XENIA HOTELS & RESORTS, INC. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included herein this Annual Report. This discussion contains forward-looking statements about our business. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in "Special Note Regarding Forward-Looking Statements" and "Part I-Item 1A. Risk Factors" contained in this Annual Report and in our other reports that we file from time to time with theSEC . Overview Xenia is a self-advised and self-administered REIT that invests primarily in uniquely positioned luxury and upper upscale hotels and resorts with a focus on the Top 25 lodging markets as well as key leisure destinations in theU.S. As ofDecember 31, 2020 , we owned 35 hotels and resorts, comprising 10,011 rooms, across 15 states. Our hotels are primarily operated and/or licensed by industry leaders such as Marriott, Hyatt, Kimpton, Fairmont, Loews, and Hilton, and The Kessler Collection. We plan to grow our business through a differentiated acquisition strategy, aggressive asset management and capital investment in our properties. We primarily target markets and sub-markets with particular positive characteristics, such as multiple demand generators, favorable supply and demand dynamics and attractive projected hotel revenue growth. We believe our focus on a broader range of markets allows us to evaluate a greater number of acquisition opportunities and thereby be highly selective in our pursuit of only those opportunities that best fit our investment criteria. We primarily own and pursue hotels and resorts in the luxury and upper upscale hotel segments that are affiliated with premium leading brands, as we believe that these segments yield attractive risk-adjusted returns. Within these segments, we focus on hotels and resorts that will provide guests with a distinctive lodging experience and that are tailored to reflect local market environments. We also seek properties that exhibit an opportunity for us to enhance operating performance through aggressive asset management and targeted capital investment. While we do not operate our hotel properties, our asset management team and our executive management team monitor and work cooperatively with our hotel managers by conducting regular revenue, sales, and financial performance reviews and also perform in-depth on-site reviews focused on ongoing operating margin improvement initiatives. We interact frequently with our management companies and on-site management personnel, including conducting regular meetings with key executives of our management companies and brands. Through these efforts, we seek to enhance the guest experience, improve property efficiencies, lower costs, maximize revenues, and grow property operating margins which we expect will increase long-term returns to our stockholders. Impact of COVID-19 on our Business InJanuary 2020 , confirmed cases of novel coronavirus and related respiratory disease ("COVID-19") started appearing inthe United States . ByMarch 11, 2020 , COVID-19 was deemed a global pandemic by theWorld Health Organization . This led federal, state and local governments inthe United States to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, school closures, quarantines, shelter-in-place orders and social distancing requirements, and also to implement multi-step policies of re-opening regions of the country. The effects of the COVID-19 pandemic on the hotel industry have been unprecedented with global demand for lodging drastically reduced and occupancy levels reaching historic lows. Between March andApril 2020 , the Company temporarily suspended operations at 31 of our hotels and resorts. The Company's remaining eight properties continued operating at levels which reflected the significantly reduced demand levels. Between May andSeptember 2020 , the Company recommenced operations at 29 of our hotels and resorts. One additional hotel recommenced operations inOctober 2020 and four hotels were sold in the fourth quarter of 2020. As a result, as ofDecember 31, 2020 , 34 of our 35 hotels and resorts were open and operating andHyatt Regency Portland at theOregon Convention Center is currently the Company's only hotel with suspended operations. Leisure demand gradually improved during the second half of 2020, however, many markets throughout the country began to experience a resurgence in COVID-19 case counts and hospitalizations and have reimplemented or strengthened closures, quarantines, shelter-in-place orders and social distancing requirements, which have continued into 2021. Business transient and group demand has been limited and, consistent with trends throughout theU.S. lodging industry, continues to lag in recovery. The vast majority of our hotel portfolio's group business for the year was canceled, and the Company does not expect that this business will be rebooked in the future. This led to total portfolio occupancy of 27.1% for the year endedDecember 31, 2020 . We have also experienced ongoing cancellations and marginal new booking activity in 2021. Our portfolio consists of luxury and upper upscale hotels and resorts, which generally offer restaurant and bar venues, large meeting facilities and event space, along with amenities, including spas and golf courses, the majority of which have resumed operations in accordance with state and local ordinances. However, these amenities could be impacted again in the future in order to comply with state and local ordinances, restrictions and safety measures to address resurgences of the pandemic and/or to accommodate reduced levels of demand. We currently expect that the recovery in lodging demand, particularly with respect 52 -------------------------------------------------------------------------------- to business transient and group business, will be gradual, and likely inconsistent, and may lag behind the recovery of other industries. Factors such as public health, availability and effectiveness of COVID-19 vaccines and therapeutics, and the geopolitical environment may impact the timing, extent and pace of such recovery. As a result of COVID-19, our revenues have declined significantly during 2020 compared to 2019. We expect the recovery to historical levels will take several years. Further, we cannot predict with certainty when business levels will return to normalized levels after the effects of the pandemic subside or whether hotels that have recommenced operations will be forced to shut down operations or impose additional restrictions due to a resurgence of COVID-19 cases. Additionally, we expect the effects of the pandemic could materially and adversely affect our ability to consummate acquisitions and dispositions of hotel properties in the near term as well as to cause us to scale back or delay planned renovations and other projects. We also cannot predict with certainty the full extent and duration of the effects of the COVID-19 pandemic on our operations, although the longer and more severe the pandemic becomes, or if a resurgence occurs, the greater the material adverse impact on our business, operating margins, results of operations, cash flows, financial condition, the market price of our common stock, our ability to make distributions to our shareholders, our access to equity and credit markets and our ability to service our indebtedness. Basis of Presentation The accompanying 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 consolidated statements of operations and comprehensive (loss) income. Market Outlook The impact of COVID-19 on the global andU.S. economy and the travel industry in particular has been unprecedented, causing a severe impact to our operations beginning in the first quarter of 2020. TheU.S. lodging industry has historically exhibited a strong correlation toU.S. GDP, which decreased at an annual rate of approximately 3.5% during 2020, according to theU.S. Department of Commerce , which was a substantial slowdown in comparison to an annual growth rate of approximately 2.1% during 2019. The decline in GDP during the year endedDecember 31, 2020 was primarily attributed to the impact of the COVID-19 pandemic. During the fourth quarter of 2020, GDP increased at an annual rate of 4.1% which reflected both an economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas ofthe United States . The increase during the fourth quarter was attributed to increases in exports, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending. In addition, the unemployment rate steadily improved from 14.8% inApril 2020 to 6.7% inDecember 2020 . However, theU.S. lodging industry has been more significantly and 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 in the second half of 2020 which is largely due to the persistence of the COVID-19 pandemic, continued governmental restrictions on travel and large gatherings to address the pandemic, and the pandemic-related sentiment towards business and leisure travel. During the year endedDecember 31, 2020 , industry demand declined 35.7% and hotel supply declined by 3.6%. The significant reduction in demand led to unprecedented declines in industry RevPAR for the year endedDecember 31, 2020 of 47.5%, which was driven by a decline in occupancy of 33.3% coupled with a 21.3% decline in ADR. AllU.S. data for the year endedDecember 31, 2020 are per industry reports. Given inherent uncertainties regarding the lodging industry outlook, there can be no assurances that any increases or decreases in hotel revenues or earnings at our properties will occur, for any number of reasons, including, but not limited to, slower than anticipated growth in theU.S. or global economy, persisting impacts of the COVID-19 pandemic, changes in travel patterns for business and leisure, or volatility in the energy and/or technology industries. See "Part I-Item 1A. Risk Factors." Significant Events The following events were significant during the year endedDecember 31, 2020 : •The COVID-19 pandemic began severely impacting our hotels and resorts during the first quarter of 2020, which led to the Company temporarily suspending operations at 31 of our hotels and resorts. The Company's remaining eight properties continued operating at levels which reflected the significantly reduced demand levels. Between May andSeptember 2020 , the Company recommenced operations at 29 of our hotels and resorts. One additional hotel recommenced operations inOctober 2020 and four hotels were sold in the fourth quarter of 2020. As a result, as of 53 --------------------------------------------------------------------------------December 31, 2020 , 34 of our 35 hotels and resorts were open and operating andHyatt Regency Portland at theOregon Convention Center is currently the Company's only hotel with suspended operations. •During 2020, the Company received$28.8 million in forfeited deposits related to terminated contracts to sellRenaissance Atlanta Waverly Hotel & Convention Center ,Renaissance Austin Hotel and a portfolio of seven Kimpton hotels, which includedKimpton Canary Hotel Santa Barbara ,Kimpton Hotel Monaco Chicago ,Kimpton Hotel Monaco Denver ,Kimpton Hotel Monaco Salt Lake City ,Kimpton Hotel Palomar Philadelphia ,Kimpton Lorien Hotel & Spa , andKimpton RiverPlace Hotel . The Company recognized the$28.8 million as other income, which is included in other income on the accompanying consolidated statement of operations and comprehensive (loss) income for the year endedDecember 31, 2020 .Renaissance Austin Hotel was later sold during the fourth quarter of 2020 as discussed below. •In the first and second quarters of 2020, the Company recorded a goodwill impairment charge of$20.1 million , which was attributed to Andaz Savannah andBohemian Hotel Savannah Riverfront , Autograph Collection. The goodwill impairments were directly attributed to the material adverse impact that the COVID-19 pandemic had, and was expected to continue to have, on the results of operations at each hotel coupled with changes in the supply and demand dynamics in theSavannah, Georgia market since the acquisition of the hotels. •In the second quarter of 2020, the Company completed amendments to each of its corporate credit facility agreements and modifications to seven of its eight mortgage loans. The modification to the eighth mortgage loan was completed in July. The terms of the amendments to the mortgage loans varied by lender, and included items such as the deferral of monthly interest and/or principal payments for three to nine months, temporary elimination of requirements to make furniture, fixture and equipment replacement reserve contributions, ability to temporarily utilize existing furniture, fixture and equipment replacement reserve funds for operating expenses, subject to certain restrictions and conditions, including requirements to replenish any funds used, waivers for existing quarterly financial covenants for one to three quarters, and adjustments to some covenant calculations following the waiver periods. •InAugust 2020 , the Company issued$300 million of Senior Notes at a price equal to 100% of face value. We utilized the majority of the net proceeds from the Senior Notes to repay a portion of our revolving credit facility and a portion of our two corporate credit facility term loans maturing in 2022. InOctober 2020 , we completed a$200 million add-on offering of the Senior Notes under the existing indenture at a price equal to 100.25% of face value with identical terms (other than issue date and offering price). The net proceeds from the additional Senior Notes, along with cash on hand, were used to repay the remaining balance of our two corporate credit facility term loans maturing in 2022 and the mortgage loan collateralized byMarriott Dallas Downtown . •During the third quarter of 2020, the Company recorded an impairment loss of approximately$8.9 million onRenaissance Austin Hotel based on the expectation that the hotel would be sold for less than its carrying value. •InOctober 2020 , upon the repayment of the two corporate credit facility term loans maturing in 2022 and completion of the offering of additional Senior Notes, the Company further amended its corporate credit facilities, which included increased commitments under the revolving credit facility throughFebruary 2022 and a two year extension of the maturity date throughFebruary 2024 , extended the waiver period for the testing of financial covenants through year end 2021 and extended the modification of certain financial covenants, once quarterly testing resumes, through the first quarter in 2023, modified the application of mandatory prepayments, and extended the minimum liquidity covenant through the second quarter of 2022. •In the fourth quarter of 2020, the Company soldResidence Inn Boston Cambridge ,Marriott Napa Valley Hotel & Spa ,Hotel Commonwealth , andRenaissance Austin Hotel for a total gross sales price of approximately$391 million . The buyer ofResidence Inn Boston Cambridge assumed the mortgage loan collateralized by the hotel, which amounted to approximately$60.3 million . The net proceeds from these dispositions were used to repay a portion of the revolving credit facility and for general corporate purposes. •While the Company reduced its capital spending budget to preserve liquidity during 2020, approximately$69.2 million was invested in select portfolio improvements, which we believe will drive positive performance at these properties in the future. These projects included the completion of a majority of the transformational renovation atPark Hyatt Aviara Resort ,Golf Club & Spa , the guestroom renovation atMarriott Woodlands Waterway Hotel & Convention Center , as well as the renovation of the existing ballroom and meeting space atHyatt Regency Grand Cypress . Our Customers We generate a significant portion of our revenue from the following broad customer groups: transient business, group business and contract business. Transient business broadly represents individual business or leisure travelers. Business travelers make up 54 -------------------------------------------------------------------------------- the majority of transient demand at our hotels. Therefore, we will be more affected by trends in business travel than trends in leisure demand. Group business represents clusters of guestrooms booked together, usually with a minimum of 10 rooms. Contract business refers to blocks of rooms sold to a specific company for an extended period of time at significantly discounted rates. Airline crews have historically been typical generators of contract demand at some of our hotels. Additionally, contract rates may be utilized by hotels that are located in markets that are experiencing consistently lower levels of demand. Our Revenues and Expenses Revenues Our revenues are derived from hotel operations and are composed of the following sources: •Rooms revenues - Represents the sale of rooms at our hotel properties and accounts for a substantial majority of our total revenue. Occupancy and ADR are the major drivers of rooms revenues. The business mix and distribution channel mix of the hotels are significant determinants of ADR. •Food and beverage revenues - Occupancy and the type of customer staying at the hotel are the major drivers of food and beverage revenue (i.e., group business typically generates more food and beverage business through catering functions when compared to transient business, which may or may not utilize the hotel's food and beverage outlets). •Other revenues - Represents ancillary revenue such as parking, resort or destination amenity fees, golf, spa services, telephone and other guest services and tenant leases. Occupancy and the nature of amenities at the property are the main drivers of other revenue. Expenses Our operating expenses consist of costs to provide hotel services and corporate-level expenses. The following are components of our expenses: •Rooms expenses - These costs include housekeeping wages, payroll taxes, room supplies, laundry services and front desk costs. Similar to rooms revenues, occupancy is the major driver of rooms expense and as a result, rooms expense has a significant correlation to rooms revenues. These costs as a percentage of revenue can increase based on increases in salaries, wages and benefits, as well as on the level of service and amenities that are provided. Rooms expenses also includes costs for severance and furloughed employee benefits. •Food and beverage expenses - These expenses primarily include food, beverage and associated labor costs. Occupancy and the type of customer staying at the hotel are major drivers of food and beverage expense (i.e., catered functions generally are more profitable than on-property food and beverage outlet sales), which correlates closely with food and beverage revenue. Food and beverage expenses also includes costs for severance and furloughed employee benefits. •Other direct expenses - These expenses primarily include labor (including severance and furloughed employee benefits) and other costs associated with other revenues, such as parking and other guest services. •Other indirect expenses - These expenses primarily include hotel costs associated with general and administrative, state sales and excise taxes, sales and marketing, information technology and telecommunications, repairs and maintenance and utility costs. •Management and franchise fees - Base management fees are computed as a percentage of gross revenue. The management fees also include incentive management fees, which are typically a percentage of net operating income (or similar measurements of hotel profitability) above an annual threshold based on our total capital investment in the hotel. Franchise fees are computed as a percentage of rooms revenues. See "Part I-Item 2. Properties - Our Principal Agreements" for a summary of key terms related to our management and franchise agreements. •Depreciation and amortization expense - These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings, furniture, fixtures and equipment at our hotels, as well as certain corporate assets. Amortization expense primarily consists of amortization of acquired advance bookings and acquired leases, which are amortized over the life of the related term or lease. •Real estate taxes, personal property taxes and insurance - Real estate taxes, personal property taxes and insurance includes the payments due in the respective jurisdictions where our hotels are located, partially offset by refunds from prior year real estate tax appeals, and payments due under insurance policies for our hotel portfolio. 55 -------------------------------------------------------------------------------- •Ground lease expense - Ground lease expense represents the rent associated with land underlying our hotels and/or meeting facilities that we lease from third-parties. It also includes the non-cash ground rent determined as part of the initial purchase price allocation at acquisition. •General and administrative expenses - General and administrative expenses primarily consist of compensation expense for our corporate staff and personnel supporting our business (including severance and non-cash stock compensation expense), office administrative and related expenses, legal and professional fees, and other corporate costs. •Gain on business interruption insurance - Gain on business interruption insurance consists of insurance settlements for lost income that was covered per the terms of our respective insurance policies, which was in excess of insurance deductibles. •Acquisition, terminated transaction and pre-opening expenses - Acquisition and terminated transaction costs typically consist of legal fees, other professional fees, transfer taxes and other direct costs associated with our pursuit and acquisitions of hotel investments. Prior toJanuary 1, 2018 , we accounted for the acquisition of hotels as business combinations and therefore expensed all the related transaction costs. BeginningJanuary 1, 2018 , upon adoption ofFinancial Accounting Standards Board ("FASB") Accounting Standard Update ("ASU") 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, we evaluated each acquisition to determine if it was an asset acquisition or acquired business. During the years endedDecember 31, 2018 and 2019, we accounted for all acquisitions as asset acquisitions and therefore capitalized the related transaction costs. As a result, these costs will vary depending on the timing, volume and nature of acquisition activity. Pre-opening expenses represent costs incurred as part of rebranding and management transition efforts, which are not eligible to be capitalized. InDecember 2018 , the Company acquired the Mandarin Oriental,Atlanta , which was rebranded as Waldorf Astoria Atlanta Buckhead immediately upon closing of the acquisition. •Impairment and other losses - Our real estate, intangible assets, goodwill and other long-lived assets are generally held for the long-term. We evaluate these assets for impairment as discussed in "Critical Accounting Policies and Estimates." These evaluations have resulted in impairment losses for certain of these assets, including goodwill, based on the specific facts and circumstances surrounding these assets, and our estimates of the fair value of these assets, including goodwill. Based on economic conditions or other factors applicable to a specific property, we may be required to take additional impairment losses to reflect further declines in our asset and/or investment values. Additionally, from time to time we may record other losses related to property damage resulting from natural disasters and/or other disaster remediation costs. Most categories of variable operating expenses, including labor costs such as housekeeping, fluctuate with changes in occupancy. Increases in occupancy are accompanied by increases in most categories of variable operating expenses, while increases in ADR typically only result in increases in limited categories of operating costs and expenses, such as management fees and franchise fees, which are based on hotel revenues. Thus, changes in ADR have a more significant impact on operating margins than changes in occupancy. Factors that May Affect Results of Operations The principal factors affecting our operating results include overall demand for hotel rooms compared to the supply of available hotel rooms, economic conditions, and the ability of our third-party management companies to increase or maintain revenues while controlling expenses. •Demand and economic conditions - Consumer demand for lodging, especially business travel, is closely linked to the performance of the overall economy and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, restrictions on travel, lower consumer confidence and adverse political conditions can lower the revenues and profitability of our hotel operations. As a result, changes in consumer demand and general business cycles can subject and have subjected our revenues to significant volatility. See "Part I-Item 1A. Risk Factors - Risks Related ToThe Hotel Industry ." •Supply - New hotel room supply is an important factor that can affect the lodging industry's performance. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. The addition of new competitive hotels affects the ability of existing hotels to drive growth in RevPAR, and thus profits. New development is driven largely by construction costs, the availability of financing and expected performance of existing hotels. 56 -------------------------------------------------------------------------------- •Third-party hotel managers - We depend on the performance of third-party hotel management companies that manage the operations of each of our hotels under long-term agreements. Our operating results could be materially and adversely affected if any of our third-party managers fail to provide quality services and amenities, or otherwise fail to manage our hotels in our best interest. We believe we have good relationships with our third-party managers and are committed to the continued growth and development of these relationships. •Fixed nature of expenses - Many of the expenses associated with operating our hotels are relatively fixed. These expenses include certain personnel costs, rent, property taxes, insurance and utilities, as well as sales and marketing expenses. If we are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, the resulting decline in our revenues can have an adverse effect on our net cash flow, margins and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth. •Seasonality - The lodging industry is seasonal in nature, which can be expected to cause fluctuations in our hotel rooms revenues, occupancy levels, room rates, operating expenses and cash flows. The periods during which our hotels experience higher or lower levels of demand vary from property to property and depend upon location, type of property and competitive mix within the specific location. The COVID-19 pandemic has disrupted our historical seasonal patterns and is expected to continue disrupting our historical seasonal patterns while the pandemic continues and during the recovery. •Competition - The lodging industry is highly competitive. Our hotels compete with other hotels and alternative accommodations for guests in each of their markets based on a number of factors, including, among others, room rates, quality of accommodations, service levels and amenities, location, brand affiliation, reputation, and reservation systems. Competition is often specific to the individual markets in which our hotels are located and includes competition from existing and new hotels. We believe that hotels, such as those in our portfolio, will enjoy the competitive advantages associated with operating under nationally recognized brands. Key Indicators of Operating Performance We measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as RevPAR; ADR; Occupancy; EBITDA, EBITDAre and Adjusted EBITDAre; FFO and Adjusted FFO. We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. ADR, Occupancy and RevPAR 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 EBITDA and EBITDAre, Adjusted EBITDAre, FFO and Adjusted FFO. Critical Accounting Policies and Estimates General The preparation of consolidated 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. We consider the following policies critical because they require the most difficult, subjective and complex judgments and include estimates about matters that are inherently uncertain, involve various assumptions, require management judgment, and because they are important for understanding and evaluating our reported financial results. As a result, these accounting policies could materially affect our financial position, results of operations and related disclosures. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our historical experiences and various matters that we believe are reasonable and appropriate for consideration under the circumstances. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material impact on financial position or results of operations. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements in "Part IV. Exhibits and Financial Statements Schedules." The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates. Investment in Hotel Properties Following the adoption of ASU 2017-01 onJanuary 1, 2018 , investments in hotel properties, including land and land improvements, building and building improvements, furniture, fixtures and equipment, and identifiable intangible assets and liabilities, will generally be accounted for as asset acquisitions. The determination of whether or not an acquisition qualifies as an asset acquisition or business combination is an area that requires management's use of judgment in evaluating the criteria of the screen test. 57 -------------------------------------------------------------------------------- Acquired assets are recorded at their relative fair value based on total accumulated costs of the acquisition, which includes direct acquisition-related costs. Identifiable assets include land, land improvements, building and building improvements, furniture, fixtures and equipment, inventory and identifiable intangible assets or liabilities. Identifiable intangible assets or liabilities typically arise from contractual arrangements assumed in connection with the transaction, including terms that are above or below market compared to an estimated market agreement at the acquisition date. The allocation of the purchase price to elements of our acquired hotel properties is an area that requires judgment and significant estimates. Therefore, the amounts allocated to acquired assets and liabilities could be materially different than if that transaction had occurred on a different date or in a different location. At times estimates are determined based on limited data for comparable market transactions, such as discount rates used in the market or income valuation approach or the purchase involves land or a ground lease in a niche market. This could materially impact the allocation to identifiable assets and the related amortization and depreciation over future periods if the value was assigned to another identifiable asset acquired. Impairment Long-lived assets and intangibles The Company assesses the carrying values of the respective long-lived assets, which includes hotel properties and the related intangible assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Events or circumstances that may cause a review include, but are not limited to, when (1) a hotel property experiences a significant decrease in the market price of the long-lived asset, (2) a hotel property experiences a current or projected loss from operations combined with a history of operating or cash flow losses, (3) it becomes more likely than not that a hotel property will be sold before the end of its useful life, (4) an accumulation of costs is significantly in excess of the amount originally expected for the acquisition, construction or renovation of a long-lived asset, (5) adverse changes in the demand occur for lodging at a specific property due to declining national or local economic conditions and/or new hotel construction in markets where the hotel is located, (6) there is a significant adverse change in legal factors or in the business climate that could affect the value of the long-lived asset and/or (7) there is a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition. When such conditions exist, we perform an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the eventual disposition of a hotel exceed its carrying value. If it is determined that the estimated undiscounted future cash flow do not exceed the carrying value of the asset, an adjustment to reduce the carrying amount of the hotel to its estimated fair market value is recorded and an impairment loss is recognized. The COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on the lodging and hospitality industries, which management considered to be an ongoing triggering event for all of the Company's hotels during its impairment testing for the year endedDecember 31, 2020 .Goodwill The excess of the cost of an acquired entity (i.e. those that met the definition of an acquired business), over the net of the fair values assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill.Goodwill has been recognized and allocated to specific properties. The Company tests goodwill for impairment annually or more frequently if events or changes in circumstances indicate impairment. Annually, we opt to perform a qualitative analysis, which is an assessment of whether it is more likely than not that the goodwill is impaired. If it is determined that it is more likely than not that the goodwill is impaired, we perform a single-step analysis to identify and measure impairment. The fair value of goodwill is based on either the direct capitalization or the discounted cash flow valuation method. The direct capitalization method is based on a capitalization rate applied to the underlying hotel's most recent stabilized trailing twelve month net operating income at the time of the fair value analysis. The discounted cash flow method is based on estimated future cash flow projections utilizing discount rates, terminal capitalization rates, and planned capital expenditures. These estimates approximate the inputs the Company believes would be utilized by market participants in assessing fair value. If the carrying amount of the property's assets, including goodwill, exceeds its estimated fair value an impairment charge is recorded in an amount equal to that excess but only to the extent the value of goodwill is reduced to zero. Estimates In the evaluation of impairment of our hotel properties, including the related intangible assets and goodwill, we make many assumptions and estimates including valuation approach, projected cash flows, growth rates, eventual disposition, expected useful life and holding period, future capital expenditures, and fair values, which includes consideration of capitalization rates, discount rates, and comparable selling prices. The valuation and possible subsequent impairment of a hotel or goodwill is a significant estimate that can and does change based on our continuous process of analyzing each hotel property and goodwill 58 -------------------------------------------------------------------------------- and reviewing assumptions about uncertain inherent factors, as well as the economic condition of the property at a particular point in time. If we misjudge or estimate incorrectly or if future operating profitability, market or industry factors differ from our expectations, we may record an impairment charge which is inappropriate, fail to record a charge when we should have done so or the amount of such charges may be inaccurate. Results of Operations Impact of COVID-19 on Our Business Significant events affecting travel, including the COVID-19 pandemic, typically have an impact on lodging, with the full extent of the impact generally determined by the length of time the event influences travel decisions. While the full extent of the economic impact of the COVID-19 pandemic remains highly uncertain, our business and results of operations, including our revenues, earnings and cash flows, were materially and adversely impacted during 2020. The pandemic has continued to impact our business in 2021 and it will likely take several years for many of our hotels to achieve a full recovery, if at all. While vaccines and therapeutics have been and continue to be developed and distributed, there is no certainty regarding how long it will take for the pandemic to subside, if a resurgence will occur, or if and how long it will take for travel to return to levels that existed prior to the pandemic. Our focus has been on the well-being and safety of our guests, our employees, and our third-party managers' employees at our properties, as well as the financial strength of our company. Our response to the COVID-19 pandemic and its effect on our operations during 2020 included the following: •The vast majority of our hotel portfolio's group business for the year was canceled and both business transient and leisure demand declined significantly compared to 2019, consistent with trends throughout theU.S. lodging industry. The Company does not expect that this business will be rebooked in the future. As a result of a majority our hotels and resorts being temporarily closed for a portion of 2020 and significantly reduced levels of demand due to the ongoing effects of the COVID-19 pandemic, our total revenues declined significantly for the year endedDecember 31, 2020 compared to 2019. Leisure demand gradually improved during the second half of 2020, however, many markets throughout the country began to experience a resurgence in COVID-19 case counts and hospitalizations and have reimplemented or strengthened closures, quarantines, shelter-in-place orders and social distancing requirements, which have continued into 2021. Business transient and group demand has been limited and continues to lag in recovery consistent with trends throughout theU.S. lodging industry. This led to total portfolio occupancy of 27.1% for the year endedDecember 31, 2020 . We have also experienced ongoing cancellations and marginal new booking activity in 2021. With the uncertainty surrounding the continued rise of COVID-19 cases, general sentiment towards travel and short booking windows, as well as the likelihood of strict corporate travel policies, both business and leisure demand continue to be extremely difficult to predict throughout the portfolio. We have seen evidence from hotels and resorts in our portfolio that leisure demand has been the first segment to improve, with a lag in business transient and particularly group business based on the anticipated ongoing safety measures for large social gatherings, and limitations on corporate travel. We cannot predict with certainty when business levels will return to normalized levels after the effects of the pandemic subside or whether hotels that have recommenced operations will be forced to shut down operations or impose additional restrictions due to a resurgence of COVID-19 cases. •The health and well-being of our guests, our employees and our third-party managers' employees continues to be a top priority. We worked with our third-party managers to evaluate the best strategy and approach for reopening each of our properties based on the ability of each hotel to implement necessary safety precautions including adherence to allCDC guidelines and industry cleanliness standards, anticipated demand and other considerations. We continue to closely monitor the safety measures being implemented by our third-party managers, which includes the use of personal protective equipment by hotel employees and guests, implementing social distancing practices, enhanced cleaning of guest rooms and public spaces, mobile check-in and keys, reduction of services and amenities, including the removal of mini bars, buffets, room service and reduced seating in restaurants to maintain social distancing measures. Upon recommencement of operations at our hotels and resorts, we have incurred startup expenses, as well increased expenses related to enhanced safety and cleanliness measures, and we expect to continue to incur such expenses. •Our third-party managers have continued to monitor and manage hotel operating expenses, primarily by adjusting staffing and service levels in response to the significant reduction in demand. As a result, a substantial number of the employees of our third-party managers have been furloughed or permanently laid off. During 2020 we incurred approximately$6.0 million in expenses for furloughed employees of our third-party managers. In addition, during the year endedDecember 31, 2020 , the Company incurred$5.8 million of severance for the employees of our third-party managers. We may have additional severance costs in the near term, which is dependent on the level of business at our properties. 59 -------------------------------------------------------------------------------- •We entered into a series of amendments to our corporate credit facility term loans and revolving credit facility. Amendments inJune 2020 waived the event of default caused by our noncompliance with the unsecured interest coverage ratio financial covenant for the fiscal quarter endingMarch 31, 2020 , suspended the testing of the leverage ratio covenant, the fixed charge ratio covenant and the unsecured interest ratio covenants, through and including the fiscal quarter endingMarch 31, 2021 , and provided for the gradual return to pre-amendment covenant levels by mid-2022. TheJune 2020 amendments also extended the maturity date for the$175 million corporate credit facility term loan fromFebruary 2021 toFebruary 2022 , allowed the Company to maintain cash liquidity with no required immediate prepayment on the revolving credit facility, and provided the Company the ability to complete its 2020 capital expenditure projects along with flexibility to utilize capital in 2021 for additional capital expenditure projects at the Company's discretion. However, theJune 2020 amendments imposed certain additional restrictions and covenants through a specified covenant waiver period (and until the Company has thereafter demonstrated compliance with its financial covenants) relating to dividends, share repurchases, the incurrence of additional debt or liens, acquisitions, capital expenditures, the addition of a minimum liquidity requirement, certain mandatory prepayment requirements, and equity pledges from subsidiaries that own certain of the assets in the unencumbered borrowing base, as well as restrictions on the use of proceeds from asset sales, new borrowings and equity capital raised, among other things. InAugust 2020 , we further amended our corporate credit facility term loans and revolving credit facility to modify the mandatory prepayment requirements in contemplation of the Senior Notes offering described below and repayment of certain corporate credit facility term loans. InOctober 2020 , we further amended our corporate credit facility term loans and revolving credit facility, which increased the commitments under the revolving credit facility by$23 million to$523 million throughFebruary 2022 , after which the total commitments will decrease to$450 million throughFebruary 2024 , which represents a two-year extension of the maturity date, extended the waiver period for the testing of the financial covenants through year end 2021, extended the modification of certain financial covenants, once quarterly testing resumes, through the first quarter of 2023, modified the application of mandatory prepayments to require the Company, in the event that the revolving credit facility outstanding balance is less than$350 million , to apply 50% of net proceeds raised through various activities, including debt issuances, equity issuances, and dispositions, to repay its revolving credit facility (without a permanent reduction in the commitments), with the balance of the proceeds retained by the Company, and extended the minimum liquidity covenant through the second quarter of 2022. See further discussion in "Liquidity and Capital Resources". •In addition, we completed loan amendments for each of our eight mortgage loans. The terms of the amendments varied by lender, and included items such as the deferral of monthly interest and/or principal payments for three to nine months; temporary waiver of requirements to make furniture, fixture and equipment replacement reserve contributions; ability to temporarily utilize existing furniture, fixture and equipment replacement reserve funds for operating expenses, subject to certain restrictions and conditions, including requirements to replenish any funds used; waivers for existing quarterly financial covenants for one to three quarters and adjustments to some covenant calculations following the waiver periods. •InAugust 2020 , we issued$300 million of Senior Notes at a price equal to 100% of face value. We utilized the majority of the net proceeds from the Senior Notes to repay a portion of our revolving credit facility and a portion of our two corporate credit facility term loans maturing in 2022. InOctober 2020 , we completed a$200 million add-on offering of Senior Notes under the existing indenture at a price equal to 100.25% of face value with identical terms (other than issue date and offering price). The net proceeds from the additional Senior Notes, along with cash on hand, were used to repay the remaining balance of our two corporate credit facility term loans maturing in 2022 and the mortgage loan collateralized byMarriott Dallas Downtown . •We reduced our corporate full-year cash general and administrative expense by over 25%, or approximately$6.0 million from our original budget, excluding the impact of non-recurring restructuring costs, primarily resulting from lower incentive compensation, as well as a reduction in other costs. In addition, we reduced our corporate personnel by 25% and management will continue to evaluate expense reductions as appropriate. In connection with these corporate personnel reductions, we incurred$1.6 million of non-recurring accelerated share-based compensation expense and$1.8 million of non-recurring severance costs during the year endedDecember 31, 2020 . •We suspended our quarterly dividend beginning in the second quarter through the balance of the 2020 in order to preserve liquidity. The Company will evaluate if and when to resume paying dividends in the future based on business and economic conditions and the need to distribute 90% of REIT taxable income to remain qualified as a REIT. •We reviewed our capital expenditure program for 2020 and canceled or deferred approximately$54.8 million of capital expenditures, representing a 46.7% reduction from our initial budget. Our full-year capital expenditures were approximately$69.2 million . Most of these expenditures were related to the transformative renovation ofPark Hyatt Aviara Resort ,Golf Club & Spa , the guestroom renovation atMarriott Woodlands Waterway Hotel & Convention 60 -------------------------------------------------------------------------------- Center and the renovation of the existing meeting space atHyatt Regency Grand Cypress . Each of these projects was adjusted, in terms of timing or scope, to reduce 2020 capital outlays. •The Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed intoU.S. law onMarch 27, 2020 and provided an estimated$2.2 trillion to fight the COVID-19 pandemic and stimulate theU.S. economy. The assistance includes tax relief and government loans, grants and investments for entities in affected industries. We evaluated the programs and tax benefits that may apply to our operations including corporate net operating loss carryback, increases in the interest expense limitation, employee retention credits, and deferrals of both employer payroll taxes and corporate estimated taxes. Because we bear the expense for the wages and benefits of our third-party managers' employees at our hotels, our third-party managers have filed for the employee retention credit on our behalf. During the year endedDecember 31, 2020 we have received employee retention credits totaling approximately$5.9 million and expect to receive additional credits in 2021. We also expect approximately$17.4 million in federal tax refunds related to the carryback of net operating losses generated in 2020 by the TRS. The estimated tax refund is anticipated to be received in 2021. •We created additional balance sheet flexibility and enhanced the Company's overall liquidity through strategic dispositions. In the fourth quarter of 2020, the Company soldResidence Inn Boston Cambridge ,Marriott Napa Valley Hotel & Spa ,Hotel Commonwealth , andRenaissance Austin Hotel for a total gross sales price of approximately$391 million . The buyer ofResidence Inn Boston Cambridge assumed the mortgage loan collateralized by the hotel, which amounted to approximately$60.3 million . The net proceeds from these dispositions were used to reduce debt and for general corporate purposes. Operating Results Overview Our total portfolio RevPAR, which includes the results of hotels sold or acquired for the period of ownership by the Company, decreased 68.0% to$53.88 for the year endedDecember 31, 2020 , compared to$168.43 for the year endedDecember 31, 2019 . The decrease in our total portfolio RevPAR for the year endedDecember 31, 2020 compared to the same period in 2019 was driven by the significant ongoing impact of the COVID-19 pandemic. Net income decreased 391.5% for the year endedDecember 31, 2020 compared to 2019, which was primarily attributed to a reduction in hotel operating income of$358.0 million for our 39-hotels as a result of the COVID-19 pandemic, which includes a$14.5 million operating loss attributed toHyatt Regency Portland at theOregon Convention Center that was acquired and opened for business inDecember 2019 , in addition to impairment charges of$29.0 million attributable to the write-off of goodwill related to Andaz Savannah andBohemian Hotel Savannah Riverfront , Autograph Collection and an impairment loss related toRenaissance Austin Hotel , compared to an impairment loss of$24.2 million in 2019, and a$13.4 million increase in interest expense. These decreases were offset by a$93.6 million gain on the sale of investment properties, the recognition of$28.8 million from forfeited deposits on terminated transactions, a$15.9 million income tax benefit for the year endedDecember 31, 2020 compared to income tax expense of$5.4 million for the same period 2019, and an$8.6 million decrease in depreciation and amortization for the year. Adjusted EBITDAre and Adjusted FFO attributable to common stock and unit holders decreased 117.1% and 137.5%, respectively, for the year endedDecember 31, 2020 compared to 2019, which was attributable to the impact of the COVID-19 pandemic on the Company's results of operations. Refer to "Non-GAAP Financial Measures" for the definition of these financial measures, a description of how 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) income attributable to common stock and unit holders. Portfolio Composition As ofDecember 31, 2020 and 2019, the Company owned 35 lodging properties with a total of 10,011 rooms and owned 39 lodging properties with a total of 11,245 rooms, respectively. As ofDecember 31, 2018 , the Company owned 40 lodging properties with a total of 11,165 rooms. 61 --------------------------------------------------------------------------------
The following represents the disposition details for the properties sold in the
years ended
Gross Sale
Property Date No. of Rooms Price
Residence Inn Boston Cambridge 10/2020 221 $ 107,500
Marriott Napa Valley Hotel & Spa 10/2020 275 $ 100,096
Hotel Commonwealth 11/2020 245 $ 113,000
Renaissance Austin Hotel 11/2020 492 $ 70,000
Total for the year ended December 31, 2020 1,233 $ 390,596
Marriott Chicago at Medical District/UIC 12/2019 113 $ 10,000
Marriott Griffin Gate Resort & Spa 12/2019 409 51,500
Total for the year ended December 31, 2019 522 $ 61,500
Aston Waikiki Beach Hotel 03/2018 645 $ 200,000
Hilton Garden Inn Washington D.C. Downtown 11/2018 300 128,000
Residence Inn Denver City Center 12/2018 228 92,000
Total for the year ended December 31, 2018 1,173 $ 420,000
No hotels were acquired during the year ended December 31, 2020 . The following
represents our acquisitions activity for the years ended December 31, 2019 and
2018 (in thousands, except rooms):
Net Purchase
Property Location Date No. of Rooms Price
Hyatt Regency Portland at the Oregon Portland, OR 600 $ 190,000
Convention Center 12/2019
Total acquired in the year ended December 31, 600$ 190,000
2019
The Ritz-Carlton, Denver Denver, CO 08/2018 202$ 99,450 Fairmont Pittsburgh Pittsburgh, PA 09/2018 185 30,000 Park Hyatt Aviara Resort, Golf Club & Spa Carlsbad, CA 11/2018 327 170,000 Waldorf Astoria Atlanta Buckhead(1) Atlanta, GA 12/2018 127 60,500 Total acquired in the year ended December 31, 841$ 359,950
2018
(1) The hotel was formerly the Mandarin Oriental,Atlanta . The hotel was rebranded as Waldorf Astoria Atlanta Buckhead immediately upon completion of this acquisition. As part of the acquisition of the hotel, the Company also acquired a free-standing restaurant unit that is part of the same mixed-use development. The restaurant is currently leased and operated asDel Frisco's Grille. 62 -------------------------------------------------------------------------------- Comparison of the year endedDecember 31, 2020 to the year endedDecember 31, 2019 Operating Information The following table sets forth certain operating information for the years endedDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 Change Number of properties at January 1 39 40 (1) Properties acquired - 1 (1) Properties disposed (4) (2) 2 Number of properties at December 31 35 39 (4) Number of rooms at January 1 11,245 11,165 80
Rooms in properties acquired or added to portfolio upon completion of property improvements(1)
- 602 (602)
Rooms in properties disposed or combined during property improvements(2)
(1,234) (522) (712)
Number of rooms at December 31 10,011 11,245 (1,234)
Portfolio Statistics:
Occupancy(3) 27.1 % 76.0 % (4,890) bps
ADR(3) $ 198.88 $ 221.59 (10.2)%
RevPAR(3) $ 53.88 $ 168.43 (68.0)%
Hotel operating income (in thousands)(4) $ 18,243 $ 376,230 (95.2)%
(1) During the year ended December 31, 2019, we acquired the 600-room Hyatt
Regency Portland at the Oregon Convention Center and created two additional
rooms at Marriott Woodlands Waterway Hotel & Convention Center .
(2) During the year ended December 31, 2020 , the Company disposed of four
hotels with 1,233 rooms and reduced the room count by one at Grand Bohemian
Hotel Mountain Brook , Autograph Collection. During the year ended December 31,
2019 , the Company disposed of two hotels with 522 rooms.
(3) For hotels acquired during the applicable period, only includes operating
statistics since the date of acquisition. For hotels disposed of during the
period, operating results and statistics are only included through the date of
the respective disposition.
(4) Hotel operating income represents the difference between total revenues and
total hotel operating expenses.
As a result of the impact of the COVID-19 pandemic, the Company temporarily
suspended operations at certain of our hotels and resorts for a portion of 2020.
The following represents the status of our hotels and resorts at the end of each
quarter during the year ended December 31, 2020 :
As of As of As of As of
March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020
Number of hotels open 15 26 37 34 (1)
Number of rooms in hotels open 3,296 6,889 10,176 9,411 Number of hotels with temporarily suspended operations 24 13 2 1 Number of rooms in hotels with temporarily suspended operations 7,949 4,356 1,069 600 Total number of hotels 39 39 39 35 Total number of rooms 11,245 11,245 11,245 10,011
(1) The Company reopened one hotel and sold four hotels during the fourth
quarter. The
63
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Revenues consists of room, food and beverage, and other revenues from our hotels, as follows (in thousands):
Year Ended December 31,
2020 2019 Decrease % Change
Revenues:
Rooms revenues $ 217,960 $ 686,485 $ (468,525) (68.2) %
Food and beverage revenues 105,857 382,031 (276,174) (72.3) %
Other revenues 45,959 80,571 (34,612) (43.0) %
Total revenues $ 369,776 $ 1,149,087 $ (779,311) (67.8) %
Rooms revenues
Rooms revenues decreased by $468.5 million , or 68.2%, to $218.0 million for the
year ended December 31, 2020 from $686.5 million for the year ended December 31,
2019 due to the impact of COVID-19. Of the decrease, $83.3 million was
attributed to the four hotels sold in the fourth quarter of 2020 and the two
hotels sold in December 2019 . These decreases were partially offset by an
increase of $1.9 million contributed by Hyatt Regency Portland at the Oregon
Convention Center , which was acquired in December 2019 , prior to temporarily
suspending its operations in March 2020 due to COVID-19.
Food and beverage revenues
Food and beverage revenues decreased by $276.2 million , or 72.3%, to $105.9
million for the year ended December 31, 2020 from $382.0 million for the year
ended December 31, 2019 due to the impact of COVID-19. Of the decrease, $32.9
million attributed to the four hotels sold in the fourth quarter of 2020 and two
hotels sold in December 2019 . These decreases were partially offset by an
increase of $1.1 million contributed by Hyatt Regency Portland at the Oregon
Convention Center , which was acquired in December 2019 , prior to temporarily
suspending its operations in March 2020 due to COVID-19.
Other revenues
Other revenues decreased by $34.6 million , or 43.0%, to $46.0 million for the
year ended December 31, 2020 from $80.6 million for the year ended December 31,
2019 due to the impact of COVID-19. However, this was net of revenue from
cancellations and attrition, which increased $3.6 million for the year ended
December 31, 2020 compared to 2019 mostly attributed to the impact of COVID-19.
In addition, $6.7 million of the decrease was attributed to the four hotels sold
in the fourth quarter of 2020 and two hotels sold in December 2019 .
During 2020, as a result of the impact of the COVID-19 pandemic, the Company has
provided limited short-term rent deferrals and/or abatements to third-party
tenants in certain cases and may continue to do so as the recovery continues.
Some of our space lease tenants have defaulted on their rent obligations and
others may also default in the future. There is no certainty as to when, or if,
these tenants will start paying rent again in the future. If there are leases in
which it is not probable that the Company will collect all or substantially all
of the remaining lease payments under the terms of the lease, the Company
records rental income only when cash is received.
Hotel Operating Expenses
Hotel operating expenses consist of the following (in thousands):
Year Ended December 31,
2020 2019 Decrease % Change
Hotel operating expenses:
Rooms expenses $ 71,986 $ 162,853 $ (90,867) (55.8) %
Food and beverage expenses 93,487 247,487 (154,000) (62.2) %
Other direct expenses 12,996 30,076 (17,080) (56.8) %
Other indirect expenses 161,418 285,920 (124,502) (43.5) %
Management and franchise fees 11,646 46,521 (34,875) (75.0) %
Total hotel operating expenses $ 351,533 $ 772,857 $ (421,324) (54.5) %
64
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Total hotel operating expenses
Generally, 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
services and amenities provided to guests.
Total hotel operating expenses decreased $421.3 million , or 54.5%, to $351.5
million for the year ended December 31, 2020 from $772.9 million for the year
ended December 31, 2019 , due to our hotels temporarily suspending operations for
a portion of 2020 as a result of the impact of COVID-19. In addition, during the
year ended December 31, 2020 , hotel operating expenses decreased by $67.0
million attributed to the four hotels sold in the fourth quarter of 2020 and two
hotels sold in December 2019 . However, we incurred $7.1 million of additional
operating expenses from Hyatt Regency Portland at the Oregon Convention Center ,
which was acquired in December 2019 . The Company also incurred severance
expenses of approximately $5.8 million related to our third-party managers'
employees at our hotels. This was offset by employee retention credits under the
CARES Act, which amounted to approximately $5.9 million and $1.3 million from a
partial legal settlement during the year ended December 31, 2020 .
Corporate and Other Expenses
Corporate and other expenses consist of the following (in thousands):
Year Ended December 31,
Increase /
2020 2019 (Decrease) % Change
Depreciation and amortization $ 146,511 $ 155,128 $ (8,617) (5.6) %
Real estate taxes, personal property taxes and
insurance 50,955 50,184 771 1.5 %
Ground lease expense 2,031 4,403 (2,372) (53.9) %
General and administrative expenses 30,402 30,732 (330) (1.1) %
Gain on business interruption insurance - (823) 823 100.0 %
Acquisition, terminated transaction and
pre-opening expenses 994 954 40 4.2 %
Impairment and other losses 29,044 24,171 4,873 20.2 %
Total corporate and other expenses $ 259,937 $ 264,749 $ (4,812) (1.8) %
Depreciation and amortization
Depreciation and amortization expense decreased $8.6 million , or 5.6%, to $146.5
million for the year ended December 31, 2020 from $155.1 million for the year
ended December 31, 2019 . The decrease was attributed to a reduction in
depreciation expense related to the four hotels sold in the fourth quarter of
2020 and two hotels sold in December 2019 and due to the timing of fully
depreciated assets during the comparable periods. These decreases were offset by
increases contributed from $69.2 million of capital expenditures during the year
ended December 31, 2020 and the $93.0 million of capital expenditures during the
year ended December 31, 2019 along with additional expense from Hyatt Regency
Portland at the Oregon Convention Center that was acquired in December 2019 .
Real estate taxes, personal property taxes and insurance
Real estate taxes, personal property taxes and insurance expense increased $0.8
million , or 1.5%, to $51.0 million for the year ended December 31, 2020 from
$50.2 million for the year ended December 31, 2019 . The increase was primarily
attributed to annual increases in property and casualty insurance expense which
increased at a rate of approximately 9.0% and additional expense from Hyatt
Regency Portland at the Oregon Convention Center , which was acquired in December
2019 . This was offset by a reduction in general liability insurance expense,
personal property taxes, and a reduction in expenses attributed to the four
hotels sold in the fourth quarter of 2020 and two hotels sold in December 2019 .
Ground lease expense
Ground lease expense decreased $2.4 million , or 53.9%, to $2.0 million for the
year ended December 31, 2020 from $4.4 million for the year ended December 31,
2019 , which was attributable to a reduction in percentage rent on our ground
leases as a result of certain of our hotels and resorts temporarily suspending
operations during a portion of 2020 and reduced demand due to the COVID-19
pandemic.
65
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General and administrative expenses
General and administrative expenses decreased $0.3 million , or 1.1%, to $30.4
million for the year ended December 31, 2020 from $30.7 million for the year
ended December 31, 2019 . During the year ended December 31, 2020 , the Company
incurred $1.6 million of accelerated amortization of share-based compensation
expense and $1.8 million of other non-recurring expenses for severance related
costs due to the restructuring of our corporate office. In addition, the Company
incurred a non-recurring non-cash expense attributed to the write-off of
capitalized costs that expired upon the filing our new shelf registration
statement in August 2020 .
Gain on business interruption insurance
Gain on business interruption insurance was $0.8 million for the year ended
December 31, 2019 , which was attributed to insurance proceeds related to
business lost at Hyatt Centric Key West Resort & Spa as a result of Hurricane
Irma. Of the $0.8 million recognized in 2019, $0.7 million of the proceeds
related to lost income in the 2018, with the remaining $0.1 million attributable
to lost income from the first quarter of 2019.
Acquisition, terminated transaction and pre-opening expenses
Acquisition, terminated transaction and pre-opening expenses increased to $1.0
million , or 4.2%, for the year ended December 31, 2020 from $1.0 million for the
year ended December 31, 2019 . These amounts for both 2020 and 2019 were
primarily related to non-recurring charges associated with terminated
transactions costs during each of the respective periods then ended.
Impairment and other losses
The Company recorded an impairment charge of $29.0 million and $24.2 million
during years ended December 31, 2020 and 2019, respectively.
During the year ended December 31, 2020 , the Company determined the carrying
values of goodwill related to Andaz Savannah and Bohemian Hotel Savannah
Riverfront , Autograph Collection, were in excess of their respective fair values
and therefore recorded a total impairment charge of $20.1 million . The goodwill
impairments were directly attributed to existing weakness due to new supply in
the market and the material adverse impact that the COVID-19 pandemic has had,
and is expected to continue to have, on the results of operations. The fair
value was estimated using a ten-year discounted cash flows approach. In
addition, the Company recorded an impairment loss of $8.9 million related to
Renaissance Austin Hotel as it was determined to have a shortened hold period
due to the expected sale. The hotel was subsequently sold in November 2020 .
During the year ended December 31, 2019 , the Company recorded an impairment
charge of $14.8 million , which was attributed to Marriott Chicago at Medical
District /UIC. The impairment was primarily the result of a projected future
decline in operating profits attributable to demand trends, anticipated adverse
changes in the hotel's expense profile and the estimated hold period. The fair
value was estimated after consideration of various valuation techniques,
including discounted cash flows over the estimated hold period and values from
market participants. Based on the fair value estimated by management, the
Company recorded an impairment charge, which represented the carrying value in
excess of estimated fair value. This hotel was subsequently sold in December
2019 . Also in 2019, the Company recorded a goodwill impairment charge of $9.4
million related to Bohemian Hotel Savannah Riverfront , Autograph Collection,
which was attributed to changes in the supply and demand dynamics in the
Savannah, Georgia market since the acquisition of the hotel in 2012.
Refer to Notes 2 and 8 to the accompanying consolidated financial statements
included herein for further discussion.
66
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Results of Non-Operating Income and Expenses
Non-operating income and expenses consist of the following (in thousands):
Year Ended
2020 2019 (Decrease) % Change
Non-operating income and expenses:
Gain (loss) on sale of investment properties $ 93,630 $ (947) $ 94,577 9987.0 %
Other income 28,911 895 28,016 3,130.3 %
Interest expense (61,975) (48,605) 13,370 27.5 %
Loss on extinguishment of debt (1,625) (214) 1,411 659.3 %
Income tax benefit (expense) 15,867 (5,367) (21,234) 395.6 %
Gain (loss) on sale of investment properties
The gain on sale for the year ended December 31, 2020 was attributed to the
disposition of Residence Inn Boston Cambridge and Marriott Napa Valley Hotel &
Spa in October 2020 , which was offset by a loss on sale attributed to the
disposition of Hotel Commonwealth in November 2020 . The loss on sale of
investment properties for the year ended December 31, 2019 was related to the
sale of two hotels in December 2019 .
Other income
Other income increased $28.0 million , or 3,130.3%, to $28.9 million for the year
ended December 31, 2020 from $0.9 million for the year ended December 31, 2019 .
The increase was attributed to $28.8 million during the year ended December 31,
2020 in forfeited deposits from terminated transactions. Refer to Note 4 in the
consolidated financial statements included herein for further discussion.
Interest expense
Interest expense increased $13.4 million , or 27.5%, to $62.0 million for the
year ended December 31, 2020 from $48.6 million for the year ended December 31,
2019 . This was primarily due to an increase in outstanding debt during portions
of the year ended December 31, 2020 compared to 2019, coupled with an increase
in the weighted-average interest rate. Refer to Note 6 in the consolidated
financial statements included herein for further discussion.
Loss on extinguishment of debt
Loss on extinguishment of debt increased by $1.4 million , or 659.3%, to $1.6
million for the year ended December 31, 2020 from $0.2 million for the year
ended December 31, 2019 . The loss on extinguishment of debt during 2020 was
attributable to the write off of unamortized debt issuance costs upon the
repayment of two corporate credit facility term loans that were to mature in
2022 and the mortgage loan collateralized by Marriott Dallas Downtown as well as
the assignment of the mortgage loan collateralized by Residence Inn Boston
Cambridge upon its disposition. The loss on extinguishment of debt during 2019
was attributable to the write off of unamortized loan costs for the prepayment
of one mortgage loans.
Income tax benefit (expense)
Income tax benefit increased $21.2 million , or 395.6%, to $15.9 million for the
year ended December 31, 2020 from income tax expense of $5.4 million for the
year ended December 31, 2019 . The income tax benefit during the year ended
December 31, 2020 was primarily attributed to the net operating loss carryback
allowed for under the CARES Act.
Comparison of the year ended December 31, 2019 to the year ended December 31,
2018
This information is contained in "Part II - Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K for the year ended December 31, 2019 filed with the Securities and
Exchange Commission on February 25, 2020 , and is incorporated herein by
reference.
67
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Non-GAAP Financial Measures
We consider the following non-GAAP financial measures 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 an investor regarding our results of operations, 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, it is used by management in the annual budget
process for compensation programs.
We then calculate EBITDAre in accordance with standards established by the
National Association of Real Estate Investment Trusts ("Nareit"), which we
adopted on January 1, 2018 . Nareit defines EBITDAre as EBITDA plus or minus
losses and gains on the disposition of depreciated property, including
gains/losses on change of control, plus impairment write-downs of depreciated
property and of investments in unconsolidated affiliates caused by a decrease in
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 believe it is
meaningful for the investor to understand Adjusted EBITDAre attributable to all
common stock and Operating Partnership unit holders. 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 Adjusted EBITDAre attributable to common stock and
unit holders provides investors with another 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 the 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 (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 our operating performance by excluding the effect of real
estate depreciation and amortization, gains (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 all common
stock and unit holders.
68
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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, operating
results from properties that are sold 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
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) income to EBITDA, EBITDAre and
Adjusted EBITDAre attributable to common stock and unit holders for the years
ended December 31, 2020 , 2019, and 2018 (in thousands):
Year Ended
2020 2019 2018
Net (loss) income $ (166,886) $ 57,243 $ 198,532
Adjustments:
Interest expense 61,975 48,605 51,402
Income tax (benefit) expense (15,867) 5,367 5,993
Depreciation and amortization 146,511 155,128 157,838
EBITDA $ 25,733 $ 266,343 $ 413,765
Impairment and other losses(1) 29,044 24,171 -
(Gain) loss on sale of investment properties (93,630) 947 (123,540)
EBITDAre $ (38,853)
- - 288
Adjustments related to non-controlling interests in consolidated real estate entities
- - (1,130)
Depreciation and amortization related to corporate assets (392)
(399) (404)
Loss on extinguishment of debt 1,625 214 599
Acquisition, terminated transaction and pre-opening expenses
994 954 763
Amortization of share-based compensation expense(2) 10,930 9,380 9,172
Non-cash ground rent and straight-line rent expense 145 508 495
Other income attributed to forfeited deposits from terminated transactions(3)
(28,750) - -
Other non-recurring expenses (income)(2) 2,568 - (195)
Adjusted EBITDAre attributable to common stock and unit holders
$ (51,733)
(1) During the year endedDecember 31, 2020 , the Company recognized an$8.9 million impairment loss related toRenaissance Austin Hotel , which was attributed to its carrying value exceeding the undiscounted cash flows over the shortened hold period due to the expected sale. The hotel was subsequently sold inNovember 2020 . In addition, during the year endedDecember 31, 2020 , the Company recognized goodwill impairments totaling$20.1 million attributed to Andaz Savannah andBohemian Hotel Savannah Riverfront , Autograph Collection. These goodwill impairments were directly attributed to existing weakness due to new supply in the market and the material adverse impact that the COVID-19 pandemic has had, and is expected to continue to have, on the results of operations at each hotel. During the year endedDecember 31, 2019 , the Company recognized a long-lived asset impairment charge of$14.8 million attributed toMarriott Chicago atMedical District /UIC and a goodwill impairment charge of$9.4 million attributed toBohemian Hotel Savannah Riverfront , Autograph Collection. (2) During the year endedDecember 31, 2020 , the Company restructured its corporate office in order to preserve capital over the long-term as a result of the material adverse impact COVID-19 has had, and is expected to continue to have, on the Company's results of operations. As a result during the year endedDecember 31, 2020 , the Company incurred$1.6 million of accelerated amortization of share-based compensation expense and$1.8 million of other non-recurring expenses for severance related costs. In addition, during the year endedDecember 31, 2020 , the Company incurred other non-recurring expenses for legal costs of$0.7 million to amend the terms of its debt. (3) During the year endedDecember 31, 2020 , the Company recognized other income of$28.8 million as a result of forfeited deposits from terminated transactions. 69 -------------------------------------------------------------------------------- The following is a reconciliation of our GAAP net (loss) income to FFO and Adjusted FFO for the years endedDecember 31, 2020 , 2019, and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Net (loss) income$ (166,886) $ 57,243 $ 198,532 Adjustments: Depreciation and amortization related to investment properties 146,119 154,729 157,434 Impairment of investment properties(1) 29,044 24,171 - (Gain) loss on sale of investment property (93,630) 947 (123,540)
Non-controlling interests in consolidated real estate entities
- - 288
Adjustments related to non-controlling interests in consolidated real estate entities
- - (732)
FFO attributable to common stock and unit holders
$ 237,090 $ 231,982 Reconciliation to Adjusted FFO Loss on extinguishment of debt 1,625 214 599
Acquisition, terminated transaction and pre-opening expenses
994 954 763
Loan related costs, net of adjustment related to
non-controlling interests(2) 3,874 2,452 2,583
Amortization of share-based compensation expense(3) 10,930 9,380 9,172
Non-cash ground rent and straight-line rent expense 145 508 495
Other income attributed to forfeited deposits from terminated transactions(4)
(28,750) - -
Other non-recurring expenses (income)(3) 2,568 - (195)
Adjusted FFO attributable to common stock and unit holders
$ (93,967)
(1) During the year endedDecember 31, 2020 , the Company recognized an$8.9 million impairment loss related toRenaissance Austin Hotel , which was attributed to its carrying value exceeding the undiscounted cash flows over the shortened hold period due to the expected sale. The hotel was subsequently sold inNovember 2020 . In addition, during the year endedDecember 31, 2020 , the Company recognized goodwill impairments totaling$20.1 million attributed to Andaz Savannah andBohemian Hotel Savannah Riverfront , Autograph Collection. These goodwill impairments were directly attributed to existing weakness due to new supply in the market and the material adverse impact that the COVID-19 pandemic has had, and is expected to continue to have, on the results of operations at each hotel. During the year endedDecember 31, 2019 , the Company recognized a long-lived asset impairment charge of$14.8 million attributed toMarriott Chicago atMedical District /UIC and a goodwill impairment charge of$9.4 million attributed toBohemian Hotel Savannah Riverfront , Autograph Collection. (2) Loan related costs included amortization of debt premiums, discounts and deferred loan origination costs. (3) During the year endedDecember 31, 2020 , the Company restructured its corporate office in order to preserve capital over the long-term as a result of the material adverse impact COVID-19 has had, and is expected to continue to have, on the Company's results of operations. As a result during the year endedDecember 31, 2020 , the Company incurred$1.6 million of accelerated amortization of share-based compensation expense and$1.8 million of other non-recurring expenses for severance related costs. In addition, during the year endedDecember 31, 2020 , the Company incurred other non-recurring expenses for legal costs of$0.7 million to amend the terms of its debt. (4) During the year endedDecember 31, 2020 , the Company recognized other income of$28.8 million as a result of forfeited deposits from terminated transactions. 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 fund 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 management's 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. 70 -------------------------------------------------------------------------------- We compensate for these limitations by separately considering the impact of these 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 consolidated statements of operations and comprehensive (loss) income, 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. Liquidity and Capital Resources Since the onset of COVID-19 in early 2020, liquidity has been a significant priority. During the year, we took several steps to increase liquidity to manage through the duration of the pandemic and to put ourselves in position to take advantage of growth opportunities that may arise during and after the recovery. Currently, we expect to meet our short-term liquidity requirements from cash on hand, use of our unencumbered asset base, asset dispositions, 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. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments. 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. To the extent we are able to successfully improve the performance of our portfolio, we believe this will result in increased operating cash flows. 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 ofDecember 31, 2020 , we had$389.8 million of consolidated cash and cash equivalents and$39.0 million of restricted cash and escrows. The restricted cash as ofDecember 31, 2020 primarily consisted of$25.9 million related to furniture, fixtures and equipment replacement reserves as required per the terms of our management and franchise agreements, cash held in restricted escrows of$3.0 million primarily for real estate taxes, insurance, and replacement reserves escrows,$9.7 million for disposition escrows held back at closing, and$0.4 million in deposits made for capital projects that are currently in progress. Certain of the Company's third-party managers have temporarily suspended required contributions to the furniture, fixture and equipment replacement reserve for a period of time due to the impact of COVID-19. Additionally, we have the ability to utilize a portion of these cash balances for hotel operating expenses. Usage of such reserves may be subject to lender approval for hotels encumbered by mortgage loans or may be required to be replenished. As ofDecember 31, 2020 , the Company had used$12.1 million of the furniture, fixture and equipment replacement reserves for working capital purposes, which is subject to replenishment. As ofDecember 31, 2020 ,$163.1 million was outstanding on the revolving credit facility at an interest rate of 2.93%, thus approximately$360 million remained 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 (as defined below). 71 -------------------------------------------------------------------------------- Debt and Loan Covenants As ofDecember 31, 2020 , our outstanding total debt was$1.4 billion and had a weighted-average interest rate of 4.78%. Our weighted-average debt maturity as ofDecember 31, 2020 was 4.4 years for our mortgage loans, 3.9 years for our corporate credit facility term loans, the Senior Notes, and revolving credit facility and 4.1 years for all debt. Debt as ofDecember 31, 2020 andDecember 31, 2019 consisted of the following (dollars in thousands): Balance Outstanding as of Rate Type Rate(1) Maturity Date December 31, December 31, 2020(2) 2019 Mortgage Loans Marriott Dallas Downtown Fixed (3) 4.05 % 1/3/2022 $ - (4) 51,000 Kimpton Hotel Palomar Philadelphia Fixed (3) 4.14 % 1/13/2023 57,660 58,000
8/14/2024 100,000 100,000
Convention Center
Andaz Napa Fixed (6) 3.55 % 9/13/2024 56,000 56,000
The Ritz-Carlton, Pentagon City Fixed (7) 4.95 % 1/31/2025 65,000 65,000
Residence Inn Boston Cambridge Fixed 4.48 % 11/1/2025 - (8) 60,731
Grand Bohemian Hotel Orlando, Autograph Fixed 4.53 % 3/1/2026 57,857 58,286
Collection
Marriott San Francisco Airport Fixed 4.63 % 5/1/2027 115,762 115,000 Waterfront Total Mortgage Loans 4.08 % (9)$ 452,279 $ 564,017
Corporate Credit Facilities Corporate Credit Facility Term Loan Fixed (10) 3.54 %
2/15/2022 (11) - (4) 175,000
Corporate Credit Facility Term Loan Fixed (12) 4.03 %
10/22/2022 - (4) 125,000
Corporate Credit Facility Term Loan Fixed (13) 3.77 %
8/21/2023 150,000 150,000
Corporate Credit Facility Term Loan Fixed (14) 3.92 %
9/13/2024 125,000 125,000
Revolving Credit Facility Variable 2.93 % 2/28/2024 (15) 163,093 160,000 Total Corporate Credit Facilities$ 438,093 $ 735,000 Senior Notes$500M Fixed 6.375 % 8/15/2025 500,000 - Loan premiums, discounts and (16) unamortized deferred financing costs, (15,892) (5,963)
net
Total Debt, net of loan premiums,
(9)
discounts and unamortized deferred 4.78 %$ 1,374,480 $ 1,293,054
financing costs
(1)Each of the Company's mortgage loans and Corporate Credit Facilities were modified or amended during 2020. The rates shown represent the annual interest rates as ofDecember 31, 2020 The variable index for mortgage loans is one-month LIBOR and the variable index for the Corporate Credit Facilities reflects a 25 to 50 basis point LIBOR floor which is applicable for the value of all Corporate Credit Facilities not subject to an interest rate hedge. (2)For certain mortgage loans, includes deferred interest balances in accordance with the respective amended loan agreement as applicable. (3)The Company entered into interest rate swap agreements to fix the interest rate of the variable rate mortgage loans for the entire term of the loan. (4)OnOctober 20, 2020 , the Company repaid the outstanding balance of the respective mortgage loan and Corporate Credit Facility Term Loans with cash on hand and proceeds from the additional Senior Notes. (5)A variable interest loan for which the interest rate has been fixed on$90 million of the balance throughJanuary 2022 , after which the rate reverts to variable. (6)A variable interest loan for which the interest rate has been fixed on$51 million of the balance throughJanuary 2022 , after which the rate reverts to variable. (7)A variable interest loan for which the interest rate has been fixed throughJanuary 2023 . (8)OnOctober 1, 2020 , the Company closed on the sale ofResidence Inn Boston Cambridge . As part of the transaction the buyer assumed the mortgage loan collateralized by the hotel with a principal balance of$60.3 million . (9)Represents the weighted-average interest rate as ofDecember 31, 2020 . (10)A variable interest loan for which LIBOR was previously fixed throughFebruary 2021 . The spread to LIBOR was fixed at 2.25% for the remaining term of the loan as a result of the amendment completed inJune 2020 . This Corporate Credit Facility Term loan was repaid inOctober 2020 . Three interest rate swaps associated with this loan were terminated in connection with the repayment. (11)InJune 2020 , the Company modified the terms of this Corporate Credit Facility Term Loan, which included an extension of the maturity date fromFebruary 15, 2021 toFebruary 15, 2022 . This Corporate Credit Facility Term Loan was repaid inOctober 2020 . 72 -------------------------------------------------------------------------------- (12)A variable rate interest loan for which LIBOR was previously fixed through maturity. The spread varied, as it was determined by the Company's leverage ratio after the covenant compliance date specified in the applicable Corporate Credit Facility Term Loan agreement. This Corporate Credit Facility Term Loan was repaid inOctober 2020 . (13)A variable interest loan for which LIBOR has been fixed for$125.0 million of the balance for certain interest periods throughOctober 2022 . The spread to LIBOR may vary, as it is determined by the Company's leverage ratio. The applicable interest rate has been set to the highest level of grid-based pricing during the Covenant Waiver Period. (14)A variable interest loan for which LIBOR has been fixed for certain interest periods throughSeptember 2022 . The spread to LIBOR may vary, as it is determined by the Company's leverage ratio. The applicable interest rate has been set to the highest level of grid-based pricing during the Covenant Waiver Period. (15)InOctober 2020 , the Company increased commitments under the Revolving Credit Facility by$23 million to$523 million throughFebruary 2022 , after which the total commitments will decrease to$450 million throughFebruary 2024 . This reflects a two year extension of the maturity date. (16)Includes loan premiums, discounts and deferred financing costs, net of accumulated amortization. Mortgage Loans During 2020, we completed loan amendments for each of our eight mortgage loans that were outstanding at the time. The terms of the amendments varied by lender, and included items such as the deferral of monthly interest and/or principal payments for three to nine months, temporary elimination of requirements to make furniture, fixtures and equipment replacement reserve contributions, ability to temporarily utilize existing furniture, fixtures and equipment replacement reserve funds for operating expenses, subject to certain restrictions and conditions, including requirements to replenish any funds used, waivers for existing quarterly financial covenants for one to three quarters, and adjustments to some covenant calculations following the waiver periods. Corporate Credit Facilities InJune 2020 , certain subsidiaries of the Company entered into an amendment of its revolving credit facility (the "June 2020 Revolver Amendment"). TheJune 2020 Revolver Amendment amended the Amended and Restated Revolving Credit Agreement, dated as ofJanuary 11, 2018 , by and among theXHR LP ("the Borrower"), the lenders from time to time party thereto andJPMorgan Chase Bank, N.A ., as administrative agent (the "Revolving Credit Agreement"). We also entered into amendments for each of our corporate credit facility term loans (collectively, the "June 2020 Term Loan Amendments" and together with theJune 2020 Revolver Amendment, the "June 2020 Amendments"), which amended (i) the Term Loan Agreement, dated as ofOctober 22, 2015 , by and among the Borrower,Wells Fargo Bank, National Association , as administrative agent, and the lenders from time to time party thereto (as amended to date, the "Wells Term Loan Agreement"); (ii) the Term Loan Agreement, dated as ofOctober 22, 2015 , by and among the Borrower,KeyBank National Association , as administrative agent, and the lenders from time to time party thereto (the "KeyBank 2015 Term Loan Agreement"); (iii) the Term Loan Agreement, dated as ofAugust 21, 2018 , by and among the Borrower,PNC Bank, National Association , as administrative agent, and the lenders from time to time party thereto; and (iv) the Term Loan Agreement, dated as ofSeptember 13, 2017 , by and among the Borrower,KeyBank National Association , as administrative agent, and the lenders from time to time party thereto. Such credit agreements, collectively with the Revolving Credit Agreement (as they have each been described herein), are referred to herein as the "Credit Agreements". TheJune 2020 Amendments, among other things, relieved the Borrower's compliance with certain covenants under the Credit Agreements by (i) waiving the event of default caused by the Borrower's noncompliance with the unsecured interest coverage ratio financial covenant for the fiscal quarter endingMarch 31, 2020 ; (ii) suspending the testing of the leverage ratio covenant, the fixed charge coverage ratio covenant and the unsecured interest coverage ratio covenant thereunder, in each case, through the fiscal quarter endingMarch 31, 2021 (unless terminated earlier by the Borrower) (the "Initial Covenant Waiver Period"); and (iii) providing for a phased return to pre-amendment covenant levels by mid-2022. In addition, the amendments extended the maturity date for the$175 million Corporate Credit Facility Term Loan fromFebruary 2021 toFebruary 2022 , resulting in no debt maturities for the Company until 2022. TheJune 2020 Amendments added or modified certain restrictions and covenants, which are applicable during the Covenant Waiver Period (defined below) and until the Borrower has thereafter demonstrated compliance with its financial covenants, including mandatory prepayment requirements and new negative covenants restricting certain acquisitions, investments, capital expenditures, ground leases, and distributions. A new minimum liquidity covenant also applies during the Covenant Waiver Period and for two fiscal quarters thereafter. TheJune 2020 Amendments (other than with respect to the Wells Term Loan Agreement) set the applicable interest rate under the respective Credit Agreements during the Covenant Waiver Period to the highest level of the grid-based pricing under each such Credit Agreement, with a Eurodollar rate floor of 0.25%, except to the extent the loans are subject to interest rate hedges. 73 -------------------------------------------------------------------------------- TheJune 2020 Amendments required that certain additional subsidiaries of the Borrower become guarantors of the obligations under the Credit Agreements. In addition, the obligations under the Credit Agreements are secured by a first priority security interest in the capital stock of a material portion of the Borrower's subsidiaries (the "Pledged Entities"), which pledges remain in effect until the date after the Covenant Waiver Period on which (x) the Borrower achieves compliance with all of its financial covenants under each Credit Agreement for two consecutive fiscal quarters at pre-amendment levels and (y) the financial covenant maintenance levels have reverted to pre-amendment levels, unless the Pledged Entities are released prior to such date in connection with a permitted transaction. InAugust 2020 , in connection with the closing of the$300 million of Senior Notes, the Company effectuated additional amendments to each of the Credit Agreements (the "August 2020 Amendments"). TheAugust 2020 Amendments included permanent changes to the application of mandatory prepayments and enable us to acquire hotels by issuing equity. TheAugust 2020 Amendments modified the mandatory prepayment provisions of each Credit Agreement by allowing us, in the event that the revolving credit facility outstanding balance is less than$350 million , to retain 55% of net proceeds raised through various actions, including debt issuances, equity issuances, and dispositions, for general corporate purposes with the remaining 45% being used to prepay the revolving credit facility (without a permanent reduction in the commitments thereunder), the Wells Term Loan Agreement and theKeyBank 2015 Term Loan Agreement. InOctober 2020 , the Company further amended each of the Credit Agreements (the "October 2020 Amendments"), other than the Wells Term Loan Agreement and theKeyBank 2015 Term Loan Agreement, which were repaid in full upon consummation of theOctober 2020 Amendments. TheOctober 2020 Amendments (i) increased commitments under the revolving credit facility by$23 million to$523 million throughFebruary 2022 , after which the total commitments will decrease to$450 million throughFebruary 2024 , reflecting a two year extension of the maturity date of the revolving credit facility; (ii) extended the Initial Covenant Waiver Period through year end 2021 (the Initial Covenant Waiver Period, as so extended, the "Covenant Waiver Period") and extended the modification of certain financial covenants, once quarterly testing resumes, through the first quarter of 2023; (iii) modified the mandatory prepayment provisions of each Credit Agreement by allowing us in the event that the revolving credit facility outstanding balance is less than$350 million , to apply 50% of the net proceeds raised through various activities, including debt issuances, equity issuances, and dispositions, to repay its revolving credit facility (without a permanent reduction in the commitments thereunder), with the balance of the proceeds retained by the Company; and (iv) extended the minimum liquidity covenant through the second quarter of 2022. Senior Notes InAugust 2020 , theOperating Partnership issued$300 million of Senior Notes at a price equal to 100% of face value with net proceeds primarily used to repay a portion of our revolving credit facility and the two corporate credit facility term loans maturing in 2022. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, by the Company and certain of its subsidiaries that incur or guarantee any indebtedness under the Company's corporate credit facilities, any additional first lien obligations, certain other bank indebtedness or any other material capital markets indebtedness (each, a "subsidiary guarantor" and together with the Company, the "guarantors"). The Senior Notes are initially secured, subject to certain permitted liens, by a first priority security interest in all of the equity interests (the "Collateral") of a material portion of theOperating Partnership's subsidiaries and any proceeds of such equity interests, which Collateral also secures obligations under the corporate credit facilities on a first priority basis. The Collateral securing the Senior Notes will be released in full upon its release under the corporate credit facilities, after which the Senior Notes will be unsecured, which is expected to occur prior to the maturity of the Senior Notes if theOperating Partnership achieves compliance with certain financial covenant requirements under the corporate credit facilities. The Senior Notes contain customary covenants that will limit theOperating Partnership's ability and, in certain instances, the ability of its subsidiaries, to borrow money, create liens on assets, make distributions and pay dividends on or 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 indenture. In addition, the indenture will require theOperating Partnership to maintain total unencumbered assets as of each fiscal quarter of at least 150% of total unsecured indebtedness, in each case calculated on a consolidated basis.The Operating Partnership may redeem the Senior Notes at any time prior toAugust 15, 2022 , in whole or in part, at a redemption price equal to 100% of the accrued principal amount thereof plus unpaid interest, if any, to, but excluding, the redemption date, plus a make-whole premium.The Operating Partnership may redeem the Senior Notes at any time on or afterAugust 15, 2022 , in whole or in part, at a redemption price equal to (i) 103.188% of the principal amount thereof, should such redemption occur beforeAugust 15, 2023 , (ii) 101.594% of the principal amount thereof, should such redemption occur before 74 --------------------------------------------------------------------------------
In addition, at any time prior toAugust 15, 2022 , theOperating Partnership may redeem up to 40% of the original principal amount of the Senior Notes with the net cash proceeds from certain equity offerings at a redemption price of 106.375% of the principal amount redeemed plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least 60% of the aggregate principal amount of the Senior Notes remains outstanding immediately after the occurrence of such redemption. Under certain circumstances, until 120 days after the issue date, theOperating Partnership may redeem in the aggregate up to 35% of the original aggregate principal amount of the Senior Notes with the net cash proceeds of certain support received by theOperating Partnership or any of its subsidiaries from a government authority in connection with the COVID-19 global pandemic at a redemption price of 103.188% of the principal amount redeemed plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least 65% of the aggregate principal amount of the Senior Notes remain outstanding immediately after such redemption. InOctober 2020 , theOperating Partnership issued an additional$200 million of Senior Notes at a price equal to 100.25% of face value. Net proceeds from the additional Senior Notes, along with cash on hand, were used to repay the remaining balance outstanding on the Company's two corporate credit facility term loans due in 2022 and the$51 million mortgage loan collateralized by theMarriott Dallas Downtown . The additional Senior Notes were offered under the existing indenture, datedAugust 18, 2020 , pursuant to which the Issuer previously issued$300 million in aggregate principal amount of its Senior Notes. The additional Senior Notes have identical terms (other than issue date and offering price). In connection with the loan amendments and issuance of the Senior Notes, during the year endedDecember 31, 2020 , the Company capitalized$5.3 million of deferred financing costs for fees paid to lenders and expensed$0.7 million of legal fees, which were included in general and administrative expenses on the accompanying consolidated statement of operations and comprehensive loss (income) for the period then ended. Debt Covenants As ofDecember 31, 2020 , we were not in compliance with our debt covenants for two of our mortgage loans, however, this did not result in an event of default but did trigger a cash sweep until covenant compliance is achieved in the future. The cash sweep allows the lender to pull excess cash generated by the property into a separate account that they control, which may be used to reduce the outstanding loan balance. We anticipate that we will fail additional covenants on certain mortgage loans within the next 12 months which would result in covenant violations and foresee the need to request waivers or modifications from our lenders. If we are unable to obtain waivers we would be required to pay down the loan by an amount which would result in our compliance with the debt covenant test. Derivatives We continuously monitor and evaluate the level of floating rate debt exposure that we have and will continue to use interest rate hedges to limit it as we determine appropriate. See "Part II-Item. 7 Management's Discussion of Financial Condition and Results of Operations - Derivative Instruments" for more information related to our hedging policy and transaction activity. Capital Markets We have 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, the Company may from time to time offer and sell shares of its common stock having an aggregate gross offering price of up to$200 million . No shares were sold under the ATM Agreement during the years endedDecember 31, 2020 or 2019. As ofDecember 31, 2020 , we had$62.6 million available for sale under the ATM Agreement. We may have restrictions on the use of proceeds raised from equity capital during the covenant waiver period. We may, from time to time, seek to retire or purchase additional amounts of our outstanding equity through cash purchases and/or exchanges for other securities in open market purchases, privately negotiated transactions or otherwise, including pursuant to a Rule 10b5-1 plan. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. InDecember 2015 , our Board of Directors authorized a stock repurchase program pursuant to which we are authorized to purchase up to$100 million of the Company's outstanding common stock, in the open market, in privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 plans. InNovember 2016 , our Board of Directors authorized the repurchase of up to an additional$75 million of the Company's outstanding common stock (such repurchase authorizations collectively referred to as the "Repurchase Program"). The Repurchase Program does not have an expiration date. The Repurchase Program may be suspended or 75 -------------------------------------------------------------------------------- discontinued at any time, and does not obligate the Company to acquire any particular amount of shares. During the year endedDecember 31, 2020 , 165,516 shares were repurchased under the Repurchase Program, at a weighted-average price of$13.68 per share for an aggregate purchase price of$2.3 million . No shares were purchased as part of the Repurchase Program during the year endedDecember 31, 2019 . As ofDecember 31, 2020 , we had approximately$94.7 million remaining under its share repurchase authorization. The terms of our credit facility amendments currently prohibit us from making repurchases of our common stock until we achieve compliance with applicable debt covenants and our covenant waiver period ends. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , the Company had various contracts outstanding with third-parties in connection with the renovation of certain of its hotel properties. The remaining commitments under these contracts atDecember 31, 2020 totaled$4.2 million . 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 property 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 be undergoing renovations as a result of our decision to 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 often are required to complete a property improvement plan in order to bring the hotel up to the respective brand standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the furniture, fixtures and equipment replacement 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 furniture, fixtures and equipment replacement 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 ofDecember 31, 2020 and 2019, we had a total of$25.9 million and$70.8 million , respectively, of furniture, fixtures and equipment replacement reserves. During the year endedDecember 31, 2020 and 2019, we made total capital expenditures of$69.2 million and$93.0 million , respectively. Certain of the Company's third-party managers have suspended required contributions to the furniture, fixture and equipment replacement reserve for a period of time. Additionally, for certain hotels we have the ability to utilize a portion of these cash balances for hotel operating expenses. Usage of such replacement reserves may be subject to lender approval for hotels encumbered by mortgage loans or may be required to be replenished. As ofDecember 31, 2020 , the Company had used$12.1 million of the furniture, fixture and equipment replacement reserves for working capital purposes, which is subject to replenishment requirements. In light of the COVID-19 pandemic and its impact on our operations, the Company reviewed its capital program for 2020 and cancelled or deferred$54.8 million of capital expenditures, representing a 46.7% reduction from the original budget. Most of the 2020 expenditures related to the transformative renovation ofPark Hyatt Aviara Resort ,Golf Club & Spa , the guestroom renovation atMarriott Woodlands Waterway Hotel & Convention Center and the renovation of the existing meeting space atHyatt Regency Grand Cypress . 76 -------------------------------------------------------------------------------- Sources and Uses of Cash Our principal sources of cash are cash flows from operations, borrowings 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 that the COVID-19 pandemic has had on our business, certain sources of capital may not be as readily available to us as they have been historically. 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. Comparison of the Year EndedDecember 31, 2020 to the Year EndedDecember 31, 2019 The table below presents summary cash flow information for the consolidated statements of cash flows (in thousands): Year
Ended
2020 2019
Net cash (used in) provided by operating activities
$ 246,570 Net cash provided by (used in) investing activities 254,188 (222,888) Net cash flows provided by financing activities 57,374 9,656 Increase in cash and cash equivalents$ 233,840 $ 33,338
Cash and cash equivalents and restricted cash, at beginning of year
194,946 161,608
Cash and cash equivalents and restricted cash, at end of
year $ 428,786 $ 194,946
Operating
•Cash used in operating activities was $77.7 million for the year ended
December 31, 2020 and cash provided by operating activities was $246.6 million
for the year ended December 31, 2019 . Cash flows from operating activities
generally consist of the net cash generated by our hotel operations, offset by
the cash paid for 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 decrease
to cash used in operating activities during the year ended December 31, 2020 was
primarily due to a significant decrease in operating income attributed to the
impact of the COVID-19 pandemic and reductions from the four hotels sold in the
fourth quarter of 2020 and the two hotels sold in December 2019 , partially
offset by $28.8 million in forfeited deposits from terminated transactions.
Refer to the "Results of Operations" section for further discussion of our
operating results for the year ended December 31, 2020 and 2019.
Investing
•Cash provided by investing activities during the year ended December 31, 2020
was $254.2 million and cash used in investing activities was $222.9 million
during the year ended December 31, 2019 . Cash provided by investing activities
for the year ended December 31, 2020 was attributed to (i) $320.4 million in net
proceeds from the dispositions of Residence Inn Boston Cambridge , Marriott Napa
Valley Hotel & Spa , Hotel Commonwealth , and Renaissance Austin Hotel and (ii)
$3.0 million of performance guaranty payments that were recorded as a reduction
in the respective hotel's cost basis which was offset by $69.2 million in
capital improvements at our hotel properties. Cash used in investing activities
for the year ended December 31, 2019 was primarily due to (i) $190.0 million for
the acquisition of Hyatt Regency Portland at the Oregon Convention Center and
(ii) $93.0 million in capital improvements at our hotel properties, which was
offset by (iii) proceeds from the dispositions of Marriott Chicago at Medical
District/UIC and Marriott Griffin Gate Resort & Spa for net proceeds of $60.2
million .
Financing
•Cash provided by financing activities during the year ended December 31, 2020
was $57.4 million compared to $9.7 million during 2019. Cash provided by
financing activities for the year ended December 31, 2020 was attributed to
$500.5 million in proceeds from the issuance of Senior Notes, which included a
$0.5 million premium related to the add-on offering, and a $3.1 million net draw
on the revolving credit facility, offset by (i) the repayment of two corporate
credit facility term loans maturing in 2022 totaling $300.0 million ; (ii) the
repayment of mortgage debt totaling $51.0 million ; (iii) payment of loan fees
and issuance costs of $18.1 million ; (iv) principal payments of mortgage debt
totaling $2.2 million ; (v) the payment of $63.2 million in dividends for common
stock and units; (vi) redemption of Operating Partnership Units for common stock
and cash of $8.6 million ; (vii) the repurchase of common stock totaling $2.3
million ; and (viii) shares redeemed to satisfy tax withholding on vested share
based compensation of $0.8 million . Cash provided by financing activities for
the year ended December 31, 2019 was primarily attributed
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to proceeds of $85.0 million from the draw down of the remaining balance of the
corporate credit facility term loan entered into in during 2018 and proceeds of
$160.0 million from the draw on the revolving credit facility to acquire the
Hyatt Regency Portland at the Oregon Convention Center , which was offset by (i)
the payment of $125.9 million in dividends, (ii) the repayment of mortgage debt
totaling $104.9 million , and (iii) principal payments of $3.6 million .
Contractual Obligations
The table below presents, on a consolidated basis, obligations and commitments
to make future payments under debt obligations (including interest) and lease
agreements as of December 31, 2020 (in thousands):
Payments due by period
Less than 1 More than 5
Total year 1-3 years 3-5 years years
Debt maturities(1) $ 1,490,939 $ 65,363
175,236 4,779 7,066 163,391 -
Ground leases 40,143 1,658 3,316 3,316 31,853
Parking garage leases 2,519 165 337 346 1,671
Corporate office lease 3,702 436 907 957 1,402
Total $ 1,712,539 $ 72,401 $ 336,684 $ 1,103,625 $ 199,829
(1) Includes principal and interest payments, for both variable and fixed rate
loans. The variable rate interest payments were calculated based upon the
variable rate spread plus 1 month LIBOR yield curve as of December 31, 2020 and
for the revolving credit facility assumes the current balance is outstanding
until maturity.
Derivative Instruments
In the normal course of business, we are exposed to the effects of interest rate
changes. We may enter into derivative instruments including interest rate swaps,
caps and collars to manage or hedge interest rate risk in accordance with the
criteria of the hedging policy approved by our Board of Directors. Derivative
instruments are subject to fair value reporting at each reporting date and the
increase or decrease in fair value is recorded in net (loss) income or
accumulated other comprehensive income (loss), based on the applicable hedge
accounting guidance. We anticipate that our interest rate hedges will be highly
effective because the terms of the derivative instruments closely match the
terms of the related hedged debt agreements. As such, periodic changes in the
fair value of these derivatives are expected to be reflected in other
comprehensive income (loss) in our consolidated financial statements.
Derivatives expose the Company to credit risk in the event of non-performance by
the counterparties under the terms of the interest rate hedge agreements. The
Company believes it minimizes the credit risk by transacting with well-known
creditworthy financial institutions.
To the extent that payment terms of our loans change, it could impact our
ability to apply hedge accounting in the future. If we were to discontinue hedge
accounting this could result in the recognition of a portion or all of the $14.4
million balance of accumulated other comprehensive loss as of December 31, 2020
into net loss. Additionally, the discontinuation of hedge accounting could
require future changes in the fair market values of hedges to be recognized on
the consolidated statement of operations (loss) income through net (loss)
income. 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.
As of December 31, 2020 , we had various interest rate swaps with an aggregate
notional amount of $513.0 million . These swaps fix a portion of the variable
interest rate for four of our mortgage loans for a portion of or the entire term
of the mortgage loan and fix LIBOR for a portion of the term of our two
outstanding corporate credit facility term loans. The term loan spreads may
vary, as they are determined by the Company's leverage ratio. The applicable
interest rate for the term loans has been set to the highest level of grid-based
pricing during the covenant waiver period. In addition, three interest rate
swaps were terminated in October 2020 in connection with the repayment of the
$175M corporate credit facility term loan.
In July 2017 , the Financial Conduct Authority ("FCA") that regulates the London
Inter-bank Offered Rate ("LIBOR") announced it intends to stop compelling banks
to submit rates for the calculation of LIBOR after 2021. As a result, the
Federal Reserve Board and the Federal Reserve Bank of New York organized the
Alternative Reference Rates Committee ("ARRC") which identified the Secured
Overnight Financing Rate ("SOFR") as its preferred alternative to US
Dollar-LIBOR in derivatives and other financial contracts. The Company is not
able to predict when LIBOR will cease to be available or when there will be
sufficient liquidity in the SOFR markets. Any changes adopted by FCA 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.
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As of December 31, 2020 , the Company's has various interest rate swaps with a
notional amount of $513.0 million that have maturity dates ranging from 2022 to
2023 that are indexed to LIBOR. The Company is currently monitoring and
evaluating the related risks, which include interest expense and amounts
received and paid on derivative instruments. These risks arise in connection
with transitioning contracts to a new alternative rate, including any resulting
value transfer that may occur. The value of loans, securities, or derivative
instruments tied to LIBOR could also be impacted if LIBOR is limited or
discontinued. For some instruments, the method of transitioning to an
alternative rate may be challenging, as they may require negotiation with the
respective counterparty.
If a contract is not transitioned to an alternative rate and LIBOR is
discontinued, the impact on our contracts is likely to vary by contract. If
LIBOR is discontinued or if the methods of calculating LIBOR change from their
current form, interest rates on our current or future indebtedness may be
adversely affected.
While we expect LIBOR to be available in substantially its current form until
the end of 2021, it is possible that LIBOR will become unavailable prior to that
point. 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.
Inflation
We rely on the performance of our hotels to increase revenues in order to keep
pace with inflation. Generally, our third-party management companies possess the
ability to adjust room rates daily, except for group or corporate rates
contractually committed to in advance, although competitive pressures may limit
the ability of our third-party management companies to raise rates faster than
inflation or even at the same rate.
Inflation may affect our expenses, including, without limitation, by increasing
costs such as wages, benefits, food, taxes, property and casualty insurance,
borrowing costs and utilities. In addition, our hotel expenses may increase at
higher rates than hotel revenue.
New Accounting Pronouncements Not Yet Implemented
See Note 2 to the accompanying consolidated financial statements included herein
this Annual Report for additional information related to recently issued
accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
We are subject to market risk associated with changes in interest rates both in
terms of variable rate debt and the price of new fixed rate debt upon maturity
of existing debt and for acquisitions. Our interest rate risk management
objectives are to limit the impact of interest rate changes on earnings and cash
flows and to lower our overall borrowing costs. If market rates of interest on
all of our variable rate debt as of December 31, 2020 permanently increased or
decreased by 1%, the increase or decrease in interest expense on the variable
rate debt would increase or decrease future earnings and cash flows by
approximately $2.4 million per annum. If market rates of interest on all of the
variable rate debt as of December 31, 2019 permanently increased or decreased by
1%, the increase or decrease in interest expense on the variable rate debt would
increase or decrease future earnings and cash flows by approximately $3.8
million per annum. The decrease from prior period was driven by the management's
efforts to repay or refinance floating rate debt with fixed rate debt.
With regard to our variable rate financing, we assess interest rate cash flow
risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating
hedging opportunities. We maintain risk management control systems to monitor
interest rate cash flow risk attributable to both of our outstanding or
forecasted debt obligations as well as our potential offsetting hedge positions.
The risk management control systems involve the use of analytical techniques,
including cash flow sensitivity analysis, to estimate the expected impact of
changes in interest rates on our future cash flows.
We monitor interest rate risk using a variety of techniques, including
periodically evaluating fixed interest rate quotes on variable rate debt and the
costs associated with converting the debt to fixed rate debt. Also, existing
fixed and variable rate loans that are scheduled to mature in the near term are
evaluated for possible early refinancing or extension due to consideration given
to current interest rates. We have taken significant steps in reducing our
variable rate debt exposure by paying off property-level mortgage debt subject
to floating rates and entering into various interest rate swap agreements to
hedge the interest rate exposure risk. Refer to Note 6 in the accompanying
consolidated financial statements included herein this Annual Report, for our
mortgage debt principal amounts and weighted-average interest rates by year and
expected maturity to evaluate the expected cash flows and sensitivity to
interest rate changes. Refer to Note 7 in the accompanying the consolidated
financial statements included herein this Annual Report for more information on
our interest rate swap derivatives.
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We may continue to use derivative instruments to hedge exposures to changes in
interest rates on loans secured by our properties. To the extent we do, we are
exposed to credit risk and market risk. Credit risk is the failure of the
counterparty to perform under the terms of the derivative contract. We maintain
credit policies with regard to our counterparties that we believe reduce overall
credit risk. These policies include evaluating and monitoring our
counterparties' financial condition, including their credit ratings, and
entering into agreements with counterparties based on established credit limit
policies. Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. The market risk
associated with interest-rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market risk that may be
undertaken.
The following table provides information about our financial instruments that
are sensitive to changes in interest rates. For debt obligations outstanding as
of December 31, 2020 , the following table presents principal repayments and
related weighted-average interest rates by contractual maturity dates (in
thousands):
2021 2022 2023 2024 2025 Thereafter Total Fair Value
Maturing debt(1):
Fixed rate debt $ 4,726 $ 5,752 $ 148,476 $ 264,995 $ 568,434 $ 157,496 $ 1,149,879 $ 1,006,143
Variable rate debt - - 62,400 15,000 - - 77,400 240,211
Revolving Credit Facility - - - 163,093 - - 163,093 161,339
Total $ 4,726 $ 5,752 $ 210,876 $ 443,088 $ 568,434 $ 157,496 $ 1,390,372 $ 1,407,693
Weighted-average interest
rate on debt:
Fixed rate debt(2) 4.14% 3.58% 4.05% 3.88% 0.59% 4.60% 5.16% 1.84%
Variable rate debt -% -% 2.51% 2.18% -% -% 2.40% 4.06%
Revolving Credit Facility -% -% -% 2.93% -% -% 2.93% 3.62%
(1) The debt maturity excludes net mortgage loan discounts, premiums and
unamortized deferred loan costs of $15.9 million as of December 31, 2020 .
(2) Includes all fixed rate debt, and all variable rate debt that was swapped
to fixed rates as of December 31, 2020 .
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure on Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, our
management, with the participation of Principal Executive Officer and our
Principal Financial Officer has evaluated, as of December 31, 2020 , the
effectiveness of our disclosure controls and procedures as defined in Rules
13a-15(e) and Rule 15d-15(e) of the Exchange Act. Based on that evaluation, our
Principal Executive Officer and our Principal Financial Officer concluded that
our disclosure controls and procedures, as of December 31, 2020 , were effective
for the purpose of ensuring that information required to be disclosed by us in
this Annual Report is recorded, processed, summarized and reported within the
time periods specified by the rules and forms of the Exchange Act and is
accumulated and communicated to management, including the Principal Executive
Officer and the Principal Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). The Company's internal controls over financial reporting are
designed to provide reasonable assurance to the Company's management and Board
of Directors regarding the fair representation of published financial statements
in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP and that our
receipts and our expenditures are being made only in accordance with
authorizations of our management and our Board of Directors; and
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•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In evaluating the effectiveness of our internal control over financial reporting as ofDecember 31, 2020 , management used the framework set forth by theCommittee of Sponsoring Organizations of theTreadway Commission in Internal Control -Integrated Framework (2013). Based on such evaluation, management concluded that our internal control over financial reporting was effective as ofDecember 31, 2020 . Management reviewed the results of its assessment with the Audit Committee of our Board of Directors. Independent Registered Public Accounting Firm's Report on Internal Control Over Financial ReportingKPMG LLP , an independent registered public accounting firm, has audited the Company's consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued its report, included herein on page F-4, on the effectiveness of our internal control over financial reporting. Changes in Internal Control over Financial Reporting There has been no change in our internal controls over financial reporting during the fourth quarter of endedDecember 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. OnFebruary 23, 2021 , our Board of Directors adopted amendments to our Code of Ethics and Business Conduct ("Code of Ethics") which include revisions to the procedures for reporting suspected violations of laws, rules, regulations or the Code of Ethics. The revised Code of Ethics can be found on our website at www.xeniareit.com.
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