WATERMARK LODGING TRUST, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management's Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2020 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Business Overview We are a self-managed, publicly owned, non-traded REIT that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties inthe United States . We own a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations were significantly affected by the COVID-19 pandemic, as discussed further below. Our results of operations are also significantly impacted by seasonality and by hotel renovations. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations. As ofSeptember 30, 2021 , we held ownership interests in 29 hotels, with a total of 9,094 rooms.
Significant Developments
COVID-19 Pandemic
The COVID-19 pandemic has had a material adverse effect on our business, results of operations, financial condition and cash flows and will continue to do so for the reasonably foreseeable future. As ofNovember 12, 2021 , all of our hotels are open but many are operating at significantly reduced levels of occupancy, staffing and expenses. While seasonal decline in leisure travel and the emergence of the Delta variant reduced near-term demand, we have generally seen improving demand at our properties as government-imposed restrictions and limitations on travel and large gatherings have loosened and as the vaccines have become more widely available. We expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. Governmental and business efforts to encourage or mandate vaccinations, and public adoption rates of vaccines, impact the recovery from the COVID-19 pandemic and may have disruptive effects on certain segments of the labor market. Individual ability or desire to travel and corporate travel policies will continue to be impacted by the COVID-19 pandemic and affect the recovery of our properties. The ultimate severity and duration of the COVID-19 pandemic and its effects, and the emergence of variants, are uncertain, including whether COVID-19 will become endemic or cyclical in nature. Given these uncertainties, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results. Of our$2.2 billion ofConsolidated Hotel aggregate principal balance indebtedness outstanding as ofSeptember 30, 2021 , approximately$1.2 billion is scheduled to mature during the 12 months after the date of this Report, which included a total of$180.9 million that has subsequently been repaid as a result of a hotel disposition or refinancing ( Note 15 ). If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender. We have continued to work with our lenders to address loans with near-term mortgage maturities and have refinanced or extended the maturity date of sevenConsolidated Hotel mortgage loans, aggregating$708.1 million of principal balance indebtedness, during the nine months endedSeptember 30, 2021 . If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender. WLT9/30/2021 10-Q - 33 --------------------------------------------------------------------------------
Financial and Operating Highlights
(Dollars in thousands, except average daily rate ("ADR") and revenue per available room ("RevPAR"))
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Hotel revenues $ 198,627 $ 73,668 $ 458,559 $ 208,943
Net loss attributable to Common
Stockholders (18,321) (81,777) (119,539) (267,676)
Cash distributions paid - - - 20,357
Net cash used in operating activities (20,223) (93,873)
Net cash provided by investing activities 108,943 178,071
Net cash (used in) provided by financing
activities (109,854) 112,034
Supplemental Financial Measures: (a)
FFO attributable to Common Stockholders 6,342 (46,635) (53,766) (50,274)
MFFO attributable to Common Stockholders 18,226 (36,800) (18,213) (89,572)
Consolidated Hotel Operating Statistics (b)
Occupancy 60.4 % 25.7 % 47.6 % 26.2 %
ADR $ 268.80 $ 217.81 $ 256.18 $ 227.17
RevPAR 162.31 55.95 121.98 59.63
Comparable Consolidated Hotel Operating
Statistics (c)
Occupancy (d) 61.1 % 25.9 % 48.6 % 30.1 %
ADR $ 270.62 $ 221.05 $ 259.84 $ 242.86
RevPAR 165.26 57.21 126.15 73.07
___________
(a)We consider funds from operations ("FFO") and MFFO, which are supplemental
measures that are not defined by GAAP ("non-GAAP measures"), to be important
measures in the evaluation of our results of operations and capital resources.
We evaluate our results of operations with a primary focus on the ability to
generate cash flow necessary to meet our objective of funding distributions to
stockholders. See Supplemental Financial Measures below for our definitions
of these non-GAAP measures and reconciliations to their most directly comparable
GAAP measures.
(b)Our consolidated hotel operating statistics represent statistical data for
our Consolidated Hotels during our ownership period.
(c)Our comparable hotel operating statistics represent statistical data for
Consolidated Hotels we owned as of the end of the reporting period, but
excluding those hotels that we classified as held for sale. Statistical data
prior to our ownership was included for hotels that were not owned for the
entirety of the comparison periods. Due to the impact of COVID-19 on hotel
operations, including the temporary suspension of operations at certain hotels,
a comparison between the three and nine months ended September 30, 2021 to the
same periods in 2020 are not meaningful, therefore we have included the
operating statistics of our Comparable Consolidated Hotel Portfolio for the
three and nine months ended September 30, 2019 for comparative purposes.
Occupancy, ADR and RevPAR for our Comparable Consolidated Hotel Portfolio for
the three months ended September 30, 2019 were 76.3%, $252.03 and $192.41 ,
respectively, and 76.0%, $261.01 and $198.29 , respectively, for the nine months
ended September 30, 2019 .
(d)Occupancy rates for our Comparable Consolidated Hotel Portfolio for July,
August and September 2021 were 65.2%, 57.3% and 59.4%, respectively, as compared
to occupancy rates for July, August and September 2020 of 20.9%, 26.0% and
30.9%, respectively.
WLT 9/30/2021 10-Q - 34--------------------------------------------------------------------------------
Portfolio Overview
The following table sets forth certain information for each of our
Number
Hotels State of Rooms % Owned Hotel Type
Consolidated Hotels
Charlotte Marriott City Center NC 446 100% Full-Service
Courtyard Nashville Downtown TN 192 100% Select-Service
Courtyard Times Square West NY 224 100% Select-service
CO 403 100% Full-Service
Equinox Golf Resort & Spa VT 199 100% Resort
Fairmont Sonoma Mission Inn & Spa CA 226 100% Resort
Hawks Cay Resort (a) FL 398 100% Resort
Hilton Garden Inn/Homewood Suites Atlanta Midtown GA 228 100% Select-service
Holiday Inn Manhattan 6th Avenue Chelsea NY 226 100% Full-service
Hyatt Centric French Quarter New Orleans (b) LA 254 100% Full-service
Hyatt Place Austin Downtown TX 296 100% Select-service
Le Méridien Arlington VA 154 100% Full-Service
Le Méridien Dallas, The Stoneleigh TX 176 100% Full-service
Marriott Kansas City Country Club Plaza MO 295 100% Full-service
Marriott Raleigh City Center NC 401 100% Full-service
Marriott Sawgrass Golf Resort & Spa FL 514 100% Resort
Renaissance Atlanta Midtown Hotel GA 304 100% Full-Service
Renaissance Chicago Downtown IL 560 100% Full-service
Ritz-Carlton Bacara, Santa Barbara CA 358 100% Resort
Ritz-Carlton Fort Lauderdale (c) FL 198 70% Resort
Ritz-Carlton Key Biscayne (d) FL 443 66.7% Resort
Ritz-Carlton San Francisco CA 336 100% Full-Service
Sanderling Resort NC 128 100% Resort
San Diego Marriott La Jolla CA 376 100% Full-Service
San Jose Marriott CA 510 100% Full-Service
Seattle Marriott Bellevue WA 384 100% Full-Service
Westin Minneapolis (e) MN 214 100% Full-Service
Westin Pasadena CA 350 100% Full-Service
8,793
Unconsolidated Hotel
Ritz-Carlton Philadelphia PA 301 60% Full-service
9,094
_________
(a)Includes 221 privately owned villas that participate in the villa/condo
rental program as of September 30, 2021 .
(b)On April 6, 2021 , we acquired the remaining 20% interest in the Hyatt Centric
French Quarter Venture from an unaffiliated third party, bringing our ownership
interest to 100% ( Note 4 ).
(c)Includes 32 condo-hotel units that participate in the villa/condo rental
program as of September 30, 2021 . Also, on November 9, 2021 , we acquired the
remaining 30% interest in the Ritz-Carlton Fort Lauderdale Venture from an
unaffiliated third party, bringing our ownership interest to 100%.
(d)Includes 141 condo-hotel units that participate in the resort rental program
as of September 30, 2021 .
(e)On October 19, 2021 , we sold our 100% ownership interest in the Westin
Minneapolis to an unaffiliated third-party ( Note 15 ).
WLT 9/30/2021 10-Q - 35
--------------------------------------------------------------------------------Results of Operations
We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing the value in our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net (loss) income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation. In addition, we use other information that may not be financial in nature, including statistical information, to evaluate the operating performance of our business, including occupancy rate, ADR and RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy rate, is an important statistic for monitoring operating performance at our hotels. Our occupancy rate, ADR and RevPAR performance may be impacted by macroeconomic factors such asU.S. economic conditions, regional and local employment growth, personal income and corporate earnings, business relocation decisions, business and leisure travel, new hotel construction and the pricing strategies of competitors. The results of operations for the three and nine months endedSeptember 30, 2021 will not be comparable to the same periods in 2020 as a result of the impact of the COVID-19 pandemic, the Merger and hotel dispositions. Beginning inMarch 2020 , we experienced a significant decline in occupancy and RevPAR. The economic downturn and restrictions on travel resulting from the COVID-19 pandemic has significantly impacted our business and the overall lodging industry. Additionally, as a result of the Merger, the historical financial information included herein as of any date, or for any periods, prior toApril 13, 2020 , represents the pre-merger financial information of CWI 1 on a stand-alone basis, therefore comparisons of the period to period financial information of WLT as set forth herein may not be meaningful. WLT 9/30/2021 10-Q - 36 -------------------------------------------------------------------------------- The following table presents our comparative results of operations (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Change 2021 2020 Change Hotel Revenues$ 198,627 $ 73,668 $ 124,959 $ 458,559 $ 208,943 $ 249,616 Hotel Operating Expenses 173,647 118,847 54,800 455,917 323,087 132,830 Corporate general and administrative expenses 7,337 6,715 622 22,938 15,900
7,038
Loss (gain) on property-related insurance claims, net 956 (1,030) 1,986 (1,571) (1,030) (541) Transaction costs 345 27 318 345 18,376 (18,031) Asset management fees to affiliate - - - - 3,795 (3,795) Impairment charges - - - - 120,220 (120,220) Total Expenses 182,285 124,559 57,726 477,629 480,348 (2,719) Operating Income (Loss) before net gain on sale of real estate 16,342 (50,891) 67,233 (19,070) (271,405)
252,335
Net gain on sale of real estate 5,223 3,227 1,996 23,298 2,738 20,560 Operating Income (Loss) 21,565 (47,664) 69,229 4,228 (268,667) 272,895 Interest expense (40,878) (38,719) (2,159) (126,365) (83,449) (42,916) Net gain on change in control of interests - - - 8,612 22,250
(13,638)
Loss on extinguishment of debt (1,111) - (1,111) (6,630) -
(6,630)
Equity in losses of equity method
investments in
real estate, net (210) (3,201) 2,991 (5,796) (31,139) 25,343
Other income and (expense) (88) (55) (33) (244) 2 (246)
Bargain purchase gain - - - - 78,696 (78,696)
Loss Before Income Taxes (20,722) (89,639) 68,917 (126,195) (282,307) 156,112
Benefit from (provision for) income
taxes 529 1,549 (1,020) (693) 7,525 (8,218)
Net Loss (20,193) (88,090) 67,897 (126,888) (274,782) 147,894
Loss attributable to noncontrolling
interests 1,872 6,714 (4,842) 7,349 8,848 (1,499)
Net Loss Attributable to the Company (18,321) (81,376) 63,055 (119,539) (265,934) 146,395 Preferred dividends - (401) 401 - (1,742) 1,742 Net Loss Attributable to Common Stockholders$ (18,321) $
(81,777)
$ 148,137 Supplemental Financial Measure:(a) MFFO Attributable to Common Stockholders$ 18,226 $ (36,800) $ 55,026 $ (18,213) $ (89,572) $ 71,359 ___________ (a)We consider MFFO, a non-GAAP measure, to be an important metric in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See
Supplemental Financial Measures below for our definition of non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
For the three and nine months endedSeptember 30, 2021 as compared to the same periods in 2020, hotel revenues increased by$125.0 million and$249.6 million , respectively. Our results for both the three and nine months endedSeptember 30, 2020 were significantly impacted by the COVID-19 pandemic. Of the 29Consolidated Hotels we held ownership interests in as ofSeptember 30, 2020 , operations were suspended for either all or a portion of the second and third quarters of 2020 at 16Consolidated Hotels (with six hotel closures beginning duringMarch 2020 ) and were significantly reduced at the remaining 13Consolidated Hotels . Additionally, as a result of the Merger, the historical financial information included for the period prior toApril 13, 2020 , represents the pre-Merger financial information of CWI 1 on a stand-alone basis, therefore comparisons of the period to period financial information of WLT as set forth herein may not be meaningful. WLT9/30/2021 10-Q - 37 --------------------------------------------------------------------------------
Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including occupancy, labor costs, utilities and insurance costs. For the three and nine months endedSeptember 30, 2021 as compared to the same periods in 2020, aggregate hotel operating expenses increased by$54.8 million and$132.8 million , respectively. As discussed above, our results for the three and nine months endedSeptember 30, 2020 were significantly impacted by the COVID-19 pandemic. Additionally, as a result of the Merger, the historical financial information included for the period prior toApril 13, 2020 , represents the pre-Merger financial information of CWI 1 on a stand-alone basis, therefore comparisons of the period to period financial information of WLT as set forth herein may not be meaningful.
Corporate General and Administrative Expenses
For the three and nine months endedSeptember 30, 2021 as compared to the same periods in 2020, corporate general and administrative expenses increased by$0.6 million and$7.0 million , respectively, with the increase for the nine months endedSeptember 30, 2021 as compared to the same period in 2020 primarily as a result of the impact of the Merger, with periods post-Merger reflecting the impact of the Company being self-managed and including the compensation of our employees for the periods following the internalization.
Transaction Costs
During the nine months ended
Asset Management Fees to Affiliate
During the nine months ended
Impairment Charges
During the nine months endedSeptember 30, 2020 we recognized impairment charges totaling$120.2 million on sixConsolidated Hotels in order to reduce the carrying value of the properties to their estimated fair values, resulting from the adverse effect of the COVID-19 pandemic on our hotel operations. No impairments were recognized during the three and nine months endedSeptember 30, 2021 or the three months endedSeptember 30, 2020 .
Our impairment charges are more fully described in Note 4 .
During the three and nine months endedSeptember 30, 2021 , we recognized a gain on the sale of real estate of$5.2 million from the sale of our 100% ownership interest in the Courtyard Pittsburgh Shadyside to an unaffiliated third party. During the nine months endedSeptember 30, 2021 , we recognized a gain on sale on real estate of$18.1 million from the sale of theSheraton Austin Hotel at theCapitol to an unaffiliated third-party by theSheraton Austin Hotel at theCapitol venture. We owned an 80% controlling interest in the venture ( Note 4 ). During the three and nine months endedSeptember 30, 2020 , we recognized a gain on sale on real estate of$3.2 million from the sale of theLake Arrowhead Resort and Spa to an unaffiliated third party by theLake Arrowhead Resort and Spa venture. We owned an 97.35% controlling ownership interest in the venture. During the nine months endedSeptember 30, 2020 , we recognized a loss on sale on real estate of$0.5 million from the sale of our 100% ownership interest in theHutton Hotel Nashville to an unaffiliated third party. WLT9/30/2021 10-Q - 38 --------------------------------------------------------------------------------
Interest Expense
For the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, interest expense increased by$2.2 million and$42.9 million , respectively, primarily due to an increase in the dividends recorded in connection with our Series A Preferred Stock and Series B Preferred Stock totaling$2.4 million and$16.8 million , respectively. Interest expense for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020 also increased by$12.6 million as a result of an increase in the aggregate amortization of the debt discount related to the mortgage loans assumed in the Merger and the fair value discount related to the Series A Preferred Stock and Series B Preferred Stock and$11.4 million resulting from the assumption of the mortgage loans of the hotels acquired in the Merger.
During the nine months endedSeptember 30, 2021 , we recognized a gain on change in control of interests of$8.6 million in connection with our acquisition of the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party onApril 6, 2021 ( Note 4 ). We previously accounted for our jointly-owned interest in this venture under the equity method of accounting. Due to the change in control of this jointly owned investment, we recorded a net gain on change in control of interest reflecting the difference between our carrying value and the preliminary estimated fair value of our previously held equity investment onApril 6, 2021 . Subsequent to the acquisition, we own 100% of this hotel and consolidate our real estate interest in the hotel. During the nine months endedSeptember 30, 2020 , we recognized a net gain on change in control of interests of$22.3 million in connection with our acquisition of the remaining 50% interests in theMarriott Sawgrass Golf Resort and Spa and theRitz-Carlton Bacara , Santa Barbara in the Merger ( Note 3 ). We previously accounted for our jointly-owned interest in these ventures under the equity method of accounting. Due to the change in control of this jointly owned investment, we recorded a net gain on change in control of interest reflecting the difference between our carrying values and the preliminary estimated fair values of our previously held equity investments onApril 13, 2020 , the date of the Merger. Subsequent to the Merger, we own 100% of these hotels and consolidate our real estate interests in the hotels.
Loss on Extinguishment of Debt
During the nine months endedSeptember 30, 2021 we recognized a loss on extinguishment of debt of$6.6 million , comprised of a$4.8 million loss resulting from the refinancing of theSeattle Marriott Bellevue non-recourse mortgage loan, a$0.7 million loss in connection with the disposition of theSheraton Austin Hotel at theCapitol , a$0.1 million loss resulting from the refinancing of theRitz-Carlton Fort Lauderdale senior mortgage and mezzanine loans and a$1.1 million loss in connection with the disposition of the Courtyard Pittsburgh Shadyside. WLT9/30/2021 10-Q - 39 --------------------------------------------------------------------------------
Equity in Losses of Equity Method Investments in Real Estate, Net
Equity in losses of equity method investments in real estate, net represents losses from our equity investments inUnconsolidated Hotels recognized in accordance with each investment agreement and based upon the allocation of the investment's net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period ( Note 5 ). We are required to periodically compare an investment's carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds the estimated fair value and is determined to be other than temporary. We recognized$17.8 million of other-than-temporary impairment charges on our equity method investments in real estate during the nine months endedSeptember 30, 2020 . No such charges were recognized during the three and nine months endedSeptember 30, 2021 or the three months endedSeptember 30, 2020 . The following table sets forth our share of equity in losses from ourUnconsolidated Hotels , which are based on the HLBV model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands): Three Months Ended September 30, Nine Months Ended September 30, Venture 2021 2020 2021 2020Ritz-Carlton Philadelphia Venture (a) $ (210) $
(3,074)
- - - (20,968)
Marriott Sawgrass Golf Resort &
Spa Venture (b) - - - (58)
Hyatt Centric French Quarter
Venture (d) - (127) (857) (138)
Total equity in losses of equity
method investments in real estate,
net $ (210) $ (3,201) $ (5,796) $ (31,139)
___________
(a)The results for the three and nine months ended September 30, 2021 reflect an
improvement in the performance of the hotel during 2021 as compared to
comparable periods in 2020.
(b)Upon closing of the Merger on April 13, 2020 , the Company owns 100% of this
hotel and consolidates its real estate interest in this hotel therefore the
amounts for the nine months ended September 30, 2020 represent the equity in
losses prior to the Merger.
(c)Includes an other-than-temporary impairment charge of $17.8 million
recognized on this investment during the nine months ended September 30, 2020 to
reduce the carrying value of our equity investment in the venture to its
estimated fair value.
(d)On April 6, 2021 , we acquired the remaining 20% interest in the Hyatt Centric
French Quarter Venture from an unaffiliated third party, bringing our ownership
interest to 100% ( Note 4 ).
Bargain Purchase Gain
During the nine months ended
Benefit from (Provision for) Income Taxes
For the three months endedSeptember 30, 2021 , we recognized a benefit from income taxes of$0.5 million compared to a benefit from income taxes of$1.5 million for the three months endedSeptember 30, 2020 and for the nine months endedSeptember 30, 2021 , we recognized a provision for income taxes of$0.7 million compared to a benefit from income taxes of$7.5 million for the nine months endedSeptember 30, 2020 . Benefit from income taxes during the three and nine months endedSeptember 30, 2020 included a$0.3 million and$8.3 million current tax benefit, respectively, resulting from carrying back certain net operating losses allowable under the CARES Act, partially offset for the nine months endedSeptember 30, 2020 by a deferred expense due to the establishment of a valuation allowance of$2.5 million . WLT9/30/2021 10-Q - 40 --------------------------------------------------------------------------------
Loss Attributable to Noncontrolling Interests
The following table sets forth our (income) loss attributable to noncontrolling interests (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Venture 2021 2020 2021 2020
Sheraton Austin Hotel at the
Capitol Venture (a) $ (4) $ 476 $ (2,871) $ 922
Ritz-Carlton Fort Lauderdale
Venture (b) 321 1,297 175 2,751
Ritz-Carlton Key Biscayne Venture (21) (13) (50) (946)
Operating Partnership -
Noncontrolling interest (c) 1,576 4,954 10,095 6,121
Loss attributable to
noncontrolling interests $ 1,872 $ 6,714 $ 7,349 $ 8,848
___________
(a)On May 5, 2021 , the Sheraton Austin Hotel at the Capitol venture sold the
Sheraton Austin Hotel at the Capitol to an unaffiliated third-party. The venture
received net proceeds of approximately $36.4 million from the sale after the
repayment of the related mortgage loan. We owned an 80% controlling interest in
the venture.
(b)The results for the three and nine months ended September 30, 2021 reflect an
improvement in the performance of the hotel during 2021 as compared to
comparable periods in 2020.
(c)Reflects the OP Units' and Warrant Units' proportionate share of net loss.
Modified Funds from Operations
MFFO is a non-GAAP measure that we use to evaluate our business. For a definition of MFFO and a reconciliation to net income or loss attributable to Common Stockholders, see Supplemental Financial Measures below.
For the three and nine months endedSeptember 30, 2021 as compared to the same period in 2020, MFFO increased by$55.0 million and$71.4 million , respectively. MFFO for the three and nine months endedSeptember 30, 2020 reflects the impact of the COVID-19 pandemic on our hotel operations, beginning inMarch 2020 . Additionally, as a result of the Merger, the historical financial information included for the period prior toApril 13, 2020 , represents the pre-Merger financial information of CWI 1 on a stand-alone basis, therefore comparisons of the period to period financial information of WLT as set forth herein may not be meaningful.
Liquidity and Capital Resources
Our primary cash uses over the next 12 months are expected to be payment of debt
service, costs associated with the refinancing or restructuring of indebtedness,
funding corporate and hotel level operations, payment of real estate taxes and
insurance and payment of preferred stock dividends. Our primary capital sources
to meet such uses are expected to be funds generated by hotel operations, cash
on hand, any additional issuances of Series B Preferred Stock and proceeds from
additional asset sales.
Due to the COVID-19 pandemic and as a result of numerous government mandates,
health official mandates and significantly reduced demand, as of the date of
this Report, the Company has limited operations at a number of hotel properties.
Significant events affecting travel, including the COVID-19 pandemic, typically
have an impact on booking patterns, with the full extent of the impact generally
determined by the duration of the event and its impact on travel decisions. We
believe the ongoing effects of the COVID-19 pandemic on our operations have had,
and will continue to have, a material adverse impact on our financial results
and liquidity, and such adverse impact may continue well beyond the containment
of such outbreak.
WLT 9/30/2021 10-Q - 41-------------------------------------------------------------------------------- As ofSeptember 30, 2021 , we had cash and cash equivalents of$102.2 million . Additionally, under the terms of our agreements with the investors in the July Capital Raise, as defined and described in Note 13 , we have the option to require the investors to purchase up to$150.0 million aggregate liquidation preference of additional shares of Series B Preferred Stock during the 18 months after the closing of the July Capital Raise for additional working capital needs, including the repayment, refinancing or restructuring of indebtedness, subject to our satisfaction of customary conditions. As ofSeptember 30, 2021 , the mortgage loans for ourConsolidated Hotels had an aggregate principal balance totaling$2.2 billion outstanding, all of which is mortgage indebtedness and is generally non-recourse, subject to customary non-recourse carve-outs, except that we have provided certain lenders with limited corporate guaranties aggregating$15.6 million for items such as taxes, deferred debt service and amounts drawn from furniture, fixtures and equipment reserves to pay expenses, in connection with loan modification agreements. We have continued to work with our lenders to address loans with near-term mortgage maturities and have refinanced or extended the maturity date of seven Consolidated Hotel mortgage loans, aggregating$708.1 million of indebtedness, during the nine months endedSeptember 30, 2021 . Of the$2.2 billion aggregate principal balance indebtedness outstanding as ofSeptember 30, 2021 , approximately$1.2 billion is scheduled to mature during the 12 months after the date of this Report, which included a total of$180.9 million that has subsequently been repaid as a result of a hotel disposition or refinancing. If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender. In addition to raising capital in the July Capital Raise and through asset sales, we have taken various actions to help mitigate the effects of the COVID-19 pandemic on our operational results and to preserve our liquidity at both the operational and corporate level, including among others: reducing capital expenditures and reducing operating expenses, suspending distributions on and redemption of our common stock and temporarily suspending required contributions to the furniture, fixture and equipment replacement reserve at certain of our hotels.
Sources and Uses of Cash During the Period
Operating Activities - For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$20.2 million as compared to$93.9 million for the nine months endedSeptember 30, 2020 . Net cash used in operating activities during 2020 reflects the impact of the COVID-19 pandemic on our hotel operations, beginning inMarch 2020 . Investing Activities - During the nine months endedSeptember 30, 2021 , net cash provided by investing activities was$108.9 million primarily as a result of$126.8 million in aggregate proceeds from the sale ofSheraton Austin Hotel at theCapitol and the Courtyard Pittsburgh Shadyside, partially offset by funding$21.4 million for capital expenditures at ourConsolidated Hotels . Financing Activities - Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$109.9 million primarily as a result of payments and prepayments of mortgage financing totaling$280.6 million ,$7.1 million of distributions to noncontrolling interests, and$4.8 million of deferred financing costs, partially offset by$186.5 million of proceeds from mortgage financing.
Distributions and Redemptions
OnMarch 18, 2020 , in light of the impact that the COVID-19 pandemic has had on our business, we announced that we were suspending future distributions on our common stock. We also announced that redemptions would be suspended including, as ofDecember 2, 2020 , special circumstances redemptions. Requests for special circumstances redemptions may continue to be submitted, however, the Company will not take any action with regard to those requests until the Board of Directors has elected to lift the suspension and provided the terms and conditions for any continuation of the program. Distributions and redemptions in respect of future periods will be evaluated by the Board of Directors based on circumstances and expectations existing at the time of consideration, and are also subject to the terms of the Series A and Series B Preferred Stock. Among other terms of the Series A and Series B Preferred Stock, the Series A and Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless all accrued dividends on the Series A and Series B Preferred Stock are paid in cash for all past dividend periods and the dividend for the current dividend period is also paid in cash. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's distribution reinvestment plan. WLT9/30/2021 10-Q - 42 --------------------------------------------------------------------------------
Summary of Financing
The table below summarizes our non-recourse debt, net (dollars in thousands):
September 30, 2021 December 31, 2020
Carrying Value
Fixed rate (a) $ 1,273,674 $ 1,286,839
Variable rate (a):
Amount subject to interest rate caps 507,255 362,193
Amount subject to interest rate swaps 181,059 175,158
Amount subject to floating interest rate 170,530 345,712
858,844 883,063
$ 2,132,518 $ 2,169,902
Percent of Total Debt
Fixed rate 60 % 59 %
Variable rate 40 % 41 %
100 % 100 %
Weighted-Average Interest Rate at End of Period
Fixed rate 4.3 % 4.3 %
Variable rate (b) 4.0 % 4.1 %
_________
(a)Aggregate debt balance includes unamortized debt discount of $19.2 million
and $46.5 million as of September 30, 2021 and December 31, 2020 , respectively,
and unamortized deferred financing costs totaling $7.6 million and $6.9 million
as of September 30, 2021 and December 31, 2020 , respectively.
(b)The impact of our derivative instruments is reflected in the weighted-average
interest rates.
Covenants
Pursuant to our mortgage loan agreements, our consolidated subsidiaries are
subject to various operational and financial covenants, including minimum debt
service coverage and debt yield ratios. Most of our mortgage loan agreements
contain "lock-box" provisions, which permit the lender to access or sweep a
hotel's excess cash flow and could be triggered by the lender under limited
circumstances, including the failure to maintain minimum debt service coverage
ratios. If a lender requires that we enter into a cash management agreement, we
would generally be permitted to spend an amount equal to our budgeted hotel
operating expenses, taxes, insurance and capital expenditure reserves for the
relevant hotel. The lender would then hold all excess cash flow after the
payment of debt service in an escrow account until certain performance hurdles
are met. As of September 30, 2021 , we have effectively entered into cash
management agreements with the lenders on 22 of our 28 Consolidated Hotel
mortgage loans either because the minimum debt service coverage ratio was not
met or as a result of a loan modification agreement. The cash management
agreements generally permit cash generated from the operations of each hotel to
fund the hotel's operating expenses, debt service, taxes and insurance but
restrict distributions of excess cash flow, if any, to the Company to fund
corporate expenses.
The
Cash Resources
At
WLT 9/30/2021 10-Q - 43
--------------------------------------------------------------------------------Cash Requirements
Our primary cash uses throughSeptember 30, 2022 are expected to be payments of debt service, real estate taxes and insurance, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be cash on hand, funds generated by hotel operations, any additional issuances of Series B Preferred Stock and proceeds from additional asset sales. We may satisfy certain debt maturities during this period by turning the properties back to the lenders.
Capital Expenditures and Reserve Funds
With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures sufficient to cover the cost of routine improvements and alterations at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel's total gross revenue. As ofSeptember 30, 2021 andDecember 31, 2020 ,$57.6 million and$51.0 million , respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures and is included in Restricted cash in the consolidated financial statements. In addition, due to the effects of the COVID-19 pandemic on our operations, we have been working with the brands, management companies and lenders and have used a portion of the available restricted cash reserves to cover operating costs at our properties, of which$2.3 million is subject to replenishment as ofSeptember 30, 2021 .
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO, and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, are provided below. FFO and MFFO Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to, nor a substitute for, net income or loss as determined under GAAP. We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by theBoard of Governors of NAREIT, as restated inDecember 2018 . The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above. However, NAREIT's definition of FFO does not distinguish between the conventional method of equity accounting and the HLBV method of accounting for unconsolidated partnerships and jointly owned investments. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization, as well as impairment charges of real estate-related WLT9/30/2021 10-Q - 44 -------------------------------------------------------------------------------- assets, provides a more complete understanding of our performance to investors and to management; and when compared year over year, reflects the impact on our operations from trends in occupancy rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property's asset group to the estimated future net undiscounted cash flow that we expect the property's asset group will generate, including any estimated proceeds from the eventual sale of the property's asset group. It should be noted, however, that the property's asset group's estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value. While impairment charges are excluded from the calculation of FFO described above due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP measures FFO and MFFO and the adjustments to GAAP in calculating FFO and MFFO. Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect subsequent to the establishment of NAREIT's definition of FFO. Management believes these cash-settled expenses, such as acquisition fees that are typically accounted for as operating expenses, do not affect our overall long-term operating performance. Publicly-registered, non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-traded REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-traded REITs, theInstitute for Portfolio Alternatives (formerly known as theInvestment Program Association ) ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-traded REITs and which we believe to be another appropriate non-GAAP measure to reflect the operating performance of a non-traded REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our offering has been completed and once essentially all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance, with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. MFFO should only be used to assess the sustainability of a company's operating performance after a company's offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company's operating performance during the periods in which properties are acquired. We define MFFO consistent with the IPA's Practice Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline"), issued by the IPA inNovember 2010 . This Practice Guideline defines MFFO as FFO further adjusted for the following items, included in the determination of GAAP net income or loss, as applicable: acquisition fees and expenses; accretion of discounts and amortization of premiums on debt investments; where applicable, payments of loan principal made by our equity investees accounted for under the HLBV model where such payments reduce our equity in earnings of equity method investments in real estate, nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income or loss; nonrecurring gains or losses included in net income or loss from the extinguishment or sale of debt, hedges, derivatives or securities holdings, where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, WLT9/30/2021 10-Q - 45 -------------------------------------------------------------------------------- equity accounting, and after adjustments for Consolidated andUnconsolidated Hotels , with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses that are unrealized and may not ultimately be realized. Our MFFO calculation complies with the Practice Guideline described above. In calculating MFFO, we exclude acquisition-related expenses, fair value adjustments of derivative financial instruments and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities. We account for certain of our equity investments using the HLBV model which is based on distributable cash as defined in the operating agreement. Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-traded REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that MFFO and the adjustments used to calculate it allow us to present our performance in a manner that takes into account certain characteristics unique to non-traded REITs, such as their limited life, defined acquisition period and targeted exit strategy, and is therefore a useful measure for investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information. Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income or loss as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. Neither theSEC , NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, theSEC , NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly. WLT9/30/2021 10-Q - 46 --------------------------------------------------------------------------------
FFO and MFFO were as follows (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net loss attributable to Common Stockholders
31,966 89,498 82,791
Net gain on sale of real estate (5,223) (3,227) (23,298) (2,738)
Net gain on change in control of interests - - (8,612) (22,250)
Impairment charges - - - 120,220
Proportionate share of adjustments for
partially-owned entities - FFO adjustments (a) 1,199 6,403 8,185 39,379
Total adjustments 24,663 35,142 65,773 217,402
FFO attributable to Common Stockholders (as
defined by NAREIT) 6,342 (46,635) (53,766) (50,274)
Adjustments:
Amortization of fair value adjustments 8,209 9,958 27,584 16,924 Straight-line and other rent adjustments 1,736 1,366 4,799 4,655 Net loss on extinguishment of debt 1,111 - 6,630 - Loss (gain) on property-related insurance claims, net(b) 956 (1,030) (1,571) (1,030) Bargain purchase gain - - - (78,696) Proportionate share of adjustments for partially owned entities - MFFO adjustments (473) (486) (2,234) 473 Transaction costs (b) 345 27 345 18,376 Total adjustments 11,884 9,835 35,553 (39,298)
MFFO attributable to Common Stockholders
___________
(a)This adjustment includes an other-than-temporary impairment charge of$17.8 million recognized on our equity investment in theRitz-Carlton Bacara , Santa Barbara Venture during the three months endedMarch 31, 2020 ( Note 5 ). (b)We have excluded these costs because of their non-recurring nature. By excluding such costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties. WLT9/30/2021 10-Q - 47
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