NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
General
Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
We focus on owning premium-branded hotels with efficient operating models primarily in the Upscale segment of the lodging industry. At September 30, 2020, our portfolio consisted of 72 hotels with a total of 11,288 guestrooms located in 23 states. As of September 30, 2020, we own 100% of the outstanding equity interests in 67 of our 72 hotels. We own a 51% controlling interest in five hotels that we acquired in 2019 through a joint venture. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to our taxable REIT subsidiaries (“TRS Lessees”).
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the effects of the novel coronavirus, designated as COVID-19 (“COVID-19”). The COVID-19 pandemic has had and will continue to have a material adverse effect on our operations. The Company first began to experience effects from COVID-19 in March 2020, when the World Health Organization (“WHO”) declared a public health emergency of international concern related to COVID-19. By March 31, 2020, stay-at-home directives had been issued in many states across the United States and many local jurisdictions had additionally required the temporary closure of businesses deemed to be non-essential.
These actions and restrictions have had a significant negative effect on the U.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in hotel demand. These conditions have resulted in a substantial decline in our revenues, profitability and cash flows from operations during the first nine months of 2020 and are expected to continue to materially adversely affect our operations and financial results until consumer confidence is restored and a recovery in hospitality and travel-related demand occurs. The COVID-19 pandemic has also led to a disruption and volatility of the capital markets for the hospitality and travel-related industries, which could increase our cost of and limit accessibility to capital.
During the third quarter of 2020, many jurisdictions eased restrictions on travel and business operations as conditions have permitted. As a result, our business experienced gradual improvement, mostly as the result of an increase in leisure travel and small group business. There can be no assurance that these restrictions will continue to be eased or that we will continue to experience sustained improvement in our operations.
The COVID-19 pandemic caused the Company to temporarily suspend operations at six hotels containing 934 guestrooms in March 2020. An additional nine hotels, containing 1,278 guestrooms, each of which is adjacent to another of our hotels ("Sister Properties"), continued to accept reservations, but guests were directed to Sister Properties. In May of 2020, five hotels containing 682 guestrooms and four hotel properties adjacent to Sister Properties containing 506 guestrooms were re-opened. During the third quarter of 2020, two hotel properties adjacent to Sister Properties containing 309 guestrooms were re-opened. As of September 30, 2020, only one hotel with 252 guestrooms still has suspended operations and guests at three other hotels containing 463 guestrooms are being directed to Sister Properties.
The duration and severity of the effects of the COVID-19 pandemic are highly uncertain and difficult to predict. As such, the Company has taken several actions to mitigate the effects of the COVID-19 pandemic on the Company, including the following:
•Borrowed a net amount of $50.0 million on our $400 million unsecured revolving credit facility (“$400 Million Revolver”) during the nine months ended September 30, 2020 to meet our near-term funding needs and ensured the availability of sufficient capacity under the $400 Million Revolver to provide adequate liquidity should we experience a protracted disruption in lodging demand.
•Amended loan agreements of our 2018 Unsecured Credit Facility, 2017 Term Loan and 2018 Term Loan to provide for financial covenant waivers through March 31, 2021, to modify or waive compliance with certain financial covenant measures for the final three quarters of 2021 and to access additional borrowing capacity of $150.0 million under our $400 Million Revolver. At October 23, 2020, we had $35.3 million of consolidated unrestricted cash on hand and an additional $225.0 million of undrawn availability on our $400 Million Revolver, as amended by the First Amendment (as defined below). We have no debt maturing before November 2022.
•Amended our joint venture credit agreement to provide for a financial covenant waiver through March 31, 2021, to modify certain financial covenant measures through June 30, 2022, and to access additional availability to fund operating expense deficits and various capital expenditures.
•Suspended the declaration and payment of dividends on our common stock and operating partnership units. This will conserve an additional $19.0 million of cash quarterly, or $75.0 million on an annualized basis.
•Postponed all non-essential capital improvement projects planned for 2020 beyond those already substantially complete, which is expected to reduce previously planned total capital expenditures by at least $35.0 million, or over 50% based on the midpoint of our previously provided guidance range of total capital expenditures for 2020.
•Adopted comprehensive cost reduction initiatives, including the reduction of labor and temporary elimination of certain services and amenities, at all hotels. Certain labor costs and services or amenities have been added back on a limited basis as improvements in occupancy levels have supported. As described above, we temporarily suspended operations at certain hotels in response to specific government mandates or as the result of adverse market conditions.
•Negotiated the temporary suspension of FF&E reserve funding requirements for certain of our hotels and facilitated the interim or permanent use of cash deposited in our restricted cash reserve for replacement of furniture, fixtures and equipment ("FF&E Reserve Accounts") of certain of our hotels for general working capital purposes.
•Implemented a voluntary 25% temporary reduction of base salaries and fees, respectively, for executive officers and independent members of the Board of Directors from April 2020 to June 2020.
•Furloughed approximately 25% of the corporate-level staff in April 2020. Certain of the furloughed staff have been reinstated during the second and third quarters of 2020 to meet specific needs of the Company as supported by our operating performance, but the majority of the furloughed positions were permanently eliminated during the third quarter.
•Implemented temporary salary reductions for the majority of our remaining non-executive employees from April 2020 to June 2020.
•Implemented a temporary hiring freeze for any new corporate-level positions.
It is currently extremely difficult to predict the length of time it will take for us to return to pre-pandemic operational and financial performance. Despite the uncertainty, based on the actions we have taken, we believe we have sufficient cash and access to liquidity to meet our obligations for at least the next twelve months.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three and nine months ended September 30, 2020 may not be indicative of the results that may be expected for the full year of 2020. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
The accompanying Condensed Consolidated Financial Statements consolidate the accounts of all entities in which we have a controlling financial interest, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.
We evaluate joint venture partnerships to determine if they should be consolidated based on whether the partners exercise joint control. For a joint venture where we exercise primary control and we also own a majority of the equity interests, we consolidate the joint venture partnership. We have consolidated the accounts of our joint venture partnership with GIC in our accompanying Condensed Consolidated Financial Statements. See "Note 8 - Equity - Non-controlling Interests in Joint Venture" for further information.
Investment in Hotel Properties
The Company allocates the purchase price of acquired hotel properties based on the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Intangible assets may include certain value associated with the on-going operations of the hotel business being acquired as part of the hotel property acquisition. Acquired intangible assets that derive their values from real property or an interest in real property, are inseparable from that real property or interest in real property, and do not produce or contribute to the production of income other than consideration for the use or occupancy of space, are recorded as a component of the related real estate asset in our Condensed Consolidated Financial Statements. We allocate the purchase price of acquired hotel properties to land, building and furniture, fixtures and equipment based on independent third-party appraisals.
If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the asset or asset group is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.
Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize hotel development costs and the costs of significant additions and improvements that materially upgrade, increase the value or extend the useful life of the property. These costs may include hotel development, refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. If an asset requires a period of time in which to carry out the activities necessary to bring it to the condition necessary for its intended use, the interest cost incurred during that period as a result of expenditures for the asset is capitalized as part of the cost of the asset. We expense the cost of repairs and maintenance as incurred.
On a limited basis, we provide financing to developers of hotel properties for development projects. We evaluate these arrangements to determine if we participate in residual profits of the hotel property through the loan provisions or other agreements. Where we conclude that these arrangements are more appropriately treated as an investment in the hotel property, we reflect the loan as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets.
We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or undeveloped land may be impaired. Additionally, we perform at least annual reviews to monitor the factors that could trigger an impairment. Factors that we consider for an impairment analysis include, among others: i) significant underperformance relative to historical or anticipated operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, including changes in the estimated holding periods for hotel properties and land parcels, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, v) changes in values of comparable land or hotel sales, and vi) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows of the specific property and determine if the carrying amount of the asset is recoverable. If an impairment is identified, we estimate the fair value of the property based on discounted cash flows or sales price if the property is under contract and an adjustment is made to reduce the carrying value of the property to its estimated fair value. Due to the adverse effects of the COVID-19 pandemic across our entire portfolio of hotel properties, an impairment evaluation was completed for all of our hotel properties and identified no impairment at September 30, 2020.
Intangible Assets
We amortize intangible assets with determined finite useful lives using the straight-line method. We do not amortize intangible assets with indefinite useful lives, but we evaluate these assets for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired. Due to the effects of the COVID-19 pandemic, we evaluated our intangible assets for impairment at September 30, 2020 and identified no impairment.
Trade Receivables and Credit Policies
We grant credit to qualified customers, generally without collateral, in the form of trade accounts receivable. Trade receivables result from the rental of hotel guestrooms and the sales of food, beverage, and banquet services and are payable under normal trade terms. Trade receivables also include credit and debit card transactions that are in the process of being settled. Trade receivables are stated at the amount billed to the customer and do not accrue interest. We regularly review the collectability of our trade receivables. A provision for losses is determined on the basis of previous loss experience and current economic conditions. Our allowance for doubtful accounts was $0.3 million and $0.2 million at September 30, 2020 and December 31, 2019, respectively, and bad debt expense was $0.1 million and $0.2 million for the three months ended September 30, 2020 and 2019, respectively, and $0.6 million and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which changed lessee accounting to reflect the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet. We adopted ASU No. 2016-02 on January 1, 2019. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of ASC No. 842, Leases. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption. The Company elected certain practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. The Company also elected not to restate prior periods for the effect of the adoption of the new standard. In accordance with ASU No. 2016-02, we reclassified certain existing lease-related assets and liabilities to Right-of-use assets as of January 1, 2019. The adoption of ASU No. 2016-02 resulted in the recognition of incremental Right-of-use assets and related Lease liabilities of $23.6 million on the Condensed Consolidated Balance Sheet as of January 1, 2019.
Several of our hotels lease retail or restaurant space to third-party tenants. The majority of our third-party tenants have requested rent deferrals to ease the negative financial effects of the COVID-19 pandemic on their businesses. We have primarily negotiated rent deferrals with these tenants that defer rent for a specified number of months and require repayment of the deferred rent over a negotiated period of time. We have adopted a policy that the deferrals are not a change in the provisions of the lease. As such, we are accounting for the concessions using the rights and obligations of the existing lease and recognizing a short-term lease receivable in the period that the cash payment is owed.
Notes Receivables
We selectively provide mezzanine financing to developers, where we also have the opportunity to acquire the hotel at or after the completion of the development project, and we also may provide seller financing under limited circumstances. We classify notes receivable as held-to-maturity and carry the notes receivable at cost less the unamortized discount, if any. On January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We routinely evaluate our notes receivable and interest receivables for collectability. Probable losses on notes receivable are recognized in a valuation account that is deducted from the amortized cost basis of the notes receivable and recorded as Provision for credit losses in our Condensed Consolidated Statements of Operations. When we place notes receivable on nonaccrual status, we suspend the recognition of interest income until cash interest payments are received. Generally, we return notes receivable to accrual status when all delinquent interest becomes current and collectability of interest is reasonably assured. We do not measure an allowance for credit losses for accrued interest receivable. Accrued interest receivable is written-off to bad debt expense when collection is not reasonably assured.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may exceed the federally insured limit. We maintain our cash with high credit quality financial institutions.
Restricted Cash
Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
Revenue Recognition
In accordance with ASU No. 2014-09, revenues from the operation of our hotels are recognized when guestrooms are occupied, services have been rendered or fees have been earned. Revenues are recorded net of any discounts and sales and other taxes collected from customers. Revenues consist of room sales, food and beverage sales, and other hotel revenues and are presented on a disaggregated basis on our Condensed Consolidated Statements of Operations.
Room revenue is generated through short-term contracts with customers whereby customers agree to pay a daily rate for the right to occupy hotel rooms for one or more nights. Our performance obligations are fulfilled at the end of each night that the customers have the right to occupy the rooms. Room revenues are recognized daily at the contracted room rate in effect for each room night.
Food and beverage revenues are generated when customers purchase food and beverage at a hotel's restaurant, bar or other facilities. Our performance obligations are fulfilled at the time that food and beverage is purchased and provided to our customers.
Other revenues such as fees for parking, meeting space or communication services are recognized at the point in time or over the time period that the associated good or service is provided. Ancillary services such as parking at certain hotels are provided by third parties and we assess whether we are the principal or agent in such arrangements. If we are determined to be the agent, revenue is recognized based upon the commission paid to us by the third party for the services rendered to our customers. If we are determined to be the principal, revenues are recognized based upon the gross contract price of the service provided. Certain of our hotels have retail spaces, restaurants or other spaces that we lease to third parties. Lease revenues are recognized on a straight-line basis over the respective lease terms and are included in Other income on our Condensed Consolidated Statements of Operations.
Cash received prior to customer arrival is recorded as an advance deposit from the customer and is recognized as revenue at the time of occupancy.
Equity-Based Compensation
Our 2011 Equity Incentive Plan, which was amended and restated effective June 15, 2015 (as amended, the “Equity Plan”), provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other stock-based awards. We account for the stock options granted upon completion of our IPO at fair value using the Black-Scholes option-pricing model and we account for all other awards of equity, including time-based and performance-based stock awards, using the grant date fair value of those equity awards. Restricted stock awards with performance-based vesting conditions are market-based awards tied to total stockholder return and are valued using a Monte Carlo simulation model in accordance with ASC Topic 718, Compensation — Stock Compensation. We expense the fair value of awards under the Equity Plan ratably over the vesting period and market-based awards are not adjusted for performance. The amount of stock-based compensation expense may be subject to adjustment in future periods due to a change in forfeiture assumptions or modification of previously granted awards.
Derivative Financial Instruments and Hedging
We use interest rate derivatives to hedge our risks on variable-rate debt. Interest rate derivatives could include swaps, caps, collars, and floors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction. All derivative financial instruments are recorded at fair value as a net asset or liability in our Condensed Consolidated Balance Sheets.
The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts deferred in Other comprehensive income will be reclassified to Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings.
Income Taxes
We have elected to be taxed as a REIT under certain provisions of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRS Lessees at regular corporate income tax rates) to the extent we distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions.
Substantially all of our assets are held by and all of our operations are conducted through either our Operating Partnership or our subsidiary REITs. Partnerships are not subject to U.S. federal income taxes as revenues and expenses pass through to and are taxed on the owners. Generally, the states and cities where partnerships operate follow the U.S. federal income tax treatment. However, there are a limited number of local and state jurisdictions that tax the taxable income of the Operating Partnership. Accordingly, we provide for income taxes in these jurisdictions for the Operating Partnership.
Taxable income related to our TRS Lessees are subject to federal, state and local income taxes at applicable tax rates. Our interim tax provision includes the income tax provision related to the operations of the TRS Lessees as well as state and local income taxes related to the Operating Partnership.
Where required, we account for federal and state income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for: i) the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and the respective carrying amounts for tax purposes, and ii) operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent it is more likely than not that they will be realized based on consideration of available evidence. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We perform a quarterly review for any uncertain tax positions. The Company had no accruals for uncertain tax positions as of September 30, 2020 and December 31, 2019.
Fair Value Measurement
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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Level 1:
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Observable inputs such as quoted prices in active markets.
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Level 2:
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Directly or indirectly observable inputs, other than quoted prices in active markets.
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Level 3:
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Unobservable inputs in which there is little or no market information, which require a reporting entity to develop its own assumptions.
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Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
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Market approach:
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Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
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Cost approach:
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Amount required to replace the service capacity of an asset (replacement cost).
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Income approach:
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Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).
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Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
We have elected a measurement alternative for equity investments, such as our purchase options, that do not have readily determinable fair values. Under the alternative, our purchase options are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, if any.
Non-controlling Interests
Non-controlling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Non-controlling interests are reported in the Condensed Consolidated Balance Sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income attributable to both the Company and the non-controlling interests are reported in the Condensed Consolidated Statements of Operations.
Our Condensed Consolidated Financial Statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties and third-party ownership of a 49% interest in a consolidated joint venture. See "Note 8 - Equity - Non-controlling Interests in Joint Venture" for further information.
Use of Estimates
Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP, which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions that affect reported amounts and related disclosures in our Condensed Consolidated Financial Statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations, which could materially affect our expectations for our consolidated financial position and results of operations. In particular, a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic.
The evaluation of the carrying amounts of our assets described above requires that we make projections of the future estimated cash flows and residual values of the assets or underlying collateral based on assumptions derived from available information about future market conditions that will affect these projections. While the potential magnitude and duration of the business and economic effects of the COVID-19 pandemic are uncertain, our analysis of future estimated cash flows, values of assets or underlying collateral assumes that the nascent and gradual recovery in our business that began in the second half of April 2020 will be sustained into the fourth quarter of 2020 and operating performance will improve gradually over a multi-year period before reaching prior peak performance levels.
The severity, magnitude and duration of the COVID-19 pandemic, as well as its economic consequences, are uncertain, rapidly changing and difficult to predict. As such, there can be no assurance that our forecasts and underlying assumptions will be realized. As a result, our accounting estimates and assumptions may change over time, and actual results may differ materially from our expectations. We will continue to monitor the effects of the COVID-19 pandemic in future quarters. If actual results differ from our forecasts, this may result in future impairments of hotel properties, intangible assets, right-of-use assets, or investment securities such as our purchase options, or in incremental credit losses on our notes receivables.
New Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU No. 2019-12 is effective for our fiscal year commencing on January 1, 2021, with early adoption permitted. The adoption of ASU No. 2019-12 will not have a material effect on our consolidated financial position or results of operations.
In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or discontinuing the equity method. ASU No. 2020-01 is effective for our fiscal year commencing on January 1, 2021, with early adoption permitted. The adoption of ASU No. 2020-01 will not have a material effect on our consolidated financial position or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). ASU No. 2020-04 contains practical expedients for reference rate reform related activities that affect debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the effect of the guidance and may apply other elections as applicable as additional changes in the market occur.
NOTE 3 - INVESTMENT IN HOTEL PROPERTIES, NET
Investment in Hotel Properties, net
Investment in hotel properties, net is as follows (in thousands):
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September 30, 2020
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December 31, 2019
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Hotel buildings and improvements
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$
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2,062,345
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$
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2,049,384
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Land
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319,603
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319,603
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Furniture, fixtures and equipment
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176,058
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173,128
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Construction in progress
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6,972
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9,388
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Intangible assets
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11,231
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11,231
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Real estate development loan
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12,495
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5,485
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2,588,704
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2,568,219
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Less - accumulated depreciation and amortization
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(463,258)
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(383,987)
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$
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2,125,446
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$
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2,184,232
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We provided a mezzanine loan to fund up to $28.9 million for a mixed-use development project that includes a hotel property, retail space, and parking. We have classified the mezzanine loan as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019. See "Note 4 - Investment in Real Estate Loans" for further information.
Asset Sales
We did not sell any hotel properties during the nine months ended September 30, 2020.
On April 17, 2019, we completed the sale of the six hotel properties set forth in the following table for a gross sales price of $135.0 million and a realized net gain of $36.6 million:
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Franchise/Brand
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Location
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Guestrooms
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SpringHill Suites
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Minneapolis (Bloomington), MN
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113
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Hampton Inn & Suites
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Minneapolis (Bloomington), MN
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146
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Residence Inn
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Salt Lake City, UT
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189
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Hyatt Place
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Dallas (Arlington), TX
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127
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Hampton Inn
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Santa Barbara (Goleta), CA
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101
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Hampton Inn
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Boston (Norwood), MA
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139
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Total
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815
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On February 12, 2019, we completed the sale of two hotel properties, the Country Inn & Suites - Charleston, WV and the Holiday Inn Express - Charleston, WV, for an aggregate sales price of $11.6 million. The sale of these properties resulted in the realization of an aggregate gain of $4.2 million.
Hotel Property Acquisitions
We did not acquire any hotel properties during the nine months ended September 30, 2020.
On August 6, 2019, we completed the acquisition of the 88-guestroom Hampton Inn & Suites in Silverthorne, CO for a gross purchase price of $25.5 million through our consolidated joint venture. The net assets acquired totaled $28.1 million due to the purchase of adjacent land parcels totaling $2.4 million, $0.1 million of working capital assets and capitalized transaction costs of $0.1 million.
The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
|
2019
|
Land
|
|
|
|
$
|
6,845
|
|
Hotel buildings and improvements
|
|
|
|
20,652
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
|
465
|
|
Other assets
|
|
|
|
207
|
|
Total assets acquired
|
|
|
|
28,169
|
|
|
|
|
|
|
|
|
|
|
|
Less other liabilities
|
|
|
|
(70)
|
|
Net assets acquired
|
|
|
|
$
|
28,099
|
|
On January 31, 2019, we exercised our option pursuant to a ground lease agreement to purchase the land upon which our Residence Inn by Marriott in Baltimore (Hunt Valley), MD is located for $4.2 million, which resulted in a termination of obligations under the ground lease. As a result, this hotel property is no longer subject to a ground lease.
The results of operations of acquired properties are included in the Condensed Consolidated Statements of Operations beginning on their respective acquisition dates. The following unaudited pro forma information includes operating results for 72 hotels owned as of September 30, 2020 as if all such hotels had been owned by us since January 1, 2019. For the hotels acquired by us in the second half of 2019 (the "Acquired Hotels"), we have included in the pro forma information the financial results of each of the Acquired Hotels for the period prior to acquisition by us (the "Pre-acquisition Period"). The financial results for the Pre-Acquisition Period were provided by the third-party owner of such Acquired Hotel prior to purchase by us and such information has not been audited or reviewed by our auditors or adjusted by us. For hotels sold by us between January 1, 2019 and September 30, 2020 (the "Disposed Hotels"), the unaudited pro forma information excludes the financial results, including gains on disposal of assets, of each of the Disposed Hotels for the period of ownership by us from January 1, 2019 through the date that the Disposed Hotels were sold by us. The unaudited pro forma information is included to enable comparison of results for the current reporting period to results for the comparable period of the prior year and is not indicative of what actual results of operations would have been had the hotel acquisitions and dispositions taken place on or before January 1, 2019. The pro forma amounts exclude the gain or loss on the sale of hotel properties during the three and nine months ended September 30, 2020 and 2019. This information does not purport to be indicative of or represent results of operations for future periods.
The unaudited condensed pro forma financial information for the 72 hotel properties owned at September 30, 2020 for the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands, except per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
September 30,
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
Revenues
|
|
$
|
52,413
|
|
|
$
|
144,564
|
|
|
$
|
186,233
|
|
|
$
|
438,560
|
|
|
|
|
Income from hotel operations
|
|
$
|
5,663
|
|
|
$
|
54,290
|
|
|
$
|
25,379
|
|
|
$
|
169,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income (1)
|
|
$
|
(35,936)
|
|
|
$
|
18,340
|
|
|
$
|
(104,692)
|
|
|
$
|
54,734
|
|
|
|
|
Net (loss) income attributable to common stockholders, net of amount allocated to participating securities (2)
|
|
$
|
(38,424)
|
|
|
$
|
11,205
|
|
|
$
|
(111,654)
|
|
|
$
|
33,862
|
|
|
|
|
Basic and diluted net (loss) income per share attributable to common stockholders (2)
|
|
$
|
(0.37)
|
|
|
$
|
0.11
|
|
|
$
|
(1.07)
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Pro forma amounts include depreciation expense, property tax expense, interest expense, income tax expense, loss on impairment of assets and other corporate expenses totaling $50.9 million and $46.1 million for the three months ended September 30, 2020 and 2019, respectively, and $159.3 million and $143.6 million for the nine months ended September 30, 2020 and 2019, respectively.
(2) Pro forma amounts include depreciation expense, property tax expense, interest expense, income tax expense, loss on impairment of assets and other corporate expenses totaling $48.7 million and $45.8 million for the three months ended September 30, 2020 and 2019, respectively, and $152.4 million and $142.9 million for the nine months ended September 30, 2020 and 2019, respectively.
Assets Held for Sale
Assets held for sale at September 30, 2020 and December 31, 2019 included a land parcel in Flagstaff, AZ with a carrying amount of $0.4 million. The land parcel is currently under contract for sale and is expected to close in 2021.
NOTE 4 — INVESTMENT IN REAL ESTATE LOANS
Investment in real estate loans, net is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Real estate loans
|
|
$
|
32,655
|
|
|
$
|
32,831
|
|
Unamortized discount
|
|
(334)
|
|
|
(1,895)
|
|
Allowance for credit losses
|
|
(2,632)
|
|
|
—
|
|
Investment in real estate loans, net
|
|
$
|
29,689
|
|
|
$
|
30,936
|
|
The amortized cost bases of our Investment in real estate loans, net approximate their fair value. The amortized cost bases, net of allowance for credit losses, of our Investment in real estate loans, net at September 30, 2020, by contractual maturity are as follows: $27.7 million in 2020 and $2.0 million in 2021.
Real Estate Development Loans
We provided mezzanine loans on three real estate development projects to fund up to an aggregate of $29.6 million for the development of three hotel properties. The three real estate development loans closed in the fourth quarter of 2017 and each has a stated interest rate of 8% and an initial term of approximately three years. As of September 30, 2020, we have funded the full amount of $29.6 million. We have separate options related to each loan (each the "Initial Option") to purchase a 90% interest in each joint venture that owns the respective hotel upon completion of construction; the Initial Option for each of the three loans is currently exercisable. The Initial Option for each of the three loans will remain exercisable so long as the related mezzanine loan remains outstanding. We also have the right to purchase the remaining interests in each joint venture at future dates, generally five years after we exercise our Initial Option. We have recorded the original aggregate estimated fair value of each Initial Option totaling $6.1 million in Other assets and as a discount to the related real estate loans. The discount will be amortized as a component of non-cash interest income over the initial term of the real estate loans using the straight-line method, which approximates the interest method. We recorded amortization of the discount of $0.5 million during the three months ended September 30, 2020 and 2019 and $1.4 million and $1.5 million during the nine months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020, we recorded a Loss on impairment of assets of $0.8 million related to one of the purchase options. See "Note 9 - Fair Value Measurement" for further information.
The COVID-19 pandemic has adversely affected the operations of the hotels that collateralize our mezzanine loans. As a result, our mezzanine borrowers have requested, and we have granted, deferrals of interest payments through the initial maturity dates of the loans, which occur in the fourth quarter of 2020. Therefore, we have suspended the recognition of interest income for these loans until the cash interest payments are received. At September 30, 2020, the amortized cost basis of the three real estate development loans was $29.9 million and we had recorded an allowance for credit losses of $2.6 million related to these loans. During the nine months ended September 30, 2020, we recorded cash interest income of $0.6 million related to these loans. The mezzanine borrowers also have the right to extend the maturity dates of the loans for an additional twelve-month period subject to meeting certain conditions, including the contemporaneous extension of the respective senior loans.
During the third quarter of 2019, we completed a mezzanine loan with a commitment to fund up to $28.9 million for a mixed-use development project that includes a hotel property, retail space, and parking. The loan has a stated interest rate of 9% and an initial term of 30 months. The loan is secured by a second mortgage on the development project and a pledge of the equity in the project owner. As of September 30, 2020, we have funded $14.0 million of the loan commitment. Upon completion of construction, we have an option to purchase a 90% interest in the hotel (the “Initial Purchase Option”). We also have the right to purchase the remaining 10% interest in the hotel five years after the completion of construction. We have issued a $10.0 million letter of credit under our senior unsecured credit facility to secure the exercise of the Initial Purchase Option. As such, we have classified the loan as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at September 30, 2020. Interest income on the mezzanine loan will be recorded in our Consolidated Statement of Operations as it is earned. We have recorded the aggregate estimated fair value of the Initial Purchase Option totaling $2.8 million in Other assets and as a contra-asset to Investment in hotel properties, net. The contra-asset will be amortized as a component of non-cash interest income over the term of the real estate development loan using the straight-line method, which approximates the interest method. We recorded amortization of the contra-asset of $0.3 million and $0.2 million during the three months ended September 30, 2020 and 2019, respectively, and $0.8 million and $0.2 million during the nine months ended September 30, 2020 and 2019, respectively, as non-cash interest income.
Seller-Financing Loans
On June 29, 2018 we sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling price of $24.9 million. We provided seller financing totaling $3.6 million on the sale of these properties under two, 3.5-year notes with a blended interest rate of 7.38% secured by a $3.0 million second mortgage. As of September 30, 2020, there was $2.4 million outstanding on the seller-financing loans. The COVID-19 pandemic has adversely affected the operations of the hotels that collateralize these loans. However, we believe the loans are adequately collateralized by the hotel properties and the borrower has provided a personal guarantee to support the repayment of the loans. Therefore, we do not expect any loan losses with respect to these loans.
Current Estimate of Credit Losses
We evaluated our notes receivable for potential credit losses by estimating the fair value of the collateral supporting each note receivable at September 30, 2020 based on assumptions related to the expected future performance of the collateral assets and the resulting anticipated net selling value of the assets at capitalization rates that are common for the asset class. Our current estimate of credit losses of $2.6 million as a result of the effects of the COVID-19 pandemic is recorded as an allowance for credit losses at September 30, 2020.
NOTE 5 - DEBT
At September 30, 2020 and December 31, 2019, our indebtedness was comprised of borrowings under our 2018 Unsecured Credit Facility (as defined below), the 2018 Term Loan (as defined below), the 2017 Term Loan (as defined below), the Joint Venture Credit Facility (as defined below), and indebtedness secured by first priority mortgage liens on various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 3.44% at September 30, 2020 and 3.95% at December 31, 2019.
Debt, net of debt issuance costs, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Revolving debt
|
|
$
|
211,500
|
|
|
$
|
140,000
|
|
Term loans
|
|
725,000
|
|
|
725,000
|
|
Mortgage loans
|
|
154,937
|
|
|
157,726
|
|
|
|
1,091,437
|
|
|
1,022,726
|
|
Unamortized debt issuance costs
|
|
(7,345)
|
|
|
(6,563)
|
|
Debt, net of debt issuance costs
|
|
$
|
1,084,092
|
|
|
$
|
1,016,163
|
|
We have entered into interest rate swaps to partially fix the interest rates on a portion of our variable interest rate indebtedness. See "Note 7 - Derivative Financial Instruments and Hedging" to the Condensed Consolidated Financial Statements for additional information. Our total fixed-rate and variable-rate debt, after considering our interest rate derivative agreements that are currently effective, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Percentage
|
|
December 31, 2019
|
|
Percentage
|
Fixed-rate debt
|
|
$
|
546,646
|
|
|
50%
|
|
$
|
549,236
|
|
|
54%
|
Variable-rate debt
|
|
544,791
|
|
|
50%
|
|
473,490
|
|
|
46%
|
|
|
$
|
1,091,437
|
|
|
|
|
$
|
1,022,726
|
|
|
|
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Valuation Technique
|
Fixed-rate debt
|
|
$
|
146,646
|
|
|
$
|
143,973
|
|
|
$
|
149,236
|
|
|
$
|
151,268
|
|
|
Level 2 - Market approach
|
At September 30, 2020 and December 31, 2019, we had $400.0 million of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional information on our use of derivatives as interest rate hedges, refer to "Note 7 - Derivative Financial Instruments and Hedging."
$600 Million Senior Unsecured Credit Facility
On December 6, 2018, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into a $600.0 million senior unsecured credit facility (the “2018 Unsecured Credit Facility”) with Deutsche Bank AG New York Branch, as administrative agent, and a syndicate of lenders. The 2018 Unsecured Credit Facility is comprised of the $400 Million Revolver and a $200.0 million term loan facility (the “$200 Million Term Loan”). At September 30, 2020, we had $345.0 million borrowed and $175.0 million available to borrow plus an additional $50.0 million available to borrow subject to certain security requirements to be provided to the lender.
On May 7, 2020, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor entered into the First Amendment to Credit Agreement (the “First Amendment”) of the Operating Partnership’s 2018 Unsecured Credit Facility with Deutsche Bank AG New York Branch, as administrative agent, and a syndicate of lenders.
The interest rate on the 2018 Unsecured Credit Facility is based on a pricing grid ranging from 140 basis points to 220 basis points plus LIBOR for the $400 Million Revolver and 135 basis points to 215 basis points plus LIBOR for the $200 Million Term Loan, depending upon the Company's leverage ratio. The pricing grid was modified under the First Amendment such that during the period ending December 31, 2021, or earlier at the Company's election subject to certain requirements (the "Amendment Period"), the applicable margin will be set at Pricing Level VII, as defined in the 2018 Unsecured Credit Facility documents. The interest rate at September 30, 2020 for the $200 Million Term Loan was 2.35%.
Financial and Other Covenants. We are required to comply with various financial and other covenants to draw and maintain borrowings under the 2018 Unsecured Credit Facility. The First Amendment provides that certain financial and other covenants under the 2018 Unsecured Credit Facility were waived or adjusted, for the periods described below:
•Waivers of all financial and certain other covenants in the 2018 Unsecured Credit Facility for the period April 1, 2020 through March 31, 2021; and
•Adjustments to certain financial covenants for the period April 1, 2021 through December 31, 2021 including:
◦Increases in the Maximum Leverage Ratio, partially adjusting down beginning in the third quarter of 2021;
◦Reduction of the Minimum Consolidated Fixed Charge Coverage Ratio;
◦Increase of the Maximum Unsecured Leverage Ratio; and
◦Reduction of the Minimum Unsecured Interest Coverage Ratio;
•Increases to the Maximum Leverage Ratio for the calendar year 2022, adjusting down throughout 2022.
Certain other typical limitations and conditions for credit facilities of this nature were included among the provisions in the First Amendment including, among other provisions, limitations on the use of revolving facility advances, certain restrictions on payments of dividends and establishment of a minimum liquidity requirement.
At September 30, 2020, we were in compliance with all financial covenants.
Unencumbered Assets. The First Amendment requires the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the Unencumbered Properties, as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for the release of such pledges. During the period that the pledges are in place, as well as at all other times during the term of the facility, borrowings under the 2018 Unsecured Credit Facility are limited by the value of hotel assets that qualify as unencumbered assets. At September 30, 2020, the Company had 52 unencumbered hotel properties (the "Unencumbered Properties") supporting the 2018 Unsecured Credit Facility.
The First Amendment confirmed that the borrower may advance up to an additional $100 million on the $400 Million Revolver. Furthermore, the First Amendment permits the borrower to advance an additional $50 million, in addition to the $100 million advance described in the preceding sentence, upon filing mortgages and related security agreements on all Unencumbered Properties, with such security documents to be released upon the borrower meeting certain conditions for their release.
The 2018 Unsecured Credit Facility has an accordion feature which will allow the Company to increase the total commitments by an aggregate of up to $300.0 million. The $400 Million Revolver will mature on March 31, 2023 and can be extended to March 31, 2024 at the Company’s option, subject to certain conditions. The $200 Million Term Loan will mature on April 1, 2024.
Unsecured Term Loans
2018 Term Loan
On February 15, 2018, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a new $225.0 million unsecured term loan (the “2018 Term Loan”) with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation, which is fully drawn as of September 30, 2020. The 2018 Term Loan has an accordion feature that allows us to increase the total commitments by $150.0 million prior to the maturity date of February 14, 2025, subject to certain conditions.
The Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor entered into the Third Amendment to the First Amended and Restated Credit Agreement (the “Third Amendment”) and the Fourth Amendment to the First Amended and Restated Credit Agreement ("Fourth Amendment") of the Operating Partnership’s 2018 Term Loan with KeyBank National Association, as administrative agent, and a syndicate of lenders on May 7, 2020 and August 6, 2020, respectively. The changes to the 2018 Term Loan effected by the Third Amendment are substantially similar to the changes described above effected by the First Amendment to the Company’s 2018 Unsecured Credit Facility. The Fourth Amendment lowered the loan pricing during the Amendment Period from Pricing Level VIII to Pricing Level VII, as defined in the 2018 Term Loan documents.
We pay interest on advances at varying rates, based upon, at our option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a LIBOR margin between 1.35% and 1.95%, depending upon our leverage ratio (as defined in the loan documents). The pricing grid was modified under the Third Amendment and Fourth Amendment such that during the Amendment Period the applicable margin will be set at Pricing Level VII, as defined in the 2018 Term Loan documents. We are required to pay other fees, including customary arrangement and administrative fees. The interest rate at September 30, 2020 was 2.15%.
Financial and Other Covenants. We are required to comply with various financial and other covenants to draw and maintain borrowings under the 2018 Term Loan. The Third Amendment provides that certain financial and other covenants under the 2018 Term Loan were waived or adjusted, which waivers and adjustments are the same as under the First Amendment to the Company’s 2018 Unsecured Credit Facility. At September 30, 2020, we were in compliance with all financial covenants.
Unencumbered Assets. The Third Amendment requires the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the Unencumbered Properties, as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for the release of such pledges. During the period that the pledges are in place, as well as at all other times during the term of the facility, borrowings under the 2018 Term Loan are limited by the value of the Unencumbered Assets.
2017 Term Loan
On September 26, 2017, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a $225.0 million unsecured term loan (the "2017 Term Loan") with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation.
The Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor entered into the Second Amendment to the Credit Agreement (the “Second Amendment”) and the Third Amendment to the Credit Agreement ("Third Amendment") of the Operating Partnership’s 2017 Term Loan with KeyBank National Association, as administrative agent, and a syndicate of lenders on May 7, 2020 and August 6, 2020, respectively. The changes to the 2017 Term Loan effected by the Second Amendment are substantially similar to the changes described above effected by the First Amendment to the Company’s 2018 Unsecured Credit Facility. The Third Amendment lowered the loan pricing during the Amendment Period from Pricing Level VII to Pricing Level VI as defined in the 2017 Term Loan documents.
The 2017 Term Loan has an accordion feature which allows us to increase the total commitments by an aggregate of $175.0 million prior to the maturity date, subject to certain conditions. The 2017 Term Loan matures on November 25, 2022.
We pay interest on advances at varying rates, based upon, at our option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a LIBOR margin between 1.45% and 2.25%, depending upon our leverage ratio (as defined in the loan documents). The pricing grid was modified under the Second Amendment and Third Amendment such that during the Amendment Period the applicable margin will be set at Pricing Level VI, as defined in the 2017 Term Loan documents. We are required to pay other fees, including customary arrangement and administrative fees. The interest rate at September 30, 2020 was 2.45%.
Financial and Other Covenants. We are required to comply with a series of financial and other covenants to draw and maintain borrowings under the 2017 Term Loan. The Second Amendment provides that certain financial and other covenants under the 2017 Term Loan were waived or adjusted, which waivers and adjustments are the same as under the First Amendment to the Company’s 2018 Unsecured Credit Facility. At September 30, 2020, we were in compliance with all financial covenants.
Unencumbered Assets. The Second Amendment requires the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the Unencumbered Properties, as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for the release of such pledges. During the period that the pledges are in place, as well as at all other times during the term of the facility, borrowings under the 2017 Term Loan are limited by the value of the Unencumbered Assets.
$200 Million Credit Facility
On October 8, 2019, Summit JV MR 1, LLC (the “Borrower”), as borrower, Summit Hospitality JV, LP (the “Parent”), as parent, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $200 million credit facility (the “Joint Venture Credit Facility”) with Bank of America, N.A., as administrative agent and sole initial lender, and BofA Securities, Inc., as sole lead arranger and sole bookrunner.
The Parent is the joint venture including the Operating Partnership and an affiliate of GIC, Singapore's sovereign wealth fund. See "Note 8 - Equity - Non-controlling Interests in Joint Venture" for additional information. The Operating Partnership and the Company are not borrowers or guarantors of the Joint Venture Credit Facility. The Joint Venture Credit Facility is guaranteed by all of the Borrower’s existing and future subsidiaries, subject to certain exceptions.
On June 18, 2020, the Borrower, the Parent, and each party executing the credit facility documentation as a subsidiary guarantor, entered into the Second Amendment to Credit Agreement (the “JV Second Amendment”) of the Joint Venture Credit Facility with Bank of America, N.A., as administrative agent, BofA Securities, Inc., as sole lead arranger and sole bookrunner, and a syndicate of lenders including Bank of America, N.A., KeyBank National Association, and Bank of Montreal, Chicago Branch.
The Joint Venture Credit Facility is comprised of a $125 million revolving credit facility (the “$125 Million Revolver”) and a $75 million term loan (the “$75 Million Term Loan”). The Joint Venture Credit Facility has an accordion feature which will allow us to increase the total commitments by up to $300 million, for aggregate potential borrowings of up to $500 million on the Joint Venture Credit Facility. The JV Second Amendment confirmed that the Borrower may make additional advances on the existing revolving facility. Prior to the expiration of the Covenant Waiver Period (defined below), advances are limited to the lesser of the aggregate facility amount and the aggregate Borrowing Base Asset Value multiplied by 55%, less all outstanding advances. Upon the expiration of the Covenant Waiver Period, advances are limited to the lesser of the aggregate facility amount, the aggregate Borrowing Base Asset Value multiplied by 55%, and the amount that would permit the Borrower to achieve the Borrowing Base Coverage Ratio then applicable, less all outstanding advances.
The $125 Million Revolver and the $75 Million Term Loan will mature on October 8, 2023. Each individually can be extended for a single consecutive twelve-month period at the Joint Venture's option, subject to certain conditions.
Interest is paid on revolving credit advances at varying rates based upon, at the Borrower's option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a margin of 2.15% for Eurodollar rate advances, or (ii) LIBOR, plus a margin of 2.15% for LIBOR floating rate advances. The applicable margin for a term loan advance shall be five basis points less than revolving credit advances referenced above.
Borrowing Base Assets. The Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that hold the borrowing base assets, and the related TRS entities, which wholly own the TRS Lessees that lease each of the borrowing base assets.
Financial and Other Covenants. In addition, the Borrower is required to comply with a series of financial and other covenants in order to borrow under the Joint Venture Credit Facility. Pursuant to the JV Second Amendment, certain financial and other covenants under the Joint Venture Credit Facility were waived or adjusted, for the periods described below:
•Temporary waivers of the Consolidated Fixed Charge Coverage Ratio covenant and certain other covenants in the Joint Venture Credit Facility for the period June 18, 2020 until the date the Borrower is required to deliver to the lenders a compliance certificate for the period ending June 30, 2021 (“Covenant Waiver Period”); and
•Adjustments to the Borrowing Base Coverage Ratio beginning on June 18, 2020, and adjusting up through June 30, 2022.
Certain other typical limitations and conditions for credit facilities of this nature were included among the provisions in the JV Second Amendment including, among other provisions, limitations on the use of revolving facility advances, certain restrictions on payments of dividends and limitations on investments and dispositions.
We retain the right to opt out of certain additional restrictive covenants upon demonstration of compliance with the required financial covenants.
At September 30, 2020, we were in compliance with all financial covenants.
Metabank Loan
On June 30, 2017, we entered into a $47.6 million secured, non-recourse loan with MetaBank (the "MetaBank Loan"). During the year ended December 31, 2017, we drew $47.6 million on the MetaBank Loan and used the proceeds to pay down the principal balance of our former $300 million revolving credit facility. The MetaBank Loan provides for a fixed interest rate of 4.44% and originally provided for interest-only payments for 18 months following the closing date. On January 31, 2019, we entered into a modification agreement, at no additional cost, that increased the interest-only period from 18 months to 24 months following the closing date. Beginning August 1, 2019, the loan amortizes over 25 years through the maturity date of July 1, 2027. The MetaBank Loan is secured by three hotels and is subject to a prepayment penalty if prepaid prior to April 1, 2027.
Mortgage Loans
At September 30, 2020, we had mortgage loans totaling $154.9 million that are secured primarily by first mortgage liens on 15 hotel properties.
On April 24, 2019, we repaid a mortgage loan with Compass Bank totaling $21.9 million that was secured by three hotel properties. There was no prepayment penalty associated with the repayment of this loan. After repayment of the mortgage loan, the three hotels were added to the Company’s Unencumbered Properties.
On April 11, 2019, we repaid a $10.6 million mortgage loan with U.S. Bank to release the encumbrance on the Hampton Inn in Goleta, CA to facilitate the sale of the property. As a result of this transaction, we incurred debt transaction costs of $1.0 million.
On March 19, 2019, we had a mortgage loan of $26.2 million that was secured by four hotel properties. We defeased $6.3 million of the principal to have the encumbrance released on one hotel property, the Hyatt Place in Arlington, TX, to facilitate the sale of the hotel property. As a result of this transaction, we recorded debt transaction costs of $0.6 million primarily related to the debt defeasance premium. The mortgage loan remains outstanding and is secured by the remaining three hotel properties.
Certain mortgage agreements are subject to various maintenance covenants requiring the Company to maintain a minimum debt yield or debt service coverage ratio ("DSCR"). Failure to meet the debt yield or DSCR thresholds is not an event of default, but instead triggers a cash trap event. During the cash trap event, the lender or servicer of the mortgage loan controls cash outflows until the loan is covenant compliant. Certain cash trap events have been triggered, but there are currently no defaults under any of the Company's mortgage loan agreements.
NOTE 6 - LEASES
The Company has operating leases related to the land under certain hotel properties, conference centers, parking spaces, automobiles, our corporate office and other miscellaneous office equipment. These leases have remaining terms of 1 year to 78 years, some of which include options to extend the leases for additional years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Certain of our lease agreements include rental payments based on a percentage of revenue over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or restrictive covenants that materially affect our business. In addition, we rent or sublease certain owned real estate to third parties. We recorded gross third-party tenant income of $0.4 million and $0.6 million during the three months ended September 30, 2020 and 2019, respectively, and $1.3 million and $1.5 million during the nine months ended September 30, 2020 and 2019, respectively, which were recorded in Other income in the Condensed Consolidated Statement of Operations.
The majority of our third-party tenants requested rent deferrals to ease the negative financial effects of the COVID-19 pandemic on their businesses. We have generally negotiated rent deferrals with these tenants that defer rent for a specified number of months and require repayment of the deferred rent over a negotiated period of time.
On January 1, 2019, the Company adopted ASC No. 842, Leases, and recognized right-of-use lease assets and related liabilities. The right-of-use assets and related liabilities include renewal options reasonably certain to be exercised. We base our lease calculations on our estimated incremental borrowing rate. As of September 30, 2020, our weighted average incremental borrowing rate was 4.9%.
During the three months ended September 30, 2020 and 2019, the Company's total operating lease cost was $0.7 million and the operating cash outflows from operating leases was $0.7 million for both periods. During the nine months ended September 30, 2020 and 2019, the Company's total operating lease cost was $2.3 million and $2.5 million, respectively, and the operating cash outflows from operating leases was $2.1 million and $2.3 million, respectively. As of September 30, 2020, the weighted average operating lease term was 28.3 years.
On January 31, 2019, we exercised our option pursuant to a ground lease agreement to purchase the land upon which our hotel property in Baltimore (Hunt Valley), MD is located for $4.2 million, which resulted in a termination of obligations under the ground lease.
Operating lease maturities as of September 30, 2020 are as follows (in thousands):
|
|
|
|
|
|
2020
|
$
|
537
|
|
2021
|
2,066
|
|
2022
|
1,842
|
|
2023
|
970
|
|
2024
|
910
|
|
Thereafter
|
28,906
|
|
Total lease payments (1)
|
35,231
|
|
Less interest
|
(16,479)
|
|
Total
|
$
|
18,752
|
|
(1)Certain payments above include future increases to the minimum fixed rent based on the Consumer Price Index in effect at the initial measurement of the lease balances.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Information about our derivative financial instruments at September 30, 2020 and December 31, 2019 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
Fair Value
|
Contract date
|
|
Effective Date
|
|
Expiration Date
|
|
Average Annual Effective Fixed Rate
|
|
September 30, 2020
|
|
December 31, 2019
|
|
September 30, 2020
|
|
December 31, 2019
|
October 2, 2017
|
|
January 29, 2018
|
|
January 31, 2023
|
|
1.98
|
%
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
(4,295)
|
|
|
$
|
(1,316)
|
|
October 2, 2017
|
|
January 29, 2018
|
|
January 31, 2023
|
|
1.98
|
%
|
|
100,000
|
|
|
100,000
|
|
|
(4,319)
|
|
|
(1,350)
|
|
June 11, 2018
|
|
September 28, 2018
|
|
September 30, 2024
|
|
2.87
|
%
|
|
75,000
|
|
|
75,000
|
|
|
(7,915)
|
|
|
(4,389)
|
|
June 11, 2018
|
|
December 31, 2018
|
|
December 31, 2025
|
|
2.93
|
%
|
|
125,000
|
|
|
125,000
|
|
|
(16,881)
|
|
|
(9,122)
|
|
|
|
|
|
|
|
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
$
|
(33,410)
|
|
|
$
|
(16,177)
|
|
Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At September 30, 2020 and December 31, 2019, all of our interest rate swaps were in a liability position as a result of a decline in short-term interest rates and a continued flattening of the forward yield curve. Our interest rate swaps are recorded in Accrued expenses and other in our Condensed Consolidated Balance Sheets. We are not required to post any collateral related to these agreements and are not in breach of any financial provisions of the agreements.
Changes in the fair value of the hedging instruments are deferred in Other comprehensive income and are reclassified to Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings. In the next twelve months, we estimate that $9.3 million will be reclassified from Other comprehensive income and recorded as an increase to Interest expense.
The table below details the location in the financial statements of the gain or loss recognized on derivative financial instruments designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
|
|
|
2020
|
|
2019
|
Gain (loss) recognized in Other comprehensive income on derivative financial instruments
|
|
$
|
504
|
|
|
$
|
(4,342)
|
|
|
|
|
|
$
|
(22,300)
|
|
|
$
|
(19,086)
|
|
Loss reclassified from Other comprehensive income to Interest expense
|
|
$
|
(2,330)
|
|
|
$
|
(202)
|
|
|
|
|
|
$
|
(5,067)
|
|
|
$
|
(114)
|
|
Total Interest expense in which the effects of cash flow hedges are recorded
|
|
$
|
(10,904)
|
|
|
$
|
(9,450)
|
|
|
|
|
|
$
|
(32,665)
|
|
|
$
|
(30,068)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 - EQUITY
Common Stock
The Company is authorized to issue up to 500,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power.
Changes in common stock during the nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
Beginning common shares outstanding
|
105,169,515
|
|
|
104,783,179
|
|
|
|
|
|
Grants under the Equity Plan
|
676,171
|
|
|
537,734
|
|
Common Unit redemptions
|
34,500
|
|
|
46,076
|
|
|
|
|
|
Annual grants to independent directors
|
93,810
|
|
|
40,455
|
|
|
|
|
|
Performance share and other forfeitures
|
(212,643)
|
|
|
(167,757)
|
|
Shares retained for employee tax withholding requirements
|
(65,345)
|
|
|
(74,340)
|
|
Ending common shares outstanding
|
105,696,008
|
|
|
105,165,347
|
|
Preferred Stock
The Company is authorized to issue up to 100,000,000 shares of preferred stock, $0.01 par value per share, of which 90,600,000 is currently undesignated, 3,000,000 shares have been designated as 6.45% Series D Cumulative Redeemable Preferred Stock (the "Series D preferred shares") and 6,400,000 shares have been designated as 6.25% Series E Cumulative Redeemable Preferred Stock (the "Series E preferred shares").
The Company's outstanding shares of preferred stock (collectively, “Preferred Shares”) rank senior to our common stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirements. The Company may not redeem the Series D or Series E preferred shares prior to June 28, 2021 and November 13, 2022, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25 per share, plus any accumulated, accrued and unpaid distributions up to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each Series D preferred share is 3.9216 shares of common stock and each Series E preferred share is 3.1686 shares of common stock, all subject to certain adjustments.
The Company pays dividends at an annual rate of $1.6125 for each Series D preferred share and $1.5625 for each Series E preferred share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
Non-controlling Interests in Operating Partnership
Pursuant to the limited partnership agreement of our Operating Partnership, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of common stock at the time of redemption; however, the Company has the option to redeem Common Units with shares of our common stock on a one-for-one basis. The number of shares of our common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations.
At September 30, 2020 and December 31, 2019, unaffiliated third parties owned 174,521 and 209,021 Common Units of the Operating Partnership, respectively, representing less than a 1% limited partnership interest in the Operating Partnership for each period.
We classify outstanding Common Units held by unaffiliated third parties as Non-controlling interests in the Operating Partnership, a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income allocated to these Common Units is reported on the Company’s Condensed Consolidated Statements of Operations as Net income attributable to non-controlling interests of the Operating Partnership.
Non-controlling Interests in Joint Venture
In July 2019, the Company entered into a joint venture agreement with GIC, Singapore’s sovereign wealth fund, to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the joint venture and intends to invest 51% of the equity capitalization of the limited partnership, with GIC investing the remaining 49%. The Company earns fees for providing services to the joint venture and will have the potential to earn incentive fees based on the joint venture achieving certain return thresholds. As of September 30, 2020, the joint venture owns the five hotel properties acquired in 2019.
The joint venture owns the hotels through a master real estate investment trust (“Master REIT”) and subsidiary REITs (“Subsidiary REIT”). All of the hotels owned by the joint venture are leased to taxable REIT subsidiaries of the Subsidiary REITs (“Subsidiary REIT TRSs”). To qualify as a REIT, the Master REIT and each Subsidiary REIT must meet all of the REIT requirements summarized under “Note 2 - Basis of Presentation and Significant Accounting Policies - Income Taxes.” Taxable income related to the Subsidiary REIT TRSs is subject to federal, state and local income taxes at applicable tax rates.
We classify the Non-controlling interests in the joint venture as a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (losses) allocated to these non-controlling interests is reported on the Company’s Condensed Consolidated Statements of Operations as Net income (losses) attributable to non-controlling interests of the joint venture.
NOTE 9 - FAIR VALUE MEASUREMENT
The following table presents information about our financial instruments measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2020 using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Options related to real estate loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,138
|
|
|
$
|
8,138
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
—
|
|
|
33,410
|
|
|
—
|
|
|
33,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019 using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Options related to real estate loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,920
|
|
|
$
|
8,920
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
—
|
|
|
16,177
|
|
|
—
|
|
|
16,177
|
|
Our Purchase Options related to real estate loans do not have readily determinable fair values. The original fair value of each Purchase Option was estimated using a binomial lattice or Black-Scholes model. Due to the adverse effects of the COVID-19 pandemic, we evaluated our Purchase Options for impairment during the nine months ended September 30, 2020. The fair value of each Purchase Option was estimated using the Black-Scholes model. The estimated fair values of the Purchase Options were based on unobservable inputs for which there is little or no market information available and required us to develop our own assumptions as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loan 1
|
|
Real Estate Loan 2
|
|
Real Estate Loan 3
|
|
Real Estate Loan 4
|
|
Exercise price
|
|
$
|
15,143
|
|
|
$
|
17,377
|
|
|
$
|
5,503
|
|
|
$
|
37,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
2.59
|
(1) (2)
|
2.68
|
(1) (2)
|
2.67
|
(1) (2)
|
1.42
|
(3)
|
Expected volatility
|
|
65.0
|
%
|
|
55.0
|
%
|
|
55.0
|
%
|
|
55.0
|
%
|
|
Risk-free rate
|
|
0.3
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
|
0.2
|
%
|
|
Expected annualized equity dividend yield
|
|
6.5
|
%
|
|
7.5
|
%
|
|
17.1
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)The purchase option is currently exercisable.
(2)The option term is the period from April 1, 2020 through the fully extended maturity dates of the respective mezzanine loans.
(3)The option term is the period from April 1, 2020 through the date in which the development project is completed and the option becomes exercisable.
During the nine months ended September 30, 2020, we recorded a Loss on impairment of assets of $0.8 million as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loan 1
|
|
Real Estate Loan 2
|
|
Real Estate Loan 3
|
|
Real Estate Loan 4
|
|
Purchase Option value at December 31, 2019
|
|
$
|
2,382
|
|
|
$
|
2,761
|
|
|
$
|
977
|
|
|
$
|
2,800
|
|
|
Loss on impairment of assets
|
|
(782)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase Option value at September 30, 2020
|
|
$
|
1,600
|
|
|
$
|
2,761
|
|
|
$
|
977
|
|
|
$
|
2,800
|
|
|
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Restricted Cash
The Company maintains reserve funds for property taxes, insurance, capital expenditures and replacement or refurbishment of furniture, fixtures and equipment at some of our hotel properties in accordance with management, franchise or mortgage loan agreements. These agreements generally require us to reserve cash ranging from 2% to 5% of the revenues of the individual hotel in restricted cash escrow accounts. Any unused restricted cash balances revert to us upon the termination of the underlying agreement or may be released to us from the restricted cash escrow accounts upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
On April 13, 2020, as a result of the COVID-19 pandemic, Marriott International, Inc. (“Marriott”) agreed to allow us to use $1.6 million of cash deposited in FF&E Reserve Accounts for seven of our Marriott-branded hotels managed by Marriott affiliates (“Marriott Hotels”) to pay for the working capital needs of the respective hotels. In addition, Marriott released $8.9 million to us from the FF&E Reserve Accounts (“Borrowed Reserve”) of the Marriott Hotels for general operational purposes. The Borrowed Reserve must be replenished into the respective FF&E Reserve Accounts in ten equal monthly installments beginning on the date that is twelve months prior to the next scheduled renovation date for each of the Marriott Hotels (“Renovation Date”) or in a lump sum payment no later than sixty days prior to each respective Renovation Date. Furthermore, Marriott has suspended our obligation to fund monthly FF&E reserves for the Marriott Hotels through March 31, 2021.
At September 30, 2020 and December 31, 2019, approximately $17.5 million and $27.6 million, respectively, was available in restricted cash reserve funds required by certain of our property managers, franchisors, or mortgage lenders for property taxes, insurance, capital expenditures and replacement or refurbishment of furniture, fixtures and equipment at our hotel properties.
Franchise Agreements
We expensed fees related to our franchise agreements of $4.6 million and $11.8 million for the three months ended September 30, 2020 and 2019, respectively, and $16.5 million and $35.8 million for the nine months ended September 30, 2020 and 2019, respectively.
Management Agreements
Our hotel properties operate pursuant to management agreements with various professional third-party management companies. We pay base management fees that are a percentage of gross room revenues and incentive management fees based on achievement of certain financial targets pursuant to contracts that generally have remaining terms of less than five years. Management fee expenses were $1.3 million and $3.7 million for the three months ended September 30, 2020 and 2019, respectively, and $5.1 million and $13.3 million for the nine months ended September 30, 2020 and 2019, respectively.
Litigation
We are involved from time to time in litigation arising in the ordinary course of business. There are currently no pending legal actions that we believe would have a material effect on our financial position or results of operations.
NOTE 11 - EQUITY-BASED COMPENSATION
Our currently outstanding equity-based awards were issued under the Equity Plan which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive awards.
Stock options granted may be either incentive stock options or non-qualified stock options. Vesting terms may vary with each grant, and stock option terms are generally five to ten years. We have outstanding equity-based awards in the form of stock options and restricted stock awards. All of our outstanding equity-based awards are classified as equity awards.
Stock Options Granted Under our Equity Plan
As of September 30, 2020, we had 235,000 outstanding and exercisable stock options with a weighted average exercise price of $9.75 per share and a weighted average contractual term of 0.4 years. At September 30, 2020, the exercise price of our outstanding and exercisable stock options exceeded the market price of our common stock, resulting in no intrinsic value.
Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes time-based restricted stock award activity under our Equity Plan for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Aggregate
Current Value
|
|
|
|
|
(per share)
|
|
(in thousands)
|
Non-vested at December 31, 2019
|
|
448,467
|
|
|
$
|
12.51
|
|
|
$
|
5,534
|
|
Granted
|
|
299,562
|
|
|
8.47
|
|
|
|
Vested
|
|
(172,170)
|
|
|
13.31
|
|
|
|
Forfeited
|
|
(2,282)
|
|
|
8.64
|
|
|
|
Non-vested at September 30, 2020
|
|
573,577
|
|
|
$
|
10.18
|
|
|
$
|
2,971
|
|
The awards granted to our non-executive employees generally vest over a four-year period based on continuous service (20% on the first, second and third anniversary of the grant date and 40% on the fourth anniversary of the grant date).
The awards granted to our executive officers generally vest over a three-year period based on continuous service (25% on the first and second anniversary of the grant date and 50% on the third anniversary of the grant date) or in certain circumstances upon a change in control.
The holders of these awards have the right to vote the related shares of common stock and receive all dividends declared and paid whether or not vested. The fair value of time-based restricted stock awards granted is calculated based on the market value of our common stock on the date of grant.
Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes performance-based restricted stock activity under the Equity Plan for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted Average
Grant Date
Fair Value (1)
|
|
Aggregate
Current Value
|
|
|
|
|
(per share)
|
|
(in thousands)
|
Non-vested at December 31, 2019
|
|
755,991
|
|
|
$
|
14.31
|
|
|
$
|
9,329
|
|
Granted
|
|
376,609
|
|
|
9.38
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(210,361)
|
|
|
17.13
|
|
|
|
Non-vested at September 30, 2020
|
|
922,239
|
|
|
$
|
11.65
|
|
|
$
|
4,777
|
|
(1) The amounts included in this column represent the expected future value of the performance-based restricted stock awards calculated using the Monte Carlo simulation valuation model.
Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our common stock on the grant date. The fair value of the performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model. These awards generally vest over a three-year period based on our percentile ranking within the SNL U.S. REIT Hotel Index at the end of the period or upon a change in control. The awards require continued service during the measurement period and are subject to the other conditions described in the Equity Plan or award document.
The number of shares the executive officers may earn under these awards range from zero shares to twice the number of shares granted based on our percentile ranking within the index at the end of the measurement period. In addition, a portion of the performance-based shares may be earned based on the Company's absolute total shareholder return calculated during the performance period. The holders of these grants have the right to vote the granted shares of common stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards. Further, if additional shares are earned based on our percentile ranking within the index, dividend payments will be issued as if the additional shares had been held throughout the measurement period.
Equity-Based Compensation Expense
Equity-based compensation expense included in Corporate general and administrative expenses in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
September 30,
|
|
For the
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Time-based restricted stock
|
|
$
|
622
|
|
|
$
|
588
|
|
|
$
|
1,847
|
|
|
$
|
1,736
|
|
Performance-based restricted stock
|
|
895
|
|
|
862
|
|
|
2,664
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
Director stock
|
|
—
|
|
|
—
|
|
|
447
|
|
|
496
|
|
|
|
$
|
1,517
|
|
|
$
|
1,450
|
|
|
$
|
4,958
|
|
|
$
|
4,766
|
|
We recognize equity-based compensation expense ratably over the vesting periods. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions.
Unrecognized equity-based compensation expense for all non-vested awards pursuant to our Equity Plan was $8.9 million at September 30, 2020 and will be recorded as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Time-based restricted stock
|
|
$
|
3,763
|
|
|
$
|
623
|
|
|
$
|
1,855
|
|
|
$
|
1,037
|
|
|
$
|
232
|
|
|
$
|
16
|
|
Performance-based restricted stock
|
|
5,137
|
|
|
895
|
|
|
2,654
|
|
|
1,392
|
|
|
196
|
|
|
—
|
|
|
|
$
|
8,900
|
|
|
$
|
1,518
|
|
|
$
|
4,509
|
|
|
$
|
2,429
|
|
|
$
|
428
|
|
|
$
|
16
|
|
NOTE 12 - INCOME TAXES
As a REIT, we generally will not be subject to U.S. federal income tax on ordinary income and capital gains income generated by our REIT activities that we distribute to our stockholders. We are subject to federal and state income taxes on the earnings of our TRS Lessees. In addition, our Operating Partnership is subject to tax in a limited number of local and state jurisdictions.
The Company recorded an income tax benefit of $0.1 million for the three months ended September 30, 2020 and a nominal income tax benefit for three months ended September 30, 2019. The Company recorded income tax expense of $1.6 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively. The $1.6 million income tax expense includes a $2.1 million discrete non-cash deferred income tax related to the establishment of valuation allowances against our TRS Lessees’ deferred tax assets recorded during the quarter ended March 31, 2020. Due to the effects of the COVID-19 pandemic, certain of our TRS Lessees have incurred operating losses in the past and are expected to be in a cumulative loss for the foreseeable future. A cumulative loss is significant negative evidence that the realizability of our deferred tax assets at September 30, 2020 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all our deferred tax assets at September 30, 2020.
We had no unrecognized tax benefits at September 30, 2020. We expect no significant changes in unrecognized tax benefits within the next year.
The business tax provisions of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was signed into law on March 27, 2020, include temporary changes to income and non-income-based tax laws. Some of the key income tax provisions include:
•Eliminating the 80% of taxable income limitations by allowing corporate entities to fully utilize net operating loss (NOL) carryforwards to offset taxable income in 2018, 2019, or 2020, and reinstating it for tax years after 2020;
•Allowing NOLs generated in 2018, 2019, or 2020, to be carried back five years;
•Increasing the net interest expense deduction limit to 50% of adjusted taxable income from 30% for the 2019 and 2020 tax years;
•Allowing taxpayers with alternative minimum tax credits to claim a refund for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as required by the 2017 Tax Cut and Jobs Act;
•Allowing entities to deduct more of their charitable cash contributions made during calendar year 2020 by increasing the taxable income limitation to 25% from 10%; and
•Providing for an employee retention tax credit to offset the employer's share of payroll taxes for the period between March 13, 2020 and December 31, 2020. The credit is calculated based on 50% of qualifying wages, capped at the first $10,000 of compensation. We are in the process of preparing and submitting amended payroll tax filings to recoup an anticipated credit of approximately $0.3 million.
We anticipate that our TRS Lessees will generate a net operating loss in 2020. As such, we expect a $1.0 million future tax benefit from the NOL carry-back provisions provided in the CARES Act.
NOTE 13 - EARNINGS PER SHARE
We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested time-based restricted stock awards with non-forfeitable dividends and for our common stock. Our non-vested time-based restricted stock awards with non-forfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested time-based restricted stock awards with non-forfeitable dividends do not have such an obligation so they are not allocated losses.
Below is a summary of the components used to calculate basic and diluted earnings per share (in thousands, except per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
September 30,
|
|
For the
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(35,775)
|
|
|
$
|
11,626
|
|
|
$
|
(104,537)
|
|
|
$
|
73,595
|
|
Less: Preferred dividends
|
|
(3,710)
|
|
|
(3,710)
|
|
|
(11,128)
|
|
|
(11,128)
|
|
|
|
|
|
|
|
|
|
|
Allocation to participating securities
|
|
—
|
|
|
(81)
|
|
|
(81)
|
|
|
(254)
|
|
Attributable to non-controlling interest in Operating Partnership
|
|
70
|
|
|
(15)
|
|
|
203
|
|
|
(150)
|
|
Attributable to non-controlling interests in joint venture
|
|
1,159
|
|
|
(77)
|
|
|
4,049
|
|
|
(77)
|
|
Net (loss) income attributable to common stockholders, net of amount allocated to participating securities
|
|
$
|
(38,256)
|
|
|
$
|
7,743
|
|
|
$
|
(111,494)
|
|
|
$
|
61,986
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
104,200
|
|
|
103,935
|
|
|
104,117
|
|
|
103,861
|
|
Dilutive effect of equity-based compensation awards
|
|
—
|
|
|
35
|
|
|
—
|
|
|
55
|
|
Weighted average common shares outstanding - diluted
|
|
104,200
|
|
|
103,970
|
|
|
104,117
|
|
|
103,916
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.37)
|
|
|
$
|
0.07
|
|
|
$
|
(1.07)
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
All outstanding stock options were included in the computation of diluted earnings per share for the three and nine months ended September 30, 2019 due to their dilutive effect. The Common Units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income would also be added to derive net income attributable to common stockholders. We had unvested performance-based restricted stock awards of 922,239 shares for the three and nine months ended September 30, 2020 and 755,991 shares for the three and nine months ended September 30, 2019, which were excluded from the denominator of the diluted earnings per share as the awards had not achieved the requisite performance conditions for vesting at each period end.
NOTE 14 - SUBSEQUENT EVENTS
Dividends
On October 30, 2020, our Board of Directors declared cash dividends of $0.403125 per share of 6.45% Series D Cumulative Redeemable Preferred Stock and $0.390625 per share of 6.25% Series E Cumulative Redeemable Preferred Stock. These dividends are payable November 30, 2020 to stockholders of record on November 16, 2020.