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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
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For the fiscal year ended December 31, 2020
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| or | ||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
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For the transition period from to
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Commission File Number: 000-55461
WATERMARK LODGING TRUST, INC.
(Exact name of registrant as specified in its charter)
| Maryland | 46-5765413 | |||||||
| (State of incorporation) | (I.R.S. Employer Identification No.) | |||||||
| 150 N. Riverside Plaza | ||||||||
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Chicago, Illinois
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60606 | |||||||
| (Address of principal executive office) | (Zip Code) | |||||||
(847) 482-8600
(Registrant’s telephone numbers, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company ☐
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Emerging growth company ☐
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No R
Registrant has no active market for its common stock. Non-affiliates held 154,860,839 and 61,175,258 of Class A and Class T shares, respectively, of outstanding common stock at June 30, 2020.
As of March 5, 2021, there were 167,466,774 shares of Class A common stock and 61,096,230 shares of Class T common stock of registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant incorporates by reference its definitive Proxy Statement with respect to its 2021 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into Part III of this Annual Report on Form 10-K.
Explanatory Note
Watermark Lodging Trust, Inc. ("WLT" or the “Company”) is the legal successor of Carey Watermark Investors 2 Incorporated (“CWI 2”). On April 13, 2020, a direct, wholly-owned subsidiary (“Merger Sub”) of CWI 2 merged with and into Carey Watermark Investors Incorporated (“CWI 1”) in an all-stock transaction in which the former stockholders of CWI 1 became stockholders of CWI 2 (the “Merger”). After giving effect to the Merger, CWI 1 became a wholly-owned subsidiary of CWI 2 and CWI 2 changed its name to WLT. Immediately after the completion of the Merger, the former stockholders of CWI 1 owned approximately 60%, and the former stockholders of CWI 2 owned approximately 40%, of the outstanding common stock of WLT. Concurrently with the closing of the Merger, CWI 2 completed an internalization transaction through which it became self-managed.
For accounting and financial reporting purposes, the Merger is treated as a reverse acquisition. The financial information for WLT, as set forth herein, has been prepared on a basis consistent with the foregoing and reflects CWI 1 as the accounting acquirer. Consequently, the historical financial information included herein as of any date, or for any periods prior to April 13, 2020 (the closing date of the Merger), is the pre-Merger financial information of CWI 1. The results of operations of CWI 2, as the acquired company for accounting and financial reporting purposes, are incorporated into WLT effective April 13, 2020. See Note 3 of the financial statements included in this Report for more information.
As used throughout this document, the terms "WLT," the "Company," "we," "our" and "us" mean:
•WLT beginning April 13, 2020, following the closing of the Merger; and
•CWI 1 on a standalone basis for all periods prior to the closing of the Merger on April 13, 2020.
The term “CWI 2” refers to CWI 2 on a standalone basis for all periods prior to the closing of the Merger.
Accordingly, comparisons of the period to period financial information of WLT as set forth herein with those of CWI 1 and CWI 2 may not be meaningful.
INDEX
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| PART III | |||||||||||
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| PART IV | |||||||||||
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Forward-Looking Statements
This Annual Report on Form 10-K (this “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements regarding: the impact of the Merger (as defined herein) and management internalization that occurred in April 2020, the impact of the July Capital Raise (as defined herein), our expectations regarding the impacts on our business of the novel coronavirus (“COVID-19”) pandemic and the impact of hurricanes and other natural disasters on certain hotels, including the condition of the properties and cost estimates. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission (“SEC”), including but not limited to those described in Item 1A. Risk Factors of this Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.
All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part II, Item 8. Financial Statements and Supplementary Data.
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PART I
Item 1. Business.
General Development of Business
Overview
Watermark Lodging Trust, Inc. (“WLT”), formerly known as Carey Watermark Investors 2 Incorporated (“CWI 2”), is a self-managed, publicly owned, non-traded real estate investment trust (“REIT”) that, together with its consolidated subsidiaries, invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions to our stockholders and other factors. As of December 31, 2020, substantially all of our assets and liabilities are held by, and all of our operations are conducted through, CWI 2 OP, LP (the “Operating Partnership”) and we are a general partner and a limited partner of, and own a 99.0% capital interest in, the Operating Partnership. Watermark Capital Partners, LLC (“Watermark Capital”), which is 100% owned by Mr. Michael G. Medzigian, our Chief Executive Officer, holds the remaining 1.0% in the Operating Partnership as of December 31, 2020. In order to qualify as a REIT, we cannot operate hotels directly; therefore, we lease our hotels to our wholly-owned taxable REIT subsidiaries (“TRSs” and collectively the “TRS lessees”). As of December 31, 2020, we held ownership interests in 31 hotels, with a total of 9,615 rooms.
On April 13, 2020, we executed a business combination transaction in which a direct, wholly-owned subsidiary (“Merger Sub”) of CWI 2 merged with and into Carey Watermark Investors Incorporated (“CWI 1”) in an all-stock transaction (the “Merger”), and we became self-managed, discussed in further detail below. Prior to the transaction, we were managed by Carey Lodging Advisors, LLC (the “Former Advisor”), an indirect subsidiary of W. P. Carey Inc. (“WPC”). The Former Advisor managed our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that managed our hotels. CWA, LLC (the “CWI 1 Subadvisor”), a subsidiary of Watermark Capital, provided services to the Former Advisor, primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that managed the day-to-day operations of our hotels. In addition, the CWI 1 Subadvisor provided us with the services of our Chief Executive Officer, subject to the approval of our independent directors. Prior to the Merger and internalization of management discussed below, we had no employees. As of December 31, 2020, we had 29 employees.
Merger of CWI 1 and CWI 2
On April 13, 2020, the Merger was completed in an all-stock transaction to create WLT. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of October 22, 2019 (as amended, the “Merger Agreement”), by and among CWI 2, CWI 1 and Merger Sub.
In accordance with the Merger Agreement, at the effective time of the Merger (the “effective time”) each issued and outstanding share of CWI 1’s common stock (or fraction thereof), $0.001 par value per share (“CWI 1 common stock”), was converted into the right to receive 0.9106 shares (the “exchange ratio”) of WLT Class A common stock, $0.001 par value per share (“WLT Class A common stock”). Also at the effective time, all restricted stock units (“RSUs”) of CWI 1 outstanding and unvested immediately prior to the effective time were converted into an RSU of WLT with respect to a whole number of shares of WLT Class A common stock equal to (i) the number of shares of CWI 1 common stock subject to such unvested RSU of CWI 1, multiplied by (ii) the exchange ratio.
Immediately following the effective time of the Merger, the internalization of the management of the Company (the “Internalization”) was consummated pursuant to the Internalization Agreement, dated as of October 22, 2019 (as amended, the “Internalization Agreement”), by and among CWI 1, CWI OP, LP, the Operating Partnership, WPC, Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, the Former Advisor, Watermark Capital, the CWI 1 Subadvisor and CWA2, LLC (the “CWI 2 Subadvisor” and together with CWI 1 Subadvisor, the “Subadvisors”).
In accordance with the Internalization Agreement, CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively (the “Redemption”). As consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, WLT or the Operating Partnership (as applicable) issued equity consisting of (x) 2,840,549 shares of WLT Class A common stock, to affiliates of WPC, (y) 1,300,000 shares of WLT Series A preferred
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stock, $0.001 par value per share, to affiliates of WPC, with a liquidation preference of $50.00 per share ($65,000,000 in the aggregate) (Note 15), and (z) 2,417,996 limited partnership units in the Operating Partnership, to affiliates of Watermark Capital. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively.
Immediately following the Redemption, the existing advisory agreements, as amended, between CWI 1 or CWI 2 (as applicable) and the Former Advisor, and the existing sub‑advisory agreements, as amended, between the Former Advisor and the Subadvisors (as applicable), were automatically terminated. The secured credit facilities entered into by CWI OP, LP or the Operating Partnership (as applicable) as borrower, and CWI 1 or CWI 2 (as applicable) as guarantor, with WPC as lender, each matured at the time of the expiration of such existing advisory agreements and the applicable loan agreements and loan documents were terminated. Neither CWI 1 nor CWI 2 had any outstanding obligations under the respective facilities.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and COVID-19 has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand was dramatically reduced. See further discussion in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
July 2020 Capital Raise
On July 21, 2020, we entered into a securities purchase agreement (the “Purchase Agreement”) with ACP Watermark Investment LLC (the “Purchaser”) and, solely with respect to a guaranty, certain other parties thereto. Pursuant to the Purchase Agreement, the Company issued and sold to the Purchaser 200,000 shares of 12% Series B Cumulative Redeemable Preferred Stock, liquidation preference $1,000.00 per share (the “Series B Preferred Stock”), and warrants (the “Warrants”) to purchase 16,778,446 units of limited partnership interest of the Operating Partnership (“OP Units”) (“Warrant Units”), for an aggregate purchase price of $200.0 million (the “July Capital Raise”). See Note 15 for additional information on the Series B Preferred Stock and Warrants.
The Purchaser has also committed to provide, upon satisfaction of certain conditions, up to an additional $250.0 million to purchase additional shares of the Series B Preferred Stock during the 18 months following the consummation of the July Capital Raise, of which $150.0 million is allocated to working capital needs and other general corporate purposes and $100.0 million is allocated to approved acquisitions. The July Capital Raise closed on July 24, 2020. The Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless the Company has first paid all accrued dividends (and dividends thereon) on the Series B Preferred Stock in cash for all past dividend periods and the current dividend period. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's distribution reinvestment plan. The Warrants are entitled to participate in all distributions paid in respect of our common stock on an as-exercised basis. Additionally, the Company appointed two designees of the Purchaser as members of the Board of Directors at the closing of the July Capital Raise.
The Series B Preferred Stock ranks, with respect to rights to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the Company, senior to our common stock and on parity with our Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”). The holders of shares of Series B Preferred Stock will be entitled to receive, when, as and if authorized by the Board and declared by the Company, out of funds legally available for the payment of dividends, cumulative dividends per each share of Series B Preferred Stock at the rate of 12% per annum of the liquidation preference per share of Series B Preferred Stock. Dividends will be paid in cash or in the form of additional shares of Series B Preferred Stock (“PIK Shares”) with the value thereof equal to the liquidation preference of such shares, at the option of the Company. Dividends on each share of Series B Preferred Stock (including any PIK Shares) will accrue on the then-applicable liquidation preference thereof and on all accrued and unpaid dividends on a daily basis and compound quarterly at a rate equal to the dividend rate. The initial 12% dividend rate is subject to increase by an additional 4% per annum upon certain events of default by the Company, as provided in the Articles Supplementary governing the Series B Preferred Stock which is filed as an exhibit to this Report.
If at any time any PIK Shares are outstanding or there are any accrued and unpaid dividends, the Company may not pay or set aside dividends with respect to our Common Stock, or redeem, purchase or otherwise acquire Common Stock, in each case, subject to certain exceptions.
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On the fifth anniversary of the closing of the July 2020 Capital Raise, the Company is required to redeem all shares of Series B Preferred Stock at a redemption price, payable in cash, equal to the then applicable liquidation preference plus all accrued and unpaid dividends (including dividends on PIK shares). The Company, at its option, may redeem for cash, in whole or in part from time to time, any or all of the outstanding shares of Series B Preferred Stock upon giving the notice described in the Articles Supplementary at a price determined in the Articles Supplementary. If the Company undergoes a Fundamental Change (as defined in the Articles Supplementary), holders of shares of Series B Preferred Stock may require the Company to repurchase any or all of such shares of Series B Preferred Stock for a cash purchase price equal to the then-applicable optional redemption price. If the Company fails to redeem in full, in cash, all the shares of Series B Preferred Stock required or sought by holders to be redeemed pursuant to the Articles Supplementary by the applicable deadline (i) the dividend rate will immediately be increased by 4% (unless an increase rate is already then in effect), (ii) no further dividends or distributions on, and no purchases of, Junior Stock will be permitted, subject to certain exceptions, and (iii) the initial purchaser of the Series B Preferred Stock and its affiliates and permitted transferees will have the right to require the Company to sell certain assets and properties of the Company for net proceeds in an amount sufficient to pay all unpaid redemption amounts due, subject to the conditions specified in the Articles Supplementary.
Except for the rights expressly conferred by the Articles Supplementary or as required by the Maryland General Corporation Law, the holders of the outstanding shares of Series B Preferred Stock will not be entitled to (i) vote on any matter, or (ii) receive notice of, or to participate in, any meeting of stockholders at which they are not entitled to vote. The vote or consent of the majority holders of the Series B Preferred Stock is required for certain corporate actions of the Company, including with respect to certain amendments to the governing documents of the Company and the Operating Partnership, the authorization or creation of additional preferred stock or more senior stock, certain incurrences of corporate indebtedness and certain sales of assets of the Company, as more fully described in the Articles Supplementary.
Estimated Net Asset Value
In November 2020, we announced that our estimated net asset value (“NAV”) as of September 30, 2020 has been determined to be $5.51 per share of Class A common stock and $5.45 per share of Class T common stock, based on shares outstanding at September 30, 2020.
Narrative Description of Business
General
We are a publicly owned, non-traded REIT that strives to create value in the lodging industry with a focus on building and enhancing the value of a portfolio of interests in lodging and lodging related investments. We employ value-added strategies, such as re-branding, renovating, expanding or changing hotel operators, when we believe such strategies will increase the operating results and values of the hotels we acquire. We regularly review the hotels in our portfolio to ensure that they continue to meet our investment criteria. If we were to conclude that a hotel’s value has been maximized, or that it no longer fits within our financial or strategic criteria, we may seek to sell the hotel and use the net proceeds for investments in our existing or new hotels, or to reduce our overall leverage. While we do not operate our hotel properties, both our asset management team and our executive management team monitor and work cooperatively with our hotel operators in all aspects of our hotels' operations, including advising and making recommendations regarding property positioning and repositioning, revenue and expense management, operations analysis, physical design, renovation and capital improvements, guest experience and overall strategic direction. We believe that we can add significant value to our portfolio through our intensive asset management strategies. Our executive and asset management teams have significant experience in hotels, as well as in creating and implementing innovative asset management initiatives.
Our business was significantly impacted by the COVID-19 pandemic and the material reduction in demand experienced by our hotels and the lodging industry generally. See “Risk Factors - Risk Related to our Business and Operations - The effects of the COVID-19 pandemic continue to materially and adversely affect us and they are expected to continue to do so for the foreseeable future.”
As a REIT, we are allowed to own lodging properties, but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we enter into leases with certain of our subsidiaries organized as TRSs. The TRS lessees in turn contract with independent property operators that manage the day-to-day operations of our properties.
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The lodging properties we have acquired include full-service branded hotels located in urban settings, resort properties and select-service hotels. Full-service hotels generally provide a full complement of guest amenities, including food and beverage services, meeting and conference facilities, concierge and room service and valet parking, among others. Select-service hotels typically have limited food and beverage outlets and do not offer comprehensive business or banquet facilities. Resort properties may include smaller boutique hotels and large-scale integrated resorts. All of our investments to date have been in the United States, however, we may consider, and are not prohibited under our organizational documents from making, investments outside the United States.
Our Portfolio
As of December 31, 2020, our portfolio was comprised of our full or partial ownership in 31 hotels with 9,615 guest rooms, all located in the United States. See Item 2. Properties.
Holding Period
We generally intend to hold our investments in real property for an extended period depending on the type of investment. The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation for our stockholders while avoiding increases in risk. No assurance can be given that this objective will be realized.
Financing Strategies
As of December 31, 2020, our hotel portfolio, including both the hotels that we consolidate in our financial statements (“Consolidated Hotels”) (as further discussed in Note 5) and the hotels that we record as equity investments in our financial statements (“Unconsolidated Hotels”) (as further discussed in Note 6), was 63% leveraged. Our organizational documents permit us to incur leverage of up to 75% of the total costs of our investments or 300% of our net assets (whichever is less), or a higher amount with the approval of a majority of our independent directors.
Competition
The hotel industry is highly competitive. Hotels we acquire compete with other hotels for guests in our markets. Competitive factors include location, convenience, brand affiliation, room rates, range and the quality of services, facilities and guest amenities or accommodations offered. Competition in the markets in which our hotels operate include competition from existing, newly renovated and newly developed hotels in the relevant segments. Competition can adversely affect the occupancy, average daily rates (“ADR”), and revenue per available room (“RevPAR”) of our hotels, and thus our financial results, and may require us to provide additional amenities, incur additional costs or make capital improvements that we otherwise might not choose to make, which may adversely affect our profitability.
Seasonality
Certain lodging properties are seasonal in nature. Generally, occupancy rates and revenues are greater in the second and third quarters than in the first and fourth quarters. As a result of the seasonality of certain lodging properties, there may be quarterly fluctuations in results of operations of our properties. Quarterly financial results may be adversely affected by factors outside our control, including weather conditions and poor economic factors.
Certain Environmental and Regulatory Matters
Our hotel properties are subject to various federal, state and local environmental laws and regulations. In connection with our current or prior ownership or operation of hotels, we may potentially be liable for various environmental costs or liabilities (including investigation, clean-up and disposal of hazardous materials released at, on, under, in or from the property). Environmental laws and regulations typically impose responsibility without regard to whether the owner or operator knew of or was responsible for the presence of hazardous materials or contamination, and liability is often joint and several. As part of our efforts to mitigate these risks, we typically engage third parties to perform assessments of potential environmental risks when evaluating new acquisitions or if required to do so by a lender. Such environmental surveys are limited in scope, however, and we remain exposed to contaminates (e.g., such as asbestos and mold) and hazardous or regulated substances used during the routine operations of our hotels (e.g., swimming pool or dry cleaning chemicals). Our hotel properties incur costs to comply with environmental and health and safety laws and regulations and could be subject to fines and penalties for non-compliance.
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We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our properties. And although we are not currently aware of any material environmental or health and safety claims pending or threatened against us, a claim may be asserted against us in the future that could have a material adverse effect on us.
Our properties must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. We believe that our properties are substantially in compliance with the ADA, however, the obligation to make readily achievable accommodations is an ongoing one and we will continue to assess our properties and make alterations as appropriate.
In addition, our hotel properties are subject to state and local health and safety laws, regulations and mandates relating to their operations in light of the COVID-19 pandemic.
Human Capital Resources
We had no employees prior to the Internalization in April 2020. As part of the Internalization, we hired substantially all of the former employees of Watermark Capital and a number of the former employees of WPC that had performed services for us. Due to the significant business disruption caused by the COVID-19 pandemic, we implemented reductions in our workforce and certain of our senior executives and members of our board of directors deferred or waived portions of the cash compensation to which they were otherwise entitled in 2020. We made awards of restricted stock to key employees as means of incentivizing and retaining them. As of December 31, 2020, we had 29 employees.
The third party operators that manage our hotels are generally responsible for hiring and maintaining the labor force at the hotels. The operators implemented significant furloughs of hotel personnel in 2020 due to governmental shutdowns and lack of demand attributable to the COVID-19 pandemic.
Corporate Information
Our principal executive offices are located at 150 North Riverside Plaza, Chicago, Illinois 60606.
We will supply to any stockholder, upon written request and without charge, a copy of this Report as filed with the SEC. Our filings can also be obtained for free on the SEC’s website at http://www.sec.gov. All filings we make with the SEC, including this Report, our quarterly reports on Form 10-Q, and our current reports on Form 8-K, as well as any amendments to those reports, are available for free on our website, http://www.watermarklodging.com, as soon as reasonably practicable after they are filed with or furnished to the SEC. We are providing our website address solely for the information of investors and do not intend for it to be an active link. We do not intend to incorporate the information contained on our website into this Report or other documents filed with or furnished to the SEC.
Our Code of Business Conduct and Ethics, which applies to all of our officers, including our chief executive officer and chief financial officer, and our directors, is available on our website at http://www.watermarklodging.com. We intend to make available on our website any future amendments or waivers to our Code of Business Conduct and Ethics within four business days after any such amendments or waivers.
Item 1A. Risk Factors.
Our business, results of operations, financial condition, liquidity and ability to pay distributions could be materially adversely affected by various risks and uncertainties, including the conditions discussed below. These risk factors may affect our actual operating and financial results and could cause such results to differ materially from our expectations as expressed in any forward-looking statements. You should not consider this list exhaustive. New risk factors emerge periodically and we cannot assure you that the factors described below list all risks that may become material to us at any later time.
Risks Related to Our Business and Operations
The effects of the COVID-19 pandemic materially and adversely affected us, and are expected to continue to do so for the foreseeable future.
The full extent of the effects of the COVID-19 pandemic on the Company's business for the foreseeable future cannot be
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predicted with certainty. As of the date of this Report, the majority of our 31 hotels are operating at significantly reduced levels of occupancy, staffing and expenses, and operations at one hotel remain fully suspended. The Company has incurred and will continue to incur significant costs related to the reductions in service at the hotels, primarily as a result of employee terminations or furlough arrangements.
As discussed further below under “Risks Related to Our Indebtedness and Financing Arrangements,” we have substantial indebtedness. We have sought relief from all of our lenders to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of December 31, 2020, we have effectively entered into cash management agreements with the lenders on 27 of our 29 Consolidated Hotel mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. In addition, of the $2.2 billion of indebtedness outstanding as of December 31, 2020 for our Consolidated Hotels, approximately $811.4 million is scheduled to mature during the 12 months after the date of this Report. This indebtedness is non-recourse mortgage indebtedness. If the Company's lenders do not provide covenant relief or if the Company is unable to repay, refinance or extend any such indebtedness, the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender.
The Company expects that its operations for the foreseeable future will continue to be significantly impacted by the COVID-19 pandemic. Even when all of our hotels are able to reopen fully, we expect demand for our hotels to recover slowly and over time. The time it takes for our hotels to recover will be impacted by, among other matters, the spread of COVID-19, resurgences and new strains of COVID-19, the fear of its spread, and government and/or company-imposed quarantines, restrictions on and increased regulation of hotel operations, and limitations on travel and large gatherings. In addition, the distribution of the COVID-19 vaccines and their impact on the COVID-19 pandemic will be factors in the recovery of our hotels, including the vaccines’ actual or perceived effectiveness, rate of deployment by state, federal and local governments, general acceptance by the public, effect on public and government attitudes toward quarantines, and restrictions on travel, businesses and consumers. In addition, resurgences of COVID-19 in certain areas where our hotels are located may cause us to have to suspend operations at hotels that have remained open or reopened until the resurgence subsides. The Company has already incurred and may incur additional or continuing material costs to reconfigure the layout of its properties, add cleaning services and systems, and take other steps to seek to address customer concerns. Additionally, the disruption to our business caused by the COVID-19 pandemic has led and may continue to lead to triggering events that may indicate that the carrying value of certain of our assets, including investments in real estate, equity investments in real estate, and intangibles, may not be recoverable, resulting in impairment charges.
These and other effects of the COVID-19 pandemic are materially and adversely affecting our current business, results of operations, financial condition, cash flows, ability to meet financial covenants under financing arrangements, ability to pay dividends and asset valuations, and they are expected to continue to do so for the foreseeable future. The severity of the impact will depend on the duration of these conditions and on recovery in the travel and lodging industry.
The Company’s financial condition and results of operations will depend on access to cash flow and additional financing.
The ability of the Company to execute its near- and longer-term business strategy depends on access to an appropriate blend of cash flow from our hotel operations, financing to address upcoming debt maturities, and potentially additional equity financing, joint venture financing and asset sales, the availability of which will be affected by the performance of our hotel portfolio as well as general market and economic conditions and other factors, many of which are beyond our control. The COVID-19 pandemic has resulted in severe volatility and disruption in the financial markets for companies in the lodging sector. There can be no guarantee that financing will be available in sufficient amounts, on favorable terms or at all, to enable the Company to refinance upcoming debt maturities. While the Company may require the purchaser of its Series B Preferred Stock in the July Capital Raise to purchase additional shares of Series B Preferred Stock to fund working capital needs, the Company must satisfy certain customary closing conditions at the times of such additional purchases, and there is no assurance that the Company may be able to do so. If we are unable to repay, refinance or extend maturing mortgage loans, the lenders may declare events of default and seek to foreclose on the underlying hotels. In addition, if we fail to meet cash flow-related covenants in our loans, which has occurred with respect to 27 of our 29 mortgage loans, as discussed above, the lender typically has the right to impose cash management restrictions that limit our ability to use the cash generated on the affected properties. Any such consequences could negatively affect our results of operations, financial condition, cash flows, ability to pay dividends and asset valuations.
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The lodging industry is highly sensitive to trends in business and personal travel.
The performance of the lodging industry has historically been closely linked to the performance of the general economy and, specifically, growth in U.S. gross domestic product. The lodging industry is also sensitive to business and personal discretionary spending levels. The COVID-19 pandemic has materially adversely affected corporate budgets and consumer demand for travel and lodging. These trends are likely to continue. In particular, industry experts predict that business travel and group travel will be slower to recover than personal leisure travel. Most of our hotels have historically derived a significant portion of their business from business travel and group travel. The COVID-19 pandemic caused a significant decline in demand for our products and services. We cannot predict how long reduced demand will continue or its effect on occupancy levels and room rates. A continuing significant reduction in occupancy for room rates would continue to adversely impact our revenues and have a negative effect on our profitability.
We are subject to various operating risks common to the lodging industry.
Our hotel properties and lodging facilities are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the risk described under this section “Risk Factors” and the following:
•competition from other hotel properties or lodging facilities in our markets;
•over-building of hotels in our markets, which would adversely affect occupancy and revenues at our hotels;
•dependence on business and commercial travelers and tourism both of which have been materially adversely affected by the COVID-19 pandemic;
•increases in energy costs and other expenses, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;
•increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
•changes in governmental laws and regulations, fiscal policies and zoning ordinances, and the related compliance costs of such changes;
•adverse effects of international, national, regional and local economic and market conditions;
•unforeseen events beyond our control, such as terrorist attacks, travel related health concerns (including pandemics and epidemics such as COVID-19), political instability, governmental restrictions on travel, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel related accidents, climate change and unusual weather patterns (including natural disasters such as hurricanes, wildfires, tsunamis or earthquakes);
•adverse effects of a downturn in the lodging industry;
•the seasonal nature of resort properties, which may cause fluctuations in our quarterly results; and
•risks generally associated with the ownership of hotel properties and real estate, as discussed in other risk factors.
These risks could reduce our net operating profits, which in turn could adversely affect our ability to meet our obligations and make distributions to our stockholders.
We are subject to the risks of brand concentration.
Twenty-three of our 31 hotels utilize brands owned by Marriott. As a result, our success is dependent in part on the continued success of their brands. A negative public image or other adverse event that affects those brands, such as business difficulties arising from the COVID-19 pandemic or the widely publicized cybersecurity incident that affected Marriott hotels in recent years, could adversely affect hotels operated under those brands. If a brand suffers a significant decline in appeal to the traveling public, the revenues and profitability of our hotels operated under that brand could be adversely affected.
The cyclical nature of the lodging industry may cause fluctuations in our operating performance.
The lodging industry is highly cyclical in nature. Fluctuations in operating performance are caused largely by general economic and local market conditions, which affect business and leisure travel levels. In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging industry’s performance, and over-building has the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. A decline in lodging demand, a substantial growth in lodging supply or a deterioration in the improvement of lodging fundamentals as forecast by industry analysts could result in returns that are substantially below expectations, or result in losses, which could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.
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We own hotels pursuant to ground leases, which could materially and adversely affect us.
We lease the land underlying four of our hotels and one parking lot at another hotel from third-parties as of December 31, 2020. Purchasers may be disinterested in buying, and lenders may be disinterested in financing, properties subject to a ground lease, or lenders may condition any financing on receiving lender protection that the ground lessor is unwilling to provide. Accordingly, we may find it difficult to sell or finance a property subject to a ground lease, or may receive less proceeds in a sale or financing. To the extent that we are unable to sell or finance a hotel, or the proceeds of a sale or financing are decreased due to the existence of a ground lease, our business, financial condition, results of operations and our ability to make distributions to stockholders could be materially adversely affected.
We could have property losses that are not covered by insurance.
Our property insurance policies provide that all of the claims from each of our hotels resulting from a particular insurable event must be combined together for purposes of evaluating whether the aggregate limits and sub-limits contained in our policies have been exceeded. Therefore, if an insurable event occurs that affects more than one of our hotels, the claims from each affected hotel will be added together to determine whether the aggregate limit or sub-limits, depending on the type of claim, have been reached. If the total value of the loss exceeds the aggregate limits available, each affected hotel may only receive a proportional share of the amount of insurance proceeds provided for under the policy. We may incur losses in excess of insured limits, and as a result, may be even less likely to receive sufficient coverage for risks that affect multiple properties, such as earthquakes or catastrophic terrorist acts. Further, in the event a hotel is significantly damaged due to a casualty, restoring it may require compliance with updated zoning and use laws, which would likely be more restrictive and expensive, and could result in not being able to rebuild the hotel as it previously existed. In addition, catastrophic losses, such as those from successive or massive hurricanes or wildfires, could make the cost of insuring against such types of losses prohibitively expensive or difficult to obtain. Risks such as war, catastrophic terrorist acts, nuclear, biological, chemical or radiological attacks, climate change, pandemics and some environmental hazards may be deemed to fall completely outside the general coverage limits of our policies, may be uninsurable or may be too expensive to justify insuring against. We are in contact with our insurance carriers regarding coverage related to losses caused by the COVID-19 pandemic. Although there has been no final determination regarding insurance coverage related to losses caused by the COVID-19 pandemic, we understand that insurance carriers have generally been taking the position that losses caused by the COVID-19 pandemic are not insured. We intend to exercise our rights and remedies to the fullest extent possible in order to obtain insurance coverage related to losses caused by the COVID-19 pandemic, although any recovery is uncertain.
We have encountered, and will likely continue to encounter, disputes concerning whether an insurance provider will pay a particular claim that we believe is covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur, or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In such event, we may nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.
We obtain terrorism insurance to the extent required by lenders or franchisors as a part of our all-risk property insurance program, as well as our general liability policy. However, our all-risk policies have limitations, such as per occurrence limits and sub-limits, which may have to be shared proportionally across participating hotels under certain loss scenarios. Also, all-risk insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Act for ‘‘certified’’ acts of terrorism - namely those that are committed on behalf of non-U.S. persons or interests. Furthermore, we do not have full replacement coverage at all of our hotels for acts of terrorism committed on behalf of U.S. persons or interests (‘‘non-certified’’ events) as our coverage for such incidents is subject to sub-limits and/or annual aggregate limits. In addition, property damage related to war and to nuclear, biological and chemical incidents is excluded under our policies. While the Terrorism Risk Insurance Act will reimburse insurers for losses resulting from nuclear, biological and chemical perils, it does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. As a result of the above, there remains uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.
We face possible risks associated with the physical effects of climate change.
We are subject to the risks associated with the physical effects of climate change, which can include more frequent or severe storms, hurricanes, flooding, droughts and fires, any of which could have a material adverse effect on our hotels, operating results and cash flows. To the extent climate change causes changes in weather patterns, increases in storm intensity could occur, and rising sea-levels causing damage to our hotels in coastal markets. Our hotel properties in Florida, Louisiana and California were adversely impacted by hurricanes, storms and wildfires in recent years. We could become subject to significant
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losses and/or repair costs that may or may not be fully covered by insurance. Other markets may experience prolonged variations in temperature or precipitation that may limit access to the water needed to operate our hotels or significantly increase energy costs, which may subject those hotels to additional regulatory burdens, such as limitations on water usage or stricter energy efficiency standards. Climate change also may affect our business by increasing the cost of (or making unavailable) property insurance on terms we find acceptable in areas most vulnerable to such events, increasing operating costs at our hotels, such as the cost of water or energy, and requiring us to expend funds as we seek to repair and protect our hotels against such risks. There can be no assurance that climate change will not have a material adverse effect on our hotels, financial position, operating results or cash flows.
Compliance with the ADA and the related regulations, rules and orders may adversely affect our financial condition.
Under the ADA, all public accommodations, including hotels, are required to meet certain federal requirements for access and use by disabled persons. Various state and local jurisdictions have also adopted requirements relating to the accessibility of buildings to disabled persons. We make every reasonable effort to ensure that our hotels substantially comply with the requirements of the ADA and other applicable laws. However, we could be liable for both governmental fines and payments to private parties if it were determined that our hotels are not in compliance with these laws. If we were required to make unanticipated major modifications to our hotels to comply with the requirements of the ADA and similar laws, it could materially adversely affect our ability to make distributions to our stockholders and to satisfy our other obligations.
Our participation in joint ventures creates additional risk.
From time to time, we have and may continue to participate in joint ventures to purchase assets. There are additional risks involved in joint venture transactions. As a co-investor in a joint venture, we may not be in a position to exercise sole decision-making authority relating to the property or the joint venture. In addition, there is the potential that our joint venture partner may become bankrupt or that we may have diverging or inconsistent economic or business interests. These diverging interests could, among other things, expose us to liabilities in the joint venture investment in excess of our proportionate share of those liabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property. Further, if we have a fiduciary obligation to a co-investor it may conflict with our duties to our stockholders and any such conflict may result in a less favorable outcome to our stockholders.
We may have difficulty selling our properties, potentially resulting in a lack of liquidity.
Real estate investments are generally less liquid than many other financial assets. The real estate market is affected by general economic conditions, availability of financing, interest rates and other factors beyond our control. The COVID-19 pandemic generally reduced the number of transactions taking place for lodging properties. Some of the other factors that could restrict our ability to sell properties include, but are not limited to:
•inability to agree on a favorable price or on favorable terms;
•restrictions on transfer imposed by lenders, franchisors, managers and other third parties;
•the availability of financing for buyers of hotels; property condition, including environmental issues; and
•lack of funds to correct defects or make improvements necessary for a sale.
Our inability to sell properties may result in our being unable to raise proceeds needed to repay maturing debt or in our owning lodging facilities that no longer fit within our business strategy. Holding these properties or selling them at a loss may affect our earnings and, in turn, could adversely affect the value of our portfolio. These factors could have a material adverse effect on our results of operations and financial condition, as well as our ability to pay distributions to stockholders.
Potential liability for environmental matters could adversely affect our financial condition.
Owners of real estate are subject to numerous federal, state and local environmental laws and regulations. Under these laws and regulations, a current or former owner of real estate may be liable for costs of remediating hazardous substances found on its property, whether or not they were responsible for its presence. Although we subject our properties to an environmental assessment prior to acquisition, we may not be made aware of all the environmental liabilities associated with a property prior to its purchase, or we or a subsequent owner may discover hidden environmental hazards after acquisition. The costs of investigation, remediation or removal of asbestos and hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could expose us to liability for third party claims and/or adversely affect our ability to sell the property or to borrow using the property as collateral.
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Environmental laws may also impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures that may be material.
Future terrorist attacks or increased concern about terrorist activities, or the threat or outbreak of a pandemic disease, could adversely affect the travel and lodging industries and may affect the operations of our hotels.
As in the past, terrorist attacks or alerts in the United States and abroad, or the threat of, or actual outbreak of, pandemic disease could reduce both business and leisure travel, resulting in a decline in the lodging sector. Any kind of terrorist activity within the United States or elsewhere could negatively impact both domestic and international markets, as well as our business. Such attacks or threats of attacks could have a material adverse effect on our business, our ability to insure our properties and our operations. The threat of or actual outbreak of a pandemic disease could reduce business and leisure travel, which could have a material adverse effect on our business.
We are subject to general risks associated with the employment of hotel personnel.
While third-party hotel managers are responsible for hiring and maintaining the labor force at each of our hotels, we are subject to many of the costs and risks generally associated with the hotel labor force. Increased labor costs due to collective bargaining activity, minimum wage initiatives and additional taxes or requirements to incur additional employee benefits costs may adversely impact our operating costs. We may also incur increased legal costs and indirect labor costs as a result of contract disputes or other events. Hotels where our managers have collective bargaining agreements with employees could be affected more significantly by labor force activities and additional hotels or groups of employees may become subject to additional collective bargaining agreements in the future. Increased labor organizational efforts or changes in labor laws could lead to disruptions in our operations, increase our labor costs, or interfere with the ability of our management to focus on executing our business strategies (e.g., by consuming management’s time and attention, limiting the ability of hotel managers to reduce workforces during economic downturns, etc.). In addition, from time to time, strikes, lockouts, boycotts, public demonstrations or other negative actions and publicity may disrupt hotel operations at any of our hotels, negatively impact our reputation or the reputation of our brands, cause us to lose guests, or harm relationships with the labor forces at our hotels.
We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.
Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyberattacks can range from individual attempts to gain unauthorized access to our or our independent hotel operators’ information technology systems to more sophisticated security threats. While we and our independent hotel operators employ a number of measures to prevent, detect and mitigate these threats including password protection, backup servers and annual penetration testing, there is no guarantee such efforts will be successful in preventing a cyberattack. Cybersecurity incidents could compromise the confidential information of financial transactions and records, personal identifying information, reservations, billing and operating data and disrupt and affect the efficiency of our business operations.
We and our independent hotel operators rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We and our independent hotel operators rely on information technology networks and systems to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. We and our independent hotel operators purchase some of our information technology from third-party vendors. Although we and our independent hotel operators have taken steps to protect the security of our information systems and the data maintained in those systems, our independent hotel operators have encountered information technology issues in the past and it is possible that such safety and security measures will not be able to prevent improper system functions, damage or the improper access or disclosure of personally identifiable information. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.
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We depend on the ability of the independent hotel operators to operate and manage our hotels.
As a REIT, we are allowed to own lodging properties, but are prohibited from operating them. Therefore, in order for us to satisfy certain REIT qualification rules, we enter into leases with the TRS lessees for each of our lodging properties. The TRS lessees in turn contract with independent hotel operators that manage the day-to-day operations of our properties. We may be limited in our ability to direct the actions of the independent hotel operators, particularly with respect to daily operations. Thus, even if we believe that our lodging properties are being operated in an unsatisfactory manner, we may not have sufficient rights under a particular property operating agreement to force the property operator to change its method of operation. Our results of operations, financial position, cash flows and ability to service debt and to make distributions to stockholders are, therefore, substantially dependent on the ability of the property operators to successfully operate our hotels. Some of our operating agreements may have lengthy terms, may not be terminable by us before the agreement’s expiration and may require the payment of substantial termination fees. Replacing a property operator may also result in significant disruptions at the affected hotels.
Our hotel management and franchise agreements limit operating flexibility.
We have entered into franchise or license agreements with nationally recognized lodging brands for most of our hotels. These franchise agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of our properties and our ability to make property improvements, in order to maintain uniformity within the franchise system. The franchisors also periodically inspect our properties to ensure that we maintain their standards. As a condition to the maintenance of a franchise license, a franchisor could also require us to make capital expenditures, even if we do not believe the improvements are necessary or desirable. A breach of the standards or other terms and conditions of the franchise agreements could result in the loss or termination of a franchise license. In addition, when terminating or changing the franchise affiliation of a property, we may be required to incur significant expenses or capital expenditures.
The loss of a franchise license and associated brand recognition and marketing support could have a material adverse effect upon the operations or the underlying value of the property and could materially and adversely affect our results of operations, financial position and cash flows, including our ability to service debt and make distributions to our stockholders.
We face competition in the lodging industry, which may limit our profitability and returns to our stockholders.
The lodging industry is highly competitive. This competition could reduce occupancy levels and revenues at our properties, which would adversely affect our operations. We face competition from many sources, including from (i) other lodging facilities, both in the immediate vicinity and the geographic market where our lodging properties are located and (ii) nationally recognized lodging brands that we are not associated with. In addition, increases in operating costs due to inflation may not be offset by increased room rates. Some of our competitors may have substantially greater marketing and financial resources than us. If independent hotel operators are unable to compete successfully or if our competitors’ marketing strategies are effective, our results of operations, financial condition and ability to service debt may be adversely affected and may reduce the cash available for distribution to our stockholders.
We also face competition for investment opportunities. We face competition from other REITs, national lodging chains and other entities that may have substantially greater financial resources than us. If we are unable to compete successfully in the acquisition and management of our lodging properties, our results of operation and financial condition may be adversely affected and may reduce the cash available for distribution to our stockholders.
Risks Related to Our Indebtedness and Financing Arrangements
We are subject to risks from having substantial indebtedness and redeemable preferred stock.
Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. As discussed elsewhere in this Report in “Liquidity and Capital Resources,” as of the date of this Report, we have executed loan modifications on 24 of our 29 Consolidated Hotel mortgage loans, aggregating $1.9 billion of indebtedness, which had resulted in a temporary deferral of interest and principal payments and/or the granting of temporary covenant relief, which generally lasted for periods ranging from three months to four months. Although these loan modifications have generally expired, we are continuing to work with our lenders on longer-term modifications that will help preserve our liquidity. In addition, we refinanced or extended the maturity date of six Consolidated Hotel mortgage loans, aggregating $467.1 million of indebtedness, to address loans with near-term mortgage maturities. As of December 31, 2020, we have effectively entered into cash management agreements with the lenders on 27 of
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our 29 Consolidated Hotel mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement.
We have determined that we are likely to be unable to satisfy certain covenants in the future on most, if not all, of our mortgage loans depending on the length of the COVID-19 pandemic and its continuing effects on the travel and lodging industry and we may seek additional relief from our lenders; however, there is no assurance that we will obtain such further relief, and even if we do, we may incur increased costs and increased interest rates and we may agree to additional restrictive covenants and other lender protections related to the mortgage loans.
Of the aggregate $2.2 billion of indebtedness outstanding as of December 31, 2020 for our Consolidated Hotels, approximately $811.4 million is scheduled to mature during the 12 months after the date of this Report. If we are unable to repay, refinance or extend maturing mortgage loans, or if we breach a covenant and do not get a waiver from the applicable lenders, the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender. If an event of default were to occur, we may need to continue seeking to raise capital through asset sales or strategic financing transactions, potentially on unfavorable terms, but there is no assurance as to the certainty or timing of any such transactions. Any such consequences could negatively affect our results of operations, financial condition, cash flows, ability to pay dividends, and asset valuations.
In addition to our indebtedness, we have $65.0 million aggregate liquidation preference of Series A Preferred Stock and $200.0 million aggregate liquidation preference of Series B Preferred Stock outstanding. The Series A Preferred Stock and the Series B Preferred Stock are redeemable at the option of the respective holders thereof under certain circumstances, including in connection with certain change of control and other extraordinary corporate transactions. The holders of the Series A Preferred Stock also have the option to require us to redeem 25% of the then-outstanding shares in each of April 2022 and April 2023, and the remaining shares in April 2024. The holders of the Series B Preferred Stock have the option to require us to redeem 100% the then-outstanding shares in July 2025. If we fail to redeem in full, in cash, all the shares of Series B Preferred Stock required or sought by holders to be redeemed by the applicable deadline (i) the dividend rate will immediately be increased by 4% (unless an increased rate is already then in effect), (ii) no further dividends or distributions on, and no purchases of, common stock will be permitted, subject to certain exceptions, and (iii) the initial purchaser of the Series B Preferred Stock and its affiliates and permitted transferees will have the right to require us to sell certain assets and properties for net proceeds in an amount sufficient to pay all unpaid redemption amounts due, subject to the conditions specified in the Articles Supplementary governing the Series B Preferred Stock. There can be no assurance that we will have sufficient funds available when needed to satisfy our redemption obligations under the Series A Preferred Stock and the Series B Preferred Stock.
Our debt incurrence may subject us to an increased risk of loss.
Our charter and bylaws do not restrict the form of indebtedness we may incur. The leverage we employ varies depending on our ability to obtain credit facilities, the loan-to-value and debt service coverage ratios of our assets, the yield on our assets, the targeted leveraged return we expect from our investment portfolio and our ability to meet ongoing covenants related to our asset mix and financial performance. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire. Debt service payments and lender cash management agreements have reduced, and may continue to reduce, our net income available for distributions to our stockholders. Moreover, we may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations.
Our financial condition and ability to make distributions may be adversely affected by availability and terms of financing.
A reduction in available financing or increased interest rates for real-estate related investments may impact our financial condition by increasing our cost of borrowing, reducing our overall leverage (which may reduce our returns on investment) and making it more difficult for us to refinance maturing debt or obtain financing for ongoing acquisitions. The COVID-19 pandemic has adversely affected the availability of financing for lodging assets and will continue to do so for the foreseeable future.
The anticipated replacement of LIBOR with an alternative reference rate, may adversely affect our interest expense.
In July 2017, the U.K. Financial Conduct Authority, which regulates London Interbank Offered Rate (“LIBOR”), announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In December 2020, ICE Benchmark Association, the administrator of LIBOR, published a consultation regarding its intention to cease publication of U.S dollar
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LIBOR after June 2023. As of December 31, 2020, $345.7 million of our outstanding debt was floating rate debt. We are unable to predict the timing or effect of any changes, any establishment of alternative reference rates or any other reforms to LIBOR or any replacement of LIBOR that may be enacted in the United States, the United Kingdom or elsewhere. Such changes, reforms or replacements relating to LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us on our overall financial condition or results of operations.
Risks Related to Our Common Stock
The Company has suspended distributions and redemptions and future distributions and redemptions are restricted.
In light of the impact that the COVID-19 pandemic has had on our business, we have suspended distributions on and redemptions of our common stock. Requests for special circumstances redemptions may continue to be submitted, however, all such requests will be deferred until our Board of Directors approves considering them again. If any special circumstances redemptions are approved at that time, we currently expect they will be effectuated at a redemption price equal to 95% of the then most recent NAV. Distributions and redemptions in respect of future periods will be evaluated by the Board of Directors based on circumstances and expectations existing at the time of consideration, and are also subject to the terms of the Series A and Series B Preferred Stock.
Among other terms of the Series A and Series B Preferred Stock, the Series A and Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless all accrued and unpaid dividends on the Series A and Series B Preferred Stock are paid in cash for all past dividend periods and the dividend for the current dividend period is also paid in cash. There are certain exceptions for the payment dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's DRIP.
The terms of our outstanding preferred equity securities could adversely affect our common stockholders and result in conflicts of interest.
As of December 31, 2020, we have $65.0 million aggregate liquidation preference of Series A Cumulative Redeemable Preferred Stock and $200.0 million aggregate liquidation preference of 12% Series B Cumulative Redeemable Preferred Stock outstanding. The purchaser of the outstanding Series B Preferred Stock has committed to purchase up to an additional $250 million aggregate liquidation preference of Series B Preferred Stock during the 18 months after the initial purchase in July 2020, subject to the satisfaction of certain conditions. Upon liquidation, holders of our Series A and Series B Preferred Stock will receive a distribution of our available assets before holders of our common stock. Our Series A and Series B Preferred Stock also has a preference on periodic dividends and limits our ability to make distributions to holders of shares of our common stock and to redeem shares of our common stock. The holders of our Series A Preferred Stock and our Series B Preferred Stock are currently entitled to elect two directors per series to our board of directors. Each of the current holders of the Series A and Series B Preferred Stock holds interests in other hotels or hotel companies that may compete with us; therefore, their director representatives on our board may face conflicts of interest with respect to certain business matters. The terms of each of the Series A Preferred Stock and the Series B Preferred Stock also require that we redeem the shares at certain dates or upon the occurrence of certain events. See Note 15 for a more complete description of our Series A Preferred Stock and Series B Preferred Stock. We cannot predict whether we may issue additional preferred stock in the future. These and other terms of our outstanding Series A and Series B Preferred Stock and additional preferred stock that we may issue in the future could adversely affect our common stockholders and result in conflicts of interest between our common and preferred stockholders, and for the directors elected by our preferred stockholders to our board.
Our NAVs may not be indicative of the price at which our shares would trade if they were listed on an exchange or actively traded by brokers.
The valuation methodologies underlying our NAVs involve subjective judgments. Valuations of real properties do not necessarily represent the price at which a willing buyer would purchase our properties; therefore, there can be no assurance that we would realize the values underlying our NAVs if we were to sell our assets and distribute the net proceeds to our stockholders. In addition, the values of our assets and debt are likely to fluctuate over time. Our NAVs may not be indicative of (i) the price at which shares would trade if they were listed on an exchange or actively traded by brokers, (ii) the proceeds that a stockholder would receive if we were liquidated or dissolved or (iii) the value of our portfolio at the time you dispose of your shares.
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Our distributions in the past have exceeded, and may in the future exceed, our funds from operations (“FFO”).
Over the life of our company, the regular quarterly cash distributions we pay are expected to be principally sourced from our FFO. However, we have funded a portion of our cash distributions to date using net proceeds from our public offerings and, to a lesser extent, other sources; and there can be no assurance that our FFO will be sufficient to cover our future distributions. If our properties are not generating sufficient cash flow or our other expenses require it, we may need to use other sources of funds, such as proceeds from asset sales, borrowings or our DRIP to fund distributions in order to satisfy REIT requirements. If we fund distributions from borrowings, such financing will incur interest costs and need to be repaid.
Our distributions at any point in time may not reflect the current performance of our properties or our current operating cash flows.
Our charter permits us to make distributions from any source, including the sources described in the risk factor above. Because the amount we pay out in distributions has in the past exceeded, and may in the future continue to exceed, our FFO, distributions to stockholders may not reflect the current performance of our properties or our current operating cash flows. To the extent distributions exceed cash flow from operations, distributions may be treated as a return of investment and could reduce a stockholder’s basis in our stock. A reduction in a stockholder’s basis in our stock could result in the stockholder recognizing more gain upon the disposition of his or her shares, which in turn could result in greater taxable income to such stockholder.
Stockholders’ equity interests may be diluted.
Our common stockholders do not have preemptive rights to any shares of common stock issued by us in the future. The purchasers of our Series B Preferred Stock in the July 2020 Capital Raise also acquired warrants to purchase 16,778,446 operating partnership units in our Operating Partnership at an exercise price of $0.01 per unit, which is equivalent to 6.75% of our fully diluted common equity as of the closing of the July 2020 Capital Raise. The warrants are entitled to participate in all distributions on our common stock, on an as-exercised basis. Therefore, (i) if the 16,778,446 warrants are exercised, (ii) when we sell shares of common stock in the future, including those issued pursuant to our DRIP, (iii) when we issue shares of common stock to our independent directors, (iv) when we issue shares of common stock under equity incentive plans or (v) if we issue additional common stock or other securities that are convertible into our common stock, then existing stockholders and investors that purchased their shares in our initial public offering will experience dilution of their percentage ownership in us. Depending on the terms of such transactions, most notably the offer price per share (which may be less than the per share proceeds received by us in our initial public offering) and the value of our properties and our other investments, existing common stockholders might also experience a dilution in the book value and NAV per share of their investment in us. The exercise of the warrants described above will result in dilution in the book value and NAV per share of our existing common stockholders due to the de minimis exercise price of the warrants.
Our board of directors may change our investment policies or revoke our REIT qualification without stockholder approval, which could alter the nature of your investment.
Except as otherwise provided in our charter, our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by a majority of our directors (including a majority of the independent directors), without the approval of our stockholders. Furthermore, our charter provides that the board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. As a result, the nature of your investment could change without your consent. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and hotel property market fluctuations. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income and we will be subject to federal income tax at regular corporate rates and state and local taxes. Any of the foregoing changes could materially adversely affect our ability to achieve our investment objectives and the returns we generate for our stockholders.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.
Our board of directors may determine that it is in our best interest to classify or reclassify any unissued stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or
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preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock. However, the issuance of preferred stock must also be approved by a majority of independent directors not otherwise interested in the transaction, who will have access at our expense to our legal counsel or to independent legal counsel. In addition, the board of directors, with the approval of a majority of the entire board and without any action by the stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue. If our board of directors determines to take any such action, it will do so in accordance with the duties it owes to holders of our common stock.
Our NAVs are computed by us in part on information provided to a third party.
Our NAVs are computed by us relying in part upon an annual third-party appraisal of the fair market value of our real estate and third-party estimates of the fair market value of our debt. Any valuation includes the use of estimates. Because NAVs are estimated values and can change as interest rate and real estate markets fluctuate, there is no assurance that a stockholder will realize a particular NAV in connection with any liquidity event.
The lack of an active public trading market for our shares could make it difficult for stockholders to sell shares quickly or at all. We may amend, suspend or terminate our redemption plan without giving our stockholders advance notice.
There is no active public trading market for our shares and we do not expect one to develop. Moreover, we are not required to ever complete a liquidity event. Our share redemption plan is currently suspended and even if it reopens, stockholders should not rely on our redemption plan as a method to sell shares promptly. If the plan is reopened, it will likely continue to include numerous restrictions that will limit stockholders’ ability to sell their shares to us to an overall cap and our board of directors will be able to amend, suspend or terminate the plan without advance notice. Given these limitations, it may be difficult for stockholders to sell their shares promptly or at all. In addition, the price received for any shares sold prior to a liquidity event is likely to be less than the applicable NAV at that time. Investor suitability standards imposed by certain states may also make it more difficult for stockholders to sell their shares to someone in those states.
Risks Related to Our Organization and Structure
Conflicts of interest may arise between holders of our common stock and holders of partnership interests in our Operating Partnership.
Our directors and officers have duties to us and our stockholders under Maryland law in connection with their management of us. At the same time, our Operating Partnership was formed in Delaware and we, as general partner, have duties under Delaware law to our Operating Partnership and the limited partners in connection with our management of our Operating Partnership. Our duties as general partner of our Operating Partnership may come into conflict with the duties of our directors and officers to us and our stockholders.
Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our Operating Partnership provides that, for so long as we own a controlling interest in our Operating Partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders. The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.
In addition, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees will not be liable or accountable to our Operating Partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. Furthermore, our Operating Partnership is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from, and against, any and all claims arising from operations of our Operating Partnership, unless it is established that: (i) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty; (ii) the indemnified party actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. These limitations on liability do not supersede the indemnification provisions of our charter.
WLT 2020 10-K – 18
The ownership limit in our charter may discourage an advantageous takeover.
To assist us in meeting the REIT qualification rules, among other things, our charter prohibits the ownership by one person or affiliated group of more than 9.8% in value of our stock or more than 9.8% in value or number, whichever is more restrictive, of our outstanding shares of common stock, unless exempted (prospectively or retroactively) by our board of directors. This ownership limitation may discourage third parties from making a potentially attractive tender offer for our stockholders’ shares, thereby inhibiting a change of control in us.
Maryland law could restrict a change in control that is in our stockholders’ interest.
Provisions of Maryland law applicable to us prohibit business combinations with:
•any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding voting stock, referred to as an interested stockholder;
•an affiliate or associate who, at any time within the two-year period prior to the date in question, was the beneficial owner of, directly or indirectly, 10% or more of the voting power of our then outstanding stock, also referred to as an interested stockholder; or
•an affiliate of an interested stockholder.
These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding voting shares and two-thirds of the votes entitled to be cast by holders of our outstanding voting stock (other than voting stock held by the interested stockholder or by an affiliate or associate of the interested stockholder). These requirements could have the effect of inhibiting a change in control of us even if a change in control were in our stockholders’ interest. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder. In addition, a person is not an interested stockholder if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
Tax Risks
While we believe that we are properly organized as a REIT in accordance with applicable law, we cannot guarantee that the Internal Revenue Service will find that we have qualified as a REIT.
We believe that we are organized in conformity with the requirements for qualification as a REIT under the Internal Revenue Code beginning with our 2008 taxable year and that our current and anticipated investments and plan of operation will enable us to meet and continue to meet the requirements for qualification and taxation as a REIT. Investors should be aware, however, that the Internal Revenue Service or any court could take a position different from our own. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will qualify as a REIT for any particular year.
Furthermore, our qualification and taxation as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership, and other requirements on a continuing basis. Our ability to satisfy the quarterly asset tests under applicable Internal Revenue Code provisions and Treasury Regulations will depend in part upon our board of directors’ good faith analysis of the fair market values of our assets, some of which are not susceptible to a precise determination. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. While we believe that we will satisfy these tests, we cannot guarantee that this will be the case on a continuing basis.
In particular, if the IRS were to successfully challenge the status of our Operating Partnership as a partnership for U.S. federal income tax purposes, we would fail to qualify as a REIT, and we and our Operating Partnership would be subject to corporate-level taxes that would reduce our cash available to pay distributions.
If we fail to remain qualified as a REIT, we would be subject to federal income tax at corporate income tax rates, would not be able to deduct distributions to stockholders and may have to take unfavorable actions.
WLT 2020 10-K – 19
If, in any taxable year, we fail to qualify for taxation as a REIT and are not entitled to relief under the Internal Revenue Code, we will:
•not be allowed a deduction for distributions to stockholders in computing our taxable income;
•be subject to federal and state income tax, including any applicable alternative minimum tax for taxable years ending prior to January 1, 2018, on our taxable income at regular corporate rates; and
•be barred from qualifying as a REIT for the four taxable years following the year when we were disqualified.
Any such corporate tax liability could be substantial and would reduce the amount of cash available for distributions to our stockholders, which in turn could have an adverse impact on the value of our common stock. This adverse impact could last for five or more years because, unless we are entitled to relief under certain statutory provisions, we will be taxed as a corporation beginning the year in which the failure occurs and for the following four years.
If we fail to qualify for taxation as a REIT, we may need to borrow funds or liquidate some investments to pay the additional tax liability. Were this to occur, funds available for investment would be reduced, our leverage would be increased and our future income may be reduced. REIT qualification involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations, as well as various factual determinations concerning matters and circumstances not entirely within our control. There are limited judicial or administrative interpretations of these provisions. Although we plan to continue to operate in a manner consistent with the REIT qualification rules, we cannot assure you that we will qualify in a given year or remain so qualified.
If we fail to make required distributions, we may be subject to federal corporate income tax.
Quarterly distributions are determined, and subject to adjustment, by our board of directors. To continue to qualify and be taxed as a REIT, we will generally be required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and excluding net capital gain) each year to our stockholders. Generally, we expect to distribute all, or substantially all, of our REIT taxable income. If our cash available for distribution falls short of our estimates, we may be unable to maintain the proposed quarterly distributions that approximate our taxable income and we may fail to qualify for taxation as a REIT. In addition, our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes or the effect of nondeductible expenditures (e.g., capital expenditures, the creation of reserves, or required debt service or amortization payments). To the extent we satisfy the 90% distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. We will also be subject to a 4.0% nondeductible excise tax if the actual amount that we pay out to our stockholders for a calendar year is less than a minimum amount specified under the Internal Revenue Code. In addition, in order to continue to qualify as a REIT, any C-corporation earnings and profits to which we succeed must be distributed as of the close of the taxable year in which we accumulate or acquire such C-corporation’s earnings and profits.
The REIT rules may limit our ability to pursue otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets (including mandatory holding periods prior to disposition), the amounts we distribute to our stockholders, and the ownership of our common stock. Compliance with these tests will require us to refrain from certain activities and may hinder our ability to make certain attractive investments or dispositions, including the purchase of non-qualifying assets, the expansion of non-real estate activities, and investments in the businesses to be conducted by our TRSs, thereby limiting our opportunities and the flexibility to change our business strategy. Furthermore, acquisition opportunities in domestic and international markets may be adversely affected if we need or require target companies to comply with certain REIT requirements prior to closing on acquisitions.
To meet our annual distribution requirements, we may be required to distribute amounts that may otherwise be used for our operations, including amounts that may be invested in future acquisitions, capital expenditures, or debt repayment; and it is possible that we might be required to borrow funds, sell assets, or raise equity to fund these distributions, even if the then-prevailing market conditions are not favorable for such transactions.
The REIT rules limit our hedging activities.
The REIT provisions of the Internal Revenue Code limit our ability to hedge assets and liabilities that are not incurred to acquire or carry real estate. Generally, income from hedging transactions that have been properly identified for tax purposes (which we enter into to manage interest rate risk with respect to borrowings to acquire or carry real estate assets) do not
WLT 2020 10-K – 20
constitute “gross income” for purposes of the REIT gross income tests (such a hedging transaction is referred to as a “qualifying hedge”). In addition, if we enter into a qualifying hedge, but dispose of the underlying property (or a portion thereof) or the underlying debt (or a portion thereof) is extinguished, we can enter into a hedge of the original qualifying hedge, and income from the subsequent hedge will also not constitute “gross income” for purposes of the REIT gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the REIT gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs could be subject to tax on income or gains resulting from such hedges or expose us to greater interest rate risks than we would otherwise want to bear. In addition, losses in any of our TRSs generally will not provide any tax benefit, except for being carried forward for use against future taxable income in the TRSs.
Our ability to fund distribution payments using cash generated through our TRSs may be limited.
Our ability to receive distributions from our TRSs is limited by the rules we must comply with in order to maintain our REIT status. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from real estate-related sources, which principally includes gross income from the leasing of our properties. Consequently, no more than 25% of our gross income may consist of dividend income from our TRSs and other non-qualifying income types. Thus, our ability to receive distributions from our TRSs is limited and may impact our ability to fund distributions to our stockholders using cash flows from our TRSs. Specifically, if our TRSs become highly profitable, we might be limited in our ability to receive net income from our TRSs in an amount required to fund distributions to our stockholders commensurate with that profitability.
Limitations imposed by the REIT rules on our use of TRSs may adversely affect us.
Overall, no more than 20% of the value of a REIT’s gross assets may consist of interests in TRSs; compliance with this limitation could limit our ability to grow our portfolio. The Internal Revenue Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Internal Revenue Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We monitor the value of investments in our TRSs in order to ensure compliance with TRS ownership limitations and will structure our transactions with our TRSs on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the TRS ownership limitation or be able to avoid application of the 100% excise tax.
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from C corporations, which could cause investors to perceive investments in REITs to be relatively less attractive.
The maximum U.S. federal income tax rate for certain qualified dividends payable by C corporations to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced qualified dividend rate. However, for taxable years beginning after December 31, 2017 and before January 1, 2026, under the recently enacted Tax Cuts and Jobs Act, noncorporate taxpayers may deduct up to 20% of certain qualified business income, including "qualified REIT dividends" (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable to qualified dividends from C corporations does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends, together with the current corporate tax rate (21%), could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends.
Even if we continue to qualify as a REIT, certain of our business activities will be subject to corporate level income tax.
Even if we qualify for taxation as a REIT, we may be subject to certain (i) federal, state and local taxes on our income and assets, including alternative minimum taxes (for taxable years ending prior to January 1, 2018), (ii) taxes on any undistributed income and state or local income, and (iii) franchise, property, and transfer taxes. Moreover, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Internal Revenue Code) will be subject to a 100% tax. In addition, we could be required to pay an excise or penalty tax under certain circumstances in order to utilize one or more relief provisions under the Internal Revenue Code to maintain qualification for taxation as a REIT, which could be significant in amount.
WLT 2020 10-K – 21
Under recently enacted partnership audit rules, for taxable years beginning in 2018, partnership audits are conducted and collected at the partnership level. Unless the partnership makes a specific election or takes certain steps to require the partners to pay their tax on their allocable shares of the adjustment, it is possible that partnerships in which we directly or indirectly invest, including the Operating Partnership, would be required to pay additional taxes, interest and penalties as a result of an audit adjustment, which could adversely impact our interest in the partnership even if the taxes are attributable to another partner.
Any TRS assets and operations would continue to be subject, as applicable, to federal and state corporate income taxes and to foreign taxes in the jurisdictions in which those assets and operations are located. Any of these taxes would decrease our earnings and our cash available for distributions to stockholders.
We will also be subject to a federal corporate level tax at the highest regular corporate rate (currently 21%) on all or a portion of the gain recognized from a sale of assets formerly held by any C corporation that we acquire on a carry-over basis transaction occurring within a five-year period after we acquire such assets, to the extent the built-in gain based on the fair market value of those assets on the date of acquisition is in excess of our then tax basis. Gains from the sale of an asset occurring after the specified period will not be subject to this corporate level tax. We expect to have only a de minimis amount of assets subject to these corporate tax rules and do not expect to dispose of any significant assets subject to these corporate tax rules.
In addition, although the Merger was intended to be treated as a tax-free reorganization for U.S. federal income tax purposes, if the Merger is determined not to have qualified for such tax-free treatment, or if CWI 1 is determined to have failed to qualify as a REIT for any period prior to the Merger, we could inherit certain tax liabilities of CWI 1 as its successor in the Merger.
Recent changes to U.S. tax laws could have a negative impact on our business.
On December 22, 2017, former President Trump signed a tax reform bill into law, referred to herein as the “Tax Cuts and Jobs Act,” which among other things:
•reduced the corporate income tax rate from 35% to 21% (including with respect to our TRSs);
•reduced the rate of U.S. federal withholding tax on distributions made to non-U.S. shareholders by a REIT that are attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;
•allowed for an immediate 100% deduction of the cost of certain capital asset investments (generally excluding real estate assets), subject to a phase-down of the deduction percentage over time;
•changed the recovery periods for certain real property and building improvements;
•restricted the deductibility of interest expense by businesses (generally, to 30% of the business’s adjusted taxable income) except, among others, real property businesses electing out of such restriction; generally, we expect our business to qualify as such a real property business;
•required the use of the less favorable alternative depreciation system to depreciate real property in the event a real property business elects to avoid the interest deduction restriction above;
•restricted the benefits of like-kind exchanges that defer capital gains for tax purposes to exchanges of real property;
•permanently repealed the “technical termination” rule for partnerships, meaning sales or exchanges of the interests in a partnership will be less likely to, among other things, terminate the taxable year of, and restart the depreciable lives of assets held by, such partnership for tax purposes;
•required accrual method taxpayers to take certain amounts in income no later than the taxable year in which such income is taken into account as revenue in an applicable financial statement prepared under GAAP, which, with respect to certain leases, could accelerate the inclusion of rental income;
•eliminated the federal corporate alternative minimum tax;
•reduced the highest marginal income tax rate for individuals to 37% from 39.6% (excluding, in each case, the 3.8% Medicare tax on net investment income);
•generally allowed a deduction for individuals equal to 20% of certain income from pass-through entities, including ordinary dividends distributed by a REIT (excluding capital gain dividends and qualified dividend income), generally resulting in a maximum effective federal income tax rate applicable to such dividends of 29.6% compared to 37% (excluding, in each case, the 3.8% Medicare tax on net investment income), although regulations restrict the ability to claim this deduction for non-corporate shareholders depending upon their holding period in our stock; and
•limited certain deductions for individuals, including deductions for state and local income taxes, and eliminated deductions for miscellaneous itemized deductions (including certain investment expenses).
WLT 2020 10-K – 22
As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders annually. As a result of the changes to U.S. federal tax laws implemented by the Tax Cuts and Jobs Act, our taxable income and the amount of distributions to our stockholders required to maintain our REIT status, as well as our relative tax advantage as a REIT, could change.
The Tax Cuts and Jobs Act is a complex revision to the U.S. federal income tax laws with impacts on different categories of taxpayers and industries, which will require subsequent rulemaking and interpretation in a number of areas. In addition, many provisions in the Tax Cuts and Jobs Act, particularly those affecting individual taxpayers, expire at the end of 2025. The long-term impact of the Tax Cuts and Jobs Act on the overall economy, government revenues, us, and the real estate industry cannot be reliably predicted at this time. There can be no assurance that the Tax Cuts and Jobs Act will not negatively impact our operating results, financial condition, and future business operations.
In addition, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. Among other changes, the CARES Act temporarily modified rules relating to net operating losses and interest expense deductions, which could impact the usage by our TRSs of any net operating losses and the deduction of interest by us or our TRSs.
Item 1B. Unresolved Staff Comments.
None.
WLT 2020 10-K – 23
Item 2. Properties.
Our Hotels
The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels at December 31, 2020:
| Hotels | State |
Number
of Rooms |
% Owned | Hotel Type | ||||||||||||||||||||||
| Consolidated Hotels | ||||||||||||||||||||||||||
|
Charlotte Marriott City Center
|
NC | 446 | 100% | Full-Service | ||||||||||||||||||||||
|
Courtyard Nashville Downtown
|
TN | 192 | 100% | Select-Service | ||||||||||||||||||||||
|
Courtyard Pittsburgh Shadyside
|
PA | 132 | 100% | Select-service | ||||||||||||||||||||||
|
Courtyard Times Square West
|
NY | 224 | 100% | Select-service | ||||||||||||||||||||||
|
Embassy Suites by Hilton Denver-Downtown/Convention Center
|
CO | 403 | 100% | Full-Service | ||||||||||||||||||||||
|
Equinox, a Luxury Collection Golf Resort & Spa
|
VT | 199 | 100% | Resort | ||||||||||||||||||||||
|
Fairmont Sonoma Mission Inn & Spa
|
CA | 226 | 100% | Resort | ||||||||||||||||||||||
|
Hawks Cay Resort (a)
|
FL | 420 | 100% | Resort | ||||||||||||||||||||||
|
Hilton Garden Inn/Homewood Suites Atlanta Midtown
|
GA | 228 | 100% | Select-service | ||||||||||||||||||||||
|
Holiday Inn Manhattan 6th Avenue Chelsea
|
NY | 226 | 100% | Full-service | ||||||||||||||||||||||
|
Hyatt Place Austin Downtown
|
TX | 296 | 100% | Select-service | ||||||||||||||||||||||
|
Le Méridien Arlington
|
VA | 154 | 100% | Full-Service | ||||||||||||||||||||||
|
Le Méridien Dallas, The Stoneleigh
|
TX | 176 | 100% | Full-service | ||||||||||||||||||||||
|
Marriott Kansas City Country Club Plaza
|
MO | 295 | 100% | Full-service | ||||||||||||||||||||||
|
Marriott Raleigh City Center
|
NC | 401 | 100% | Full-service | ||||||||||||||||||||||
|
Marriott Sawgrass Golf Resort & Spa
|
FL | 514 | 100% | Resort | ||||||||||||||||||||||
|
Renaissance Atlanta Midtown Hotel
|
GA | 304 | 100% | Full-Service | ||||||||||||||||||||||
|
Renaissance Chicago Downtown
|
IL | 560 | 100% | Full-service | ||||||||||||||||||||||
|
Ritz-Carlton Bacara, Santa Barbara
|
CA | 358 | 100% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton Fort Lauderdale (b)
|
FL | 198 | 70% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton Key Biscayne (c)
|
FL | 443 | 66.7% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton San Francisco
|
CA | 336 | 100% | Full-Service | ||||||||||||||||||||||
|
Sanderling Resort
|
NC | 128 | 100% | Resort | ||||||||||||||||||||||
|
San Diego Marriott La Jolla
|
CA | 376 | 100% | Full-Service | ||||||||||||||||||||||
|
San Jose Marriott
|
CA | 510 | 100% | Full-Service | ||||||||||||||||||||||
|
Seattle Marriott Bellevue
|
WA | 384 | 100% | Full-Service | ||||||||||||||||||||||
|
Sheraton Austin Hotel at the Capitol
|
TX | 367 | 80% | Full-Service | ||||||||||||||||||||||
|
Westin Minneapolis
|
MN | 214 | 100% | Full-Service | ||||||||||||||||||||||
|
Westin Pasadena
|
CA | 350 | 100% | Full-Service | ||||||||||||||||||||||
| 9,060 | ||||||||||||||||||||||||||
| Unconsolidated Hotels | ||||||||||||||||||||||||||
|
Hyatt Centric New Orleans French Quarter
|
LA | 254 | 80% | Full-service | ||||||||||||||||||||||
| Ritz-Carlton Philadelphia | PA | 301 | 60% | Full-service | ||||||||||||||||||||||
| 555 | ||||||||||||||||||||||||||
_________
(a)Includes 243 privately owned villas that participate in the villa/condo rental program as of December 31, 2020.
(b)Includes 32 condo-hotel units that participate in the villa/condo rental program as of December 31, 2020.
(c)The number of rooms presented includes 141 condo-hotel units that participate in the resort rental program at December 31, 2020.
Our Hotel Management and Franchise Agreements
Hotel Management Agreements
All of our hotels are managed by independent hotel operators pursuant to management or operating agreements, with many also subject to separate license agreements addressing matters pertaining to operation under the designated brand. As of
WLT 2020 10-K – 24
December 31, 2020, we had management or operating agreements with eleven different management companies. Under these agreements, the managers generally have sole responsibility and exclusive authority for all activities necessary for the day-to-day operation of the hotels, including establishing room rates; securing and processing reservations; procuring inventories, supplies and services; providing periodic inspection and consultation visits to the hotels by the managers’ technical and operational experts; and promoting and publicizing the hotels. The managers provide all managerial and other employees for the hotels; review the operation and maintenance of the hotels; prepare reports, budgets and projections; and provide other administrative and accounting support services to the hotels. These support services include planning and policy services, divisional financial services, product planning and development, employee staffing and training, corporate executive management and certain in-house legal services. We have certain approval rights over budgets, capital expenditures, significant leases and contractual commitments, and various other matters.
The initial terms of our management and operating agreements, including those that have been assumed at the time of the hotel acquisition, typically range from 5 to 40 years, with one or more renewal terms at the option of the manager. The management agreements condition the manager’s right to exercise options for specified renewal terms upon the satisfaction of specified economic performance criteria, or allow us to terminate at will with 30 to 60 days’ notice. For hotels operated with separate franchise agreements, the manager typically receives compensation in the form of a base management fee, which is calculated as a percentage (generally ranging from 1.5% to 3.5%) of annual gross revenues, and an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel.
The management agreements relating to twelve of our hotels contain the right and license to operate the hotels under specified brands. No separate franchise agreements exist and no separate franchise fee is required for these hotels. These management agreements incur a base management fee ranging from 3.0% to 7.0% of hotel revenues. These hotels are all managed by subsidiaries of Marriott.
Franchise Agreements
Seventeen of our hotels operate under franchise or license agreements with national brands that are separate from our management agreements. As of December 31, 2020, we have 12 franchise agreements with Marriott owned brands, two with a Hilton owned brand, one with InterContinental Hotels-owned brands and two with a Hyatt-owned brand related to our hotels.
Typically, franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures that the licensed hotel must comply with. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.5% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels.
Our typical franchise agreement provides for a term of 15 to 25 years. Two of our hotels are not operated with a hotel brand so the hotels do not have franchise agreements. The agreements provide no renewal or extension rights and are not assignable. If we breach one of these agreements, in addition to losing the right to use the brand name for the applicable hotel, we may be liable, under certain circumstances, for liquidated damages equal to the fees paid to the franchisor with respect to that hotel during the three immediately preceding years.
Item 3. Legal Proceedings.
As of December 31, 2020, we were not involved in any material litigation.
Various claims and lawsuits arising in the normal course of business are pending against us. The results of these proceedings are not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
WLT 2020 10-K – 25
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Unlisted Shares
There is no active public trading market for our shares. At March 5, 2021, there were 51,164 holders of record of our shares of common stock.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The following table provides information with respect to repurchases of our common stock during the three months ended December 31, 2020:
| Class A | Class T | |||||||||||||||||||||||||||||||||||||
| 2020 Period |
Total number of shares purchased (a)
|
Average price paid per share |
Total number of shares purchased (a)
|
Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | ||||||||||||||||||||||||||||||||
| October 1 – 31 | — | $ | — | — | $ | — | N/A | N/A | ||||||||||||||||||||||||||||||
| November 1 – 30 | — | — | — | — | N/A | N/A | ||||||||||||||||||||||||||||||||
| December 1 – 31 | 165,990 | 5.23 | 72,820 | 5.18 | N/A | N/A | ||||||||||||||||||||||||||||||||
| Total | 165,990 | 72,820 | ||||||||||||||||||||||||||||||||||||
___________
(a)Represents shares of our Class A and Class T common stock repurchased under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders, subject to certain exceptions, conditions and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors. Our redemption plan has been suspended as we seek to preserve liquidity in light of the COVID-19 pandemic. See “Risk Factors - Risks Related to Our Common Stock.”
Securities Authorized for Issuance Under Equity Compensation Plans
This information will be contained in our definitive proxy statement for the 2021 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
WLT 2020 10-K – 26
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the consolidated financial statements and related notes in Item 8 (in thousands, except per share amounts and statistical data):
| Years Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
|
Operating Data (a)
|
|||||||||||||||||||||||||||||
| Total hotel revenues | $ | 279,101 | $ | 611,063 | $ | 613,887 | $ | 629,132 | $ | 651,095 | |||||||||||||||||||
| Transaction costs | 18,448 | 2,783 | — | — | 3,727 | ||||||||||||||||||||||||
| Net (loss) income | (367,276) | (731) | 15,744 | 3,751 | (6,976) | ||||||||||||||||||||||||
| Loss (income) attributable to noncontrolling interests | 17,148 | (10,167) | (7,688) | 1,177 | (1,777) | ||||||||||||||||||||||||
| Preferred dividends | (1,742) | — | — | — | — | ||||||||||||||||||||||||
| Net (loss) income attributable to common stockholders | (351,870) | (10,898) | 8,056 | 4,928 | (8,753) | ||||||||||||||||||||||||
| Basic and diluted (loss) income per share: | |||||||||||||||||||||||||||||
|
Net (loss) income attributable to Common Stockholders — Class A Common
Stock (b)
|
(1.73) | (0.08) | 0.06 | 0.04 | (0.07) | ||||||||||||||||||||||||
| Net loss attributable to Common Stockholders — Class T Common Stock | (1.74) | — | — | — | — | ||||||||||||||||||||||||
|
Distributions declared per share — Class A Common Stock (b)
|
— | 0.6260 | 0.6260 | 0.6260 | 0.6260 | ||||||||||||||||||||||||
| Distributions declared per share — Class T Common Stock | — | — | — | — | — | ||||||||||||||||||||||||
|
Balance Sheet Data (a)
|
|||||||||||||||||||||||||||||
|
Total assets
|
$ | 3,419,326 | $ | 2,094,691 | $ | 2,280,144 | $ | 2,459,921 | $ | 2,476,944 | |||||||||||||||||||
|
Net investments in real estate (c)
|
2,978,103 | 1,809,844 | 2,022,367 | 2,181,592 | 2,225,070 | ||||||||||||||||||||||||
| Non-recourse debt, net, including debt attributable to Assets held for sale | 2,169,902 | 1,206,067 | 1,326,014 | 1,420,913 | 1,456,152 | ||||||||||||||||||||||||
| Mandatorily redeemable preferred stock | 214,158 | — | — | — | — | ||||||||||||||||||||||||
| WPC Credit Facility | — | — | 41,637 | 68,637 | — | ||||||||||||||||||||||||
| Due to related parties and affiliates | 190 | 3,806 | 6,258 | 3,611 | 2,628 | ||||||||||||||||||||||||
|
Other Information (a)
|
|||||||||||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (154,021) | $ | 78,186 | $ | 82,856 | $ | 120,002 | $ | 84,539 | |||||||||||||||||||
|
Cash distributions paid
|
20,357 | 80,260 | 79,045 | 77,716 | 76,233 | ||||||||||||||||||||||||
|
Supplemental Financial Measures (a)(d)
|
|||||||||||||||||||||||||||||
| FFO attributable to WLT stockholders | $ | (98,761) | $ | 46,494 | $ | 60,881 | $ | 58,581 | $ | 73,107 | |||||||||||||||||||
| MFFO attributable to WLT stockholders | (128,865) | 61,783 | 67,563 | 68,717 | 83,400 | ||||||||||||||||||||||||
|
Consolidated Hotel Operating Statistics (a)(e)
|
|||||||||||||||||||||||||||||
|
Occupancy
|
25.9 | % | 74.3 | % | 76.2 | % | 76.3 | % | 75.7 | % | |||||||||||||||||||
|
ADR
|
$ | 221.66 | $ | 234.36 | $ | 227.31 | $ | 219.68 | $ | 216.25 | |||||||||||||||||||
|
RevPAR
|
57.49 | 174.10 | 173.19 | 167.71 | 163.67 | ||||||||||||||||||||||||
___________
(a)The historical financial information for any periods prior to April 13, 2020 (the closing date of the Merger), is the pre-Merger financial information of CWI 1. The results of operations of CWI 2, as the acquired company for accounting and financial reporting purposes, are incorporated into WLT effective April 13, 2020.
(b)The Class A common stock (loss) income per share and Class A common stock distributions declared per share for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3).
WLT 2020 10-K – 27
(c)Net investments in real estate consist of Net investments in hotels, Assets held for sale (when applicable) and Equity investments in real estate.
(d)We consider FFO and modified funds from operations (“(MFFO”), which are non-GAAP measures, to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
(e)Represents statistical data for our Consolidated Hotels during our ownership period.
WLT 2020 10-K – 28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results.
The following discussion should be read in conjunction with our consolidated financial statements included in Item 8 of this Report and the matters described under Item 1A. Risk Factors. For discussion of our results of operations for the year ended December 31, 2019, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in the audited consolidated financial statements of CWI 1 and accompanying notes as of and for the year ended December 31, 2019 included as Exhibit 99.2 of Form 8-K/A filed by WLT on June 29, 2020.
Business Overview
We are a self-managed, publicly owned, non-traded REIT that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States. We own a diversified lodging portfolio, including full-service, select-service and resort hotels. Our 2020 results of operations were significantly affected by the COVID-19 pandemic, as discussed further below. Our results of operations are significantly impacted by seasonality and by hotel renovations. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations. As of December 31, 2020, we held ownership interests in 31 hotels, with a total of 9,615 rooms.
Significant Developments
COVID-19 Pandemic
As of the date of this Report, 30 of our hotels are open but the majority are operating at significantly reduced levels of occupancy, staffing, and expenses and operations at our remaining one hotel are fully suspended. While we have seen improving demand at some of our properties as certain states and cities across the United States have loosened stay-at-home restrictions, we expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. In addition, resurgences of COVID-19 in certain areas where our hotels are located may cause us to have to suspend operations at hotels that have remained open or reopened until the resurgence subsides. The distribution of the COVID-19 vaccine may impact the timing and extent of our recovery. Given the uncertainty as to the ultimate severity and duration of the COVID‑19 pandemic and its effects, and the potential for its recurrence, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.
We have taken decisive actions to help mitigate the effects of the COVID-19 pandemic on our operating results and to preserve our liquidity at both the operating level and corporate level, including:
•Completing the July Capital Raise;
•Significantly reducing hotel operating costs: in March, April and May 2020, we suspended all operations at 16 hotels and significantly reduced operations at the remaining hotels, primarily by reducing staffing, furloughing employees, eliminating non-essential amenities and services and closing several floors and food and beverage outlets. One of these hotels reopened in May, seven hotels reopened in June, five hotels reopened in July and two hotels reopened in August;
•Working with our lenders on debt forbearance plans, as discussed below;
•Suspending distributions on, and redemptions of, our common stock, subject to limited exceptions;
•Actively pursuing certain asset sales;
•Significantly reducing our planned renovation activity by either canceling or deferring this activity to future periods, other than completing projects that are near completion;
•Using a portion of our furniture, fixtures and equipment reserve accounts for expenses at our properties, as well as temporarily suspending required contributions to the furniture, fixture and equipment replacement reserves at certain of our hotels, to the extent permitted by our lenders; and
•Reducing the cash compensation payable to our senior management and the Board of Directors.
WLT 2020 10-K – 29
We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of the date of this Report, we have executed loan modifications on 24 of our 29 Consolidated Hotel mortgage loans. In addition, we refinanced or extended the maturity date of six mortgage loans to address loans with near-term mortgage maturities.
During the year ended December 31, 2020, we sold two hotels with an aggregate contractual sales price of $93.0 million, and we received net aggregate proceeds of $34.8 million after the repayment of the related mortgage loans. We may choose to market additional assets for sale and these may be at discounted valuations.
Financial and Operating Highlights
(Dollars in thousands, except ADR and RevPAR)
| Years Ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Hotel revenues | $ | 279,101 | $ | 611,063 | ||||||||||
| Net loss attributable to Common Stockholders | (351,870) | (10,898) | ||||||||||||
| Cash distributions paid | 20,357 | 80,260 | ||||||||||||
| Net cash (used in) provided by operating activities | (154,021) | 78,186 | ||||||||||||
| Net cash provided by investing activities | 171,448 | 166,816 | ||||||||||||
| Net cash provided by (used in) financing activities | 108,733 | (240,828) | ||||||||||||
|
Supplemental Financial Measures: (a)
|
||||||||||||||
| FFO attributable to Common Stockholders | (98,761) | 46,494 | ||||||||||||
| MFFO attributable to Common Stockholders | (128,865) | 61,783 | ||||||||||||
| Consolidated Hotel Operating Statistics | ||||||||||||||
| Occupancy | 25.9 | % | 74.3 | % | ||||||||||
| ADR | $ | 221.66 | $ | 234.36 | ||||||||||
| RevPAR | 57.49 | 174.10 | ||||||||||||
___________
(a)We consider FFO and MFFO, which are non-GAAP measures, to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
The comparison of our results year over year is influenced by both the number and size of the hotels consolidated in each of the respective years. As of December 31, 2020 and 2019, we owned 29 and 20 Consolidated Hotels, respectively.
WLT 2020 10-K – 30
Portfolio Overview
The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels as of December 31, 2020:
| Hotel | State | Number of Rooms | % Owned | Hotel Type | ||||||||||||||||||||||
| Consolidated Hotels | ||||||||||||||||||||||||||
|
Charlotte Marriott City Center
|
NC | 446 | 100% | Full-Service | ||||||||||||||||||||||
|
Courtyard Nashville Downtown
|
TN | 192 | 100% | Select-Service | ||||||||||||||||||||||
|
Courtyard Pittsburgh Shadyside
|
PA | 132 | 100% | Select-service | ||||||||||||||||||||||
|
Courtyard Times Square West
|
NY | 224 | 100% | Select-service | ||||||||||||||||||||||
|
Embassy Suites by Hilton Denver-Downtown/Convention Center
|
CO | 403 | 100% | Full-Service | ||||||||||||||||||||||
|
Equinox, a Luxury Collection Golf Resort & Spa
|
VT | 199 | 100% | Resort | ||||||||||||||||||||||
|
Fairmont Sonoma Mission Inn & Spa
|
CA | 226 | 100% | Resort | ||||||||||||||||||||||
|
Hawks Cay Resort (a)
|
FL | 420 | 100% | Resort | ||||||||||||||||||||||
|
Hilton Garden Inn/Homewood Suites Atlanta Midtown
|
GA | 228 | 100% | Select-service | ||||||||||||||||||||||
|
Holiday Inn Manhattan 6th Avenue Chelsea
|
NY | 226 | 100% | Full-service | ||||||||||||||||||||||
|
Hyatt Place Austin Downtown
|
TX | 296 | 100% | Select-service | ||||||||||||||||||||||
|
Le Méridien Arlington
|
VA | 154 | 100% | Full-Service | ||||||||||||||||||||||
|
Le Méridien Dallas, The Stoneleigh
|
TX | 176 | 100% | Full-service | ||||||||||||||||||||||
|
Marriott Kansas City Country Club Plaza
|
MO | 295 | 100% | Full-service | ||||||||||||||||||||||
|
Marriott Raleigh City Center
|
NC | 401 | 100% | Full-service | ||||||||||||||||||||||
|
Marriott Sawgrass Golf Resort & Spa
|
FL | 514 | 100% | Resort | ||||||||||||||||||||||
|
Renaissance Atlanta Midtown Hotel
|
GA | 304 | 100% | Full-Service | ||||||||||||||||||||||
|
Renaissance Chicago Downtown
|
IL | 560 | 100% | Full-service | ||||||||||||||||||||||
|
Ritz-Carlton Bacara, Santa Barbara
|
CA | 358 | 100% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton Fort Lauderdale (b)
|
FL | 198 | 70% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton Key Biscayne (c)
|
FL | 443 | 66.7% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton San Francisco
|
CA | 336 | 100% | Full-Service | ||||||||||||||||||||||
|
Sanderling Resort
|
NC | 128 | 100% | Resort | ||||||||||||||||||||||
|
San Diego Marriott La Jolla
|
CA | 376 | 100% | Full-Service | ||||||||||||||||||||||
|
San Jose Marriott
|
CA | 510 | 100% | Full-Service | ||||||||||||||||||||||
|
Seattle Marriott Bellevue
|
WA | 384 | 100% | Full-Service | ||||||||||||||||||||||
|
Sheraton Austin Hotel at the Capitol
|
TX | 367 | 80% | Full-Service | ||||||||||||||||||||||
|
Westin Minneapolis
|
MN | 214 | 100% | Full-Service | ||||||||||||||||||||||
|
Westin Pasadena
|
CA | 350 | 100% | Full-Service | ||||||||||||||||||||||
| 9,060 | ||||||||||||||||||||||||||
| Unconsolidated Hotels | ||||||||||||||||||||||||||
|
Hyatt Centric New Orleans French Quarter
|
LA | 254 | 80% | Full-service | ||||||||||||||||||||||
| Ritz-Carlton Philadelphia | PA | 301 | 60% | Full-service | ||||||||||||||||||||||
| 555 | ||||||||||||||||||||||||||
_________
(a)Includes 243 privately owned villas that participate in the villa/condo rental program as of December 31, 2020.
(b)Includes 32 condo-hotel units that participate in the villa/condo rental program as of December 31, 2020.
(c)The number of rooms presented includes 141 condo-hotel units that participate in the resort rental program at December 31, 2020.
Results of Operations
We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing the value in our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net (loss) income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation.
In addition, we use other information that may not be financial in nature, including statistical information, to evaluate the operating performance of our business, including occupancy rate, ADR and RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the
WLT 2020 10-K – 31
product of ADR and occupancy rate, is an important statistic for monitoring operating performance at our hotels. Our occupancy rate, ADR and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions, regional and local employment growth, personal income and corporate earnings, business relocation decisions, business and leisure travel, new hotel construction and the pricing strategies of competitors.
The results of operations for the year ended December 31, 2020 will not be comparable to the same period in 2019 as a result of the impact of the COVID-19 pandemic and the Merger. Beginning in March 2020, we experienced a significant decline in occupancy and RevPAR. The economic downturn and restrictions on travel resulting from the COVID-19 pandemic has significantly impacted our business and the overall lodging industry. As discussed above, certain of our hotel properties temporarily suspended all operations and our other hotel properties had operated, and continue to operate, in a limited capacity. Additionally, as a result of the Merger, the historical financial information included herein as of any date, or for any periods, prior to April 13, 2020, represents the pre-merger financial information of CWI 1 on a stand-alone basis, therefore comparisons of the period to period financial information of WLT as set forth herein may not be meaningful.
The following table presents our comparative results of operations (in thousands):
| Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||||||
| Hotel Revenues | $ | 279,101 | $ | 611,063 | $ | (331,962) | ||||||||||||||
|
Hotel Operating Expenses
|
434,327 | 540,814 | (106,487) | |||||||||||||||||
| Impairment charges | 120,220 | — | 120,220 | |||||||||||||||||
|
Corporate general and administrative expenses
|
23,845 | 12,202 | 11,643 | |||||||||||||||||
| Transaction costs | 18,448 | 2,783 | 15,665 | |||||||||||||||||
| Asset management fees to affiliate | 3,795 | 14,052 | (10,257) | |||||||||||||||||
| (Gain) loss on property-related insurance claims | (2,520) | 372 | (2,892) | |||||||||||||||||
| Total Expenses | 598,115 | 570,223 | 27,892 | |||||||||||||||||
| Operating (Loss) Income before net gain on sale of real estate | (319,014) | 40,840 | (359,854) | |||||||||||||||||
| Net gain on sale of real estate | 2,738 | 30,918 | (28,180) | |||||||||||||||||
| Operating (Loss) Income | (316,276) | 71,758 | (388,034) | |||||||||||||||||
|
Interest expense
|
(125,782) | (65,861) | (59,921) | |||||||||||||||||
| Bargain purchase gain | 78,696 | — | 78,696 | |||||||||||||||||
| Equity in losses of equity method investment in real estate, net | (35,026) | (1,018) | (34,008) | |||||||||||||||||
| Net gain on change in control of interests | 22,250 | — | 22,250 | |||||||||||||||||
| Other income | 954 | 253 | 701 | |||||||||||||||||
| Net loss on extinguishment of debt | (22) | (2,711) | 2,689 | |||||||||||||||||
| (Loss) Income Before Income Taxes | (375,206) | 2,421 | (377,627) | |||||||||||||||||
| Benefit from (provision for) income taxes | 7,930 | (3,152) | 11,082 | |||||||||||||||||
| Net Loss | (367,276) | (731) | (366,545) | |||||||||||||||||
| Loss (Income) attributable to noncontrolling interests | 17,148 | (10,167) | 27,315 | |||||||||||||||||
| Net Loss Attributable to the Company | (350,128) | (10,898) | (339,230) | |||||||||||||||||
|
Preferred dividends
|
(1,742) | — | (1,742) | |||||||||||||||||
| Net Loss Attributable to Common Stockholders | $ | (351,870) | $ | (10,898) | $ | (340,972) | ||||||||||||||
|
Supplemental financial measure:(a)
|
||||||||||||||||||||
| MFFO Attributable to Common Stockholders | $ | (128,865) | $ | 61,783 | $ | (190,648) | ||||||||||||||
___________
(a)We consider MFFO, a non-GAAP measure, to be an important metric in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definition of non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
As of December 31, 2020 and 2019, we owned 29 and 20 Consolidated Hotels, respectively. Based on when a hotel is acquired or sold, the operating results for certain hotel properties are not comparable for the years ended December 31, 2020 and 2019.
WLT 2020 10-K – 32
Our Same Store Hotels included 18 Consolidated Hotels and excluded the CWI 2 hotels acquired in the Merger and five hotels that were disposed of between January 1, 2019 and December 31, 2020.
The following table sets forth the average occupancy rate, ADR and RevPAR for the years ended December 31, 2020 and 2019 for our Same Store Hotels.
| Years Ended December 31, | |||||||||||||||||||||||||||||
|
Same Store Hotels
|
2020 | 2019 | |||||||||||||||||||||||||||
|
Occupancy Rate (a)
|
28.9 | % | 72.9 | % | |||||||||||||||||||||||||
| ADR | $ | 227.72 | $ | 246.96 | |||||||||||||||||||||||||
| RevPAR | 65.70 | 180.03 | |||||||||||||||||||||||||||
___________
(a)Occupancy rates for our Same Store Hotels for October, November and December 2020 were 30.7%, 23.5% and 23.8%, respectively, as compared to occupancy rates for October, November and December 2019 of 77.0%, 71.1% and 63.6%, respectively.
Hotel Revenues
For the year ended December 31, 2020 as compared to the same period in 2019, hotel revenues decreased by $332.0 million. Our Same Store Hotel revenue decreased by $336.2 million, primarily due to the impact of the COVID-19 pandemic on our hotel operations and revenue decreased by $65.3 million as a result of dispositions. These decreases were partially offset by an increase in revenue resulting from the hotels acquired in the Merger totaling $69.5 million from the date of the Merger through December 31, 2020.
Hotel Operating Expenses
Room expense, food and beverage expense and other operating department costs (including but not limited to expenses related to departments such as parking, spa and gift shops) fluctuate based on various factors, including occupancy, labor costs, utilities and insurance costs.
For the year ended December 31, 2020 as compared to the same periods in 2019, aggregate hotel operating expenses decreased by $106.5 million. Our Same Store Hotel expenses decreased by $188.9 million, primarily due to the impact of the COVID-19 pandemic on our hotel operations and expenses decreased by $52.6 million as a result of dispositions. These decreases were partially offset by an increase in hotel operating expenses resulting from the hotels acquired in the Merger totaling $135.1 million from the date of the Merger through December 31, 2020.
Impairment Charges
During the year ended December 31, 2020, we recognized impairment charges totaling $120.2 million on six Consolidated Hotels in order to reduce the carrying value of the properties to their estimated fair values, resulting from the adverse effect of the COVID-19 pandemic on our hotel operations. No impairments were recognized during the year ended December 31, 2019.
Corporate General and Administrative Expenses
For the year ended December 31, 2020 as compared to the same period in 2019, corporate general and administrative expenses increased by $11.6 million, primarily as a result of the impact of the Merger. Corporate general and administrative expenses for the year ended December 31, 2020, subsequent to the Merger, reflect the impact of the Company being self-managed.
Transaction Costs
For the year ended December 31, 2020 as compared to the same period in 2019, transactions costs increased by $15.7 million, and represented legal, accounting, investor relations and other transaction costs related to the Merger and related transactions.
WLT 2020 10-K – 33
Asset Management Fees to Affiliate
For the year ended December 31, 2020 as compared to the same period in 2019, asset management fees to affiliates decreased by $10.3 million. Upon completion of the Merger on April 13, 2020 (Note 3), the Advisory Agreement was terminated and these fees ceased being incurred.
Net Gain on Sale of Real Estate
During the year ended December 31, 2020, we recognized a net gain on sale on real estate of $2.7 million, comprised of (i) a gain of $3.2 million from the sale of the Lake Arrowhead Resort and Spa to an unaffiliated third party by the Lake Arrowhead Resort and Spa venture (of which we owned a 97.35% controlling ownership interest) for a contractual sales price of $23.0 million in August 2020, partially offset by (ii) a loss on sale on real estate of $0.5 million from the sale of our 100% ownership interest in the Hutton Hotel Nashville to an unaffiliated third party for a contractual sales price of $70.0 million in June 2020.
During the year ended December 31, 2019, we recognized a net gain on sale of real estate of $30.9 million, comprised of (i) a gain of $5.9 million related to the sale of our 100% ownership interest in the Courtyard San Diego Mission Valley to an unaffiliated third party for a contractual sales price of $79.0 million in September 2019, (ii) a gain of $10.1 million related to the sale of the hotel by the Hilton Garden Inn New Orleans French Quarter/CBD venture to an unaffiliated third party for a contractual sales price totaling $26.0 million in October 2019 and (iii) a gain of $14.9 million related to the sale of our 100% ownership in the Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center to an unaffiliated third party for a contractual sales price of $85.5 million in November 2019 (Note 5).
Interest Expense
During the year ended December 31, 2020, as compared to the same period in 2019, interest expense increased by $59.9 million, primarily due to assuming the mortgage loans of the hotels acquired in the Merger totaling $54.5 million and the interest recorded in connection with our Preferred A and Preferred B stock totaling $17.1 million, partially offset by a decrease resulting from our 2019 and 2020 dispositions totaling $5.9 million and a decrease resulting from the paydown of the working capital facility that was in place with our Former Advisor totaling $1.3 million.
Bargain Purchase Gain
During the year ended December 31, 2020, we recognized a bargain purchase gain of $78.7 million in connection with the Merger resulting from the estimated fair values of the assets acquired net of liabilities assumed exceeding the consideration paid. See Note 3 for additional disclosure regarding the Merger.
Equity in Losses of Equity Method Investments in Real Estate, Net
Equity in losses of equity method investments in real estate, net represents earnings from our equity investments in Unconsolidated Hotels recognized in accordance with each investment agreement and is based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period (Note 6). We are required to periodically compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds the estimated fair value and is determined to be other than temporary. We recognized $17.8 million of other-than-temporary impairment charges on our equity method investments in real estate during the year ended December 31, 2020. No such charges were recognized during the year ended December 31, 2019.
WLT 2020 10-K – 34
The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value (“HLBV”) method, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
| Years Ended December 31, | ||||||||||||||
| Unconsolidated Hotels | 2020 | 2019 | ||||||||||||
|
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)
|
$ | (20,968) | $ | (3,947) | ||||||||||
|
Ritz-Carlton Philadelphia Venture (c)
|
(13,038) | (513) | ||||||||||||
|
Hyatt Centric French Quarter Venture (c)
|
(962) | 1,137 | ||||||||||||
|
Marriott Sawgrass Golf Resort & Spa Venture (a)
|
(58) | 2,305 | ||||||||||||
| Total equity in losses of equity method investments in real estate, net | $ | (35,026) | $ | (1,018) | ||||||||||
___________
(a)Upon closing of the Merger on April 13, 2020, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore the amount for the year ended December 31, 2020 represents the equity in (losses) earnings for the period prior to the Merger.
(b)Includes an other-than-temporary impairment charge of $17.8 million recognized on this investment during the year ended December 31, 2020 to reduce the carrying value of our equity investment in the venture to its estimated fair value.
(c)The change in our share of equity in (losses) earnings for the year ended December 31, 2020 as compared to the same period in 2019, was primarily a result of the impact of the COVID-19 pandemic on our hotel operations.
Net Gain on Change in Control of Interests
In connection with the Merger, we acquired the remaining interests in the Marriott Sawgrass Golf Resort and Spa and the Ritz-Carlton Bacara, Santa Barbara, in which we already had joint interests, and which were accounted for under the equity method of accounting. Due to the change in control of these two jointly owned investments, we recorded a net gain on change in control of interests for the year ended December 31, 2020 of $22.3 million, reflecting the difference between our carrying values and the estimated fair values of our previously held equity investments on April 13, 2020. Subsequent to the Merger, we own 100% of these hotels and consolidate our real estate interest in these hotels.
Benefit from (Provision for) Income Taxes
For the year ended December 31, 2020, we recognized a benefit from income taxes of $7.9 million compared to a provision for income taxes of $3.2 million for the same period in 2019. Benefit from income taxes during the year ended December 31, 2020 was primarily driven by a $8.3 million current tax benefit, resulting from carrying back certain net operating losses allowable under the CARES Act.
Loss (Income) Attributable to Noncontrolling Interests
The following table sets forth our loss (income) attributable to noncontrolling interests (in thousands):
| Years Ended December 31, | ||||||||||||||
| Venture | 2020 | 2019 | ||||||||||||
|
Ritz-Carlton Fort Lauderdale Venture (a)
|
$ | 3,144 | $ | 699 | ||||||||||
|
Sheraton Austin Hotel at the Capitol Venture (a)
|
1,452 | (458) | ||||||||||||
| Ritz-Carlton Key Biscayne Venture | (978) | (1,142) | ||||||||||||
|
Hilton Garden Inn New Orleans French Quarter/CBD Venture (b)
|
— | (2,171) | ||||||||||||
|
Operating Partnership — Noncontrolling interest (c)
|
13,530 | — | ||||||||||||
| — | (7,095) | |||||||||||||
| Total loss (income) attributable to noncontrolling interests | $ | 17,148 | $ | (10,167) | ||||||||||
___________
(a)The change in loss (income) attributable to noncontrolling interest for the year ended December 31, 2020 as compared to the same period in 2019 was primarily the result of the impact of the COVID-19 pandemic on our hotel operations.
(b)On October 9, 2019, the Hilton Garden Inn New Orleans French Quarter/CBD venture sold the hotel to an unaffiliated third party.
(c)Reflects the OP Units proportionate share of net loss for the year ended December 31, 2020.
WLT 2020 10-K – 35
(d)In accordance with the Internalization Agreement and the Redemption, as further described in Note 3, Available Cash Distributions have ceased.
Modified Funds from Operations
MFFO is a non-GAAP measure we use to evaluate our business. For a definition of MFFO and a reconciliation to net income attributable to WLT stockholders, see Supplemental Financial Measures below.
For the year ended December 31, 2020 as compared to 2019, MFFO decreased by $190.6 million, primarily as a result of the impact that the COVID-19 pandemic had on hotel operations, as discussed above.
Liquidity and Capital Resources
Our primary cash uses over the next 12 months are expected to be payment of debt service, costs associated with the refinancing or restructuring of indebtedness, funding corporate and hotel level operations, payment of real estate taxes and insurance and payment of preferred stock dividends. Our primary capital sources to meet such uses are expected to be funds generated by hotel operations, cash on hand, any additional issuances of Series B Preferred Stock and proceeds from additional asset sales.
Due to the COVID-19 pandemic and as a result of numerous government mandates, health official mandates and significantly reduced demand, as of the date of this Report, the Company has limited operations at 30 of our 31 hotel properties, with operations fully suspended at one hotel property. Significant events affecting travel, including the COVID-19 pandemic, typically have an impact on booking patterns, with the full extent of the impact generally determined by the duration of the event and its impact on travel decisions. We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material adverse impact on our financial results and liquidity, and such adverse impact may continue well beyond the containment of such outbreak.
As of December 31, 2020, we had cash and cash equivalents of $160.4 million. Additionally, under the terms of our agreements with the investors in the July Capital Raise, we have the option to require such investors to purchase up to $150.0 million aggregate liquidation preference of additional shares of Series B Preferred Stock during the 18 months after the closing of the July Capital Raise for additional working capital needs, including the repayment, refinancing or restructuring of indebtedness, subject to our satisfaction of customary conditions. As of December 31, 2020, the mortgage loans for our Consolidated Hotels had an aggregate principal balance totaling $2.2 billion outstanding, all of which is mortgage indebtedness and is generally non-recourse, subject to customary non-recourse carve-outs, except that we have provided certain lenders with limited corporate guaranties aggregating $8.5 million for items such as taxes, deferred debt service and amounts drawn from furniture, fixtures and equipment reserves to pay expenses, in connection with loan modification agreements. Of the $2.2 billion of indebtedness outstanding as of December 31, 2020, approximately $811.4 million is scheduled to mature during the 12 months after the date of this Report. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of March 12, 2021, we have executed loan modifications on 24 of our 29 Consolidated Hotel mortgage loans, aggregating $1.9 billion of indebtedness, which had resulted in a temporary deferral of interest and principal payments and/or the granting of temporary covenant relief, which generally lasted for periods ranging from three months to four months. Although these loan modifications have generally expired, we are continuing to work with our lenders on longer-term modifications that will help preserve our liquidity. In addition, we refinanced or extended the maturity date of six Consolidated Hotel mortgage loans, aggregating $467.1 million of indebtedness, to address loans with near-term mortgage maturities. As of December 31, 2020, we have effectively entered into cash management agreements with the lenders on 27 of our 29 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. The cash management agreements generally permit cash generated from the operations of each hotel to fund the hotel’s operating expenses, debt service, taxes and insurance but restrict distributions of excess cash flow, if any, to the Company to fund corporate expenses. If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender. Even if we are able to obtain payment or covenant relief, we may incur increased costs and increased interest rates and we may agree to additional restrictive covenants and other lender protections related to the mortgage loans.
In addition to raising capital in the July Capital Raise and through asset sales, we have taken various actions to help mitigate the effects of the COVID-19 pandemic on our operational results and to preserve our liquidity at both the operational and corporate level, including among others: reducing capital expenditures and reducing operating expenses, suspending distributions on and
WLT 2020 10-K – 36
redemption of our common stock and temporarily suspending required contributions to the furniture, fixture and equipment replacement reserve at certain of our hotels.
During the year ended December 31, 2020, we sold two hotels with an aggregate contractual sales price of $93.0 million, and we received net aggregate proceeds of $34.8 million after the repayment of the related mortgage loans. We may choose to market additional assets for sale and these may be at discounted valuations.
Sources and Uses of Cash During the Year
2020
Operating Activities — For the year ended December 31, 2020, net cash used in operating activities was $154.0 million as compared to net cash provided by operating activities of $78.2 million for the year ended December 31, 2019. This change in operating cash flows primarily reflects the impact of the COVID-19 pandemic on our hotel operations.
Investing Activities — During 2020, net cash provided by investing activities was $171.4 million, primarily as a result of $109.5 million of cash acquired in the Merger and proceeds of $89.4 million from the sales of the Hutton Hotel Nashville and Lake Arrowhead Resort and Spa, partially offset by funding of $24.0 million for capital expenditures at our Consolidated Hotels and capital contributions to equity investments in real estate totaling $6.6 million.
Financing Activities — During 2020, net cash provided by financing activities was $108.7 million, primarily as a result of the proceeds from the July Capital Raise of $200.0 million and proceeds from mortgage financing of $81.3 million, partially offset by payments of mortgage financing totaling $142.4 million, due largely to our 2020 disposition and refinancing activity, cash distributions paid to stockholders of $20.4 million and deferred financing costs paid of $15.2 million.
2019
Operating Activities — For the year ended December 31, 2019 as compared to 2018, net cash provided by operating activities decreased by $4.7 million. The year ended December 31, 2019 included accrued interest payments totaling $3.4 million made as part of the pay down of the WPC Credit Facility as well as transaction costs paid in connection with the Merger and related transactions totaling $2.3 million.
Investing Activities — Net cash provided by investing activities for the year ended December 31, 2019 was $166.8 million, primarily as a result of:
•aggregate proceeds of $186.0 million from the sale of three properties, comprised of (i) $83.3 million of proceeds received from the sale of the Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center, (ii) $77.4 million of total proceeds received from the sale of the Courtyard San Diego Mission Valley, and (iii) $25.2 million of proceeds received from the sale of the hotel by the Hilton Garden Inn New Orleans French Quarter/CBD venture (Note 5);
•$12.8 million of property insurance proceeds received related to Hurricane Irma; and
•distributions received from equity investments in excess of cumulative equity income totaling $11.8 million.
The amounts above were partially offset by the funding of $37.2 million of capital expenditures for our Consolidated Hotels.
Financing Activities — Net cash used in financing activities for the year ended December 31, 2019 was $240.8 million, primarily as a result of:
•payments of mortgage financing totaling $207.1 million, including the refinancing of two loans totaling $77.0 million and payments resulting from dispositions totaling $111.0 million;
•cash distributions paid to stockholders aggregating $80.3 million;
•repayments towards the WPC Credit Facility totaling $46.6 million;
•redemptions of our common stock pursuant to our redemption plan totaling $22.8 million; and
•distributions to noncontrolling interests totaling $13.2 million.
The amounts above were partially offset by proceeds of $86.8 million (primarily from the refinancing of the Sheraton Austin at the Capitol loan) and the reinvestment of distributions in shares of our common stock through our DRIP totaling $42.9 million.
WLT 2020 10-K – 37
Distributions and Redemptions
In the first quarter of 2020, we paid out the common stock distributions that our Board of Directors declared in the fourth quarter of 2019 in an aggregate amount of $20.4 million. Of this aggregate cash distribution amount, $10.6 million was reinvested in shares of our common stock by stockholders through our DRIP. From inception through December 31, 2020, we declared distributions, excluding distributions paid in shares of our common stock, to stockholders totaling $462.0 million, which were comprised of cash distributions of $194.8 million and distributions that were reinvested in shares of our common stock by stockholders through our DRIP of $267.2 million.
On March 18, 2020, in light of the impact that the COVID-19 pandemic has had on our business, we announced that we were suspending future distributions on our common stock. We also announced that redemptions would be suspended including, as of December 2, 2020, special circumstances redemptions. Requests for special circumstances redemptions may continue to be submitted, however, all such requests will be deferred until our Board of Directors approves considering them again. If any special circumstances redemptions are approved at that time, we currently expect that they will be effectuated at a redemption price equal to 95% of the then most recent NAV. Distributions and redemptions in respect of future periods will be evaluated by the Board of Directors based on circumstances and expectations existing at the time of consideration, and are also subject to the terms of the Series A and Series B Preferred Stock.
Among other terms of the Series A and Series B Preferred Stock, the Series A and Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless all accrued dividends on the Series A and Series B Preferred Stock are paid in cash for all past dividend periods and the dividend for the current dividend period is also paid in cash. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's DRIP.
During the first quarter of 2020, we redeemed 70,015 shares of our common stock pursuant to our redemption plan (which were adjusted to 63,755 shares of Class A common stock to reflect the equity structure of the legal acquirer, CWI 2, by applying the exchange ratio of .9106), comprised of 29 redemption requests at an average share price of $10.04.
During the fourth quarter of 2020, we redeemed 165,990 shares and 72,820 shares of our Class A and Class T common stock, respectively, pursuant to our redemption plan, comprised of 87 redemption requests and 29 redemption requests, respectively, at an average share price of $5.23 and $5.18, respectively. All of these redemptions qualified as special circumstance redemptions.
We have fulfilled all of the valid redemption requests that we received during the year ended December 31, 2020 prior to announcing the suspension of regular and special circumstance redemptions, respectively. We funded these share redemptions from distributions that were reinvested by stockholders in our common stock pursuant to our DRIP.
WLT 2020 10-K – 38
Summary of Financing
The table below summarizes our non-recourse debt, net (dollars in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Carrying Value | |||||||||||
|
Fixed rate (a)
|
$ | 1,286,839 | $ | 884,849 | |||||||
|
Variable rate (a):
|
|||||||||||
| Amount subject to interest rate caps | 362,193 | 306,918 | |||||||||
| Amount subject to floating interest rate | 345,712 | 14,300 | |||||||||
| Amount subject to interest rate swaps | 175,158 | — | |||||||||
| 883,063 | 321,218 | ||||||||||
| $ | 2,169,902 | $ | 1,206,067 | ||||||||
| Percent of Total Debt | |||||||||||
| Fixed rate | 59 | % | 73 | % | |||||||
| Variable rate | 41 | % | 27 | % | |||||||
| 100 | % | 100 | % | ||||||||
| Weighted-Average Interest Rate at End of Year | |||||||||||
| Fixed rate | 4.3 | % | 4.4 | % | |||||||
|
Variable rate (b)
|
4.1 | % | 5.0 | % | |||||||
_________
(a)Aggregate debt balance includes unamortized debt discount of $46.5 million and $0, respectively, and deferred financing costs totaling $6.9 million and $6.0 million, respectively, as of December 31, 2020 and 2019, respectively.
(b)The impact of our derivative instruments (Note 9) are reflected in the weighted-average interest rates.
Covenants
Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. As of December 31, 2020, we have effectively entered into cash management agreements with the lenders on 27 of our 29 Consolidated Hotel mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. See Note 1 for further discussion.
Cash Resources
As of December 31, 2020, our cash resources consisted of cash totaling $160.4 million, of which $17.4 million was designated as hotel operating cash and was held at our hotel operating properties.
Cash Requirements
Our primary cash uses through December 31, 2021 are expected to be payments of debt service, real estate taxes and insurance, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be cash on hand, funds generated by hotel operations, any additional issuances of Series B Preferred Stock and proceeds from additional asset sales. We expect to satisfy certain debt maturities during this period by turning the properties back to the lenders.
WLT 2020 10-K – 39
Capital Expenditures and Reserve Funds
With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures sufficient to cover the cost of routine improvements and alterations at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of December 31, 2020 and 2019, $51.0 million and $34.6 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures. In addition, due to the effects of the COVID-19 pandemic on our operations, we have been working with the brands, management companies and lenders and had used a portion of the available restricted cash reserves to cover operating costs at our properties, of which $4.9 million is subject to replenishment requirements.
Off-Balance Sheet Arrangements and Contractual Obligations
The table below summarizes our debt, off-balance sheet arrangements and other contractual obligations (primarily our capital commitments) as of December 31, 2020, and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):
| Total |
Less than
1 year |
1-3 years | 3-5 years |
More than
5 years |
|||||||||||||||||||||||||
|
Non-recourse debt — principal (a)
|
$ | 2,223,220 | $ | 692,590 | $ | 1,480,378 | $ | 50,252 | $ | — | |||||||||||||||||||
|
Interest on borrowings (b)
|
156,454 | 95,600 | 60,026 | 828 | — | ||||||||||||||||||||||||
|
Operating lease commitments (c)
|
921,569 | 6,089 | 11,904 | 11,192 | 892,384 | ||||||||||||||||||||||||
|
Contractual capital commitments (d)
|
16,248 | 4,092 | 12,156 | — | — | ||||||||||||||||||||||||
|
Annual distribution and shareholder servicing fee (e)
|
803 | 803 | — | — | — | ||||||||||||||||||||||||
| $ | 3,318,294 | $ | 799,174 | $ | 1,564,464 | $ | 62,272 | $ | 892,384 | ||||||||||||||||||||
___________
(a)Excludes unamortized debt discount totaling $46.5 million and unamortized deferred financing costs totaling $6.9 million.
(b)For variable-rate debt, interest on borrowings is calculated using the swapped or capped interest rate, when in effect.
(c)As of December 31, 2020, this balance primarily related to our commitments on ground leases for two hotels, which expire in 2087 and 2099 and have contractual rent increases throughout their respective terms; therefore, the most significant commitments occur near the conclusion of the leases.
(d)Capital commitments represent our remaining contractual renovation commitments at our Consolidated Hotels, which does not reflect any remaining restoration work as a result of Hurricane Irma (Note 11).
(e)Represents the estimated liability for the present value of the future distribution and shareholder servicing fees in connection with our Class T common stock (Note 4).
Equity Method Investments
As of December 31, 2020, we owned equity interests in two Unconsolidated Hotels. Our ownership interest and summarized financial information for these investments as of December 31, 2020 is presented below. Summarized financial information provided represents the total amounts attributable to these investments and does not represent our proportionate share (dollars in thousands):
| Ownership Interest at | Total Third- | Third-Party Debt | ||||||||||||||||||||||||
| Venture | December 31, 2020 | Total Assets | Party Debt | Maturity Date | ||||||||||||||||||||||
|
Ritz-Carlton Philadelphia Venture (a)
|
60% | $ | 86,984 | $ | 64,410 | 02/2023 | ||||||||||||||||||||
|
Hyatt Centric French Quarter Venture (a)
|
80% | 36,888 | 29,695 | 04/2021 | ||||||||||||||||||||||
| $ | 123,872 | $ | 94,105 | |||||||||||||||||||||||
___________
(a)During the year ended December 31, 2020, the ventures entered into loan modification agreements on these loans that had resulted in a temporary deferral of interest and principal payments or extended the maturity date of the loan.
WLT 2020 10-K – 40
Environmental Obligations
Our hotels are subject to various federal, state and local environmental laws. Under these laws, governmental entities have the authority to require the current owner of the property to perform or pay for the cleanup of contamination (including hazardous substances, waste or petroleum products) at, on, under or emanating from the property and to pay for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned the property at the time it became contaminated, it is possible we could incur cleanup costs or other environmental liabilities even after we sell properties. Contamination at, on, under or emanating from our properties also may expose us to liability to private parties for costs of remediation and/or personal injury or property damage. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. If contamination is discovered on our properties, environmental laws also may impose restrictions on the manner in which the property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. We are not aware of any past or present environmental liability for non-compliance with environmental laws that we believe would have a material adverse effect on our business, financial condition, liquidity or results of operations.
In connection with the purchase of hotels, we have independent environmental consultants conduct a Phase I environmental site assessment prior to purchase. Phase I site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. None of the existing Phase I site assessments on our hotels revealed any past or present environmental condition that we believe would have a material adverse effect on our business, financial condition, liquidity or results of operations.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2. Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated financial statements. On a quarterly basis, we evaluate these estimates and judgments based on historical experience as well as other factors that we believe to be reasonable under the circumstances. These estimates are subject to change in the future if underlying assumptions or factors change. Certain accounting policies, while significant, may not require the use of estimates. Those accounting policies that require significant estimation and/or judgment are described under Critical Accounting Policies and Estimates in Note 2. The recent accounting changes that may potentially impact our business are described under Recent Accounting Requirements in Note 2.
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO, and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, are provided below.
FFO and MFFO
Due to certain unique operating characteristics of real estate companies, as discussed below, NAREIT, an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to nor a substitute for net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as restated in December 2018. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO. Our FFO calculation
WLT 2020 10-K – 41
complies with NAREIT’s policy described above. However, NAREIT’s definition of FFO does not distinguish between the conventional method of equity accounting and the HLBV method of accounting for unconsolidated partnerships and jointly-owned investments.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization, as well as impairment charges of real estate-related assets, provides a more complete understanding of our performance to investors and to management; and when compared year over year, reflects the impact on our operations from trends in occupancy rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. It should be noted, however, that the property’s asset group’s estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value. While impairment charges are excluded from the calculation of FFO described above, due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP measures FFO and MFFO and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect subsequent to the establishment of NAREIT’s definition of FFO. Management believes these cash-settled expenses, such as acquisition fees that are typically accounted for as operating expenses, do not affect our overall long-term operating performance. Publicly-registered, non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-traded REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-traded REITs, the Institute for Portfolio Alternatives (formerly known as the Investment Program Association) (“IPA”), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-traded REITs and which we believe to be another appropriate non-GAAP measure to reflect the operating performance of a non-traded REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our offering has been completed and once essentially all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance, with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. MFFO should only be used to assess the sustainability of a company’s operating performance after a
WLT 2020 10-K – 42
company’s offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company’s operating performance during the periods in which properties are acquired.
We define MFFO consistent with the IPA’s Practice Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”), issued by the IPA in November 2010. This Practice Guideline defines MFFO as FFO further adjusted for the following items, included in the determination of GAAP net income or loss, as applicable: acquisition fees and expenses; accretion of discounts and amortization of premiums on debt investments; where applicable, payments of loan principal made by our equity investees accounted for under the HLBV model where such payments reduce our equity in earnings of equity method investments in real estate, nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income or loss; nonrecurring gains or losses included in net income or loss from the extinguishment or sale of debt, hedges, derivatives or securities holdings, where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for Consolidated and Unconsolidated Hotels, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses that are unrealized and may not ultimately be realized.
Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition-related expenses, fair value adjustments of derivative financial instruments and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities. We account for certain of our equity investments using the HLBV model which is based on distributable cash as defined in the operating agreement.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-traded REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that MFFO and the adjustments used to calculate it allow us to present our performance in a manner that takes into account certain characteristics unique to non-traded REITs, such as their limited life, defined acquisition period and targeted exit strategy, and is therefore a useful measure for investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income or loss as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly.
WLT 2020 10-K – 43
FFO and MFFO were as follows (in thousands):
| Years Ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Net loss attributable to Common Stockholders | $ | (351,870) | $ | (10,898) | ||||||||||
| Adjustments: | ||||||||||||||
| Impairment charges | 120,220 | — | ||||||||||||
| Depreciation and amortization of real property | 114,697 | 76,966 | ||||||||||||
| Net gain on change in control of interests | (22,250) | — | ||||||||||||
| Gain on sale of real estate | (2,738) | (30,918) | ||||||||||||
|
Proportionate share of adjustments for partially owned entities —
FFO adjustments (a)
|
43,180 | 11,344 | ||||||||||||
| Total adjustments | 253,109 | 57,392 | ||||||||||||
| FFO attributable to Common Stockholders (as defined by NAREIT) | (98,761) | 46,494 | ||||||||||||
| Bargain purchase gain | (78,696) | — | ||||||||||||
| Amortization of fair value adjustments | 26,685 | — | ||||||||||||
|
Transaction costs (b)
|
18,448 | 2,783 | ||||||||||||
| Straight-line and other rent adjustments | 5,979 | 8,191 | ||||||||||||
|
(Gain) loss on property-related insurance claims (b)
|
(2,520) | 372 | ||||||||||||
| Loss on extinguishment of debt | 22 | 2,711 | ||||||||||||
|
Proportionate share of adjustments for partially owned entities — MFFO
adjustments |
(22) | 1,232 | ||||||||||||
| Total adjustments | (30,104) | 15,289 | ||||||||||||
| MFFO attributable to Common stockholders | $ | (128,865) | $ | 61,783 | ||||||||||
___________
(a)This adjustment includes an other-than-temporary impairment charge of $17.8 million recognized on our equity investment in the Ritz-Carlton Bacara, Santa Barbara Venture during the year ended December 31, 2020 (Note 6 and Note 8).
(b)We have excluded these costs because of their non-recurring nature. By excluding such costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties.
WLT 2020 10-K – 44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
We currently have limited exposure to financial market risks, including changes in interest rates. We currently have no foreign operations and are not exposed to foreign currency fluctuations.
Interest Rate Risk
The values of our real estate and related fixed-rate debt obligations are subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions, which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the fair value of our assets to decrease.
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we generally seek non-recourse mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse mortgage loans, and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. See Note 9 for additional information on our interest rate swaps and caps.
As of December 31, 2020, all of our debt bore interest at fixed rates, was swapped to a fixed rate or was subject to an interest rate cap, with the exception of three mortgage loans with an outstanding balance totaling $345.7 million. Our debt obligations are more fully described in Note 10 and under Liquidity and Capital Resources in Item 7 above. The following table presents principal cash outflows for our Consolidated Hotels based upon expected maturity dates of our debt obligations outstanding as of December 31, 2020 and excludes deferred financing costs (in thousands):
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||||||||||||||||||
| Fixed-rate debt | $ | 335,340 | $ | 723,372 | $ | 207,396 | $ | 50,252 | $ | — | $ | — | $ | 1,316,360 | $ | 1,268,851 | |||||||||||||||||||||||||||||||
| Variable-rate debt | $ | 357,250 | $ | 380,230 | $ | 169,380 | $ | — | $ | — | $ | — | $ | 906,860 | $ | 893,338 | |||||||||||||||||||||||||||||||
The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of an interest rate swap, or that has been subject to an interest rate cap, is affected by changes in interest rates. A decrease or increase in interest rates of 1.0% would change the estimated fair value of this debt as of December 31, 2020 by an aggregate increase of $26.5 million or an aggregate decrease of $29.8 million, respectively. Annual interest expense on our variable-rate debt that is subject to an interest rate cap as of December 31, 2020 would increase or decrease by $3.6 million for each respective 1.0% change in annual interest rates.
WLT 2020 10-K – 45
Item 8. Financial Statements and Supplementary Data.
| TABLE OF CONTENTS | Page No. | ||||
Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes thereto, or because the conditions requiring their filing do not exist.
WLT 2020 10-K – 46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Watermark Lodging Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Watermark Lodging Trust, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive (loss) income, of equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment Assessment of Long-Lived Real Estate
As described in Notes 2, 5 and 6 to the consolidated financial statements, the Company’s long-lived real estate includes net investments in hotels totaling $3.0 billion, $40.7 million of operating lease right-of-use assets, $72.3 million of intangible assets, net and equity investments in real estate totaling $18.6 million as of December 31, 2020. During 2020, the Company recorded impairment charges of $120.2 million on its investments in consolidated hotels and $17.8 million on its equity investments in real estate. Management periodically assesses whether there are any indicators that the value of the Company’s long-lived real estate and related intangible assets may be impaired or that their carrying value may not be recoverable. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, management follows a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, management compares the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that they expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. Management then measures the loss as the excess of the
WLT 2020 10-K – 47
carrying value of the property’s asset group over its estimated fair value. For equity investments in real estate, management evaluates the Company’s investment on a periodic basis to determine if there are any indicators that the value of the equity investment may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, management measures the impairment charge as the excess of the carrying value of the Company’s investment over its estimated fair value. The estimated fair value of the property’s asset group is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. If relevant market information is not available or is not deemed appropriate, management performs a future net cash flow analysis, discounted for the inherent risk associated with each investment, using estimates such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth.
The principal considerations for our determination that performing procedures relating to the impairment assessment of long-lived real estate is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of long-lived real estate; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to capitalization rates, discount rates, and estimates of future income growth; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others (i) testing management’s process for developing the fair value measurement of long-lived real estate; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the reasonableness of management’s significant assumptions related to capitalization rates, discount rates, and estimates of future income growth. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow model and the reasonableness of the significant assumptions.
Merger of CWI 1 and CWI 2
As described in Note 3 to the consolidated financial statements, on April 13, 2020, a direct, wholly-owned subsidiary of Carey Watermark Investors 2 Incorporated (“CWI 2”) merged, with and into Carey Watermark Investors Incorporated (“CWI 1”), in an all-stock transaction to create Watermark Lodging Trust, Inc. for total consideration of $462.0 million. As the merger was accounted for as a reverse acquisition, the fair value of the consideration transferred was measured based upon (i) the number of shares of CWI 1 common stock, as the accounting acquirer, that would theoretically have to be issued to the stockholders of CWI 2 to achieve the same ratio of ownership in the combined company upon completion of the merger, and (ii) applying the fair value per implied share of the Company’s pre-merger common stock issued in consideration. The fair value per implied share of CWI 1 common stock issued in consideration was calculated using estimated fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment of the CWI 1 hotel properties as of April 13, 2020 and estimates of the fair market value of the CWI 1 mortgage debt at the same date. Management allocated the purchase consideration based on the estimated fair values of the assets acquired and liabilities assumed. Management estimated the fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the income capitalization and sales comparison approaches. These valuation methodologies are based on significant unobservable Level 3 inputs in the fair value hierarchy, such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth. Management estimated the fair market value of the trade name intangible assets acquired through a relief-from-royalty discounted cash flow method whereby management valued the avoided third-party license payment for the right to employ the asset to earn benefits. The relief-from-royalty discounted cash flow method applies an estimated royalty rate to forecasted future cash flows, discounted to present value and includes estimates of net sales growth, discount rate and royalty fee, which are valuation methodologies based on significant unobservable Level 3 inputs in the fair value hierarchy.
The principal considerations for our determination that performing procedures relating to the merger of CWI 1 and CWI 2 is a critical audit matter are (i) the significant judgment by management when developing the estimated fair value per implied share of CWI 1 common stock issued in the merger and the estimated fair values of the hotel properties and trade name intangible assets acquired; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to capitalization rates, discount rates, and estimates of future income growth used to estimate the fair value per implied share of the CWI 1 common stock issued in the merger and the fair value of the hotel properties acquired, and the net sales growth, discount rate and royalty fee assumptions used to estimate the fair value of the trade name intangible assets acquired; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others (i) reading the merger agreement and (ii) testing management’s process for estimating the fair value per implied share of the CWI 1 common stock issued in the merger and the fair values of the hotel properties and trade name intangible assets acquired. Testing management’s process
WLT 2020 10-K – 48
included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of management’s significant assumptions related to capitalization rates, discount rates, and estimates of future income growth used to estimate the fair value per implied share of the CWI 1 common stock issued in the merger and the fair value of the hotel properties acquired, and the net sales growth, discount rate and royalty fee assumptions used to estimate the fair value of the trade name intangible assets acquired. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the valuation methods and the reasonableness of the significant assumptions.
/s/ PricewaterhouseCoopers LLP
New York, NY
March 12, 2021
We have served as the Company's auditor since 2014.
WLT 2020 10-K – 49
WATERMARK LODGING TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Assets | |||||||||||
| Investments in real estate: | |||||||||||
| Hotels, at cost | $ | 3,315,792 | $ | 2,008,496 | |||||||
| Accumulated depreciation | (356,328) | (298,949) | |||||||||
| Net investments in hotels | 2,959,464 | 1,709,547 | |||||||||
| Equity investments in real estate | 18,639 | 100,297 | |||||||||
| Operating lease right-of-use assets | 40,729 | 45,727 | |||||||||
| Cash and cash equivalents | 160,383 | 70,605 | |||||||||
| Intangible assets, net | 72,285 | 64,786 | |||||||||
| Restricted cash | 91,081 | 54,699 | |||||||||
| Accounts receivable, net | 46,010 | 23,753 | |||||||||
| Other assets | 30,735 | 25,277 | |||||||||
| Total assets | $ | 3,419,326 | $ | 2,094,691 | |||||||
| Liabilities and Equity | |||||||||||
| Non-recourse debt, net | $ | 2,169,902 | $ | 1,206,067 | |||||||
| Mandatorily redeemable preferred stock | 214,158 | — | |||||||||
| Accounts payable, accrued expenses and other liabilities | 174,027 | 94,849 | |||||||||
| Operating lease liabilities | 74,633 | 71,733 | |||||||||
| Due to related parties and affiliates | 190 | 3,806 | |||||||||
| Distributions payable | — | 20,357 | |||||||||
| Total liabilities | 2,632,910 | 1,396,812 | |||||||||
| Equity | |||||||||||
|
Class A common stock, $0.001 par value; 320,000,000 shares authorized; 167,441,281 and 130,083,865 shares, respectively, issued and outstanding
|
167 | 130 | |||||||||
|
Class T common stock, $0.001 par value; 80,000,000 shares authorized; 61,102,438 and 0 shares, respectively, issued and outstanding
|
61 | — | |||||||||
| Additional paid-in capital | 1,655,554 | 1,209,691 | |||||||||
| Distributions and accumulated losses | (911,863) | (562,747) | |||||||||
| Accumulated other comprehensive loss | (724) | (172) | |||||||||
| Total stockholders’ equity | 743,195 | 646,902 | |||||||||
| Noncontrolling interests | 43,221 | 50,977 | |||||||||
| Total equity | 786,416 | 697,879 | |||||||||
| Total liabilities and equity | $ | 3,419,326 | $ | 2,094,691 | |||||||
See Notes to Consolidated Financial Statements.
WLT 2020 10-K – 50
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenues | |||||||||||||||||
| Hotel Revenues | |||||||||||||||||
| Rooms | $ | 171,544 | $ | 387,769 | $ | 385,189 | |||||||||||
| Food and beverage | 68,292 | 166,315 | 159,020 | ||||||||||||||
| Other operating revenue | 38,323 | 52,641 | 46,099 | ||||||||||||||
| Business interruption income | 942 | 4,338 | 23,579 | ||||||||||||||
| Total Hotel Revenues | 279,101 | 611,063 | 613,887 | ||||||||||||||
| Expenses | |||||||||||||||||
| Rooms | 50,540 | 86,060 | 88,761 | ||||||||||||||
| Food and beverage | 61,532 | 114,239 | 112,708 | ||||||||||||||
| Other hotel operating expenses | 14,724 | 27,669 | 26,400 | ||||||||||||||
| Property taxes, insurance, rent and other | 79,879 | 72,236 | 62,586 | ||||||||||||||
| General and administrative | 42,353 | 54,831 | 53,417 | ||||||||||||||
| Sales and marketing | 29,013 | 57,330 | 57,763 | ||||||||||||||
| Repairs and maintenance | 19,683 | 19,932 | 19,857 | ||||||||||||||
| Utilities | 15,677 | 15,032 | 14,701 | ||||||||||||||
| Management fees | 6,436 | 16,864 | 17,849 | ||||||||||||||
| Depreciation and amortization | 114,490 | 76,621 | 77,170 | ||||||||||||||
| Total Hotel Operating Expenses | 434,327 | 540,814 | 531,212 | ||||||||||||||
| Impairment charges | 120,220 | — | — | ||||||||||||||
| Corporate general and administrative expenses | 23,845 | 12,202 | 11,602 | ||||||||||||||
| Transaction costs | 18,448 | 2,783 | — | ||||||||||||||
| Asset management fees to affiliate | 3,795 | 14,052 | 14,136 | ||||||||||||||
| (Gain) loss on property-related insurance claims | (2,520) | 372 | (1,340) | ||||||||||||||
| Total Expenses | 598,115 | 570,223 | 555,610 | ||||||||||||||
| Operating (Loss) Income before net gain on sale of real estate | (319,014) | 40,840 | 58,277 | ||||||||||||||
| Net gain on sale of real estate | 2,738 | 30,918 | 31,260 | ||||||||||||||
| Operating (Loss) Income | (316,276) | 71,758 | 89,537 | ||||||||||||||
| Interest expense | (125,782) | (65,861) | (66,597) | ||||||||||||||
| Bargain purchase gain | 78,696 | — | — | ||||||||||||||
| Equity in losses of equity method investment in real estate, net | (35,026) | (1,018) | (1,315) | ||||||||||||||
| Net gain on change in control of interests | 22,250 | — | — | ||||||||||||||
| Other income (expense) | 954 | 253 | (493) | ||||||||||||||
| Net loss on extinguishment of debt | (22) | (2,711) | (511) | ||||||||||||||
| (Loss) income before income taxes | (375,206) | 2,421 | 20,621 | ||||||||||||||
| Benefit from (provision for) income taxes | 7,930 | (3,152) | (4,877) | ||||||||||||||
| Net (Loss) Income | (367,276) | (731) | 15,744 | ||||||||||||||
|
Loss (Income) attributable to noncontrolling interests (inclusive of
Available Cash Distributions to a related party of $0, $7,095 and $5,142,
respectively)
|
17,148 | (10,167) | (7,688) | ||||||||||||||
| Net (Loss) Income Attributable to the Company | (350,128) | (10,898) | 8,056 | ||||||||||||||
| Preferred dividends | (1,742) | — | — | ||||||||||||||
| Net (Loss) Income Attributable to Common Stockholders | $ | (351,870) | $ | (10,898) | $ | 8,056 | |||||||||||
| Class A Common Stock | |||||||||||||||||
| Net (loss) income attributable to Common Stockholders | $ | (274,928) | $ | (10,898) | $ | 8,056 | |||||||||||
| Basic and diluted weighted-average shares outstanding | 157,288,346 | 128,978,410 | 126,915,817 | ||||||||||||||
| Basic and diluted (loss) income per share | $ | (1.73) | $ | (0.08) | $ | 0.06 | |||||||||||
| Class T Common Stock | |||||||||||||||||
| Net loss attributable to Common Stockholders | $ | (76,942) | $ | — | $ | — | |||||||||||
| Basic and diluted weighted-average shares outstanding | 43,957,081 | — | — | ||||||||||||||
| Basic and diluted loss per share | $ | (1.74) | $ | — | $ | — | |||||||||||
See Notes to Consolidated Financial Statements.
WLT 2020 10-K – 51
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net (Loss) Income | $ | (367,276) | $ | (731) | $ | 15,744 | |||||||||||
| Other Comprehensive (Loss) Income | |||||||||||||||||
|
Unrealized (loss) gain on derivative instruments
|
(532) | 130 | 158 | ||||||||||||||
| Comprehensive (Loss) Income | (367,808) | (601) | 15,902 | ||||||||||||||
|
Amounts Attributable to Noncontrolling Interests
|
|||||||||||||||||
| Net loss (income) | 17,148 | (10,167) | (7,688) | ||||||||||||||
|
Unrealized (gain) loss on derivative instruments
|
(20) | (16) | 11 | ||||||||||||||
| Comprehensive loss (income) attributable to noncontrolling interests | 17,128 | (10,183) | (7,677) | ||||||||||||||
| Comprehensive (Loss) Income Attributable to Common Stockholders | $ | (350,680) | $ | (10,784) | $ | 8,225 | |||||||||||
See Notes to Consolidated Financial Statements.
WLT 2020 10-K – 52
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
| WLT Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock |
Additional
Paid-In Capital |
Distributions
and Accumulated Losses |
Accumulated
Other Comprehensive Loss |
Total
Stockholders’ Equity |
Noncontrolling
Interests |
Total
Stockholders’ Equity |
|||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class T | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | 130,083,865 | $ | 130 | — | $ | — | $ | 1,209,691 | $ | (562,747) | $ | (172) | $ | 646,902 | $ | 50,977 | $ | 697,879 | |||||||||||||||||||||||||||||||||||||||||
| Net loss | (350,128) | (350,128) | (17,148) | (367,276) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to affiliates | 417,261 | — | 4761 | 4,761 | 4,761 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Redemption of special general partnership
interest |
2,840,549 | 3 | (65,464) | (65,461) | 12,861 | (52,600) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Merger consideration | 94,480,247 | 95 | 496,485 | 496,580 | (34,571) | 462,009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Merger recapitalization | (61,175,258) | (61) | 61,175,258 | 61 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued, net of offering costs | 925,762 | 1 | 10,514 | 10,515 | 10,515 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share incentive plans | 63,490 | — | 1,276 | 1,276 | 1,276 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation to directors | 35,110 | — | 240 | 240 | 240 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | 725 | 725 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of warrants | — | 30,357 | 30,357 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value adjustment on reclassification of Series A Preferred Stock | 2,754 | 2,754 | 2,754 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividends | (1,742) | (1,742) | (1,742) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | (552) | (552) | 20 | (532) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares | (229,745) | (1) | (72,820) | — | (1,949) | (1,950) | (1,950) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 167,441,281 | $ | 167 | 61,102,438 | $ | 61 | $ | 1,655,554 | $ | (911,863) | $ | (724) | $ | 743,195 | $ | 43,221 | $ | 786,416 | |||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | 127,144,688 | $ | 127 | — | $ | — | $ | 1,174,900 | $ | (471,130) | $ | (286) | $ | 703,611 | $ | 53,771 | $ | 757,382 | |||||||||||||||||||||||||||||||||||||||||
|
Net (loss) income
|
(10,898) | (10,898) | 10,167 | (731) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued, net of offering costs
|
3,760,578 | 4 | 42,898 | 42,902 | 42,902 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued to affiliates
|
1,236,528 | 1 | 14,114 | 14,115 | 14,115 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions to noncontrolling interests | — | 175 | 175 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Distributions to noncontrolling interests
|
— | (13,152) | (13,152) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued under share incentive plans
|
22,742 | — | 370 | 370 | 370 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation to directors
|
18,400 | — | 210 | 210 | 210 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Distributions declared ($0.6260 and $0.0000 per share to Class A and Class T, respectively)
|
(80,719) | (80,719) | (80,719) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 114 | 114 | 16 | 130 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares | (2,099,071) | (2) | (22,801) | (22,803) | (22,803) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 130,083,865 | $ | 130 | — | $ | — | $ | 1,209,691 | $ | (562,747) | $ | (172) | $ | 646,902 | $ | 50,977 | $ | 697,879 | |||||||||||||||||||||||||||||||||||||||||
(Continued)
WLT 2020 10-K – 53
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Continued)
(in thousands, except share and per share amounts)
| WLT Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock |
Additional
Paid-In Capital |
Distributions
and Accumulated Losses |
Accumulated
Other Comprehensive (Loss) Income |
Total
Stockholders’ Equity |
Noncontrolling
Interests |
Total
Stockholders’ Equity |
|||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class T | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | 125,504,814 | $ | 125 | — | $ | — | $ | 1,153,665 | $ | (399,884) | $ | (455) | $ | 753,451 | $ | 54,437 | $ | 807,888 | |||||||||||||||||||||||||||||||||||||||||
| Net income | 8,056 | 8,056 | 7,688 | 15,744 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued, net of offering costs
|
3,805,862 | 4 | 43,865 | 43,869 | 43,869 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued to affiliates
|
1,233,591 | 1 | 14,234 | 14,235 | 14,235 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Distributions to noncontrolling interests
|
— | (8,343) | (8,343) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Shares issued under share incentive plans
|
17,275 | — | 278 | 278 | 278 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation to directors
|
15,745 | — | 180 | 180 | 180 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Distributions declared ($0.6260 and $0.0000 per share to Class A and Class T, respectively)
|
(79,302) | (79,302) | (79,302) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 169 | 169 | (11) | 158 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of shares
|
(3,432,599) | (3) | (37,322) | (37,325) | (37,325) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 127,144,688 | $ | 127 | — | $ | — | $ | 1,174,900 | $ | (471,130) | $ | (286) | $ | 703,611 | $ | 53,771 | $ | 757,382 | |||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
WLT 2020 10-K – 54
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash Flows — Operating Activities | |||||||||||||||||
| Net (loss) income | $ | (367,276) | $ | (731) | $ | 15,744 | |||||||||||
| Adjustments to net (loss) income: | |||||||||||||||||
| Impairment charges | 120,220 | — | — | ||||||||||||||
| Depreciation and amortization | 114,490 | 76,621 | 77,170 | ||||||||||||||
| Bargain purchase gain | (78,696) | — | — | ||||||||||||||
| Equity in losses of equity method investments in real estate, net | 35,026 | 1,018 | 1,315 | ||||||||||||||
| Amortization of fair value adjustments, deferred financing costs and other | 30,229 | 3,237 | 3,014 | ||||||||||||||
| Net gain on change in control of interests | (22,250) | — | — | ||||||||||||||
| Asset management fees to affiliates settled in shares | 3,656 | 14,052 | 14,136 | ||||||||||||||
| Net gain on sale of real estate | (2,738) | (30,918) | (31,260) | ||||||||||||||
| (Gain) loss on property-related insurance claims | (2,520) | 372 | (1,340) | ||||||||||||||
| Amortization of stock-based compensation | 1,816 | 705 | 558 | ||||||||||||||
| Business interruption income | (942) | (4,338) | (23,579) | ||||||||||||||
| Net loss on extinguishment of debt | 22 | 2,711 | 511 | ||||||||||||||
| Straight-line rent adjustments | — | — | 6,030 | ||||||||||||||
| Net changes in other assets and liabilities | 8,538 | 8,822 | 5,521 | ||||||||||||||
| Net decrease in operating lease right-of-use assets | 4,887 | 6,688 | — | ||||||||||||||
| (Decrease) increase in due to related parties and affiliates | (3,086) | (3,540) | 1,935 | ||||||||||||||
| Insurance proceeds for remediation work due to property damage | 2,907 | 3,106 | 5,555 | ||||||||||||||
| Net increase in operating lease liabilities | 1,064 | 1,335 | — | ||||||||||||||
| Funding of remediation work | (1,025) | (9,234) | (10,746) | ||||||||||||||
| Business interruption insurance proceeds | 942 | 4,338 | 14,446 | ||||||||||||||
| Receipt of key money and other deferred incentive payments | 715 | 500 | 58 | ||||||||||||||
| Distributions of earnings from equity method investments | — | 3,442 | 3,788 | ||||||||||||||
| Net Cash (Used in) Provided by Operating Activities | (154,021) | 78,186 | 82,856 | ||||||||||||||
| Cash Flows — Investing Activities | |||||||||||||||||
| Cash and restricted cash acquired in the Merger | 109,475 | — | — | ||||||||||||||
| Proceeds from sale of real estate investments | 89,398 | 185,990 | 156,646 | ||||||||||||||
| Capital expenditures | (23,951) | (37,227) | (73,393) | ||||||||||||||
| Capital contributions to equity investments in real estate | (6,620) | (3,835) | (732) | ||||||||||||||
| Hurricane-related and other property insurance proceeds | 4,239 | 12,802 | 15,556 | ||||||||||||||
| Payment of Watermark commitment fee | (1,151) | (2,950) | — | ||||||||||||||
| Repayments of loan receivable | 58 | 232 | 312 | ||||||||||||||
| Distributions from equity investments in excess of cumulative equity income | — | 11,804 | 14,238 | ||||||||||||||
| Net Cash Provided by Investing Activities | 171,448 | 166,816 | 112,627 | ||||||||||||||
| Cash Flows — Financing Activities | |||||||||||||||||
| Proceeds from issuance of mandatorily redeemable preferred stock and warrants | 200,000 | — | — | ||||||||||||||
| Scheduled payments and prepayments of mortgage principal | (142,433) | (207,103) | (170,425) | ||||||||||||||
| Proceeds from mortgage financing | 81,308 | 86,805 | 75,250 | ||||||||||||||
| Distributions paid | (20,357) | (80,260) | (79,045) | ||||||||||||||
| Deferred financing costs | (15,169) | (3,447) | (2,320) | ||||||||||||||
| Net proceeds from issuance of shares | 10,553 | 42,903 | 43,868 | ||||||||||||||
| Payment of distribution and shareholder servicing fee | (3,406) | — | — | ||||||||||||||
| Repurchase of shares | (1,950) | (22,806) | (37,321) | ||||||||||||||
| Other financing activities, net | 187 | (2,131) | (1,393) | ||||||||||||||
| Repayment of WPC Credit Facility | — | (46,637) | (37,000) | ||||||||||||||
| Distributions to noncontrolling interests | — | (13,152) | (8,343) | ||||||||||||||
| Proceeds from WPC Credit Facility | — | 5,000 | 10,000 | ||||||||||||||
| Net Cash Provided by (Used in) Financing Activities | 108,733 | (240,828) | (206,729) | ||||||||||||||
| Change in Cash and Cash Equivalents and Restricted Cash During the Year | |||||||||||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash | 126,160 | 4,174 | (11,246) | ||||||||||||||
| Cash and cash equivalents and restricted cash, beginning of year | 125,304 | 121,130 | 132,376 | ||||||||||||||
| Cash and cash equivalents and restricted cash, end of year | $ | 251,464 | $ | 125,304 | $ | 121,130 | |||||||||||
(Continued)
WLT 2020 10-K – 55
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Supplemental Cash Flow Information (in thousands):
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest paid, net of amounts capitalized | $ | 67,579 | $ | 65,235 | $ | 61,295 | |||||||||||
| Income taxes paid | $ | 1,933 | $ | 4,568 | $ | 2,312 | |||||||||||
See Notes to Consolidated Financial Statements.
WLT 2020 10-K – 56
WATERMARK LODGING TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Organization
Organization
Watermark Lodging Trust, Inc. (“WLT”), formerly known as Carey Watermark Investors 2 Incorporated (“CWI 2”), is a self-managed, publicly owned, non-traded real estate investment trust (“REIT”) that, together with its consolidated subsidiaries, invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States.
Substantially all of our assets and liabilities are held by, and all of our operations are conducted through CWI 2 OP, LP (the “Operating Partnership”) and we are a general partner and a limited partner of, and own a 99.0% capital interest in, the Operating Partnership, as of December 31, 2020. Watermark Capital Partners, LLC (“Watermark Capital”), which is 100% owned by Mr. Michael G. Medzigian, our Chief Executive Officer, held the remaining 1.0% in the Operating Partnership as of December 31, 2020.
Until April 13, 2020, we were managed by Carey Lodging Advisors, LLC (the “Former Advisor”), an indirect subsidiary of W. P. Carey Inc. (“WPC”). The Former Advisor managed our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that managed our hotels. CWA, LLC (the “CWI 1 Subadvisor”), a subsidiary of Watermark Capital, provided services to the Former Advisor, primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that managed the day-to-day operations of our hotels. In addition, the CWI 1 Subadvisor provided us with the services of our Chief Executive Officer, subject to the approval of our independent directors.
We held ownership interests in 31 hotels as of December 31, 2020, including 29 hotels that we consolidate (“Consolidated Hotels”) and two hotels that we record as equity investments (“Unconsolidated Hotels”).
July Capital Raise
On July 21, 2020, we entered into a securities purchase agreement (the “Purchase Agreement”) with ACP Watermark Investment LLC (the “Purchaser”) and, solely with respect to a guaranty, certain other parties thereto. Pursuant to the Purchase Agreement, the Company, in a private placement made in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, agreed to issue and sell to the Purchaser 200,000 shares of 12% Series B Cumulative Redeemable Preferred Stock, liquidation preference $1,000.00 per share (the “Series B Preferred Stock”) and warrants (the “Warrants”) to purchase 16,778,446 units of limited partnership interest of the Operating Partnership (“OP Units”) (“Warrant Units”), for an aggregate purchase price of $200.0 million (the “July Capital Raise”). See Note 15 for additional information on the Series B Preferred Stock and Warrants.
The Purchaser has also committed to provide, upon satisfaction of certain conditions, up to an additional $250.0 million to purchase additional shares of the Series B Preferred Stock during the 18 months following the consummation of the July Capital Raise, of which $150.0 million is allocated to working capital needs and other general corporate purposes and $100.0 million is allocated to approved acquisitions. The July Capital Raise closed on July 24, 2020. Among other terms of the Series B Preferred Stock, the Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless the Company has first paid all accrued dividends (and dividends thereon) on the Series B Preferred Stock in cash for all past dividend periods and the current dividend period. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's distribution reinvestment plan. Additionally, the Company appointed two designees of the Purchaser as members of the Board of Directors at the closing of the July Capital Raise.
COVID-19, Management’s Plans and Liquidity
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) to be a global pandemic. The COVID-19 pandemic has had a material adverse effect on our business, results of operations, financial condition and cash flows and will continue to do so for the reasonably foreseeable future. As of March 12, 2021, 30 of our hotels are open but the majority are operating at significantly reduced levels of occupancy, staffing and expenses, and operations at our remaining one hotel are fully suspended. While we have seen improving demand at some of our properties as certain states and
WLT 2020 10-K – 57
Notes to Consolidated Financial Statements
cities across the United States have loosened stay-at-home restrictions, we expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. In addition, resurgences of COVID-19 in certain areas where our hotels are located may cause us to have to suspend operations at hotels that have remained open or reopened until the resurgence subsides. Given the uncertainty as to the ultimate severity and duration of the COVID‑19 pandemic and its effects, and the potential for its recurrence, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.
We have taken actions to help mitigate the effects of the COVID-19 pandemic on our operating results and to preserve our liquidity at both the operating level and corporate level, including:
•Completing the July Capital Raise transaction, as discussed above;
•Significantly reducing hotel operating costs: in March, April and May 2020, we suspended all operations at 16 hotels and significantly reduced operations at the remaining hotels, primarily by reducing staffing, furloughing employees, eliminating non-essential amenities and services and closing several floors and food and beverage outlets. One of these hotels reopened in May, seven hotels reopened in June, five hotels reopened in July and two hotels reopened in August;
•Working with our lenders on debt forbearance plans, as discussed below;
•Suspending distributions on, and redemptions of, our common stock, subject to limited exceptions;
•Actively pursuing certain asset sales;
•Significantly reducing our planned renovation activity by either canceling or deferring this activity to future periods, other than completing projects that are near completion;
•Using a portion of our furniture, fixtures and equipment reserve accounts for expenses at our properties, as well as temporarily suspending required contributions to the furniture, fixture and equipment replacement reserves at certain of our hotels, to the extent permitted by our lenders; and
•Reducing the cash compensation payable to our senior management and the Board of Directors.
As of December 31, 2020, we had cash and cash equivalents of $160.4 million. Additionally, under the terms of our agreements with the investors in the July Capital Raise, we have the option to require such investors to purchase up to $150.0 million aggregate liquidation preference of additional shares of Series B Preferred Stock during the 18 months after the closing of the July Capital Raise for additional working capital needs, including the repayment, refinancing or restructuring of indebtedness, subject to our satisfaction of customary conditions. As of December 31, 2020, the mortgage loans for our Consolidated Hotels had an aggregate principal balance totaling $2.2 billion outstanding, all of which is mortgage indebtedness and is generally non-recourse, subject to customary non-recourse carve-outs, except that we have provided certain lenders with limited corporate guaranties aggregating $8.5 million for items such as taxes, deferred debt service and amounts drawn from furniture, fixtures and equipment reserves to pay expenses, in connection with loan modification agreements. Of the $2.2 billion of indebtedness outstanding as of December 31, 2020, approximately $811.4 million is scheduled to mature during the 12 months after the date of this Report. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of March 12, 2021, we have executed loan modifications on 24 of our 29 Consolidated Hotel mortgage loans, aggregating $1.9 billion of indebtedness, which had resulted in a temporary deferral of interest and principal payments and/or the granting of temporary covenant relief, which generally lasted for periods ranging from three months to four months. Although these loan modifications have generally expired, we are continuing to work with our lenders on longer-term modifications that will help preserve our liquidity. In addition, we refinanced or extended the maturity date of six Consolidated Hotel mortgage loans, aggregating $467.1 million of indebtedness, to address loans with near-term mortgage maturities. As of December 31, 2020, we have effectively entered into cash management agreements with the lenders on 27 of our 29 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. The cash management agreements generally permit cash generated from the operations of each hotel to fund the hotel’s operating expenses, debt service, taxes and insurance but restrict distributions of excess cash flow, if any, to the Company to fund corporate expenses. If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender. Even if we are able to obtain payment or covenant relief, we may incur increased costs and increased interest rates and we may agree to additional restrictive covenants and other lender protections related to the mortgage loans.
During the year ended December 31, 2020, we sold two hotels with an aggregate contractual sales price of $93.0 million, and we received net aggregate proceeds of $34.8 million after the repayment of the related mortgage loans. We recognized a net gain of $2.7 million on the sale of these hotels. We may choose to market additional assets for sale.
WLT 2020 10-K – 58
Notes to Consolidated Financial Statements
Our primary cash uses through December 31, 2021 are expected to be payment of debt service, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be cash on hand, funds generated by hotel operations, any additional issuances of Series B Preferred Stock and proceeds from additional asset sales.
We cannot predict with reasonable certainty when our hotels will return to normalized levels of operations after the effects of the COVID-19 pandemic subside or whether hotels that have recommenced operations will be forced to shut down operations or impose additional restrictions due to a resurgence of COVID-19 in the future. Therefore, as a consequence of these unprecedented trends resulting from the impact of the COVID-19 pandemic, we are unable to estimate future financial performance with reasonable certainty.
Note 2. Summary of Significant Accounting Policies
Critical Accounting Policies and Estimates
Accounting for Acquisitions
In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, we evaluate the existence of goodwill or a gain from a bargain purchase. We capitalize acquisition-related costs and fees associated with asset acquisitions. We immediately expense acquisition-related costs and fees associated with business combinations, which are included in Transaction costs in the consolidated statements of operations.
See Note 3 for the valuation methodologies, inputs, and assumptions used to estimate the fair value of the assets acquired, the liabilities assumed, and the noncontrolling interests acquired in the Merger (as defined in Note 3).
Impairments
We periodically assess whether there are any indicators that the value of our long-lived real estate and related intangible assets may be impaired and that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, when a hotel property experiences a current or projected loss from operations, when it becomes more likely than not that a hotel property will be sold before the end of its useful life, or when there are adverse changes in the demand for lodging due to declining national or local economic conditions. We may incur impairment charges on long-lived assets, including real estate, related intangible assets and equity investments. Our policies and estimates for evaluating whether these assets are impaired are presented below.
Real Estate — For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of, among other things, net operating income (“NOI”), residual values and holding periods.
Our investment objective is to hold properties on a long-term basis. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. We then measure the loss as the excess of the carrying value of the property’s asset group over its estimated fair value. The estimated fair value of the property’s asset group is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for the inherent risk associated with each investment, using estimates such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth.
WLT 2020 10-K – 59
Notes to Consolidated Financial Statements
Equity Investments in Real Estate — We evaluate our equity investments in real estate on a periodic basis to determine if there are any indicators that the value of our equity investment may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, we measure the charge as the excess of the carrying value of our investment over its estimated fair value. We estimate the fair value of the hotel property using the methodologies discussed above and estimate the fair value of the debt using a discounted cash flow model with rates that take into account the interest rate risk. We also consider the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.
Other Accounting Policies
Basis of Presentation and Consolidation — The consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity (“VIE”), and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply the accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Certain decision-making rights within a loan or joint-venture agreement can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.
As of December 31, 2020 and 2019, we considered three and five entities to be VIEs, of which we consolidated three and four, respectively, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net investments in hotels | $ | 461,142 | $ | 494,304 | |||||||
| Intangible assets, net | 36,234 | 37,045 | |||||||||
| Total assets | 520,833 | 566,075 | |||||||||
| Non-recourse debt, net | $ | 327,597 | $ | 341,263 | |||||||
| Total liabilities | 354,193 | 376,004 | |||||||||
Reclassifications — Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
WLT 2020 10-K – 60
Notes to Consolidated Financial Statements
Cash and Cash Equivalents and Restricted Cash — Our cash is held in the custody of several financial institutions, and these balances, at times, exceed federally-insurable limits. We seek to mitigate this risk by depositing funds only with major financial institutions. Restricted cash consists primarily of amounts escrowed pursuant to the terms of our mortgage debt to fund planned renovations and improvements, property taxes, insurance, and normal replacement of furniture, fixtures and equipment at our hotels. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
| December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
|
Cash and cash equivalents
|
$ | 160,383 | $ | 70,605 | $ | 66,593 | |||||||||||
|
Restricted cash
|
91,081 | 54,699 | 54,537 | ||||||||||||||
|
Total cash and cash equivalents and restricted cash
|
$ | 251,464 | $ | 125,304 | $ | 121,130 | |||||||||||
Share Repurchases — Share repurchases are recorded as a reduction of common stock par value and additional paid-in capital under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders, subject to certain exceptions, conditions, and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors.
Real Estate — We carry land, buildings and personal property at cost less accumulated depreciation. We capitalize improvements and we expense replacements, maintenance and repairs that do not improve or extend the life of the respective assets as incurred. Renovations and/or replacements at the hotel properties that improve or extend the life of the assets are capitalized and depreciated over their useful lives, and repairs and maintenance are expensed as incurred. We capitalize interest and certain other costs, such as incremental labor costs relating to hotels undergoing major renovations and redevelopments.
Gain/Loss on Sale — We recognize gains and losses on the sale of properties when the transaction meets the definition of a contract, criteria are met for the sale of one or more distinct assets and control of the properties is transferred.
Equity Investments in Real Estate — We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
Other Assets and Liabilities — Other assets consists primarily of prepaid expenses, costs related to the internalization of Watermark Capital representing goodwill as of December 31, 2020 (Note 4) and hotel inventories in the consolidated financial statements. Other liabilities, which are included in Accounts payable, accrued expenses and other liabilities, consists primarily of unamortized key money, hotel advance deposits, sales and use and occupancy taxes payable, deferred tax liabilities and accrued income taxes.
Deferred Financing Costs — Deferred financing costs represent costs to obtain mortgage financing. We amortize these charges to interest expense over the term of the related mortgage using a method which approximates the effective interest method. Deferred financing costs are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability.
Segments — We operate in one business segment, hospitality, with domestic investments.
Hotel Revenue Recognition — Revenue consists of amounts derived from hotel operations, including the sale of rooms, food and beverage and revenue from other operating departments, such as parking, spa, resort fees and gift shops, and is presented on a disaggregated basis on the consolidated statements of operations. These revenues are recorded net of any sales or occupancy taxes, which are collected from our guests as earned. All rebates or discounts are recorded as a reduction in revenue and there are no material contingent obligations with respect to rebates or discounts offered by us.
We recognize revenue when control of the promised good or service is transferred to the guest, in an amount that reflects the consideration we expect to receive in exchange for the promised good or service. Room revenue is generated through contracts with guests whereby the guest agrees to pay a daily rate for the right to use a hotel room and applicable amenities for an agreed upon length of stay. Our contract performance obligations are fulfilled at the end of the day that the guest is provided the room and revenue is recognized daily at the contract rate. Food and beverage revenue, including restaurant and banquet and catering services, are recognized at a point in time once food and beverage has been provided. Other operating department revenue for
WLT 2020 10-K – 61
Notes to Consolidated Financial Statements
services such as parking, spa and other ancillary services, is recognized at a point in time when the goods and services are provided to the guest. We may engage third parties to provide certain services at the hotel, for example, audiovisual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenues as appropriate (i.e., gross vs. net).
Payment is due at the time that goods or services are rendered or billed. For room revenue, payment is typically due and paid in full at the end of the stay with some guests prepaying for their rooms prior to the stay. For package revenue, where ancillary guest services are included with the guests’ hotel reservations in a package arrangement, we allocate revenue based on the stand-alone selling price for each of the components of the package. We applied a practical expedient to not disclose the value of unsatisfied performance obligations for contracts that have an original expected length of one year or less. Any contracts that have an original expected length of greater than one year are insignificant.
Capitalized Costs — We capitalize interest and certain other costs, such as property taxes, land leases, property insurance and incremental labor costs relating to hotels undergoing major renovations and redevelopments. We begin capitalizing interest as we incur disbursements, and capitalize other costs when activities necessary to prepare the asset ready for its intended use are underway. We cease capitalizing these costs when construction is substantially complete.
Depreciation and Amortization — We compute depreciation for hotels and related building improvements using the straight-line method over the estimated useful lives of the properties (limited to 40 years for buildings and ranging from four years up to the remaining life of the building at the time of addition for building improvements), site improvements (generally four to 15 years), and furniture, fixtures and equipment (generally one to 12 years).
Derivative Instruments — We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated and qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive loss until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. In accordance with fair value measurement guidance, counterparty credit risk is measured on a net portfolio position basis.
Income Taxes — We elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. In order to maintain our qualification as a REIT, we are required, among other things, to distribute at least 90% of our REIT net taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income taxes on our income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We believe that we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT.
We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.
We elect to treat certain of our corporate subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may perform additional services for our investments and generally may engage in any real estate or non-real estate-related business (except for the operation or management of health care facilities or lodging facilities or providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal, state and local income taxes.
Significant judgment is required in determining our tax provision and in evaluating our tax positions. We establish tax reserves based on a benefit recognition model, which could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. We derecognize the tax position when it is no longer more likely than not of being sustained.
Our earnings and profits, which determine the taxability of distributions to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation and timing differences of certain income and expense recognitions, for federal income tax purposes. Deferred income taxes relate primarily to our TRSs and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of our TRSs and their respective tax bases and for their operating loss and tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However,
WLT 2020 10-K – 62
Notes to Consolidated Financial Statements
deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors (Note 14).
We recognize deferred income taxes in certain of our subsidiaries taxable in the United States. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes as described in Note 14). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years. Deferred income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial bases of assets and liabilities. We provide a valuation allowance against our deferred income tax assets when we believe that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).
Share-Based Payments — We have granted restricted stock units (“RSUs”) to certain employees (and prior to the Merger, employees of our former subadvisor). RSUs issued to employees generally vest over three years, and are subject to continued employment. We also issued Class A common stock to our directors as part of their director compensation. The expense recognized for share-based payment transactions for awards made to directors is based on the grant date fair value estimated in accordance with current accounting guidance for share-based payments. Share-based payment transactions for awards made to employees are based on the fair value of the shares on the date of grant. We recognize these compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the award. We include share-based payment transactions within Corporate general and administrative expense.
Income Attributable to Noncontrolling Interests — Earnings attributable to noncontrolling interests are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.
(Loss) Income Per Share — (Loss) income per share, as presented, represents both basic and diluted per-share amounts for all periods presented in the consolidated financial statements. We calculate (loss) income per share using the two-class method to reflect the different classes of our outstanding common stock. (Loss) income per basic share of common stock is calculated by dividing Net (loss) income attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during the year. The allocation of Net (loss) income attributable to common stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the years ended December 31, 2020, 2019 and 2018, as applicable.
Recent Accounting Requirements
The following Accounting Standards Updates (“ASU”), promulgated by the Financial Accounting Standards Board (“FASB”), are applicable to us:
Pronouncements Adopted as of December 31, 2020
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform-related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate (“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. We will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 replaces the “incurred loss” model with an “expected loss” model, resulting in the earlier recognition of credit losses even if the risk of loss is remote. This standard applies to financial assets measured at amortized cost and certain other instruments, including loans receivable. This standard does not apply to receivables arising from operating leases, which are within the scope of Topic 842. We adopted this guidance for our interim and annual periods beginning January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
WLT 2020 10-K – 63
Notes to Consolidated Financial Statements
Note 3. Merger of CWI 1 and CWI 2
On April 13, 2020, a direct, wholly-owned subsidiary (“Merger Sub”) of CWI 2 merged, with and into Carey Watermark Investors Incorporated (“CWI 1”), in an all-stock transaction to create WLT (the “Merger”). The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of October 22, 2019 (as amended, the “Merger Agreement”), by and among CWI 2, CWI 1 and Merger Sub.
In accordance with the Merger Agreement, at the effective time of the Merger (the “effective time”) each issued and outstanding share of CWI 1’s common stock (or fraction thereof), $0.001 par value per share (“CWI 1 common stock”), was converted into the right to receive 0.9106 shares (the “exchange ratio”) of WLT Class A common stock, $0.001 par value per share (“WLT Class A common stock”). Also at the effective time, all RSUs of CWI 1 outstanding and unvested immediately prior to the effective time were converted into an RSU of WLT with respect to a whole number of shares of WLT Class A common stock equal to (i) the number of shares of CWI 1 common stock subject to such unvested RSU of CWI 1, multiplied by (ii) the exchange ratio.
Immediately following the effective time of the Merger, the internalization of the management of the Company (the “Internalization”) was consummated pursuant to the Internalization Agreement, dated as of October 22, 2019 (as amended, the “Internalization Agreement”), by and among CWI 1, CWI OP, LP, the Operating Partnership, WPC, Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, the Former Advisor, Watermark Capital, the CWI 1 Subadvisor and CWA2, LLC (the “CWI 2 Subadvisor” and together with CWI 1 Subadvisor, the “Subadvisors”).
In accordance with the Internalization Agreement, CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively (the “Redemption”). As consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, WLT or the Operating Partnership (as applicable) issued equity consisting of (x) 2,840,549 shares of CWI 2 Class A common stock, to affiliates of WPC, (y) 1,300,000 shares of WLT Series A preferred stock, $0.001 par value per share, to affiliates of WPC, with a liquidation preference of $50.00 per share ($65,000,000 in the aggregate) (Note 15), and (z) 2,417,996 limited partnership units in the Operating Partnership, to affiliates of Watermark Capital. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively.
Immediately following the Redemption, the existing advisory agreements, as amended, between CWI 1 or CWI 2 (as applicable) and the Former Advisor, and the existing sub‑advisory agreements, as amended, between the Former Advisor and the Subadvisors (as applicable), were automatically terminated. The secured credit facilities entered into by CWI OP, LP or the Operating Partnership (as applicable) as borrower, and CWI 1 or CWI 2 (as applicable) as guarantor, with WPC as lender, each matured at the time of the expiration of such existing advisory agreements and the applicable loan agreements and loan documents were terminated. Neither CWI 1 nor CWI 2 had any outstanding obligations under the respective facilities.
The Merger was accounted for as a business combination in accordance with current authoritative accounting guidance. CWI 1 was the accounting acquirer in the Merger as (i) CWI 1’s pre-merger stockholders had a majority of the voting power in the Company after the Merger and (ii) CWI 1 was significantly larger than CWI 2 when considering assets and revenues. As CWI 1 was the accounting acquirer while CWI 2 was the legal acquirer, the Merger was accounted for as a reverse acquisition, and therefore, the historical financial information included in the Company’s financial statements as of any date, or for any periods prior to April 13, 2020, represents the pre-merger information of CWI 1. The financial statements of the Company, as set forth herein, represent a continuation of the financial information of CWI 1 as the accounting acquirer, except that the equity structure of WLT is adjusted to reflect the equity structure of the legal acquirer, CWI 2, including for comparative periods, by applying the exchange ratio of 0.9106.
WLT 2020 10-K – 64
Notes to Consolidated Financial Statements
As a result of the Merger, the Company acquired an ownership interest in the following 12 hotel properties:
___________
| Hotels | State |
Number
of Rooms |
% Acquired | Hotel Type | ||||||||||||||||||||||
|
Charlotte Marriott City Center
|
NC | 446 | 100% | Full-Service | ||||||||||||||||||||||
|
Courtyard Nashville Downtown
|
TN | 192 | 100% | Select-Service | ||||||||||||||||||||||
|
Embassy Suites by Hilton Denver-Downtown/Convention Center
|
CO | 403 | 100% | Full-Service | ||||||||||||||||||||||
|
Le Méridien Arlington
|
VA | 154 | 100% | Full-Service | ||||||||||||||||||||||
|
Marriott Sawgrass Golf Resort & Spa (a)
|
FL | 514 | 50% | Resort | ||||||||||||||||||||||
|
Renaissance Atlanta Midtown Hotel
|
GA | 304 | 100% | Full-Service | ||||||||||||||||||||||
|
Ritz-Carlton Bacara, Santa Barbara (a)
|
CA | 358 | 60% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton Key Biscayne (b)
|
FL | 443 | 19.3% | Resort | ||||||||||||||||||||||
|
Ritz-Carlton San Francisco
|
CA | 336 | 100% | Full-Service | ||||||||||||||||||||||
|
San Diego Marriott La Jolla
|
CA | 376 | 100% | Full-Service | ||||||||||||||||||||||
|
San Jose Marriott
|
CA | 510 | 100% | Full-Service | ||||||||||||||||||||||
|
Seattle Marriott Bellevue
|
WA | 384 | 100% | Full-Service | ||||||||||||||||||||||
| 4,420 | ||||||||||||||||||||||||||
(a)Upon closing of the Merger, the Company owns 100% of this hotel.
(b)Upon closing of the Merger, the Company owns 66.7% of this hotel.
As the Merger is accounted for as a reverse acquisition, the fair value of the consideration transferred is measured based upon the number of shares of CWI 1 common stock, as the accounting acquirer, would theoretically have to issue to the stockholders of CWI 2 to achieve the same ratio of ownership in the combined company upon completion of the Merger and applying the fair value per implied share of CWI 1 common stock issued in consideration.
As a result, the implied shares of CWI 1 common stock issued in consideration was computed based on the number of outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger divided by the exchange ratio of 0.9106.
WLT 2020 10-K – 65
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
| Total Merger Consideration | |||||
| Outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger | 94,480,247 | ||||
| Exchange ratio | 0.9106 | ||||
| Implied shares of CWI 1 common stock issued in consideration | 103,756,037 | ||||
| Fair value per implied share of CWI 1 common stock issued in consideration | $ | 4.83271 | |||
| Fair value of implied shares of CWI 1 common stock issued in consideration | 501,423 | ||||
| Fair value of noncontrolling interest acquired | (39,414) | ||||
| Fair value of purchase consideration | $ | 462,009 | |||
The following tables present a summary of assets acquired and liabilities assumed in this business combination, at the date of acquisition; as well as and revenues and earnings thereon, from the date of acquisition through December 31, 2020 (in thousands):
|
Purchase
Price Allocation |
|||||
| Assets | |||||
| Net investments in hotels | $ | 1,556,383 | |||
| Operating lease right-of-use assets | 974 | ||||
| Cash and cash equivalents | 71,881 | ||||
| Intangible assets | 10,200 | ||||
| Restricted cash | 37,594 | ||||
| Accounts receivable, net | 25,664 | ||||
| Other assets | 15,593 | ||||
| Total Assets | 1,718,289 | ||||
| Liabilities | |||||
| Non-recourse debt, net | (1,002,753) | ||||
| Accounts payable, accrued expenses and other liabilities | (97,843) | ||||
| Operating lease liabilities | (1,874) | ||||
| Due to related parties and affiliates | (1,520) | ||||
| Total Liabilities | (1,103,990) | ||||
| Total Identifiable Net Assets | 614,299 | ||||
| Fair value of CWI 1's equity interests in jointly-owned investments with CWI 2 prior to the merger | (73,594) | ||||
| Bargain purchase gain | (78,696) | ||||
| Fair value of purchase consideration | $ | 462,009 | |||
| From April 13, 2020 through December 31, 2020 | |||||
| Revenues | $ | 69,545 | |||
| Net loss | $ | (150,176) | |||
We recognized a bargain purchase gain of $78.7 million in connection with the Merger resulting from the estimated fair values of the assets acquired net of liabilities assumed exceeding the consideration paid.
The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the noncontrolling interests acquired:
Net Investments in Hotels — The Company estimated the fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the income capitalization and sales comparison approaches. These valuation methodologies are based on significant unobservable Level 3 inputs in the fair value hierarchy, such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth.
WLT 2020 10-K – 66
Notes to Consolidated Financial Statements
Intangible Assets — The Company estimated the fair market value of the trade name through a relief-from-royalty discounted cash flow method whereby the Company valued the avoided third-party license payment for the right to employ the asset to earn benefits. The relief-from-royalty discounted cash flow method applies an estimated royalty rate to forecasted future cash flows, discounted to present value and includes estimates of net sales growth, discount rate and royalty fee, which are valuation methodologies based on significant unobservable Level 3 inputs in the fair value hierarchy. Our intangibles are included in Intangible assets, net in the consolidated financial statements. Amortization of intangibles is included in Depreciation and amortization in the consolidated financial statements.
In connection with the Merger, we recorded intangibles comprised as follows (life in years, dollars in thousands):
| Weighted-Average Life | Amount | ||||||||||
| Amortizable Intangible Assets | |||||||||||
| Trade name | 8.0 | $ | 9,400 | ||||||||
| In-place leases | 3.2 | 800 | |||||||||
| Total intangible assets | $ | 10,200 | |||||||||
Non-Recourse Debt — We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate, which are Level 3 inputs in the fair value hierarchy. We recognized a discount of approximately $69.5 million on the mortgage loans assumed in the Merger, which is included in non-recourse debt, net in the consolidated balance sheet. The discount is amortized over the remaining terms of the respective debt instruments as adjustments to interest expense in the consolidated statements of operations.
Noncontrolling Interest — The Company estimated the fair value of the consolidated joint venture by using the same valuation methodologies for the investment in hotel properties noted above. The Company then recognized the fair value of the noncontrolling interest in the consolidated joint venture based on the joint venture partner's ownership interest in the consolidated joint venture. This valuation methodology is based on Level 3 inputs and assumptions in the fair value hierarchy.
Cash and cash equivalents, restricted cash, accounts receivable, net, other assets, accounts payable, accrued expenses and other liabilities, and due to related parties and affiliates —The carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities.
The fair value per implied share of CWI 1 common stock issued in consideration was calculated using estimated fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment of the CWI 1 hotel properties as of April 13, 2020 and estimates of the fair market value of the CWI 1 mortgage debt at the same date, based upon the methodologies discussed above, then adjusted to reflect CWI 1’s ownership interest in joint venture properties, including adjustments to appropriately capture specific joint venture promote structures. The shares used in the calculation represent the outstanding shares of CWI 1 immediately prior to the Merger.
Transaction costs are costs incurred in connection with the Merger and related transactions and included legal, accounting, financial advisory and other transaction costs. These costs were expensed as incurred in the consolidated statements of operations.
(Dollars in thousands)
|
|
Years Ended December 31,
|
|||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Transaction costs | $ | 18,448 | $ | 2,783 | $ | — | ||||||||||||||
WLT 2020 10-K – 67
Notes to Consolidated Financial Statements
Pro Forma Financial Information
The following unaudited consolidated pro forma financial information presents the results of operations as if the Merger had taken place on January 1, 2019. The unaudited consolidated pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Merger had taken place on January 1, 2019, nor is it indicative of the results of operations for future periods. The unaudited consolidated pro forma financial information is as follows (dollars in thousands, except per share amounts):
| Years Ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Pro forma total revenues | $ | 365,395 | $ | 1,061,517 | ||||||||||
|
Pro forma total hotel operating expenses (a)
|
$ | 524,854 | $ | 923,792 | ||||||||||
| Pro forma net (loss) income | $ | (454,749) | $ | 62,039 | ||||||||||
|
Pro forma net (loss) income attributable to Common Stockholders (b)
|
$ | (433,892) | $ | 59,120 | ||||||||||
| Pro forma (loss) income per Class A share: | ||||||||||||||
| Net (loss) income attributable to Common Stockholders | $ | (317,775) | $ | 43,657 | ||||||||||
| Basic and diluted pro forma weighted-average shares outstanding | 167,566,465 | 166,464,081 | ||||||||||||
| Basic and diluted pro forma (loss) income per share | $ | (1.90) | $ | 0.26 | ||||||||||
| Pro forma (loss) income per Class T share: | ||||||||||||||
| Net (loss) income attributable to Common Stockholders | $ | (116,117) | $ | 15,463 | ||||||||||
| Basic and diluted pro forma weighted-average shares outstanding | 61,173,069 | 60,499,745 | ||||||||||||
| Basic and diluted pro forma (loss) income per share | $ | (1.90) | $ | 0.26 | ||||||||||
(a)Includes pro forma depreciation and amortization expense of $130.2 million and $143.0 million for the year ended December 31, 2020 and 2019, respectively.
(b)The pro forma net (loss) income attributable to Common Stockholders through the year ended December 31, 2020 reflects the following income and expenses related to the Merger as if the Merger had taken place on January 1, 2019: (i) bargain purchase gain of $78.7 million, (ii) transaction costs of $27.5 million through December 31, 2020 and (iii) net gain on change in control of interests of $22.3 million.
Compensation
Mr. Medzigian, the Company’s Chief Executive Officer, entered into an employment agreement with WLT that took effect at the closing of the Merger, effected pursuant to the Employment Agreement, dated as of October 22, 2019, pursuant to which Mr. Medzigian is entitled to receive, among other things, an annual base salary of $775,000, an annual cash bonus opportunity equal to 150% of his annual base salary based on performance goals, and an award of RSUs of WLT common stock equal to $6.0 million. Mr. Medzigian subsequently entered into a letter agreement with CWI 2 to confirm his agreement to reduce by 50% the pro rata portion of Mr. Medzigian’s annual base salary payable by the Company through July 15, 2020. Mr. Medzigian agreed to continue to reduce his annual base salary payable by the Company, with a reduction of 25% from July 15, 2020 through September 30, 2020.
WLT 2020 10-K – 68
Notes to Consolidated Financial Statements
Note 4. Agreements and Transactions with Related Parties
Agreements with Our Former Advisor and Affiliates
Prior to the Merger, we had an advisory agreement with the Former Advisor (the “Advisory Agreement”) to perform certain services for us under a fee arrangement, including managing our overall business, our investments and certain administrative duties. The Former Advisor also had a subadvisory agreement with the CWI 1 Subadvisor (the “Subadvisory Agreement”) whereby the Former Advisor paid 20% of its fees earned under the Advisory Agreement to the CWI 1 Subadvisor in return for certain personnel services. Upon completion of the Merger on April 13, 2020 (Note 3), both the Advisory Agreement and Subadvisory Agreement were terminated.
The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to our Former Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
|
Amounts Included in the Consolidated Statements of Operations
|
|||||||||||||||||
| Asset management fees | $ | 3,795 | $ | 14,052 | $ | 14,136 | |||||||||||
| Personnel and overhead reimbursements | 3,567 | 6,571 | 6,392 | ||||||||||||||
| Available Cash Distributions | — | 7,095 | 5,142 | ||||||||||||||
| Interest expense | — | 1,319 | 1,367 | ||||||||||||||
| Disposition fees | — | 130 | 300 | ||||||||||||||
| $ | 7,362 | $ | 29,167 | $ | 27,337 | ||||||||||||
|
Other Transaction Fees Incurred
|
|||||||||||||||||
| Watermark commitment agreement | $ | — | $ | 4,101 | $ | — | |||||||||||
| Capitalized loan refinancing fees | — | 1,235 | 653 | ||||||||||||||
| $ | — | $ | 5,336 | $ | 653 | ||||||||||||
The following table presents a summary of amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Amounts Due to Related Parties and Affiliates | |||||||||||
| Reimbursable costs due to our Former Advisor | $ | 190 | $ | 1,524 | |||||||
| Watermark commitment agreement | — | 1,151 | |||||||||
| Other amounts due to our Former Advisor | — | 1,105 | |||||||||
| Due to other related parties and affiliates | — | 26 | |||||||||
| $ | 190 | $ | 3,806 | ||||||||
WLT 2020 10-K – 69
Notes to Consolidated Financial Statements
Asset Management Fees, Disposition Fees and Loan Refinancing Fees
Prior to the Merger, we paid the Former Advisor an annual asset management fee equal to 0.50% of the aggregate average market value of our investments, as described in the Advisory Agreement. The Former Advisor was also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement were met. If the Former Advisor elected to receive all or a portion of its fees in shares of our common stock, the number of shares issued was determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share (“NAV”). Upon completion of the Merger on April 13, 2020 (Note 3), the Advisory Agreement was terminated and these fees ceased being incurred. For the years ended December 31, 2020, 2019 and 2018, we settled $4.8 million, $14.1 million and $14.2 million, respectively, of asset management fees in shares of our common stock at the Former Advisor’s election. As of December 31, 2020, the Former Advisor owned 12,208,243 shares (5.3%) of our total outstanding common stock. Asset management fees are included in Asset management fees to affiliate in the consolidated financial statements.
Available Cash Distributions
Prior to the Merger, Carey Watermark Holdings, LLC’s special general partner interest entitled it to receive distributions of 10% of Available Cash (as defined in the limited partnership agreement of CWI OP, LP) (“Available Cash Distributions”) generated by CWI OP, LP, subject to certain limitations. Available Cash Distributions are included in (Income) loss attributable to noncontrolling interests in the consolidated financial statements. In connection with the Internalization (Note 3), the CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively, as further described in Note 3. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively.
Personnel and Overhead Reimbursements
Prior to the Merger, under the terms of the Advisory Agreement, the Former Advisor generally allocated expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and CWI 2, based on total pro rata hotel revenues on a quarterly basis. Pursuant to the Subadvisory Agreement, after we reimbursed the Former Advisor, it would subsequently reimburse the CWI 1 Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our Board of Directors. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements. We also granted RSUs to employees of the CWI 1 Subadvisor pursuant to our 2010 Equity Incentive Plan. Upon completion of the Merger on April 13, 2020 (Note 3), both the Advisory Agreement and Subadvisory Agreement were terminated and those expenses ceased being incurred. Subsequent to the Merger, subject to the terms of the Transition Services Agreement, as discussed below, WPC is paid its costs of providing services under this agreement and will be reimbursed for all expenses of providing the services.
Other Transactions with Affiliates
Watermark Commitment Agreement
On October 1, 2019, we, CWI 2, Watermark Capital and Mr. Medzigian, entered into a commitment agreement pursuant to which we and CWI 2 agreed to pay Watermark Capital a total of $6.95 million in consideration of the commitments of Watermark Capital and Mr. Medzigian to wind down and ultimately liquidate a private fund that was formed to raise capital to invest in lodging properties, and to devote their business activities exclusively to the affairs of us and CWI 2 and certain other activities set forth in the commitment agreement, with the exception of the wind-down of the private fund and performing asset management services for two hotels owned by WPC (one of which was subsequently sold). As of December 31, 2020, $6.95 million was included in Other assets in the consolidated balance sheet, representing goodwill related to the internalization of Watermark Capital. As of December 31, 2019, $4.2 million was included in Other assets in the consolidated balance sheet as a deferred cost, representing the portion of the payment allocated to us. We performed our annual test for impairment as of December 31, 2020 for goodwill recorded and found no impairment indicated.
WLT 2020 10-K – 70
Notes to Consolidated Financial Statements
Transition Services Agreement
Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and WPC, WPC will continue to make available to the Company all of the services that WPC provided to CWI 2 prior to the Merger. The term of the Transition Services Agreement is generally 12 months from the effective date of the internalization transaction, with some services surviving for an additional period of time. WPC will be paid its costs of providing the services and will be reimbursed for all expenses of providing the services.
Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and Watermark Capital, Watermark Capital will continue to make available to the Company all of the services that Watermark Capital provided to CWI 2 prior to the Merger and for the Company to provide certain services to Watermark Capital or its affiliates. Except with respect to particular services provided by the Company to Watermark Capital, the term of the Transition Services Agreement has expired. The Company, in its respective capacity as service provider under such Transition Services Agreement, will be paid its respective costs of providing the services and will be reimbursed for all expenses of providing the services.
Working Capital Facility
On September 26, 2017, we entered into a secured credit facility (the “WPC Credit Facility”) with CWI OP, LP as borrower and WPC as lender. The WPC Credit Facility consisted of (i) a bridge term loan of up to $75.0 million (the “Bridge Loan”) for the purpose of acquiring an interest in the Ritz-Carlton Bacara, Santa Barbara Venture and (ii) a $25.0 million revolving working capital facility (the “Working Capital Facility”) to be used for our working capital needs. The Bridge Loan, which was scheduled to mature on December 31, 2019, was repaid in full during the fourth quarter of 2019. The Working Capital Facility that was scheduled to mature on December 31, 2019, was extended to the later of March 31, 2020 or the closing date of the Merger. We served as guarantor of the WPC Credit Facility and pledged our unencumbered equity interests in certain properties as collateral, as further described in the pledge and security agreement entered into between the borrower and lender. Upon completion of the Merger on April 13, 2020, all applicable loan documents were terminated. At both April 13, 2020 and December 31, 2019, there were no outstanding balances under either the Bridge Loan or the Working Capital Facility.
Note 5. Net Investments in Hotels
Net investments in hotels are summarized as follows (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Buildings | $ | 2,289,031 | $ | 1,400,251 | |||||||
| Land | 627,296 | 331,681 | |||||||||
| Building and site improvements | 194,162 | 160,726 | |||||||||
| Furniture, fixtures and equipment | 193,517 | 103,920 | |||||||||
| Construction in progress | 11,786 | 11,918 | |||||||||
| Hotels, at cost | 3,315,792 | 2,008,496 | |||||||||
| Less: Accumulated depreciation | (356,328) | (298,949) | |||||||||
| Net investments in hotels | $ | 2,959,464 | $ | 1,709,547 | |||||||
During the years ended December 31, 2020 and 2019, we retired fully depreciated furniture, fixtures and equipment aggregating $24.9 million and $12.4 million, respectively, and recorded net write-offs of fixed assets resulting from property damage insurance claims of $5.5 million and $2.8 million, respectively.
Depreciation expense was $111.8 million, $75.1 million and $75.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
WLT 2020 10-K – 71
Notes to Consolidated Financial Statements
2020 Property Dispositions
On June 8, 2020, we sold our 100% ownership interest in the Hutton Hotel Nashville to an unaffiliated third party for a contractual sales price of $70.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $26.8 million, including the release of $0.4 million of restricted cash. We recognized a loss on sale of $0.5 million during the year ended December 31, 2020 in connection with this transaction.
On August 27, 2020, the Lake Arrowhead Resort and Spa venture sold the Lake Arrowhead Resort and Spa to an unaffiliated third party for a contractual sales price of $23.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $8.0 million. We owned a 97.35% controlling ownership interest in the venture. We recognized a gain on sale of $3.2 million during the year ended December 31, 2020 in connection with this transaction.
2019 Property Dispositions
On September 17, 2019, we sold our 100% ownership interest in the Courtyard San Diego Mission Valley to an unaffiliated third party for a contractual sales price of $79.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $33.6 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $5.9 million and a loss on extinguishment of debt of $0.3 million during the year ended December 31, 2019 in connection with this transaction.
On October 9, 2019, the Hilton Garden Inn New Orleans French Quarter/CBD venture sold the hotel to an unaffiliated third party for a contractual sales price of $26.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $11.4 million, including the release of $1.1 million of restricted cash. We owned an 88% controlling ownership interest in the venture. We recognized a gain on sale of $10.1 million and a loss on extinguishment of debt of $0.5 million during the year ended December 31, 2019 in connection with this transaction.
On November 21, 2019, we sold our 100% ownership interest in the Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center to an unaffiliated third party for a contractual sales price of $85.5 million with net proceeds after the repayment of the related mortgage loan of approximately $34.1 million, including the release of $3.1 million of restricted cash. We recognized a gain on sale of $14.9 million and a loss on extinguishment of debt of $1.8 million during the year ended December 31, 2019 in connection with this transaction.
Impairments
As a result of the adverse effect the COVID-19 pandemic has had, and continues to have, on our hotel operations, we reviewed all of our hotel properties for impairment and recognized impairment charges during the year ended December 31, 2020 totaling $120.2 million on six Consolidated Hotels with an aggregate fair value measurement of $266.6 million before impairment charges in order to reduce the carrying value of the properties to their estimated fair values. For five of the hotel properties, the fair value measurements were determined using a future net cash flow analysis, discounted for the inherent risk associated with each investment and for one property, the fair value measurement approximated its estimated selling price. No impairments were recognized during the years ended December 31, 2019 and 2018.
Construction in Progress
As of December 31, 2020 and 2019, construction in progress, recorded at cost, was $11.8 million and $11.9 million, respectively, and related to planned renovations at certain of our hotels. Upon substantial completion of renovation work, costs are reclassified from construction in progress to buildings, building and site improvements and furniture, fixture and equipment, as applicable, and depreciation will commence.
We capitalize qualifying interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.5 million, $1.6 million and $2.6 million of such costs during the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, 2019 and 2018, accrued capital expenditures were $0.5 million, $2.5 million and $5.5 million, respectively, representing non-cash investing activity.
WLT 2020 10-K – 72
Notes to Consolidated Financial Statements
Note 6. Equity Investments in Real Estate
As of December 31, 2020, we owned equity interests in two Unconsolidated Hotels with unrelated third parties. We did not control the ventures that own these hotels, but we exercised significant influence over them. We accounted for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our Former Advisor that we incurred and other-than-temporary impairment charges, if any).
Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income or loss to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate if the venture’s capital structure gives different rights and priorities to its investors. Therefore, we follow the hypothetical liquidation at book value (“HLBV”) method in determining our share of these ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.
The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):
| Unconsolidated Hotels | State |
Number
of Rooms |
% Owned | Hotel Type | Carrying Value at December 31, | |||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
|
Ritz-Carlton Philadelphia Venture (a)
|
PA | 301 | 60.0 | % | Full-service | $ | 18,157 | $ | 27,247 | |||||||||||||||||||||||||||||
|
Hyatt Centric French Quarter Venture (b)
|
LA | 254 | 80.0 | % | Full-service | 482 | 505 | |||||||||||||||||||||||||||||||
|
Ritz-Carlton Bacara, Santa Barbara Venture (c)
|
CA | 358 | 40.0 | % | Resort | — | 51,965 | |||||||||||||||||||||||||||||||
|
Marriott Sawgrass Golf Resort & Spa Venture (c)
|
FL | 514 | 50.0 | % | Resort | — | 20,580 | |||||||||||||||||||||||||||||||
| 1,427 | $ | 18,639 | $ | 100,297 | ||||||||||||||||||||||||||||||||||
___________
(a)We contributed $3.9 million to this investment during the year ended December 31, 2020.
(b)We contributed $0.9 million to this investment during the year ended December 31, 2020.
(c)Upon completion of the Merger on April 13, 2020, the Company consolidates its 100% real estate interest in this hotel.
The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which is based on the HLBV model, as well as amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
| Unconsolidated Hotels | Years Ended December 31, | |||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
|
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)
|
$ | (20,968) | $ | (3,947) | $ | (4,879) | ||||||||||||||
| Ritz-Carlton Philadelphia Venture | (13,038) | (513) | (985) | |||||||||||||||||
| Hyatt Centric French Quarter Venture | (962) | 1,137 | 2,072 | |||||||||||||||||
|
Marriott Sawgrass Golf Resort & Spa Venture (a)
|
(58) | 2,305 | 1,971 | |||||||||||||||||
|
Westin Atlanta Venture (c)
|
— | — | 506 | |||||||||||||||||
|
Total equity in losses of equity method investments in
real estate, net |
$ | (35,026) | $ | (1,018) | $ | (1,315) | ||||||||||||||
___________
(a) Upon closing of the Merger on April 13, 2020, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore these amounts represent the equity in (losses) earnings for the respective periods prior to the Merger.
(b) Includes an other-than-temporary impairment charge of $17.8 million recognized on this investment during the year ended December 31, 2020 to reduce the carrying value of our equity investment in the venture to its estimated fair value.
(c ) On October 19, 2017, the venture sold the Westin Atlanta Perimeter North to an unaffiliated third party. Our share of equity in earnings during the year ended December 31, 2018 was the result of additional cash distributions received in this period in connection with the disposition.
WLT 2020 10-K – 73
Notes to Consolidated Financial Statements
No other-than-temporary impairment charges were recognized during the years ended December 31, 2019 and 2018.
As of December 31, 2020 and 2019, the unamortized basis differences on our equity investments were $2.1 million and $6.3 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $0.2 million, $0.3 million and $0.3 million during the years ended December 31, 2020, 2019 and 2018, respectively.
The following tables present combined summarized financial information of our equity method investment entities. Amounts provided are the total amounts attributable to the ventures since our respective dates of acquisition and do not represent our proportionate share (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Real estate, net | $ | 111,405 | $ | 600,956 | |||||||
| Other assets | 12,467 | 61,027 | |||||||||
| Total assets | 123,872 | 661,983 | |||||||||
| Debt | 94,105 | 411,407 | |||||||||
| Other liabilities | 21,723 | 68,497 | |||||||||
| Total liabilities | 115,828 | 479,904 | |||||||||
| Members’ equity | $ | 8,044 | $ | 182,079 | |||||||
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Revenues | $ | 19,444 | $ | 201,570 | $ | 203,202 | |||||||||||
| Expenses | 37,227 | 207,987 | 210,334 | ||||||||||||||
| Net loss attributable to equity method investments | $ | (17,783) | $ | (6,417) | $ | (7,132) | |||||||||||
Note 7. Intangible Assets
Intangible assets are summarized as follows (dollars in thousands):
| December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Amortization Period (Years) | Gross Carrying Amount |
Accumulated
Amortization |
Net Carrying
Amount |
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||||||||
|
Finite-Lived Intangible Assets
|
|||||||||||||||||||||||||||||||||||||||||
|
Villa/condo rental programs
|
45 - 55
|
$ | 72,400 | $ | (9,529) | $ | 62,871 | $ | 72,400 | $ | (8,025) | $ | 64,375 | ||||||||||||||||||||||||||||
| Trade name |
8
|
9,400 | (844) | 8,556 | — | — | — | ||||||||||||||||||||||||||||||||||
|
Other intangible assets
|
1 - 10
|
1,633 | (775) | 858 | 855 | (444) | 411 | ||||||||||||||||||||||||||||||||||
|
Total intangible assets, net
|
$ | 83,433 | $ | (11,148) | $ | 72,285 | $ | 73,255 | $ | (8,469) | $ | 64,786 | |||||||||||||||||||||||||||||
Net amortization of intangibles was $2.7 million, $1.5 million and $1.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization of intangibles is included in Depreciation and amortization in the consolidated financial statements.
WLT 2020 10-K – 74
Notes to Consolidated Financial Statements
Based on the intangible assets recorded as of December 31, 2020, scheduled annual amortization of intangibles for each of the next five calendar years and thereafter is as follows (in thousands):
| Years Ending December 31, | Total | |||||||
| 2021 | $ | 3,062 | ||||||
| 2022 | 2,842 | |||||||
| 2023 | 2,839 | |||||||
| 2024 | 2,833 | |||||||
| 2025 | 2,683 | |||||||
| Thereafter | 58,026 | |||||||
| Total | $ | 72,285 | ||||||
Note 8. Fair Value Measurements
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which inputs are unobservable and are corroborated by little or no market data, therefore requiring us to develop our own assumptions.
Items Measured at Fair Value on a Recurring Basis
Derivative Assets and Liabilities — Our derivative assets, which are included in Other assets in the consolidated financial statements, are comprised of interest rate caps and our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps (Note 9).
The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the years ended December 31, 2020 or 2019. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income and (expenses) in the consolidated financial statements.
Our non-recourse debt, which we have classified as Level 3, had a carrying value of $2.2 billion and $1.2 billion as of December 31, 2020 and 2019, respectively, and an estimated fair value of $2.2 billion and $1.2 billion as of December 31, 2020 and 2019, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.
Our Series A and Series B preferred stock, which we have classified as Level 3, had carrying values of $52.0 million and $162.1 million as of December 31, 2020, respectively, and estimated fair values of $54.2 million and $194.9 million as of December 31, 2020, respectively. We determined the estimated fair value using a discounted cash flow analysis of the interest and anticipated redemption payments associated with the preferred stock.
We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both December 31, 2020 and 2019.
WLT 2020 10-K – 75
Notes to Consolidated Financial Statements
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
The Company estimated the fair values of our long-lived real estate and related intangible assets either using Level 3 inputs or the selling price of a hotel property based upon an executed purchase and sales agreement, using a combination of the income capitalization and sales comparison approaches, specifically utilizing a discounted cash flow analysis and recent comparable sales transactions. The estimate of the fair value of the assets acquired in the Merger, as discussed in Note 3 and the evaluation of the assets for potential impairment, as discussed below, required the Company’s management to exercise significant judgment and make certain key assumptions, including, but not limited to, the following: (i) capitalization rate; (ii) discount rate; (iii) net operating income; and (iv) number of years the property will be held or benefit realized. There are inherent uncertainties in making these estimates, including the impact of the COVID-19 pandemic. For our estimate of the fair value of the assets acquired in the Merger and impairment tests for our long-lived real estate and related intangible assets during the year ended December 31, 2020, we used discount rates ranging from 7.0% to 10.5%, with a weighted-average rate of 8.4%, and capitalization rates ranging from 5.0% to 8.5%, with a weighted-average rate of 6.5%.
We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated cost to sell. See Note 5 and Note 6 for a description of impairment charges recognized during the year ended December 31, 2020. No impairments were recognized during the years ended December 31, 2019 or 2018.
See Note 15 for information on the measurement of fair value of the Series A and Series B Preferred Stock and Warrants.
Note 9. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.
Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment, as well as the approval, reporting and monitoring of derivative financial instrument activities.
We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive (loss) income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.
WLT 2020 10-K – 76
Notes to Consolidated Financial Statements
The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
|
Derivatives Designated as Hedging Instruments
|
Asset Derivatives Fair Value at December 31, | Liability Derivatives Fair Value at December 31, | ||||||||||||||||||||||||||||||
| Balance Sheet Location | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||
| Interest rate caps |
Other assets
|
$ | 9 | $ | 18 | $ | — | $ | — | |||||||||||||||||||||||
| Interest rate swaps | Accounts payable, accrued expenses and other liabilities | — | — | (5,080) | — | |||||||||||||||||||||||||||
| $ | 9 | $ | 18 | $ | (5,080) | $ | — | |||||||||||||||||||||||||
All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both December 31, 2020 and 2019, no cash collateral had been posted nor received for any of our derivative positions.
We recognized unrealized losses of $1.0 million, $0.2 million and $0.3 million in Other comprehensive (loss) income on derivatives in connection with our interest rate swaps and caps during the years ended December 31, 2020, 2019, and 2018, respectively.
We reclassified 0.4 million, $0.3 million, and $0.4 million from Other comprehensive (loss) income on derivatives into Interest expense during the years ended December 31, 2020, 2019 and 2018, respectively.
Amounts reported in Other comprehensive (loss) income related to our interest rate swaps and caps will be reclassified to Interest expense as interest expense is incurred on our variable-rate debt. As of December 31, 2020, we estimated that $0.5 million will be reclassified as Interest expense during the next 12 months related to our interest rate swaps and caps.
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
The interest rate swaps and caps that we had outstanding on our Consolidated Hotels as of December 31, 2020 were designated as cash flow hedges and are summarized as follows (dollars in thousands):
| Number of | Notional | Fair Value at | ||||||||||||||||||
| Interest Rate Derivatives | Instruments | Amount | December 31, 2020 | |||||||||||||||||
| Interest rate swaps | 2 | $ | 187,550 | $ | (5,080) | |||||||||||||||
| Interest rate caps | 9 | 427,745 | 9 | |||||||||||||||||
| $ | (5,071) | |||||||||||||||||||
Credit Risk-Related Contingent Features
We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of December 31, 2020. As of December 31, 2020, both our total credit exposure and the maximum exposure to any single counterparty were less than $0.1 million.
Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. As of December 31, 2020, we had not been declared in default on any of our derivative obligations. The
WLT 2020 10-K – 77
Notes to Consolidated Financial Statements
estimated fair value of our derivatives in a net liability position was $5.3 million as of December 31, 2020, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions as of December 31, 2020, we could have been required to settle our obligations under these agreements at their aggregate termination value of $5.6 million. As of December 31, 2019, we had no derivatives that were in a net liability position.
Note 10. Debt
Our debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):
___________
| Carrying Amount at December 31, | ||||||||||||||||||||||||||
| Interest Rate Range |
Current Maturity Date Range (a)
|
2020 | 2019 | |||||||||||||||||||||||
|
Fixed rate
|
3.6% – 5.9%
|
03/21 – 04/24
|
$ | 1,286,839 | $ | 884,849 | ||||||||||||||||||||
|
Variable rate (b)
|
2.4% – 8.5%
|
06/21 – 11/23
|
883,063 | 321,218 | ||||||||||||||||||||||
| $ | 2,169,902 | $ | 1,206,067 | |||||||||||||||||||||||
(a)Many of our mortgage loans have extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.
(b)The interest rate range presented for these mortgage loans reflect the rates in effect as of December 31, 2020 through the use of an interest rate swap or cap, when applicable.
Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. As of December 31, 2020, we have effectively entered into cash management agreements with the lenders on 27 of our 29 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. See Note 1 for further discussion.
Financing Activity During 2020
During the fourth quarter of 2020, we refinanced the $43.6 million Le Meridien Dallas, The Stoneleigh non-recourse mortgage loan with a new mortgage loan totaling $47.0 million. The loan has a floating annual interest rate of LIBOR plus 6.7% (subject to an interest rate cap) and a maturity date of October 1, 2023, with one one-year extension option, which is subject to certain conditions. We recognized a loss on extinguishment of debt of less than $0.1 million on this refinancing.
During the fourth quarter of 2020, we also refinanced the $27.3 million Sanderling Resort and Spa non-recourse mortgage loan with a new mortgage loan totaling $30.8 million. The loan has a floating annual interest rate of LIBOR plus 8.0% (subject to an interest rate cap) and a maturity date of November 1, 2023, with two one-year extension options, which are subject to certain conditions. We recognized a loss on extinguishment of debt of less than $0.1 million on this refinancing.
Financing Activity During 2019
During the fourth quarter of 2019, we refinanced the $93.9 million Hawks Cay Resort mortgage loan with a new mortgage loan of up to $115.7 million, of which $95.3 million was funded at closing. The loan has a floating annual interest rate of LIBOR plus 2.8% (subject to an interest rate cap) and a maturity date of November 15, 2022, with three one-year extension options. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
During the third quarter of 2019, we refinanced the $10.0 million Hilton Garden Inn New Orleans French Quarter/CBD mortgage loan with a new mortgage loan of up to $18.0 million, of which $15.0 million was funded at closing. The loan has a floating annual interest rate of LIBOR plus 2.8% (subject to an interest rate cap) and a maturity date of July 1, 2022, with two one-year extension options. No gain or loss was recognized on the extinguishment of debt. This hotel was subsequently sold on October 9, 2019.
WLT 2020 10-K – 78
Notes to Consolidated Financial Statements
During the second quarter of 2019, we refinanced the $67.0 million Sheraton Austin Hotel at the Capitol mortgage loan with a new mortgage loan that has a maximum principal amount of $92.4 million, of which we drew $68.4 million at closing, with the remaining balance available to fund planned renovations at the hotel. The loan has a floating annual interest rate of LIBOR plus 3.5% (subject to an interest rate cap) and a maturity date of July 9, 2022 with two one-year extension options. We recognized a loss on extinguishment of debt of $0.1 million on this refinancing.
Scheduled Debt Principal Payments
Scheduled debt principal payments during each of the next five calendar years following December 31, 2020 are as follows (in thousands):
| Years Ending December 31, | Total | |||||||
| 2021 | $ | 692,590 | ||||||
| 2022 | 1,103,602 | |||||||
| 2023 | 376,776 | |||||||
| 2024 | 50,252 | |||||||
| 2025 | — | |||||||
| Total principal payments | 2,223,220 | |||||||
| Unamortized debt discount | (46,466) | |||||||
| Unamortized deferred financing costs | (6,852) | |||||||
| Total | $ | 2,169,902 | ||||||
Note 11. Commitments and Contingencies
As of December 31, 2020, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, including liens for which we may obtain a bond, provide collateral or provide an indemnity, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Hotel Management Agreements
As of December 31, 2020, our hotel properties were operated pursuant to long-term management agreements with eleven different management companies, with initial terms ranging from 5 to 40 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.5% to 3.5% of hotel revenues. Twelve of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee ranging from 3.0% to 7.0% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. We incurred management fee expense, including amortization of deferred management fees, of $6.4 million, $16.9 million and $17.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Franchise Agreements
Seventeen of our hotel properties operated under franchise or license agreements with national brands that are separate from our management agreements. As of December 31, 2020, we had 12 franchise agreements with Marriott-owned brands, two with Hilton-owned brands, one with InterContinental Hotels-owned brands and two with a Hyatt-owned brand related to our hotels. Our typical franchise agreement provides for a term of 15 to 25 years. Two of our hotels are not operated with a hotel brand so the hotels do not have franchise agreements. Generally, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.5% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. We incurred franchise fee expense, including amortization of deferred franchise fees, of $4.7 million, $16.4 million and $16.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
WLT 2020 10-K – 79
Notes to Consolidated Financial Statements
Capital Expenditures and Reserve Funds
With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of December 31, 2020 and 2019, $51.0 million and $34.6 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures and is included in Restricted cash in the consolidated financial statements. In addition, due to the effects of the COVID-19 pandemic on our operations, we have been working with the brands, management companies and lenders and had used a portion of the available restricted cash reserves to cover operating costs at our properties, of which $4.9 million is subject to replenishment requirements.
Renovation Commitments
Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. As of December 31, 2020, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts as of December 31, 2020 totaled $16.2 million. As discussed in Note 1, we have significantly reduced our planned renovation activity by either canceling or deferring this activity to future periods, other than completing projects that are near completion. Funding for a renovation will first come from our furniture, fixtures and equipment reserve accounts, to the extent permitted by the terms of the management agreement. Should these reserves be unavailable or insufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with existing cash resources or other sources of available capital, including cash flow from operations.
Leases
Lease Obligations
We recognize an operating ROU asset and a corresponding lease liability for ground lease arrangements, hotel parking leases and various hotel equipment leases for which we are the lessee. Our leases have remaining lease terms ranging from less than one year to 86 years (excluding extension options not reasonably certain of being exercised).
Lease Cost
Certain information related to the total lease cost for operating leases is as follows (in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||
| Fixed lease cost | $ | 11,911 | $ | 13,592 | ||||||||||||||||||||||
|
Variable lease cost (a)
|
125 | 815 | ||||||||||||||||||||||||
| Total lease cost | $ | 12,036 | $ | 14,407 | ||||||||||||||||||||||
___________
(a)Our variable lease payments consist of payments based on a percentage of revenue.
WLT 2020 10-K – 80
Notes to Consolidated Financial Statements
Other Information
Supplemental balance sheet information related to ROU assets and lease liabilities is as follows (dollars in thousands):
| December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
|
Operating lease ROU assets
|
$ | 40,729 | $ | 45,727 | |||||||||||||||||||
|
Operating lease liabilities
|
74,633 | 71,733 | |||||||||||||||||||||
|
Weighted-average remaining lease term
|
67.0 years | 69.0 years | |||||||||||||||||||||
|
Weighted-average discount rate
|
9.1 | % | 9.1 | % | |||||||||||||||||||
Cash paid for operating lease liabilities included in Net cash (used in) provided by operating activities totaled $6.0 million and $5.5 million for the years ended December 31, 2020 and 2019.
Undiscounted Cash Flows
A reconciliation of the undiscounted cash flows for operating leases recorded on the consolidated balance sheet as of December 31, 2020 is as follows (in thousands):
| Years Ending December 31, | Total | |||||||
| 2021 | $ | 6,089 | ||||||
| 2022 | 6,101 | |||||||
| 2023 | 5,803 | |||||||
| 2024 | 5,720 | |||||||
| 2025 | 5,472 | |||||||
| Thereafter through 2107 | 892,384 | |||||||
| Total lease payments | 921,569 | |||||||
| Less: amount of lease payments representing interest | (846,936) | |||||||
| Present value of future lease payments/lease obligations | $ | 74,633 | ||||||
Note 12. Loss Per Share and Equity
(Loss) Income Per Share
The computation of basic and diluted earnings per share is as follows (in thousands, except share and per share amounts):
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Net (loss) income attributable to the Company | $ | (350,128) | $ | (10,898) | $ | 8,056 | |||||||||||
| Preferred dividends | (1,742) | — | — | ||||||||||||||
| Fair value adjustment on reclassification of Series A Preferred Stock | 2,754 | — | — | ||||||||||||||
| Net (loss) income attributable to Common Stockholders including amounts attributable to fair value adjustment | $ | (349,116) | $ | (10,898) | $ | 8,056 | |||||||||||
WLT 2020 10-K – 81
Notes to Consolidated Financial Statements
| Year Ended December 31, 2020 | |||||||||||||||||
|
Basic and Diluted Weighted-Average
Shares Outstanding |
Allocation of Loss |
Basic and Diluted Loss
Per Share |
|||||||||||||||
|
Class A common stock (a)
|
157,288,346 | $ | (272,776) | $ | (1.73) | ||||||||||||
| Class T common stock | 43,957,081 | (76,340) | (1.74) | ||||||||||||||
| Net loss attributable to Common Stockholders including amounts attributable to fair value adjustment | $ | (349,116) | |||||||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||
|
Basic and Diluted Weighted-Average
Shares Outstanding |
Allocation of Loss |
Basic and Diluted Loss
Per Share |
|||||||||||||||
|
Class A common stock (a)
|
128,978,410 | $ | (10,898) | $ | (0.08) | ||||||||||||
| Class T common stock | — | — | — | ||||||||||||||
| Net loss attributable to Common Stockholders | $ | (10,898) | |||||||||||||||
| Year Ended December 31, 2018 | |||||||||||||||||
|
Basic and Diluted Weighted-Average
Shares Outstanding |
Allocation of Income |
Basic and Diluted Income
Per Share |
|||||||||||||||
|
Class A common stock (a)
|
126,915,817 | $ | 8,056 | $ | 0.06 | ||||||||||||
| Class T common stock | — | — | — | ||||||||||||||
| Net income attributable to Common Stockholders | $ | 8,056 | |||||||||||||||
___________
(a)For purposes of determining the weighted-average number of shares of Class A common stock outstanding and loss (income) per share, amounts for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3).
The allocation of Net (loss) income attributable to common stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the period. The allocation for the Class A common stock excludes the accretion of interest on the annual distribution and shareholder servicing fee of $0.1 million for the year ended December 31, 2020 since this fee is only applicable to holders of Class T common stock. No such fees were incurred for the years ended December 31, 2019 and 2018.
The distribution and shareholder servicing fee is 1.0% of the NAV of our Class T common stock; it accrues daily and is payable quarterly in arrears. We ceased incurring the distribution and shareholder servicing fee during the fourth quarter of 2020, at which time the total underwriting compensation paid in respect of the offering reached 10.0% of the gross offering proceeds. We paid distribution and shareholder servicing fees to selected dealers of $3.4 million during the year ended December 31, 2020.
Noncontrolling Interest in the Operating Partnership
We consolidate the Operating Partnership, which is a majority-owned limited partnership that has a noncontrolling interest. As of December 31, 2020 the Operating Partnership had 230,961,715 OP Units outstanding, of which 99.0% of the outstanding OP Units were owned by the Company, and the noncontrolling 1.0% ownership interest was owned by Mr. Medzigian.
As of December 31, 2020, Mr. Medzigian owned 2,417,996 OP Units. The outstanding OP Units held by Mr. Medzigian are exchangeable on a one-for-one basis into shares of WLT Class A common stock. Additionally, we had 16,778,446 Warrant Units outstanding as of December 31, 2020. The noncontrolling interest is included in noncontrolling interest on the consolidated balance sheet as of December 31, 2020.
WLT 2020 10-K – 82
Notes to Consolidated Financial Statements
Reclassifications Out of Accumulated Other Comprehensive Loss
The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
| Years Ended December 31, | ||||||||||||||||||||
| Gains and Losses on Derivative Instruments | 2020 | 2019 | 2018 | |||||||||||||||||
| Beginning balance | $ | (172) | $ | (286) | $ | (455) | ||||||||||||||
| Other comprehensive loss before reclassifications | (959) | (153) | (290) | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss to: | ||||||||||||||||||||
|
Interest expense
|
421 | 280 | 448 | |||||||||||||||||
| Equity in losses of equity method investments in real estate, net | 6 | 3 | — | |||||||||||||||||
| Total | 427 | 283 | 448 | |||||||||||||||||
| Net current period other comprehensive (loss) income | (532) | 130 | 158 | |||||||||||||||||
|
Net current period other comprehensive (income) loss attributable to noncontrolling interests
|
(20) | (16) | 11 | |||||||||||||||||
| Ending balance | $ | (724) | $ | (172) | $ | (286) | ||||||||||||||
Distributions
Distributions paid to stockholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. Our distributions per share are summarized as follows:
| Years Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
|
Class A (a)
|
Class T |
Class A (a)
|
Class T
|
Class A (a)
|
Class T
|
||||||||||||||||||||||||||||||
| Return of capital | $ | 0.1565 | $ | — | $ | 0.4125 | $ | — | $ | 0.5380 | $ | — | |||||||||||||||||||||||
| Capital gain | — | — | 0.1556 | — | — | — | |||||||||||||||||||||||||||||
| Ordinary income | — | — | 0.0579 | — | 0.0880 | — | |||||||||||||||||||||||||||||
| Total distributions paid | $ | 0.1565 | $ | — | $ | 0.6260 | $ | — | $ | 0.6260 | $ | — | |||||||||||||||||||||||
___________
(a)The distributions per share for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3).
In the first quarter of 2020, we paid out the common stock distributions that our Board of Directors declared in the fourth quarter of 2019 in an aggregate amount of $20.4 million. No distributions were declared during the year ended December 31, 2020.
WLT 2020 10-K – 83
Notes to Consolidated Financial Statements
Note 13. Share-Based Payments
Prior to the Merger, we maintained the 2010 Equity Incentive Plan, which authorized the issuance of stock-based awards to the officers and employees of our former Subadvisor, who performed services on our behalf. The 2010 Equity Incentive Plan provided for the grant of RSUs and dividend equivalent rights. We also maintained the Directors Incentive Plan — 2010 Incentive Plan, which authorized the issuance of stock-based awards to our independent directors. The Directors Incentive Plan — 2010 Incentive Plan provided for the grant of RSUs and dividend equivalent rights.
Subsequent to the Merger, we maintain the 2015 Equity Incentive Plan, which authorizes the issuance of Class A shares of stock-based awards to our officers and employees. The 2015 Equity Incentive Plan provides for the grant of RSUs and dividend equivalent rights. A maximum of 2,000,000 shares may be granted, of which 895,940 shares remained available for future grants as of December 31, 2020.
A summary of the stock-based award activity for the years ended December 31, 2020, 2019 and 2018 follows:
| Former Subadvisor/WLT Employees | Independent Directors | ||||||||||||||||||||||
|
Shares (a)
|
Weighted-Average Grant Date Fair Value (a)
|
Shares (a)
|
Weighted-Average Grant Date Fair Value (a)
|
||||||||||||||||||||
| Nonvested at January 1, 2018 | 55,482 | $ | 11.73 | — | $ | — | |||||||||||||||||
| Granted | 55,709 | 11.43 | 15,745 | 11.43 | |||||||||||||||||||
|
Vested (b)
|
(26,011) | 11.63 | (15,745) | 11.43 | |||||||||||||||||||
| Forfeited | (5,236) | 11.54 | — | — | |||||||||||||||||||
| Nonvested at January 1, 2019 | 79,944 | 11.56 | — | — | |||||||||||||||||||
| Granted | 63,932 | 11.41 | 18,400 | 11.41 | |||||||||||||||||||
|
Vested (b)
|
(33,686) | 11.61 | (18,400) | 11.41 | |||||||||||||||||||
| Forfeited | (2,399) | 11.81 | — | — | |||||||||||||||||||
| Nonvested at December 31, 2019 | 107,791 | 11.45 | — | — | |||||||||||||||||||
| RSU’s of CWI 2 acquired in the Merger | 74,075 | 11.23 | |||||||||||||||||||||
| Granted | 808,970 | 9.35 | 35,111 | 6.84 | |||||||||||||||||||
|
Vested (b)
|
(92,020) | 11.35 | (35,111) | 6.84 | |||||||||||||||||||
| Forfeited | (51,486) | 11.38 | — | — | |||||||||||||||||||
|
Nonvested at December 31, 2020 (c)
|
847,330 | 9.44 | — | — | |||||||||||||||||||
___________
(a)The number of shares and the weighted-average grant date fair value for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3).
(b)RSUs issued to employees (and prior to the Merger, employees of the former Subadvisor) generally vest over three years, subject to continued employment and are forfeited if the recipient’s employment terminates prior to vesting. RSUs issued to independent directors vest immediately. The total fair value of shares vested was $1.0 million, $0.4 million and $0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(c)We currently expect to recognize compensation expense totaling approximately $6.7 million over the vesting period. The awards to employees (and prior to the Merger, employees of the former Subadvisor) of the Subadvisor had a weighted-average remaining contractual term of 2.82 years as of December 31, 2020.
Stock-Based Compensation Expense
For the years ended December 31, 2020, 2019, and 2018, we recognized share-based compensation expense related to RSU awards to employees of the Subadvisor under the 2010 Equity Incentive Plan, 2015 Equity Incentive Plan and equity compensation issued to our independent directors aggregating $1.8 million, $0.7 million and $0.6 million, respectively. Share-based compensation expense is included within Corporate general and administrative expenses in the consolidated financial statements. We have not recognized any income tax benefit in earnings for our share-based compensation arrangements since the inception of this plan.
WLT 2020 10-K – 84
Notes to Consolidated Financial Statements
Note 14. Income Taxes
As a REIT, we are permitted to own lodging properties but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we enter into leases for each of our lodging properties with TRSs (“TRS lessees”). The TRS lessees in turn contract with independent hotel management companies that manage day-to-day operations of our hotels under our oversight.
Certain of our subsidiaries have elected TRS status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. On April 20, 2020, the TRSs that were previously wholly-owned by CWI 1 were contributed into the wholly-owned WLT combined TRS in a tax-free restructuring. This restructuring will result in a single federal tax filing for the WLT combined TRS, which will include the contributed entities. The WLT combined TRS measures the deferred tax assets and liabilities of the combined entities based on the WLT combined TRS’s deferred tax rate.
The components of our (benefit from) provision for income taxes for the periods presented are as follows (in thousands):
| Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Federal | ||||||||||||||||||||
| Current | $ | (8,165) | $ | 1,415 | $ | 2,255 | ||||||||||||||
| Deferred | 581 | 1,168 | 930 | |||||||||||||||||
| (7,584) | 2,583 | 3,185 | ||||||||||||||||||
| State and Local | ||||||||||||||||||||
| Current | 180 | 427 | 592 | |||||||||||||||||
| Deferred | (526) | 142 | 1,100 | |||||||||||||||||
| (346) | 569 | 1,692 | ||||||||||||||||||
| Total (Benefit) Provision | $ | (7,930) | $ | 3,152 | $ | 4,877 | ||||||||||||||
Deferred income taxes as of December 31, 2020 and 2019 consist of the following (in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Deferred Tax Assets | |||||||||||
| Net operating loss carryforwards | $ | 40,224 | $ | 8,381 | |||||||
| Accrued vacation payable and deferred rent | 9,369 | 2,534 | |||||||||
| Operating lease liabilities | 1,329 | 1,446 | |||||||||
| Interest expense limitation | 1,286 | 769 | |||||||||
| Deferred revenue — key money | 1,128 | 351 | |||||||||
| Gift card liability | 531 | 271 | |||||||||
| Fixed assets and intangibles | — | 416 | |||||||||
| Total deferred income taxes | 53,867 | 14,168 | |||||||||
| Valuation allowance | (42,047) | (8,559) | |||||||||
| Total deferred tax assets | 11,820 | 5,609 | |||||||||
| Deferred Tax Liabilities | |||||||||||
| Villa rental management agreement | (6,967) | (6,574) | |||||||||
| Fixed assets and intangibles | (4,676) | — | |||||||||
| Operating lease ROU assets | (1,244) | (1,426) | |||||||||
| Other | (212) | (373) | |||||||||
| Deferred rent | — | (1,553) | |||||||||
| Total deferred tax liabilities | (13,099) | (9,926) | |||||||||
| Net Deferred Tax Liability | $ | (1,279) | $ | (4,317) | |||||||
WLT 2020 10-K – 85
Notes to Consolidated Financial Statements
A reconciliation of the provision for income taxes with the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the periods presented is as follows (dollars in thousands):
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Pre-tax (loss) income from taxable subsidiaries | $ | (139,598) | $ | 6,674 | $ | 22,992 | |||||||||||
|
Federal provision at statutory tax rate (a)
|
$ | (29,315) | $ | 1,402 | $ | 4,828 | |||||||||||
| Valuation allowance | 22,726 | 2,418 | 1,782 | ||||||||||||||
| State and local taxes, net of federal provision | (6,207) | (122) | 655 | ||||||||||||||
| Income not subject to federal tax | 3,152 | 210 | (2,529) | ||||||||||||||
| Rate change | 2,438 | — | — | ||||||||||||||
| Tax benefit net operating loss carryback | (2,008) | — | — | ||||||||||||||
| Return to provision true-up | 1,731 | (469) | (315) | ||||||||||||||
| Other | (472) | (1) | (48) | ||||||||||||||
| Non-deductible expenses | 25 | 81 | 204 | ||||||||||||||
| Tax credit | — | (367) | — | ||||||||||||||
| Disposition of hotels | — | — | 300 | ||||||||||||||
| Total (benefit) provision | $ | (7,930) | $ | 3,152 | $ | 4,877 | |||||||||||
___________
(a)The applicable statutory tax rate was 21% for the years ended December 31, 2020, 2019 and 2018.
The utilization of net operating losses may be subject to certain limitations under the tax laws of the relevant jurisdiction. If not utilized, our federal and state and local net operating losses will begin to expire in 2028. As of December 31, 2020 and 2019, we recorded a valuation allowance of $42.0 million and $8.6 million, respectively, related to these net operating loss carryforwards and other deferred tax assets.
The net deferred tax liabilities in the table above are comprised of deferred tax asset balances, net of certain deferred tax liabilities and valuation allowances, of less than $0.1 million and $0.4 million as of December 31, 2020 and 2019, respectively, which are included in Other assets in the consolidated balance sheets, and other deferred tax liability balances of $1.3 million and $4.7 million as of December 31, 2020 and 2019, respectively, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated balance sheets.
Our taxable subsidiaries recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.
Our tax returns are subject to audit by taxing authorities. The statute of limitations varies by jurisdiction and ranges from three to four years. Such audits can often take years to complete and settle. The tax years 2016 through 2019 remain open to examination by the major taxing jurisdictions in which we are subject to income taxes.
Note 15. Mandatorily Redeemable Preferred Stock
At both December 31, 2020 and 2019, we had authorized 50,000,000 shares of preferred stock, $0.001 par value per share.
Series A Preferred Stock
As discussed in Note 3, as consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, affiliates of WPC were issued 1,300,000 shares of WLT Series A preferred stock, $0.001 par value per share, with a liquidation preference of $50.00 per share (the “Series A Preferred Stock”).
WLT 2020 10-K – 86
Notes to Consolidated Financial Statements
Dividends
Dividends are comprised of cumulative preferential dividends that holders of the Series A Preferred Stock are entitled to receive at a rate of 5% per year, with the rate increasing to 7% on the second anniversary of the Merger and increasing to 8% on the third anniversary of the Merger. Dividends accrue annually. Any dividend payable on the Series A Preferred Stock will be computed on the basis of a 360-day year consisting of twelve 30-day months.
Redemption
Partial Redemption – On both April 13, 2023 and April 13, 2024, the holders of the Series A Preferred Stock may elect to have the Company redeem 25% of the shares of the Series A Preferred Stock outstanding as of the respective dates for cash at a redemption price per share equal to $50.00, plus all accrued and unpaid dividends thereon up to and including the date of redemption, without interest, to the extent the Company has funds legally available therefor.
Full Redemption – At the earlier of April 13, 2025 or a redemption event (as defined in the Articles Supplementary governing the Series A Preferred Stock), the holders of the Series A Preferred Stock may elect to have the Company redeem all of the outstanding shares of the Series A Preferred Stock for cash at a redemption price per share equal to $50.00, plus all accrued and unpaid dividends thereon up to and including the date of redemption, without interest, to the extent the Company has funds legally available therefor.
Series B Preferred Stock and Warrants
On July 24, 2020, we issued 200,000 shares of our newly designated Series B Preferred Stock, with a liquidation preference of $1,000.00 per share and Warrants to purchase 16,778,446 Warrant Units, for an aggregate purchase price of $200.0 million. The Warrant exercise price is $0.01 per Warrant Unit, and the Warrants expire on July 24, 2027. The Warrant Units are recorded as noncontrolling interest in the consolidated balance sheet totaling $19.8 million as of December 31, 2020, discussed further below. The Warrants require that, if the Operating Partnership pays any distribution to holders of OP Units, then the Operating Partnership shall concurrently distribute the same securities, cash, indebtedness, rights or other property to the holders of Warrants as if the Warrants had been exercised into Warrant Units on the date of such distribution. The Warrants include a call option that will allow the Company to purchase Warrants, Warrant Units and Common Stock issued on redemption of Warrant Units from the Purchaser or its transferees at a specified call price until the Common Stock is approved for trading on any securities exchange registered as a national securities exchange under Section 6 of the Securities and Exchange Act of 1934, as amended (or the equivalent thereof in a jurisdiction outside the United States).
Dividends
The holders are entitled to receive cumulative dividends per share of Series B Preferred Stock at the rate of 12% per year. Dividends can be paid in cash or in the form of additional shares of Series B Preferred Stock with the value thereof equal to the liquidation preference of such shares, at the option of the Company. The dividends are cumulative, compound quarterly and accrue, whether or not earned or declared, from and after the date of issue.
Redemption
On July 24, 2025, the Company is obligated to redeem all shares of Series B Preferred Stock at a redemption price, payable in cash, equal to the then applicable liquidation preference plus all accrued and unpaid dividends. The Company, at its option, may redeem for cash, in whole or in part from time to time, any or all of the outstanding shares of Series B Preferred Stock upon giving the notice described in the Articles Supplementary governing the Series B Preferred Stock at a price determined in the Articles Supplementary.
Accounting Treatment
ASC 480, “Distinguishing Liabilities from Equity”, generally requires liability classification for financial instruments that are certain to be redeemed, represent obligations to purchase shares of stock or represent obligations to issue a variable number of common shares. Upon issuance of the Series A Preferred Stock during the second quarter of 2020, we concluded that the Series A Preferred Stock was not within the scope of ASC 480 because none of the three conditions for liability classification was present and we recorded it in the mezzanine equity section and accreted it to its redemption value through charges to stockholders’ equity using the effective interest method as redemption was probable. As a result of the issuance of the Series B Preferred Stock during the third quarter of 2020, which we concluded was within the scope of ASC 480 and recorded it as a
WLT 2020 10-K – 87
Notes to Consolidated Financial Statements
liability as a result of its certainty to be redeemed, we reevaluated the classification of our Series A Preferred Stock and because of certain protective provisions that prohibit the Company from purchasing or redeeming capital stock of the Company for as long as any shares of Series A Preferred Stock remain outstanding (as more fully described in the Articles Supplementary governing the Series A Preferred Stock), we concluded that Series A Preferred Stock was now certain to be redeemed and this modification resulted in the reclassification of the Series A Preferred Stock from mezzanine to a liability and we recognized a decrease to distributions and accumulated losses of $2.8 million representing the difference between the carrying value and estimated fair value.
Dividends accrued included in interest expense in the consolidated financial statements related to our Series A and Series B Preferred Stock for the year ended December 31, 2020 totaled $12.0 million.
The following table presents the carrying value of our Series A and Series B Preferred Stock:
| December 31, 2020 | |||||||||||||||||
| Series A | Series B | ||||||||||||||||
| Preferred Stock | Preferred Stock | Total | |||||||||||||||
| Liquidation value | $ | 65,000 | $ | 200,000 | $ | 265,000 | |||||||||||
| Fair value discount | (14,310) | (30,358) | (44,668) | ||||||||||||||
| 50,690 | 169,642 | 220,332 | |||||||||||||||
| Accumulated amortization of fair value discount | 1,336 | 2,675 | 4,011 | ||||||||||||||
| Deferred financing costs | — | (11,169) | (11,169) | ||||||||||||||
| Accumulated amortization of deferred financing costs | — | 984 | 984 | ||||||||||||||
| $ | 52,026 | $ | 162,132 | $ | 214,158 | ||||||||||||
Upon closing of the July Capital Raise, the Series A Preferred Stock had both an estimated fair value and carrying value of $50.7 million and the Series B Preferred Stock and Warrant Units had an estimated fair value of $185.8 million and $33.2 million, respectively. We allocated the $200.0 million of gross proceeds received in the July Capital Raise based upon the relative fair values of the Series B Preferred Stock and Warrant Units, and recorded $169.6 million and $30.4 million, respectively, on the consolidated balance sheet. The fair values of the Series A and Series B Preferred Stock were primarily determined by a discounted cash flow analysis of the interest and anticipated redemption payments associated with the preferred stock. We classified this investment as Level 3 because the discounted cash flow valuation model incorporates unobservable inputs to determine its fair value.
WLT 2020 10-K – 88
Notes to Consolidated Financial Statements
Note 16. Selected Quarterly Financial Data (Unaudited)
(Dollars in thousands, except per share amounts)
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2020 | June 30, 2020 | September 30, 2020 | December 31, 2020 | ||||||||||||||||||||
| Revenues | $ | 114,978 | $ | 20,297 | $ | 73,668 | $ | 70,158 | |||||||||||||||
| Operating expenses | 249,644 | 106,145 | 124,559 | 117,767 | |||||||||||||||||||
| Net loss | (169,145) | (17,547) | (88,090) | (92,494) | |||||||||||||||||||
| (Income) loss attributable to noncontrolling interests | (860) | 2,994 | 6,714 | 8,300 | |||||||||||||||||||
| Preferred dividends | — | (1,341) | (401) | — | |||||||||||||||||||
|
Net loss attributable to common stockholders (a)
|
$ | (170,005) | $ | (15,894) | $ | (81,777) | $ | (84,194) | |||||||||||||||
|
Basic and diluted loss per share — Class A common stock (b) (c)
|
$ | (1.30) | $ | (0.07) | $ | (0.35) | $ | (0.37) | |||||||||||||||
|
Basic and diluted loss per share — Class T common stock (c)
|
$ | — | $ | (0.07) | $ | (0.35) | $ | (0.37) | |||||||||||||||
| Three Months Ended | |||||||||||||||||||||||
| March 31, 2019 | June 30, 2019 | September 30, 2019 | December 31, 2019 | ||||||||||||||||||||
| Revenues | $ | 152,190 | $ | 166,053 | $ | 151,118 | $ | 141,702 | |||||||||||||||
| Operating expenses | 144,862 | 148,253 | 140,005 | 137,103 | |||||||||||||||||||
| Net (loss) income | (9,786) | 1,317 | (1,576) | 9,314 | |||||||||||||||||||
|
Income attributable to noncontrolling interests
|
(4,578) | (1,018) | (878) | (3,693) | |||||||||||||||||||
| Preferred dividends | — | — | — | — | |||||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (14,364) | $ | 299 | $ | (2,454) | $ | 5,621 | |||||||||||||||
|
Basic and diluted (loss) income per share — Class A common
stock (b) (c)
|
$ | (0.11) | $ | — | $ | (0.02) | $ | 0.04 | |||||||||||||||
| Basic and diluted income per share — Class T common stock | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
___________
(a)Results for the first quarter of 2020 include impairment charges of $120.2 million and results for the second quarter of 2020 include a bargain purchase gain of $78.7 million and net gain on change in control of interests of $22.3 million, both related to the Merger.
(b)For purposes of determining the weighted-average number of shares of Class A common stock outstanding and loss (income) per share, amounts for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3).
(c)The sum of the quarterly loss per share for the year ended December 31, 2020 does not agree to the annual loss per share primarily due to the theoretical number of shares of common stock issued in connection with the Merger (Note 3). The sum of the quarterly (loss) income per share for the year ended December 31, 2019 does not agree to the annual (loss) income per share, as the quarterly computation utilizes weighted average shares outstanding during that quarter and the annual computation utilizes weighted average shares outstanding during the year.
Note 17. Subsequent Event
On March 5, 2021 we refinanced the $190.0 million Ritz-Carlton Key Biscayne non-recourse mortgage loan, which extended the maturity date of the loan from August 1, 2021 to August 1, 2023. The principal balance and interest rate of 4% remain unchanged.
WLT 2020 10-K – 89
WATERMARK LODGING TRUST, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2020, 2019 and 2018
(in thousands)
| Description |
Balance at
Beginning of Year |
Other
Additions |
Deductions |
Balance at
End of Year |
||||||||||||||||||||||
| Year Ended December 31, 2020 | ||||||||||||||||||||||||||
| Valuation reserve for deferred tax assets | $ | 8,559 | $ | 38,809 | $ | (5,321) | $ | 42,047 | ||||||||||||||||||
| Year Ended December 31, 2019 | ||||||||||||||||||||||||||
| Valuation reserve for deferred tax assets | $ | 6,140 | $ | 2,824 | $ | (405) | $ | 8,559 | ||||||||||||||||||
| Year Ended December 31, 2018 | ||||||||||||||||||||||||||
| Valuation reserve for deferred tax assets | $ | 4,359 | $ | 2,966 | $ | (1,185) | $ | 6,140 | ||||||||||||||||||
WLT 2020 10-K – 90
WATERMARK LODGING TRUST, INC.
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2020
(in thousands)
| Initial Cost to Company |
Costs
Capitalized Subsequent to
Acquisition (a)
|
(Decrease) Increase
In Net
Investments (b)
|
Gross Amount at which Carried at
Close of Period (c)
|
Life on which Depreciation in Latest Statement of Income is Computed
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Encumbrances | Land | Buildings | Land | Buildings | Total |
Accumulated
Depreciation (c)
|
Date of
Construction |
Date
Acquired |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Courtyard Pittsburgh Shadyside | $ | 15,414 | $ | 3,515 | $ | 25,833 | $ | 1,939 | $ | (10,166) | $ | 2,132 | $ | 18,989 | $ | 21,121 | $ | 5,949 | 2003 | Mar 2013 |
4 – 40 yrs.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
| Holiday Inn Manhattan 6th Ave Chelsea | 72,559 | 30,023 | 81,398 | 2,999 | (33,812) | 19,896 | 60,712 | 80,608 | 15,662 | 2008 | Jun 2013 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fairmont Sonoma Mission Inn & Spa | 59,425 | 17,657 | 66,593 | 6,365 | (119) | 17,657 | 72,839 | 90,496 | 16,365 | 1927 | Jul 2013 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marriott Raleigh City Center | 66,274 | — | 68,405 | 8,506 | (40) | — | 76,871 | 76,871 | 15,895 | 2008 | Aug 2013 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hawks Cay Resort | 94,593 | 25,800 | 73,150 | 54,203 | (34,811) | 25,800 | 92,542 | 118,342 | 20,684 | 1960 | Oct 2013 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Renaissance Chicago Downtown | 83,461 | — | 132,198 | 33,694 | (2,311) | — | 163,581 | 163,581 | 38,593 | 1991 | Dec 2013 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hyatt Place Austin Downtown | 53,089 | 9,100 | 73,700 | 2,112 | (11) | 9,100 | 75,801 | 84,901 | 12,755 | 2013 | Apr 2014 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Courtyard Times Square West | 53,473 | — | 87,438 | 464 | (5,121) | — | 82,781 | 82,781 | 14,506 | 2013 | May 2014 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sheraton Austin Hotel at the Capitol | 69,362 | 18,210 | 78,703 | 7,566 | (46) | 18,210 | 86,223 | 104,433 | 16,240 | 1986 | May 2014 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sanderling Resort | 29,869 | 9,800 | 23,677 | 9,935 | (180) | 9,800 | 33,432 | 43,232 | 7,870 | 1985 | Oct 2014 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marriott Kansas City Country Club Plaza | 37,864 | 5,100 | 48,748 | 8,699 | (44) | 5,100 | 57,403 | 62,503 | 11,109 | 1987 | Nov 2014 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Westin Minneapolis | 40,462 | 6,405 | 57,105 | 1,521 | (28,398) | 3,206 | 33,427 | 36,633 | 8,371 | 2007 | Feb 2015 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Westin Pasadena | 86,309 | 22,785 | 112,215 | 7,518 | (4) | 22,785 | 119,729 | 142,514 | 19,096 | 1989 | Mar 2015 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hilton Garden Inn/Homewood Suites Atlanta Midtown | 36,274 | 5,700 | 47,680 | 505 | (25) | 5,700 | 48,160 | 53,860 | 6,906 | 2012 | Apr 2015 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ritz-Carlton Key Biscayne | 183,003 | 117,200 | 154,182 | 21,233 | 1,017 | 118,656 | 174,976 | 293,632 | 27,931 | 2001 | May 2015 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ritz-Carlton Fort Lauderdale | 74,966 | 22,100 | 74,422 | 10,179 | 716 | 22,380 | 85,037 | 107,417 | 14,331 | 2007 | Jun 2015 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Le Méridien Dallas, The Stoneleigh | 45,597 | 9,400 | 57,989 | 1,952 | 21 | 9,400 | 59,962 | 69,362 | 8,350 | 1923 | Nov 2015 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equinox, a Luxury Collection Golf Resort & Spa | 45,035 | 15,000 | 59,235 | 6,081 | (35,991) | 7,273 | 37,052 | 44,325 | 10,637 | 1853 | Feb 2016 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charlotte Marriott City Center | 98,085 | 22,700 | 109,300 | 10 | — | 22,700 | 109,310 | 132,010 | 1,971 | 1983 | Apr 2020 |
4– 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Courtyard Nashville Downtown | 52,399 | 14,300 | 67,800 | 34 | 7 | 14,300 | 67,841 | 82,141 | 1,180 | 1998 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Embassy Suites by Hilton Denver-Downtown/Convention Center | 88,223 | 15,400 | 92,600 | 44 | — | 15,400 | 92,644 | 108,044 | 1,675 | 2010 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Le Méridien Arlington | 34,479 | 8,000 | 30,000 | 34 | — | 8,000 | 30,034 | 38,034 | 562 | 2007 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marriott Sawgrass Golf Resort & Spa | 83,644 | 24,800 | 116,627 | 57 | (2,892) | 24,800 | 113,792 | 138,592 | 2,309 | 1987 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Renaissance Atlanta Midtown Hotel | 47,806 | 10,900 | 56,900 | 19 | — | 10,900 | 56,919 | 67,819 | 1,025 | 2009 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ritz-Carlton Bacara, Santa Barbara | 224,314 | 81,700 | 202,700 | 87 | — | 81700 | 202,787 | 284,487 | 4,536 | 2000 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ritz-Carlton San Francisco | 138,813 | 83,201 | 133,000 | — | — | 83,201 | 133,000 | 216,201 | 2,404 | 1991 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Diego Marriott La Jolla | 76,676 | 20,800 | 89,900 | 108 | 44 | 20,800 | 90,052 | 110,852 | 1,706 | 1985 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Jose Marriott | 86,920 | 24,600 | 115,900 | 167 | — | 24,600 | 116,067 | 140,667 | 2,113 | 2003 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Seattle Marriott Bellevue | 91,514 | 23,800 | 91,100 | 130 | — | 23,800 | 91,230 | 115,030 | 1,665 | 2015 | Apr 2020 |
4 – 40 yrs.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 2,169,902 | $ | 647,996 | $ | 2,428,498 | $ | 186,161 | $ | (152,166) | $ | 627,296 | $ | 2,483,193 | $ | 3,110,489 | $ | 292,396 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
___________
WLT 2020 10-K – 91
(a)Consists of the cost of improvements subsequent to acquisition, including construction costs primarily for renovations pursuant to our contractual obligations.
(b)The net decrease in net investments was primarily due to impairment charges, as well as write-offs of fixed assets resulting from property damage insurance claims.
(c)A reconciliation of hotels and accumulated depreciation follows:
WLT 2020 10-K – 92
WATERMARK LODGING TRUST, INC.
NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
| Reconciliation of Hotels | |||||||||||||||||
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Beginning balance | $ | 1,892,658 | $ | 2,056,770 | $ | 2,036,454 | |||||||||||
| Assets acquired in the Merger | 1,436,027 | — | — | ||||||||||||||
| Impairments | (117,150) | — | — | ||||||||||||||
| Dispositions | (106,206) | (180,339) | (23,280) | ||||||||||||||
| Improvements | 13,342 | 19,116 | 52,752 | ||||||||||||||
| Write-off of assets damaged by hurricane and other | (5,869) | (2,784) | (8,905) | ||||||||||||||
| Write-off of fully depreciated assets | (2,313) | (105) | (251) | ||||||||||||||
| Ending balance | $ | 3,110,489 | $ | 1,892,658 | $ | 2,056,770 | |||||||||||
| Reconciliation of Accumulated Depreciation for Hotels | |||||||||||||||||
| Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Beginning balance | $ | 246,816 | $ | 217,050 | $ | 165,509 | |||||||||||
| Depreciation expense | 70,306 | 55,992 | 53,758 | ||||||||||||||
| Dispositions | (22,413) | (26,121) | (1,966) | ||||||||||||||
| Write-off of fully depreciated assets | (2,313) | (105) | (251) | ||||||||||||||
| Ending balance | $ | 292,396 | $ | 246,816 | $ | 217,050 | |||||||||||
As of December 31, 2020, the aggregate cost of real estate that we and our consolidated subsidiaries own for federal income tax purposes was approximately $3.7 billion.
WLT 2020 10-K – 93
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.
Our chief executive officer and chief financial officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of December 31, 2020 at a reasonable level of assurance.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting at December 31, 2020. In making this assessment, we used criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we concluded that, at December 31, 2020, our internal control over financial reporting was effective based on those criteria.
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to SEC rules that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. Other Information.
None.
WLT 2020 10-K – 94
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
This information will be contained in our definitive proxy statement for the 2021 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 11. Executive Compensation.
This information will be contained in our definitive proxy statement for the 2021 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This information will be contained in our definitive proxy statement for the 2021 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This information will be contained in our definitive proxy statement for the 2021 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
This information will be contained in our definitive proxy statement for the 2021 Annual Meeting of Stockholders, to be filed within 120 days following the end of our fiscal year, and is incorporated herein by reference.
WLT 2020 10-K – 95
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following exhibits are filed with this Report, except where indicated.
| Exhibit No. | Description | Method of Filing | ||||||||||||
| 2.1 | Agreement and Plan of Merger, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Apex Merger Sub LLC. |
Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on October 22, 2019
|
||||||||||||
| 2.2 | Internalization Agreement, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, CWI OP, LP, Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, W. P. Carey Inc., Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, Carey Lodging Advisors, LLC, Watermark Capital Partners, LLC, CWA, LLC, and CWA 2, LLC. |
Incorporated by reference to Exhibit 2.2 to Current Report on Form 8-K, filed on October 22, 2019
|
||||||||||||
| 3.1 | Second Articles of Amendment and Restatement of Carey Watermark Investors 2 Incorporated |
Incorporated by reference to Exhibit 3.1 to Form 10‑Q filed on May 15, 2015
|
||||||||||||
| 3.2 | Amended and Restated Bylaws of Carey Watermark Investors 2 Incorporated |
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 27, 2018
|
||||||||||||
| 3.3 | Articles Supplementary of 12% Series B Cumulative Redeemable Preferred Stock of Watermark Lodging Trust, Inc. |
Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K, filed on July 24, 2020
|
||||||||||||
| 4.1 | Amended and Restated Distribution Reinvestment Plan |
Incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 14, 2016
|
||||||||||||
| 4.2 | Form of Notice to Stockholder |
Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-11 (File No. 333-196681) filed on August 7, 2014
|
||||||||||||
| 4.3 | Description of Securities under Section 12 of the Exchange Act |
Incorporated by reference to Exhibit 4.3 to Form 10-K filed on March 12, 2020
|
||||||||||||
| 4.4 | Warrant Certificate, dated July 24, 2020, of Watermark Lodging Trust, Inc. |
Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K, filed on July 24, 2020
|
||||||||||||
| 10.1 | Advisory Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, and Carey Lodging Advisors, LLC |
Incorporated by reference to Exhibit 10.1 to Form 10‑Q filed on May 15, 2015
|
||||||||||||
| 10.2 | Subadvisory Agreement dated February 9, 2015 between Carey Lodging Advisors, LLC, and CWA 2, LLC |
Incorporated by reference to Exhibit 10.2 to Form 10‑Q filed on May 15, 2015
|
||||||||||||
| 10.3 | Agreement of Limited Partnership of CWI 2 OP, LP dated as of February 9, 2015, by and among Carey Watermark Investors 2 Incorporated and Carey Watermark Holdings 2, LLC |
Incorporated by reference to Exhibit 10.3 to Form 10‑Q filed on May 15, 2015
|
||||||||||||
| 10.4 | 2015 Equity Incentive Plan |
Incorporated by reference to Exhibit 10.6 to Form 10‑Q filed on May 15, 2015
|
||||||||||||
| 10.5 | Indemnification Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated and CWA2, LLC |
Incorporated by reference to Exhibit 10.7 to Form 10‑Q filed on May 15, 2015
|
||||||||||||
| 10.6 | Form of Indemnification Agreement between Carey Watermark Investors 2 Incorporated and its directors and executive officers |
Incorporated by reference to Exhibit 10.8 to Form 10‑Q filed on May 15, 2015
|
||||||||||||
| 10.7 | Amended and Restated Limited Liability Company Agreement of CWI Sawgrass Holdings, LLC dated April 1, 2015 |
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 2, 2015
|
||||||||||||
WLT 2020 10-K – 96
| Exhibit No. | Description | Method of Filing | ||||||||||||
| 10.8 | First Amendment to Advisory Agreement, dated as of June 30, 2015, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC. |
Incorporated by reference to Exhibit 10.2 to W. P. Carey Inc.’s Quarterly Report on Form 10-Q (File No. 001-13779) filed on August 7, 2015.
|
||||||||||||
| 10.9 | Amended and Restated Limited Liability Company Operating Agreement of CWI Key Biscayne Hotel, LLC, by and between CWI OP, LP and CWI 2 OP, LP dated as of May 29, 2015 |
Incorporated by reference to Exhibit 10.1 to current Report on Form 8-K filed on June 4, 2015
|
||||||||||||
| 10.10 | Second Amendment to Advisory Agreement, dated as of June 13, 2017, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC |
Incorporated by reference to Exhibit 10.27 to W. P. Carey Inc.’s Annual Report on Form 10-K (File No. 001-13779) filed February 23, 2018
|
||||||||||||
| 10.11 | Payment Guaranty, between W.P. Carey Inc. as Lender, and Carey Watermark Investors 2 Inc. as Guarantor, dated as of October 19, 2017 |
Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017
|
||||||||||||
| 10.12 | Pledge and Security Agreement between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Pledgor, dated October 19, 2017 |
Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017
|
||||||||||||
| 10.13 | Promissory Note, between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Borrower, dated as of October 19, 2017 |
Incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 13, 2017
|
||||||||||||
| 10.14 | First Amendment to the Loan Agreement, between W. P. Carey, as Lender, and CWI 2 OP, LP, as Borrower, effective September 30, 2018 |
Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10‑Q for the Quarter ended September 30, 2018
|
||||||||||||
| 10.15 | Commitment Agreement, dated as of October 1, 2019, among Watermark Capital Partners, LLC, Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Michael Medzigian. |
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on October 22, 2019
|
||||||||||||
| 10.16 | Second Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective September 30, 2019 |
Incorporated by reference to Exhibit 10.16 to Form 10-K filed on March 12, 2020
|
||||||||||||
| 10.17 | Third Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective January 16, 2020 |
Incorporated by reference to Exhibit 10.17 to Form 10-K filed on March 12, 2020
|
||||||||||||
| 10.18 | Transition Services Agreement, dated as of October 22, 2019, between Watermark Capital Partners, LLC, and Carey Watermark Investors 2 Incorporated. |
Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed on October 22, 2019
|
||||||||||||
| 10.19 | Transition Services Agreement, dated as of October 22, 2019, between W. P. Carey Inc., and Carey Watermark Investors 2 Incorporated. |
Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K, filed on October 22, 2019
|
||||||||||||
| 10.20 | Employment Agreement, dated as of October 22, 2019, between Carey Watermark Investors 2 Incorporated and Michael G. Medzigian. |
Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K, filed on October 22, 2019
|
||||||||||||
| 10.21 | Securities Purchase Agreement, dated July 21, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP, ACP Watermark Investment LLC and certain other parties thereto |
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on July 24, 2020
|
||||||||||||
| 10.22 | Investor Rights Agreement, dated July 24, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP and ACP Watermark Investment LLC |
Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed on July 24, 2020
|
||||||||||||
WLT 2020 10-K – 97
| Exhibit No. | Description | Method of Filing | ||||||||||||
| 10.23 | Indemnification Agreement dated September 15, 2010, between Carey Watermark Investors Incorporated and CWA, LLC |
Incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 10, 2010
|
||||||||||||
| 10.24 | Limited Liability Company Operating Agreement of CWI-HRI French Quarter Hotel Property, LLC dated September 2, 2011 by and between CWI New Orleans Hotel, LLC and Guitar Partners LLC |
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on September 12, 2011
|
||||||||||||
| 10.25 | Limited Liability Company Operating Agreement of CWI-HRI New Orleans CBD Hotel, LLC dated as of June 8, 2012, by and between CWI New Orleans CBD Hotel, LLC and Eleventh Floor Lodging, LLC |
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on June 14, 2012
|
||||||||||||
| 10.26 | Limited Liability Company Operating Agreement of CWI-Fairmont Sonoma Hotel, LLC, by and between CWI Sonoma Hotel, LLC and Fairmont Hotels and Resorts (Maryland) LLC, dated as of July 10, 2013 |
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on July 16, 2013
|
||||||||||||
| 10.27 | Subadvisory Agreement dated September 15, 2010 by and between Carey Lodging Advisors, LLC and CWA, LLC |
Incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-11 (File No. 333-191913) filed on December 17, 2013
|
||||||||||||
| 10.28 | First Amendment to Subadvisory Agreement, dated as of May 12, 2015, by and between Carey Lodging Advisors, LLC and CWA, LLC |
Incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q, filed on May 14, 2015
|
||||||||||||
| 10.29 | Amended and Restated Advisory Agreement, dated as of January 1, 2016, by and among Carey Watermark Investors Incorporated, CWI OP, LP and Carey Lodging Advisors, LLC |
Incorporated by reference to Exhibit 10.14 to W. P. Carey’s Annual Report on Form 10-K (File No. 001-13779), filed on February 26, 2016
|
||||||||||||
| 10.30 | First Amendment to Amended and Restated Advisory Agreement, dated as of June 13, 2017, by and among Carey Watermark Investors Incorporated, CWI OP, LP and Carey Lodging Advisors, LLC |
Incorporated by reference to Exhibit 10.24 to W. P. Carey Inc.’s Annual Report on Form 10-K (File No. 001-13779), filed on February 23, 2018
|
||||||||||||
| 10.31 | Form of Restricted Stock Unit Award Agreement |
Filed herewith
|
||||||||||||
| 21.1 | List of Registrant Subsidiaries |
Filed herewith
|
||||||||||||
| 23.1 | Consent of PricewaterhouseCoopers LLP |
Filed herewith
|
||||||||||||
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Filed herewith
|
||||||||||||
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
Filed herewith
|
||||||||||||
| 32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Filed herewith
|
||||||||||||
| 101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | Filed herewith | ||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | ||||||||||||
WLT 2020 10-K – 98
Item 16. Form 10-K Summary.
None.
WLT 2020 10-K – 99
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Watermark Lodging Trust, Inc. | |||||||||||
| Date: | March 12, 2021 | ||||||||||
| By: | /s/ Michael G. Medzigian | ||||||||||
| Michael G. Medzigian | |||||||||||
| Chief Executive Officer | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Michael G. Medzigian | Chief Executive Officer and Director | March 12, 2021 | ||||||||||||
| Michael G. Medzigian | (Principal Executive Officer) | |||||||||||||
| /s/ Mallika Sinha | Chief Financial Officer | March 12, 2021 | ||||||||||||
| Mallika Sinha | (Principal Financial Officer) | |||||||||||||
| /s/ Noah K. Carter | Chief Accounting Officer | March 12, 2021 | ||||||||||||
| Noah K. Carter | (Principal Accounting Officer) | |||||||||||||
| /s/ Russell L. Gimelstob | Director | March 12, 2021 | ||||||||||||
| Russell L. Gimelstob | ||||||||||||||
| /s/ Alexander N. Halpern | Director | March 12, 2021 | ||||||||||||
| Alexander N. Halpern | ||||||||||||||
| /s/ Charles S. Henry | Director | March 12, 2021 | ||||||||||||
| Charles S. Henry | ||||||||||||||
| /s/ Michael D. Johnson | Director | March 12, 2021 | ||||||||||||
| Michael D. Johnson | ||||||||||||||
| /s/ Katherine G. Lugar | Director | March 12, 2021 | ||||||||||||
| Katherine G. Lugar | ||||||||||||||
| /s/ Robert E. Parsons, Jr. | Director | March 12, 2021 | ||||||||||||
| Robert E. Parsons, Jr. | ||||||||||||||
| /s/ William H. Reynolds, Jr. | Director | March 12, 2021 | ||||||||||||
| William H. Reynolds, Jr. | ||||||||||||||
| /s/ Simon M. Turner | Director | March 12, 2021 | ||||||||||||
| Simon M. Turner | ||||||||||||||
WLT 2020 10-K – 100
EXHIBIT INDEX
The following exhibits are filed with this Report, except where indicated.
| Exhibit No. | Description | Method of Filing | ||||||||||||
| 2.1 | Agreement and Plan of Merger, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Apex Merger Sub LLC. | |||||||||||||
| 2.2 | Internalization Agreement, dated as of October 22, 2019, among Carey Watermark Investors Incorporated, CWI OP, LP, Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, W. P. Carey Inc., Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, Carey Lodging Advisors, LLC, Watermark Capital Partners, LLC, CWA, LLC, and CWA 2, LLC. | |||||||||||||
| 3.1 | Second Articles of Amendment and Restatement of Carey Watermark Investors 2 Incorporated | |||||||||||||
| 3.2 | Amended and Restated Bylaws of Carey Watermark Investors 2 Incorporated | |||||||||||||
| 3.3 | Articles Supplementary of 12% Series B Cumulative Redeemable Preferred Stock of Watermark Lodging Trust, Inc. | |||||||||||||
| 4.1 | Amended and Restated Distribution Reinvestment Plan | |||||||||||||
| 4.2 | Form of Notice to Stockholder | |||||||||||||
| 4.3 | Description of Securities under Section 12 of the Exchange Act | |||||||||||||
| 4.4 | Warrant Certificate, dated July 24, 2020, of Watermark Lodging Trust, Inc. | |||||||||||||
| 10.1 | Advisory Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP, and Carey Lodging Advisors, LLC | |||||||||||||
| 10.2 | Subadvisory Agreement dated February 9, 2015 between Carey Lodging Advisors, LLC, and CWA 2, LLC | |||||||||||||
| 10.3 | Agreement of Limited Partnership of CWI 2 OP, LP dated as of February 9, 2015, by and among Carey Watermark Investors 2 Incorporated and Carey Watermark Holdings 2, LLC | |||||||||||||
| 10.4 | 2015 Equity Incentive Plan | |||||||||||||
| 10.5 | Indemnification Agreement dated February 9, 2015, between Carey Watermark Investors 2 Incorporated and CWA2, LLC | |||||||||||||
| 10.6 | Form of Indemnification Agreement between Carey Watermark Investors 2 Incorporated and its directors and executive officers | |||||||||||||
| 10.7 | Amended and Restated Limited Liability Company Agreement of CWI Sawgrass Holdings, LLC dated April 1, 2015 | |||||||||||||
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| Exhibit No. | Description | Method of Filing | ||||||||||||
| 10.8 | First Amendment to Advisory Agreement, dated as of June 30, 2015, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC. | |||||||||||||
| 10.9 | Amended and Restated Limited Liability Company Operating Agreement of CWI Key Biscayne Hotel, LLC, by and between CWI OP, LP and CWI 2 OP, LP dated as of May 29, 2015 | |||||||||||||
| 10.10 | Second Amendment to Advisory Agreement, dated as of June 13, 2017, by and among Carey Watermark Investors 2 Incorporated, CWI 2 OP, LP and Carey Lodging Advisors, LLC | |||||||||||||
| 10.11 | Payment Guaranty, between W.P. Carey Inc. as Lender, and Carey Watermark Investors 2 Inc. as Guarantor, dated as of October 19, 2017 | |||||||||||||
| 10.12 | Pledge and Security Agreement between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Pledgor, dated October 19, 2017 | |||||||||||||
| 10.13 | Promissory Note, between W.P. Carey Inc. as Lender, and CWI 2 OP, LP as Borrower, dated as of October 19, 2017 | |||||||||||||
| 10.14 | First Amendment to the Loan Agreement, between W. P. Carey, as Lender, and CWI 2 OP, LP, as Borrower, effective September 30, 2018 | |||||||||||||
| 10.15 | Commitment Agreement, dated as of October 1, 2019, among Watermark Capital Partners, LLC, Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Michael Medzigian. | |||||||||||||
| 10.16 | Second Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective September 30, 2019 | |||||||||||||
| 10.17 | Third Amendment of the Loan Agreement between W. P. Carey, as Lender, and CWI 2 OP LP, as Borrower, effective January 16, 2020 | |||||||||||||
| 10.18 | Transition Services Agreement, dated as of October 22, 2019, between Watermark Capital Partners, LLC, and Carey Watermark Investors 2 Incorporated. | |||||||||||||
| 10.19 | Transition Services Agreement, dated as of October 22, 2019, between W. P. Carey Inc., and Carey Watermark Investors 2 Incorporated. | |||||||||||||
| 10.20 | Employment Agreement, dated as of October 22, 2019, between Carey Watermark Investors 2 Incorporated and Michael G. Medzigian. | |||||||||||||
| 10.21 | Securities Purchase Agreement, dated July 21, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP, ACP Watermark Investment LLC and certain other parties thereto | |||||||||||||
| 10.22 | Investor Rights Agreement, dated July 24, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP and ACP Watermark Investment LLC | |||||||||||||
| 10.23 | Indemnification Agreement dated September 15, 2010, between Carey Watermark Investors Incorporated and CWA, LLC | |||||||||||||
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| Exhibit No. | Description | Method of Filing | ||||||||||||
| 10.24 | Limited Liability Company Operating Agreement of CWI-HRI French Quarter Hotel Property, LLC dated September 2, 2011 by and between CWI New Orleans Hotel, LLC and Guitar Partners LLC | |||||||||||||
| 10.25 | Limited Liability Company Operating Agreement of CWI-HRI New Orleans CBD Hotel, LLC dated as of June 8, 2012, by and between CWI New Orleans CBD Hotel, LLC and Eleventh Floor Lodging, LLC | |||||||||||||
| 10.26 | Limited Liability Company Operating Agreement of CWI-Fairmont Sonoma Hotel, LLC, by and between CWI Sonoma Hotel, LLC and Fairmont Hotels and Resorts (Maryland) LLC, dated as of July 10, 2013 | |||||||||||||
| 10.27 | Subadvisory Agreement dated September 15, 2010 by and between Carey Lodging Advisors, LLC and CWA, LLC | |||||||||||||
| 10.28 | First Amendment to Subadvisory Agreement, dated as of May 12, 2015, by and between Carey Lodging Advisors, LLC and CWA, LLC | |||||||||||||
| 10.29 | Amended and Restated Advisory Agreement, dated as of January 1, 2016, by and among Carey Watermark Investors Incorporated, CWI OP, LP and Carey Lodging Advisors, LLC | |||||||||||||
| 10.30 | First Amendment to Amended and Restated Advisory Agreement, dated as of June 13, 2017, by and among Carey Watermark Investors Incorporated, CWI OP, LP and Carey Lodging Advisors, LLC | |||||||||||||
| 10.31 | Form of Restricted Stock Unit Award Agreement | |||||||||||||
| 21.1 | List of Registrant Subsidiaries | |||||||||||||
| 23.1 | Consent of PricewaterhouseCoopers LLP | |||||||||||||
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | Filed herewith | ||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | ||||||||||||
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