XENIA HOTELS & RESORTS, INC. Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include statements about Xenia's plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions,prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "guidance," "predict," "potential," "continue," "likely," "will," "would," "illustrative" and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Xenia and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. Forward-looking statements in this Form 10-Q include, among others, statements about our plans, strategies and the effects of the COVID-19 pandemic, including on the demand for travel (including leisure travel and transient and group business travel), capital expenditures and the timing of renovations, and derivations thereof, financial performance, prospects or future events. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors include, among others: the factors set forth under "Part I-Item 1A. Risk Factors" and "Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission (the "SEC") onMarch 1, 2022 , as may be updated elsewhere in this report; and the information set forth in other Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we have filed or will file with theSEC ; the short- and longer-term effects of the COVID-19 pandemic, including on the demand for travel (including leisure travel and transient and group business travel), and levels of consumer confidence; actions that governments, businesses, and individuals take in response to the COVID-19 pandemic or any resurgence of the disease or its variants, including limiting or banning travel and implementation of social distancing requirements; the impact of the COVID-19 pandemic, and actions taken in response to the COVID-19 pandemic or any resurgence of the disease or its variants, on global and regional economies, travel, and economic activity, including the duration and magnitude of its impact on unemployment rates, impacts to supply chains, and consumer discretionary spending; the broad distribution of COVID-19 vaccines and boosters and wide acceptance by the general population of such vaccines and boosters; the effectiveness of the vaccines and boosters; the ability of third-party managers or other partners to successfully navigate the impacts of the COVID-19 pandemic including labor shortages; the pace of recovery following the COVID-19 pandemic or any resurgence of the disease or its variants; COVID-19 may cause us to incur additional expenses; our ability to successfully negotiate amendments and covenant waivers under our indebtedness; our ability to comply with contractual covenants; business, financial and operating risks inherent to real estate investments and the lodging industry; seasonal and cyclical volatility in the lodging industry; adverse changes in specialized industries, such as the energy, technology and/or tourism industries that result in a sustained downturn of related businesses and corporate spending that may negatively impact our revenues and results of operations; difficulties in procuring required products caused by supply chain disruptions; macroeconomic and other factors beyond our control that can adversely affect and reduce demand for hotel rooms, food and beverage services, and/or meeting facilities, including inflation; contraction in theU.S. and/or global economy or low levels of economic growth; inflationary pressures which increases our labor and other costs of providing services to guests and meeting hotel brand standards, as well as costs related to construction and other capital expenditures, property and other taxes, and insurance which could result in reduced operating profit margins; levels of spending in business and leisure segments as well as consumer confidence; declines in occupancy and average daily rate; decreased demand for business travel due to technological advancements and preferences for virtual over in-person meetings and/or changes in guest and consumer preferences, including consideration of the impact of travel on the environment; fluctuations in the supply of hotels, due to hotel construction and/or renovation and expansion of existing hotels, and demand for hotel rooms; changes in the competitive environment in the lodging industry, including due to consolidation of management companies, franchisors and online travel agencies, and changes in the markets where we own hotels; events beyond our control, such as war, terrorist or cyber-attacks, mass casualty events, government shutdowns and closures, travel-related health concerns, and natural disasters; cyber incidents and information technology failures, including unauthorized access to our computer systems and/or our vendors' computer systems, and our third-party management companies' or franchisors' computer systems and/or their vendors' computer systems; our inability to directly operate our properties and reliance on third-party hotel management companies to operate and manage our hotels; our ability to maintain good relationships with our third-party hotel management companies and franchisors; our failure to maintain and/or comply with brand operating standards; our ability to maintain our brand licenses at our hotels; relationships with labor unions and changes in labor laws (including increases in minimum wages); loss of our senior management team or key corporate personnel; our ability to identify and consummate acquisitions and dispositions of hotels; our ability to integrate and successfully operate any hotel properties acquired in the future and the risks 23 -------------------------------------------------------------------------------- associated with these hotel properties; the impact of hotel renovations, repositionings, redevelopments and re-branding activities; our ability to access capital for renovations and acquisitions and general operating needs on terms and at times that are acceptable to us; the fixed cost nature of hotel ownership; our ability to service, restructure or refinance our debt; changes in interest rates and operating costs, including labor and service related costs; compliance with regulatory regimes and local laws; uninsured or under insured losses, including those relating to natural disasters, the physical effects of climate change, civil unrest, terrorism or cyber-attacks; changes in distribution channels, such as through internet travel intermediaries or websites that facilitate short-term rental of homes and apartments from owners; the amount of debt that we currently have or may incur in the future; provisions in our debt agreements that may restrict the operation of our business; our organizational and governance structure; our status as a real estate investment trust ("REIT"); our taxable REIT subsidiary ("TRS") lessee structure; the cost of compliance with and liabilities under environmental, health and safety laws; adverse litigation judgments or settlements; changes in real estate and zoning laws; increases in insurance or other fixed costs and increases in real property tax valuations or rates; changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs; changes in governmental regulations or interpretations thereof; and estimates relating to our ability to make distributions to our stockholders in the future. These factors are not necessarily all of the important factors that could cause our actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. The following discussion and analysis should be read in conjunction with the Company's Unaudited Condensed Consolidated Financial Statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q.
Overview
Xenia Hotels & Resorts, Inc. ("we", "us", "our", "Xenia" or the "Company") is a self-advised and self-administered REIT that invests in uniquely positioned luxury and upper upscale hotels and resorts with a focus on top 25 lodging as well as key leisure destinations inthe United States . As ofMarch 31, 2022 , we owned 34 hotels, comprising 9,814 rooms, across 14 states. Our hotels are operated and/or licensed by industry leaders such as Marriott, Hyatt, Kimpton, Fairmont, Loews, Hilton, The Kessler Collection and Davidson.
Ongoing Impact of COVID-19 on our Business
The onset and global spread of the COVID-19 pandemic led federal, state and
local governments in
We began to see improvements in leisure demand during the second half of 2020, a trend that accelerated in 2021 and has continued into 2022. During the first quarter of 2022, operations continued to improve due to a re-acceleration in leisure travel and higher levels of business transient and group demand beginning in mid-February resulting in total portfolio ADR climbing above 2019 levels for the comparable period. Despite this improvement, there remains significant uncertainty regarding the pace of recovery and whether and when business travel and larger group meetings will return to pre-pandemic levels. We may be impacted by, among other things, the distribution and acceptance of COVID-19 vaccines and boosters, breakthrough cases, and new variants of COVID-19, as well as the ongoing local and national response to the virus. As the recovery continues, we expect that the pace will vary from market to market and may be uneven in nature.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, theOperating Partnership , andXHR Holding . The Company's subsidiaries generally consist of limited liability companies, limited partnerships and the TRS. The effects of all inter-company transactions have been eliminated. Corporate costs directly associated with our principal executive offices, personnel and other administrative costs are reflected as general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss. 24
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Our Revenues and Expenses
Our revenue is primarily derived from hotel operations, including rooms revenue, food and beverage revenue and other revenue, which consists of parking, spa, resort fees, other guest services, and tenant leases, among other items. Our operating costs and expenses consist of the costs to provide hotel services, including rooms expense, food and beverage expense, other direct and indirect operating expenses, and management and franchise fees. Rooms expense includes housekeeping wages and associated payroll taxes, room supplies, laundry services and front desk costs. Food and beverage expense primarily includes the cost of food, beverages and associated labor. Other direct and indirect hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with general and administrative departments, sales and marketing, information technology and telecommunications, repairs and maintenance and utility costs. We enter into management agreements with independent third-party management companies to operate our hotels. The management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel.
Key Indicators of Operating Performance
We measure hotel results of operations and the operating performance of our business by evaluating financial and nonfinancial metrics such asRevenue Per Available Room ("RevPAR"); average daily rate ("ADR"); occupancy rate ("occupancy"); earnings before interest, income taxes, depreciation and amortization for real estate ("EBITDAre") and Adjusted EBITDAre; and funds from operations ("FFO") and Adjusted FFO. We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. RevPAR, ADR, and occupancy may be impacted by macroeconomic factors as well as regional and local economies and events. See "Non-GAAP Financial Measures" for further discussion of the Company's use, definitions and limitations of EBITDAre, Adjusted EBITDAre, FFO and Adjusted FFO and the reasons management believes these financial measures are useful to investors. Results of Operations Lodging Industry Overview We began to see improvements in leisure demand during the second half of 2020, a trend that accelerated in 2021 and has continued into the first quarter of 2022. Further, by mid-February, we began to experience higher levels of business transient and group business. Despite this relative improvement, there is still significant uncertainty regarding the pace of recovery and the length of time it will take for business travel and larger group meetings to return to pre-pandemic levels. TheU.S. lodging industry has historically exhibited a strong correlation toU.S. GDP, which decreased at an estimated annual rate of approximately 1.4% during the first quarter of 2022, according to theU.S. Department of Commerce , compared to the annual rate growth trend from the third and fourth quarters of 2021 of 2.3% and 6.9%, respectively. The decrease during the first quarter reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending that were partially offset by increases in personal consumption expenditures, nonresidential fixed investment, residential fixed investment, and imports. In addition, the unemployment rate fell to 3.6% in March from 3.9% inDecember 2021 and from 4.8% inSeptember 2021 . The unemployment rate has declined considerably from theApril 2020 high of 14.7%. TheU.S. lodging industry has been more acutely impacted by the COVID-19 pandemic than the overallU.S. economy and other industries and has not experienced the same level of recovery as theU.S. economy which is largely due to the persistence of the COVID-19 pandemic and its variants and sentiment towards business and leisure travel as a result of the pandemic. Additionally, we expect the recovery of the lodging industry will take longer than it will for the broader economy and many other industries. Further, we continue to monitor and evaluate the challenges associated with inflationary pressures, the evolving workforce landscape, particularly related to achieving the appropriate balance between hotel staffing levels and demand as business at our hotels increases as well as ongoing supply chain issues which may continue to impact the hotels' ability to source operating supplies and other materials. Demand and new hotel supply increased 26.4% and 4.0%, respectively, during the three months endedMarch 31, 2022 . The significant increase in demand led to increases in industry RevPAR of 67.2% for the three months endedMarch 31, 2022 compared to 2021, which was driven by an increase in occupancy of 21.6% coupled with an increase of 37.5% in ADR, respectively. AllU.S. data for the three months endedMarch 31, 2022 are per industry reports.
First Quarter 2022 Overview
Our total portfolio RevPAR, which includes the results of hotels sold or acquired for the period of ownership by the Company, increased 133.1% to$143.99 for the three months endedMarch 31, 2022 compared to$61.76 for the three months endedMarch 31, 2021 driven by increases in leisure transient business and improving business transient and corporate group demand. 25 -------------------------------------------------------------------------------- Net loss decreased 90.6% for the three months endedMarch 31, 2022 compared to 2021, which was primarily attributed to an increase in operating income of$59.3 million from the 33 hotels owned during the three months endedMarch 31, 2022 and 2021 as a result of a recovery from the COVID-19 pandemic, a$0.7 million reduction in operating loss attributed to the sale of hotels inNovember 2021 andJanuary 2022 and a$0.2 million increase in operating income attributed to the acquisition ofW Nashville . These increases were partially offset by a$1.8 million increase in interest expense attributed to a higher weighted-average interest rate coupled with an increase in weighted-average debt outstanding, a$1.4 million increase in income tax expense, a$1.3 million increase in impairment and other losses, a$1.1 million reduction attributed to business interruption proceeds, a$0.9 million increase in corporate general and administrative expenses, other losses of$0.8 million in 2022 compared to other income of$0.1 million in 2021 and a$0.3 million increase in loss on extinguishment of debt. Adjusted EBITDAre and Adjusted FFO attributable to common stock and unit holders for the three months endedMarch 31, 2022 increased 1,469.5% and 239.9%, respectively, compared to 2021, which was attributable to the extent and timing of the impact of the COVID-19 pandemic on our results of operations. Refer to "Non-GAAP Financial Measures" for the definition of these financial measures, a description of the reasons we believe they are useful to investors as key supplemental measures of our operating performance and the reconciliation of these non-GAAP financial measures to net loss attributable to common stock and unit holders.
Operating Information Comparison
The following table sets forth certain operating information for the three
months ended
Three Months Ended
March 31,
2022 2021 Change
Number of properties at March 31 34 35 (1)
Number of rooms at March 31 9,814 10,011 (197)
Number of hotels open at March 31 34 34 -
Number of rooms in hotels open at March 31 9,814 9,511
303
Number of hotels with temporarily suspended operations at
- 1
(1)
Number of rooms in hotels with temporarily suspended operations at
- 600 (600)
Three Months Ended
March 31,
2022 2021 Increase
Total Portfolio Statistics:
Occupancy (1) 56.6 % 32.7 % 2,390 bps
ADR (1) $ 254.57 $ 188.68 34.9 %
RevPAR (1) $ 143.99 $ 61.76 133.1 %
(1) For hotels acquired during the applicable period, includes operating
statistics since the date of acquisition. For hotels disposed of during the
period, operating results and statistics are included through the date of the
respective disposition. The three months ended March 31, 2022 and 2021 includes
hotels that had suspended operations for a portion of or all of the periods
presented.
26
--------------------------------------------------------------------------------Revenues
Revenues consists of rooms, food and beverage, and other revenues from our hotels, as follows (in thousands):
Three Months Ended March 31,
2022 2021 Increase % Change
Revenues:
Rooms revenues $ 123,198 $ 55,646 $ 67,552 121.4 %
Food and beverage revenues 67,735 21,592 46,143 213.7 %
Other revenues 19,414 10,614 8,800 82.9 %
Total revenues $ 210,347 $ 87,852 $ 122,495 139.4 %
Rooms revenues
Rooms revenues increased by $67.6 million , or 121.4%, to $123.2 million for the
three months ended March 31, 2022 from $55.6 million for the three months ended
March 31, 2021 primarily due to increases in occupancy and ADR due to a recovery
from the COVID-19 pandemic. Additionally, the acquisition of W Nashville in
March 2022 contributed to the increase in rooms revenue by $0.3 million . The
increase is net of a reduction of $1.2 million attributed to the sale of
Marriott Charleston Town Center in November 2021 and Kimpton Hotel Monaco
Chicago in January 2022 (collectively, "the hotels sold in November 2021 and
January 2022 ").
Food and beverage revenues
Food and beverage revenues increased by $46.1 million , or 213.7%, to $67.7
million for the three months ended March 31, 2022 from $21.6 million for the
three months ended March 31, 2021 primarily due to increases in occupancy due to
a recovery from the COVID-19 pandemic. The impact from the acquisition of W
Nashville in March 2022 was offset by the impact from the hotels sold in
November 2021 and January 2022 .
Other revenues
Other revenues increased by$8.8 million , or 82.9%, to$19.4 million for the three months endedMarch 31, 2022 from$10.6 million for the three months endedMarch 31, 2021 primarily due to a recovery from the COVID-19 pandemic. This increase includes$3.2 million in revenues from cancellations and attrition and is net of a reduction of$0.2 million attributed to the hotels sold inNovember 2021 andJanuary 2022 . The acquisition ofW Nashville inMarch 2022 did not have a significant impact on other revenues.
Hotel operating expenses consist of the following (in thousands):
Three Months Ended March 31,
2022 2021 Increase % Change
Hotel operating expenses:
Rooms expenses $ 29,217 $ 15,537 $ 13,680 88.0 %
Food and beverage expenses 45,610 18,178 27,432 150.9 %
Other direct expenses 5,294 3,198 2,096 65.5 %
Other indirect expenses 53,860 37,327 16,533 44.3 %
Management and franchise fees 7,626 2,844 4,782 168.1 %
Total hotel operating expenses
$ 64,523 83.7 %
Total hotel operating expenses
In general, hotel operating costs fluctuate based on various factors, including occupancy, labor costs, utilities and insurance costs. Luxury and upper upscale hotels generally have higher fixed costs than other types of hotels due to the level of services and amenities provided to guests. Total hotel operating expenses increased$64.5 million , or 83.7%, to$141.6 million for the three months endedMarch 31, 2022 from$77.1 million for the three months endedMarch 31, 2021 primarily due to increases in occupancy and other related 27
-------------------------------------------------------------------------------- operating costs due to the extent and timing of the impact of COVID-19. Additionally,W Nashville contributed to the increase in hotel operating expenses by$0.3 million . The increase in total hotel operating expenses is net of a reduction of$2.1 million attributed to the hotels sold inNovember 2021 andJanuary 2022 .
Corporate and Other Expenses
Corporate and other expenses consist of the following (in thousands):
Three Months Ended March 31,
Increase /
2022 2021 (Decrease) % Change
Depreciation and amortization $ 30,565 $ 33,197 $ (2,632) (7.9) %
Real estate taxes, personal property taxes
and insurance 10,855 10,540 315 3.0 %
Ground lease expense 517 403 114 28.3 %
General and administrative expenses 7,786 6,922 864 12.5 %
Gain on business interruption insurance - (1,116) 1,116 100.0 %
Impairment and other losses 1,278 - 1,278 100.0 %
Total corporate and other expenses
2.1 %
Depreciation and amortization
Depreciation and amortization expense decreased$2.6 million , or 7.9%, to$30.6 million for the three months endedMarch 31, 2022 from$33.2 million for the three months endedMarch 31, 2021 . This decrease was primarily attributed to the timing of fully depreciated assets during the comparable periods and a reduction in depreciation expense related to the hotels sold inNovember 2021 andJanuary 2022 . The acquisition ofW Nashville inMarch 2022 did not have a significant impact on depreciation and amortization expense.
Real estate taxes, personal property taxes and insurance
Real estate taxes, personal property taxes and insurance expense increased$0.3 million , or 3.0%, to$10.9 million for the three months endedMarch 31, 2022 from$10.5 million for the three months endedMarch 31, 2021 . This increase was primarily attributed a$1.5 million non-recurring property tax refund received in 2021 and increases in insurance premiums of$0.8 million . These increases were partially offset by a$1.3 million reduction in real estate taxes and a$0.5 million reduction related to the hotels sold inNovember 2021 andJanuary 2022 . The acquisition ofW Nashville inMarch 2022 did not have a significant impact.
General and administrative expenses
General and administrative expenses increased
Gain on business interruption insurance
Gain on business interruption insurance was$1.1 million for the three months endedMarch 31, 2021 , which was attributed to insurance proceeds for a portion of lost revenue associated with cancellations related to the COVID-19 pandemic.
Impairment and other losses
InAugust 2021 , Hurricane Ida impactedLoews New Orleans Hotel located inNew Orleans, Louisiana . During the three months endedMarch 31, 2022 , the Company expensed additional hurricane-related repair and cleanup costs of$1.3 million .
Non-Operating Income and Expenses
Non-operating income and expenses consist of the following (in thousands):
28
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Three Months Ended March 31,
2022 2021 Increase / (Decrease) % ChangeNon-operating income and expenses:
Other (loss) income $ (777)$ 116 (893) (769.8) % Interest expense (20,538) (18,750) 1,788 9.5 % Loss on extinguishment of debt (294) - 294 100.0 % Income tax expense (1,607) (165) 1,442 873.9 % Other (loss) income Other loss decreased$0.9 million , or 769.8%, to$0.8 million for the three months endedMarch 31, 2022 from income of$0.1 million for the three months endedMarch 31, 2021 . The decrease was primarily attributed to the recognition of$1.6 million of costs associated with the termination of two interest rate hedges partially offset by a gain of$1.0 million from the receipt of insurance proceeds in excess of recognized losses associated with hurricane-related damage atLoews New Orleans Hotel . Interest expense Interest expense increased$1.8 million , or 9.5%, to$20.5 million for the three months endedMarch 31, 2022 from$18.8 million for the three months endedMarch 31, 2021 . The increase was primarily due to an increase in the weighted-average interest rate and an increase in the outstanding debt as ofMarch 31, 2022 compared to 2021. Refer to Note 5 in the accompanying condensed consolidated financial statements for further discussion.
Loss on extinguishment of debt
The loss on extinguishment of debt of$0.3 million for the three months endedMarch 31, 2022 was attributable to the write-off of unamortized debt issuance costs upon the early repayment of one mortgage loan.
Income tax expense
Income tax expense increased$1.4 million , or 873.9%, to$1.6 million for the three months endedMarch 31, 2022 from$0.2 million for the three months endedMarch 31, 2021 . The increase from prior year was primarily attributed to higher projected taxable income related to the recovery from the COVID-19 pandemic and the acquisition ofW Nashville inMarch 2022 coupled with an increase in the effective tax rate for the first quarter of 2022 compared to 2021. These increases were partially offset by the use of the Company's federal and state net operation loss carryforwards.
Liquidity and Capital Resources
We expect to meet our short-term liquidity requirements from cash on hand, cash flow from hotel operations, use of our unencumbered asset base, asset dispositions, borrowings under our revolving credit facility, and proceeds from various capital market transactions, including issuances of debt and equity securities. The objectives of our cash management policy are to maintain the availability of liquidity and minimize operational costs. On a long-term basis, our objectives are to maximize revenue and profits generated by our existing properties and acquired hotels, to further enhance the value of our portfolio and produce an attractive current yield, as well as to generate sustainable and predictable cash flow from our operations to distribute to our common stock and unit holders. We believe successful improvements to the performance of our portfolio will result in increased operating cash flows over time. Additionally, we may meet our long-term liquidity requirements through additional borrowings, the issuance of equity and debt securities, which may not be available on advantageous terms or at all, and/or proceeds from the sales of hotels. Liquidity As ofMarch 31, 2022 , we had$179.1 million of consolidated cash and cash equivalents and$40.2 million of restricted cash and escrows. The restricted cash as ofMarch 31, 2022 primarily consisted of$33.4 million related to furniture, fixtures and equipment replacement reserves ("FF&E reserves") as required per the terms of our management and franchise agreements, cash held in restricted escrows of$4.3 million primarily for real estate taxes and mortgage escrows,$1.8 million in deposits made for capital projects and$0.7 million for disposition-related holdbacks. As ofMarch 31, 2022 , there was no outstanding balance on our revolving credit facility and the full$450 million is available to be borrowed. Proceeds from future borrowings may be used for working capital, general corporate or other purposes permitted by the revolving credit agreement (subject to certain additional restrictions during the covenant waiver period). 29 -------------------------------------------------------------------------------- InMay 2021 , we upsized the ATM Agreement and, as a result, the we had$200 million available for sale under the ATM Agreement as ofMarch 31, 2022 . The terms of the amended revolving credit facility impose restrictions on the use of proceeds raised from equity issuances. We remain committed to increasing total shareholder returns through the following priorities: (1) maximize revenue and profits generated by our existing properties and acquired hotels, including the continued focused management of expenses, (2) further enhance the value of our portfolio and produce an attractive current yield and (3) generate sustainable and predictable cash flow from our operations to distribute to our common stock and unit holders. Future determinations regarding the declaration and payment of dividends will be at the discretion of our Board of Directors and will depend on then-existing conditions, including our results of operations, payout ratio, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements, maintaining our REIT status and other factors that our Board of Directors may deem relevant.
Debt and Loan Covenants
As of
Mortgage Loans
InJanuary 2022 , the Company repaid in full the$65.0 million outstanding balance on the mortgage loan collateralized by The Ritz-Carlton, Pentagon City. Our mortgage loan agreements require contributions to be made to FF&E reserves. In addition, certain quarterly financial covenants have been waived for a period of time specified in the respective amended loan agreements and certain financial covenants have been adjusted following the waiver periods.
Corporate Credit Facilities
Certain financial covenants related to our amended corporate credit facilities have been suspended until the date that financial statements are required to be delivered thereunder for the fiscal quarter endingJune 30, 2022 (such period, unless earlier terminated by theOperating Partnership in accordance with the terms of the corporate credit facilities, the "covenant waiver period") and, once quarterly testing resumes, certain financial covenants have been modified through the second quarter in 2023. In addition, the amended corporate credit facilities have certain restrictions and covenants which are applicable during the covenant waiver period, including (i) mandatory prepayment requirements, (ii) affirmative covenants related to the pledge of equity of certain subsidiaries and (iii) negative covenants restricting certain acquisitions, investments, capital expenditures, ground leases and distributions. A minimum liquidity covenant also applies during the covenant waiver period.
Senior Notes
The indentures governing the Senior Notes contain customary covenants that limit theOperating Partnership's ability and, in certain circumstances, the ability of its subsidiaries, to borrow money, create liens on assets, make distributions and pay dividends, redeem or repurchase stock, make certain types of investments, sell stock in certain subsidiaries, enter into agreements that restrict dividends or other payments from subsidiaries, enter into transactions with affiliates, issue guarantees of indebtedness and sell assets or merge with other companies. These limitations are subject to a number of important exceptions and qualifications set forth in the indentures.
Debt Covenants
As ofMarch 31, 2022 , the Company was not in compliance with its debt covenants on one mortgage loan which did not result in an event of default but allows the lender the option to institute a cash sweep until covenant compliance is achieved for a period of time specified in the loan agreement. The cash sweep permits the lender to withdraw excess cash generated by the property into a separate bank account that they control, which may be used to reduce the outstanding loan balance.
Derivatives
As ofMarch 31, 2022 , we had eight interest rate swaps with an aggregate notional amount of$250.0 million . These swaps fix a portion of the variable interest rate on two of our mortgage loans for a portion of the term of each respective mortgage loan and fix LIBOR for a portion of the term of our one outstanding corporate credit facility term loan agented byKeyBank National Association . The corporate credit facility term loan spread may vary, as it is determined by the Company's leverage ratio. The applicable interest rate for the corporate credit facility term loan has been set to the highest level of grid-based pricing during the covenant waiver period. In addition, two interest rate swaps were terminated inJanuary 2022 in connection with the repayment of a$65.0 million mortgage loan. Our ability to apply hedge accounting in the future could be impacted to the extent that the payment terms of our loans change. The discontinuation of hedge accounting could result in future changes in the fair market values of hedges and/or a portion or 30
-------------------------------------------------------------------------------- all of the$0.8 million balance of accumulated other comprehensive loss as ofMarch 31, 2022 to be recognized on the condensed consolidated statements of operations and comprehensive loss through net loss. Any future defaults by the Company under the terms of its hedges, including those which may arise from cross default provisions with loan agreements, could result in the Company being immediately liable for the fair market value liability of the defaulted hedges. InMarch 2021 , theFinancial Conduct Authority ("FCA") announced that USD LIBOR will no longer be published afterJune 30, 2023 . This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, banking regulators were encouraging banks to discontinue new LIBOR debt issuance byDecember 31, 2021 . Any changes adopted by theFCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. All of our interest rate swap contracts mature prior toJune 30, 2023 . While we expect LIBOR to be available in substantially its current form through maturity, it is possible that LIBOR will become unavailable prior to that date. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR. Capital Markets We maintain an established "At-the-Market" ("ATM") program pursuant to an Equity Distribution Agreement ("ATM Agreement") withWells Fargo Securities, LLC ,Robert W. Baird & Co. Incorporated ,Jefferies LLC ,KeyBanc Capital Markets Inc. andRaymond James & Associates, Inc. In accordance with the terms of the ATM Agreement, we may from time to time offer and sell shares of common stock having an aggregate offering price of up to$200 million . InMay 2021 , we upsized the ATM Agreement and, as a result, had$200 million available for sale as ofMarch 31, 2022 . No shares were sold under the ATM Agreement during the three months endedMarch 31, 2022 and 2021. Our Board of Directors has authorized a stock repurchase program pursuant to which we are authorized to purchase up to$175 million of our outstanding common stock in the open market, in privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 plans (the "Repurchase Program"). The Repurchase Program does not have an expiration date. This Repurchase Program may be suspended or discontinued at any time and does not obligate us to acquire any particular amount of shares. As ofMarch 31, 2022 , we had approximately$94.7 million remaining under our share repurchase authorization. No shares were purchased as part of the Repurchase Program during the three months endedMarch 31, 2022 and 2021. The terms of our amended corporate credit facilities currently prohibit us from making repurchases of our common stock until we achieve compliance with applicable debt covenants and our covenant waiver period ends.
Capital Expenditures and Reserve Funds
We maintain each of our properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. Routine capital expenditures are administered by the hotel management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our properties. From time to time, certain of our hotels may undergo renovations as a result of our decision to expand or upgrade portions of the hotels, such as guest rooms, public space, meeting space and/or restaurants, in order to better compete with other hotels in our markets. In addition, upon the acquisition of a hotel we may be required to complete a property improvement plan in order to bring the hotel into compliance with the respective brand standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. We are obligated to maintain reserve funds with respect to certain agreements with our hotel management companies, franchisors and lenders to provide funds, generally 3% to 5% of hotel revenues, sufficient to cover the cost of certain capital improvements to the hotels and to periodically replace and update furniture, fixtures and equipment. Certain of the agreements require that we reserve this cash in separate accounts. To the extent that the FF&E reserves are not available or adequate to cover the cost of the renovation, we may fund a portion of the renovation with cash on hand, borrowings from our revolving credit facility and/or other sources of available liquidity. We have been, and will continue to be, prudent with respect to our capital spending, taking into account our cash flows from operations. As ofMarch 31, 2022 andDecember 31, 2021 , we had a total of$33.4 million and$29.3 million , respectively, of FF&E reserves. During the three months endedMarch 31, 2022 and 2021, we made total capital expenditures of$7.5 million and$7.2 million , respectively. 31
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Off-Balance Sheet Arrangements
As ofMarch 31, 2022 , we had various contracts outstanding with third-parties in connection with the renovation of certain of our hotel properties. The remaining commitments under these contracts as ofMarch 31, 2022 totaled$6.9 million .
Sources and Uses of Cash
Our principal sources of cash are cash flows from operations, borrowing under debt financings, including draws on our revolving credit facility, and from various types of equity offerings or the sale of our hotels. As a result of the impact the COVID-19 pandemic has had on our business, along with rising rates of inflation and interest rates, certain sources of capital may not be as readily available to us as they have been historically or may come at higher costs. Our principal uses of cash are asset acquisitions, capital investments, routine debt service and debt repayments, operating costs, corporate expenses and dividends. We may also elect to use cash to buy back our common stock in the future under the Repurchase Program. We are prohibited under the terms of the amended corporate credit facilities from making repurchases of our common stock until we achieve compliance with applicable debt covenants for a period of time and our covenant waiver period ends.
Comparison of the Three Months Ended
The table below presents summary cash flow information for the condensed consolidated statements of cash flows (in thousands):
Three
Months Ended
2022 2021
Net cash provided by (used in) operating activities $ 32,572
(301,092) (6,547)
Net cash used in financing activities (66,476) (1,854)
Net decrease in cash and cash equivalents and restricted cash
$
(334,996)
554,231 428,786
Cash and cash equivalents and restricted cash, at end of
period $ 219,235 $ 389,225
Operating
•Cash provided by operating activities was $32.6 million and cash used in
operating activities was $31.2 million for the three months ended March 31, 2022
and 2021, respectively. Cash flows from operating activities generally consist
of the net cash generated by our hotel operations, partially offset by the cash
paid for interest, corporate expenses and other working capital changes. Our
cash flows from operating activities may also be affected by changes in our
portfolio resulting from hotel acquisitions, dispositions or renovations. The
net increase in cash from operating activities during the three months ended
March 31, 2022 was primarily due to an increase in hotel operating income
attributed to a recovery from the impact of the COVID-19 pandemic net of
reductions from the hotels sold in November 2021 and January 2022 . Refer to the
"Results of Operations" section for further discussion of our operating results
for the three months ended March 31, 2022 and 2021.
Investing
•Cash used in investing activities was$301.1 million and$6.5 million for the three months endedMarch 31, 2022 and 2021, respectively. Cash used in investing activities for the three months endedMarch 31, 2022 was attributed to$328.5 million for the acquisition ofW Nashville and$7.5 million in capital improvements at our hotel properties, which was partially offset by net proceeds of$32.8 million from the disposition ofKimpton Hotel Monaco Chicago ,$1.2 million of proceeds from property insurance and$0.9 million of performance guaranty payments received that were recorded as a reduction in the respective hotel's cost basis. Cash used in investing activities for the three months endedMarch 31, 2021 was attributed to$7.2 million in capital improvements at our hotel properties, which was partially offset by$0.7 million of performance guaranty payments received that were recorded as a reduction in the respective hotel's cost basis. Financing •Cash used in financing activities was$66.5 million and$1.9 million for the three months endedMarch 31, 2022 and 2021, respectively. Cash used in financing activities for the three months endedMarch 31, 2022 was attributed the repayment of mortgage debt totaling$65.0 million , principal payments of mortgage debt totaling$0.9 million and shares redeemed to satisfy tax withholding on vested share-based compensation of$0.5 million . Cash used in financing activities for the three months endedMarch 31, 2021 was primarily attributed to principal payments of 32 --------------------------------------------------------------------------------
mortgage debt totaling
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures to be useful to investors as key supplemental measures of our operating performance: EBITDA, EBITDAre, Adjusted EBITDAre, FFO and Adjusted FFO. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss, operating profit, cash from operations, or any other operating performance measure as prescribed per GAAP.
EBITDA, EBITDAre and Adjusted EBITDAre
EBITDA is a commonly used measure of performance in many industries and is defined as net income or loss (calculated in accordance with GAAP) excluding interest expense, provision for income taxes (including income taxes applicable to sale of assets) and depreciation and amortization. We consider EBITDA useful to investors in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results, even though EBITDA does not represent an amount that accrues directly to common stockholders. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions and, along with FFO and Adjusted FFO, is used by management in the annual budget process for compensation programs. We calculate EBITDAre in accordance with standards established by theNational Association of Real Estate Investment Trusts ("Nareit"). Nareit defines EBITDAre as EBITDA plus or minus losses and gains on the disposition of depreciated property, including gains or losses on change of control, plus impairments 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 further adjust EBITDAre to exclude the impact of non-controlling interests in consolidated entities other than our Operating Partnership Units because our Operating Partnership Units may be redeemed for common stock. We also adjust EBITDAre for certain additional items such as depreciation and amortization related to corporate assets, hotel property acquisition, terminated transaction and pre-opening expenses, amortization of share-based compensation, non-cash ground rent and straight-line rent expense, the cumulative effect of changes in accounting principles, and other costs we believe do not represent recurring operations and are not indicative of the performance of our underlying hotel property entities. We believe it is meaningful for investors to understand Adjusted EBITDAre attributable to all common stock and unit holders. We believe Adjusted EBITDAre attributable to common stock and unit holders provides investors with another useful financial measure in evaluating and facilitating comparison of operating performance between periods and between REITs that report similar measures.
FFO and Adjusted FFO
We calculate FFO in accordance with standards established by Nareit, as amended in theDecember 2018 restatement white paper, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairments, gains or losses from sales of real estate, the cumulative effect of changes in accounting principles, similar adjustments for unconsolidated partnerships and consolidated variable interest entities, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding operating performance by excluding the effect of real estate depreciation and amortization, gains or losses from sales for real estate, impairments of real estate assets, extraordinary items and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation of FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the Nareit definition of FFO or do not calculate FFO per diluted share in accordance with Nareit guidance. Additionally, FFO may not be helpful when comparing us to non-REITs. We present FFO attributable to common stock and unit holders, which includes our Operating Partnership Units because our Operating Partnership Units may be redeemed for common stock. We believe it is meaningful for the investor to understand FFO attributable to common stock and unit holders. We further adjust FFO for certain additional items that are not in Nareit's definition of FFO such as hotel property acquisition, terminated transaction and pre-opening expenses, amortization of debt origination costs and share-based compensation, non-cash ground rent and straight-line rent expense, and other items we believe do not represent recurring operations. We believe that Adjusted FFO provides investors with useful supplemental information that may facilitate comparisons of ongoing 33
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operating performance between periods and between REITs that make similar adjustments to FFO and is beneficial to investors' complete understanding of our operating performance.
The following is a reconciliation of net loss to EBITDA, EBITDAre and Adjusted
EBITDAre attributable to common stock and unit holders for the three months
ended
Three Months Ended March 31,
2022 2021
Net loss $ (5,477) $ (57,977)
Adjustments:
Interest expense 20,538 18,750
Income tax expense 1,607 165
Depreciation and amortization 30,565 33,197
EBITDA and EBITDAre $
47,233
Reconciliation to Adjusted EBITDAre Depreciation and amortization related to corporate assets $ (102)$ (100) Gain on insurance recoveries(1) (994) - Loss on extinguishment of debt 294 - Amortization of share-based compensation expense 2,207 2,295 Non-cash ground rent and straight-line rent expense 16 19 Other non-recurring expenses(2) 1,292 4
Adjusted EBITDAre attributable to common stock and unit holders
(1) During the three months endedMarch 31, 2022 , the Company received$1.0 million of insurance proceeds in excess of recognized losses related to damage sustained atLoews New Orleans Hotel during Hurricane Ida inAugust 2021 . This gain on insurance recovery is included in other (loss) income on the condensed consolidated statement of operations and comprehensive loss for the period then ended.
(2) During the three months ended
The following is a reconciliation of net loss to FFO and Adjusted FFO
attributable to common stock and unit holders for the three months ended
Three
Months Ended
2022 2021
Net loss $ (5,477) $ (57,977)
Adjustments:
Depreciation and amortization related to investment properties 30,463 33,097
FFO attributable to common stock and unit holders $
24,986
Reconciliation to Adjusted FFO Gain on insurance recoveries(1) $ (994) $ - Loss on extinguishment of debt 294 -
Loan related costs, net of adjustment related to non-controlling interests(2)
1,286 1,767
Amortization of share-based compensation expense 2,207 2,295
Non-cash ground rent and straight-line rent expense 16 19
Other non-recurring expenses(3) 1,292 4
Adjusted FFO attributable to common stock and unit holders
(1) During the three months endedMarch 31, 2022 , the Company received$1.0 million of insurance proceeds in excess of recognized losses related to damaged sustained atLoews New Orleans Hotel during Hurricane Ida inAugust 2021 . This gain on insurance recovery is included in other (loss) income on the condensed consolidated statement of operations and comprehensive loss for the period then ended. 34
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(2) Loan related costs include amortization of debt premiums, discounts and deferred loan origination costs.
(3) During the three months ended
Use and Limitations of Non-GAAP Financial Measures
EBITDA, EBITDAre, Adjusted EBITDAre, FFO, and Adjusted FFO do not represent cash generated from operating activities under GAAP and should not be considered as alternatives to net income or loss, operating profit, cash flows from operations or any other operating performance measure prescribed by GAAP. Although we present and use EBITDA, EBITDAre, Adjusted EBITDAre, FFO and Adjusted FFO because we believe they are useful to investors in evaluating and facilitating comparisons of our operating performance between periods and between REITs that report similar measures, the use of these non-GAAP measures has certain limitations as analytical tools. These non-GAAP financial measures are not measures of our liquidity, nor are they indicative of funds available to meet our cash needs, including our ability to fund capital expenditures, contractual commitments, working capital, service debt or make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that we have incurred and will incur. These non-GAAP financial measures may include funds that may not be available for discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. These non-GAAP financial measures as presented may not be comparable to non-GAAP financial measures as calculated by other real estate companies. We compensate for these limitations by separately considering the impact of the excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparable GAAP financial measures, and our condensed consolidated statements of operations and comprehensive loss, include interest expense, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. These non-GAAP financial measures 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgments to confirm that they are reasonable and appropriate on an ongoing basis, based on information that is then available to us as well as our experience relating to various matters. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 and Note 2 in the accompanying condensed consolidated financial statements included herein.
Inflation
We rely on the performance of the hotels to increase revenues to keep pace with inflation. Generally, in a stable macroeconomic environment, our hotel operators possess the ability to adjust room rates daily, except for group or corporate rates contractually committed to in advance, although competitive pressures or prevailing economic conditions may limit the ability of our operators to raise rates faster than inflation or even at the same rate.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns, which are greatly influenced by overall economic cycles, the geographic locations of the hotels and the customer mix at the hotels. The impact of the COVID-19 pandemic has disrupted, and is expected to continue to disrupt, our historical seasonal patterns.
New Accounting Pronouncements Not Yet Implemented
See Note 2 in the accompanying condensed consolidated financial statements included herein for additional information related to recently issued accounting pronouncements.
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