SUNSTONE HOTEL INVESTORS, INC. Overview
Sunstone Hotel Investors, Inc. (the "Company," "we," "our" or "us") is aMaryland corporation. We operate as a self-managed and self-administered real estate investment trust ("REIT"). A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust for federal income tax purposes. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests ofSunstone Hotel Partnership, LLC (the "Operating Partnership"), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary,Sunstone Hotel TRS Lessee, Inc. (the "TRS Lessee"), which, directly or indirectly, leases all of our hotels from theOperating Partnership , and engages independent third-parties to manage our hotels. We own hotels that we consider to be Long-Term Relevant Real Estate® (or LTRR®) inthe United States , specifically hotels in urban and resort destination locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As part of our ongoing portfolio management strategy, on an opportunistic basis, we may also sell hotel properties that we believe will not satisfy our long-term return requirements. As ofSeptember 30, 2022 , we owned 15 hotels, which average 516 rooms in size. All but two of our hotels (theBoston Park Plaza and theOceans Edge Resort & Marina) are operated under nationally recognized brands. Our two unbranded hotels are located in top urban and resort destination markets that have enabled them to establish awareness with both group and transient customers.
COVID-19 Operational Update
COVID-19 and its variants have had and continue to have a detrimental effect on the hotel industry and our business, including significant room and event cancellations, corporate and government travel restrictions and an unprecedented decline in hotel demand. While operations have gradually improved since the onset of the COVID-19 pandemic in 2020, the Omicron variant inDecember 2021 led to a slowdown in demand recovery at our hotels. However, demand began to recover again inFebruary 2022 as Omicron-related case counts subsided and travel patterns re-accelerated. During the first nine months of 2022, corporate transient and group demand accelerated, reducing our reliance on leisure demand, which was the dominant source of business at many of our hotels during 2021. While leisure demand continued to be robust, the greatest demand growth during the second and third quarters of 2022 was at our urban and group-oriented hotels which experienced increased near-term booking activity, higher than expected attendance at group events and increased business transient demand. The amount of corporate business at our hotels continues to grow and we expect business travel to continue to increase as the year progresses. We anticipate that group demand will compose a more meaningful component of our total room nights during the remainder of 2022. However, the negative effects of the COVID-19 pandemic on the hotel industry have been unprecedented, and we continue to have limited visibility to predict future operations. Year To Date 2022 Overview
Demand. We continue to experience improvements in hotel demand. Occupancy during the first nine months of 2022 and 2021 at the 12 hotels we owned during all reporting periods (the "Existing Portfolio") was as follows:
January February March April May June July August September
2022 37.9 % 53.6 % 67.9 % 75.7 % 73.4 % 75.1 % 74.7 % 70.1 % 72.7 %
2021 14.0 % 24.5 % 31.7 % 42.0 % 47.3 % 50.7 % 60.7 % 50.6 % 48.3 %
Acquisitions. InJune 2022 , we purchased the 339-room The ConfidanteMiami Beach for a contractual purchase price of$232.0 million . Also inJune 2022 , we purchased the 25.0% noncontrolling partner's ownership interest in theHilton San Diego Bayfront for a contractual purchase price of$102.0 million plus 25.0% of closing date working capital and cash and the effective assumption of the 25.0% noncontrolling partner's share of the existing mortgage loan on the hotel, which was already fully consolidated in our financial 25
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statements. We paid a preliminary purchase price of
Dispositions. During the first nine months of 2022, we sold three hotels. InFebruary 2022 , we sold the Hyatt Centric Chicago Magnificent Mile for gross proceeds of$67.5 million , excluding closing costs, and recorded a gain of$11.3 million . InMarch 2022 , we sold the Embassy Suites Chicago and theHilton Garden Inn Chicago Downtown/Magnificent Mile for combined gross proceeds of$129.5 million , excluding closing costs, and recorded a combined gain of$11.6 million . Significant Renovations. During the first nine months of 2022, our significant renovations primarily consisted of additional progress on the renovation of the Renaissance Washington DC in preparation for its conversion to the Westin brand in 2023, and the completion of the room renovation at theHyatt Regency San Francisco . Debt Transactions. InFebruary 2022 , we used a portion of the proceeds received from the disposition of the Hyatt Centric Chicago Magnificent Mile to repay$25.0 million of our unsecured Series A Senior Notes and$10.0 million of our unsecured Series B Senior Notes, resulting in remaining balances of$65.0 million and$105.0 million , respectively, as ofSeptember 30, 2022 . InMarch 2022 , we elected to early terminate the covenant relief period related to our unsecured debt, having satisfied the financial covenants stipulated in the 2020 and 2021 amendments to our unsecured debt agreements (the "Unsecured Debt Amendments") for the quarter endedDecember 31, 2021 . The Unsecured Debt Amendments were scheduled to provide covenant relief through the end of the third quarter of 2022, with quarterly testing resuming for the period endingSeptember 30, 2022 . Following our early termination of the covenant relief period inMarch 2022 , the original financial covenants on our unsecured debt agreements were to be phased-in over the following five quarters to ease compliance. By exiting the covenant relief period, we are no longer subject to additional restrictions on debt issuance and repayment, capital investment, share repurchases and dividend distributions. InJune 2022 , we drew a total of$230.0 million under the revolving portion of our credit facility to fund the acquisitions of The ConfidanteMiami Beach and the noncontrolling partner's 25.0% interest in theHilton San Diego Bayfront . InJuly 2022 , we entered into a Second Amended and Restated Credit Agreement (the "Amended Credit Agreement") which expanded our unsecured borrowing capacity and extended the maturity of our two unsecured term loans. The Amended Credit Agreement increased the balances of both Term Loan 1 and Term Loan 2 to$175.0 million each from$19.4 million and$88.9 million , respectively. In addition, the maturity dates were extended toJuly 2027 andJanuary 2028 for Term Loan 1 and Term Loan 2, respectively. Under the Amended Credit Agreement, the term loans bear interest pursuant to a leverage-based pricing grid ranging from 135 basis points to 220 basis points over the applicable adjusted term SOFR. InJuly 2022 , we utilized the proceeds received from the incremental borrowing on the term loans to fully repay the$230.0 million that was outstanding on our revolving credit facility. The Amended Credit Agreement continues to provide for a$500.0 million revolving credit facility, with two six-month extension options, which would result in an extended maturity ofJuly 2027 . Under the Amended Credit Agreement, the revolving credit facility bears interest pursuant to a leverage-based pricing grid ranging from 140 basis points to 225 basis points over the applicable adjusted term SOFR. As ofSeptember 30, 2022 , we had no amount outstanding on our credit facility, with$500.0 million of capacity available for borrowing under the facility. Capital Transactions. During the third quarter and first nine months of 2022, we repurchased 880,577 shares and 7,995,560 shares of our common stock, respectively, under our stock repurchase program at average purchase prices of$9.82 per share and$10.82 per share, respectively. As ofSeptember 30, 2022 , approximately$413.5 million of authorized capacity remains under our stock repurchase program.
Operating Activities
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
? Room revenue, which is comprised of revenue realized from the sale of rooms at
our hotels;
? Food and beverage revenue, which is comprised of revenue realized in the hotel
food and beverage outlets as well as banquet and catering events; and
Other operating revenue, which includes ancillary hotel revenue and other items
? primarily driven by occupancy such as telephone/internet, parking, spa,
facility and resort fees, entertainment and other guest services. Additionally,
this category
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includes, among other things, attrition and cancellation revenue, tenant revenue
derived from hotel space and marina slips leased by third parties, winery
revenue, any business interruption proceeds and any performance guarantee or
reimbursements to offset net losses.
Expenses. Our expenses consist of the following:
? Room expense, which is primarily driven by occupancy and, therefore, has a
significant correlation with room revenue;
Food and beverage expense, which is primarily driven by hotel food and beverage
? sales and banquet and catering bookings and, therefore, has a significant
correlation with food and beverage revenue;
Other operating expense, which includes the corresponding expense of other
? operating revenue, advertising and promotion, repairs and maintenance,
utilities and franchise costs;
Property tax, ground lease and insurance expense, which includes the expenses
associated with property tax, ground lease and insurance payments, each of
? which is primarily a fixed expense, however property tax is subject to regular
revaluations based on the specific tax regulations and practices of each
municipality, along with our cash and noncash operating lease expenses, general
excise tax assessed by
Other property-level expenses, which includes our property-level general and
administrative expenses, such as payroll, benefits and other employee-related
? expenses, contract and professional fees, credit and collection expenses,
employee recruitment, relocation and training expenses, labor dispute expenses,
consulting fees, management fees and other expenses;
Corporate overhead expense, which includes our corporate-level expenses, such
as payroll, benefits and other employee-related expenses, amortization of
? deferred stock compensation, business acquisition and due diligence expenses,
legal expenses, association, contract and professional fees, board of director
expenses, entity-level state franchise and minimum taxes, travel expenses,
office rent and other customary expenses; and
Depreciation and amortization expense, which includes depreciation on our hotel
buildings, improvements, furniture, fixtures and equipment ("FF&E"), along with
? amortization on our finance lease right-of-use asset (prior to the related
hotel's sale in
Additionally, this category includes depreciation and amortization related to
FF&E for our corporate office.
Other Revenue and Expense. Other revenue and expense consists of the following:
Interest and other income (loss), which includes interest we have earned on our
restricted and unrestricted cash accounts, as well as any energy or other
? rebates, property insurance proceeds we have received, miscellaneous income,
contingency payments related to sold hotels and any gains or losses we have
recognized on sales or redemptions of assets other than real estate investments;
Interest expense, which includes interest expense incurred on our outstanding
fixed and variable rate debt and finance lease obligation (prior to the related
? hotel's sale in
amortization of deferred financing costs, and any loan or waiver fees incurred
on our debt;
? Gain on sale of assets, which includes the gains we recognized on our hotel
sales that do not qualify as discontinued operations;
(Loss) gain on extinguishment of debt, net, which includes losses recognized on
amendments or early repayments of mortgages or other debt obligations from the
? accelerated amortization of deferred financing costs, along with any other
costs, or gains related to the resolution of contingencies on extinguished
debt;
Income tax benefit (provision), net, which includes federal and state income
taxes related to continuing operations charged to the Company net of any
? refundable credits or refunds received, any adjustments to deferred tax assets,
liabilities or valuation allowances, and any adjustments to unrecognized tax
positions, along with any related interest and penalties incurred;
(Income) loss from consolidated joint venture attributable to noncontrolling
? interest, which includes the net (income) loss attributable to a third-party's
25.0% ownership interest in the joint venture that owned the
Bayfront prior to our acquisition of the interest inJune 2022 ; and 27 Table of Contents
Preferred stock dividends and redemption charges, which includes dividends
accrued on our Series E Cumulative Redeemable Preferred Stock ("Series E
preferred stock") and Series F Cumulative Redeemable Preferred Stock ("Series F
preferred stock") until their redemptions in
? respectively, as well as dividends accrued on our Series G Cumulative
Redeemable Preferred Stock ("Series G preferred stock"), Series H Cumulative
Redeemable Preferred Stock ("Series H preferred stock") and Series I Cumulative
Redeemable Preferred Stock ("Series I preferred stock"), along with any
redemption charges on preferred stock redemptions made in excess of net
carrying values.
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
? Occupancy, which is the quotient of total rooms sold divided by total rooms
available;
? Average daily room rate, or ADR, which is the quotient of room revenue divided
by total rooms sold;
Revenue per available room, or RevPAR, which is the product of occupancy and
? ADR, and does not include food and beverage revenue, or other operating
revenue;
RevPAR index, which is the quotient of a hotel's RevPAR divided by the average
RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100
? indicates a hotel is achieving higher RevPAR than the average of its
competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR
index;
EBITDAre, which is net income (loss) excluding: interest expense; benefit or
provision for income taxes, including any changes to deferred tax assets,
? liabilities or valuation allowances and income taxes applicable to the sale of
assets; depreciation and amortization; gains or losses on disposition of
depreciated property (including gains or losses on change in control); and any
impairment write-downs of depreciated property; Adjusted EBITDAre, excluding noncontrolling interest, which is EBITDAre
adjusted to exclude: the net income (loss) allocated to a third-party's 25.0%
ownership interest in the joint venture that owned the
Bayfront prior to our acquisition of the interest in
noncontrolling partner's pro rata share of any EBITDAre components;
amortization of deferred stock compensation; amortization of contract
? intangibles; amortization of right-of-use assets and obligations; the cash
component of ground lease expense for any finance lease obligation that has
been included in interest expense; the impact of any gain or loss from
undepreciated asset sales or property damage from natural disasters; any
lawsuit settlement costs; prior year property tax assessments or credits; the
write-off of development costs associated with abandoned projects;
property-level restructuring, severance and management transition costs; debt
resolution costs; and any other nonrecurring identified adjustments;
Funds from operations ("FFO") attributable to common stockholders, which is net
income (loss) and preferred stock dividends and any redemption charges,
excluding: gains and losses from sales of property; real estate-related
? depreciation and amortization (excluding amortization of deferred financing
costs and right-of-use assets and obligations); any real estate-related
impairment losses; and the noncontrolling partner's pro rata share of net
income (loss) and any FFO components prior to our acquisition of the noncontrolling partner's interest inJune 2022 ; and
Adjusted FFO attributable to common stockholders, which is FFO attributable to
common stockholders adjusted to exclude: amortization of deferred stock
compensation; amortization of contract intangibles; real estate-related
amortization of right-of-use assets and obligations; noncash interest on our
derivative and any finance lease obligations; income tax benefits or provisions
associated with any changes to deferred tax assets, liabilities or valuation
allowances, the application of net operating loss carryforwards and uncertain
? tax positions; gains or losses due to property damage from natural disasters;
any lawsuit settlement costs; prior year property tax assessments or credits;
the write-off of development costs associated with abandoned projects; non-real
estate-related impairment losses; property-level restructuring, severance and
management transition costs; debt resolution costs; preferred stock redemption
charges; the noncontrolling partner's pro rata share of any Adjusted FFO
components prior to our acquisition of the noncontrolling partner's interest in
Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
Demand. The demand for lodging has traditionally been closely linked with the
performance of the general economy. Our hotels are classified as either upper
? upscale or luxury hotels. In an economic downturn, these types of hotels may be
more susceptible to a decrease in revenue, as compared to hotels in other
categories that have lower room rates in part because
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they generally target business and high-end leisure travelers. In periods of
economic difficulty, including those caused by global pandemics and inflation,
business and leisure travelers may reduce costs by limiting travel or by using
lower cost accommodations. In addition, operating results in key gateway markets
may be negatively affected by reduced demand from international travelers due to
pandemic-related travel restrictions, financial conditions in their home
countries or a material strengthening of the
currencies. Also, volatility in transportation fuel costs, increases in air and
ground travel costs and decreases in airline capacity may reduce the demand for
our hotel rooms.
Supply. The addition of new competitive hotels affects the ability of existing
hotels to absorb demand for lodging and, therefore, impacts the ability to
generate growth in RevPAR and profits. The development of new hotels is largely
driven by construction costs and expected performance of existing hotels. Prior
to the COVID-19 pandemic,
market-by-market basis, some markets experienced new hotel room openings at or
? greater than historic levels, including in
Additionally, an increase in the supply of vacation rental or sharing services
such as Airbnb also affects the ability of existing hotels to generate growth
in RevPAR and profits. We believe that both new full-service hotel construction
and new hotel openings will be delayed in the near-term due to several factors,
including COVID-19's effect on the economy, increased borrowing costs and an
increase in materials and construction costs.
Revenues and expenses. We believe that marginal improvements in RevPAR index,
even in the face of declining revenues, are a good indicator of the relative
quality and appeal of our hotels, and our operators' effectiveness in
? maximizing revenues. Similarly, we also evaluate our operators' effectiveness
in minimizing incremental operating expenses in the context of increasing
revenues or, conversely, in reducing operating expenses in the context of
declining revenues. Inflationary pressures could increase operating costs,
which could limit our operators' effectiveness in minimizing expenses.
Operating Results. The following table presents our unaudited operating results for our total portfolio for the three months endedSeptember 30, 2022 and 2021, including the amount and percentage change in the results between the two periods. Three Months Ended September 30, 2022 2021 Change $ Change % (in thousands, except statistical data) REVENUES Room$ 158,400 $ 118,061 $ 40,339 34.2 % Food and beverage 63,476 27,338 36,138 132.2 % Other operating 22,438 22,022 416 1.9 % Total revenues 244,314 167,421 76,893 45.9 % OPERATING EXPENSES Hotel operating 145,686 110,946 34,740 31.3 % Other property-level expenses 29,032 21,633 7,399 34.2 % Corporate overhead 7,879 15,422 (7,543) (48.9) % Depreciation and amortization 31,750 32,585 (835) (2.6) % Impairment loss - 1,014 (1,014) (100.0) % Total operating expenses 214,347 181,600 32,747 18.0 % Interest and other income 270 2 268 13,400.0 % Interest expense (9,269) (7,983) (1,286) (16.1) % (Loss) gain on extinguishment of debt, net (770) 61 (831) (1,362.3) % Income (loss) before income taxes 20,198 (22,099) 42,297 191.4 % Income tax benefit (provision), net 290 (25) 315 1,260.0 % NET INCOME (LOSS) 20,488 (22,124) 42,612 192.6 % Income from consolidated joint venture attributable to noncontrolling interest - (933) 933 100.0 % Preferred stock dividends and redemption charge (3,351) (6,287) 2,936 46.7 % INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS$ 17,137 $ (29,344) $ 46,481 158.4 % 29 Table of Contents
The following table presents our unaudited operating results for our total
portfolio for the nine months ended
Nine Months Ended September 30,
2022 2021 Change $ Change %
(in thousands, except statistical data)
REVENUES
Room $ 428,893 $ 236,877 $ 192,016 81.1 %
Food and beverage 174,717 47,547 127,170 267.5 %
Other operating 64,299 50,840 13,459 26.5 %
Total revenues 667,909 335,264 332,645 99.2 %
OPERATING EXPENSES
Hotel operating 396,548 239,479 157,069 65.6 %
Other property-level expenses 83,333 48,177 35,156 73.0 %
Corporate overhead 27,310 32,066 (4,756) (14.8) %
Depreciation and amortization 94,003 96,084 (2,081) (2.2) %
Impairment loss - 1,014 (1,014) (100.0) %
Total operating expenses 601,194 416,820 184,374 44.2 %Interest and other income (loss) 4,766 (356)
5,122 1,438.8 % Interest expense (20,288) (23,697) 3,409 14.4 % Gain on sale of assets 22,946 - 22,946 100.0 % (Loss) gain on extinguishment of debt, net (962) 371 (1,333) (359.3) % Income (loss) before income taxes 73,177 (105,238) 178,415 169.5 % Income tax benefit (provision), net 126 (91) 217 238.5 % NET INCOME (LOSS) 73,303 (105,329) 178,632 169.6 % (Income) loss from consolidated joint venture attributable to noncontrolling interest (3,477) 1,638 (5,115) (312.3) % Preferred stock dividends and redemption charges (10,897) (17,289) 6,392 37.0 % INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS$ 58,929 $ (120,980) $
179,909 148.7 %
Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:
COVID-19: Our operations have been and continue to be affected by COVID-19 and
its variants. Since our portfolio's pandemic-induced occupancy low point in
?
growth and continued rate strength across our portfolio. Consequently, the
results of our operations for the third quarter and first nine months of 2022
are not comparable to the same periods in 2021.
the Montage Healdsburg, the
?
increased revenues, operating expenses and depreciation expense for the third
quarter and first nine months of 2022 as compared to the same periods in 2021.
Magnificent Mile, and in
and the
?
Embassy Suites La Jolla, respectively. As a result of these five hotel
dispositions (the "Five
depreciation expense for the third quarter and first nine months of 2022 are
not comparable to the same periods in 2021.
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Room revenue. Room revenue increased
Room revenue at the Existing Portfolio increased
? increased 1,930 basis points and the average daily room rate increased 11.0%,
resulting in a 51.2% increase in RevPAR:
Three Months Ended September 30,
2022 2021 Change
Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR
Existing Portfolio 72.5 % $ 290.42 $ 210.55 53.2 % $ 261.72 $ 139.24 1,930 bps 11.0 % 51.2 %
Three Recently
Acquired Hotels 57.2 % $ 656.33 $ 375.42 N/A N/A N/A N/A N/A N/A
?
million.
? The dispositions of the
For the nine months ended
Room revenue at the Existing Portfolio increased
? increased 2,560 basis points and the average daily room rate increased 20.7%,
resulting in a 95.7% increase in RevPAR:
Nine Months Ended September 30,
2022 2021 Change
Occ% ADR RevPAR Occ% ADR
RevPAR Occ% ADR RevPAR
Existing Portfolio 66.8 %
Three Recently Acquired Hotels 56.7 %$ 829.25 $ 470.18 N/A N/A N/A N/A N/A N/A
?
million.
? The dispositions of the
Food and beverage revenue. Food and beverage revenue increased$36.1 million , or 132.2%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 as follows:
? Food and beverage revenue at the Existing Portfolio increased
?
by
? The dispositions of the
to decrease by
For the nine months ended
? Food and beverage revenue at the Existing Portfolio increased
?
by
? The dispositions of the
to decrease by
Other operating revenue. Other operating revenue increased
Other operating revenue at the Existing Portfolio decreased
? retail, facility and resort fees, spa, marina, tenant rent and contract
commissions. During the third quarter of 2021, we recognized a
reimbursement to offset net losses at the
stipulated by the hotel's operating lease agreement, with no corresponding
reimbursement recognized in the third quarter of 2022.
?
by
? The dispositions of the
decrease by
For the nine months endedSeptember 30, 2022 , other operating revenue increased$13.5 million , or 26.5%, as compared to the nine months endedSeptember 30, 2021 as follows:
Other operating revenue at the Existing Portfolio increased
which includes
first quarter of 2022 at the
? Hurricane Ida disruption in 2021. In addition, other operating revenue at the
Existing Portfolio increased due to increases in internet, parking, retail,
facility and resort fees, spa, marina, cancellation fees, tenant rent and
contract commissions.
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These increases were partially offset by an $8.8 million reimbursementrecognized in the first nine months of 2021 to offset net losses at the Hyatt
Regency
with no corresponding reimbursement recognized in the first nine months of 2022.
?
by
? The dispositions of the
decrease by
Hotel operating expenses. Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance and other hotel operating expenses increased$34.7 million , or 31.3%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 as follows:
Hotel operating expenses at the Existing Portfolio increased
primarily corresponding to the increases in the Existing Portfolio's revenues
and occupancy rates, along with increased property and liability insurance. In
addition, utility expenses at the Existing Portfolio increased due to increases
? in the cost of natural gas. These increased expenses were partially offset by
decreased Hurricane Ida-related restoration expenses. During the third quarter
of 2021, we recognized
expenses at our
recognized in the third quarter of 2022.
?
by
? The dispositions of the
decrease by
For the nine months endedSeptember 30, 2022 , hotel operating expenses increased$157.1 million , or 65.6%, as compared to the nine months endedSeptember 30, 2021 as follows:
Hotel operating expenses at the Existing Portfolio increased
primarily corresponding to the increases in the Existing Portfolio's revenues
and occupancy rates, along with increased property and liability insurance and
property taxes. In addition, utility expenses at the Existing Portfolio
increased due to increases in the cost of natural gas. Hurricane Ida-related
? restoration expenses recognized by our
in both the first nine months of 2022 and 2021. While our hotels were not
significantly impacted by Hurricane Ian in late
incur approximately
property insurance deductibles.
?
by
? The dispositions of the
decrease by
Other property-level expenses. Other property-level expenses increased
Other property-level expenses at the Existing Portfolio increased
including a
in the Existing Portfolio's revenues. Additional increases to other
? property-level expenses at the Existing Portfolio included payroll and related
expenses, credit card commissions, employee recruiting and training expenses,
dues and subscriptions, travel expenses and supply expenses, partially offset
by decreased contract and professional fees.
?
increase by
? The dispositions of the
expenses to decrease by
For the nine months ended
Other property-level expenses at the Existing Portfolio increased
million, including a
increases in the Existing Portfolio's revenues. Additional increases to other
? property-level expenses at the Existing Portfolio included payroll and related
expenses, credit card commissions, employee recruiting and training expenses,
dues and subscriptions, contract and professional fees, travel expenses and
supply expenses.
?
increase by
? The dispositions of the
expenses to decrease by
Corporate overhead expense. Corporate overhead expense decreased$7.5 million , or 48.9%, during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 primarily due to decreased payroll expenses, deferred stock amortization expense and board of director expenses related to chief executive officer transition costs recognized inSeptember 2021 . These decreased expenses were partially offset by increased due diligence expenses and professional fees. 32
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For the nine months endedSeptember 30, 2022 , corporate overhead expense decreased$4.8 million , or 14.8%, as compared to the nine months endedSeptember 30, 2021 , due to decreased payroll expenses, deferred stock amortization expense and board of director expenses related to chief executive officer transition costs recognized inSeptember 2021 . In addition, deferred stock amortization expense decreased due to the second quarter 2021 retirement of our former chief operating officer. These decreased expenses were partially offset by increased due diligence expenses, professional fees and travel expenses. Depreciation and amortization expense. Depreciation and amortization expense decreased$0.8 million , or 2.6%, during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 as follows:
Depreciation and amortization expense related to the Existing Portfolio
? increased
newly renovated hotels, partially offset by decreased expense due to fully
depreciated assets.
?
increase by
? The dispositions of the
depreciation and amortization of
For the nine months ended
Depreciation and amortization expense related to the Existing Portfolio
? increased
discussion regarding the third quarter.
?
increase by
? The dispositions of the
depreciation and amortization of
Impairment loss. Impairment loss totaled zero for both the three and nine months endedSeptember 30, 2022 , and$1.0 million for both the three and nine months endedSeptember 30, 2021 . InSeptember 2021 , we recorded an impairment loss of$1.0 million on theHilton New Orleans St. Charles due to Hurricane Ida-related damage to the hotel. Interest and other income (loss). Interest and other income (loss) for the three months endedSeptember 30, 2022 totaled income of$0.3 million as compared to$2,000 for the three months endedSeptember 30, 2021 . During the three months endedSeptember 30, 2022 and 2021, we recognized interest income of$0.3 million and$2,000 , respectively. Interest income increased in the third quarter of 2022 as compared to the same period in 2021 due to higher interest rates. Interest and other income (loss) for the nine months endedSeptember 30, 2022 totaled income of$4.8 million as compared to a loss of$0.4 million for the nine months endedSeptember 30, 2021 . During the first nine months of 2022, we recognized$4.4 million in insurance proceeds for Hurricane Ida-related property damage at ourNew Orleans hotels and$0.4 million in interest income. During the first nine months of 2021, we accrued a post-closing contingency of$0.4 million to the current owner of a hotel we sold in 2018, which was slightly offset by the recognition of a nominal amount of interest income. As noted above, interest income increased during the first nine months of 2022 as compared to the same period in 2021 due to higher interest rates.
Interest expense. We incurred interest expense as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Interest expense on debt and finance
lease obligation $ 8,719 $ 7,864 $ 21,252 $ 23,684
Noncash interest on derivatives, net (39) (616) (2,904) (2,194)
Amortization of deferred financing
costs 589 735 1,940 2,207
Total interest expense $ 9,269 $ 7,983 $ 20,288 $ 23,697 Interest expense increased$1.3 million , or 16.1%, during the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 , and decreased$3.4 million , or 14.4%, during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 as follows: Interest expense on our debt and finance lease obligation increased$0.9 million in the third quarter of 2022 as compared to the same period in 2021 primarily due to the additional amounts borrowed under our term loans inJuly 2022 , as well as increased interest on our variable rate debt. These increases were partially offset by decreased interest due to the assignment of the loan secured by the Embassy Suites La Jolla to the hotel's buyer inDecember 2021 . In addition, interest expense on our finance lease obligation decreased due to our sale of the Hyatt Centric Chicago Magnificent Mile inFebruary 2022 . 33
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Interest expense on our debt and finance lease obligation decreased$2.4 million in the first nine months of 2022 as compared to the same period in 2021 primarily due to our 2022 and 2021 debt transactions, including our partial repayments of the senior notes and term loans inFebruary 2022 andDecember 2021 , respectively, and the assignment of the loan secured by theEmbassy Suites La Jolla to the hotel's buyer inDecember 2021 . In addition, interest expense on our finance lease obligation decreased due to our sale of the Hyatt Centric Chicago Magnificent Mile inFebruary 2022 . These decreases were partially offset by increased interest due to our second quarter 2022 draws on our credit facility and the additional amounts borrowed under our term loans inJuly 2022 , as well as increased interest on our variable rate debt.
Noncash changes in the fair market value of our derivatives caused interest
expense to increase
The amortization of deferred financing costs caused interest expense to decrease
Our weighted average interest rate per annum, including our variable rate debt obligation, was approximately 4.4% and 3.8% atSeptember 30, 2022 and 2021, respectively. Approximately 42.4% and 70.5% of our outstanding notes payable had fixed interest rates atSeptember 30, 2022 and 2021, respectively. Gain on sale of assets. Gain on sale of assets totaled zero and$22.9 million for the three and nine months endedSeptember 30, 2022 , respectively, and zero for both the three and nine months endedSeptember 30, 2021 . In the first nine months of 2022, we recognized an$11.3 million gain on the sale of the Hyatt Centric Chicago Magnificent Mile and an$11.6 million gain on the combined sale of the Embassy Suites Chicago and theHilton Garden Inn Chicago Downtown/Magnificent Mile . (Loss) gain on extinguishment of debt, net. (Loss) gain on extinguishment of debt, net totaled a loss of$0.8 million and a gain of$0.1 million for the three months endedSeptember 30, 2022 and 2021, respectively. During the third quarter of 2022, we recognized a loss of$0.8 million related to lender fees and the write-off of deferred financing costs associated with ourJuly 2022 Amended Credit Agreement. During the third quarter of 2021, we recognized a gain of$0.1 million associated with the assignment of theHilton Times Square to the hotel's mortgage holder due to reassessments of the potential employee-related obligations currently held in escrow. (Loss) gain on extinguishment of debt, net for the nine months endedSeptember 30, 2022 totaled a loss of$1.0 million as compared to a gain of$0.4 million for the nine months endedSeptember 30, 2021 . During the first nine months of 2022, we recognized a loss of$1.0 million related to lender fees and the write-off of deferred financing costs associated with ourJuly 2022 Amended Credit Agreement and theFebruary 2022 repayments of a portion of our senior notes. During the first nine months of 2022 and 2021, we recognized a nominal gain and$0.4 million , respectively, associated with the assignment of theHilton Times Square to the hotel's mortgage holder due to reassessments of the potential employee-related obligations currently held in escrow. Income tax benefit (provision), net. We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and theOperating Partnership may also be subject to various state and local income taxes. During the three and nine months endedSeptember 30, 2022 , we recognized net current income tax benefits of$0.3 million and$0.1 million , respectively. InSeptember 2022 , we recognized a state tax credit of$0.4 million associated with solar improvements at theWailea Beach Resort . This credit was partially offset by$0.1 million in current state income tax expense. During the first nine months ofSeptember 2022 , theWailea Beach Resort solar state tax credit of$0.4 million was partially offset by$0.3 million in current state income tax expense.
During the three and nine months ended
(Income) loss from consolidated joint venture attributable to noncontrolling interest. (Income) loss from consolidated joint venture attributable to noncontrolling interest, which represents the outside 25.0% interest in the entity that owned theHilton San Diego Bayfront , totaled zero and income of$3.5 million for the three and nine months endedSeptember 30, 2022 , respectively, and income of$0.9 million and a loss of$1.6 million for the three and nine months endedSeptember 30, 2021 , respectively.
In
Preferred stock dividends and redemption charges. Preferred stock dividends and redemption charges decreased$2.9 million , or 46.7%, during the three months endedSeptember 30, 2022 as compared to the same period in 2021, and$6.4 million , or 37.0%, during the nine months endedSeptember 30, 2022 as compared to the same period in 2021 due to the redemptions of our Series E 34
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preferred stock and Series F preferred stock, partially offset by the issuances
of our Series G preferred stock, Series H preferred stock and Series I preferred
stock.
Preferred stock dividends and redemption charges were incurred as follows (in
thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021Series E preferred stock $ - $ - $ -$ 7,568 (1) Series F preferred stock - 3,175 (1) - 5,593 (1) Series G preferred stock 165 164 1,339 456 Series H preferred stock 1,761 1,761 5,283 2,485 Series I preferred stock 1,425 1,187 4,275 1,187 Total preferred stock dividends and redemption charges $ 3,351$ 6,287 $ 10,897$ 17,289
Includes redemption charges of
(1) original issuance costs of the Series E preferred stock and the Series F
preferred stock, respectively, which were previously included in additional
paid in capital.
Non-GAAP Financial Measures. We use the following "non-GAAP financial measures" that we believe are useful to investors as key supplemental measures of our operating performance: EBITDAre; Adjusted EBITDAre, excluding noncontrolling interest; FFO attributable to common stockholders; and Adjusted FFO attributable to common stockholders. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. In addition, our calculation of these measures may not be comparable to other companies that do not define such terms exactly the same as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to net income (loss), cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure. We present EBITDAre in accordance with guidelines established by theNational Association of Real Estate Investment Trusts ("NAREIT"), as defined in itsSeptember 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate." We believe EBITDAre is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates. We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDAre, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor's complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions. We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre, excluding noncontrolling interest:
Amortization of deferred stock compensation: we exclude the noncash expense
? incurred with the amortization of deferred stock compensation as this expense
is based on historical stock prices at the date of grant to our corporate
employees and does not reflect the underlying performance of our hotels.
Amortization of contract intangibles: we exclude the noncash amortization of
any favorable or unfavorable contract intangibles recorded in conjunction with
? our hotel acquisitions. We exclude the noncash amortization of contract
intangibles because it is based on historical cost accounting and is of lesser
significance in evaluating our actual performance for the current period.
Amortization of right-of-use assets and obligations: we exclude the
amortization of our right-of-use assets and related lease obligations, as these
? expenses are based on historical cost accounting and do not reflect the actual
rent amounts due to the respective lessors or the underlying performance of our
hotels.
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Finance lease obligation interest - cash ground rent: we include an adjustment
for the cash finance lease expense recorded on the building lease at the Hyatt
Centric Chicago Magnificent Mile (prior to the hotel's sale in February 2022).
? We determined that the building lease is a finance lease, and, therefore, we
include a portion of the lease payment each month in interest expense. We
adjust EBITDAre for the finance lease in order to more accurately reflect the
actual rent due to the hotel's lessor in the current period, as well as the
operating performance of the hotel.
Undepreciated asset transactions: we exclude the effect of gains and losses on
? the disposition of undepreciated assets because we believe that including them
in Adjusted EBITDAre, excluding noncontrolling interest is not consistent with
reflecting the ongoing performance of our assets. Gains or losses from debt transactions: we exclude the effect of finance
charges and premiums associated with the extinguishment of debt, including the
? acceleration of deferred financing costs from the original issuance of the debt
being redeemed or retired because, like interest expense, their removal helps
investors evaluate and compare the results of our operations from period to
period by removing the impact of our capital structure.
Acquisition costs: under GAAP, costs associated with acquisitions that meet the
? definition of a business are expensed in the year incurred. We exclude the
effect of these costs because we believe they are not reflective of the ongoing
performance of the Company or our hotels.
Noncontrolling interest: we exclude the noncontrolling partner's pro rata share
of the net (income) loss allocated to the
? prior to our acquisition of the noncontrolling partner's interest in
as well as the noncontrolling partner's pro rata share of any EBITDAre and
Adjusted EBITDAre components.
Cumulative effect of a change in accounting principle: from time to time, the
FASB promulgates new accounting standards that require the consolidated
? statement of operations to reflect the cumulative effect of a change in
accounting principle. We exclude these one-time adjustments, which include the
accounting impact from prior periods, because they do not reflect our actual
performance for that period.
Other adjustments: we exclude other adjustments that we believe are outside the
ordinary course of business because we do not believe these costs reflect our
actual performance for the period and/or the ongoing operations of our hotels.
Such items may include: lawsuit settlement costs; prior year property tax
? assessments or credits; the write-off of development costs associated with
abandoned projects; property-level restructuring, severance and management
transition costs; debt resolution costs; lease terminations; property insurance
restoration proceeds or uninsured losses; and other nonrecurring identified
adjustments.
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The following table reconciles our unaudited net income (loss) to EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest for our total portfolio for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income (loss) $ 20,488 $ (22,124) $ 73,303 $ (105,329)
Operations held for investment:
Depreciation and amortization 31,750 32,585 94,003 96,084
Interest expense 9,269 7,983 20,288 23,697
Income tax (benefit) provision, net (290) 25 (126) 91
Loss (gain) on sale of assets -
12 (22,946) 82
Impairment loss - 1,014 - 1,014
EBITDAre 61,217 19,495 164,522 15,639
Operations held for investment:
Amortization of deferred stock compensation 2,230 3,165 8,661 10,576
Amortization of right-of-use assets and
obligations (350) (335) (1,050) (1,004)
Amortization of contract intangibles, net (19) - (43) -
Finance lease obligation interest - cash ground
rent - (351) (117) (1,053)
Loss (gain) on extinguishment of debt, net 770 (61) 962 (371)
Prior year property tax adjustments, net - 605 - (1,384)
Hurricane-related losses net of (insurance
restoration proceeds) - 1,621 (2,755) 1,621
Property-level severance related to sold hotel -
4,562 - 4,562
Lawsuit settlement cost - 691 - 691
CEO transition costs - 7,976 - 7,976
Noncontrolling interest:
(Income) loss from consolidated joint venture
attributable to noncontrolling interest - (933) (3,477) 1,638
Depreciation and amortization - (791) (1,456) (2,407)
Interest expense - (181) (374) (501)
Amortization of right-of-use asset and
obligation - 72 132 217
Lawsuit settlement cost - (173) - (173)
Adjustments to EBITDAre, net 2,631 15,867 483 20,388
Adjusted EBITDAre, excluding noncontrolling
interest $ 63,848 $ 35,362 $ 165,005 $ 36,027
Adjusted EBITDAre, excluding noncontrolling interest increased $28.5 million , or
80.6%, in the third quarter of 2022 as compared to the same period in 2021, and
$129.0 million , or 358.0%, in the first nine months of 2022 as compared to the
same period in 2021 primarily due to the following:
Adjusted EBITDAre at the Existing Portfolio increased
and
? 2022, respectively, as compared to the same periods in 2021 primarily due to
the changes in the Existing Portfolio's revenues and expenses included in the
discussion above regarding the operating results for the third quarter and
first nine months of 2022.
and
? respectively. The Montage Healdsburg, acquired in
EBITDAre of
months of 2021, respectively.
? million in the first nine months of 2022 as compared to net positive Adjusted
EBITDAre of
the third quarter and first nine months of 2021, respectively.
Corporate-level Adjusted EBITDAre decreased
? the third quarter and first nine months of 2022 as compared to the same periods
in 2021, respectively.
We believe that the presentation of FFO attributable to common stockholders
provides useful information to investors regarding our operating performance
because it is a measure of our operations without regard to specified noncash
items such as real estate depreciation and amortization, any real estate
impairment loss and any gain or loss on sale of real estate assets, all of which
are based on historical cost accounting and may be of lesser significance in
evaluating our current performance. Our presentation of FFO attributable to
common stockholders conforms to the NAREIT definition of "FFO applicable to
common shares." Our presentation may not be comparable to FFO reported by other
REITs that do not define the terms in accordance with the current NAREIT
definition, or that interpret the current NAREIT definition differently than we
do.
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We also present Adjusted FFO attributable to common stockholders when evaluating
our operating performance because we believe that the exclusion of certain
additional items described below provides useful supplemental information to
investors regarding our ongoing operating performance, and may facilitate
comparisons of operating performance between periods and our peer companies. We
adjust FFO attributable to common stockholders for the following items, which
may occur in any period, and refer to this measure as Adjusted FFO attributable
to common stockholders:
Amortization of deferred stock compensation: we exclude the noncash expense
? incurred with the amortization of deferred stock compensation as this expense
is based on historical stock prices at the date of grant to our corporate
employees and does not reflect the underlying performance of our hotels.
Amortization of contract intangibles: we exclude the noncash amortization of
any favorable or unfavorable contract intangibles recorded in conjunction with
? our hotel acquisitions. We exclude the noncash amortization of contract
intangibles because it is based on historical cost accounting and is of lesser
significance in evaluating our actual performance for the current period.
Real estate amortization of right-of-use assets and obligations: we exclude the
amortization of our real estate right-of-use assets and related lease
obligations, which includes the amortization of both our finance and operating
? lease intangibles (with the exception of our corporate operating lease), as
these expenses are based on historical cost accounting and do not reflect the
actual rent amounts due to the respective lessors or the underlying performance
of our hotels. Gains or losses from debt transactions: we exclude the effect of finance
charges and premiums associated with the extinguishment of debt, including the
? acceleration of deferred financing costs from the original issuance of the debt
being redeemed or retired, as well as the noncash interest on our derivatives
and finance lease obligation. We believe that these items are not reflective of
our ongoing finance costs.
Acquisition costs: under GAAP, costs associated with acquisitions that meet the
? definition of a business are expensed in the year incurred. We exclude the
effect of these costs because we believe they are not reflective of the ongoing
performance of the Company or our hotels.
Noncontrolling interest: we deduct the noncontrolling partner's pro rata share
? of any FFO adjustments related to our consolidated
partnership prior to our acquisition of the noncontrolling partner's interest
in
Cumulative effect of a change in accounting principle: from time to time, the
FASB promulgates new accounting standards that require the consolidated
? statement of operations to reflect the cumulative effect of a change in
accounting principle. We exclude these one-time adjustments, which include the
accounting impact from prior periods, because they do not reflect our actual
performance for that period.
Other adjustments: we exclude other adjustments that we believe are outside the
ordinary course of business because we do not believe these costs reflect our
actual performance for that period and/or the ongoing operations of our hotels.
Such items may include: lawsuit settlement costs; prior year property tax
assessments or credits; the write-off of development costs associated with
abandoned projects; changes to deferred tax assets, liabilities or valuation
? allowances; property-level restructuring, severance and management transition
costs; debt resolution costs; preferred stock redemption charges; lease
terminations; property insurance restoration proceeds or uninsured losses;
income tax benefits or provisions associated with the application of net
operating loss carryforwards, uncertain tax positions or with the sale of
assets other than real estate investments; and other nonrecurring identified
adjustments.
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The following table reconciles our unaudited net income (loss) to FFO
attributable to common stockholders and Adjusted FFO attributable to common
stockholders for our total portfolio for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income (loss) $ 20,488 $ (22,124) $ 73,303 $ (105,329) Preferred stock dividends and redemption charges (3,351) (6,287) (10,897) (17,289) Operations held for investment: Real estate depreciation and amortization 31,313
31,959 92,796 94,206
Loss (gain) on sale of assets - 12 (22,946) 82
Impairment loss - 1,014 - 1,014
Noncontrolling interest:
(Income) loss from consolidated joint venture
attributable to noncontrolling interest - (933) (3,477) 1,638
Real estate depreciation and amortization - (791) (1,456) (2,407)
FFO attributable to common stockholders 48,450 2,850 127,323 (28,085)
Operations held for investment:
Amortization of deferred stock compensation (1) 2,230 3,165 8,661 10,576
Real estate amortization of right-of-use assets
and obligations (288) 87 (868) 249
Amortization of contract intangibles, net 141 - 344 -
Noncash interest on derivatives, net (39) (616) (2,904) (2,194)
Loss (gain) on extinguishment of debt, net 770 (61) 962 (371)
Prior year property tax adjustments, net - 605 - (1,384)
Hurricane-related losses net of (insurance
restoration proceeds) - 1,621 (2,755) 1,621
Property-level severance related to sold hotel -
4,562 - 4,562
Lawsuit settlement cost - 691 - 691
CEO transition costs - 7,976 - 7,976Preferred stock redemption charges - 2,624 - 6,640 Noncontrolling interest: Real estate amortization of right-of-use asset and obligation - 72 132 217 Lawsuit settlement cost - (173) - (173) Noncash interest on derivatives, net - (20) - (20) Adjustments to FFO attributable to common stockholders, net 2,814 20,533 3,572 28,390 Adjusted FFO attributable to common stockholders $ 51,264$ 23,383 $ 130,895$ 305
Amortization of deferred stock compensation has been added to the adjustments
(1) to FFO attributable to common stockholders, net for the three and nine months
ended
Adjusted FFO attributable to common stockholders increased$27.9 million , or 119.2%, in the third quarter of 2022 as compared to the same period in 2021, and$130.6 million , or 42,816.4%, in the first nine months of 2022 as compared to the same period in 2021 primarily due to the same reasons noted in the discussion above regarding Adjusted EBITDAre, excluding noncontrolling interest.
Liquidity and Capital Resources
During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from hotel dispositions, our credit facility and term loans, issuances of both common and preferred stock, property insurance and contributions from our former joint venture partner. Our primary uses of cash were for capital expenditures for hotels and other assets, acquisitions of hotels and other assets, operating expenses, including funding the negative cash flow at our hotels, repurchases of our common stock, redemptions of our preferred stock, repayments of notes payable and our credit facility, dividends and distributions on our preferred and common stock and distributions to our former joint venture partner. We cannot be certain that traditional sources of funds will be available in the future. Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in hotel revenue and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was$149.7 million for the nine months endedSeptember 30, 2022 as compared to$8.4 million for the nine months endedSeptember 30, 2021 . The net increase in cash provided by operating activities during the first nine months of 2022 as compared to the same period in 39
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2021 was primarily due to the increase in travel demand benefiting our hotels and additional operating cash provided by theThree Recently Acquired Hotels , partially offset by a decrease in operating cash caused by the sales of theFive Disposed Hotels . Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels and other assets. Net cash used in investing activities during the first nine months of 2022 as compared to the first nine months of 2021 was
as
follows (in thousands):
Nine Months Ended September 30,
2022 2021
Proceeds from sale of assets $ 191,291 $ -Acquisition and disposition deposits, net -
(3,900)
Proceeds from property insurance 4,369 - Acquisitions of hotel properties and other assets (232,506)
(195,706)
Renovations and additions to hotel properties and other assets (97,539)
(41,910)
Payment for interest rate derivative - (80) Net cash used in investing activities$ (134,385)
During the first nine months of 2022, we received total proceeds of$191.3 million from our sales of three hotels, consisting of$63.2 million for the Hyatt Centric Chicago Magnificent Mile (having already received a$4.0 million disposition deposit inDecember 2021 ) and$128.1 million for theEmbassy Suites Chicago and theHilton Garden Inn Chicago Downtown/Magnificent Mile . In addition, we received insurance proceeds of$4.4 million for hurricane-related property damage at theHilton New Orleans St. Charles . These cash inflows were partially offset by$232.5 million paid to acquire hotel properties and other assets, consisting of$232.0 million for The ConfidanteMiami Beach , including closing costs and prorations, and$0.5 million paid to acquire additional wet and dry boat slips at theOceans Edge Resort & Marina. In addition, we invested$97.5 million for renovations and additions to our portfolio and other assets. During the first nine months of 2021, we paid a deposit of$4.0 million towards ourDecember 2021 acquisition of theFour Seasons Resort Napa Valley , and we received a deposit of$0.1 million from the buyer of the RenaissanceWestchester , which we sold inOctober 2021 . In addition, during the first nine months of 2021, we paid a total of$195.7 million to acquire hotel properties and other assets, including$195.6 million to acquire the Montage Healdsburg and$0.1 million to acquire an additional dry boat slip at theOceans Edge Resort & Marina. We also invested$41.9 million for renovations and additions to our portfolio and other assets and paid$0.1 million for an interest rate cap derivative on debt secured by theHilton San Diego Bayfront . Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our dividends and distributions paid, issuance and repurchase of common stock, issuance and repayment of notes payable and our credit facility, debt restructurings and issuance and redemption of other forms of capital, including preferred equity. Net cash used in financing activities during the first nine months of 2022 as compared to net cash provided by financing activities during the first nine months of 2021 was as follows
(in
thousands):
Nine Months Ended September 30,
2022 2021
Acquisition of noncontrolling interest, including
transaction costs $ (101,348) $ -
Proceeds from preferred stock offerings - 215,000
Payment of preferred stock offering costs - (7,287)
Redemptions of preferred stock - (190,000)
Proceeds from common stock offerings - 38,443
Payment of common stock offering costs (91) (784)
Repurchases of outstanding common stock (86,646) -
Repurchases of common stock for employee tax
obligations (3,351) (4,877)
Proceeds from credit facility 230,000
-
Payment on credit facility (230,000) -
Proceeds from notes payable 243,615 -
Payments on notes payable (38,405) (2,461)Payments of deferred financing costs (7,404) - Dividends and distributions paid (11,059) (10,745) Distribution to noncontrolling interest (5,500) - Contribution from noncontrolling interest - 1,375 Net cash (used in) provided by financing activities$ (10,189) $ 38,664 40 Table of Contents
During the first nine months of 2022, we paid$101.3 million to acquire the outside 25.0% equity interest in the entity that owns theHilton San Diego Bayfront ,$86.6 million to repurchase 7,995,560 shares of our outstanding common stock and$0.1 million in common stock offering costs related to restricted common stock issued to employees. We also paid$3.4 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees,$11.1 million in dividends and distributions to our preferred and common stockholders and$5.5 million in distributions to our former joint venture partner. InJuly 2022 , we entered into the Amended Credit Agreement and received$243.6 million in proceeds associated with additional borrowing on our two term loans. We utilized the proceeds received from the incremental borrowing on the term loans to fully repay the$230.0 million we drew on our credit facility in the second quarter of 2022. In addition, we paid$38.4 million in principal payments on our notes payable, including$35.0 million to repay a portion of our senior notes,$1.5 million in scheduled principal payments on our notes payable and$1.9 million in principal payments associated with our Amended Credit Agreement, and we paid$7.4 million in deferred financing costs related to the Amended Credit Agreement. During the first nine months of 2021, we received total gross proceeds of$215.0 million on our preferred stock offerings, including$115.0 million from the issuance of 4,600,000 shares of our Series H preferred stock and$100.0 million from the issuance of 4,000,000 shares of our Series I preferred stock, and we paid a total of$7.3 million in offering costs on our Series G preferred stock, Series H preferred stock and Series I preferred stock. We used$190.0 million of the proceeds received from our preferred stock issuances to redeem in full all 4,600,000 shares of our Series E preferred stock and all 3,000,000 shares of our Series F preferred stock. In addition, we received gross proceeds of$38.4 million from the issuance of 2,913,682 shares of our common stock under our ATM Program, and paid$0.8 million in related offering costs. We also received a$1.4 million contribution from our former joint venture partner. These net cash inflows were partially offset as we paid$4.9 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees,$2.5 million in principal payments on our notes payable and$10.7 million in dividends to our preferred stockholders. Future. While operations have improved in the first nine months of 2022 as compared to the same period in 2021, certain of our hotels continue to operate below pre-pandemic levels. We believe the ongoing effects of the COVID-19 pandemic on our operations could continue to have a negative impact on our financial results and liquidity in 2022. Despite these challenges, we believe that we have sufficient liquidity, as well as access to our credit facility and capital markets, to withstand any potential declines in our operating cash flow. Given the unprecedented impact of COVID-19 on the global market and our hotel operations, we cannot, however, assure you that our forecast or the assumptions we used to estimate our liquidity requirements will be correct. In addition, the magnitude and duration of the COVID-19 pandemic is uncertain. We expect our primary sources of cash will continue to be our working capital, credit facility, dispositions of hotel properties and proceeds from public and private offerings of debt securities and common and preferred stock. However, there can be no assurance that our future asset sales will be successfully completed or that the capital markets will be available to us in the future on favorable terms or at all. We expect our primary uses of cash to be for operating expenses, including funding the cash flow needs at our hotels if necessary, capital investments in our hotels, repayment of principal on our notes payable and credit facility, interest expense, repurchases of our common stock, distributions on our common stock, dividends on our preferred stock and acquisitions of hotels or interests in hotels. In the third quarter of 2022, our board of directors declared a cash dividend of$0.05 per share of common stock that was paid inOctober 2022 . Any future common stock dividends will be determined by our board of directors after considering our obligations under our various financing agreements, projected taxable income, compliance with our debt covenants, long-term operating projections, expected capital requirements and risks affecting our business. Cash Balance. As ofSeptember 30, 2022 , our unrestricted cash balance was$117.6 million . We believe that our current unrestricted cash balance and our ability to draw the$500.0 million of capacity available for borrowing under the unsecured revolving credit facility will enable us to successfully manage our Company while operations at our hotels are reduced. Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. These provisions were triggered inJanuary 2021 for the loan secured by theJW Marriott New Orleans and inMay 2021 for the loan secured by theHilton San Diego Bayfront . InApril 2022 , the loan secured by theHilton San Diego Bayfront exited the cash trap, and inOctober 2022 we notified the lender for the loan secured by theJW Marriott New Orleans that we have met the criteria to exit the cash trap. As ofSeptember 30, 2022 , no excess cash generated by theJW Marriott New Orleans was held in a lockbox account for the benefit of the lender. Debt. As ofSeptember 30, 2022 , we had$816.6 million of debt,$167.8 million of cash and cash equivalents, including restricted cash, and total assets of$3.1 billion . We believe that by maintaining appropriate debt levels, staggering
maturity dates and
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maintaining a highly flexible structure, we will have lower capital costs than
more highly leveraged companies, or companies with limited flexibility due to
restrictive corporate-level financial covenants.
In February 2022 , we used a portion of the proceeds received from the
disposition of the Hyatt Centric Chicago Magnificent Mile to repay $25.0 million
of our unsecured Series A Senior Notes and $10.0 million of our unsecured Series
B Senior Notes, resulting in remaining balances of $65.0 million and $105.0
million on our Series A Senior Notes and Series B Senior Notes, respectively, as
of September 30, 2022 .
In March 2022 , we elected to early terminate the covenant relief period related
to our unsecured debt, having satisfied the financial covenants stipulated in
the 2020 and 2021 Unsecured Debt Amendments for the quarter ended December 31,
2021 . The Unsecured Debt Amendments were scheduled to provide covenant relief
through the end of the third quarter of 2022, with quarterly testing resuming
for the period ending September 30, 2022 . Following our early termination of the
covenant relief period in March 2022 , the original financial covenants on our
unsecured debt agreements were to be phased-in over the following five quarters
to ease compliance. By exiting the covenant relief period, we are no longer
subject to additional restrictions on debt issuance and repayment, capital
investment, share repurchases and dividend distributions that were imposed as
part of the Unsecured Debt Amendments.
In May 2022 and June 2022 , we drew $140.0 million and $90.0 million ,
respectively, under our credit facility to acquire The Confidante Miami Beach
and the outside 25.0% equity interest in the entity that owns the Hilton San
Diego Bayfront .
In July 2022 , we entered into the Amended Credit Agreement which expanded our
unsecured borrowing capacity and extended the maturity of the in-place term
loans. The Amended Credit Agreement continues to provide for a $500.0 million
revolving credit facility and increased the aggregate amount of our two term
loans from $108.3 million to $350.0 million . The facilities bear interest
pursuant to a leverage-based pricing grid ranging from 1.35% to 2.25% over the
applicable adjusted term SOFR. The $500.0 million revolving credit facility has
two six-month extension options, which would result in an extended maturity of
July 2027 . The two term loan facilities each have a balance of $175.0 million
and mature in July 2027 and January 2028 . We utilized the proceeds received from
the incremental borrowing on the term loans to fully repay the $230.0 million
that was outstanding on our revolving credit facility. As of September 30, 2022 ,
we have no amount outstanding under the revolving portion of our credit
facility, with $500.0 million of capacity available for additional borrowing
under the facility. The Company's ability to draw on the credit facility is
subject to the Company's compliance with various financial covenants.
As of September 30, 2022 , 42.4% of our outstanding debt had fixed interest rates
or had been swapped to fixed interest rates, including the loan secured by the
JW Marriott New Orleans , a portion of our unsecured corporate-level Term Loan 2
and two unsecured corporate-level senior notes. The Company's floating rate debt
includes the $220.0 million non-recourse mortgage on the Hilton San Diego
Bayfront , which is subject to an interest rate cap derivative that caps the
floating interest rate at 6.0% until December 2022 , our $175.0 million unsecured
corporate-level Term Loan 1, which was subject to an interest rate swap
derivative until the derivative matured in September 2022 , and a portion of our
$175.0 million unsecured corporate-level Term Loan 2.
We may in the future seek to obtain mortgages on one or more of our 13
unencumbered hotels (subject to certain stipulations under our unsecured term
loans and senior notes), all of which were held by subsidiaries whose interests
were pledged to our credit facility as of September 30, 2022 . Our 13
unencumbered hotels include: Boston Park Plaza ; Four Seasons Resort Napa Valley ;
Hilton New Orleans St. Charles ; Hyatt Regency San Francisco ; Marriott Boston
Long Wharf ; Montage Healdsburg; Oceans Edge Resort & Marina; Renaissance Long
Beach ; Renaissance Orlando at SeaWorld®; Renaissance Washington DC; The Bidwell
Marriott Portland ; The Confidante Miami Beach ; and Wailea Beach Resort . Should
we obtain secured financing on any or all of our unencumbered hotels, the amount
of capital available through our credit facility or future unsecured borrowings
may be reduced.
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Contractual Obligations. The following table summarizes our payment obligations
and commitments as of
Payment due by period
Less Than 1 to 3 3 to 5 More than
Total 1 year years years 5 years
Notes payable (1) $ 816,647 $ 2,145 $ 294,502 $ 240,000 $ 280,000
Interest obligations on
notes payable (2) 134,395 35,428 53,115 40,455 5,397
Operating lease
obligations, including
imputed interest (3) 27,414 6,734 13,391 4,656 2,633
Construction commitments 66,701 66,701 - - -
Total $ 1,045,157 $ 111,008 $ 361,008 $ 285,111 $ 288,030 Notes payable includes the
(1) Diego Bayfront, which is scheduled to mature in
notified the lenders of our intent to exercise the remaining one-year option
to extend the maturity to December 2023 .
Interest is calculated based on the loan balances and variable rates, as
(2) applicable, at
rate derivatives.
Operating lease obligations include a ground lease that expires in 2071 and
(3) requires a reassessment of rent payments due after 2025, agreed upon by both
us and the lessor; therefore, no amounts are included in the above table for
this ground lease after 2025.
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground lease, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested$97.5 million in our portfolio and other assets during the first nine months of 2022. As ofSeptember 30, 2022 , we have contractual construction commitments totaling$66.7 million for ongoing renovations. If we renovate or develop additional hotels or other assets in the future, our capital expenditures will likely increase. With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between 2.0% and 5.0% of the respective hotel's applicable annual revenue. As ofSeptember 30, 2022 , our balance sheet includes restricted cash of$36.2 million , which was held in FF&E reserve accounts for future capital expenditures at the majority of our hotels. According to certain loan agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year.
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong inHawaii ,Key West ,New Orleans andOrlando , the second quarter is strong for the Mid-Atlantic business hotels, both the second and third quarters are strong for theCalifornia counties ofNapa andSonoma and the fourth quarter is strong forHawaii andKey West ). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers' effectiveness in generating business and by events beyond our control, such as economic and business conditions, including aU.S. recession or increased inflation, trade conflicts and tariffs, changes impacting global travel, regional or global economic slowdowns, any flu or disease-related pandemic that impacts travel or the ability to travel, including the COVID-19 pandemic, the adverse effects of climate change, the threat of terrorism, terrorist events, civil unrest, government shutdowns, events that reduce the capacity or availability of air travel, increased competition from other hotels in our markets, new hotel supply or alternative lodging options and unexpected changes in business, commercial travel, leisure travel and tourism. 43 Table of Contents Inflation Inflation affects our expenses, including, without limitation, by increasing such costs as wages, employee-related benefits, food, commodities, including those used to renovate or reposition our hotels, taxes, property and liability insurance, utilities and borrowing costs. We rely on our hotel operators to adjust room rates and pricing for hotel services to reflect the effects of inflation. However, previously contracted rates, competitive pressures or other factors may limit the ability of our operators to respond to inflation. As a result, our hotel expenses may increase at higher rates than hotel revenue.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Impairment of long-lived assets. Impairment losses are recorded on long-lived
assets to be held and used by us when indicators of impairment are present and
the future undiscounted net cash flows, including potential sale proceeds,
expected to be generated by those assets, based on our anticipated investment
horizon, are less than the assets' carrying amount. We evaluate our long-lived
? assets to determine if there are indicators of impairment on a quarterly basis.
No single indicator would necessarily result in us preparing an estimate to
determine if a hotel's future undiscounted cash flows are less than the book
value of the hotel. We use judgment to determine if the severity of any single
indicator, or the fact there are a number of indicators of less severity that
when combined, would result in an indication that a hotel requires an estimate
of the undiscounted cash flows to determine if an impairment has occurred.
If a hotel is considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment loss is recognized. The impairment loss recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. We perform a fair value assessment, using one or more discounted cash flow analyses to estimate the fair value of the hotel, taking into account the hotel's expected cash flow from operations, our estimate of how long we will own the hotel and the estimated proceeds from the disposition of the hotel. When multiple cash flow analyses are prepared, a probability is assigned to each cash flow analysis based upon the estimated likelihood of each scenario. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and the terminal capitalization rate. Our judgment is required in determining the discount rate applied to estimated cash flows, the estimated growth of revenues and expenses, net operating income (loss) and margins, the need for capital expenditures, as well as specific market and economic conditions.
Acquisition related assets and liabilities. Accounting for the acquisition of a
hotel property or other entity requires either allocating the purchase price to
the assets acquired and the liabilities assumed in the transaction at their
respective relative fair values for an asset acquisition or recording the
assets and liabilities at their estimated fair values with any excess
consideration above net assets going to goodwill for a business combination.
The most difficult estimations of individual fair values are those involving
long-lived assets, such as property, equipment and intangible assets, together
with any finance or operating lease right-of-use assets and their related
obligations. When we acquire a hotel property or other entity, we use all
? available information to make these fair value determinations, including
discounted cash flow analyses, market comparable data and replacement cost
data. In addition, we make significant estimations regarding capitalization
rates, discount rates, average daily rates, revenue growth rates and occupancy.
We also engage independent valuation specialists to assist in the fair value
determinations of the long-lived assets acquired and the liabilities assumed.
The determination of fair value is subjective and is based in part on
assumptions and estimates that could differ materially from actual results in
future periods. Given the subjectivity, business combinations are provided a
one-year measurement period to adjust the provisional amounts recognized if the
necessary information is not available by the end of the reporting period in
which the acquisition occurs.
In addition, the acquisition of a hotel property or other entity requires an
analysis of the transaction to determine if it qualifies as the purchase of a
business or an asset. If the fair value of the gross assets acquired is
concentrated in a single identifiable asset or group of similar identifiable
assets, then the transaction is an asset acquisition. Transaction costs
associated with asset acquisitions are capitalized and subsequently depreciated
over the life of the related asset, while the same costs associated with a
business combination are expensed as incurred and included in corporate overhead
on our
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consolidated statements of operations. Also, asset acquisitions are not subject to a measurement period, as are business combinations.
Depreciation and amortization expense. Depreciation expense is based on the
estimated useful life of our assets. The life of the assets is based on a
number of assumptions, including the cost and timing of capital expenditures to
maintain and refurbish our hotels, as well as specific market and economic
conditions. Hotel properties are depreciated using the straight-line method
over estimated useful lives primarily ranging from five to 40 years for
buildings and improvements and three to 12 years for FF&E. Finance lease
? right-of-use assets other than land are depreciated using the straight-line
method over the shorter of either their estimated useful life or the life of
the related finance lease obligation. Intangible assets are amortized using the
straight-line method over the shorter of their estimated useful life or the
length of the related agreement. While we believe our estimates are reasonable,
a change in the estimated lives could affect depreciation expense and net
income or the gain or loss on the sale of any of our hotels. We have not
changed the useful lives of any of our assets during the periods discussed.
Income Taxes. To qualify as a REIT, we must meet a number of organizational and
operational requirements, including a requirement that we currently distribute
at least 90% of our REIT taxable income (determined without regard to the
deduction for dividends paid and excluding net capital gains) to our
stockholders. As a REIT, we generally will not be subject to federal corporate
income tax on that portion of our taxable income that is currently distributed
to stockholders. We are subject to certain state and local taxes on our income
and property, and to federal income and excise taxes on our undistributed
taxable income. In addition, our wholly owned TRS, which leases our hotels from
the
account for income taxes using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to the differences between the financial
? statement carrying amounts of existing assets and liabilities and their
respective income tax bases, and for net operating loss, capital loss and tax
credit carryforwards. The deferred tax assets and liabilities are measured
using the enacted income tax rates in effect for the year in which those
temporary differences are expected to be realized or settled. The effect on the
deferred tax assets and liabilities from a change in tax rates is recognized in
earnings in the period when the new rate is enacted. However, deferred tax
assets are recognized only to the extent that it is more likely than not that
they will be realized based on consideration of all available evidence,
including the future reversals of existing taxable temporary differences,
future projected taxable income and tax planning strategies. Valuation
allowances are provided if, based upon the weight of the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
We review any uncertain tax positions and, if necessary, we will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements. Tax positions not deemed to meet the "more-likely-than-not" threshold are recorded as a tax benefit or expense in the current year. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.
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