SUMMIT HOTEL PROPERTIES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year endedDecember 31, 2021 and our unaudited interim Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Unless stated otherwise or the context otherwise requires, references in this report to "we," "our," "us," "our company" or "the company" meanSummit Hotel Properties, Inc. and its consolidated subsidiaries.
Cautionary Statement about Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). We intend such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and include this statement for purposes
of complying with these safe harbor provisions. Forward-looking statements,
which are based on certain assumptions and describe our future plans, strategies
and expectations, are generally identifiable by use of the words "may," "could,"
"expect," "intend," "plan," "seek," "anticipate," "believe," "estimate,"
"predict," "forecast," "project," "potential," "continue," "likely," "will,"
"would" or similar expressions. Forward-looking statements in this report
include, among others, statements about our business strategy, including
acquisition and development strategies, industry trends, estimated revenues and
expenses, ability to realize deferred tax assets and expected liquidity needs
and sources (including capital expenditures and the ability to obtain financing
or raise capital). You should not rely on forward-looking statements since they
involve known and unknown risks, uncertainties and other factors that are, in
some cases, beyond our control and which could materially affect actual results,
performances or achievements. Factors that may cause actual results to differ
materially from current expectations include, but are not limited to:
•the effects of COVID-19 and its variants (the "Pandemic") and other infectious
disease outbreaks;
•potential changes in operations as a result of regulations or changes in brand
standards imposed in connection with, or changes in consumer behavior in
response to, the Pandemic;
•financing risks, including the risk of leverage and the corresponding risk of
default on our existing indebtedness and potential inability to refinance or
extend the maturities of our existing indebtedness;
•default by borrowers to which we lend or provide seller financing;
•global, national, regional and local economic and geopolitical conditions and
events, including wars or other hostilities;
•supply and demand factors in our markets or sub-markets.
•levels of spending for business and leisure travel, travel costs affected by
changes in energy prices, and consumer confidence;
•the effect of alternative accommodations on our business;
•adverse changes in occupancy, average daily rate ("ADR") and revenue per
available room ("RevPAR") and other hotel property operating metrics;
•hostilities, including future terrorist attacks, or fear of hostilities that
affect travel;
•financial condition of, and our relationships with, third-party property
managers and franchisors;
•the degree and nature of our competition;
•increased interest rates;
•increased operating costs, including but not limited to labor costs;
•increased renovation costs, which may cause actual renovation costs to exceed
our current estimates;
•supply-chain disruption, which may reduce access to operating supplies or
construction materials and increase related costs;
•changes in zoning laws;
•increases in real property taxes that are significantly higher than our
expectations;
•risks associated with hotel proeprty acquisitions, including the ability to
ramp up and stabilize newly acquired hotel properties with limited or no
operating history or that require substantial amounts of capital improvements
for us to earn economic returns consistent with our expectations at the time of
acquisition;
•risks associated with dispositions of hotel properties, including our ability
to successfully complete the sale of hotel properties under contract to be sold,
including the risk that the purchaser may not have access to the capital needed
to complete the purchase;
•the nature of our structure and transactions such that our federal and state
taxes are complex and there is risk of successful challenges to our tax
positions by the Internal Revenue Service ("IRS") or other federal and state
taxing authorities;
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•the recognition of taxable gains from the sale of hotel properties as a result
of the inability to complete certain like-kind exchanges in accordance with
Section 1031 of the Internal Revenue Code of 1986, as amended (the "IRC");
•availability of and the abilities of our property managers and us to retain
qualified personnel at our hotel proeprties and corporate offices;
•our failure to maintain our qualification as a real estate investment trust
("REIT") under the IRC;
•changes in our business or investment strategy;
•availability, terms and deployment of capital;
•general volatility of the capital markets and the market price of our common
stock;
•environmental uncertainties and risks related to natural disasters;
•our ability to recover fully under third party indemnities or our existing
insurance policies for insurable losses and our ability to maintain adequate or
full replacement cost "all-risk" property insurance policies on our properties
on commercially reasonable terms;
•the effect of a data breach or significant disruption of hotel property
operator information technology networks as a result of cyber-attacks that are
greater than insurance coverages or indemnities from service providers;
•the effect on our interest rates as LIBOR is replaced with the Secured
Overnight Financing Rate ("SOFR") which may perform differently than LIBOR;
•our ability to effectively manage our Joint Venture with our Joint Venture
partner;
•current and future changes to the IRC;
•our ability to manage inflationary pressures related to commodities, labor and
other costs of our business as well as consumer purchasing power and overall
behavior;
•our ability to continue to effectively enhance our Environmental, Social and
Governance ("ESG") program to achieve expected social, environment and
governance objectives and goals; and
•the other factors discussed under the heading "Risk Factors" included in our
Annual Report on Form 10-K for the year ended December 31, 2021 .
Accordingly, there is no assurance that our expectations will be realized.
Except as otherwise required by the federal securities laws, we disclaim any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein (or elsewhere) to reflect any change
in our expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
Overview
Summit Hotel Properties, Inc. is a self-managed hotel investment company that was organized inJune 2010 and completed its initial public offering inFebruary 2011 . We focus on owning primarily premium-branded, select-service hotel properties. AtMarch 31, 2022 , our portfolio consisted of 101 hotel properties with a total of 15,228 guestrooms located in 24 states. We own our hotel properties in fee simple, except for seven hotel properties which are subject to ground leases or subleases. As ofMarch 31, 2022 , we own 100% of the outstanding equity interests in 61 of our 101 hotel properties. We own a 51% controlling interest in 40 hotel properties through the Joint Venture. Our hotel properties are typically located in markets with multiple demand generators such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, and leisure attractions.
Our hotels operate under premium franchise brands owned by Marriott®
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We have elected to be taxed as a REIT for federal income tax purposes commencing
with our short taxable year ended December 31, 2011 . To qualify as a REIT, we
cannot operate or manage our hotel properties. Accordingly, all of our hotel
properties are leased to our taxable REIT subsidiaries ("TRS Lessees"). All of
our hotel properties are operated pursuant to hotel property management
agreements between our TRS Lessees and professional third-party hotel property
management companies that are not affiliated with us as follows:
Number of Number of
Management Company Properties Guestrooms
Affiliates of
62 9,166
OTO Development, LLC 15 2,164
Stonebridge Realty Advisors, Inc. and affiliates 9 1,312
Affiliates of Marriott, including
6 973
Crestline Hotels & Resorts, LLC 4 570
White Lodging Services Corporation 2 453
Hersha Hospitality Management 2 338
1 252
Total 101 15,228
Our typical hotel property management agreement requires us to pay a base fee to
our hotel property manager calculated as a percentage of hotel property
revenues. In addition, our hotel property management agreements generally
provide that the hotel property manager can earn an incentive fee for revenue
or Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
over certain thresholds or based on a return over our required preferred
return. Our TRS Lessees may employ other hotel property managers in the future.
We do not, and will not, have any ownership or economic interest in any of the
hotel property management companies engaged by our TRS Lessees.
Our revenues are derived from hotel property operations and consist of room
revenue, food and beverage revenue and other hotel property operations revenue.
Revenues from our other hotel property operations consist of ancillary revenues
related to meeting rooms and other customer services provided at certain of our
hotel properties.
Industry Trends and Outlook
Room-night demand in theU.S. lodging industry is generally correlated to certain macroeconomic trends. Key drivers of lodging demand include changes in gross domestic product, corporate profits, capital investments, employment and more recently, travel-related health and safety restrictions and concerns. Volatility in the economy and risks arising from global and domestic political or economic conditions may cause slowing economic growth, which would have an adverse effect on lodging demand. The global andU.S. economies, and the travel and lodging industries, have experienced a significant downturn as a result of the Pandemic. During the three months endedMarch 31, 2022 , we continued to experience a significant recovery in hotel demand driven primarily by leisure travelers. Corporate and group demand remain below historical levels and are recovering more slowly; however, we have recently begun to experience an increase in demand related to these segments as return to work trends continue to accelerate and travel restrictions are reduced or eliminated.
Effects of the Pandemic on Our Business
The effects of the Pandemic and the restrictions implemented in response to the Pandemic have had a significant negative effect on theU.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in hotel demand. These conditions resulted in a substantial decline from pre-Pandemic levels in our revenues, profitability and cash flows from operations. 34 -------------------------------------------------------------------------------- During the three months endedMarch 31, 2022 , we continued to experience significant improvement in our business compared to earlier in the Pandemic, driven primarily by leisure travel and to a lesser extent modest improvement in other demand segments, including corporate and group. The improvement was the result of a significant increase in the availability and administration of vaccines globally as well as the easing of government restrictions and guidance in most jurisdictions. We anticipate that continued improvement in operating trends will be dependent on continued strength in leisure travel and a recovery of business travel. More broadly, a return to normalized levels of operations is dependent upon a continuation in the recovery of our business, further dissipation of concerns related to the Pandemic, geopolitical stability, moderating inflation and maintaining a high-quality portfolio aligned with evolving guest preferences.
Health and Well-being
All of our hotel properties are licensed with national franchise brands and we have worked closely with our brand partners to develop and implement comprehensive protocols for the safety and well-being of employees and guests to address a broad spectrum of pathogens and viruses, including COVID-19 and variants thereof. We continue to apply advanced cleaning procedures developed during the Pandemic to all of our hotel properties.
Forward-looking Information and Use of Estimates
The full effects of the Pandemic and its variants on our Company will depend on future developments, such as the ultimate duration and scope of the outbreak, its effect on our customers, brands and business partners, the rate at which normal economic conditions, operations, and the demand for lodging resume, and the magnitude of the recessionary conditions in any of our markets. Accordingly, the full effects of the Pandemic on our Company cannot be determined at this time. While the potential magnitude and duration of the business and economic effects of the Pandemic are uncertain, we believe that the recovery in our business that began during 2020 and has continued through the three months endedMarch 31, 2022 will continue through 2022 and we expect that operating performance will improve gradually over a multi-year period before reaching prior peak performance levels. We believe that a recovery in business conditions resulting in positive operating cash flows, together with cash on hand, and the current availability under our credit facilities, will provide sufficient liquidity to fund operations for at least the next twelve months. There can be no assurance that the assumptions used to evaluate the carrying amounts of our assets or to estimate our liquidity requirements will be correct. For additional information on the current and potential future effects of the Pandemic, please see Item 1A. Risk Factors. 35 --------------------------------------------------------------------------------
Our
AtMarch 31, 2022 , our portfolio consisted of 101 hotel properties with a total of 15,228 guestrooms. According to current chain scales as defined bySTR, Inc. , six of our hotel properties with a total of 952 guestrooms are categorized as Upper-upscale hotels, 80 of our hotel properties with a total of 12,184 guestrooms are categorized as Upscale hotels and 15 of our hotel properties with a total of 2,091 guestrooms are categorized as Upper-midscale hotels. Information about our hotel properties as ofMarch 31, 2022 is as follows: Number of Hotel Number of Franchise/Brand Properties Guestrooms Marriott Courtyard by Marriott 17 3,049 Residence Inn by Marriott 15 2,136 SpringHill Suites by Marriott 7 983 AC Hotel by Marriott 5 870 TownePlace Suites 2 225 Fairfield Inn & Suites by Marriott 1 140 Four Points by Sheraton 1 101 Marriott 1 165Total Marriott 49 7,669 Hilton Hilton Garden Inn 10 1,460 Hampton Inn & Suites 8 1,162 Homewood Suites 3 369 Canopy Hotel 2 326 Embassy Suites 2 346 DoubleTree by Hilton 1 210Total Hilton 26 3,873 Hyatt Hyatt Place 17 2,419 Hyatt House 3 466Total Hyatt 20 2,885 IHG Holiday Inn Express & Suites 4 564 Hotel Indigo 1 116 Staybridge Suites 1 121 Total IHG 6 801 Total 101 15,228
We continually consider ways in which to refine our portfolio to drive growth
and create value. In the normal course of business, we evaluate opportunities
to acquire additional properties that meet our investment criteria and
opportunities to recycle capital through the disposition of properties. As
such, the composition and size of our portfolio of properties may change
materially over time. Significant changes to our portfolio of properties could
have a material effect on our Condensed Consolidated Financial Statements.
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On January 13, 2022 and March 23, 2022 , the Joint Venture completed the purchase
from NewcrestImage Holdings, LLC , a Delaware limited liability company, and
NewcrestImage Holdings II, LLC , a Delaware limited liability company (together,
"NewcrestImage"), a portfolio of 27 hotel properties, containing an aggregate of
3,709 guestrooms, and two parking structures, containing 1,002 spaces (such
hotel properties and parking structures, the "Portfolio"), and various financial
incentives for an aggregate purchase price of $822.0 million (the "NCI
Transaction").
Results of Operations
The comparisons that follow should be reviewed in conjunction with the unaudited interim Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Comparison of the Three Months Ended
The following table contains key operating metrics for our total portfolio for the three months endedMarch 31, 2022 compared with the three months endedMarch 31, 2021 (dollars in thousands, except ADR and RevPAR). For the Three Months EndedMarch 31 , Quarter-over-Quarter Quarter-over-Quarter 2022 2021 Dollar Change Percentage Change Total Same-Store Total Same-Store Total Same-Store Total Same-Store Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio (101 hotels) (72 hotels) (72 hotels) (72 hotels) (101/72 hotels) (72 hotels) (101/72 hotels) (72 hotels) Revenues: Room$ 128,810 $ 99,868 $ 53,245 $ 53,245 $ 75,565 $ 46,623 141.9 % 87.6 % Food and beverage 5,662 2,878 1,003 1,003 4,659 1,875 464.5 % 186.9 % Other 7,397 5,539 3,606 3,606 3,791 1,933 105.1 % 53.6 % Total$ 141,869 $ 108,285 $ 57,854 $ 57,854 $ 84,015 $ 50,431 145.2 % 87.2 % Expenses: Room$ 28,410 $ 22,340 $ 12,550 $ 12,550 $ 15,860 $ 9,790 126.4 % 78.0 % Food and beverage 4,114 2,136 556 556 3,558 1,580 639.9 % 284.2 % Other hotel operating expenses 46,277 35,921 24,574 24,574 21,703 11,347 88.3 % 46.2 % Total$ 78,801 $ 60,397 $ 37,680 $ 37,680 $ 41,121 $ 22,717 109.1 % 60.3 % Operational Statistics: Occupancy 64.2 % 63.2 % 50.3 % 50.3 % n/a n/a 27.6 % 25.6 % ADR$ 152.79 $ 155.63 $ 104.12 $ 104.12 $ 48.67 $ 51.51 46.7 % 49.5 % RevPAR$ 98.05 $ 98.30 $ 52.41 $ 52.41 $ 45.64 $ 45.89 87.1 % 87.6 %
Changes from the three months ended
•Revenues and RevPAR. The increase in total revenues and RevPAR for our total
portfolio during the first quarter of 2022 compared to the first quarter of 2021
was due to continued strength in leisure travel as well improving corporate and
group demand resulting in steady improvement in both weekend and weekday
results. Additionally, revenues increased due to the NCI Transaction which
significantly expanded the size of our portfolio with the acquisition of 27
hotel properties and two parking garages. Our increased exposure to the Sunbelt,
focused revenue management, and property management initiatives related to the
portfolio acquired in the NCI Transaction also contributed to significant
revenue growth during the period. On a same store basis, the improvements in our
business resulted in an increase of approximately 25.6% in occupancy and 49.5%
in average daily rate in the first quarter of 2022, which resulted in an 87.6%
increase in same-store RevPAR. For the total portfolio, we experienced an
increase of approximately 27.6% in our occupancy and an increase of 46.7% in
average daily rate in the first quarter of 2022. This resulted in our highest
nominal quarterly RevPAR, an increase of 87.1% over the same period in the prior
year, since the onset of the Pandemic. See "Industry Trends and Outlook -
Effects of the Pandemic on Our Business" for further information.
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•Room Expenses. The increase in room expenses for both our total and the
same-store portfolio is highly correlated to the increase in room revenues
driven by increasing occupancy across our portfolio. Room expenses increased at
a slower rate than room revenues due to reduced staffing levels and strength in
average daily rate, offset by increasing wage rates. Additionally, room costs
for the total portfolio increased due to the NCI Transaction, which
significantly expanded the size of our portfolio with the acquisition of 27
hotel properties and two parking garages.
•Food and beverage Revenues and Expenses. Total and same-store food and beverage
revenues increased during the quarter ended March 31, 2022 as a result of an
increase in occupancy across our portfolio and the NCI Transaction. Food and
beverage expenses increased at a higher rate than food and beverage revenues due
to an expansion in food and beverage product offerings and increased staffing
costs.
•Other hotel operating Revenues and Expenses. The increase in other hotel
operating revenues and expenses in both our total and same-store portfolios was
driven by an increase in occupancy during the first quarter of 2022 and the NCI
Transaction.
The following table includes other consolidated income and expenses for the
three months ended March 31, 2022 compared with the three months ended March 31,
2021 (dollars in thousands).
For the Three Months Ended
March 31,
2022 2021 Dollar Change Percentage Change
Property taxes, insurance and
other $ 13,138 $ 10,904 $ 2,234 20.5 %
Management fees 3,795 1,555 2,240 144.1 %
Depreciation and amortization 36,274 27,297 8,977 32.9 %
Corporate general and
administrative 9,137 5,678 3,459 60.9 %
Gain on disposal of assets, net - 50 (50) nm¹
Interest expense 13,439 10,788 2,651 24.6 %
Other income, net 1,742 3,232 (1,490) (46.1) %
Income tax (benefit) expense (2,000) 105 (2,105) (2004.8) %
(1)Not meaningful.
Changes from the three months ended
•Property Taxes, Insurance and Other. The increase in Property taxes, insurance and other is primarily due to the NCI Transaction which significantly expanded the size of our portfolio with the acquisition of 27 hotel properties and two parking garages. The higher property taxes due to an increase in the number of hotel properties in our portfolio during the quarter endedMarch 31, 2022 was partially offset by property tax reductions that we have generated through our property tax appeal efforts to reduce the assessed values of our hotel properties for property tax purposes based on the lower operating performance than we experienced during the Pandemic. •Management Fees. The increase in Management fees during the current period is primarily due to increased consolidated revenues as our business has experienced a steady improvement in performance during the three months endedMarch 31, 2022 and due to the NCI Transaction, which significantly expanded the size of our portfolio with the acquisition of 27 hotel properties and two parking garages. •Depreciation and Amortization. The increase in Depreciation and amortization is primarily due to the NCI Transaction which significantly expanded the size of our portfolio with the acquisition of 27 hotel properties and two parking garages, which resulted in a substantial increase the our depreciable assets during the first quarter of 2022. Additionally, we have increased renovation activities at our hotel properties as our operating performance has improved. 38 -------------------------------------------------------------------------------- •Corporate General and Administrative. The increase in corporate, general and administrative costs during the current period is primarily due to higher incentive and other compensation costs, including a one-time charge of approximately$1.3 million related to the acceleration of time-based restricted shares and the modification of performance stock-based compensation for our former Chief Operating Officer who retired onMarch 4, 2022 . •Interest Expense. Interest expense increased as a result of the additional debt outstanding during the first quarter of 2022 related to the NCI Transaction and higher base rates on our floating rate debt that is not hedged.
•Other Income, net. Other income, net decreased during the first quarter of 2022
as a result of a reduction in interest income during the period due to the
repayment in full of several mezzanine loans totaling approximately
•Income Tax Expense. The Company recorded a$2.0 million income tax benefit during the three months endedMarch 31, 2022 primarily due to taxable losses incurred during the period related to certain of our TRS entities.
Non-GAAP Financial Measures
We disclose certain "non-GAAP financial measures," which are measures of our
historical financial performance. Non-GAAP financial measures are financial
measures not prescribed by Generally Accepted Accounting Principles ("GAAP").
These measures are as follows: (i) Funds From Operations ("FFO") and Adjusted
Funds from Operations ("AFFO"), (ii) Earnings before Interest, Taxes,
Depreciation and Amortization ("EBITDA"), Earnings before Interest, Taxes,
Depreciation and Amortization for Real Estate ("EBITDAre") and Adjusted EBITDAre
(as described below). We caution investors that amounts presented in accordance
with our definitions of non-GAAP financial measures may not be comparable to
similar measures disclosed by other companies, since not all companies calculate
these non-GAAP financial measures in the same manner. Our non-GAAP financial
measures should be considered along with, but not as alternatives to, net income
(loss) as a measure of our operating performance. Our non-GAAP financial
measures may include funds that may not be available for our discretionary use
due to functional requirements to conserve funds for capital expenditures,
property acquisitions, debt service obligations and other commitments and
uncertainties. Although we believe that our non-GAAP financial measures can
enhance the understanding of our financial condition and results of operations,
these non-GAAP financial measures are not necessarily better indicators of any
trend as compared to a comparable measure prescribed by GAAP such as net income
(loss).
FFO and AFFO
As defined by Nareit, FFO represents net income or loss (computed in accordance
with GAAP), excluding preferred dividends, gains (or losses) from sales of real
property, impairment losses on real estate assets, items classified by GAAP as
extraordinary, the cumulative effect of changes in accounting principles, plus
depreciation and amortization related to real estate assets, and adjustments for
unconsolidated partnerships, and joint ventures. AFFO represents FFO excluding
amortization of deferred financing costs, franchise fees, equity-based
compensation expense, debt transaction costs, premiums on redemption of
preferred shares, losses from net casualties, non-cash lease expense, non-cash
interest income and non-cash income tax related adjustments to our deferred tax
assets. Unless otherwise indicated, we present FFO and AFFO applicable to our
common shares and common units. We present FFO and AFFO because we consider FFO
and AFFO important supplemental measures of our operational performance and
believe they are frequently used by securities analysts, investors and other
interested parties in the evaluation of REITs, many of which present FFO and
AFFO when reporting their results. FFO and AFFO are intended to exclude GAAP
historical cost depreciation and amortization, which assumes that the value of
real estate assets diminishes ratably over time. Historically, however, real
estate values have risen or fallen with market conditions. Because FFO and AFFO
exclude depreciation and amortization related to real estate assets, gains and
losses from real property dispositions and impairment losses on real estate
assets, FFO and AFFO provide performance measures that, when compared year over
year, reflect the effect to operations from trends in occupancy, guestroom
rates, operating costs, development activities and interest costs, providing
perspective not immediately apparent from net income. Our computation of FFO
differs slightly from the computation of Nareit-defined FFO related to the
reporting of corporate depreciation and amortization expense, and adjustments
related to provision for credit losses. Our computation of FFO may also differ
from the methodology for calculating FFO used by other equity REITs and,
accordingly, may not be comparable to such other REITs. FFO and AFFO should not
be considered as alternatives to net income (loss) (computed in accordance with
GAAP) as an indicator of our liquidity, nor are they indicative of funds
available to fund our cash needs, including our ability to pay dividends or make
distributions. Where indicated in this Quarterly Report on Form 10-Q, FFO is
based on our computation of FFO and not the computation of Nareit-defined FFO
unless otherwise noted.
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The following is a reconciliation of our GAAP net loss to FFO and AFFO for the
three months ended March 31, 2022 and 2021 (in thousands, except per share/unit
amounts):
For the
Three Months Ended
March 31,
2022 2021
Net loss $ (8,973) $ (32,871)
Preferred dividends (4,525) (3,709)
Loss related to non-controlling interests in joint venture 82 1,452
Net loss applicable to common shares and common units (13,416) (35,128)
Real estate-related depreciation 35,195 27,180
Gain on disposal of assets, net - (50)
Adjustments related to non-controlling interests in consolidated joint venture
(7,286) (1,510)
FFO applicable to common shares and common units 14,493 (9,508)
Amortization of intangible assets 911 -
Amortization of lease-related intangible assets, net - 22
Amortization of deferred financing costs 1,412 1,011
Amortization of franchise fees 168 117
Equity-based compensation 3,698 1,569
Debt transaction costs - 116
Non-cash interest income (122) (257)
Non-cash lease expense, net 128 120
Casualty losses (recoveries), net 185 (35)
Adjustments related to non-controlling interests in consolidated joint venture
(732) (78)
AFFO applicable to common shares and common units (1) $ 20,141 $ (6,923)
FFO per common share/common unit $ 0.12 $ (0.09)
AFFO per common share/common unit $ 0.17 $ (0.07)
Weighted average diluted common shares/common units:
FFO and AFFO (2) (3) 118,976 104,440
(1)AFFO applicable to common shares and common units for the three months ended
March 31, 2022 and 2021 has not been adjusted for interest related to our
Convertible Notes for purposes of calculating AFFO per common share/common unit
because we intend to settle the principal portion of the Convertible Notes in
cash and we did not include in the denominator of our calculation of AFFO per
common share/common unit the potential dilutive effect of shares that would be
issued if the principal portion of the Convertible Notes were converted into
shares of our common stock.
(2)Includes common units in the Operating Partnership held by limited partners
(other than us and our subsidiaries) because the common units are redeemable for
cash or, at our election, shares of our common stock.
(3)The weighted average diluted common shares/common units used to calculate FFO
and AFFO per common share/common unit for the three months ended March 31, 2022
and 2021 includes the dilutive effect of our outstanding restricted stock
awards. These shares were excluded from our weighted average shares outstanding
used to calculate net loss per share because they would have been antidilutive.
The weighted average common shares/common units used to calculate FFO and AFFO
per common share/common unit for the three months ended March 31, 2022 and 2021
exclude the potential dilution related to our Convertible Notes as we intend to
settle the principal value of the Convertible Notes in cash.
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A reconciliation of weighted average diluted common shares to non-GAAP weighted
average diluted common shares/common units for FFO and AFFO is as follows (in
thousands):
For the Three Months Ended
March 31,
2022 2021
Weighted average common shares outstanding 104,896 104,278
Dilutive effect of unvested restricted stock awards 627 -
Dilutive effect of shares issuable upon conversion of convertible debt
23,978 -
Adjusted weighted dilutive common shares outstanding 129,501 104,278
Non-GAAP adjustment for dilutive effects of common units 13,453 162
Non-GAAP adjustment for dilutive effect of shares issuable upon conversion of convertible debt
(23,978) -
Non-GAAP weighted dilutive common shares/common units
outstanding 118,976 104,440
AFFO applicable to common shares and common units increased $28.9 million for
the three months ended March 31, 2022 compared to the same period of 2021. The
increase was due to the NCI Transaction which significantly expanded the size of
our portfolio with the acquisition of 27 hotel properties and two parking
garages. In addition, the increase in AFFO applicable to common shares and
common units during the first quarter of 2022 was due to an improvement in our
business that has been primarily driven by leisure travel and to a lesser extent
modest improvement in other demand segments.
EBITDA, EBITDAre and Adjusted EBITDAre
EBITDA
EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions.
EBITDAre and Adjusted EBITDAre
EBITDAre is based on EBITDA and is expected to provide additional relevant
information about REITs as real estate companies in support of growing interest
among generalist investors. EBITDAre is intended to be a supplemental non-GAAP
performance measure that is independent of a company's capital structure and
will provide a uniform basis to measure the enterprise value of a company
compared to other REITs.
EBITDAre, as defined by Nareit, is calculated as EBITDA, excluding: (i) loss and
gains on disposition of property and (ii) asset impairments, if any. We believe
EBITDAre is useful to an investor in evaluating our operating performance
because it provides investors with an indication of our ability to incur and
service debt, to satisfy general operating expenses, to make capital
expenditures and to fund other cash needs or reinvest cash into our business. We
also believe it helps investors meaningfully evaluate and compare the results of
our operations from period to period by removing the effect of our asset base
(primarily depreciation and amortization) from our operating results.
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We make additional adjustments to EBITDAre when evaluating our performance, such
as adjustments related to the provision for credit losses, because we believe
that the exclusion of certain additional non-recurring or certain non-cash items
described below provides useful supplemental information to investors regarding
our ongoing operating performance. We believe that the presentation of Adjusted
EBITDAre, when combined with the primary GAAP presentation of net income, is
useful to an investor in evaluating our operating performance because it
provides investors with an indication of our ability to incur and service debt,
to satisfy general operating expenses, to make capital expenditures and to fund
other cash needs or reinvest cash into our business. We also believe it helps
investors meaningfully evaluate and compare the results of our operations from
period to period by removing the effect of our asset base (primarily
depreciation and amortization) from our operating results.
The following is a reconciliation of our GAAP net loss to EBITDA, EBITDAre and
Adjusted EBITDAre for the three months ended March 31, 2022 and 2021 (in
thousands):
For the
Three Months Ended
March 31,
2022 2021
Net loss $ (8,973) $ (32,871)
Depreciation and amortization 36,274 27,297
Interest expense 13,439 10,788
Interest income (2) (1)
Income tax (benefit) expense (2,000) 105
EBITDA 38,738 5,318
Gain on disposal of assets, net - (50)
EBITDAre 38,738 5,268
Amortization of lease-related intangible assets, net - 22
Equity-based compensation 3,698 1,569
Debt transaction costs - 116
Non-cash interest income (122) (257)
Non-cash lease expense, net 128 120
Casualty losses, net 185 (35)
Loss related to non-controlling interests in joint venture 82 1,452
Adjustments related to non-controlling interests in consolidated
joint venture (9,788) (2,031)
Adjusted EBITDAre $ 32,921 $ 6,224
Adjusted EBITDAre increased $26.7 million for the three months ended March 31,
2022 compared to the same period of 2021. The increase was due to the NCI
Transaction which significantly expanded the size of our portfolio with the
acquisition of 27 hotel properties and two parking garages. In addition, the
increase in Adjusted EBITDAre during the first quarter of 2022 was due to an
improvement in our business that has been primarily driven by leisure travel and
to a lesser extent modest improvement in other demand segments.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Due to the Pandemic, we entered into modifications of our 2018 Senior Credit Facility during the years endedDecember 31, 2020 and 2021, which included a waiver of covenants throughMarch 31, 2022 and restricted our ability to use advances on the$400 Million Revolver for certain purposes; however, we continue to be able to access the$400 Million Revolver to fund operations, for growth opportunities and to execute our business plan. Upon expiration of our covenant waivers inMarch 2022 , the capacity available under the$400 Million Revolver may be restricted based upon our quarterly achievement of certain liquidity or other financial metrics. The Company's availability under the$400 Million Revolver will fluctuate based on the performance of the Company relative to its covenant package. See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information concerning our 2018 Senior Credit Facility. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with internal and brand standards, capital expenditures to improve our hotel properties, hotel property development costs, acquisitions, interest payments, settlement of interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, mezzanine loan funding commitments, our Joint Venture acquisitions and capital requirements, contractual lease payments, corporate overhead, and distributions to our stockholders when declared. We have approximately$62.0 million of debt under our 2017 Term Loan maturing inNovember 2022 . We currently have adequate liquidity to fund this maturity. Our corporate overhead primarily consists of employee compensation expenses, professional fees and corporate insurance and rent expenses. Cash requirements for our corporate overhead expenses (excluding non-cash stock-based compensation), which are generally paid from operating cash flows, were$7.5 million and$4.1 million for the three months endedMarch 31, 2022 and 2021, respectively. We generally expect our corporate overhead expenses to remain consistent with the level of our operating activities and market conditions for goods and services. Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our hotel properties, dividend distributions and scheduled debt payments, including maturing loans.
During the three months ended
During the three months endedMarch 31, 2021 we sold Convertible Notes totaling approximately$280.0 million before consideration of the related capped call transactions, and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company (including net proceeds from the full exercise by the underwriters of their over-allotment option to purchase additional Convertible Notes). These proceeds were used to pay the cost of the capped call transactions and to partially repay outstanding obligations under the 2018 Senior Credit Facility and 2017 Term Loan. See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information concerning the Convertible Notes, Convertible Notes Offering and the Capped Call Transactions. To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to distribute a sufficient amount of our taxable income to maintain our status as a REIT and to avoid tax on undistributed income. Because we anticipate distributing a substantial amount of our available cash from operations, if sufficient funds are not available to us from hotel property dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business. 43
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Outstanding Indebtedness
Subsequent to quarter-end, atApril 22, 2022 , we had$200.0 million outstanding on our$200 Million Term Loan,$62.0 million outstanding on our 2017 Term Loan and$225.0 million outstanding on our 2018 Term Loan. Each of the credit facilities was supported by the 46 hotel properties included in the credit facility borrowing base and a pledge of the equity securities in each of the entities which own one of the 46 hotel properties, and the respective TRS Lessees. We also had$287.5 million of Convertible Notes outstanding. Subsequent to quarter-end, atApril 22, 2022 , the Joint Venture had$143.5 million outstanding under our Joint Venture Credit Facility, which included borrowings of$75.0 million on its$75 million term loan and$68.5 million on its$125 million revolving line of credit. The Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that hold the five hotel property borrowing base assets, and the related TRS entities, which wholly own the TRS lessees that lease each of the borrowing base assets. As ofApril 22, 2022 , our Joint Venture also owns eight hotel properties that are not collateral for the Joint Venture Credit Facility. See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information related to our Joint Venture financing arrangements. To complete the NCI Transaction, the Joint Venture entered into a$410.0 million senior secured term loan facility (the "Joint Venture Term Loan"). The Joint Venture Term Loan has an accordion feature which will permit an increase in the total commitments by up to$190.0 million , for aggregate potential borrowings of up to$600.0 million . The Second Joint Credit Facility will mature onJanuary 13, 2026 and can be extended for one 12-month period at the Company's option, subject to certain conditions. The Joint Venture Term Loan is interest-only and provides for a floating interest rate equal to SOFR plus 2.86%. Subsequent to quarter-end, atApril 22, 2022 , the Joint Venture had$410.0 million outstanding under the Joint Venture Term Loan. See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information related to our Joint Venture financing arrangements. AtMarch 31, 2022 , we have scheduled debt principal amortization payments during the next twelve months totaling$3.4 million and debt maturities of$62.0 million . Currently, we have the capacity to pay these scheduled principal debt payments using cash on hand or draws under our$400 Million Revolver. We have obtained financing through debt instruments having staggered maturities and intend to continue to do so in the future. Our debt includes, and may include in the future, debt secured by stock pledges, debt secured by first priority mortgage liens on certain hotel properties and unsecured debt. We believe that we will have adequate liquidity to meet the requirements for scheduled maturities and principal repayments. However, we can provide no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable terms. Our outstanding indebtedness requires us to comply with various financial and other covenants. AtMarch 31, 2022 , we are in compliance with all of the Company's loan agreements. We have entered into certain amendments of the 2018 Senior Credit Facility, the 2018 Term Loan and the 2017 Term Loan that give us full access to the$400 Million Revolver (subject to certain conditions), provide for financial covenant waivers throughMarch 31, 2022 , and modify certain financial covenant measures throughDecember 31, 2023 . Additionally, we have amended the Joint Venture Credit Facility to provide for certain financial covenant waivers and adjustments as described in "Note 5 - Debt" to the Condensed Consolidated Financial Statements. Our outstanding indebtedness requires us to comply with various financial and other covenants. AtMarch 31, 2022 , we and our Joint Venture are in compliance with all loan covenants.
See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information concerning the loan amendments and our financing arrangements.
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A summary of our gross debt at March 31, 2022 is as follows (dollars in
thousands):
Amortization Number of Principal Amount
Lender Interest Rate Period (Years) Maturity Date Encumbered Properties Outstanding
2018 Senior Credit Facility (1)
Deutsche Bank AG New York Branch
$400 Million Revolver 2.65% Variable n/a March 31, 2023 n/a $ -
$200 Million Term Loan 2.60% Variable n/a April 1, 2024 n/a 200,000
Total Senior Credit and Term Loan
Facility 200,000
Term Loans (1)
KeyBank National Association Term
Loan 2.70% Variable n/a November 25, 2022 n/a 62,000
KeyBank National Association Term
Loan 2.40% Variable n/a February 14, 2025 n/a 225,000
287,000
Convertible Notes 1.50% Fixed n/a February 15, 2026 n/a 287,500
Secured Mortgage Indebtedness
MetaBank 4.44% Fixed 25 July 1, 2027 3 44,780
KeyBank National Association 4.46% Fixed 30 February 1, 2023 3 18,415
4.52% Fixed 30 April 1, 2023 3 18,893
4.30% Fixed 30 April 1, 2023 3 18,229
4.95% Fixed 30 August 1, 2023 2 32,945
Bank of the Cascades 2.08% Variable
25 December 19, 2024 1 (3) 7,891
4.30% Fixed 25 December 19, 2024 - (3) 7,891
15 149,044
923,544
Joint Venture Credit Facilities and
Term Loans (2)
Bank of America, N.A .
$125 Million Revolver 2.55% Variable n/a October 8, 2023 n/a 68,500
$75 Million Term Loan 2.50% Variable n/a October 8, 2023 n/a 75,000
Bank of America, N.A. (4) 2.91% Variable n/a January 13, 2026 n/a 410,000
Wells Fargo 4.99% Fixed 30 June 6, 2028 1 13,207
PACE loan(5) 6.10% Fixed 20 July 31, 2040 1 6,389
Total Joint Venture Credit Facility
and Term Loans 2 573,096
Total Debt 17 $ 1,496,640
(1)The 2018 Senior Credit Facility and Term Loans are supported by a borrowing
base of 46 unencumbered hotel properties and a pledge of the equity securities
of the entities that own and operate the 46 unencumbered hotel properties.
(2)The Joint Venture Credit Facility is secured by pledges of the equity in the
entities (and affiliated entities) that own five of the hotel proeprties owned
by the joint venture.
(3)The Bank of Cascades mortgage loan is comprised of two promissory notes that
are secured by the same collateral and cross-defaulted.
(4)The Joint Venture Credit Facilities and Term Loans are secured by a pledge of
the equity interests in the subsidiaries that own and operate the borrowing base
assets financed by the facility.
(5)The PACE loan is secured by an assessment lien imposed by the County of
Tarrant, Texas for the benefit of the lender.
We are exposed to interest rate risk through our variable-rate debt. We manage
this risk primarily by managing the amount, sources, and duration of our debt
funding and through the use of derivative financial instruments. Specifically,
we enter into derivative financial instruments to manage our exposure to known
or expected cash payments related to our variable-rate debt. During the three
months ended March 31, 2022 , the fair value of our interest rate swaps increased
$12.1 million due to an increase in interest rate expectations. Each interest
rate swap fixes the interest rates on portions of our variable interest rate
indebtedness and converts LIBOR from a floating rate to average fixed rates
ranging from 1.98% to 2.93%.
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--------------------------------------------------------------------------------Capital Expenditures
During the three months endedMarch 31, 2022 , we funded$10.3 million in capital expenditures at our hotel properties. We anticipate spending an additional$60.0 million to$80.0 million on capital expenditures across our portfolio during the remainder of 2022 assuming a reasonable recovery in lodging demand occurs throughout the remainder of the year. We expect to fund these expenditures through a combination of cash on hand, working capital, borrowings under our$400 Million Revolver, or other potential sources of capital, to the extent available to us. Cash Flows For the Three Months Ended March 31, 2022 2021 Change (in thousands) Net cash provided by (used in) operating activities$ 25,505 $ (3,167) $ 28,672 Net cash used in investing activities (284,818) (6,243) (278,575) Net cash provided by financing activities 277,602 17,902 259,700 Net change in cash, cash equivalents and restricted cash$ 18,289 $ 8,492 $ 9,797
Changes from the three months ended
•Cash provided by (used in) operating activities. This increase primarily resulted from an increase in net income of$35.4 million after adjusting for non-cash items, such as depreciation and amortization and gains on the sale of assets, and net changes in working capital of$6.7 million . The net changes in working capital were primarily due to increases in accrued expenses during the three months endedMarch 31, 2021 as a result of an increase in the number of hotel properties during the first quarter of 2022 with the NCI Transaction, decreases in Prepaid expenses and other as a result of the NCI Transaction, offset by an increase in Trade receivables, net due to the increased size of our hotel portfolio with the NCI Transaction. •Cash used in investing activities. This increase in cash used in investing activities is due to the NCI Transaction which resulted in the acquisition of 27 hotel properties and two parking garages. •Cash provided by financing activities. Cash provided by financing activities for the three months endedMarch 31, 2022 was primarily the result of contributions from our joint venture partner of$203.7 million for the NCI Transaction, borrowings under the Joint Venture Term Loan for the NCI Transaction, offset by debt repayments, including the repayment of$328.7 million of debt assumed as part of the NCI Transaction. During the first quarter of 2021, cash provided by financing activities was primarily the result of the completion of a convertible debt offering of$287.5 million aggregate principal amount, which was used to partially repay obligations under the 2018 Senior Credit Facility and to pay the cost of capped call transactions.
Critical Accounting Policies
For critical accounting policies, see "Note 2 - Basis of Presentation and Significant Accounting Policies" to the Condensed Consolidated Financial Statements.
Cybersecurity
The hospitality industry and certain of the major brand and franchise companies
have recently experienced cybersecurity breaches. We are not aware of any
material cybersecurity losses at any of our properties. We manage cybersecurity
risks at our hotel properties through our franchisors and property management
companies. An important part of our cybersecurity risk mitigation efforts
includes maintaining cybersecurity insurance and indemnifications in certain of
our property management agreements. Our Board of Directors provides on-going
oversight of management's approach to managing cybersecurity risks.
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