SUMMIT HOTEL PROPERTIES, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
Industry trends and outlook
Room-night demand in theU.S. lodging industry is generally correlated to certain macroeconomic trends. Key drivers of lodging demand include changes in gross domestic product, corporate profits, capital investments, employment and more recently, travel-related health and safety restrictions and concerns. Volatility in the economy and risks arising from global and domestic political or economic conditions may cause slowing economic growth, which would have an adverse effect on lodging demand. The global andU.S. economies, and the travel and lodging industries, have experienced a significant downturn as a result of the COVID-19 global pandemic, which we refer to as the Pandemic. During the twelve months endedDecember 31, 2021 , we began to see a significant recovery in hotel demand driven primarily by leisure travel. Corporate transient and group demand remains significantly reduced from historical levels and is recovering more slowly than leisure demand.
Effects of the pandemic on our business
The effects of the Pandemic and the restrictions implemented in response to the Pandemic have had a significant negative effect on theU.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in hotel demand. These conditions resulted in a substantial decline from pre-Pandemic levels in our revenues, profitability and cash flows from operations. During the twelve months endedDecember 31, 2021 , we experienced significant improvement in our business in comparison to the period early in the Pandemic, driven primarily by leisure travel and to a lesser extent modest improvement in other demand segments; however, we are still recovering to attain pre-Pandemic financial and operating performance levels. The improvement was the result of a significant increase in the administration of vaccines globally as well as the easing of government restrictions and guidance in most jurisdictions. A recovery in business travel and group business has been slower to date. We anticipate that continued improvement in operating trends will be dependent on continued strength in leisure travel and a recovery of business travel. More broadly, a return to normalized levels of operations is dependent upon a continuation in the recovery of our business, further dissipation of concerns related to the Pandemic, and maintaining a high-quality portfolio aligned with evolving guest preferences. 41
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Management actions in response to the effects of the pandemic on our operations
We have taken the following actions to mitigate the negative effects of the pandemic on our consolidated financial position, results of operations and cash flows:
Operational Adjustments In response to the rapid decline in demand for room nights and loss of revenues as a result of the Pandemic, we, along with our property managers, evaluated each hotel in our portfolio and initially adjusted labor and cost structures for hotels based on existing market conditions. As demand at our hotels has increased during the year endedDecember 31, 2021 , we have also increased staffing commensurately.
Financial measures and liquidity
Beginning in
At
OnMay 1, 2021 , the Company contributed a portfolio of six hotels containing 846 guestrooms to our consolidated joint venture with an affiliate of GIC,Singapore's sovereign wealth fund. The estimated market value of the portfolio of hotel properties was$172.0 million and GIC contributed$84.3 million in cash for its 49% interest in the Joint Venture after the completion of the transfer of the six hotels. Net proceeds from the transaction were used to repay$62.5 million of our senior debt and$20.9 million was applied to our Cash and cash equivalents balances. OnAugust 12, 2021 , the Company completed the offering of 4,000,000 Series F preferred shares for net proceeds of$96.6 million , after the underwriting discount and offering-related expenses of$3.4 million . OnSeptember 4, 2021 , using proceeds from the issuance of the Series F preferred shares, the Company paid$75.0 million to redeem all 3,000,000 of its outstanding 6.45% Series D Cumulative Redeemable Preferred Stock at a redemption price of$25 per share plus accrued and unpaid dividends. The remaining net proceeds from the Series F preferred share offering was used to repay$22.0 million of our senior debt. See "Part II - Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 - Debt," for additional information. Health and Well-being All of our hotels are licensed with national franchise brands and we have worked closely with our brand partners to develop and implement comprehensive protocols for the safety and well-being of employees and guests to address a broad spectrum of pathogens and viruses, including COVID-19 and variants thereof. We continue to apply advanced cleaning procedures developed during the Pandemic to all of our hotel properties. Operating Performance Metrics We use a variety of performance indicators and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP, as well as other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotel properties, groups of hotel properties and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include: •Occupancy - Occupancy represents the total number of guestrooms occupied divided by the total number of guestrooms available. •Average Daily Rate (ADR) - ADR represents total room revenues divided by the total number of guestrooms occupied. •Revenue Per Available Room (RevPAR) - RevPAR is the product of ADR and Occupancy. 42 -------------------------------------------------------------------------------- Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR is an important metric for monitoring operating performance at the individual hotel property level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and market-by-market basis. ADR and RevPAR are based only on room revenue. Room revenue depends on demand (as measured by occupancy), pricing (as measured by ADR), and our available supply of hotel guestrooms. Our ADR, occupancy and RevPAR performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, air travel and other business and leisure travel, new hotel property construction, and the pricing strategies of competitors. In addition, our ADR, occupancy and RevPAR performance is dependent on the continued success of our franchisors and brands.
We continuously evaluate alternatives to refine our portfolio to drive growth and create value. In the normal course of business, we evaluate opportunities to acquire additional properties that meet our investment criteria and opportunities to recycle capital through the disposition of properties. As such, the composition and size of our portfolio of properties may change materially over time. Significant changes to our portfolio of properties could have a material effect on our Consolidated Financial Statements. OnMay 1, 2021 , the Company contributed a portfolio of six hotels containing 846 guestrooms to our consolidated Joint Venture. The estimated market value of the portfolio of hotel properties was$172.0 million and GIC, our Joint Venture partner, paid us$84.3 million in cash to maintain its 49% interest in the joint venture after the completion of the transfer of the six hotels. See Part II - Item 8. - Financial Statements and Supplementary Data - Note 3 - Investment in Hotel Properties, net for additional information. OnJuly 9, 2021 , we acquired a 110-roomResidence Inn inSteamboat Springs, CO. through our Joint Venture for$33.0 million . Additionally, onDecember 21, 2021 , through our Joint Venture, we acquired a 120-roomEmbassy Suites inTucson, AZ. for$25.5 million . InJanuary 2022 , we completed the NCI Transaction for an aggregate purchase price of$766.0 million . As part of the same portfolio purchase, we expect to acquire one additional hotel, the Canopy New Orleans, upon completion of its construction, which is expected to occur during the first quarter of 2022, for a purchase price of$56.0 million . See "Part II - Item 8. - Financial Statements and Supplementary Data -Note 3 - Investment in Hotel Properties, net" to the Consolidated Financial Statements for additional information concerning our asset acquisitions, development, and dispositions.
Our revenues are derived from hotel operations and consist of room revenue, food
and beverage revenue and other revenue. As a result of our focus on
select-service hotels, substantially all of our revenues are related to the
sales of hotel guestrooms. Our other revenue consists of ancillary revenues
related to meeting rooms, parking and other guest services provided at certain
of our hotel properties.
Our hotel operating expenses consist primarily of expenses incurred in the
day-to-day operation of our hotel properties. Many of our expenses are fixed,
such as essential hotel staff, real estate taxes, insurance, and depreciation.
These expenses generally do not decrease even if the revenues at our hotel
properties decrease. Room expense includes housekeeping and front office wages
and payroll taxes, reservation systems, room supplies, laundry services and
other costs. Food and beverage expense primarily includes the cost of food, the
cost of beverages and associated labor costs. Other operating expenses include
labor and other costs associated with administrative departments, sales and
marketing, repair and maintenance, utility costs and franchise fees.
As discussed above under "Part II - Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management's Actions
in Response to the Effects of the Pandemic on Our Operations - Operational
Adjustments," in response to the rapid decline in demand for room nights and
loss of revenues throughout the Pandemic, we, along with our property managers,
evaluated each hotel in our portfolio to determine if market conditions
warranted the temporary suspension of operations, and to adjust labor cost
structures for hotels that would continue to operate. Although the vast majority
of our hotels remained open throughout the Pandemic, staffing levels were
temporarily reduced to levels that
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safely and effectively maintain reasonable accommodations for our guests. As
demand at our hotels has increased, we have also increased staffing
commensurately. Our hotels implemented and have continued to modify health and
safety protocols aligned with brand guidelines to allay guest concerns about
COVID-19 and its variants.
Operating results
The following comparisons should be considered in conjunction with the consolidated financial statements included elsewhere in this Form 10-K.
Comparison of 2021 to 2020
The following table contains key operating metrics for our total portfolio and our same-store portfolio for 2021 compared with 2020 (dollars in thousands, except ADR and RevPAR). We define same-store hotels as properties that we owned as ofDecember 31, 2021 and that we have owned at all times sinceJanuary 1, 2020 . Year-over-Year Year-over-Year 2021 2020 Dollar Change Percentage Change Total Same-Store Total Same-Store Total Same-Store Total Same-Store Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio (74 hotels) (72 hotels) (72 hotels) (72 hotels) (74/72 hotels) (72 hotels) (74/72 hotels) (72 hotels) Revenues: Room$ 334,338 $ 331,299 $ 215,506 $ 215,506 $ 118,832 $ 115,793 55.1 % 53.7 % Food and beverage 7,299 7,270 6,444 6,444 855 826 13.3 % 12.8 % Other 20,289 20,218 12,513 12,513 7,776 7,705 62.1 % 61.6 % Total$ 361,926 $ 358,787 $ 234,463 $ 234,463 $ 127,463 $ 124,324 54.4 % 53.0 % Expenses: Room$ 74,781 $ 74,187 $ 53,784 $ 53,784 $ 20,997 $ 20,403 39.0 % 37.9 % Food and beverage 4,856 4,815 5,416 5,416 (560) (601) (10.3) % (11.1) % Other hotel operating expenses 123,626 122,777 96,506 96,504 27,120 26,273 28.1 % 27.2 % Total$ 203,263 $ 201,779 $ 155,706 $ 155,704 $ 47,557 $ 46,075 30.5 % 29.6 % Occupancy 62.3 % 62.2 % 43.3 % 43.3 % n/a n/a 43.6 % 43.4 % ADR$ 129.70 $ 129.35 $ 120.36 $ 120.36 $ 9.34$ 8.99 7.8 % 7.5 % RevPAR$ 80.74 $ 80.41 $ 52.16 $ 52.16 $ 28.58$ 28.25 54.8 % 54.2 % The total portfolio information above includes revenues and expenses from the two hotel properties that we acquired in 2021 (the "2021Acquired Hotels ") from the date of acquisition throughDecember 31, 2021 , and operating information (occupancy, ADR, and RevPAR) for the period each hotel was owned. Accordingly, the information does not reflect a full twelve months of operations in 2021 for the 2021Acquired Hotels .
Changes compared to the financial year ended
•Revenues. Growth in revenues was primarily driven by an increase in leisure travel and to a lesser extent modest improvement in other demand segments resulting from the administration of vaccines globally as well as the easing of government restrictions in most jurisdictions. See "Part II - Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Effects of Pandemic on Our Business" for further information. •RevPAR. The increase in RevPAR was due to an improvement in our business that was primarily driven by an increase in leisure travel and to a lesser extent modest improvement in other demand segments resulting from the administration of vaccines globally as well as the easing of government restrictions in most jurisdictions. The increase in RevPAR during the year endedDecember 31, 2021 was due to a 43.6% increase in occupancy and a 7.8% increase in ADR in comparison with the prior year. The increase in occupancy was substantially greater than the increase in ADR as a result of a much larger decline in occupancy in the prior year. See "Part II - Item 7. - Management's Discussion and 44 -------------------------------------------------------------------------------- Analysis of Financial Condition and Results of Operations - Effects of Pandemic on Our Business" for further information. •Food and Beverage Revenues and Expenses. Food and beverage revenues increased during the year endedDecember 31, 2021 as a result of the increase in occupancy. The increase in food and beverage revenues was lower than the increase in rooms revenues primarily driven by modified food and beverage offerings. Food and beverage expenses declined during the year endedDecember 31, 2021 despite an increase in revenues for the period because the modified food and beverage offerings reduced product and staffing costs. •Expenses. The increase in expenses was driven by the increase in occupancy relative to 2020. The occupancy related increases have been partially offset by comprehensive cost reduction initiatives, including the reduction of labor and temporary elimination of certain services and amenities, at all hotels. Although revenues have significantly improved, we have focused on continuing to achieve operating efficiencies to manage expenses.
The following table includes consolidated other income and expenses for 2021 versus 2020 (in thousands of dollars).
For the Years
Ended
2021 2020 Dollar Change Percentage Change Property taxes, insurance and other $ 41,350$ 44,691 $ (3,341) (7.5) % Management fees 9,858 6,276 3,582 57.1 % Depreciation and amortization 105,955 109,619 (3,664) (3.3) % Corporate general and administrative 29,428 20,985 8,443 40.2 % Transaction costs 3,849 - 3,849 (1) (Reversal of) provision for credit losses (2,632) 4,821 (7,453)
(1)
Loss on impairment and write-off of assets 4,361 1,759 2,602 147.9 % Gain (loss) on disposal of assets, net 240 (16) 256 (1) Interest expense 43,368 43,300 68 0.2 % Other income, net 9,523 4,841 4,682 96.7 % Income tax expense 1,473 1,376 97 7.0 % (1) Not meaningful.
Changes compared to the financial year ended
•Property Taxes, Insurance and Other. This decrease is primarily due to a reduction in property taxes due to lower property tax assessments for 2021, which were based on our lower operating performance during 2020 as a result of the negative effects of the Pandemic. •Management Fees. The increase in management fees during the current period is primarily due to increased consolidated revenues as our business has experienced a steady improvement in performance during 2021. •Depreciation and Amortization. This decrease is due to the effect of certain assets becoming fully amortized, offset by capital expenditures and the acquisition of two hotel properties during the second half of 2021. •Corporate General and Administrative. Corporate general and administrative expense increased$8.4 million , including$4.0 million related to executive transition costs recorded during the fourth quarter of 2021. The remaining increase is primarily due to higher incentive and other compensation costs. •Transaction Costs. During 2021, we incurred costs of$2.1 million in transfer taxes and legal fees related to the contribution of six hotels to our Joint Venture. GIC, our Joint Venture partner, paid 49%, or$0.9 million , of the$1.8 million transfer tax which is reflected in non-controlling interest on our Consolidated Statement of Operations. We also incurred$1.7 million in transaction costs in pursuit of the acquisition of a company with a portfolio of hotel properties that ultimately was not consummated. •(Reversal of) Provision for Credit Losses. During 2021, we reached an agreement with the borrowers of the mezzanine loans on two of the remaining real estate development projects for the full repayment of the loans during the fourth quarter of 2021. Accordingly, the Company reversed the$2.6 million allowance for credit losses related to these two loans during 2021. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 4 - Investment in Real Estate Loans" for further information. •Loss on Impairment and Write-off of Assets. During 2021, we reached an agreement with the borrowers of the mezzanine loans on two of the remaining real estate development projects for the full repayment of the loans in the 45 -------------------------------------------------------------------------------- fourth quarter of 2021, which resulted in us foregoing the exercise of the purchase options. As such, the Company recorded a Loss on impairment during 2021 to write-off the carrying amounts of the purchase options totaling$4.4 million . •Gain (loss) on Disposal of Assets. The gain on disposal of assets, net for 2021 is primarily due to the recovery of certain amounts related to sold properties that were written off in a prior period. •Interest Expense. Interest expense was consistent with 2020 as an increase in amortization of deferred financing costs was offset by a reduction in our weighted average interest rate, primarily related to the Convertible Notes Offering. •Other Income. This increase is primarily due to the interest income recorded on our mezzanine loans as a result of the interest payments made in connection with the loan amendments completed during 2021. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 4 - Investment in Real Estate Loans" for further information. The Company also received COVID-19 relief grants from certain jurisdictions in which we operate which were recorded as Other income during 2021. •Income Tax Expense. In 2021, we recorded a$1.5 million income tax expense primarily attributable to current federal and state income taxes of our TRSs. In 2020, we recorded Income tax expense of$1.4 million which related to i) deferred tax expense of$2.0 million related to the establishment of a valuation allowance on deferred tax assets of certain TRSs which were in a 3-year cumulative loss position, ii)$1.0 million income tax benefit from federal net operating loss carrybacks, and iii)$0.4 million income tax expense related to taxable income in our TRS entities. For information about our key operating metrics and results of operations for the year ended 2020 compared to the year ended 2019, refer to "Part II - Item 7. - Management's Discussion and Analysis of Financial Conditions and Results of Operations - Results of Operations" of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC .
Non-GAAP Financial Measures
We disclose certain "non-GAAP financial measures," which are measures of our
historical financial performance. Non-GAAP financial measures are financial
measures not prescribed by Generally Accepted Accounting Principles ("GAAP").
These measures are as follows: (i) Funds From Operations ("FFO") and Adjusted
Funds from Operations ("AFFO"), (ii) Earnings before Interest, Taxes,
Depreciation and Amortization ("EBITDA"), Earnings before Interest, Taxes,
Depreciation and Amortization for Real Estate ("EBITDAre") and Adjusted EBITDAre
(as described below). We caution investors that amounts presented in accordance
with our definitions of non-GAAP financial measures may not be comparable to
similar measures disclosed by other companies, since not all companies calculate
these non-GAAP financial measures in the same manner. Our non-GAAP financial
measures should be considered along with, but not as alternatives to, net income
(loss) as a measure of our operating performance. Our non-GAAP financial
measures may include funds that may not be available for our discretionary use
due to functional requirements to conserve funds for capital expenditures,
property acquisitions, debt service obligations and other commitments and
uncertainties. Although we believe that our non-GAAP financial measures can
enhance the understanding of our financial condition and results of operations,
these non-GAAP financial measures are not necessarily better indicators of any
trend as compared to a comparable measure prescribed by GAAP such as net income
(loss).
FFO and AFFO
As defined by Nareit, FFO represents net income or loss (computed in accordance
with GAAP), excluding preferred dividends, gains (or losses) from sales of real
property, impairment losses on real estate assets, items classified by GAAP as
extraordinary, the cumulative effect of changes in accounting principles, plus
depreciation and amortization related to real estate assets, and adjustments for
unconsolidated partnerships, and joint ventures. AFFO represents FFO excluding
amortization of deferred financing costs, franchise fees, equity-based
compensation expense, debt transaction costs, premiums on redemption of
preferred shares, losses from net casualties, non-cash interest income and
non-cash income tax related adjustments to our deferred tax asset. Unless
otherwise indicated, we present FFO and AFFO applicable to our common shares and
common units. We present FFO and AFFO because we consider FFO and AFFO an
important supplemental measure of our operational performance and believe it is
frequently used by securities analysts, investors and other interested parties
in the evaluation of REITs, many of which present FFO and AFFO when reporting
their results. FFO and AFFO are intended to exclude GAAP historical cost
depreciation and amortization, which assumes that the value of real estate
assets diminishes ratably over time. Historically, however, real estate values
have risen or fallen with market conditions. Because FFO and AFFO exclude
depreciation and amortization related to real estate assets, gains and losses
from real property dispositions and impairment losses on real estate assets, FFO
and AFFO provide performance measures that, when compared year over year,
reflect the effect to operations from trends in occupancy, guestroom rates,
operating costs, development activities and interest costs, providing
perspective not immediately apparent from net income. Our computation of FFO
differs slightly from the computation of Nareit-defined FFO related to the
reporting of corporate depreciation and amortization expense, and adjustments
related to provision for credit losses. Our computation of FFO may also differ
from the methodology for
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calculating FFO used by other equity REITs and, accordingly, may not be
comparable to such other REITs. FFO and AFFO should not be considered as an
alternative to net income (loss) (computed in accordance with GAAP) as an
indicator of our liquidity, nor is it indicative of funds available to fund our
cash needs, including our ability to pay dividends or make distributions. Where
indicated in this Annual Report on Form 10-K, FFO is based on our computation of
FFO and not the computation of Nareit-defined FFO unless otherwise noted.
The following is a reconciliation of our GAAP net income to FFO and AFFO for the
years ended December 31, 2021 , 2020 and 2019 (in thousands, except per
share/unit amounts):
2021 2020 2019
Net (loss) income $ (68,584) $ (149,245) $ 82,348
Preferred dividends (15,431) (14,838) (14,838)
Premium on redemption of preferred stock (2,710) - -
Loss related to non-controlling interests in joint venture 2,896 5,635 419
Net income (loss) applicable to common shares and common units
(83,829) (158,448) 67,929 Real estate-related depreciation 105,462 109,159 99,013 Loss on impairment and write-off of assets 4,361 1,759 2,521 (Gain) loss on disposal of assets, net (240) 16 (45,418)
Adjustments related to non-controlling interests in a consolidated joint venture
(8,454) (5,949) (1,554) FFO applicable to common shares and common units 17,300 (53,463) 122,491 (Reversal of) provision for credit losses (1) (2,632) 4,821 - Amortization of lease-related intangible assets, net 87 86 127 Amortization of deferred financing costs 4,353 2,267 1,485 Amortization of franchise fees 493 460 432 Equity-based compensation 10,681 (2) 6,476 6,219 Executive transition costs 1,065 (3) - - Transaction costs 3,849 - - Debt transaction costs 220 365 1,892 Premium on redemption of preferred stock 2,710 - - Non-cash interest income (1,042) (2,848) (2,477) Non-cash lease expense, net 521 329 494 Casualty losses (recoveries), net 468 1,132 (239) Increase in deferred tax asset valuation allowance - 2,056 -
Adjustments related to non-controlling interests in a consolidated joint venture
(1,291) (341) (68) Other - 91 - AFFO applicable to common shares and common units$ 36,782 $ (38,569) $ 130,356 FFO per common share/common unit$ 0.16 $ (0.51) $ 1.17 AFFO per common share/common unit (4)$ 0.35 $ (0.37) $ 1.25 Weighted average diluted common shares/common units: FFO and AFFO (5)(6) 105,455 104,320 104,363 (1) The adjustment for (Reversal of) provision for credit losses has been reclassified from the calculation of FFO applicable to common shares and common units to the calculation of AFFO applicable to common shares and common units for the years endedDecember 31, 2020 and 2019 to conform to the current period presentation. (2) The total equity-based compensation expense for 2021 includes$2.9 million of incremental expense related to the modification of certain restricted stock awards as a result of the retirement of our Executive Chairman. (3) Executive transition costs are cash payments due to our former Executive Chairman due to the non-renewal of his employment contract inDecember 2021 . (4) AFFO for the year ended December 31, 2021 has not been adjusted for interest related to the Convertible Notes for purposes of calculating AFFO per common share/common unit because we intend to settle the principal portion of the Convertible Notes in cash and we did not include in the denominator of our calculation of AFFO per common share/common unit the potential dilutive effect of shares that would be issued if the principal portion of the Convertible Notes were converted into shares of our common stock. (5) Includes Common Units in the Operating Partnership held by limited partners (other than us and our subsidiaries) because the Common Units are redeemable for cash or, at our election, shares of our common stock. 47 -------------------------------------------------------------------------------- (6) The weighted average diluted common shares/common units used to calculate FFO and AFFO per common share/common unit for the year endedDecember 31, 2021 includes the dilutive effect of our outstanding restricted stock awards. These shares were excluded from our weighted average shares outstanding used to calculate net loss per share because they would have been antidilutive. The weighted average common shares/common units used to calculate FFO and AFFO per common share/common unit for the year endedDecember 31, 2021 exclude the potential dilution related to our Convertible Notes as we intend to settle the principal value of the Convertible Notes in cash. A reconciliation of weighted average diluted common shares to non-GAAP weighted average diluted common shares/common units for FFO and AFFO is as follows (in thousands): 2021 2020 2019 Weighted average dilutive common shares outstanding 104,471 104,141 103,887 Dilutive effect of restricted stock awards 402 52 52
Dilutive effect of shares issuable upon conversion of convertible debt
23,256 - - Adjusted weighted average dilutive common shares outstanding 128,129 104,193 103,939
Non-GAAP adjustment for dilutive effects of common units
144 179 241 Non-GAAP adjustment for dilutive effects of restricted stock awards 438 (52) 183 Non-GAAP adjustment for dilutive effect of shares issuable upon conversion of convertible debt (23,256) - - Non-GAAP weighted dilutive common shares/common units outstanding 105,455 104,320 104,363 During the year endedDecember 31, 2021 , AFFO applicable to common shares and common units increased$75.4 million over the prior year due to an improvement in our business that was primarily driven by an increase in leisure travel and to a lesser extent modest improvement in other demand segments resulting from the administration of vaccines globally as well as the easing of government restrictions in most jurisdictions. See "Part II - Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Effects of Pandemic on Our Business" for further information. For information about our AFFO for the year ended 2020 compared to the year ended 2019, refer to "Part II - Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC .
EBITDA, EBITDAre and adjusted EBITDAre
EBITDA
EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions.
EBITDAre and adjusted EBITDAre
InSeptember 2017 , Nareit proposed a standardized performance measure, called EBITDAre, which is based on EBITDA and is expected to provide additional relevant information about REITs as real estate companies in support of growing interest among generalist investors. The conclusion was reached that, while dedicated REIT investors have long been accustomed to utilizing the industry's supplemental measures such as FFO and net operating income ("NOI") to evaluate the investment quality of REITs as real estate companies, it would be helpful to generalist investors for REITs as real estate companies to also present EBITDAre as a more widely known and understood supplemental measure of performance. EBITDAre is intended to be a supplemental non-GAAP performance measure that is independent of a company's capital structure and will provide a uniform basis for one measurement of the enterprise value of a company compared to other REITs. EBITDAre, as defined by Nareit, is calculated as EBITDA, excluding: (i) loss and gains on disposition of property and (ii) asset impairments, if any. We believe EBITDAre is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make 48 -------------------------------------------------------------------------------- capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional non-recurring or unusual items described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of Adjusted EBITDAre, when combined with the primary GAAP presentation of net income, is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.
The following is a reconciliation of our GAAP net income and EBITDA for the years ended
2021 2020 2019 Net (loss) income$ (68,584) $ (149,245) $ 82,348 Depreciation and amortization 105,955 109,619 99,445 Interest expense 43,368 43,300 41,030 Interest income (8) (145) (278) Income tax expense 1,473 1,376 1,500 EBITDA 82,204 4,905 224,045 Loss on impairment and write-off of assets 4,361 1,759 2,521 (Gain) loss on disposal of assets, net (240) 16 (45,418) EBITDAre 86,325 6,680 181,148 (Reversal of) provision for credit losses(1) (2,632) 4,821 - Amortization of lease-related intangible assets, net 87 86 127 Equity-based compensation 10,681 (2) 6,476 6,219 Executive transition costs 1,065 (3) - - Transaction costs 3,849 - - Debt transaction costs 220 365 1,892 Non-cash interest income (1,042) (2,848) (2,477) Non-cash lease expense, net 521 329 494 Casualty losses (recoveries), net 468 1,132 (239) Loss related to non-controlling interests in joint venture 2,896 5,635 419 Adjustments related to non-controlling interests in consolidated joint venture (11,943) (8,353) (2,320) Other - 91 - Adjusted EBITDAre$ 90,495 $ 14,414 $ 185,263 (1) The adjustment for (Reversal of) provision for credit losses has been reclassified from the calculation of EBITDAre to the calculation of Adjusted EBITDAre for the years endedDecember 31, 2020 and 2019 to conform to the current period presentation. (2) The total equity-based compensation expense for 2021 includes$2.9 million of incremental expense related to the modification of certain restricted stock awards as a result of the retirement of our Executive Chairman. (3) Executive transition costs are cash payments due to our former Executive Chairman due to the non-renewal of his employment contract inDecember 2021 . During the year endedDecember 31, 2021 , Adjusted EBITDAre increased$76.1 million from the prior year primarily due to an improvement in our business that was primarily driven by an increase in leisure travel and to a lesser extent modest improvement in other demand segments resulting from the administration of vaccines globally as well as the easing of government restrictions in most jurisdictions. See "Part II - Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Effects of Pandemic on Our Business" for further information. For information about our Adjusted EBITDAre for the year ended 2020 compared to the year ended 2019, refer to "Part II - Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP 49 --------------------------------------------------------------------------------
Financial Measures” of the Company’s Annual Report on Form 10-K for the fiscal year ended
Cash and capital resources
Due to the Pandemic, we entered into modifications of our 2018 Senior Credit Facility during the years endedDecember 31, 2020 and 2021, which included a waiver of covenants throughMarch 31, 2022 and restricted our ability to use advances on the$400 Million Revolver for certain purposes; however, we continue to be able to access the$400 Million Revolver to fund operations, for growth opportunities and to execute our business plan. Upon expiration of our covenant waivers inMarch 2022 , the capacity available under the$400 Million Revolver may be restricted based upon our quarterly achievement of certain liquidity or other financial metrics. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 - Debt," for additional information concerning our 2018 Senior Credit Facility. Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with internal and brand standards, capital expenditures to improve our hotel properties, hotel development costs, acquisitions, interest payments, settlement of interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, mezzanine loan funding commitments, our Joint Venture acquisitions and capital requirements, contractual lease payments, corporate overhead, and distributions to our stockholders when declared. We have approximately$62.0 million of debt under our 2017 Term Loan maturing inNovember 2022 . We have adequate liquidity to fund this maturity. Our corporate overhead primarily consists of employee compensation expenses, professional fees and corporate insurance and rent expenses. Cash requirements for our corporate overhead expenses (excluding non-cash stock-based compensation), which are generally paid from operating cash flows, were$18.7 million ,$14.5 million and$17.4 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. We generally expect our corporate overhead expenses to remain consistent with the level of our operating activities and market conditions for goods and services. Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our hotel properties, dividend distributions and scheduled debt payments, including maturing loans. To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to distribute a sufficient amount of our taxable income to maintain our status as a REIT and to avoid tax on undistributed income. Because we anticipate distributing a substantial amount of our available cash from operations, if sufficient funds are not available to us from hotel dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business. The net proceeds from ourJanuary 12, 2021 sale of the Convertible Notes, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company (including net proceeds from the full exercise by the underwriters of their over-allotment option to purchase additional Convertible Notes), were approximately$280.0 million before consideration of the related capped call transactions. These proceeds were used to pay the cost of the capped call transactions and to partially repay outstanding obligations under the 2018 Senior Credit Facility and 2017 Term Loan. The effective strike price of the capped call transactions is initially$15.26 , which represents a premium of 75.0% over the last reported sale price of the common stock on theNew York Stock Exchange onJanuary 7, 2021 , and is subject to certain adjustments under the terms of the capped call transactions. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 - Debt," for additional information concerning the Convertible Notes, Convertible Notes Offering and the capped call Transactions. OnMay 1, 2021 , the Company contributed a portfolio of six hotels containing 846 guestrooms to our consolidated joint venture with an affiliate of GIC,Singapore's sovereign wealth fund. The estimated market value of the portfolio of hotel properties was$172.0 million and GIC contributed$84.3 million in cash for its 49% interest in our Joint Venture after the completion of the transfer of the six hotels. Net proceeds from the transaction were used to repay$62.5 million of our senior debt and$20.9 million was recorded as Cash and cash equivalents.
At
50 -------------------------------------------------------------------------------- OnAugust 12, 2021 , the Company sold 4,000,000 Series F preferred shares for net proceeds of$96.6 million , after the underwriting discount and offering-related expenses of$3.4 million . OnSeptember 4, 2021 , using proceeds from the issuance of the Series F preferred shares, the Company paid$75.0 million to redeem all 3,000,000 of its outstanding 6.45% Series D Cumulative Redeemable Preferred Stock at a redemption price of$25 per share plus accrued and unpaid dividends. The remaining net proceeds from the Series F preferred share offering was used to repay$22.0 million of our senior debt. OnDecember 21, 2021 , we acquired the 120-guestroomEmbassy Suites by Hilton inTucson, AZ for$25.5 million through our Joint Venture. The Joint Venture acquired the property with a combination of cash and an assumed loan that had a balance of approximately$13.3 million . The loan has a fixed interest rate of 4.99% and a maturity date ofJune 2028 . OnJanuary 13, 2022 , theOperating Partnership and our Joint Venture completed the NCI Transaction, paid in the form of 15,314,494 Common Units, 1,958,429 Series Z Preferred Units,$382.0 million cash draw from a term loan entered into by subsidiaries of the Joint Venture, the assumption by a subsidiary of the Joint Venture of approximately$6.5 million in PACE loan debt and approximately$174.1 million cash contributed by GIC, as a limited partner in the Joint Venture. In connection with the NCI Transaction, GIC will contribute to the Joint Venture an estimated additional$10.9 million in cash, a portion of which will be distributed to theOperating Partnership after transaction costs payable by theOperating Partnership are deducted. In connection with the NCI Transaction, theOperating Partnership and the Joint Venture expect to acquire the Canopy New Orleans upon completion of its construction, which is expected to occur during the first quarter of 2022, for a purchase price of$56.0 million , to be paid in the form of 550,180 Common Units, 41,571 Series Z Preferred Units,$21.4 million cash and$28.0 million cash proceeds from a delayed draw on the term loan entered into by subsidiaries of the Joint Venture. We currently have an outstanding mezzanine loan on a real estate development project to fund up to an aggregate of$29.9 million for the development of two hotel properties. The real estate development loan, which closed in the third quarter of 2019, has$27.7 million funded as ofDecember 31, 2021 , has$2.2 million remaining to be funded, and has a stated interest rate of 9.0% and a maturity date ofMay 15, 2022 . See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 4 - Investment in Real Estate Loans" for additional information concerning these loans and our rights to acquire ownership of the properties. Outstanding Indebtedness Subsequent to year-end, atFebruary 11, 2022 , we had$200.0 million outstanding on our$200 Million Term Loan,$62.0 million outstanding on our 2017 Term Loan and$225.0 million outstanding on our 2018 Term Loan. Each of the credit facilities was supported by the 46 hotel properties included in the credit facility borrowing base and a pledge of the equity securities in each of the entities which own one of the 46 hotel properties, and the respective TRS Lessees. We also had an aggregate of$149.4 million of mortgage loans outstanding and$287.5 million of Convertible Notes outstanding. Subsequent to year-end, atFebruary 11, 2022 , our Joint Venture had$143.5 million outstanding under our Joint Venture Credit Facility, which included borrowings of$75.0 million on its$75 Million Term Loan and$68.5 million on its$125 million revolving line of credit. The Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that hold the five hotel borrowing base assets, and the related TRS entities, which wholly own the TRS lessees that lease each of the borrowing base assets. As ofFebruary 11, 2022 , our Joint Venture also owns seven hotel properties that are not collateral for the Joint Venture's senior unsecured credit facility. As ofFebruary 11, 2022 , our Joint Venture also had$382.0 million outstanding on a term loan and$6.4 million outstanding on a PACE loan entered into in connection with the NCI Transaction and a mortgage loan totaling$13.2 million . AtDecember 31, 2021 , we have scheduled debt principal amortization payments during the next twelve months totaling$4.3 million and debt maturities totaling$62.0 million . Currently, we have the capacity to pay these scheduled principal debt payments using cash on hand or availability on our$400 Million Revolver. We have obtained financing through debt instruments having staggered maturities and intend to continue to do so in the future. Our debt includes, and may include in the future, debt secured by stock pledges, debt secured by first priority mortgage liens on certain hotel properties and unsecured debt. We believe that we will have adequate liquidity to meet the requirements for scheduled maturities and principal repayments. However, we can provide no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable terms. 51 -------------------------------------------------------------------------------- OnFebruary 5, 2021 , the Company entered into certain amendments of the 2018 Senior Credit Facility, the 2018 Term Loan and the 2017 Term Loan that give us full access to the$400 Million Revolver (subject to certain conditions), provide for financial covenant waivers throughMarch 31, 2022 , and modify certain financial covenant measures throughDecember 31, 2023 . Additionally, onApril 29, 2021 , we amended the Joint Venture Credit Facility to provide for certain financial covenant waivers and adjustments as described in "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 - Debt" to the Condensed Consolidated Financial Statements. Our outstanding indebtedness requires us to comply with various financial and other covenants. AtDecember 31, 2021 , we and our Joint Venture are in compliance with all loan covenants. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 - Debt" for additional information concerning our loans, loan amendments and our financing arrangements. A summary of our debt atDecember 31, 2021 is as follows (dollars in thousands): Amortization Number of Principal Amount Lender Interest Rate Period (Years) Maturity Date Encumbered Properties
Exceptional
$600Million Senior Credit and Term Loan Facility (1) Deutsche Bank AG New York Branch$400 Million Revolver 2.65% Variable n/a March 31, 2023 n/a $
–
$200 Million Term Loan 2.60% Variable n/a April 1, 2024 n/a
200,000
Total Senior Credit and Term Loan Facility
200,000
Joint Venture Credit Facility (2)Bank of America, N.A .$125 Million Revolver 2.55% Variable n/a October 8, 2023 n/a
68,500
$75 Million Term Loan 2.50% Variable n/a October 8, 2023 n/a
75,000
Total Joint Venture Credit Facility 143,500 Term Loans (1)KeyBank National Association Term Loan 2.70% Variable n/a November 25, 2022 n/a
62,000
KeyBank National Association Term Loan 2.40% Variable n/a February 14, 2025 n/a
225,000
Convertible Notes 1.50% Fixed n/a February 15, 2026 n/a
287,500
Secured Mortgage Indebtedness
KeyBank National Association 4.46% Fixed 30 February 1, 2023 3 18,545
4.52% Fixed 30 April 1, 2023 3 19,024
4.30% Fixed 30 April 1, 2023 3 18,358
4.95% Fixed 30 August 1, 2023 2 33,155
MetaBank 4.44% Fixed 25 July 1, 2027 3 45,070
Bank of Cascades (3) 2.10% Variable 25 December 19, 2024 1 7,957
4.30% Fixed 25 December 19, 2024 - 7,957
Wells Fargo 4.99% Fixed 30 June 6, 2028 1 13,249
Total Mortgage Loans 16 163,315
Total Debt $ 1,081,315
(1) The 2018 Senior Credit Facility and Term Loans are supported by a borrowing
base of 46 unencumbered hotel properties and a pledge of the equity securities
of the entities that own and operate the 46 unencumbered hotels.
(2) The Joint Venture Credit Facility is secured by pledges of the equity in the
entities (and affiliated entities) that own five of the hotels owned by the
Joint Venture.
(3) The Bank of Cascades mortgage loan is comprised of two promissory notes that
are secured by the same collateral and cross-defaulted.
52
--------------------------------------------------------------------------------
As part of the NCI transaction concluded in
Amortization Number of Principal Amount
Lender Interest Rate Period (Years) Maturity Date Encumbered Properties
Exceptional
Term Loan (1) Bank of America, N.A. 2.91% Variable n/a January 13, 2026 n/a $
382,000
PACE Loan (2) Twain Community Partners II LLC 6.10% Fixed 20 July 31, 2040 1 6,479 Total Debt$ 388,479 (1)The Bank of America term loan is secured by a pledge of the equity interests in the subsidiaries that own and operate the borrowing base assets financed by the facility. (2) The PACE loan is secured by an assessment lien imposed by the County ofTarrant, Texas for the benefit of the lender.
Capital expenditure
During the year ended
Cash flow analysis
The following table summarizes the changes in cash flows for the years ended
For the Years Ended December 31,
2021 2020 Change
Net cash provided by (used in) operating activities $66,051
$ (42,052) $ 108,103 Net cash used in investing activities (74,244) (30,710) (43,534) Net cash provided by financing activities 66,241 41,825 24,416 Net change in cash, cash equivalents and restricted cash $ 58,048$ (30,937) $ 88,985
Changes from the year ended
•Cash provided by (used in) operating activities. This increase primarily resulted from a decrease in net loss of$77.8 million , after adjusting for non-cash items, such as depreciation and amortization and gains on the sale of assets, and net changes in working capital of$30.3 million . The net changes in working capital were primarily due to decreases in accrued expenses during the year endedDecember 31, 2020 driven by reduced operating activity resulting from the negative effects of the Pandemic. Accrued expenses increased during the year endedDecember 31, 2021 due to an increase in accruals at our hotel properties driven by an increase in operating activity as we recover from the Pandemic. The overall increase is due to an improvement in our business that has been primarily driven by leisure travel and to a lesser extent modest improvement in other demand segments in 2021. •Cash used in investing activities. This increase in cash used in investing activities is primarily due to the acquisition of two hotel properties in 2021 totaling$59.0 million and an increase in escrow deposits and deferred acquisition costs totaling$10.6 million . These expenditures were partially offset by an increase in the net repayments of mezzanine loans receivable of$21.6 million and a decline in capital expenditures of$2.3 million . Capital expenditures were lower during 2021 compared with 2020 because much of the capital expenditures for 2020 were incurred early in the year prior to the Pandemic, after which capital expenditures were reduced to preserve liquidity. •Cash provided by financing activities. Cash provided by financing activities for the year endedDecember 31, 2021 was primarily the result of contributions from our joint venture partner of$115.5 million and net proceeds from the issuance of preferred stock of$96.6 million , partially offset by the redemption of preferred stock totaling$75.0 million , net repayments of debt of$20.2 million including the proceeds from the issuance and sale of the Convertible Notes which were used to partially repay the$400 Million Revolver and 2017 Term Loan, the purchase of capped call options related to the Convertible Notes of$21.1 million , debt financing fees of$11.4 million and dividend payments of$15.5 million . Cash provided by financing activities for the year endedDecember 31, 2020 was primarily the result 53 --------------------------------------------------------------------------------
net debt of
For information about our consolidated cash flows for the year ended 2020 compared to the year ended 2019, refer to "Part II - Item 7. - Management's Discussion and Analysis of Financial Conditions and Results of Operations - Cash Flow Analysis" of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC .
Critical accounting estimates
Asset impairment
Each quarter, we evaluate the net carrying amounts of our long-term assets for impairment when impairment indicators are present. We evaluate for impairment triggers based on qualitative factors such as macroeconomic trends, trends related to demand for travel and lodging, and current and projected trends related to local market conditions. We also evaluate for impairment triggers based on quantitative factors such as historical and projected revenue and profitability performance trends. When an impairment indicator is identified, we perform a recoverability analysis based on estimated future undiscounted cash flows for the asset. Forecasted undiscounted cash flows require substantial management judgment related to estimates of future revenues, which is based on historical results, our expectations related to revenue trends and future performance of the asset, our assessment of current and future market conditions and competition, our expectations related to performance of the overall economy, and third-party industry published forecasts. Revenue performance has been volatile as a result of the Pandemic making revenue forecasts particularly challenging in the current environment. Future revenue performance is highly dependent on matters outside of our control such as dissipation of concerns related to the Pandemic, continued easing of government restrictions and guidance, restoration of consumer confidence, and a recovery in corporate and overall travel-related demand.
Main accounting policies and new accounting standards
See “Part II – Item 8. – Financial statements and additional data – Note 2 – Basis of presentation and significant accounting policies.”
cyber security
The hospitality industry and certain of the major brand and franchise companies have experienced cybersecurity breaches. We are not aware of any material cybersecurity losses at any of our properties. We manage cybersecurity risks with our franchisors and property management companies. An important part of our cybersecurity risk mitigation efforts includes maintaining cybersecurity insurance and indemnifications in certain of our property management agreements. Our Board of Directors provides on-going oversight of management's approach to managing cybersecurity risks. Recent Developments
Leadership and Board Transitions
Effective
In January, 2022, theOperating Partnership and the Joint Venture completed the NCI Transaction, paid in the form of 15,314,494 Common Units, 1,958,429 Series Z Preferred Units,$382.0 million cash draw from a term loan entered into by subsidiaries of the Joint Venture, the assumption by a subsidiary of the Joint Venture of approximately$6.5 million in PACE loan debt and approximately$174.1 million cash contributed by GIC, as a limited partner in the Joint Venture. In connection with the NCI Transaction, GIC will contribute to the Joint Venture an estimated additional$10.9 million in cash, a portion of which will be distributed to theOperating Partnership after transaction costs payable by theOperating Partnership are deducted.The Operating Partnership and the Joint Venture expect to acquire the Canopy New Orleans upon completion of its construction, which is expected to occur during the first quarter of 2022, for a purchase price of$56.0 million , to be paid in the form of 550,180 Common Units, 41,571 Series Z Preferred Units,$21.4 million cash and$28.0 million cash proceeds from a delayed draw on the term loan entered into by subsidiaries of the Joint Venture. 54 --------------------------------------------------------------------------------
Stock trading
OnJanuary 28, 2022 , our board of directors declared cash dividends of$0.390625 per share of 6.25% Series E Cumulative Redeemable Preferred Stock and$0.3671875 per share of 5.875% Series F Cumulative Redeemable Preferred Stock. Our board of directors also declared on behalf of theOperating Partnership , a cash dividend of$0.171354 per unit of theOperating Partnership's 5.25% Series Z Cumulative Perpetual Preferred Units that were issued onJanuary 13, 2022 as part of the NCI Transaction.
These dividends are payable
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