact on our results of operations, financial position and cash flow in 2022.
The effectiveness and wide distribution of COVID-19 vaccines have generally reduced the spread and severity of COVID-19 infections. We believe improved global distribution of the vaccine is likely to positively impact the timing, pace, and extent of a lodging demand recovery. The emergence of new variant strains of COVID-19, however, has the potential to slow or reverse these expected positive trends in 2022 and beyond.
See also "Risk Factors" in Part I, Item 1A of this report.
Overview of 2021
Key highlights for 2021 include the following:
Hotel Dispositions . OnApril 30, 2021 , we sold a wholly owned subsidiary of the Company that owned Frenchman's Reef for$35.0 million in cash upon closing, as well as a participation right in the future profits of the hotel once certain return metrics are achieved. OnJune 30, 2021 , we soldThe Lexington Hotel for$185.3 million .Hotel Acquisitions . OnJuly 29, 2021 , we acquired theBourbon Orleans Hotel located inNew Orleans, Louisiana , for net consideration of$90.1 million , including prorations and transaction costs. OnJuly 30, 2021 , we acquired theHenderson Park Inn located inDestin, Florida , for net consideration of$26.4 million , including prorations and transaction costs. OnDecember 23, 2021 , we acquired theHenderson Beach Resort located inDestin, Florida , for net consideration of$110.1 million , including prorations and transaction costs. Financing Activity. OnDecember 27, 2021 , we extended the mortgage loan secured by theSalt Lake City Marriott Downtown atCity Creek . The loan now matures inJanuary 2023 . Outlook for 2022 TheU.S. economy continues to recover from a severe global pandemic that disproportionately impacted hospitality industries. Broad economic measures such as Gross Domestic Product (GDP) and corporate profits have surpassed their pre-pandemic levels and the unemployment rate is again approaching a 50-year low. Travel demand, however, has yet to reattain pre-pandemic levels of activity but continues to show steady improvement. We expect theU.S. will experience RevPAR growth in 2022 from 2021 due to continued strength in leisure travel and an emerging recovery in corporate travel facilitated by COVID-19 protocols and widespread vaccination of eligible individuals. Our portfolio is composed primarily of luxury and upper-upscale resorts and hotels located in popular leisure destinations and major urban markets. We expect our destination hotels will continue to outperform the broader U.S. market for the foreseeable future. The strong consumer preference for drive-to leisure destinations is expected to persist into 2022. Longer term, we believe robust secular demand for experiential leisure travel, low growth in directly competitive supply, and targeted investments to renovate and reposition destination hotels can extend and intensify our growth. We believe urban hotels should also experience strong growth in 2022 and could outpace theU.S. overall as employers encourage return-to-office and business travel for their employees. Business travel activity increased slowly, but steadily, from depressed levels throughout 2021, and early indications suggest growth will accelerate in mid-2022. Group room nights on the books at the beginning of 2022 is nearly 40% above group room nights realized in 2021, which is approximately 75% of our average bookings in a typical, pre-pandemic year. We anticipate industry profitability will be challenged by a short booking window and guest mix that makes it -45- -------------------------------------------------------------------------------- Table of Contents challenging to maximize room rates as well as pressure on labor costs due to labor scarcity. We continue to work closely with our hotel managers to maximize revenue and identify operating efficiencies. We expect the resumption of corporate travel will enable the industry to materially improve profitability in 2022 and we enter the year with several favorable factors, including the following: (1) ownership of a high-quality portfolio, with a meaningful concentration in destination resort locations, (2) internal growth from five recent or pending hotel upbrandings, (3) internal growth from the continuation of our asset management initiatives and ROI projects, (4) expense savings from the conversion of six formerly Marriott-managed contracts to Marriott franchises, (5) conservative debt capital structure with limited near-term debt maturities, and (6) liquidity of$441.3 million as ofDecember 31, 2021 .
Results of Operations
The following table sets forth certain operating information for the year endedDecember 31, 2021 for each of the hotels we owned during 2021. The table indicates the operating status of each hotel and the occupancy percentage, ADR and RevPAR for each hotel for the portion of the year endedDecember 31, 2021 that the hotel was open and owned by the Company.
Hotels Open Throughout the Year Ended
% Change
Number of from 2020
Property Location Rooms Occupancy (%) ADR ($) RevPAR($) RevPAR
Westin Boston Seaport
District (1) Boston, Massachusetts 793 44.6 % 196.14 87.51 152.0 %
Salt Lake City Marriott
Downtown at City Creek Salt Lake City, Utah 510 43.3 % $ 145.42 $ 63.04 89.1 %
Worthington Renaissance
Fort Worth Hotel Fort Worth, Texas 504 53.6 % 155.68 83.37 65.7 %
Westin San Diego Downtown San Diego, California 436 52.5 % 159.11 83.49 39.1 %
Westin Fort Lauderdale
Beach Resort Fort Lauderdale, Florida 433 60.3 % 242.16 146.01 64.1 %
Westin Washington D.C .
City Center Washington, D.C. 410 29.5 % 150.37 44.34 28.0 %
Hilton Boston
Downtown/Faneuil Hall (1) Boston, Massachusetts 403 60.2 % 204.39 122.97 201.2 %
The Hythe Vail, a Luxury
Collection Resort
(formerly the Vail
Marriott Mountain Resort )
(1) Vail, Colorado 344 45.2 % 356.33 161.20 34.9 %
Courtyard New York
Manhattan /Midtown East New York, New York 321 76.9 % 201.68 155.12 91.6 %
Atlanta Marriott
Alpharetta Atlanta, Georgia 318 44.9 % 113.77 51.14 63.7 %
The Gwen Hotel (1) Chicago, Illinois 311 54.3 % 251.51 136.68 183.0 %
Bethesda Marriott Suites Bethesda, Maryland 272 34.6 % 113.93 39.37 26.0 %
Hilton Burlington Lake
Champlain (1) Burlington, Vermont 258 60.8 % 236.55 143.78 327.3 %
Hotel Palomar Phoenix (1) Phoenix, Arizona 242 58.8 % 169.73 99.73 58.4 %
Bourbon Orleans Hotel (2) New Orleans, Louisiana 218 55.3 % 219.19 121.25 N/A
Henderson Beach Resort (3) Destin, Florida 216 55.9 % 437.94 244.88 264.3 %
JW Marriott Denver Cherry
Creek (1) Denver, Colorado 199 63.9 % 261.17 166.79 126.5 %
Margaritaville Beach House
Key West (formerly the
Barbary Beach House Key
West ) (1) Key West, Florida 186 84.6 % 384.58 325.51 173.8 %
The Lodge at Sonoma Resort
(1) Sonoma, California 182 59.2 % 360.12 213.28 204.9 %
Courtyard Denver Downtown
(1) Denver, Colorado 177 60.0 % 156.54 93.99 163.0 %
Renaissance Charleston
Historic District Hotel Charleston, South Carolina 167 81.5 % 308.52 251.36 159.7 %
Kimpton Shorebreak Resort Huntington Beach, California 157 66.9 % 311.01 208.15 69.0 %
Cavallo Point , The Lodge
at the Golden Gate (1) Sausalito, California 142 45.5 % 652.13 296.95 144.9 %
Havana Cabana Key West (1) Key West, Florida 106 90.2 % 285.74 257.78 104.2 %
Hotel Emblem San Francisco
(1) San Francisco, California 96 44.5 % 158.29 70.38 34.3 %
L'Auberge de Sedona Sedona, Arizona 88 80.0 % 920.04 736.34 70.3 %
-46--------------------------------------------------------------------------------- Table of Contents The Landing Lake Tahoe Resort South Lake Tahoe, & Spa (1)California 82 45.0 % 484.40 217.76 13.9 %Orchards Inn Sedona (1)Sedona, Arizona 70 71.8 % 304.71 218.91 87.3 %Henderson Park Inn (4)Destin, Florida 37 82.8 % 575.63 476.67 16.2 % TOTAL/WEIGHTED AVERAGE FOR OPEN HOTELS 7,678 54.3 %$ 242.87 $ 131.80 98.8 %
Hotels Closed for a Portion of the Year Ended
Number of % Change
Property Location Date of Closure Date of Reopening Rooms Occupancy (%) ADR ($) RevPAR ($) from 2020 RevPAR
Chicago Marriott Downtown 4/10/2020 9/1/2020
Magnificent Mile (1) Chicago, Illinois 1/3/2021 4/15/2021 1,200 31.2 % $ 197.29 $ 61.53 199.0 %
The Lexington Hotel (1) (5) New York, New York 3/29/2020 - 725 - % - - (100.0) %
Hilton Garden Inn New
York/Times Square Central (1) New York, New York 3/29/2020 5/3/2021 282 57.0 % 204.33 116.51 294.5 %
Courtyard New York
Manhattan/Fifth Avenue (1) New York, New York 3/27/2020 6/1/2021 189 54.3 % 211.93 115.08 264.5 %
TOTAL/WEIGHTED AVERAGE FOR
CLOSED HOTELS 2,396 33.0 % 201.42 66.40 116.7 %
TOTAL/WEIGHTED AVERAGE 10,074 49.8 % $ 237.13 $ 118.15 100.8 %
________________
(1)Operations were suspended for a portion of the year ended December 31, 2020 .
(2)The operating statistics reflect our ownership period from July 29, 2021 to
December 31, 2021 . The hotel was closed during the comparable period in 2020.
(3)The operating statistics reflect our ownership period from December 23, 2021
to December 31, 2021 .
(4)The operating statistics reflect our ownership period from July 30, 2021 to
December 31, 2021 .
(5)The hotel was sold on June 30, 2021 . The operating statistics reflect the
period from January 1, 2021 to June 30, 2021 .
Comparison of the Year Ended
Our results of operations for the year endedDecember 31, 2021 improved relative to the year endedDecember 31, 2020 as all but four of our hotels were open for the entire year and theU.S. economy recovered from the impacts of COVID-19, government mandates eased, vaccines were distributed, and travel increased.
Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (in millions):
Year Ended December 31,
2021 2020 % Change
Rooms $ 399.1 $ 196.7 102.8 %
Food and beverage 117.7 68.6 71.7
Other 50.3 34.2 47.1
Total revenues $ 567.1 $ 299.5 89.3 %
Our total revenues increased
The following are key hotel operating statistics for the years endedDecember 31, 2021 and 2020. The 2020 amounts reflect the period in 2020 comparable to our ownership period in 2021 for our dispositions of Frenchman'sReef and The Lexington Hotel and the acquisitions of theBourbon Orleans Hotel ,Henderson Park Inn , andHenderson Beach Resort . -47- --------------------------------------------------------------------------------
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Year Ended December 31,
2021 2020 % Change
Occupancy % 49.8 % 28.1 % 21.7 %
ADR $ 237.13 $ 209.10 13.4 %
RevPAR $ 118.15 $ 58.83 100.8 %
Food and beverage revenues increased
Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased$16.1 million from the year endedDecember 31, 2020 , primarily due to an increase in resort fees and parking. Hotel operating expenses. The operating expenses consisted of the following (in millions): Year Ended December 31, 2021 2020 % Change Rooms departmental expenses$ 102.2 $ 68.6 49.0 % Food and beverage departmental expenses 89.8 58.4 53.8 Other departmental expenses 12.3 8.3 48.2 General and administrative 58.9 45.0 30.9 Utilities 18.3 16.0 14.4 Repairs and maintenance 30.7 24.1 27.4 Sales and marketing 37.7 28.7 31.4 Franchise fees 18.7 10.1 85.1 Base management fees 9.7 3.6 169.4 Incentive management fees 0.5 - 100.0 Property taxes 50.5 54.5 (7.3) Other fixed charges 19.4 17.0 14.1 Severance costs (0.1) 7.6 (101.3)
Professional fees and pre-opening costs related to Frenchman's Reef
1.4 1.0 40.0
Lease expense (cash and non-cash) 11.7 11.4 2.6
Total hotel operating expenses $ 461.7 $ 354.3 30.3 %
Our hotel operating expenses increased $107.4 million from $354.3 million for
the year ended December 31, 2020 to $461.7 million for the year ended
December 31, 2021 . For the year ended December 31, 2020 , we recognized $7.6
million of severance costs at our properties in connection with the COVID-19
pandemic.
Depreciation and amortization. Our depreciation and amortization expense
decreased $11.8 million from the year ended December 31, 2020 . This is primarily
due to the timing of fully depreciated capital expenditures and the sale of The
Lexington Hotel on June 30, 2021 .
Impairment losses. During the year ended December 31, 2021 , we recorded
impairment losses of $11.5 million related to Frenchman's Reef, which was sold
on April 30, 2021 , and $115.2 million related to The Lexington Hotel , which was
sold on June 30, 2021 . During the year ended December 31, 2020 , we recorded an
impairment loss of $174.1 million related to Frenchman's Reef.
Corporate expenses. Corporate expenses principally consist of employee-related
costs, including base payroll, bonus and restricted stock. Corporate expenses
also include corporate operating costs, professional fees and directors' fees.
Our corporate expenses increased $5.2 million , from $27.4 million for the year
ended December 31, 2020 to $32.6 million for the year ended December 31, 2021 .
The increase is primarily due to an increase in employee-related compensation
and other employee-related expenses.
Business interruption insurance income. For the year ended December 31, 2021 , we
recognized $0.7 million of business interruption insurance income related to the
Caldor wildfires at The Landing Lake Tahoe Resort & Spa , which caused the hotel
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to be closed for 21 days. For the year ended December 31, 2020 , we recognized
$2.2 million of business interruption insurance income related to lost revenue
at the Westin Boston Seaport District due to the COVID-19 pandemic.
Interest expense. Our interest expense was $37.0 million and $54.0 million for
the years ended December 31, 2021 and December 31, 2020 , respectively, and is
comprised of the following (in millions):
Year Ended December 31,
2021 2020
Mortgage debt interest $ 24.9 $ 26.2
Term loan interest 14.8 13.4
Credit facility interest and unused fees 2.4 4.5
Amortization of debt issuance costs and debt premium 2.6
2.0
Capitalized interest -
(2.1)
Interest rate swap mark-to-market (7.7) 10.0
$ 37.0 $ 54.0
The decrease in interest expense is primarily related to the mark-to-market of
our interest rate swaps and lower average outstanding borrowings on our credit
facility in 2021, partially offset by the cessation of interest capitalization
due to ceasing reconstruction of Frenchman's Reef.
Income taxes. We recorded income tax expense of $3.3 million in 2021 and income
tax benefit of $26.5 million in 2020. The 2021 income tax expense was incurred
on the $39.5 million pre-tax income of our TRSs. The 2021 income tax provision
includes a valuation allowance of $1.4 million . The 2020 income tax benefit is
net of a valuation allowance of $24.9 million . These valuation allowances were
recognized based on assessments of our ability to utilize our net operating loss
carryforwards in future years.
Comparison of the Year Ended
In response to the COVID-19 pandemic, we suspended operations at 20 of our 30 previously operating hotels for a portion of the year endedDecember 31, 2020 . Seventeen of these hotels reopened byDecember 31, 2020 . Three of our previously operating hotels were closed as ofDecember 31, 2020 .
Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (in millions):
Year Ended December 31,
2020 2019 % Change
Rooms $ 196.7 $ 661.2 (70.2) %
Food and beverage 68.6 215.3 (68.1)
Other 34.2 61.6 (44.5)
Total revenues $ 299.5 $ 938.1 (68.1) %
Our total revenues decreased
The following are key hotel operating statistics for the years endedDecember 31, 2020 and 2019. Year Ended December 31, 2020 2019 % Change Occupancy % 27.0 % 79.1 % (52.1) % ADR$ 207.68 $ 238.63 (13.0) % RevPAR$ 55.99 $ 188.75 (70.3) %
Food and beverage revenues decreased
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Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, decreased$27.4 million from the year endedDecember 31, 2019 . Hotel operating expenses. The operating expenses consisted of the following (in millions): Year Ended December 31, 2020 2019 % Change Rooms departmental expenses$ 68.6 $ 166.9 (58.9) % Food and beverage departmental expenses 58.4 137.9 (57.7) Other departmental expenses 8.3 15.7 (47.1) General and administrative 45.0 83.3 (46.0) Utilities 16.0 20.6 (22.3) Repairs and maintenance 24.1 35.3 (31.7) Sales and marketing 28.7 66.9 (57.1) Franchise fees 10.1 26.9 (62.5) Base management fees 3.6 19.8 (81.8) Incentive management fees - 5.7 (100.0) Property taxes 54.5 57.6 (5.4) Other fixed charges 17.0 23.7 (28.3) Severance costs 7.6 - 100.0
Professional fees and pre-opening costs related to Frenchman's Reef
1.0 17.8 (94.4)
Lease expense (cash and non-cash) 11.4 12.7 (10.2)
Total hotel operating expenses $ 354.3 $ 690.8 (48.7) %
Our hotel operating expenses decreased $336.5 million from $690.8 million for
the year ended December 31, 2019 to $354.3 million for the year ended December
31, 2020 . For the year ended December 31, 2020 , we recognized $7.6 million of
severance costs at our properties in connection with the COVID-19 pandemic.
Additionally, in connection with the change in hotel manager of the Renaissance
Charleston Historic District Hotel , we recognized $1.4 million of accelerated
amortization of the unfavorable management agreement liability during the year
ended December 31, 2020 , which reduced base management fees.
Depreciation and amortization. Our depreciation and amortization expense
decreased
Impairment losses. During the year ended
Corporate expenses. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors' fees. Our corporate expenses decreased$0.8 million , from$28.2 million for the year endedDecember 31, 2019 to$27.4 million for the year endedDecember 31, 2020 . The decrease is primarily due to a decrease in employee compensation, travel costs, and certain professional fees, partially offset by an increase in legal fees. Business interruption insurance income. For the year endedDecember 31, 2020 , we recognized$2.2 million of business interruption insurance income related to lost revenue at theWestin Boston Waterfront due to the COVID-19 pandemic. InSeptember 2017 , Hurricane Irma caused significant damage to Frenchman's Reef and resulted in lost revenue and additional expenses covered under our insurance policy. For the year endedDecember 31, 2019 , we recognized$8.8 million of business interruption insurance income related to the Frenchman's Reef insurance claim.
Gain on property insurance settlement. In
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Interest expense. Our interest expense was $54.0 million and $46.6 million for
the years ended December 31, 2020 and December 31, 2019 , respectively, and is
comprised of the following (in millions):
Year Ended December 31,
2020 2019
Mortgage debt interest $ 26.2 $ 26.5
Term loan interest 13.4 13.7
Credit facility interest and unused fees 4.5 3.7
Amortization of debt issuance costs and debt premium 2.0
2.1
Capitalized interest (2.1)
(1.9)
Interest rate swap mark-to-market 10.0 2.5
$ 54.0 $ 46.6 The increase in interest expense is primarily related to the mark-to-market of our interest rate swaps.
Loss on early extinguishment of debt. OnJuly 25, 2019 , we refinanced our senior unsecured credit facility and unsecured term loans. In connection with the refinancing we repaid our previously existing$100 million and$200 million term loans and recognized a$2.4 million loss on early extinguishment of debt related to the write-off of certain unamortized debt issuance costs. Income taxes. We recorded income tax benefit of$26.5 million in 2020 and income tax expense of$22.0 million in 2019. The 2020 income tax benefit is net of a valuation allowance of$24.9 million , which was recognized based on an assessment of our ability to utilize our net operating loss carryforwards in future years. The 2019 income tax expense includes$1.2 million of income tax expense incurred on the$5.7 million pre-tax income of our domestic TRSs, foreign income tax expense of$20.8 million incurred on the$132.6 million pre-tax income of the TRS that owns Frenchman's Reef.
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service, operating expenses, ground lease payments (see Note 4 to the accompanying consolidated financial statements), capital expenditures directly associated with our hotels and distributions to our preferred stockholders. We have suspended our quarterly common dividend. We currently expect that our existing cash balances and available capacity on our senior unsecured credit facility will be sufficient to meet our short-term liquidity requirements. Our mortgage debt agreements contain "cash trap" provisions that are triggered when the hotel's operating results fall below a certain debt service coverage ratio. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio is reached and maintained for a certain period of time. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt. As ofDecember 31, 2021 , the debt service coverage ratios or debt yields for all of our mortgage loans, except for the mortgage loan secured by theSalt Lake Marriott Downtown atCity Creek , were below the minimum thresholds such that the cash trap provision of each respective loan was triggered. We do not expect that such cash traps will affect our ability to satisfy our short-term liquidity requirements. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, redemption of limited operating partnership units ("common OP units"), ground lease payments, and making distributions to our common and preferred stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including common OP units, and/or debt securities and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. -51- --------------------------------------------------------------------------------
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OnApril 30, 2021 , we sold a wholly owned subsidiary of the Company that owns Frenchman's Reef to an unaffiliated third party pursuant to a share purchase agreement for$35.0 million in cash upon closing, as well as a participation right in the future profits of the hotel once certain return metrics are achieved. OnJune 30, 2021 , we soldThe Lexington Hotel for$185.3 million . OnJuly 29, 2021 , we acquired the 218-roomBourbon Orleans Hotel located inNew Orleans, Louisiana , for net consideration of$90.1 million , including prorations. OnJuly 30, 2021 , we acquired the 37-roomHenderson Park Inn located inDestin, Florida , for net consideration of$26.4 million , including prorations and transaction costs. OnDecember 23, 2021 , we acquired the 170-roomHenderson Beach Resort located inDestin, Florida , for net consideration of$110.1 million , including prorations and transaction costs. OnJanuary 6, 2022 , we acquired the 103-roomTranquility Bay Beachfront Resort located inMarathon, Florida , for net consideration of$62.3 million , including prorations and transaction costs.
Our Financing Strategy
Since our formation in 2004, we have been committed to a conservative capital structure with prudent leverage. Our outstanding debt consists of fixed interest rate mortgage debt, unsecured term loans and borrowings on our senior unsecured credit facility. We have a preference to maintain a significant portion of our portfolio as unencumbered assets in order to provide balance sheet flexibility. We expect that our strategy will enable us to maintain a balance sheet with an appropriate amount of debt throughout all phases of the lodging cycle. We believe that it is prudent to reduce the inherent risk of highly cyclical lodging fundamentals through a low leverage capital structure. We prefer a relatively simple but efficient capital structure. We generally structure our hotel acquisitions to be straightforward and to fit within our capital structure; however, we will consider a more complex transaction, such as the issuance of common OP units in connection with the acquisition ofCavallo Point , TheLodge at theGolden Gate , if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available. We believe that we maintain a reasonable amount of debt. As ofDecember 31, 2021 , we had$1.1 billion of debt outstanding with a weighted average interest rate of 3.88% and a weighted average maturity date of approximately 2.5 years. We have limited near-term mortgage debt maturities and 24 of our 32 hotels are unencumbered by mortgage debt. We remain committed to our core strategy of prudent leverage.
The following table outlines the timing and extent of our debt principal
maturities and estimated interest payments for our mortgage debt and unsecured
term loans as of
Principal Interest (1) Total Principal and Interest
2022 $ 15,896 $ 39,618 $ 55,514
2023 236,420 32,213 268,633
2024 432,381 21,642 454,023
2025 295,807 8,406 304,213
2026 - - -
Thereafter - - -
$ 980,504 $ 101,879 $ 1,082,383
________________
(1)The interest expense for our variable rate mortgage and unsecured term loans
is calculated based on the rate as of December 31, 2021 . Excludes interest
expense on the outstanding borrowings on our senior unsecured credit facility of
$90.0 million as of December 31, 2021 .
Information about our financing activities is available in Note 8 to the accompanying consolidated financial statements.
ATM Program
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In August 2021 , we implemented an "at-the-market" equity offering program (the
"Current ATM Program"), pursuant to which we may issue and sell shares of our
common stock from time to time, having an aggregate offering price of up to
$200.0 million . We have not sold any shares under the Current ATM Program. Prior
to the implementation of the Current ATM Program, we had a $200.0 million ATM
program (the "Prior ATM Program"), which is no longer active. No shares under
the Prior ATM Program were sold during the year ended December 31, 2021 .
Short-Term Borrowings
Other than borrowings under our senior unsecured credit facility, we do not utilize short-term borrowings to meet liquidity requirements.
Senior Unsecured Credit Facility and Unsecured Term Loans
We are party to a$400 million senior unsecured credit facility expiring inJuly 2023 , a$350 million unsecured term loan maturing inJuly 2024 and a$50 million unsecured term loan maturing inOctober 2023 . The maturity date for the senior unsecured credit facility may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions. As ofDecember 31, 2021 , we had$90.0 million of borrowings outstanding under our senior unsecured credit facility. Subsequent toDecember 31, 2021 , we drew an additional$70.0 million on our senior unsecured credit facility. On each ofJune 9, 2020 ,August 14, 2020 ,January 20, 2021 andFebruary 4, 2022 , we executed amendments to the credit agreements for our corporate credit facility and term loans. These amendments provided for a waiver of the quarterly tested financial covenants beginning with the second quarter of 2020 through the first quarter of 2022 and allow for certain other modifications to the covenants thereafter through the second quarter of 2023. We expect to comply with the quarterly tested financial covenants beginning with the first testing period following the end of the covenant waiver period. The third amendment to the credit agreements for our corporate credit facility and term loans also permits us to pay dividends on our Series A Preferred Stock in an amount up to$25.0 million annually. Additional information about the credit agreements, including the restrictions imposed by the amendments and their impacts on our liquidity, sources of capital, and ability to incur additional debt, can be found in Note 8 to the accompanying consolidated financial statements.
Sources and Uses of Cash
Our principal sources of cash are net cash flow from hotel operations, sales of common and preferred stock, debt financings and proceeds from hotel dispositions. Our principal uses of cash are acquisitions of hotel properties, debt service and maturities, share repurchases, capital expenditures, operating costs, ground lease payments, corporate expenses, and distributions to holders of common stock, common units and preferred stock. As ofDecember 31, 2021 , we had$38.6 million of unrestricted corporate cash and$36.9 million of restricted cash, and$90.0 million of outstanding borrowings on our senior unsecured credit facility. Our net cash used in operations was$2.3 million for the year endedDecember 31, 2021 . Our cash from operations generally consists of the net cash flow from hotel operations, offset by cash paid for corporate expenses and other working capital changes. Our net cash used in investing activities was$62.2 million for the year endedDecember 31, 2021 , which consisted of$213.8 million of net proceeds from the sale of Frenchman'sReef and The Lexington Hotel and$0.5 million receipt of deferred key money received for theWestin Washington ,D.C. City Center , offset by$226.6 million paid for the acquisitions of theBourbon Orleans Hotel ,Henderson Park Inn , andHenderson Beach Resort ,$44.5 million of capital expenditures at our operating hotels,$2.7 million of capital expenditures for the rebuild of Frenchman's Reef, and$2.8 million paid to extend theSalt Lake City Marriott Downtown at City Center ground lease. Our net cash provided by financing activities was$5.2 million for the year endedDecember 31, 2021 , which consisted of net draws of$35.0 million on our senior unsecured credit facility, offset by$15.3 million of scheduled mortgage debt principal payments,$1.9 million of mortgage debt principal repaid in connection with the extension of theSalt Lake City Marriott Downtown at City Center mortgage loan,$1.2 million of financing costs related to the amendment and restatement of our credit agreements and the extension of theSalt Lake City Marriott Downtown at City Center mortgage loan,$1.5 million paid to repurchase shares upon the vesting of restricted stock for the payment of tax withholdings obligations, and$9.8 million of distributions paid to holders of preferred stock. -53- -------------------------------------------------------------------------------- Table of Contents We currently anticipate our significant sources of cash for the year endingDecember 31, 2022 will be the net cash flow from hotel operations as the lodging disruptions from COVID-19 continue to subside and draws on our senior unsecured credit facility. We expect our estimated uses of cash for the year endingDecember 31, 2022 will be scheduled debt service payments, payments of outstanding borrowings on our unsecured credit facility, capital expenditures, potential funding of hotel working capital requirements, distributions to preferred stockholders, corporate expenses, the acquisition of theTranquility Bay Beachfront Resort inMarathon, Florida onJanuary 6, 2022 and other potential hotel acquisitions.
Dividend Policy
We intend to distribute to our stockholders dividends at least equal to our REIT taxable income to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our TRS, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:
•90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, plus
•90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus
•any excess non-cash income.
The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including our financial performance, restrictions under applicable law and our current and future loan agreements, our debt service requirements, our capital expenditure requirements, the requirements for qualification as a REIT under the Code and other factors that our board of directors may deem relevant from time to time. Our board of directors suspended the quarterly common dividend commencing with the first quarter dividend that would have been paid inApril 2020 . The payment of future dividends, including a quarterly common dividend, will be determined by our board of directors after considering our projected taxable income, obligations under our financing agreements, expected capital requirements, and risks affecting our business.
We have paid the following dividends to holders of our Series A Preferred Stock during 2020 and 2021, and through the date of this report:
Dividend
Payment Date Record Date per Share
September 30, 2020 September 20, 2020 $ 0.178
December 31, 2020 December 18, 2020 $ 0.516
March 31, 2021 March 18, 2021 $ 0.516
June 30, 2021 June 18, 2021 $ 0.516
September 30, 2021 September 17, 2021 $ 0.516
December 31, 2021 December 20, 2021 $ 0.516 Capital Expenditures
The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement reserves to cover, among other things, the cost of replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. Contributions to the property improvement fund are calculated as a percentage of hotel revenues. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement reserves under the applicable management or franchise agreement. As ofDecember 31, 2021 , we have set aside$24.5 million for capital projects in property improvement funds, which are included in restricted cash. We spent approximately$44.5 million on capital improvements at our operating hotels and approximately$2.7 million on the rebuild of Frenchman's Reef during the year endedDecember 31, 2021 . Due to the COVID-19 pandemic, we canceled or deferred a significant portion of the planned capital improvements at our operating hotels and paused the rebuild of Frenchman's Reef prior to its sale. Significant projects in 2021 were as follows: -54- --------------------------------------------------------------------------------
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•The Lodge atSonoma : We completed a renovation to reposition and rebrand the hotel to anAutograph Collection Hotel inJuly 2021 . The renovation includes a new restaurant by celebrity chefMichael Mina . •The Hythe Vail, aLuxury Collection Resort : We completed the final phase of a multi-year renovation to rebrand theVail Marriott Mountain Resort as The HytheVail , aLuxury Collection Resort , in the fourth quarter of 2021. •Margaritaville Beach House Key West: We converted the BarbaryBeach House Key West to the Margaritaville Beach ResortKey West in the fourth quarter of 2021.
In 2022, we expect to spend approximately
•JW Marriott Denver Cherry Creek: We plan to complete the renovations in the first quarter of 2022 to rebrand the hotel asHotel Clio , aLuxury Collection Hotel . •Hilton Boston Downtown/Faneuil Hall: We expect to commence a comprehensive renovation and repositioning of the hotel commencing in the fourth quarter of 2022. •Orchards Inn Sedona: We expect to commence the first phase of the upgrade renovation of the resort in mid-2022. •Hilton BurlingtonLake Champlain : We expect to complete a renovation of the hotel to rebrand it as aCurio Collection Hotel in late 2022. The renovation is expected to include a new restaurant concept by a local renowned chef.The United States is experiencing both supply chain disruptions and significant price increases for certain construction materials. The supply chain disruptions are the result of, in part, substantial backlogs of container ships seeking to unload cargo at major ports, with delays caused or exacerbated by port and trucking labor shortages, railway logistics issues and a shortage of warehouse space in close proximity to the affected ports. We have not been significantly impacted by these backlogs to date; however, if not resolved, these backlogs and related logistics issues could result in material delays and increased costs for our planned capital improvements.
Non-GAAP Financial Measures
We use the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance withU.S. GAAP. EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company.
Use and Limitations of Non-GAAP Financial Measures
Our management and Board of Directors use EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO to evaluate the performance of our hotels and to facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital intensive companies. The use of these non-GAAP financial measures has certain limitations. These non-GAAP financial measures as presented by us, may not be comparable to non-GAAP financial measures as calculated by other real estate companies. These measures do not reflect certain expenses or expenditures that we incurred and will incur, such as depreciation, interest and capital expenditures. We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparableU.S. GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance withU.S. GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed byU.S. GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with ourU.S. GAAP results and the reconciliations to the correspondingU.S. 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.
EBITDA, EBITDAre and FFO
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EBITDA represents net income (calculated in accordance withU.S. GAAP) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. The Company computes EBITDAre in accordance with theNational Association of Real Estate Investment Trusts ("Nareit") guidelines, as defined in itsSeptember 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate." EBITDAre represents net income (calculated in accordance withU.S. GAAP) adjusted for: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization; (4) gains or losses on the disposition of depreciated property, including gains or losses on change of control; (5) impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate; and (6) adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates. We believe EBITDA and EBITDAre are useful to an investor in evaluating our operating performance because they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization, and in the case of EBITDAre, impairment and gains or losses on dispositions of depreciated property) from our operating results. In addition, covenants included in our debt agreements use EBITDA as a measure of financial compliance. We also use EBITDA and EBITDAre as measures in determining the value of hotel acquisitions and dispositions. The Company computes FFO in accordance with standards established by the Nareit, which defines FFO as net income determined in accordance withU.S. GAAP, excluding gains or losses from sales of properties and impairment losses, plus real estate related depreciation and amortization. The Company believes that the presentation of FFO provides useful information to investors regarding its operating performance because it is a measure of the Company's operations without regard to specified non-cash items, such as real estate related depreciation and amortization and gains or losses on the sale of assets. The Company also uses FFO as one measure in assessing its operating results.
Adjustments to EBITDAre and FFO
We adjust EBITDAre and FFO when evaluating our 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 that the presentation of Adjusted EBITDA and Adjusted FFO, when combined withU.S. GAAP net income, EBITDAre and FFO, is beneficial to an investor's complete understanding of our consolidated operating performance. We adjust EBITDAre and FFO for the following items: •Non-Cash Lease Expense and Other Amortization: We exclude the non-cash expense incurred from the straight line recognition of expense from our ground leases and other contractual obligations and the non-cash amortization of our favorable and unfavorable contracts, originally recorded in conjunction with certain hotel acquisitions. We exclude these non-cash items because they do not reflect the actual cash amounts due to the respective lessors in the current period and they are of lesser significance in evaluating our actual performance for that period. •Cumulative Effect of a Change in Accounting Principle: TheFinancial Accounting Standards Board promulgates new accounting standards that require or permit the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude the effect of these adjustments, which include the accounting impact from prior periods, because they do not reflect the Company's actual underlying performance for the current period. •Gains or Losses from Early Extinguishment of Debt: We exclude the effect of gains or losses recorded on the early extinguishment of debt because these gains or losses result from transaction activity related to the Company's capital structure that we believe are not indicative of the ongoing operating performance of the Company or our hotels.
•Hotel Acquisition Costs: We exclude hotel acquisition costs expensed during the period because we believe these transaction costs are not reflective of the ongoing performance of the Company or our hotels.
•Severance Costs: We exclude corporate severance costs, or reversals thereof, incurred with the termination of corporate-level employees and severance costs incurred at our hotels related to lease terminations or structured severance programs because we believe these costs do not reflect the ongoing performance of the Company or our hotels.
•Hotel Manager Transition Items: We exclude the transition items associated with a change in hotel manager because we believe these items do not reflect the ongoing performance of the Company or our hotels.
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•Other Items: From time to time we incur costs or realize gains that we consider outside the ordinary course of business and that we do not believe reflect the ongoing performance of the Company or our hotels. Such items may include, but are not limited to the following: pre-opening costs incurred with newly developed hotels; lease preparation costs incurred to prepare vacant space for marketing; management or franchise contract termination fees; gains or losses from legal settlements; costs incurred related to natural disasters; and gains on property insurance claim settlements, other than income related to business interruption insurance.
In addition, to derive Adjusted FFO we exclude any unrealized fair value adjustments to interest rate swaps. We exclude these non-cash amounts because they do not reflect the underlying performance of the Company.
The following table is a reconciliation of our
Year Ended December 31,
2021 2020 2019
(in thousands)
Net (loss) income $ (195,405) $ (396,027) $ 184,211
Interest expense 37,043 53,995 46,584
Income tax expense (benefit) 3,267 (26,452) 22,028
Real estate related depreciation and amortization 102,963 114,716 118,110
EBITDA (52,132) (253,768) 370,933
Impairment losses 126,697 174,120 -
EBITDAre 74,565 (79,648) 370,933
Non-cash lease expense and other amortization 6,673 6,910 7,013 Professional fees and pre-opening costs related to Frenchman's Reef (1)
1,388 1,012 20,524
Uninsured costs related to natural disasters (2) 298 - -
Loss on early extinguishment of debt - - 2,373
Hotel manager transition items (3) 651 (434) 3,758 Severance costs (4) (37) 7,648 - Gain on property insurance settlement - - (144,192) Adjusted EBITDA$ 83,538 $ (64,512) $ 260,409 _______________
(1) Represents pre-opening costs and professional fees relate to the reopening of
Frenchman's Reef, as well as legal an other costs incurred at Frenchman's Reef
as a result of Hurricane Irma that are not covered by insurance.
(2) Represents costs incurred at the
Ida that have not been or are not expected to be recovered by insurance.
(3) Amount for the year ended
transition at the
termination fees for the Sheraton Suites
amortization of the unfavorable management agreement liability related to the
manager transition at the
Amount for the year ended
termination of the franchise agreement for Sheraton Suites
(4) For the year ended
the elimination of positions at our hotels, which are classified within other
hotel expenses on the consolidated statement of operations.
The following table is a reconciliation of ourU.S. GAAP net income to FFO, FFO available to common stock and unit holders, and Adjusted FFO available to common stock and unit holders (in thousands): -57- --------------------------------------------------------------------------------
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Year Ended December 31,
2021 2020 2019
(in thousands)
Net (loss) income $ (195,405) $ (396,027) $ 184,211
Real estate related depreciation and amortization 102,963 114,716 118,110
Impairment losses, net of tax 127,282 174,120 -
FFO 34,840 (107,191) 302,321
Distributions to preferred stockholders (9,817) (3,300) -
FFO available to common stock and unit holders 25,023 (110,491) 302,321
Non-cash lease expense and other amortization 6,673 6,910 7,013 Professional fees and pre-opening costs related to Frenchman's Reef (1)
1,388 1,012 20,524
Uninsured costs related to natural disasters (2) 298 - -
Loss on early extinguishment of debt - - 2,373
Hotel manager transition items (3) 651
(434) 3,758 Gain on property insurance settlement, net of income tax
- - (121,525)
Severance costs (4) (37) 7,648 -
Fair value adjustments to interest rate swaps (7,690) 10,072 2,545
Adjusted FFO available to common stock and unit
holders $ 26,306 $ (85,283) $ 217,009
_______________
(1) Represents pre-opening costs and professional fees relate to the reopening of
Frenchman's Reef, as well as legal an other costs incurred at Frenchman's Reef
as a result of Hurricane Irma that are not covered by insurance.
(2) Represents costs incurred at the
Ida that have not been or are not expected to be recovered by insurance.
(3) Amount for the year ended
transition at the
termination fees for the Sheraton Suites
amortization of the unfavorable management agreement liability related to the
manager transition at the
Amount for the year ended
termination of the franchise agreement for Sheraton Suites
(4) For the year ended
the elimination of positions at our hotels, which are classified within other
hotel expenses on the consolidated statement of operations.
Critical Accounting Estimates and Policies
Our consolidated financial statements include the accounts ofDiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:
Investment in Hotels
Investment purchases of hotel properties, land, land improvements, building and
furniture, fixtures and equipment and identifiable intangible assets that are
not businesses are accounted for as asset acquisitions and recorded at relative
fair value based upon total accumulated cost of the acquisition. Property and
equipment purchased after the hotel acquisition date is recorded at cost.
Identifiable intangible assets are typically related to contracts, including
ground lease agreements and hotel management agreements, which are recorded at
fair value. Above-market and below-market contract values are based on the
present value of the difference between contractual amounts to be paid pursuant
to the contracts acquired and our estimate of the fair market contract rates for
corresponding contracts. Contracts acquired that are at market do not have
significant value. We enter into a
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hotel management agreement at the time of acquisition and such agreements are
generally based on market terms. Intangible assets are amortized using the
straight-line method over the remaining non-cancelable term of the related
agreements. In making estimates of fair values for purposes of allocating
purchase price, we may utilize a number of sources that may be obtained in
connection with the acquisition or financing of a property and other market
data. Management also considers information obtained about each property as a
result of its pre-acquisition due diligence in estimating the fair value of the
tangible and intangible assets acquired.
We review our investments in hotels for impairment whenever events or changes in
circumstances indicate that the carrying value of the hotel properties may not
be recoverable. Events or circumstances that may cause us to perform a review
include, but are not limited to, adverse changes in the demand for lodging at
our properties, current or projected losses from operations, and an expectation
that the property is more likely than not to be sold significantly before the
end of its previously estimated useful life. If such events or circumstances are
identified, management performs an analysis to compare the estimated
undiscounted future cash flows from operations and the net proceeds from the
ultimate disposition of a hotel to the carrying amount of the asset. If the
estimated undiscounted future cash flows are less than the carrying amount of
the asset, an adjustment to reduce the carrying amount to the related hotels'
estimated fair value is recorded and an impairment loss is recognized. The fair
value is determined through various valuation techniques, including discounted
cash flow models with estimated discount and terminal capitalization rates,
comparable market transactions, third-party appraisals, the net sales proceeds
from pending offers, or from transactions that closed subsequent to the end of
the reporting period.
Seasonality
The periods during which our hotels experience higher revenues vary from
property to property, depending principally upon location and the customer base
served. Accordingly, we expect some seasonality in our business. Volatility in
our financial performance from the seasonality of the lodging industry could
adversely affect our financial condition and results of operations.
New Accounting Pronouncements Not Yet Implemented
See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.
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