Certain statements in this Quarterly Report on Form 10-Q, other than purely
historical information, are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These statements include
statements about Xenia's plans, objectives, strategies, financial performance
and outlook, trends, the amount and timing of future cash distributions,
anticipated timing to close a pending transaction, prospects or future events
and involve known and unknown risks that are difficult to predict. As a result,
our actual financial results, performance, achievements or prospects may differ
materially from those expressed or implied by these forward-looking statements.
In some cases, you can identify forward-looking statements by the use of words
such as "may," "could," "expect," "intend," "plan," "seek," "anticipate,"
"believe," "estimate," "guidance," "predict," "potential," "continue," "likely,"
"will," "would," "illustrative" and variations of these terms and similar
expressions, or the negative of these terms or similar expressions. Such
forward-looking statements are necessarily based upon estimates and assumptions
that, while considered reasonable by Xenia and its management based on their
knowledge and understanding of the business and industry, are inherently
uncertain. These statements are not guarantees of future performance, and
stockholders should not place undue reliance on forward-looking statements.
Forward-looking statements in this Form 10-Q include, among others, statements
about our plans, strategies and the effects of the COVID-19 pandemic, including
on the demand for travel, transient and group business, the timing of hotel
re-openings, the level of expenses incurred in connection with hotel
re-openings, capital expenditures and the timing of renovations, status of
transactions and escrow deposits, and derivations thereof, financial
performance, prospects or future events. There are a number of risks,
uncertainties and other important factors, many of which are beyond our control,
that could cause our actual results to differ materially from the
forward-looking statements contained in this Quarterly Report on Form 10-Q. Such
risks, uncertainties and other important factors include, among others: the
factors set forth under "Part I-Item IA. Risk Factors" and "Part II-Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission (the "SEC") on March 1, 2021, as may be updated elsewhere in
this report; and the information set forth in other Quarterly Reports on Form
10-Q and Current Reports on Form 8-K that we have filed or will file with the
SEC; the short- and longer-term effects of the COVID-19 pandemic, including on
the demand for travel, transient and group business, and levels of consumer
confidence; actions that governments, businesses, and individuals take in
response to the COVID-19 pandemic or any future resurgence, including limiting
or banning travel and implementation of social distancing requirements; the
impact of the COVID-19 pandemic, and actions taken in response to the COVID-19
pandemic or any future resurgence, on global and regional economies, travel, and
economic activity, including the duration and magnitude of its impact on
unemployment rates and consumer discretionary spending; the ability of
third-party managers or other partners to successfully navigate the impacts of
the COVID-19 pandemic; the pace of recovery following the COVID-19 pandemic or
any future resurgence; COVID-19 may cause us to incur additional expenses (for
example, depending on the length of furloughs for employees at our hotels, we
may be required to make severance payments to some of the hotels furloughed
employees); our ability to successfully negotiate amendments and covenant
waivers under our indebtedness; our ability to comply with covenants; business,
financial and operating risks inherent to real estate investments and the
lodging industry; seasonal and cyclical volatility in the lodging industry;
adverse changes in specialized industries, such as the technology and/or tourism
industries that result in a sustained downturn of related businesses and
corporate spending that may negatively impact our revenues and results of
operations; macroeconomic and other factors beyond our control that can
adversely affect and reduce demand for hotel rooms, food and beverage services,
and/or meeting facilities, including inflation; contraction in the global
economy or low levels of economic growth; levels of spending in business and
leisure segments as well as consumer confidence; declines in occupancy and
average daily rate; fluctuations in the supply, due to hotel construction and/or
renovation and expansion of existing hotels, and demand for hotel rooms; changes
in the competitive environment in the lodging industry, including due to
consolidation of management companies, franchisors and online travel agencies,
and changes in the markets where we own hotels; events beyond our control, such
as war, terrorist or cyber-attacks, mass casualty events, government shutdowns
and closures, travel-related health concerns, and natural disasters; cyber
incidents and information technology failures, including unauthorized access to
our computer systems and/or vendors' computer systems, and our third-party
management companies' or franchisors' computer systems and/or their vendors'
computer systems; our inability to directly operate our properties and reliance
on third-party hotel management companies to operate and manage our hotels; our
ability to maintain good relationships with our third-party hotel management
companies and franchisors; our failure to maintain brand operating standards;
our ability to maintain our brand licenses at our hotels; relationships with
labor unions and changes in labor laws; loss of our senior management team or
key personnel; our ability to identify and consummate acquisitions and
dispositions of hotels; our ability to integrate and successfully operate any
hotel properties acquired in the future and the risks associated with these
hotel properties; the impact of hotel renovations, repositioning, redevelopments
and re-branding activities; our ability to access capital for renovations and
acquisitions on terms and at times that are acceptable to us; the fixed cost
nature of hotel ownership; our ability to service, restructure or refinance our
debt; changes in interest rates and operating costs, including labor and service
related costs; compliance with regulatory regimes and local laws; uninsured or
under insured losses, including those relating to natural disasters, terrorism
or cyber-attacks; changes in distribution channels, such as through internet
travel intermediaries or websites that facilitate short-term rental of homes and
apartments from owners; the amount of
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debt that we currently have or may incur in the future; provisions in our debt
agreements that may restrict the operation of our business; our organizational
and governance structure; our status as a real estate investment trust ("REIT");
our taxable REIT subsidiary ("TRS") lessee structure; the cost of compliance
with and liabilities under environmental, health and safety laws; adverse
litigation judgments or settlements; changes in real estate and zoning laws and
increase in real property tax valuations or rates; changes in federal, state or
local tax law, including legislative, administrative, regulatory or other
actions affecting REITs; changes in governmental regulations or interpretations
thereof; and estimates relating to our ability to make distributions to our
stockholders in the future.
These factors are not necessarily all of the important factors that could cause
our actual financial results, performance, achievements or prospects to differ
materially from those expressed in or implied by any of our forward-looking
statements. Other unknown or unpredictable factors also could harm our results.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
set forth above. Forward-looking statements speak only as of the date they are
made, and we do not undertake or assume any obligation to update publicly any of
these forward-looking statements to reflect actual results, new information or
future events, changes in assumptions or changes in other factors affecting
forward-looking statements, except to the extent required by applicable laws. If
we update one or more forward-looking statements, no inference should be drawn
that we will make additional updates with respect to those or other
forward-looking statements.
The following discussion and analysis should be read in conjunction with the
Company's Unaudited Condensed Consolidated Financial Statements and accompanying
notes, which appear elsewhere in this Quarterly Report on Form 10-Q.
Overview
Xenia Hotels & Resorts, Inc. ("we", "us", "our", "Xenia" or the "Company") is a
self-advised and self-administered REIT that primarily invests in uniquely
positioned luxury and upper upscale hotels and resorts in Top 25 lodging markets
as well as key leisure destinations in the United States ("U.S."). As of
March 31, 2021, we owned 35 hotels, comprising 10,011 rooms, across 15 states.
Our hotels are operated and/or licensed by industry leaders such as Marriott,
Hyatt, Kimpton, Fairmont, Loews, Hilton, and The Kessler Collection.
Impact of COVID-19 on our Business
In January 2020, confirmed cases of novel coronavirus and related respiratory
disease ("COVID-19") started appearing in the United States. By March 2020,
COVID-19 was deemed a global pandemic by the World Health Organization. This led
federal, state and local governments in the 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 phased multi-step policies governing
re-opening regions of the country. The effects of the COVID-19 pandemic on the
hotel industry have been significant and unprecedented with global demand for
lodging drastically reduced and occupancy levels reaching historic lows. As a
result of the COVID-19 pandemic, the majority of our hotels and resorts
temporarily suspended operations for certain periods of time during 2020.
Currently, Hyatt Regency Portland at the Oregon Convention Center is the
Company's only hotel that continues to have suspended operations.
Leisure demand gradually improved during the second half of 2020, a trend that
accelerated during the first quarter of 2021; however, consistent with trends
throughout the U.S. lodging industry, business transient and group demand
continues to be limited. This led to total portfolio occupancy of 32.7% for the
three months ended March 31, 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, and 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, particularly with respect to
business transient and group business, will be gradual, likely inconsistent, and
may lag behind the recovery of other industries. Factors such as public health
(including a significant increase in new and variant strains of COVID-19 cases),
availability and effectiveness of COVID-19 vaccines and therapeutics, the level
of acceptance of the vaccine by the general population and the economic and
geopolitical environments may impact the timing, extent and pace of such
recovery.
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, including
variants of the virus. 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 cannot predict
the full extent and duration of the effects of the COVID-19 pandemic on our
business, operating margins, results of operations, cash flows,
                                       26
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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 condensed consolidated financial statements include the
accounts of the Company, the Operating Partnership, and XHR Holding. The
Company's subsidiaries generally consist of limited liability companies, limited
partnerships and the TRS. The effects of all inter-company transactions have
been eliminated. Corporate costs directly associated with our principal
executive offices, personnel and other administrative costs are reflected as
general and administrative expenses on the condensed consolidated statements of
operations and comprehensive loss.
Our Revenues and Expenses
Our revenue is primarily derived from hotel operations, including rooms revenue,
food and beverage revenue and other revenue, which consists of parking, spa,
resort fees, other guest services, and tenant leases, among other items.
Our operating costs and expenses consist of the costs to provide hotel services,
including rooms expense, food and beverage expense, management and franchise
fees, and other direct and indirect operating expenses. Rooms expense includes
housekeeping wages and associated payroll taxes, room supplies, laundry services
and front desk costs. Food and beverage expense primarily includes the cost of
food, beverages and associated labor. Other direct and indirect hotel expenses
include labor and other costs associated with the other operating department
revenue, as well as labor and other costs associated with general and
administrative departments, sales and marketing, information technology and
telecommunications, repairs and maintenance and utility costs. We enter into
management agreements with independent third-party management companies to
operate our hotels. The management companies typically earn base and incentive
management fees based on the levels of revenues and profitability of each
individual hotel.
Key Indicators of Operating Performance
We measure hotel results of operations and the operating performance of our
business by evaluating financial and nonfinancial metrics such as Revenue Per
Available Room ("RevPAR"); average daily rate ("ADR"); occupancy rate
("occupancy"); earnings before interest, income taxes, depreciation and
amortization for real estate ("EBITDAre") and Adjusted EBITDAre; and funds from
operations ("FFO") and Adjusted FFO. We evaluate individual hotel and
company-wide performance with comparisons to budgets, prior periods and
competing properties. RevPar, ADR, and occupancy may be impacted by
macroeconomic factors as well as regional and local economies and events. See
"Non-GAAP Financial Measures" for further discussion of the Company's use,
definitions and limitations of EBITDAre, Adjusted EBITDAre, FFO and Adjusted FFO
and the reasons management believes these financial measures are useful to
investors.
Results of Operations
Lodging Industry Overview
The impact of COVID-19 on the global and U.S. economy and the travel industry in
particular has been significant and unprecedented, causing a severe impact to
our operations beginning late in the first quarter of 2020 and continuing
through the first quarter of 2021. The U.S. lodging industry has historically
exhibited a strong correlation to U.S. GDP, which increased at an estimated
annual rate of approximately 6.4% during the first quarter of 2021, according to
the U.S. Department of Commerce, continuing the annual rate growth trend from
the third and fourth quarters of 2020 of 33.1% and 4.3%, respectively. The
increase during the first quarter reflected increases in personal consumption
expenditures, nonresidential fixed investment, federal government spending,
residential fixed investment, and state and local government spending that were
partially offset by decreases in private inventory investment and exports. In
addition, the unemployment rate continues to steadily improve from 6.7% in
December 2020 to 6.0% in March 2021 and economists are currently forecasting
continued gains in employment during the remainder of 2021.
The U.S. lodging industry has been more acutely impacted by the COVID-19
pandemic than the overall U.S. economy and other industries and has not
experienced the same level of recovery as the U.S. economy which is largely due
to the persistence of the COVID-19 pandemic, continued governmental restrictions
on travel and large gatherings, and sentiment towards business and leisure
travel as a result of the pandemic. Additionally, we expect it will take longer
for the lodging industry to return to pre-pandemic levels than it will for the
broader economy and many other industries. Further, we continue to monitor and
evaluate the challenges associated with the evolving workforce landscape,
particularly related to achieving the appropriate balance between hotel staffing
levels and demand as business at our hotels increases.
Demand and new hotel supply declined 11.9% and 2.0%, respectively, during the
three months ended March 31, 2021. The significant reduction in demand led to
declines in industry RevPAR of 27.7% for the three months ended March 31, 2021
                                       27
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compared to 2020, which was driven by a decline in occupancy of 10.1% coupled
with a 19.6% decline in ADR. All U.S. data for the three months ended March 31,
2021 are per industry reports.
First Quarter 2021 Overview
Our total portfolio RevPAR, which includes the results of hotels sold or
acquired for the period of ownership by the Company, decreased 49.2% to
$61.76 for the three months ended March 31, 2021, compared to $121.68 for
the three months ended March 31, 2020. The decrease in our total portfolio
RevPAR for the three months ended March 31, 2021 compared to the same period in
2020 was driven by the significant ongoing impact of the COVID-19 pandemic on
our results of operations. We began to see sequential improvement in our
portfolio during the first three months of 2021, due primarily to an increase in
leisure travel. The following table sets forth certain operating information for
the three months ended March 31, 2021:
                                                 January            February            March             Three Months Ended
Total Portfolio Statistics                         2021               2021               2021               March 31, 2021
Occupancy (1)                                       23.1  %            32.4  %            42.7  %                    32.7     %
Average Daily Rate (1)                         $  170.41          $  183.57          $  202.07          $          188.68
RevPAR (1)                                     $   39.32          $   59.56          $   86.19          $           61.76


(1)  Includes Hyatt Regency Portland at the Oregon Convention Center which had
suspended operations for all periods presented.
Net loss increased 56.1% for the three months ended March 31, 2021 compared to
2020, which was primarily attributed to a reduction in operating income of $31.0
million from our current portfolio of 35 hotels as a result of the COVID-19
pandemic, a $7.5 million reduction in income tax benefit and a $5.7 million
increase in interest expense attributed to a higher weighted-average interest
rate offset by a reduction in weighted-average debt outstanding. These decreases
were offset by a $16.4 million reduction in impairment loss, $4.7 million
attributed to four hotels sold during the fourth quarter of 2020, a $1.2 million
reduction in corporate general and administrative expenses attributed to
reductions in corporate personnel and $1.1 million attributed to business
interruption proceeds.
Adjusted EBITDAre and Adjusted FFO attributable to common stock and unit holders
for the three months ended March 31, 2021 decreased 114.9% and 207.4%,
respectively, compared to 2020, which was attributable to the extent and timing
of the impact of the COVID-19 pandemic on our results of operations. Refer to
"Non-GAAP Financial Measures" for the definition of these financial measures, a
description of the reasons we believe they are useful to investors as key
supplemental measures of our operating performance and the reconciliation of
these non-GAAP financial measures to net loss attributable to common stock and
unit holders.
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Operating Information Comparison The following table sets forth certain operating information for the three months ended March 31, 2021 and 2020:


                                                                                Three Months Ended March 31,
                                                                                  2021                  2020                  Change

Number of properties at March 31                                                   35                    39                    (4)

Number of rooms at March 31                                                      10,011                11,245                (1,234)

Number of hotels open at March 31                                                  34                    15                     19
Number of rooms in hotels open at March 31                                        9,511                 3,296                 6,215

Number of hotels with temporarily suspended operations at March 31

         1                    24                    (23)

Number of rooms in hotels with temporarily suspended operations at March 31

        600                  7,949                (7,349)

                                                                                Three Months Ended March 31,
                                                                                  2021                  2020                  Change
Total Portfolio
Statistics:
Occupancy (1)                                                                        32.7   %             55.2  %          (2,250) bps
ADR (1)                                                                     $      188.68           $   220.41               (14.4)%
RevPAR (1)                                                                  $       61.76           $   121.68               (49.2)%


(1)  For hotels disposed of during the period, operating results and statistics
are only included through the date of respective disposition. During the three
months ended March 31, 2021 and 2020 includes hotels that had suspended
operations for a portion of or all of the periods presented.
Revenues
Revenues consists of rooms, food and beverage, and other revenues from our
hotels, as follows (in thousands):
                                     Three Months Ended March 31,
                                         2021                   2020          Decrease       % Change
Revenues:
Rooms revenues                $       55,646                 $ 124,515      $  (68,869)       (55.3) %
Food and beverage revenues            21,592                    73,729         (52,137)       (70.7) %
Other revenues                        10,614                    17,109          (6,495)       (38.0) %
Total revenues                $       87,852                 $ 215,353      $ (127,501)       (59.2) %


Rooms revenues
Rooms revenues decreased by $68.9 million, or 55.3%, to $55.6 million for the
three months ended March 31, 2021 from $124.5 million for the three months ended
March 31, 2020 primarily due to the extent and timing of the impact of COVID-19.
This decrease includes a reduction of $11.3 million in rooms revenues attributed
to the sale of Marriott Napa Valley Hotel & Spa and Residence Inn Boston
Cambridge in October 2020 and Hotel Commonwealth and Renaissance Austin Hotel in
November 2020 (collectively, "the four hotels sold in the fourth quarter of
2020").
Food and beverage revenues
Food and beverage revenues decreased by $52.1 million, or 70.7%, to $21.6
million for the three months ended March 31, 2021 from $73.7 million for the
three months ended March 31, 2020 primarily due to the extent and timing of the
impact of COVID-19. This decrease includes a reduction of $4.7 million in food
and beverage revenues attributed to the four hotels sold in the fourth quarter
of 2020.

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Other revenues
Other revenues decreased by $6.5 million, or 38.0%, to $10.6 million for the
three months ended March 31, 2021 from $17.1 million for the three months ended
March 31, 2020 primarily due to the extent and timing of the impact of COVID-19.
This decrease includes a reduction of $2.8 million in revenues from
cancellations and attrition and $1.0 million attributed to the four hotels sold
in the fourth quarter of 2020.
Hotel Operating Expenses
Hotel operating expenses consist of the following (in thousands):
                                              Three Months Ended March 31,
                                                2021                  2020             Decrease             % Change
Hotel operating expenses:
Rooms expenses                            $       15,537          $  35,076          $ (19,539)                 (55.7) %
Food and beverage expenses                        18,178             52,972            (34,794)                 (65.7) %
Other direct expenses                              3,198              5,392             (2,194)                 (40.7) %
Other indirect expenses                           37,327             70,088            (32,761)                 (46.7) %
Management and franchise fees                      2,844              7,330             (4,486)                 (61.2) %
Total hotel operating expenses            $       77,084          $ 170,858          $ (93,774)                 (54.9) %


Total hotel operating expenses
In general, hotel operating costs fluctuate based on various factors, including
occupancy, labor costs, utilities and insurance costs. Luxury and upper upscale
hotels generally have higher fixed costs than other types of hotels due to the
level of services and amenities provided to guests.
Total hotel operating expenses decreased $93.8 million, or 54.9%, to $77.1
million for the three months ended March 31, 2021 from $170.9 million for the
three months ended March 31, 2020 primarily due to the extent and timing of the
impact of COVID-19. This decrease includes a reduction of $14.5 million in hotel
operating expenses attributed to the four hotels sold in the fourth quarter of
2020.
Corporate and Other Expenses
Corporate and other expenses consist of the following (in thousands):
                                                Three Months Ended March 31,
                                                   2021                  2020             Decrease             % Change
Depreciation and amortization               $        33,197          $  37,091          $  (3,894)                 (10.5) %
Real estate taxes, personal property taxes
and insurance                                        10,540             13,675             (3,135)                 (22.9) %
Ground lease expense                                    403                754               (351)                 (46.6) %
General and administrative expenses                   6,922              8,151             (1,229)                 (15.1) %
Gain on business interruption insurance              (1,116)                 -             (1,116)                     -  %

Impairment and other losses                               -             16,368            (16,368)                (100.0) %

Total corporate and other expenses $ 49,946 $ 76,039 $ (26,093)

                 (34.3) %


Depreciation and amortization
Depreciation and amortization expense decreased $3.9 million, or 10.5%, to $33.2
million for the three months ended March 31, 2021 from $37.1 million for the
three months ended March 31, 2020. The decrease was primarily attributed to a
reduction in depreciation expense related to the four hotels sold in the fourth
quarter of 2020.
Real estate taxes, personal property taxes and insurance
                                       30
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Real estate taxes, personal property taxes and insurance expense decreased $3.1
million, or 22.9%, to $10.5 million for the three months ended March 31, 2021
from $13.7 million for the three months ended March 31, 2020. The decrease was
primarily attributed to a $1.5 million property tax refund and a $1.6 million
decrease related to the four hotels sold in the fourth quarter of 2020.
Ground lease expense
Ground lease expense decreased $0.4 million, or 46.6%, to $0.4 million for the
three months ended March 31, 2021 from $0.8 million for the three months ended
March 31, 2020, which was attributable to a reduction in percentage rent on
certain of our ground leases as a result of a decrease in revenues related to
certain of our hotels and resorts temporarily suspending operations and reduced
demand due to the impact of the COVID-19 pandemic.
General and administrative expenses
General and administrative expenses decreased $1.2 million, or 15.1%, to $6.9
million for the three months ended March 31, 2021 from $8.2 million for the
three months ended March 31, 2020. The Company incurred non-recurring severance
expense and accelerated amortization of share-based compensation expense
totaling $0.8 million related to the reductions in corporate personnel during
the three months ended March 31, 2020.
Gain on business interruption insurance
Gain on business interruption insurance was $1.1 million for the three months
ended March 31, 2021, which was attributed to insurance proceeds for a portion
of lost revenue associated with cancellations in 2020 related to the COVID-19
pandemic.
Impairment and other losses
During the three months ended March 31, 2020, the Company recorded an impairment
charge of $16.4 million, which was attributed to Andaz Savannah and Bohemian
Hotel Savannah Riverfront, Autograph Collection. The goodwill impairments were
directly attributed existing market weakness due to new supply in Savannah,
Georgia and the material adverse impact that the COVID-19 pandemic had on the
results of operations at each hotel. Refer to Notes 2 and 6 in the accompanying
condensed consolidated financial statements for further discussion.
Non-Operating Income and Expenses
Non-operating income and expenses consist of the following (in thousands):
                                                    Three Months Ended March 31,
                                                                                               Increase /
                                                      2021                  2020               (Decrease)              % Change

Non-operating income and expenses:



Other income                                   $           116          $      127          $         (11)                  (8.7) %
Interest expense                                       (18,750)            (13,024)                 5,726                   44.0  %

Income tax (expense) benefit                              (165)              7,311                 (7,476)                (102.3) %


Interest expense
Interest expense increased $5.7 million or 44.0%, to $18.8 million for the three
months ended March 31, 2021 from $13.0 million for the three months ended
March 31, 2020. This was primarily due to an increase in the weighted-average
interest rate offset by a reduction in our weighted-average debt outstanding as
of March 31, 2021 compared to 2020. Refer to Note 4 in the accompanying
condensed consolidated financial statements for further discussion.
Income tax (expense) benefit
Income tax benefit decreased $7.5 million, or 102.3%, to an expense of $0.2
million for the three months ended March 31, 2021 from an income tax benefit of
$7.3 million for the three months ended March 31, 2020. The income tax benefit
during the three months ended March 31, 2020 was primarily attributed to the net
operating loss carryback allowed for under the CARES Act.
Liquidity and Capital Resources
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.
Additionally, we expect our hotel portfolio to begin generating net operating
income in the second half of 2021. The objectives
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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. We believe successful improvements to the
performance of our portfolio will result in increased operating cash flows over
time. Additionally, we may meet our long-term liquidity requirements through
additional borrowings, the issuance of equity and debt securities, which may not
be available on advantageous terms or at all, and/or proceeds from the sales of
hotels.
Liquidity
As of March 31, 2021, we had $354.6 million of consolidated cash and cash
equivalents and $34.6 million of restricted cash and escrows. The restricted
cash as of March 31, 2021 primarily consisted of $24.5 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
$3.1 million primarily for real estate taxes and mortgage escrows, $6.3 million
for disposition-related holdbacks and $0.7 million in deposits made for capital
projects.
As of March 31, 2021, $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. To the extent we pay down the outstanding balance of
our revolving credit facility in the future, 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).
Our third-party managers have temporarily suspended required contributions to
the furniture, fixture and equipment replacement reserves 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 and may be required to
be replenished. As of March 31, 2021, the Company had used $13.5 million of the
furniture, fixture and equipment replacement reserves for working capital
purposes, all of which is subject to replenishment requirements.
We remain committed to cash conservation and increasing total shareholder
returns through the following priorities: (1) maximize revenue and profits
generated by our existing properties and acquired hotels, including the
continued focused management of expenses, (2) further enhance the value of our
portfolio and produce an attractive current yield, and (3) generate sustainable
and predictable cash flow from our operations to distribute to our common stock
and unit holders. Future determinations regarding the declaration and payment of
dividends will be at the discretion of our Board of Directors and will depend on
then-existing conditions, including our results of operations, payout ratio,
capital requirements, financial condition, prospects, contractual arrangements,
any limitations on payment of dividends present in our current and future debt
agreements and other factors that our Board of Directors may deem relevant.
Debt and Loan Covenants
As of March 31, 2021, our outstanding total debt was $1.4 billion and had a
weighted-average interest rate of 4.78%.
Mortgage Loans
Our mortgage loan agreements, as amended, require contributions to be made to
furniture, fixtures and equipment replacement reserves, however, this
requirement has been temporarily eliminated and we currently have the ability to
utilize existing furniture, fixtures and equipment replacement reserve funds for
operating expenses, subject to certain restrictions and a requirement to
replenish any funds used. In addition, certain quarterly financial covenants
have been waived for a period of time specified in the respective amended loan
agreements and certain financial covenants will be adjusted following the waiver
periods.
Corporate Credit Facilities
Certain financial covenants related to our amended corporate credit facilities
have been suspended through year end 2021 and, once quarterly testing resumes,
certain financial covenants have been modified through the first quarter in 2023
(the "covenant waiver period"). In addition, the amended corporate credit
facilities have certain restrictions and covenants which are applicable during
the covenant waiver period, including (i) mandatory prepayment requirements,
(ii) the addition of certain subsidiaries as guarantors, and (iii) negative
covenants restricting certain acquisitions, investments, capital expenditures,
ground leases, and
                                       32
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distributions. A minimum liquidity covenant also applies during the covenant
waiver period and for two fiscal quarters thereafter.
Senior Notes
The Operating Partnership issued $500 million of Senior Notes during the year
ended December 31, 2020. The Senior Notes contain customary covenants that will
limit the Operating Partnership's ability and, in certain circumstances, 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 the Operating 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.
Debt Covenants
As of March 31, 2021, we were not in compliance with debt covenants for four
mortgage loans, which did not result in events of default but allow the
respective lenders the option to initiate a cash sweep until covenant compliance
is achieved for a period of time specified in the respective loan agreements.
The cash sweeps permit the lenders to pull excess cash generated by the property
into a separate bank 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 the need to request waivers or modifications from our
lenders. If we are unable to obtain waivers or modifications, we would be
required to pay down the loans by amounts which would result in compliance with
the applicable covenants.
Derivatives
As of March 31, 2021, we had various interest rate swaps with an aggregate
notional amount of $512.8 million. These swaps fix a portion of the variable
interest rate on four of our mortgage loans for a portion of or the entire term
of the mortgage loan and fix LIBOR for a portion of or the entire term of our
two outstanding corporate credit facility term loans. The corporate credit
facility term loan spreads may vary, as they are determined by the Company's
leverage ratio. The applicable interest rate for the corporate credit facility
term loans has been set to the highest level of grid-based pricing during the
covenant waiver period.
Our ability to apply hedge accounting in the future could be impacted to the
extent that the payment terms of our loans change. The discontinuation of hedge
accounting could result in future changes in the fair market values of hedges
and/or a portion or all of the $12.1 million balance of accumulated other
comprehensive loss as of March 31, 2021 to be recognized on the condensed
consolidated statements of operations and comprehensive loss through net loss.
Any future defaults by the Company under the terms of its hedges, including
those which may arise from cross default provisions with loan agreements, could
result in the Company being immediately liable for the fair market value
liability of the defaulted hedges.
On March 5, 2021, the Financial Conduct Authority ("FCA") announced that USD
LIBOR will no longer be published after June 30, 2023. This announcement has
several implications, including setting the spread that may be used to
automatically convert contracts from LIBOR to the Secured Overnight Financing
Rate ("SOFR"). Additionally, banking regulators are encouraging banks to
discontinue new LIBOR debt issuance by December 31, 2021. Any changes adopted by
the 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.
As of March 31, 2021, we have various interest rate swaps with notional amounts
that have maturity dates ranging from 2022 to 2023 and that are indexed to
LIBOR. All of our contracts mature prior to June 30, 2023. While we expect LIBOR
to be available in substantially its current form through June 30, 2023, it is
possible that LIBOR will become unavailable prior to that date. This could
result, for example, if sufficient banks decline to make submissions to the
LIBOR administrator. In that case, the risks associated with the transition to
an alternative reference rate will be accelerated and magnified. The
introduction of an alternative rate also may create additional basis risk and
increased volatility as alternative rates are phased in and utilized in parallel
with LIBOR.
Capital Markets
We maintain an established "At-the-Market" ("ATM") program pursuant to an Equity
Distribution Agreement ("ATM Agreement") with Wells Fargo Securities, LLC,
Robert W. Baird & Co. Incorporated, Jefferies LLC, KeyBanc Capital Markets Inc.
and Raymond James & Associates, Inc. In accordance with the terms of the ATM
Agreement, we may from time to time
                                       33
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offer and sell shares of common stock having an aggregate offering price of up
to $200 million. No shares were sold under the ATM Agreement during the three
months ended March 31, 2021 and 2020. As of March 31, 2021, we had $62.6 million
available for sale under the ATM Agreement. We may have restrictions on the use
of proceeds raised from equity issuances during the covenant waiver period.
Our Board of Directors has authorized a stock repurchase program pursuant to
which we are authorized to purchase up to $175 million of our outstanding common
stock in the open market, in privately negotiated transactions or otherwise,
including pursuant to Rule 10b5-1 plans (the "Repurchase Program"). Such
repurchases or exchanges, if any, will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other factors. The
Repurchase Program does not have an expiration date. This Repurchase Program may
be suspended or discontinued at any time and does not obligate us to acquire any
particular amount of shares.
No shares were purchased as part of the Repurchase Program during the three
months ended March 31, 2021. During the three months ended March 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. As of March 31, 2021, we had approximately $94.7 million
remaining under our share repurchase authorization. The terms of our amended
corporate credit facilities currently prohibit us from making repurchases of our
common stock until we achieve compliance with applicable debt covenants and our
covenant waiver period ends.
Capital Expenditures and Reserve Funds
We maintain each of our properties in good repair and condition and in
conformity with applicable laws and regulations, franchise agreements and
management agreements. Routine capital expenditures are administered by the
hotel management companies. However, we have approval rights over the capital
expenditures as part of the annual budget process for each of our properties.
From time to time, certain of our hotels may undergo renovations as a result of
our decision to expand or upgrade portions of the hotels, such as guest rooms,
public space, meeting space and/or restaurants, in order to better compete with
other hotels in our markets. In addition, upon the acquisition of a hotel we may
be required to complete a property improvement plan in order to bring the hotel
into compliance with the respective brand standards. If permitted by the terms
of the management agreement, funding for a renovation will first come from the
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 of March 31, 2021 and December 31, 2020, we had a total of $24.5 million and
$25.9 million, respectively, of furniture, fixtures and equipment replacement
reserves. During the three months ended March 31, 2021 and 2020, we made total
capital expenditures of $7.2 million and $22.2 million, respectively.
The Company's third-party managers have temporarily suspended required
contributions to the furniture, fixture and equipment replacement reserves.
Additionally, 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 of March 31, 2021, the Company had used $13.5 million of the
furniture, fixture and equipment replacement reserves for working capital
purposes, all of which is subject to replenishment requirements.
Off-Balance Sheet Arrangements
As of March 31, 2021, we had various contracts outstanding with third-parties in
connection with the renovation of certain of our hotel properties. The remaining
commitments under these contracts as of March 31, 2021 totaled $2.9 million.
Sources and Uses of Cash
Our principal sources of cash are cash flows from operations, borrowing under
debt financings, including draws on our revolving credit facility, and from
various types of equity offerings or the sale of our hotels. As a result of the
impact the COVID-19 pandemic has had on our business, 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. We are prohibited under the terms of the amended
corporate credit facilities from making repurchases of our common stock until we
achieve compliance with applicable debt covenants for a period of time and our
covenant waiver period ends.
                                       34
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Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended
March 31, 2020
The table below presents summary cash flow information for the condensed
consolidated statements of cash flows (in thousands):
                                                                  Three

Months Ended March 31,


                                                                   2021                   2020

Net cash (used in) provided by operating activities $ (31,160) $ 5,387 Net cash used in investing activities

                                (6,547)              (20,177)
Net cash (used in) provided by financing activities                  (1,854)              296,189

Net (decrease) increase in cash and cash equivalents and restricted cash

                                             $

(39,561) $ 281,399 Cash and cash equivalents and restricted cash, at beginning of period

                                                           428,786               194,946
Cash and cash equivalents and restricted cash, at end of
period                                                      $       389,225          $    476,345


Operating
•Cash used in operating activities was $31.2 million and cash provided by
operating activities was $5.4 million for the three months ended March 31, 2021
and 2020, respectively. Cash flows from operating activities generally consist
of the net cash generated by our hotel operations, partially 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
in cash from operating activities during the three months ended March 31, 2021
was primarily due to a decrease in hotel operating income attributed to the
impact of the COVID-19 pandemic and reductions from the four hotels sold during
the fourth quarter of 2020. Refer to the "Results of Operations" section for
further discussion of our operating results for the three months ended March 31,
2021 and 2020.
Investing
•Cash used in investing activities was $6.5 million and $20.2 million for the
three months ended March 31, 2021, and 2020, respectively. Cash used in
investing activities for the three months ended March 31, 2021 was attributed to
$7.2 million in capital improvements at our hotel properties, which was offset
by $0.7 million of performance guaranty payments that were recorded as a
reduction in the respective hotel's cost basis. Cash used in investing
activities for the three months ended March 31, 2020 was attributed to $22.2
million in capital improvements at our hotel properties, which was offset by a
$2.0 million deposit received from escrow for a pending hotel disposition.
Financing
•Cash used in financing activities was $1.9 million and cash provided by
financing activities was $296.2 million for the three months ended March 31,
2021, and 2020, respectively. Cash used in financing activities for the three
months ended March 31, 2021 was primarily attributed to principal payments of
mortgage debt totaling $1.4 million and payments to satisfy withholding on
vested share-based compensation of $0.4 million. Cash provided by financing
activities for the three months ended March 31, 2020 was attributed to (i) a
$340.0 million drawdown on the revolving credit facility, which was offset by
(ii) the payment of $31.6 million in dividends for common stock and units, (iii)
redemption of Operating Partnership Units for common stock and cash of $8.6
million, and (iv) the repurchase of common stock totaling $2.3 million.
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures to be useful to investors
as key supplemental measures of our operating performance: EBITDA, EBITDAre,
Adjusted EBITDAre, FFO and Adjusted FFO. These non-GAAP financial measures
should be considered along with, but not as alternatives to, net income or loss,
operating profit, cash from operations, or any other operating performance
measure as prescribed per GAAP.
                                       35
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EBITDA, EBITDAre and Adjusted EBITDAre
EBITDA is a commonly used measure of performance in many industries and is
defined as net income or loss (calculated in accordance with GAAP)
excluding interest expense, provision for income taxes (including income taxes
applicable to sale of assets) and depreciation and amortization. We consider
EBITDA useful to investors in evaluating and facilitating comparisons of our
operating performance between periods and between REITs by removing the impact
of our capital structure (primarily interest expense) and asset base (primarily
depreciation and amortization) from our operating results, even though EBITDA
does not represent an amount that accrues directly to common stockholders. In
addition, EBITDA is used as one measure in determining the value of hotel
acquisitions and dispositions and, along with FFO and Adjusted FFO, is used by
management in the annual budget process for compensation programs.
We calculate EBITDAre in accordance with standards established by the National
Association of Real Estate Investment Trusts ("Nareit"). Nareit defines EBITDAre
as EBITDA plus or minus losses and gains on the disposition of depreciated
property, including gains or losses on change of control, plus impairments of
depreciated property and of investments in unconsolidated affiliates caused by a
decrease in the value of depreciated property in the affiliate, and adjustments
to reflect the entity's share of EBITDAre of unconsolidated affiliates.
We further adjust EBITDAre to exclude the impact of non-controlling interests in
consolidated entities other than our Operating Partnership Units because our
Operating Partnership Units may be redeemed for common stock. We also adjust
EBITDAre for certain additional items such as depreciation and amortization
related to corporate assets, hotel property acquisition, terminated transaction
and pre-opening expenses, amortization of share-based compensation, non-cash
ground rent and straight-line rent expense, the cumulative effect of changes in
accounting principles, and other costs we believe do not represent recurring
operations and are not indicative of the performance of our underlying hotel
property entities. We believe it is meaningful for investors to understand
Adjusted EBITDAre attributable to all common stock and unit holders. We believe
Adjusted EBITDAre attributable to common stock and unit holders provides
investors with another useful financial measure in evaluating and facilitating
comparison of operating performance between periods and between REITs that
report similar measures.
FFO and Adjusted FFO
We calculate FFO in accordance with standards established by Nareit, as amended
in the December 2018 restatement white paper, which defines FFO as net income or
loss (calculated in accordance with GAAP), excluding real estate-related
depreciation, amortization and impairments, gains or losses from sales of real
estate, the cumulative effect of changes in accounting principles, similar
adjustments for unconsolidated partnerships and consolidated variable interest
entities, and items classified by GAAP as extraordinary. Historical cost
accounting for real estate assets implicitly assumes that the value of real
estate assets diminishes predictably over time. Since real estate values instead
have historically risen or fallen with market conditions, most industry
investors consider presentations of operating results for real estate companies
that use historical cost accounting to be insufficient by themselves. We believe
that the presentation of FFO provides useful supplemental information to
investors regarding operating performance by excluding the effect of real estate
depreciation and amortization, gains or losses from sales for real estate,
impairments of real estate assets, extraordinary items and the portion of these
items related to unconsolidated entities, all of which are based on historical
cost accounting and which may be of lesser significance in evaluating current
performance. We believe that the presentation of FFO can facilitate comparisons
of operating performance between periods and between REITs, even though FFO does
not represent an amount that accrues directly to common stockholders. Our
calculation of FFO may not be comparable to measures calculated by other
companies who do not use the Nareit definition of FFO or do not calculate FFO
per diluted share in accordance with Nareit guidance. Additionally, FFO may not
be helpful when comparing us to non-REITs. We present FFO attributable to common
stock and unit holders, which includes our Operating Partnership Units because
our Operating Partnership Units may be redeemed for common stock. We believe it
is meaningful for the investor to understand FFO attributable to common stock
and unit holders.
We further adjust FFO for certain additional items that are not in Nareit's
definition of FFO such as hotel property acquisition, terminated transaction and
pre-opening expenses, amortization of debt origination costs and share-based
compensation, non-cash ground rent and straight-line rent expense, and other
items we believe do not represent recurring operations. We believe that Adjusted
FFO provides investors with useful supplemental information that may facilitate
comparisons of ongoing operating performance between periods and between REITs
that make similar adjustments to FFO and is beneficial to investors' complete
understanding of our operating performance.
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The following is a reconciliation of net loss to EBITDA, EBITDAre and Adjusted EBITDAre attributable to common stock and unit holders for the three months ended March 31, 2021 and 2020 (in thousands):


                                                                    Three Months Ended March 31,
                                                                      2021                  2020
Net loss                                                       $       (57,977)         $  (37,130)
Adjustments:
Interest expense                                                        18,750              13,024
Income tax expense (benefit)                                               165              (7,311)
Depreciation and amortization                                           33,197              37,091
EBITDA                                                         $        (5,865)         $    5,674
Impairment and other losses(1)                                               -              16,368

EBITDAre                                                       $        (5,865)         $   22,042

Reconciliation to Adjusted EBITDAre Depreciation and amortization related to corporate assets $ (100) $ (96)



Amortization of share-based compensation expense(2)                      2,295               2,040
Non-cash ground rent and straight-line rent expense                         19                  80

Other non-recurring expenses(2)                                              4                 394

Adjusted EBITDAre attributable to common stock and unit holders

                                                        $

(3,647) $ 24,460




(1)  During the three months ended March 31, 2020, we recorded goodwill
impairments totaling $16.4 million for Andaz Savannah and Bohemian Hotel
Savannah Riverfront, Autograph Collection. The goodwill impairments were
directly attributed to existing market weakness due to new supply and the
material adverse impact that the COVID-19 pandemic had on the results of
operations at each hotel.
(2)  During the three months ended March 31, 2020, we reduced our corporate
personnel in order to preserve capital over the long-term as a result of the
material adverse impact COVID-19 has had on our results of operations. As a
result of the corporate personnel reductions, during the three months ended
March 31, 2020 we incurred $0.4 million of accelerated amortization of
share-based compensation expense and $0.4 million of other non-recurring
expenses for severance related costs.

The following is a reconciliation of net loss to FFO and Adjusted FFO attributable to common stock and unit holders for the three months ended March 31, 2021 and 2020 (in thousands):


                                                                    Three Months Ended March 31,
                                                                     2021                   2020
Net loss                                                      $       (57,977)         $    (37,130)
Adjustments:
Depreciation and amortization related to investment
properties                                                             33,097                36,995
Impairment of investment properties(1)                                      -                16,368

FFO attributable to common stock and unit holders             $

(24,880) $ 16,233

Reconciliation to Adjusted FFO



Loan related costs, net of adjustment related to
non-controlling interests(2)                                  $         1,767          $        623
Amortization of share-based compensation expense(3)                     2,295                 2,040
Non-cash ground rent and straight-line rent expense                        19                    80

Other non-recurring expenses(3)                                             4                   394

Adjusted FFO attributable to common stock and unit holders $ (20,795) $ 19,370




(1)  During three months ended March 31, 2020, we recorded goodwill impairments
totaling $16.4 million for Andaz Savannah and Bohemian Hotel Savannah
Riverfront, Autograph Collection. 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 had on the results of operations at
each hotel.
(2)   Loan related costs include amortization of debt premiums, discounts and
deferred loan origination costs.
                                       37
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(3)  During the three months ended March 31, 2020, we reduced our corporate
personnel in order to preserve capital over the long-term as a result of the
material adverse impact COVID-19 has had on our results of operations. As a
result of the corporate personnel reductions, during the three months ended
March 31, 2020 we incurred $0.4 million of accelerated amortization of
share-based compensation expense and $0.4 million of other non-recurring
expenses for severance related costs.
Use and Limitations of Non-GAAP Financial Measures
EBITDA, EBITDAre, Adjusted EBITDAre, FFO, and Adjusted FFO do not represent cash
generated from operating activities under GAAP and should not be considered as
alternatives to net income or loss, operating profit, cash flows from operations
or any other operating performance measure prescribed by GAAP. Although we
present and use EBITDA, EBITDAre, Adjusted EBITDAre, FFO and Adjusted FFO
because we believe they are useful to investors in evaluating and facilitating
comparisons of our operating performance between periods and between REITs that
report similar measures, the use of these non-GAAP measures has certain
limitations as analytical tools. These non-GAAP financial measures are not
measures of our liquidity, nor are they indicative of funds available to meet
our cash needs, including our ability to fund capital expenditures, contractual
commitments, working capital, service debt or make cash distributions. These
measurements do not reflect cash expenditures for long-term assets and other
items that we have incurred and will incur. These non-GAAP financial measures
may include funds that may not be available for discretionary use due to
functional requirements to conserve funds for capital expenditures, property
acquisitions, and other commitments and uncertainties. These non-GAAP financial
measures as presented may not be comparable to non-GAAP financial measures as
calculated by other real estate companies.
We compensate for these limitations by separately considering the impact of the
excluded items to the extent they are material to operating decisions or
assessments of our operating performance. Our reconciliations to the most
comparable GAAP financial measures, and our condensed consolidated statements of
operations and comprehensive loss, include interest expense, and other excluded
items, all of which should be considered when evaluating our performance, as
well as the usefulness of our non-GAAP financial measures. These non-GAAP
financial measures reflect additional ways of viewing our operations that we
believe, when viewed with our GAAP results and the reconciliations to the
corresponding GAAP financial measures, provide a more complete understanding of
factors and trends affecting our business than could be obtained absent this
disclosure. We strongly encourage investors to review our financial information
in its entirety and not to rely on a single financial measure.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities at the date of our financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual amounts may
differ significantly from these estimates and assumptions. We evaluate our
estimates, assumptions and judgments to confirm that they are reasonable and
appropriate on an ongoing basis, based on information that is then available to
us as well as our experience relating to various matters. All of our significant
accounting policies, including certain critical accounting policies, are
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020
and Note 2 in the accompanying condensed consolidated financial statements
included herein.
Inflation
We rely on the performance of the hotels to increase revenues to keep pace with
inflation. Generally, in a stable macroeconomic environment, our hotel operators
possess the ability to adjust room rates daily, except for group or corporate
rates contractually committed to in advance, although competitive pressures or
prevailing economic conditions may limit the ability of our operators to raise
rates faster than inflation or even at the same rate.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns, which
are greatly influenced by overall economic cycles, the geographic locations of
the hotels and the customer mix at the hotels. The impact of the COVID-19
pandemic has disrupted, and is expected to continue to disrupt, our historical
seasonal patterns.
New Accounting Pronouncements Not Yet Implemented
See Note 2 in the accompanying condensed consolidated financial statements
included herein for additional information related to recently issued accounting
pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 March 31, 2021 permanently increased or
decreased by 1%, the increase or decrease in
                                       38
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interest expense on our variable rate debt would decrease or increase future
earnings and cash flows by approximately $2.0 million per annum. 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
our variable rate debt would decrease or increase future earnings and cash flows
by approximately $2.4 million per annum.
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 all variable rate debt and
the costs associated with converting to fixed rate debt. Also, existing fixed
and variable rate loans that are scheduled to mature in the next two years 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 and
entering into various interest rate swap agreements to hedge the interest rate
exposure risk related to several variable rate loans. Refer to Note 4 in the
accompanying condensed consolidated financial statements included herein, for
our 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 5 in the accompanying condensed
consolidated financial statements for more information on our interest rate swap
derivatives.
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 March 31, 2021, 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(2)            $ 2,533          $ 4,620          $ 184,258          $ 263,780          $ 567,138          $  163,593          $ 1,185,922          $   944,787
Variable rate debt                  -                -             25,000             15,000                  -                   -               40,000              295,109
Revolving Credit Facility           -                -                  -            163,093                  -                   -              163,093              161,871
Total                         $ 2,533          $ 4,620          $ 209,258          $ 441,873          $ 567,138          $  163,593          $ 1,389,015          $ 1,401,767
Weighted-average interest
rate on debt:
Fixed rate debt(2)              4.34%            4.21%             4.07%              3.88%              6.21%               4.59%               5.12%                5.43%
Variable rate debt                -                -               2.45%              2.14%                -                   -                 2.34%                3.93%
Revolving Credit Facility         -                -                 -                2.93%                -                   -                 2.93%                3.58%


(1)  Excludes net mortgage loan premiums, discounts and unamortized deferred
loan costs. See Item 7A of our most recent Annual Report on Form 10-K and Note 4
in the accompanying condensed consolidated financial statements included herein.
(2)  Includes all fixed rate debt and all variable rate debt that was swapped to
fixed rates as of March 31, 2021.
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