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, 2020 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 the novel coronavirus (COVID-19) 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 COVID-19 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;
•levels of spending for business and leisure travel, as well as consumer
confidence;
•supply and demand factors in our markets or sub-markets;
•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 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;
•changes in zoning laws;
•increases in real property taxes that are significantly higher than our
expectations;
•risks associated with hotel acquisitions, including the ability to ramp up and
stabilize newly acquired hotels 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;
•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 our ability to retain qualified personnel;
•our failure to maintain our qualification as a real estate investment trust
("REIT") under the IRC;
•changes in our business or investment strategy;
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•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 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 when LIBOR is replaced with a new benchmark
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; 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, 2020 .
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 hotels. AtMarch 31, 2021 , our portfolio consisted of 72 hotels with a total of 11,288 guestrooms located in 23 states. We own our hotels in fee simple, except for four hotels which are subject to ground leases. As ofMarch 31, 2021 , we own 100% of the outstanding equity interests in 67 of our 72 hotels. We own a 51% controlling interest in five hotels acquired in 2019 through a joint venture. Our hotels 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®
We have elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year endedDecember 31, 2011 . To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to our taxable REIT subsidiaries ("TRS Lessees"). All of our hotels are operated pursuant to hotel management agreements between our TRS Lessees and professional third-party hotel management companies that are not affiliated with us as follows: Number of Number of Management Company Properties Guestrooms
Affiliates of
34 5,336
OTO Development, LLC 15 2,164
Stonebridge Realty Advisors, Inc. and affiliates 9 1,312
Affiliates of Marriott, including
6 973
White Lodging Services Corporation 4 791
American Liberty Hospitality, Inc. 2 372
1 252
Crestline Hotels & Resorts, LLC 1 88
Total 72 11,288
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Our typical hotel management agreement requires us to pay a base fee to our
hotel manager calculated as a percentage of hotel revenues. In addition, our
hotel management agreements generally provide that the hotel 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 managers in
the future. We do not, and will not, have any ownership or economic interest in
any of the hotel management companies engaged by our TRS Lessees.
Our revenues are derived from hotel operations and consist of room revenue, food
and beverage revenue and other hotel operations revenue. Revenues from our other
hotel 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. 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 COVID-19 global pandemic, which is expected to continue until an effective vaccine is more broadly distributed, government restrictions are lifted, consumer confidence is restored and a recovery in hospitality and travel-related demand occurs. During the first quarter of 2021, we began to see a more significant recovery in leisure demand, which we expect to continue in the summer months. However, corporate transient and group demand remains significantly reduced from historical levels and is expected to recover later and more slowly than leisure demand.
Effects of COVID-19 Pandemic on Our Business
OnJanuary 30, 2020 , theWorld Health Organization ("WHO") declared a public health emergency of international concern related to a novel coronavirus ("COVID-19"), and onMarch 11, 2020 , theWHO declared COVID-19 to be a pandemic. ByMarch 31, 2020 , stay-at-home directives had been issued in many states acrossthe United States and many local jurisdictions had additionally required the temporary closure of businesses deemed to be non-essential. The restrictions implemented in response to the COVID-19 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 have resulted in a substantial decline in our revenues, profitability and cash flows from operations. The COVID-19 pandemic caused the Company to temporarily suspend operations at six hotels containing 934 guestrooms inMarch 2020 . An additional nine hotels, containing 1,278 guestrooms, each of which is adjacent to another of our hotels ("Sister Properties "), continued to accept reservations, but guests were directed toSister Properties . In May of 2020, five hotels containing 682 guestrooms and four hotel properties adjacent toSister Properties containing 506 guestrooms were re-opened. During the second half of 2020, three hotel properties adjacent toSister Properties containing 430 guestrooms were re-opened. As ofMarch 31, 2021 , only one hotel with 252 guestrooms still has suspended operations and guests at two other hotels containing 342 guestrooms are being directed toSister Properties . The effects of the COVID-19 pandemic on our operations were the primary drivers of a 45.4% decline in RevPAR during the three months endedMarch 31, 2021 in comparison to the three months endedMarch 31, 2020 . Furthermore, our income from hotel operations declined from$29.7 million during the three months endedMarch 31, 2020 to$7.7 million for the three months endedMarch 31, 2021 . During the first quarter of 2021, the administration of COVID-19 vaccines has rapidly increased and government restrictions in many jurisdictions have been eased or lifted. As a result, we have experienced a sequential improvement in our business that has been primarily driven by leisure travel. A recovery in business travel and group business has been slower and we anticipate that these trends will continue until the effects of the COVID-19 pandemic subside. However, it is currently extremely difficult to predict how long the adverse effects of the COVID-19 pandemic will continue, when an economic recovery will commence and the length of time it will take for us to return to operational and financial performance that is consistent with past performance. 33 --------------------------------------------------------------------------------
Management's Actions in Response to the Effects of COVID-19 on Our Operations
We have taken the following actions to mitigate the negative effects of the COVID-19 pandemic on our consolidated financial position, results of operations and cash flows:
Operational Adjustments In response to the rapid decline in demand for room nights and loss of revenues as a result of the COVID-19 pandemic, we, along with our property managers, evaluated each hotel in our portfolio to determine if market conditions warranted the temporary suspension of operations, and to adjust labor cost structures for hotels that would continue to operate. Although the vast majority of our hotels have remained open, staffing levels have been reduced to levels that safely and effectively maintain reasonable accommodations for our guests, including essential hotel functions such as cleaning and disinfecting to mitigate the spread of COVID-19. As demand at our hotels has increased, we have also increased staffing commensurately.
Financial Measures and Liquidity
We took significant action to enhance our overall liquidity position in response to the COVID-19 pandemic's effect on our financial position. The following is a summary of certain measures that we have adopted in order to improve our overall liquidity position: •We further amended loan agreements of our 2018 Senior Credit Facility, 2017 Term Loan and 2018 Term Loan (each as defined in "Note 5 - Debt" to the Condensed Consolidated Financial Statements) inFebruary 2021 to provide for financial covenant waivers throughMarch 31, 2022 , to obtain certain modifications to financial covenant measures throughDecember 31, 2023 and to access the full borrowing capacity under our$400 million revolving credit facility ("$400 Million Revolver") subject to certain conditions. AtMay 1, 2021 , we had$50.4 million of consolidated unrestricted cash on hand and an additional$390.0 million of undrawn availability on our$400 Million Revolver. We have no debt maturing beforeNovember 2022 . •We further amended our joint venture credit agreement inApril 2021 to provide for certain financial covenant waivers and adjustments as described below. •We completed the offering of$287.5 million of Convertible Notes (as defined below) inJanuary 2021 and used a portion of the proceeds to repay the outstanding borrowings under our$400 Million Revolver and to partially repay outstanding balances under our term loan obligations. These transactions ensured the availability of sufficient capacity under the$400 Million Revolver to provide adequate liquidity should we experience a prolonged disruption in lodging demand. •We suspended the declaration and payment of dividends on our common stock and operating partnership units beginning in the first quarter of 2020. This conserves an additional$19.0 million of cash quarterly, or$75.0 million on an annualized basis. •We postponed non-essential capital improvement projects beyond those already substantially complete and continue to adjust capital improvement spending in response to changes in demand. •We adopted comprehensive cost reduction initiatives, including the reduction of labor and temporary elimination of certain services and amenities, at all hotels. Certain labor costs and services or amenities have been added back on a limited basis as improvements in occupancy levels have supported. As described above, we temporarily suspended operations at certain hotels in response to specific government mandates or as the result of adverse market conditions. •We implemented a voluntary temporary reduction of base salaries and fees, respectively, for executive officers and independent members of the Board of Directors for a portion of 2020. •We furloughed approximately 25% of the corporate-level staff inApril 2020 . Certain of the furloughed staff were reinstated during 2020 to meet specific needs of the Company as supported by our operating performance, but the majority of the furloughed positions were permanently eliminated during the third quarter. •We implemented temporary salary reductions for the majority of our remaining non-executive employees for a portion of 2020. 34 -------------------------------------------------------------------------------- •We implemented a temporary hiring freeze for any new corporate-level positions. We expect that the operational, financial and liquidity measures that we have taken will allow us to meet our funding needs for the foreseeable future. However, there is substantial uncertainty as to how long the economic hardship caused by the COVID-19 pandemic will last and the timing and rate of an economic recovery afterwards. Modification of TRS Leases All of our hotels are leased by either ourOperating Partnership , or subsidiary REITs to our TRS Lessees. Economic challenges caused by the COVID-19 pandemic have resulted in the temporary suspension of operations of certain hotels and significantly reduced operations at the hotels that have remained open for business. InDecember 2020 , most of our TRS Lessees received rent abatements for rent deficiencies. During the three months endedMarch 31, 2021 , prospective lease modifications were entered into with most of our TRS Lessees to reflect the current market conditions and better enable the TRS Lessees to manage their operations and cash flows at reduced levels. The deferral, abatement or modification of the rents related to our TRS Lessees has no effect on our consolidated financial position or results of operations. However, it may increase the income of our TRS Lessees on a stand-alone basis.
Health and Well-being
All of our hotels 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. The health and safety procedures at our hotels are designed and have been enhanced to address a broad spectrum of pathogens and viruses, including COVID-19, and include personal hygiene such as frequent and thorough hand-washing, cleaning product specifications, availability of disinfecting products for our guests, and guestroom and common area cleaning procedures. Our hotels have increased the frequency of cleaning throughout the hotels, with focused attention on high-touch areas such as entrances, public spaces, laundry rooms and staff offices. Additionally, many of our hotels have implemented contactless guest check-in and check-out and modified grab-and-go food and beverage offerings.
Forward-looking Information and Use of Estimates
The full effects of the COVID-19 pandemic 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 on our Company cannot be determined at this time; however, despite the uncertainty of the effects of the COVID-19 pandemic, we expect our full year 2021 results of operations to be adversely affected. While the potential magnitude and duration of the business and economic effects of COVID-19 are uncertain, we believe that the nascent recovery in our business that began during 2020 will continue into the year endingDecember 31, 2021 and 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 COVID-19 pandemic, please see Item 1A. Risk Factors. 35 --------------------------------------------------------------------------------
Our
AtMarch 31, 2021 , our portfolio consisted of 72 hotels with a total of 11,288 guestrooms. According to current chain scales as defined bySTR, Inc. , two of our hotel properties with a total of 280 guestrooms are categorized as Upper-upscale hotels, 60 of our hotel properties with a total of 9,537 guestrooms are categorized as Upscale hotels and 10 of our hotel properties with a total of 1,471 guestrooms are categorized as Upper-midscale hotels. Information about our hotel properties as ofMarch 31, 2021 is as follows: Number of Hotel Number of Franchise/Brand Properties Guestrooms Marriott Courtyard by Marriott 15 2,761 Residence Inn by Marriott 11 1,636 SpringHill Suites by Marriott 5 761 AC Hotel by Marriott 1 255 Marriott 1 165 Fairfield Inn & Suites by Marriott 1 140 Four Points by Sheraton 1 101Total Marriott 35 5,819 Hilton Hilton Garden Inn 7 1,067 Hampton Inn & Suites 7 986 Homewood Suites 2 251 DoubleTree by Hilton 1 210Total Hilton 17 2,514 Hyatt Hyatt Place 13 1,908 Hyatt House 3 466Total Hyatt 16 2,374 IHG Holiday Inn Express & Suites 2 345 Staybridge Suites 1 121 Hotel Indigo 1 115 Total IHG 4 581 Total 72 11,288 36
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We continuously 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.
See "Note 3 - Investment in Hotel Properties, net" to the Condensed Consolidated Financial Statements for additional information concerning our asset acquisitions, development, and dispositions.
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, 2021 compared with the three months endedMarch 31, 2020 (dollars in thousands, except ADR and RevPAR). For the Three Months Ended March 31, Quarter-over-Quarter Quarter-over-Quarter 2021 2020 Dollar Change Percentage Change Total Total Total Total Portfolio Portfolio Portfolio Portfolio (72 hotels) (72 hotels) (72 hotels) (72 hotels) Revenues: Room $ 53,245 $ 98,603$ (45,358) (46.0) % Food and beverage 1,003 4,884 (3,881) (79.5) % Other 3,606 4,898 (1,292) (26.4) % Total $ 57,854 $ 108,385$ (50,531) (46.6) % Expenses: Room $ 12,550 $ 24,573$ (12,023) (48.9) % Food and beverage 556 4,037 (3,481) (86.2) % Other hotel operating expenses 24,574 35,283 (10,709) (30.4) % Total $ 37,680 $ 63,893$ (26,213) (41.0) % Operational Statistics: Occupancy 50.3 % 61.4 % n/a (18.0) % ADR $ 104.12 $ 156.44$ (52.32) (33.4) % RevPAR $ 52.41 $ 95.99$ (43.58) (45.4) % 37
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Changes from the three months ended
•Revenues. The decline in revenues was primarily due to a significant decline in occupancy as a result of the COVID-19 pandemic. See "Industry Trends and Outlook - Effects of COVID-19 Pandemic on Our Business" for further information. •RevPAR. The declines in RevPAR were primarily due to a significant decline in occupancy as a result of the COVID-19 pandemic. See "Industry Trends and Outlook - Effects of COVID-19 Pandemic on Our Business" for further information. •Expenses. We have taken comprehensive cost reduction initiatives, including the reduction of labor and temporary elimination of certain services and amenities, at all hotels which led to the significant decline in operating expenses. The following table includes other consolidated income and expenses for the three months endedMarch 31, 2021 compared with the three months endedMarch 31, 2020 (dollars in thousands). For the Three Months Ended March 31, 2021 2020 Dollar Change Percentage Change Property taxes, insurance and other$ 10,904 $ 11,698 $ (794) (6.8) % Management fees 1,555 3,072 (1,517) (49.4) % Depreciation and amortization 27,297 27,079 218 0.8 % Corporate general and administrative 5,678 4,668 1,010 21.6 % Provision for credit losses - 2,530 (2,530) (100.0) % Loss on impairment and write-off of assets - 782 (782) (100.0) % Gain (loss) on disposal of assets, net 50 (3) 53 1,766.7 % Interest expense 10,788 11,012 (224) (2.0) % Other income, net 3,232 2,106 1,126 53.5 % Income tax expense 105 1,968 (1,863) (94.7) %
Changes from the three months ended
•Property Taxes, Insurance and Other. This decrease is primarily due to a reduction in property taxes related to certain properties as a result of the effects of the COVID-19 pandemic on 2021 property tax valuations. •Management Fees. This decrease is primarily due to reduced consolidated revenues, upon which management fees are based, as a result of the COVID-19 pandemic. •Depreciation and Amortization. This increase is due to incremental depreciation expense as a result of renovation completions and capital expenditures. •Corporate General and Administrative. This increase is primarily due to incentive and other compensation costs. •Gain (Loss) on Disposal of Assets. The gain on disposal of assets, net for the three months endedMarch 31, 2021 is due to the receipt of a legal settlement related to properties sold in a prior period. •Interest Expense. Interest expense decreased as a result of a reduction in our weighted average interest rate, primarily due to the Convertible Notes Offering. •Other Income, net. This increase is primarily due to the interest income recorded on our mezzanine loans as a result of the interest payments made in connection with the loan amendments completed during the three months endedMarch 31, 2021 . See "Note 4 - Investment in Real Estate Loans" to the Condensed Consolidated Financial Statements for further information. •Income Tax Expense. The Company recorded a$0.1 million income tax expense during the three months endedMarch 31, 2021 primarily attributable to current federal and state income taxes of our TRSs. The$2.0 million income tax expense recorded in the three months endedMarch 31, 2020 included a$2.1 million discrete non-cash deferred income tax related to the establishment of valuation allowances against our TRS Lessees' deferred tax assets. 38 --------------------------------------------------------------------------------
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.
39
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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, 2021 and 2020 (in thousands, except per share/unit
amounts):
For the
Three Months Ended
March 31,
2021 2020
Net loss $ (32,871) $ (16,214)
Preferred dividends (3,709) (3,709)
Loss related to non-controlling interests in joint venture 1,452 855
Net loss applicable to common shares and common units (35,128) (19,068)
Real estate-related depreciation 27,180 26,964
Loss on impairment and write-off of assets - 782
(Gain) loss on disposal of assets, net (50) 3
Provision for credit losses - 2,530
Adjustments related to non-controlling interests in consolidated joint venture
(1,510) (1,413)
FFO applicable to common shares and common units (9,508) 9,798
Amortization of lease-related intangible assets, net 22 22
Amortization of deferred financing costs 1,011 457
Amortization of franchise fees 117 115
Equity-based compensation 1,569 1,475
Debt transaction costs 116 1
Non-cash interest income (257) (791)
Non-cash lease expense, net 120 109
Casualty (recoveries) losses, net (35) 89
Increase in deferred tax asset valuation allowance - 2,058
Adjustments related to non-controlling interests in consolidated joint venture
(78) (64)
AFFO applicable to common shares and common units $ (6,923) $ 13,269
Weighted average diluted common shares/common units (1) 104,440 104,298
FFO per common share/common unit $ (0.09) $ 0.09
AFFO per common share/common unit (1)Includes common units in theOperating 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. AFFO applicable to common shares and common units decreased$20.2 million , or 152.2%, for the three months endedMarch 31, 2021 compared to the same period of 2020 due to a significant decline in revenue as a result of the COVID-19 pandemic. See "Industry Trends and Outlook - Effects of COVID-19 Pandemic on Our Business" for further information. 40 --------------------------------------------------------------------------------
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.
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.
41
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The following is a reconciliation of our GAAP net loss to EBITDA, EBITDAre and
Adjusted EBITDAre for the three months ended March 31, 2021 and 2020 (in
thousands):
For the
Three Months Ended
March 31,
2021 2020
Net loss $ (32,871) $ (16,214)
Depreciation and amortization 27,297 27,079
Interest expense 10,788 11,012
Interest income (1) (56)
Income tax expense 105 1,968
EBITDA 5,318 23,789
Loss on impairment and write-off of assets - 782
Provision for credit losses - 2,530
(Gain) loss on disposal of assets, net (50) 3
EBITDAre 5,268 27,104
Amortization of lease-related intangible assets, net 22 22
Equity-based compensation 1,569 1,475
Debt transaction costs 116 1
Non-cash interest income (257) (791)
Non-cash lease expense, net 120 109
Casualty (recoveries) losses, net (35) 89
Loss related to non-controlling interests in joint venture 1,452 855
Adjustments related to non-controlling interests in consolidated joint
venture (2,031) (2,114)
Adjusted EBITDAre $ 6,224 $ 26,750
Adjusted EBITDAre decreased $20.5 million , or 76.7%, for the three months ended
March 31, 2021 compared to the same period of 2020 due to a significant decline
in revenue as a result of the COVID-19 pandemic. See "Industry Trends and
Outlook - Effects of COVID-19 Pandemic on Our Business" for further information.
42
--------------------------------------------------------------------------------Liquidity and Capital Resources
The effects of the COVID-19 pandemic have adversely affected our financial position and cash flows from operations. The COVID-19 pandemic has also significantly increased economic uncertainty and has led to disruption and volatility in the global capital markets, which could increase the cost of and limit accessibility to capital. As such, our ability to raise capital through public or private offerings of our equity securities may be limited until capital markets recover toward pre-pandemic levels. In addition, we have entered into modifications of our 2018 Senior Credit Facility, which restricts 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, in addition to other items. Additionally, certain factors may have an adverse effect on our ability to access capital sources, including our financial performance, degree of leverage, the value of our unencumbered hotel properties, borrowing restrictions imposed by lenders, volatility in the equity and debt capital markets and other market conditions. Financing may not be available to us, or on terms that are attractive to us. 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 development costs, acquisitions, interest payments, settlement of interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, mezzanine loan funding commitments, joint venture acquisitions and capital requirements, corporate overhead, and distributions to our stockholders when declared. 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. 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 dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business. We currently have outstanding mezzanine loans on three real estate development projects to fund up to an aggregate of$54.6 million for the development of four hotel properties. Two of the real estate development loans, which closed in the fourth quarter of 2017, are fully funded. Both have a stated interest rate of 8.00% and mature onMarch 31, 2022 . One of the real estate development loans, which closed in the third quarter of 2019, has$20.3 million funded as ofMarch 31, 2021 , has$8.5 million remaining to be funded, and has a stated interest rate of 9.00% and a maturity date ofMay 15, 2022 . As ofMarch 31, 2021 , we have funded$46.1 million of our loan commitments. See "Note 4 - Investment in Real Estate Loans" for additional information concerning these loans and our rights to acquire ownership of the properties. We evaluated our notes receivable for potential credit losses by estimating the fair value of the collateral supporting each note receivable atMarch 31, 2021 based on assumptions related to the expected future performance of the collateral assets and the resulting anticipated net selling value of the assets at capitalization rates that are common for the asset class. Our current estimate of credit losses related to the real estate development loans of$2.6 million as a result of the COVID-19 pandemic is recorded as an allowance for credit losses atMarch 31, 2021 . OnJanuary 7, 2021 , we entered into an underwriting agreement pursuant to which the Company agreed to offer and sell$287.5 million aggregate principal amount of the Company's 1.50% convertible senior notes due 2026 (the "Convertible Notes"). The net proceeds from the Convertible Notes Offering, 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), were approximately$280.0 million before consideration of the Capped Call Transactions. 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. The Convertible Notes bear interest at a rate of 1.50% per year, payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, beginning onAugust 15, 2021 . The Convertible Notes will mature onFebruary 15, 2026 (the "Maturity Date"), unless earlier converted, purchased or redeemed. Prior toAugust 15, 2025 , the Convertible Notes will be convertible only upon certain circumstances and during certain periods. On or afterAugust 15, 2025 and through the Maturity Date, holders may convert any of their Convertible Notes into shares of the Company's common stock, at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day prior to the Maturity Date, unless the Convertible Notes have been previously purchased or redeemed by the Company. 43 -------------------------------------------------------------------------------- The initial conversion rate of the Convertible Notes is 83.4028 shares of common stock per$1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of$11.99 per share of common stock based on the 37.5% base conversion premium on the reference price of$8.72 per share. The conversion rate is subject to adjustment in certain circumstances. OnJanuary 7, 2021 , in connection with the pricing of the Convertible Notes, and onJanuary 8, 2021 , in connection with the full exercise by the Underwriters of their option to purchase additional Convertible Notes pursuant to the Underwriting Agreement, the Company entered into privately negotiated capped call transactions with certain of the underwriters or their respective affiliates and another financial institution (the "Capped Call Counterparties"). The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of shares of common stock underlying the Convertible Notes. The Capped Call Transactions are generally expected to reduce the potential dilution to holders of shares of common stock upon conversion of the Convertible Notes or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction or offset subject to a cap. The effective strike price of the Capped Call Transactions is initially$15.26 , which represents a premium of 75.0% over the last reported sale price of the common stock on theNew York Stock Exchange onJanuary 7, 2021 , and is subject to certain adjustments under the terms of the Capped Call transactions. See "Note 5 - Debt," for additional information concerning the Convertible Notes, Convertible Notes Offering and the Capped Call Transactions.
Outstanding Indebtedness
Subsequent to quarter-end, atMay 1, 2021 , we had$200.0 million outstanding on our$200 Million Term Loan,$84.0 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, atMay 1, 2021 , our subsidiary 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 borrowing base assets, and the related TRS entities, which wholly own the TRS lessees that lease each of the borrowing base assets. AtMarch 31, 2021 , we have scheduled debt principal amortization payments during the next twelve months totaling$4.0 million and no debt maturities. 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, 2021 , we are in compliance with all of the Company's loan agreements. OnFebruary 5, 2021 , the Company 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, onApril 29, 2021 , we 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.
There are currently no defaults under any of the Company's mortgage loan agreements.
See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information concerning the loan amendments and our financing arrangements.
44
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A summary of our gross debt at March 31, 2021 is as follows (dollars in
thousands):
Amortization Number of Principal Amount
Lender Interest Rate Period (Years) Maturity Date Encumbered Properties Outstanding
$600 Million Senior Credit and Term
Loan Facility (1)
Deutsche Bank AG New York Branch
$400 Million Revolver 2.65% Variable n/a March 31, 2023 n/a $ 20,000
$200 Million Term Loan 2.60% Variable n/a April 1, 2024 n/a 200,000
Total Senior Credit and Term Loan
Facility 220,000
Joint Venture Credit Facility (2)
Bank of America, N.A .
$125 Million Revolver 2.40% Variable n/a October 8, 2023 n/a 67,500
$75 Million Term Loan 2.35% Variable n/a October 8, 2023 n/a 75,000
Total Joint Venture Credit Facility 142,500
Term Loans (1)
KeyBank National Association
Term Loan 2.70% Variable n/a November 25, 2022 n/a 126,500
KeyBank National Association
Term Loan 2.40% Variable n/a February 14, 2025 n/a 225,000
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 45,894
KeyBank National Association 4.46% Fixed 30 February 1, 2023 3 18,915
4.52% Fixed 30 April 1, 2023 3 19,395
4.30% Fixed 30 April 1, 2023 3 18,728
4.95% Fixed 30 August 1, 2023 2 33,747
Bank of the Cascades 2.11% Variable 25 December 19, 2024 1 (3) 8,157
4.30% Fixed 25 December 19, 2024 - (3) 8,157
Total Mortgage Loans 152,993
Total Debt 15 $ 1,154,493
(1)The $600 Million Senior Revolving Credit and Term Loan Facility and Term
Loans are supported by a borrowing base of 52 unencumbered hotel properties and
a pledge of the equity securities of the entities that own and operate the 52
unencumbered hotels.
(2)The Joint Venture Credit Facility is secured by pledges of the equity in the
entities (and affiliated entities) that own the hotels.
(3)The Bank of Cascades mortgage loan is comprised of two promissory notes that
are secured by the same collateral and cross-defaulted.
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, 2021 , the fair value of our interest rate swaps increased
$6.2 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%.
45
--------------------------------------------------------------------------------Capital Expenditures
During the three months endedMarch 31, 2021 , we funded$3.6 million in capital expenditures at our hotel properties. We anticipate spending an estimated$20.0 million to$30.0 million on capital expenditures across our portfolio in 2021 assuming a reasonable recovery in lodging demand occurs throughout the year. We expect to fund these expenditures through a combination of cash on hand, working capital, borrowings under our$400 Million Revolver, or other potential sources of capital, to the extent available to us. Cash Flows For the Three Months Ended March 31, 2021 2020 Change (in thousands) Net cash (used in) provided by operating activities$ (3,167) $ 7,306 $ (10,473) Net cash used in investing activities (6,243) (12,720) 6,477 Net cash provided by financing activities 17,902 95,445 (77,543) Net change in cash, cash equivalents and restricted cash$ 8,492 $ 90,031 $ (81,539)
Changes from the three months ended
•Cash (used in) provided by operating activities. This decrease primarily resulted from a decrease in net income of$20.5 million after adjusting for non-cash items, such as depreciation and amortization and gains on the sale of assets, partially offset by net changes in working capital of$10.1 million . The overall decrease is primarily due to the effects of the COVID-19 pandemic. •Cash used in investing activities. This decrease in cash used in investing activities is primarily due to a reduction in capital expenditures of$7.5 million , partially offset by an increase in net real estate loan funding of$1.0 million . •Cash provided by financing activities. Cash provided by financing activities for the quarter endedMarch 31, 2020 was primarily the result of net borrowings under our revolving line of credit during the quarter endedMarch 31, 2020 of approximately$120 million , including a net$100.0 million precautionary draw at the end of the first quarter endedMarch 31, 2020 to offset the negative effects of the COVID-19 pandemic on our business. We repaid$75.0 million of the net$100.0 million draw during the third quarter of 2020. The net borrowings under our revolving line of credit were offset by dividend payments during the quarter endedMarch 31, 2020 of approximately$23.0 million . Cash provided by financing activities for the quarter endedMarch 31, 2021 was primarily the result of borrowings during the period of$317.5 million , including of the issuance of$287.5 million of convertible debt which was used to pay down our$400 Million Revolver, to partially repay outstanding balances under our term loan obligations and to purchase capped call options related to our convertible debt offering for approximately$21.1 million , further offset by debt financing fees of$8.7 million and dividend payments of$3.7 million . 46 --------------------------------------------------------------------------------
Contractual Obligations
The following table outlines the timing of required payments related to our long-term debt and other contractual obligations atMarch 31, 2021 (in thousands): Payments Due By Period Less than One to Three Four to Five More than Total One Year Years Years Five Years Debt obligations (1)$ 1,154,493 $ 3,951
126,188 38,722 65,366 20,202 1,898
Lease obligations (3) 34,164 2,035 2,540 1,825 27,764
Purchase obligations (4) 2,204 2,204 - - -
Total $ 1,317,049 $ 46,912 $ 648,984 $ 451,928 $ 169,225
(1)Amounts shown include amortization of principal and debt maturities.
(2)Interest payments on our variable rate debt have been estimated using the
interest rates in effect at March 31, 2021 , after giving effect to our interest
rate swaps.
(3)Amounts consist primarily of non-cancelable ground lease and corporate office
lease obligations.
(4)This amount represents purchase orders and executed contracts for development
or renovation projects at our hotel properties.
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 with 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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