Summit Hotel Properties, Inc. - Annual Report: 2021 (Form 10-K)
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
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35074
SUMMIT HOTEL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
| Maryland | 27-2962512 | |||||||
| (State or other jurisdiction | (I.R.S. Employer Identification No.) | |||||||
| of incorporation or organization) | ||||||||
13215 Bee Cave Parkway, Suite B-300
Austin, TX 78738
(Address of principal executive offices, including zip code)
(512) 538-2300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | INN | New York Stock Exchange | ||||||||||||
| 6.25% Series E Cumulative Redeemable Preferred Stock, par value $0.01 per share | INN-PE | New York Stock Exchange | ||||||||||||
| 5.875% Series F Cumulative Redeemable Preferred Stock, par value $0.01 per share | INN-PF | New York Stock Exchange | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
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 ☒ No
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 ☐ No
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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
| 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 Exchange Act). ☐ Yes ☒ No
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant’s as of June 30, 2021 was $962,001,344 based on the closing sale price of the registrant’s common stock on the New York Stock Exchange as of June 30, 2021.
As of February 11, 2022 the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 106,340,958.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement on Schedule 14A for its 2022 annual meeting of stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year pursuant to Regulation 14A, are incorporated herein by reference into Part III, Items 10, 11, 12, 13 and 14.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2021
SUMMIT HOTEL PROPERTIES, INC.
TABLE OF CONTENTS
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “forecast,” “project,” “potential,” “continue,” “likely,” “will,” “would” or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
•the effects of the novel coronavirus (COVID-19) and its variants (the "Pandemic") and other infectious disease outbreaks;
•potential changes in operations as a result of regulations or changes in brand standards imposed in connection with, or changes in consumer behavior in response to, the Pandemic;
•financing risks, including the risk of leverage and the corresponding risk of default on our existing indebtedness and potential inability to refinance or extend the maturities of our existing indebtedness;
•default by borrowers to which we lend or provide seller financing;
•global, national, regional and local economic and geopolitical conditions;
•levels of spending for business, group and leisure travel, as well as consumer confidence;
•supply and demand factors in our markets or sub-markets;
•the effect of alternative accommodations on our business;
•adverse changes in, occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) and other hotel operating metrics;
•hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
•financial condition of, and our relationships with, third-party property managers and franchisors;
•the degree and nature of our competition;
•increased interest rates;
•increased operating costs, including but not limited to labor costs;
•increased renovation costs, which may cause actual renovation costs to exceed our current estimates;
•supply-chain disruption, which may reduce access to operating supplies or construction materials and increase related costs;
•changes in zoning laws;
•increases in real property taxes that are significantly higher than our expectations;
•risks associated with hotel acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history or that require substantial amounts of capital improvements for us to earn economic returns consistent with our expectations at the time of acquisition;
•risks associated with dispositions of hotel properties, including our ability to successfully complete the sale of hotel properties under contract to be sold, including the risk that the purchaser may not have access to the capital needed to complete the purchase;
•the nature of our structure and transactions such that our federal and state taxes are complex and there is risk of successful challenges to our tax positions by the Internal Revenue Service (“IRS”) or other federal and state taxing authorities;
•the recognition of taxable gains from the sale of hotel properties as a result of the inability to complete certain like-kind exchanges in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (the “IRC”);
•availability of and the abilities of our property managers and us to retain qualified personnel at our hotels and corporate offices;
•our failure to maintain our qualification as a real estate investment trust (“REIT”) under the IRC;
•changes in our business or investment strategy;
•availability, terms and deployment of capital;
•general volatility of the capital markets and the market price of our common stock;
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•environmental uncertainties and risks related to natural disasters;
•our ability to recover fully under third party indemnities or our existing insurance policies for insurable losses and our ability to maintain adequate or full replacement cost "all-risk" property insurance policies on our properties on commercially reasonable terms;
•the effect of a data breach or significant disruption of hotel operator information technology networks as a result of cyber-attacks that are greater than insurance coverages or indemnities from service providers;
•the effect on our interest rates as LIBOR is replaced with the Secured Overnight Financing Rate ("SOFR") which may perform differently than LIBOR;
•our ability to effectively manage our joint venture with our joint venture partner;
•current and future changes to the IRC;
•our ability to manage inflationary pressures related to commodities, labor and other costs of our business as well as consumer purchasing power and overall behavior;
•our ability to continue to effectively enhance our Environmental, Social and Governance ("ESG") program to achieve expected social, environment and governance objectives and goals; and
•the other factors discussed in “Part I – Item 1A. – Risk Factors” in this report.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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PART I
Item 1. Business.
Unless the context otherwise requires, all references to “we”, “us,” “our,” or the “Company” refer to Summit Hotel Properties, Inc. and its consolidated subsidiaries.
Overview
Summit Hotel Properties, Inc. is a self-managed hotel investment company that was organized in June 2010 and completed its initial public offering in February 2011. We focus on owning primarily premium-branded, select-service hotels. At December 31, 2021, our portfolio consisted of 74 hotels with a total of 11,518 guestrooms located in 23 states. We own our hotels fee simple, except for four hotels which are subject to ground leases. As of December 31, 2021, we own 100% of the outstanding equity interests in 61 of 74 of our hotels. We own a 51% controlling interest in thirteen hotels through a joint venture.
Our joint venture (“Joint Venture”) was formed in July 2019 with GIC, Singapore’s sovereign wealth fund, to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the Joint Venture and intends to invest 51% of the equity capitalization of the limited partnership, with GIC investing the remaining 49%. The Joint Venture intends to finance assets with an anticipated 50% overall leverage target. The Company earns fees for providing services to the Joint Venture and will have the potential to earn incentive fees based on the Joint Venture achieving certain return thresholds. As of December 31, 2021, the Joint Venture owns thirteen hotel properties.
As of December 31, 2021, 90% of our guestrooms were located in the top 50 metropolitan statistical areas (“MSAs”), 96% were located within the top 100 MSAs and all of our hotel guestrooms operated under premium franchise brands owned by Marriott® International, Inc. (“Marriott”), Hilton® Worldwide (“Hilton”), Hyatt® Hotels Corporation (“Hyatt”) and InterContinental® Hotels Group (“IHG”). Our hotels are typically located in markets with multiple demand generators such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, universities, and leisure attractions.
In January 2022, we significantly expanded the size of our portfolio with the acquisition of 26 hotel properties, containing an aggregate of 3,533 guestrooms, and two parking structures, containing 1,002 spaces for an aggregate purchase price of $766.0 million from NewcrestImage (the "NCI Transaction"). As part of the same portfolio purchase, we expect to complete the purchase of one additional hotel, the 176-guestroom Canopy by Hilton New Orleans (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. The portfolio acquisition was completed through our Joint Venture. For additional information, see our Current Report on Form 8-K filed on January 14, 2022.
As of February 11, 2022, including the NCI Transaction, our portfolio consisted of 100 hotels with a total of 15,051 guestrooms located in 24 states. We own our hotels fee simple, except for five hotels which are subject to ground leases. As of February 11, 2022, we own 100% of the outstanding equity interests in 61 of 100 of our hotels. As of February 11, 2022, we own a 51% controlling interest in 39 hotels through a joint venture. As of February 11, 2022, 86% of our guestrooms were located in the top 50 MSAs and 91% were located within the top 100 MSAs.
Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership, Summit Hotel OP, LP (the “Operating Partnership”). Through a wholly-owned subsidiary, we are the sole general partner of the Operating Partnership. At December 31, 2021, we owned, directly and indirectly, approximately 99.9% of the Operating Partnership’s issued and outstanding common units of limited partnership interest (“Common Units”), and all of the Operating Partnership’s issued and outstanding Series E and Series F preferred units of limited partnership interest. Pursuant to the Operating Partnership’s partnership agreement, we have full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions and refinancings, to make distributions to partners and to cause changes in the Operating Partnership’s business activities.
As of February 11, 2022, including the NCI Transaction, we owned, directly or indirectly, approximately 87.3% of the outstanding Common Units. An unrelated third party owns all of the issued and outstanding 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation preference $25 per unit) of the Operating Partnership ("Series Z Preferred Units"). We refer to units of limited partnership interests of our Operating Partnership as "Preferred Units."
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We have elected to be taxed as a REIT for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to our taxable REIT subsidiaries ("TRS lessees"). All of our hotels are operated pursuant to hotel management agreements between our TRS lessees and professional third-party hotel management companies that are not affiliated with us. We have one reportable segment as defined by generally accepted accounting principles (“GAAP”). See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 2 – Basis of Presentation and Significant Accounting Policies" to our Consolidated Financial Statements.
Our corporate offices are located at 13215 Bee Cave Parkway, Suite B-300, Austin, TX 78738. Our telephone number is (512) 538-2300. Our website is www.shpreit.com. The information contained on, or accessible through, our website is not incorporated by reference into this report and should not be considered a part of this report.
Business Strategy
Our portfolio consists of premium-branded hotels in favorable locations with efficient operating models. Our approach to creating value includes the following:
•Selectively allocate capital which includes, among other things, capital investment, growth initiatives and other strategic transactions, such as the NCI Transaction, which was completed in January 2022;
•Evolving our portfolio by selling assets with lower operating margins, RevPAR growth opportunities or risk-adjusted return profiles and purchasing assets with higher operating margins, RevPAR growth opportunities or risk-adjusted return profiles; and
•Intensive asset management.
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The Pandemic and the restrictions implemented in response to the Pandemic had a significant negative effect on the U.S. and global economies, including a rapid and sharp decline during the year ended December 31, 2020 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 ended December 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. Industry expectations are for continued improvement in operating results as the effects of the Pandemic moderate. 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.
We expect that when we are able to return to pre-Pandemic operational and financial performance levels, our strategy will enable us to continue to create long-term value. The key elements of our strategy that we believe will allow us to create long-term value include the following:
Focus on Premium-Branded Hotels with Efficient Operating Models. We focus on hotels with efficient operating models that are primarily in the Upscale segment of the lodging industry, as defined by Smith Travel Research ("STR"). We believe that our focus on this segment provides us the opportunity to achieve strong, risk-adjusted returns across multiple lodging cycles for several reasons, including:
•RevPAR Growth. We believe that our hotels are positioned for long-term demand growth as travel recovers to levels more in-line with pre-Pandemic demand and the effects of the Pandemic diminish.
•Stable Cash Flow Potential. Our hotels are generally operated with fewer employees than full-service hotels that offer more amenities including more extensive food and beverage options; when coupled with our premium market share, we have been able to generate higher operating margins and cash flows with less volatility.
•Broad Customer Base. Our target brands deliver consistently high-quality hotel accommodations with value-oriented pricing that we believe appeals to a wide range of customers, including business, group and leisure travelers. We believe that our hotels are particularly popular with frequent travelers who seek to stay in hotels operating under Marriott, Hilton, Hyatt, or IHG brands, which offer strong loyalty rewards programs.
•Enhanced Diversification and Lower Capital Requirements. Premium-branded hotels with efficient operating models generally require less capital to acquire, build, or maintain on an absolute and a per-key basis, than hotels in the Upper-Upscale and Luxury segments of the industry. As a result, we can diversify our investment capital into ownership of a larger number of hotels than we could in the Upper-upscale or Luxury segments.
Capitalize on Investments in Our Hotels. We believe in the benefits of strategically investing capital in our properties to ensure they are in good physical condition and facilitate market leading financial performance. We believe these investments produce attractive returns, and we intend to continue to invest capital to upgrade our hotels with strategic renovations and brand-required hotel property improvement plans.
External Growth Through Acquisitions. We intend to continue to opportunistically grow through acquisitions of existing lodging facilities either through wholly owned or joint venture structures using a disciplined approach, while maintaining a prudent capital structure. We generally target lodging facilities with efficient operating models that meet one or more of the following acquisition criteria:
•potential for strong risk-adjusted returns and are located in the top 50 MSAs and other select destination markets;
•can operate under leading franchise brands, which may include but are not limited to brands owned by Marriott, Hilton, Hyatt, and IHG;
•located in close proximity to multiple demand generators, such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, universities, and leisure attractions, with a diverse source of potential guests, including corporate, government and leisure travelers;
•located in markets with barriers to entry due to lengthy or challenging real estate entitlement processes or other factors;
•can be acquired at a discount to replacement cost; and
•provide an opportunity to add value through operating efficiencies, revenue management and asset management expertise, repositioning, renovating or rebranding.
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Strategic Hotel Sales. We strive to maximize our return on invested capital and we periodically review our hotels to determine if any significant changes to markets or our hotels have occurred or are anticipated to occur that would warrant the sale of a hotel or hotels. We intend to continue to pursue a disciplined capital allocation strategy designed to maximize the value of our investments by selectively selling hotel properties that we believe are no longer consistent with our investment strategy or whose returns on invested capital appear to have been maximized. To the extent that we sell hotel properties, we may redeploy the capital into acquisition and capital investment opportunities that we believe have the potential to generate better risk-adjusted returns, or we may repay outstanding indebtedness. We also expect to generate these improvements in returns with our proactive asset management approach and by investing in our hotels to enhance their quality and attractiveness, increase their long-term value and generate more favorable returns on our invested capital.
Selectively Develop Hotels. We endeavor to identify attractive opportunities to selectively partner with experienced hotel developers to acquire, upon completion, newly constructed hotels that meet our acquisition criteria. We will consider unique opportunities to develop hotels utilizing our own capital if and when circumstances warrant.
Selective Mezzanine Lending. We seek to identify select opportunities to provide mezzanine lending to developers, where we also have the opportunity to acquire the hotel at or after the completion of the development project.
Our Financing Strategy
We rely on cash generated through operations, working capital, borrowings under our senior revolving and term loan facility (the "2018 Senior Credit Facility"), term debt, repayment of notes receivable, proceeds from the issuance of common and preferred securities, the strategic sale of hotels, contributions from our Joint Venture partner, and the release of restricted cash upon satisfaction of the usage requirements to finance our business. We may also issue Common Units or preferred units of the Operating Partnership in connection with acquisitions.
The 2018 Senior Credit Facility is comprised of a $400.0 million revolver (the "$400 Million Revolver") and a $200.0 million term loan facility (the $200 Million Term Loan"). We have obtained certain financial covenant waivers from our senior credit facility lenders through March 31, 2022 and we have obtained certain modifications to financial covenant measures through December 31, 2023. The covenant waivers, subject to certain conditions, will make the full capacity under the 2018 Senior Credit Facility available to us during those time periods to provide adequate liquidity to execute our business plan and pursue external growth opportunities. Our Joint Venture also operates with borrowings under a $200 million credit facility (the "Joint Venture Credit Facility"). The Joint Venture Credit Facility is comprised of a $125.0 million revolving credit facility (the “$125 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). We have obtained certain financial covenant waivers from our Joint Venture Credit Facility lenders through March 31, 2022 and we have obtained certain modifications to financial covenant measures through December 31, 2023. The amendments to the Joint Venture Credit facility confirmed that our Joint Venture could make additional advances on the $125 Million Revolver, subject to certain financial covenant limitations.
Our long-term leverage approach is to maintain conservative debt levels with high coverage ratios to allow us the flexibility to withstand various economic cycles and to position us for growth when accretive opportunities arise.
Our debt includes, and may include in the future, debt secured by stock pledges, mortgage debt secured by hotels and unsecured debt. As of December 31, 2021, we had $1.1 billion in outstanding indebtedness, including $143.5 million under the Joint Venture Credit Facility.
When purchasing hotel properties, subject to restrictions contained in the 2018 Senior Credit Facility, our $225 million term loan facility dated February 15, 2018 (the "2018 Term Loan"), and our $225 million term loan facility dated September 26, 2017 (the "2017 Term Loan"), the Operating Partnership may issue Common Units or Preferred Units as full or partial consideration to sellers who may be interested in taking advantage of the opportunity to defer taxable gains on the sale of a property or participate in the potential appreciation in the value of our common stock.
Competition
We face competition for investments in hotel properties from institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in hotel acquisitions and investments. Some of these entities have substantially greater financial and operational resources than we have. This competition may increase the bargaining power of property owners seeking to sell, reduce the number of suitable investment opportunities available to us and increase the cost of acquiring targeted hotel properties.
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The lodging industry is highly competitive. Our hotels compete with other hotels and alternative accommodations for guests in their respective markets based on a number of factors, including location, convenience, brand affiliation, quality of the physical condition of the hotel, guestroom rates, range of services and guest amenities or accommodations offered and quality of customer service. Competition is often specific to the individual markets in which our hotels are located and includes competition from existing and new hotels. Competition could adversely affect our occupancy rates, our ADR and our RevPAR, and may require us to provide additional amenities or make capital improvements that we otherwise would not have to make, which may reduce our profitability.
Seasonality
Certain segments of the hotel industry are seasonal in nature. The current trend in our business is for business and leisure travelers to occupy hotels relatively consistently throughout the year, but decreases in business travel occur during summer and the winter holidays. The hotel industry is also seasonal based upon geography. Hotels in the southern U.S. tend to have higher occupancy rates during the winter months. Hotels in the northern U.S. tend to have higher occupancy rates during the summer months.
Regulation
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to accessibility, fire and safety requirements. We believe each of our hotels has the necessary permits and approvals to operate its business.
Americans with Disabilities Act of 1990 (“ADA”)
Our properties must comply with Title III of the ADA to the extent that they are “public accommodations” as defined by the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where removal is readily achievable. Although we believe the properties in our portfolio substantially comply with present requirements of the ADA, a determination to the contrary could require removal of access barriers and non-compliance could result in litigation costs, costs to remediate deficiencies, U.S. government fines or in damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Environmental, Health and Safety Matters
Our hotels and undeveloped land parcels are subject to various federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require us, as 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 contamination. These laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused the contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned a property at the time it became contaminated, 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, personal injury and death or property damage. In addition, environmental liens may be created on contaminated sites in favor of the government for damages and costs it incurs to address contamination. If contamination is discovered on our properties, environmental laws also may impose restrictions on the manner in which our property may be used or our 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. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.
Some of our properties may have contained historical uses which involved the use or storage of hazardous chemicals and petroleum products (for example, storage tanks, gas stations and dry-cleaning operations) which if released, could have affected our properties. In addition, some of our properties may be near or adjacent to other properties that have contained or currently contain storage tanks containing petroleum products or conducted or currently conduct operations which use other hazardous or toxic substances. Releases from these adjacent or surrounding properties could affect our properties and we may be liable for any associated cleanup.
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Independent environmental consultants conducted Phase I environmental site assessments on all of our properties prior to acquisition and we intend to conduct Phase I environmental site assessments on properties we acquire in the future. Phase I site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed properties and surrounding properties. These assessments do not generally include soil sampling, subsurface investigations or comprehensive asbestos surveys. In some cases, the Phase I environmental site assessments were conducted by another entity such as a lender, and we may not have the authority to rely on such reports. None of the Phase I environmental site assessments of the hotel properties in our portfolio revealed any past or present environmental condition that we believe could have a material adverse effect on our business, financial position or results of operations. In addition, the Phase I environmental site assessments may also have failed to reveal all environmental conditions, liabilities or compliance concerns. The Phase I environmental site assessments were completed at various times and material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future; and future laws, ordinances or regulations may impose material additional environmental liability.
In addition, our hotels (including our real property, operations and equipment) are subject to various federal, state and local environmental, health and safety regulatory requirements that address a wide variety of issues, including, but not limited to, the potential transmission of infectious diseases such as COVID-19, the existence of mold and other airborne contaminants above regulatory thresholds, the registration, maintenance and operation of our boilers and storage tanks, the supply of potable water to our guests, air emissions from emergency generators, storm water and wastewater discharges, protection of natural resources, asbestos, lead-based paint, and waste management. Some of our hotels also routinely handle and use hazardous or regulated substances and wastes as part of their operations (for example, swimming pool chemicals or biological waste). Our hotels incur costs, and in certain situations, may be required to limit operations, to comply with these environmental, health and safety laws and regulations and if these regulatory requirements are not met or unforeseen events result in the discharge of dangerous or toxic substances at our hotels, we could be subject to fines and penalties for non-compliance with applicable laws and material liability from third parties for harm to the environment, damage to real property or personal injury or death. We are aware of no past or present environmental liability for non-compliance with environmental, health and safety laws and regulations that we believe would have a material adverse effect on our business, financial position or results of operations.
Environmental, Social and Governance (ESG) Matters
Our ongoing commitment to our environment, our communities and our stakeholders is an important part of our core responsibility to be more sustainable, inclusive and equitable. Since establishing our Corporate Responsibility program in 2017, we have built upon our sustainability objectives, from tracking metrics related to our consumption, waste, recycling and greenhouse gas emissions, to setting measurable, science-based reduction targets for energy, water and carbon, and to committing to improve the efficiency of our buildings and promote sustainable operations through our energy management program. Additionally, we have expanded charitable engagement with our community through the Summit Foundation, our 501(c)(3) nonprofit organization, and have broadened our social programs to enhance connectivity among our employees, partners and stakeholders to ensure that we champion an environment of diversity and inclusivity.
For more information on these and our other sustainability practices, including environmental and social metrics and results, please see our current sustainability report available on our website at https://www.shpreit.com/responsibility.
Tax Status
REIT Election
We have elected to be taxed as a REIT for federal income tax purposes. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the IRC relating to, among other things, the sources of our gross income, the composition and values of our assets, the timing and amount of our dividend distributions and the diversity of ownership of our stock. We believe that we have been organized and have operated in conformity with the requirements for qualification as a REIT under the IRC and that our current and intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for federal income tax purposes.
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For the income from our hotel operations to constitute “rents from real property” for purposes of the gross income tests required for REIT qualification, we cannot directly operate any of our hotel properties. Accordingly, all of our hotels are leased to our TRS lessees. Summit Hotel TRS, Inc. is a “taxable REIT subsidiary,” which is a corporate subsidiary of a REIT that jointly elects with the REIT to be treated as a TRS and pays federal income tax at regular corporate rates on its taxable income. In addition, for the hotels owned in our Joint Venture, we have separate taxable REIT subsidiaries (collectively with Summit Hotel TRS, Inc., our "TRSs"). We will lease newly acquired hotels to our existing TRSs or additional TRSs in the future. Our TRS lessees pay rent to us that will qualify as “rents from real property,” provided that the TRS lessees engage “eligible independent contractors” to manage our hotels. All of our hotels are operated pursuant to hotel management agreements with professional third-party hotel management companies. We believe each of the third-party managers qualifies as an “eligible independent contractor” under the IRC.
As a REIT, we generally will not be subject to federal income tax on our REIT taxable income that we distribute as dividends to our stockholders. Under the IRC, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their taxable income, subject to certain adjustments and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by our TRSs will be fully subject to federal, state and local corporate income tax.
Human Capital Resources
As of February 11, 2022, we had 63 corporate employees. None of our corporate employees are represented by a labor union or covered by a collective bargaining agreement. All persons employed in the day-to-day operations of the hotels are employees of our third-party independent management companies engaged by our TRS lessees or their subsidiaries to operate such hotels.
We have implemented COVID-19 protection protocols in order to minimize the spread of COVID-19 in our corporate office. All of our employees have received training on these protocols, and are required to sign an acknowledgement of such protocols.
Our employees are vital to the success of our Company. We are committed to cultivating a culture of connectedness based on our primary values of passion, integrity, and excellence and strive to create an inspiring and inclusive work environment where our employees feel motivated and empowered to produce exceptional results for the Company. We strive to always be guided by our fundamental values and ethical standards to provide our team members with a fair and equitable work environment. We annually distribute and require acknowledgement of an employee handbook to all employees that provides direction on relevant policies related to conducting our business in accordance with our core values.
Our human capital resource objectives include, as applicable, identifying, recruiting, retaining and incentivizing our employees. To attract and retain top talent, we have designed our compensation and benefits programs to provide a balanced and effective reward structure, including:
•Subsidized medical, dental and vision insurance;
•Life and disability insurance;
•Stock grant program;
•401(k) savings and retirement plan with Company Safe Harbor contribution;
•Paid family leave; and
•Employee education programs
We believe that our compensation and employee benefits are competitive and allow us to attract and retain skilled employees throughout our Company. We frequently benchmark our compensation and benefits package against those in both our industry and in similar disciplines.
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We have established social programs with the goal of promoting a culture of unity and collaboration among our various departments through career and personal development opportunities designed to inspire all of those involved. Our career and personal development focus on four main principles: (1) communication and teamwork; (2) networking and mentorship; (3) leadership development; and (4) work-life balance. In addition, we have a formal annual goal setting and performance review process for our employees.
We believe that equal employment opportunity is a fundamental principle and do not tolerate discrimination against any person on the basis of race, color, religious creed, sex, age, gender, gender identity, national origin, ancestry, present or past history of mental disability, learning disability, physical disability, marital status, pregnancy, genetic information, sexual orientation or any other protected characteristic as established by law, in recruiting, hiring, compensation, benefits, termination or any other terms or conditions of employment. Our employees have multiple avenues available through which concerns or inappropriate behavior can be reported, including a confidential hotline. All concerns or reports of inappropriate behavior are promptly investigated with appropriate action taken to address such concerns or behavior.
We are committed to maintaining a work culture that treats all employees fairly and with respect, promotes inclusivity and provides equal opportunities for advancement based on merit. Of the 63 corporate employees employed by us at February 11, 2022, females constituted approximately 46.0% of our workforce, and ethnic and racial minorities constituted approximately 17.5% of our workforce. We intend to continue using a combination of targeted recruiting, talent development and internal promotion strategies to expand the diversity of our employee base across all roles and functions.
Available Information
Our Internet website is located at www.shpreit.com. Copies of the charters of the committees of our board of directors, our code of business conduct and ethics and our corporate governance guidelines are available on our website. We will provide timely disclosures of amendments and waivers to the aforementioned documents, if any, via website posting. All reports that we have filed with the Securities and Exchange Commission (“SEC”) including this Annual Report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, can be obtained free of charge from the SEC’s website at www.sec.gov or through our website. The information contained on, or accessible through the SEC’s website or our website is not incorporated by reference into this report and should not be considered a part of this report.
Item 1A. Risk Factors.
Summary of Risk Factors
Risks Related to Our Business
•Risks related to achieving revenue and net income growth
•Risks related to acquisitions
•Risks of taxable gains as a result of hotel dispositions
•Risks related to our third-party property management companies
•Risks related to hotel management and franchise agreements
•Risks related to outstanding indebtedness including our ability to hedge our interest rate exposure
•Risks related to retaining key personnel
•Risks related to cyber security
•Risks related to the management of our Joint Venture
•Risks related to inflation
Risks Related to the Lodging Industry
•Risks related to the outbreak of the Coronavirus and its variants, or an outbreak of other highly infectious or contagious diseases
•Risks related to adverse changes in economic conditions
•Risks related to competition from other hotels and alternative accommodations
•Risks inherent to the ownership of hotels and the markets in which we operate
•Risks related to hotel development and other capital expenditures
•Risks related to changes in consumer trends and preferences
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Risks Related to the Real Estate Industry and Real Estate-Related Investments
•Risks related to the illiquidity of real estate investments
•Risks related to compliance with the laws, regulations and covenants that apply to our hotels
•Risks related to right-of-use assets on which certain of our hotels are located
•Risks related to adverse changes in income and property tax rates or amendments to tax regimes that increase our state and local tax liabilities
Risks Related to Our Organization and Structure
•Risks related to our fiduciary duties as the general partner of our Operating Partnership
•Risks related to the provisions of our charter
•Risks related to the provisions of Maryland law
•Risks related to the limited rights of our stockholders
•Risks related to actions taken by our board of directors
•Risks related to being a holding company with no direct operations
•Risks related to maintaining an effective system of internal controls
Risks Related to Ownership of Our Securities
•Risks related to the continued listing of our securities on a nationally-recognized exchange
•Risks related to expected distributions
•Risks related to stock price volatility
•Risks related to the issuance of debt or equity securities
Risks Related to Our Status as a REIT
•Risks related to compliance with REIT regulations
•Risks related to our TRS structure, including increased tax liabilities and operating costs
•Risks that transactions with our TRSs are not conducted on arm’s-length terms
•Risks that hotel management companies may not qualify as “eligible independent contractors,” or our hotels may not be considered “qualified lodging facilities”
•Risks that the 100% prohibited transactions tax may limit our ability to dispose of our properties
•Risks related to adverse legislative or regulatory tax changes
•Risks related to our REIT distribution requirements
•Risks that our Operating Partnership could be treated as a publicly traded partnership taxable as a corporation for federal income tax purposes
•Risks that stockholders may be restricted from acquiring or transferring certain amounts of our stock
•Risks that the IRS could determine that certain payments we have received in the nature of liquidated damages may not be ignored for purposes of the gross income tests applicable to REITs
Risks Related to Environmental, Social and Governance Factors
•Risks related to uninsured and underinsured losses
•Risks related to organized labor
•Risks related to our ESG program
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The following risk factors address the material risks concerning our business. If any of the risks discussed in this report were to occur, our business, prospects, financial condition, results of operation and our ability to service our debt and make distributions to our stockholders could be materially and adversely affected and the market price per share of our stock could decline significantly. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Statement About Forward-Looking Statements.” The discussion of the potential effect of the following risk factors on our financial results relates to our consolidated financial position, consolidated results of operations and cash flows.
Risks Related to Our Business
Our business strategy, future results of operations and growth prospects are dependent on achieving revenue and net income growth from anticipated increases in demand for hotel guestrooms and general economic conditions.
Our business strategy includes achieving continued revenue and cash flow growth from anticipated improvement in demand for hotel guestrooms driven by long-term economic growth. We, however, cannot provide any assurances that demand for hotel guestrooms will increase from current levels or continue to exceed the growth of new supply, or the time or extent of any demand growth that we do experience. If demand does not continue to increase as the economy grows, or if there is a slowdown in the general economy resulting in weakening demand, our operating results and growth prospects could be adversely affected. As a result, any slowdown in economic growth or an economic downturn could adversely affect our future results of operations and our growth prospects.
The Pandemic has materially adversely affected and may continue to materially adversely affect our financial position and results of operations. We anticipate that continued improvement in operating trends will be dependent on continued growth in leisure travel and a recovery of business and group travel. More broadly, a return to normalized levels of operations is dependent upon the dissipation of concerns related to COVID-19 and its variants, continued easing of government restrictions and guidance, restoration of consumer confidence, and a recovery in corporate and overall travel-related demand. See additional risk factor discussion below related to the Pandemic.
Our expenses may not decrease if our revenue decreases.
Many of the expenses associated with owning and operating hotels, such as debt service payments, property taxes, insurance, utilities, and certain employee compensation costs are relatively fixed. They do not necessarily decrease directly with a reduction in revenue at the hotels and may be subject to increases that are not related to the performance of our hotels or the increase in the rate of inflation. Also, as of December 31, 2021, four of our hotels are subject to third-party ground leases which generally require periodic increases in rent payments. Our ability to pay these rents could be adversely affected if our hotel revenues do not increase at the same or a greater rate than the increases in rental payments under the ground leases.
Additionally, certain costs, such as wages, benefits and insurance, may exceed the rate of inflation in any given period. In the event of a significant decrease in demand, our hotel managers may not be able to reduce the size of hotel work forces in order to decrease compensation costs. Our managers also may be unable to offset any fixed or increased expenses with higher room rates. Any of our efforts to reduce operating costs also could adversely affect the future growth of our business and the value of our hotel properties.
We may be unable to complete acquisitions that would grow our business.
Our growth strategy includes the disciplined acquisition of hotels as opportunities arise, which may be subject to restrictions related to our debt covenants. Our ability to acquire hotels on satisfactory terms or at all is subject to the following significant risks:
•we may be unable to acquire, or may be forced to acquire at significantly higher prices, desired hotels because of competition from other real estate investors, including other real estate operating companies, REITs and investment funds;
•we may be unable to obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be on satisfactory terms; and
•agreements for the acquisition of hotels are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations and the receipt of franchisor and lender consents, and we may spend significant time and incur significant transaction costs on potential acquisitions that we do not consummate.
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Our inability to complete hotel acquisitions on favorable terms or at all, could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
The sale of certain hotel properties could result in significant tax liabilities unless we are able to defer the taxable gain through like-kind exchanges under Section 1031 of the IRC ("1031 Exchanges").
From time to time, we structure asset sales for possible inclusion in like-kind exchanges within the meaning of Section 1031 of the IRC. The ability to complete a like-kind exchange depends on many factors, including, among others, identifying and acquiring suitable replacement property within limited time periods, and the ownership structure of the properties being sold and acquired. Therefore, we are not always able to sell an asset as part of a like-kind exchange. When successful, a like-kind exchange enables us to defer the taxable gain on the asset sold. Our inability to defer the taxable gain resulting from the sales of certain hotel properties, could adversely affect our financial position, results of operations, and cash flows or the market price of our stock. Moreover, Section 1031 Exchanges now only apply to real property and do not apply to any related personal property transferred with the real property. As a result, any appreciated personal property that is transferred in connection with a Section 1031 Exchange of real property will cause gain to be recognized, and such gain is generally treated as non-qualifying income for the REIT 95% and 75% gross income tests. Any such non-qualifying income could have an adverse effect on our REIT status.
We may fail to successfully integrate acquired hotels or achieve expected operating performance.
Our ability to successfully integrate newly acquired hotels or achieve expected operating performance is subject to the following risks:
•we may not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could result in us paying too much for hotels in new markets or not have the hotels achieve their maximum potential;
•market conditions may result in lower than expected occupancy and guestroom rates;
•we may acquire hotels without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as cleanup of environmental contamination, claims by tenants, vendors or other persons against the former owners of the hotels and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the hotels;
•we may need to spend more than anticipated amounts to make necessary improvements or renovations to our newly acquired hotels;
•we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of hotels, into our existing operations; and
•the negative effect of the Pandemic on our financial performance and the uncertainty related to the recovery of our business to levels in-line with our long-term performance.
The inability of our acquired hotels to meet our operating performance expectations could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
We may assume liabilities in connection with the acquisition of hotel properties, including unknown liabilities.
We may assume existing liabilities in connection with the acquisition of hotel properties, some of which may be unknown or unquantifiable on the acquisition date. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of hotel guests, vendors or other persons dealing with the seller of a particular hotel property, tax liabilities, employment-related issues and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, they could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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We may not be able to cause our hotel management companies to operate any of our hotels in a manner that is satisfactory to us, and termination of our hotel management agreements may be costly and disruptive.
To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to TRS lessees of our TRSs. All of our hotels are operated pursuant to hotel management agreements with independent hotel management companies, each of which must qualify as an “eligible independent contractor” to operate our hotels. As a result, our financial position, results of operations and our ability to service debt and make distributions to stockholders are dependent on the ability of our hotel management companies to operate our hotels successfully. Any failure of our hotel management companies to provide quality services and amenities or maintain a quality brand name and reputation could have a negative effect on their ability to operate our hotels and could have a material adverse effect on our financial position, results of operations and cash flows.
Even if we believe a hotel is being operated inefficiently or in a manner that does not result in satisfactory operating results, we will have limited ability to require the hotel management company to change its method of operation. We generally attempt to resolve issues with our hotel management companies through discussions and negotiations, but otherwise will only be able to seek redress if a hotel management company violates the terms of the applicable hotel management agreement, and then only to the extent of the remedies provided for under the terms of the hotel management agreement. If we replace the hotel management company of any of our hotels, we may be required to pay a substantial termination fee and we may experience significant disruptions at the affected hotel.
Furthermore, we have certain indemnifications from our property managers that generally protect us from financial losses due to the gross negligence or willful misconduct of our property managers. However, the indemnifications may be insufficient or the property manager may not have the financial wherewithal to support their indemnification obligation to us. As such, the indemnification may not provide us with sufficient protection against third-party claims resulting from the gross negligence or willful misconduct of our property managers in the operation of our hotels.
Our hotel managers or their affiliates manage, and in some cases own, have invested in, or provided credit support or operating guarantees to hotels that compete with our hotels, all of which may result in conflicts of interest. As a result, our hotel managers may in the future make decisions regarding competing lodging facilities that are not or would not be in our best interest.
Certain of our hotels are managed by affiliates of the franchisors for such hotels. In these situations, the management agreement and the franchise agreement are typically combined into one document. Thus, the termination of the management agreement due to poor performance or breach of the management agreement by the management company could also terminate our franchise license. Thus, we may have very limited options to remedy poor hotel management performance if we desire to retain the franchise license.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
The management of a large number of hotels in our portfolio is currently concentrated with one hotel management company.
As of December 31, 2021, Aimbridge Hospitality or its affiliates (“Aimbridge”) managed 35 of our 74 hotels. Following the completion of the NCI Transaction, as of February 11, 2022, Aimbridge manages 61 of our 100 hotels. Thus, a substantial portion of our revenues is generated by hotels managed by Aimbridge. This significant concentration of operational risk in one hotel management company makes us more vulnerable economically than if our hotel management was more evenly diversified among several hotel management companies. Any adverse developments in Aimbridge's business, financial strength or ability to operate our hotels efficiently and effectively could have a material adverse effect on our results of operations. We cannot provide assurance that Aimbridge will satisfy its obligations to us or effectively and efficiently operate our hotel properties. The failure or inability of Aimbridge to satisfy its obligations to us or effectively and efficiently operate our hotel properties could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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Our hotels may be clustered geographically increasing business risks based on adverse market conditions.
Our hotels are primarily located in the top 50 MSAs and 96% are located within the top 100 MSAs. In certain regions, we have hotel properties that are concentrated geographically, which may increase business risks based on adverse market conditions. Adverse market developments in a particular region, which themselves may become more frequent and severe due to climate change, could adversely affect hotel demand and rates. Also, adverse market developments caused by increased capacity in a region in which we are located could adversely affect rates or demand for our hotel properties due to increased competition. These conditions could have a material adverse effect on our profitability and cash generation.
Restrictive covenants and other provisions in hotel management and franchise agreements could preclude us from taking actions with respect to the sale, refinancing or rebranding of a hotel that would otherwise be in our best interest.
Our hotel management agreements and franchise agreements generally contain restrictive covenants and other provisions that do not provide us with flexibility to sell, refinance or rebrand a hotel without the consent of the manager or franchisor. For example, the terms of some of these agreements may restrict our ability to sell a hotel unless the purchaser is not a competitor of the hotel management company or franchisor, assumes the related agreement and meets specified other conditions. In addition, our franchise agreements restrict our ability to rebrand particular hotels without the consent of the franchisor, which could result in significant operational disruptions and litigation if we do not obtain the consent. We could be forced to pay consent or termination fees to hotel managers or franchisors under these agreements as a condition to changing management or franchise brands of our hotels, and these fees could deter us from taking actions that would otherwise be in our best interest or could cause us to incur substantial expense.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
We are required to expend funds to maintain franchisor operating standards and we may experience a loss of a franchise license or a decline in the value of a franchise brand.
Our hotels operate under franchise agreements, and the maintenance of franchise licenses for our hotels is subject to our franchisors’ operating standards and other terms and conditions. We expect that franchisors will periodically inspect our hotels to ensure that we, our TRS lessees and our hotel management companies maintain our franchisors’ standards. Failure by us, our TRS lessees or our hotel management companies to maintain these standards or other terms and conditions could result in a franchise license being terminated. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we could also be liable to the franchisor for a termination payment, which varies by franchisor and by hotel. As a condition of our continued holding of a franchise license, a franchisor could also require us to make capital improvements to our hotels, even if we do not believe the improvements are necessary or desirable or would result in an acceptable return on our investment.
The loss of a franchise license could materially and adversely affect the operations or the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. Because our hotels are concentrated with a limited number of franchise brands, a loss of all of the licenses for a particular franchise could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Negative publicity related to one of the franchise brands or the general decline of a brand also may adversely affect the underlying value of our hotels or result in a reduction in business.
We rely on external sources of capital to fund future capital needs, and if we encounter difficulty in obtaining such capital, we may not be able to make future acquisitions necessary to grow our business or meet maturing obligations.
To qualify as a REIT under the IRC, we are required, among other things, to distribute each year to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. Because of this distribution requirement, we may not be able to fund, from cash retained from operations, all of our future capital needs, including capital needed to make investments and to satisfy or refinance maturing obligations.
We expect to continue to rely on external sources of capital, including debt and equity financing, and contributions from joint venture partners related to joint venture activities, to fund future capital needs. Part of our strategy involves the use of additional debt financing to supplement our equity capital which may include our revolving credit and term loan facilities,
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mortgage financing and other unsecured financing. Our ability to effectively implement and accomplish our business strategy will be affected by our ability to obtain and use additional leverage in sufficient amounts and on favorable terms. However, the capital environment is often characterized by extended periods of limited availability of both debt and equity financing, increasing financing costs, stringent credit terms and significant volatility. We may not be able to secure first mortgage financing or increase the availability under, extend the maturity of or refinance our revolving credit and term loan facilities. If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to make the investments needed to expand our business, or to meet our obligations and commitments as they mature. Our access to capital will depend upon a number of factors over which we have little or no control, including general market conditions, the market’s perception of our current and potential future earnings and cash distributions and the market price of the shares of our common stock.
Additionally, certain factors may have an adverse effect on our ability to access certain capital sources, including our financial performance, degree of leverage, the value of our unencumbered hotel properties, borrowing restrictions imposed by lenders, volatility in the equity and debt capital markets and other market conditions. We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable to access the capital markets on a timely basis or on favorable terms.
We have a significant amount of debt, and our organizational documents have no limitation on the amount of additional indebtedness that we may incur in the future.
We have a significant amount of debt. In the future, we may incur additional indebtedness to finance future hotel acquisitions, capital improvements and development activities and other general corporate purposes. In addition, there are no restrictions in our charter or bylaws that limit the amount or percentage of indebtedness that we may incur or restrict the form in which our indebtedness will be incurred (including recourse or non-recourse debt or cross-collateralized debt).
A substantial level of indebtedness could have adverse consequences for our business, results of operations and financial position because it could, among other things:
•require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, thereby reducing our cash flow available to fund working capital, capital expenditures and other general corporate purposes, including to pay dividends on our common stock and our preferred stock as currently contemplated or necessary to satisfy the requirements for qualification as a REIT;
•increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and our industry;
•limit our ability to borrow additional funds or refinance indebtedness on favorable terms or at all to expand our business or ease liquidity constraints; and
•place us at a competitive disadvantage relative to competitors that have less indebtedness.
Generally, our mortgage debt carries maturity dates or call dates such that the loans become due prior to their full amortization. It may be difficult to refinance or extend the maturity of such loans on terms acceptable to us, or at all, and we may not have sufficient borrowing capacity on our 2018 Senior Credit Facility to repay any amounts that we are unable to refinance. Although we believe that we will be able to refinance or extend the maturity of these loans, or will have the capacity to repay them, if necessary, using draws under our 2018 Senior Credit Facility, there can be no assurance that our 2018 Senior Credit Facility will be available to repay such maturing debt, as draws under our 2018 Senior Credit Facility are subject to certain use restrictions and limitations based upon our unencumbered assets and certain financial covenants.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.
The agreements governing our indebtedness contain covenants that place restrictions on us and our subsidiaries. These covenants may restrict, among other activities, our and our subsidiaries’ ability to:
• merge, consolidate or transfer all or substantially all of our or our subsidiaries’ assets;
•sell, transfer, pledge or encumber our stock or the ownership interests of our subsidiaries;
• incur additional debt or place mortgages on our unencumbered hotels;
•make certain investments in hotel or other assets;
•enter into, terminate or modify leases for our hotels and hotel management and franchise agreements;
•make certain expenditures, including capital expenditures;
• pay dividends on or repurchase our capital stock; and
•enter into certain transactions with affiliates.
These covenants could impair our ability to grow our business, take advantage of attractive business opportunities or successfully compete. Our ability to comply with financial and other covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders could exercise their remedies available under the terms of the loan agreements, which could include accelerating outstanding debt to be immediately due and payable. If we were unable to repay or refinance the accelerated debt, the lenders could proceed against any assets pledged to secure that debt, including foreclosing on equity pledges or foreclosing on or requiring the sale of our hotels, and the proceeds from the sale of these assets may not be sufficient to repay such debt in full.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Secured debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in any hotel subject to mortgage debt or equity pledges.
All of our long-term debt existing as of December 31, 2021 is secured by mortgages on our hotel properties and related assets or pledges of the equity in our hotel-ownership and TRS lessee subsidiaries or both. Incurring mortgages, equity pledges and other secured debt obligations increases our risk of property losses because defaults on secured indebtedness may result in foreclosure actions initiated by lenders and ultimately our loss of the hotels securing such loans or of the entities whose equity is pledged to secure such loans, which would include a loss of all of such entity's assets. For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the IRC. We may assume or incur new mortgage or other secured indebtedness on the hotels and entities in our portfolio or hotels and entities that we acquire in the future. Any default under any one of our secured debt obligations may increase the risk of our default on our other indebtedness.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
An increase in interest rates would increase our interest costs on our variable rate debt and could have broader effects on the cost of capital for real estate companies and real estate asset values.
With respect to our existing and future variable-rate debt, an increase in interest rates would increase our interest payments and reduce our cash flow available for other general corporate purposes, including funding of working capital, capital improvements to our hotels, acquisitions of additional hotels, or dividends, among other things. In addition, rising interest rates could limit our ability to refinance existing debt when it matures and increase interest costs on any debt that is refinanced. Further, an increase in interest rates could increase the cost of capital for real estate assets which, in turn, could have a negative effect on real estate asset values generally, and our hotel properties specifically.
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In addition, certain of our variable rate indebtedness uses LIBOR as a benchmark for establishing the rate of interest and may be hedged with LIBOR-based interest rate derivatives. Our lenders no longer make new LIBOR-based loans, and LIBOR tenors relevant to us will no longer be available after June 30, 2023. The transition from LIBOR to SOFR or another benchmark interest rate will result in a different calculation of our variable interest rates that are currently indexed to LIBOR. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness.
See “Part II — Item 7A. — Quantitative and Qualitative Disclosures about Market Risk.”
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
We hedge our interest rate exposure to manage our exposure to interest rate volatility, however, such arrangements may adversely affect us.
We have entered into four interest rate swaps having an aggregate notional amount of $400.0 million at December 31, 2021, to hedge against interest rate increases on certain of our outstanding variable-rate indebtedness. In the future, we may manage our exposure to interest rate volatility by using hedging arrangements, such as interest rate swaps, caps, and collars. Hedging arrangements involve the risk that the arrangement may fail to protect or adversely affect us because, among other things:
•interest rate hedging can be expensive, particularly during periods of volatile interest rates;
•available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
•the duration of the hedge may not match the duration of the related liability;
•the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to collect, sell, or assign our side of the hedging transaction; and
•the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
As a result of any of the foregoing, our hedging transactions, which are intended to limit losses and exposure to interest rate volatility, could adversely affect our financial position, results of operations, and cash flows or the market price of our stock. At December 31, 2021, our interest rate swaps were in a liability position totaling $15.7 million (see "Part II – Item 8. – Financial Statements and Supplementary Data – Note 8 – Derivative Financial Instruments and Hedging").
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our management team to manage our day-to-day operations and strategic business activities. The loss of services from any of the members of our management team, and our inability to find suitable replacements on a timely basis, could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to guests at our hotels, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
We and our third-party managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic customer information. These systems require the collection and retention of large volumes of hotel guests’ personally identifiable information, including credit card numbers. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as personally identifiable information, including information relating to financial accounts. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Cyber criminals may be able to penetrate our network security, or the network security of our third-party managers and franchisors, and misappropriate or compromise our confidential information or that of our hotel guests, create system disruptions or cause the shutdown of our hotels. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our computer systems, or the computer systems operated by our third-party managers and franchisors, or otherwise exploit any security vulnerabilities of our respective networks. In addition, sophisticated hardware and operating system software and applications that we and our third-party managers or franchisors may procure from outside companies may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with our internal operations or the operations at our hotels. The costs to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential business at our hotels. Many of the information systems and networks used to operate our hotel properties are managed by our third-party property managers or franchisors and are not under our control. Any compromise of the function, security and availability of the information networks managed by our third-party property managers or franchisors could result in disruptions to operations, delayed sales or bookings, lost guest reservations, increased costs and lower margins. Any of these events could adversely affect our financial results, stock price and reputation, result in misstated financial reports and subject us to potential litigation and liability.
Portions of our information technology infrastructure or the information technology infrastructure of our third-party managers and franchisors also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We or our third-party managers and franchisors may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability of our third-party managers and franchisors to fulfill reservations for guestrooms and other services offered at our hotels.
Although we work with our third-party property managers and franchisors to protect the security of our information systems, and the data maintained in these systems, there can be no assurance that the security measures we have taken will prevent failures, inadequacies or interruptions in system services, or that system security will not be breached through physical or electronic break-ins, computer viruses or attacks by hackers. The increased level of sophistication and volume of attacks in recent years make it more difficult to predict the effect of a future breach. In addition, we rely on the security systems of our third-party managers and franchisors to protect proprietary and customer information from these threats.
All of our third-party property managers carry cyber insurance policies to protect and offset a portion of potential costs that may be incurred from a security breach. Additionally, we currently have cyber insurance policies to provide supplemental coverage above the coverage carried by our third-party managers. Despite various precautionary steps to protect our hotels from losses resulting from cyber-attacks, any occurrence of a cyber-attack could still result in losses at our properties, which could affect our results of operations. We have not experienced any cyber incidents that we believe to be material or that could have a material adverse effect on the business, financial condition and results of operations of the Company.
Any of these items could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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Joint venture investments could be adversely affected by a lack of sole decision-making authority with respect to such investments, disputes with joint venture partners and the financial condition of joint venture partners.
We have in the past and may in the future enter into strategic joint ventures, including the Joint Venture, with unaffiliated investors to acquire, develop, improve or dispose of hotels, thereby reducing the amount of capital required by us to make investments and diversifying our capital sources for growth. We may not have sole decision-making authority with respect to these investments, and as a result we may not be able to take actions which are in the best interest of our stockholders. Further, disputes between us and our joint venture partners may result in litigation or arbitration which could increase our expenses and prevent our officers and directors from focusing their time and effort on our business and could result in subjecting the hotels owned by the applicable joint venture to additional risks.
If a joint venture partner becomes bankrupt or otherwise defaults on its obligations under a joint venture agreement, we and any other remaining joint venture partners would generally remain liable for the joint venture liabilities. Furthermore, if a joint venture partner becomes bankrupt or otherwise defaults on its obligations under a joint venture agreement, we may be unable to continue the joint venture other than by purchasing such joint venture partner’s interests or the underlying assets at a premium to the market price. If any of the above risks are realized, it could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Inflation may affect consumer confidence which could dampen consumer demand for lodging, and may increase our operating costs, resulting in a material adverse effect on our business, financial condition, results of operations and cash flows.
Our business is generally correlated to certain macroeconomic trends. The U.S. economy has experienced the highest rate of inflation during the year ended December 31, 2021 than in the past 40 years. Increasing inflation could adversely affect consumer confidence, which could reduce consumer purchasing power and demand for lodging. Additionally, an increased rate of inflation will cause our operating and renovation costs to increase. These conditions could have a material adverse effect on our business, financial conditions, results of operations and cash flows.
Risks Related to the Lodging Industry
The outbreak of any highly infectious or contagious diseases, could adversely affect the number of guests visiting our hotel properties and disrupt our operations, resulting in a material adverse effect on our business, financial condition, results of operations and cash flows.
Our business is sensitive to the willingness and ability of our customers to travel. The outbreak of any highly infectious or contagious diseases, such as COVID-19 and its variants, may result in decreases in travel to and from, and economic activity in, areas in which we operate, and may adversely affect the number of guests that visit our hotel properties. The spread of highly infectious or contagious diseases could cause severe disruptions in air and other forms of travel that reduce the number of guests visiting our hotel properties. This could disrupt our operations and we could experience a material adverse effect on our business, financial condition, results of operations and cash flows. The Pandemic has had a material adverse effect on our operations and financial performance. Management cannot predict the extent to which disruptions in travel as a result of infectious disease outbreaks, such as COVID-19 and its variants, will continue to have a material adverse effect on our business, financial condition, results of operations and cash flows.
The Pandemic has disrupted and may further disrupt our business, which could further materially adversely affect our operations, financial position and results of operations.
The Pandemic has materially adversely affected and may continue to materially adversely affect our financial position and results of operations. The extent to which the Pandemic will affect our business, liquidity, financial condition, and results of operations, will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the pandemic; the negative effect on the domestic and global economies; the short and long-term effects on the demand for guestrooms and levels of consumer confidence; the short and long-term effects on business travel or group demand for guestrooms; our ability to successfully mitigate the effects caused by the pandemic; government action, including restrictions on travel; increased unemployment; access to labor; and reductions in business and consumer discretionary spending. It is possible that the Pandemic could also cause further disruptions in our supply-chain which may cause an increase in renovation and operating costs, including the availability of and our access to labor. Supply-chain disruptions could also limit our access to critical operating supplies. Regardless of the extent or duration of the Pandemic, the perceived risk of infection or health risk may adversely affect consumer confidence, which will adversely affect our business, liquidity, financial condition
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and results of operations. We have been and could continue to be adversely affected by government restrictions mandated as a result of the Pandemic. We are unable to predict when restrictive measures may be reduced or eliminated or how quickly our operations will return to pre-Pandemic levels after the restrictive measures are reduced or eliminated.
Economic conditions may adversely affect the lodging industry.
The performance of the lodging industry has historically been directly correlated to the performance of the general economy and, specifically, growth in U.S. gross domestic product (“GDP”). The lodging industry is also sensitive to business and personal discretionary spending levels. Declines in corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the revenue and profitability of our assets and therefore the net operating profits of our investments. Economic weakness could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
We experience a high level of competition from other hotels and alternative accommodations in the markets in which we operate.
The lodging industry is highly competitive. Our hotels compete with other hotels for guests in each market in which our hotels operate based on a number of factors, including location, convenience, brand affiliation, guestroom rates, range of services and guest amenities or accommodations offered and quality of customer service. We also compete with numerous owners and operators of vacation ownership resorts, as well as companies that offer alternative accommodations, such as Airbnb and similar organizations, which operate websites that market available furnished, privately-owned residential properties, including homes and condominiums, that can be rented on a nightly, weekly or monthly basis. Competition will often be specific to the individual markets in which our hotels are located and includes competition from existing and new hotels as well as alternative accommodations. The price transparency of the lodging industry could lead to difficulty in increasing ADR as our competitors may offer guestrooms at lower rates than we can, which could result in our competitors increasing their occupancy at our expense. Competition could adversely affect our occupancy, ADR and RevPAR, and may require us to provide additional amenities or make capital improvements that we otherwise would not have to make.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Our operating results and ability to make distributions to our stockholders may be adversely affected by the risks inherent to the ownership of hotels and the markets in which we operate.
Hotels have different economic characteristics than many other real estate assets. A typical office property owner, for example, has long-term leases with third-party tenants, which provide a relatively stable long-term stream of revenue. By contrast, our hotels are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:
•relatively short-duration occupancies;
•dependence on business and commercial travelers and tourism;
•over-building of hotels in our markets, which could adversely affect occupancy and revenue at the hotels we acquire;
•increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;
•increases in operating costs, including increased real estate and personal property taxes, due to inflation and other factors that may not be offset by increased guestroom rates;
•potential increases in labor costs at our hotels, including as a result of unionization of the labor force, and increasing health care insurance expense;
•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
•adverse effects of international, national, regional and local economic and market conditions; and
•unforeseen events beyond our control, such as instability in the national, European or global economy, terrorist attacks, travel-related health concerns including pandemics and epidemics, travel-related environmental concerns including water contamination and air pollution, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities and travel-related accidents and unusual weather patterns, including natural disasters such as hurricanes.
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These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
We have significant ongoing needs to make capital expenditures at our hotels, which require us to devote funds to these purposes.
Our hotels have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. Our franchisors also require periodic capital improvements as a condition of keeping the franchise licenses. In addition, lenders and hotel management companies may require that we set aside annual amounts for capital improvements to our assets. These capital improvements and replacements may give rise to the following risks:
•possible environmental problems;
•construction cost overruns and delays, including the effect of supply-chain disruptions;
•a possible shortage of available cash to fund capital improvements and replacements and, the related possibility that financing for these capital improvements may not be available to us on affordable terms; and
•uncertainties as to market demand or a loss of market demand after capital improvements and replacements have begun.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Hotel development is subject to timing, budgeting and other risks.
We have in the past and may in the future develop hotels or acquire hotels that are under development as suitable opportunities arise, taking into consideration general economic conditions. Hotel development involves a number of risks, including the following:
•possible environmental problems;
•construction cost overruns and delays;
•receipt of and expense related to zoning, occupancy and other required governmental permits and authorizations;
•development costs incurred for projects that are not pursued to completion;
•acts of God such as earthquakes, hurricanes, floods or fires that could adversely affect a project;
•inability to raise capital; and
•governmental restrictions on the nature or size of a project.
To the extent we develop hotels or acquire hotels under development, we cannot provide assurance that any development project will be completed on time or within budget. Our inability to complete a project on time or within budget could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Customers may increasingly use Internet travel intermediaries.
Our hotel guestrooms can be booked through Internet travel intermediaries, including, but not limited to Expedia.com and Booking.com, and their portfolio of companies (commonly referred to as "online travel agents" or "OTA's"). As these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced guestroom rates or other significant contract concessions from our management companies. Moreover, some of these Internet travel intermediaries are attempting to offer hotel guestrooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their reservations system rather than to the brands under which our hotels are franchised. If the amount of sales made through Internet intermediaries increases significantly, guestroom revenue may flatten or decrease, which could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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Consumer trends and preferences, particularly with respect to younger generations, could change away from select-service hotels.
Consumer trends and preferences continuously change, especially within younger generations. Many new hotel brands have been introduced over recent years to specifically address the perceived unique needs and preferences of younger travelers. As our portfolio is concentrated in select-service hotels, significant consumer shifts in preferences away from select-service hotels could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Risks Related to the Real Estate Industry and Real Estate-Related Investments
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our hotels or to adjust our portfolio in response to changes in economic and other conditions.
Our ability to promptly sell one or more hotels in our portfolio in response to changing economic, financial and investment conditions may be limited. We cannot predict whether we will be able to sell any hotels for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of an asset. The real estate market is affected by many factors that are beyond our control, including:
•adverse changes in international, national, regional and local economic and market conditions;
•changes in interest rates and in the availability, cost and terms of debt financing;
•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
•the ongoing need for capital improvements, particularly in older structures, that may require us to expend funds to correct defects or to make improvements before an asset can be sold;
•changes in operating expenses; and
•civil unrest, acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses, and acts of war or terrorism, environmental uncertainties, or outbreaks of highly infectious diseases or pandemics, such as COVID-19.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
We could incur significant costs related to government regulation and litigation over environmental, health and safety matters.
Our hotels and development land parcels are subject to various federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require us, as the current or former owner of the property, to perform or pay for the cleanup of contamination (including hazardous substances, waste or petroleum products) at or emanating from the property and to pay for natural resource damage arising from contamination. These laws often impose liability without regard to whether the owner or operator knew of, or caused the contamination. We can also be liable to private parties for costs of remediation, personal injury and death and/or property damage resulting from contamination at or emanating from our properties. 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. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.
In addition, our hotels (including our real property, operations and equipment) are subject to various federal, state and local environmental, health and safety regulatory requirements that address a wide variety of issues, including, but not limited to the registration, maintenance and operation of our boilers and storage tanks, air emissions from emergency generators, storm water and wastewater discharges, asbestos, lead-based paint, mold and mildew, and waste management. Some of our hotels also routinely handle or use hazardous or regulated substances and waste in their operations (for example, swimming pool chemicals or biological waste). Our hotels incur costs to comply with these environmental, health and safety laws and regulations and if these regulatory requirements are not met or unforeseen events result in the discharge of dangerous or toxic substances at our hotels, we could be subject to fines and penalties for non-compliance with applicable laws and material liability from third parties for harm to the environment, damage to real property or personal injury and death. We are aware of no past or present
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environmental liability for non-compliance with environmental, health and safety laws and regulations that we believe would have a material adverse effect on our business, assets or results of operations.
Certain hotels we currently own or those we acquire in the future contain, may contain, or may have contained, asbestos-containing material (“ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to undertake special precautions, such as removal or abatement, if ACM would be disturbed during maintenance, renovation, or demolition of a building. These laws regarding ACM may impose fines and penalties on building owners, employers and operators for failure to comply with these requirements or expose us to third-party liability.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Compliance with the laws, regulations and covenants that apply to our hotels, including permit, license and zoning requirements, may adversely affect our ability to make future acquisitions or renovations, result in significant costs or delays and adversely affect our growth strategy.
Our hotels are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements which can restrict the use of our properties and increase the cost of acquisition, development and operation of our hotels. Our hotels are also subject to regulations intended to address the risk of highly infectious diseases, such as COVID-19, which can restrict certain hotel activities and result in increased costs. In addition, federal and state laws and regulations, including laws such as the ADA, impose further restrictions on our operations. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance. As such, some of our hotels currently may be in noncompliance with the ADA. If one or more of the hotels in our portfolio is not in compliance with the ADA or any other regulatory requirements, we may be required to incur additional costs to bring the hotel into compliance and we might incur damages or governmental fines. In addition, existing requirements may change and future requirements may require us to make significant unanticipated expenditures.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
We have fixed obligations related to right-of-use assets on which certain of our hotels are located.
If we default on the terms of any of our right-of-use assets, such as ground leases, air rights or other intangible assets, and are unable to cure the default in a timely manner, we may be liable for damages and could lose our leasehold interest in the applicable property and interest in the hotel on the applicable property. An event of default that is not timely cured could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
The states and localities in which we own material amounts of property or conduct material business operations could raise their income and property tax rates or amend their tax regimes in a manner that increases our state and local tax liabilities.
We and our subsidiaries are subject to income tax and other taxes by states and localities in which we conduct business. Additionally, we are and will continue to be subject to property taxes in states and localities in which we own property, and our TRS lessees are and will continue to be subject to state and local corporate income tax. As these states and localities seek additional sources of revenue, they may, among other steps, raise income and property tax rates or amend their tax regimes to eliminate for state income tax purposes the favorable tax treatment REITs enjoy for federal income tax purposes. We cannot predict when or if any states or localities would make any such changes, or what form those changes would take. If states and localities in which we own material amounts of property or conduct material amounts of business make changes to their tax rates or tax regimes that increase our state and local tax liabilities, such increases could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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Risks Related to Our Organization and Structure
Our fiduciary duties as the general partner of our Operating Partnership could create conflicts of interest.
We, through our wholly-owned subsidiary that serves as the sole general partner of our Operating Partnership, have fiduciary duties to our Operating Partnership’s limited partners, the discharge of which may conflict with the interests of our stockholders. The limited partners of our Operating Partnership have agreed for so long as we own a controlling interest in our Operating Partnership that, in the event of a conflict between the duties owed by our directors to our company and the duties that we owe, in our capacity as the sole general partner of our Operating Partnership, to the limited partners, our directors must give priority to the interests of our stockholders. In addition, those persons holding Common Units have the right to vote on certain amendments to the limited partnership agreement (which require approval by a majority interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights, as well as the right to vote on mergers and consolidations of the general partner or us in certain limited circumstances. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. For example, we cannot adversely affect the limited partners’ rights to receive distributions, as set forth in the limited partnership agreement, without their consent, even though modifying such rights might be in the best interest of our stockholders generally.
Provisions of our charter may limit the ability of a third party to acquire control of us by authorizing our board of directors to issue additional securities.
Our board of directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued shares of common stock or preferred stock, and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may authorize the issuance of additional shares or establish a series of common or preferred stock that may have the effect of delaying or preventing a change in control of our company, including transactions at a premium over the market price of our shares, even if stockholders believe that a change in control is in their interest. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our securities.
Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our board of directors or stockholders to approve proposals to acquire our company or effect a change in control.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to Maryland corporations may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including “business combination” and “control share” provisions.
By resolution of our board of directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Under Maryland law, generally, a director will not be liable if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
•actual receipt of an improper benefit or profit in money, property or services; or
•active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.
Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director and officer, to the maximum
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extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other companies.
Our stockholders have limited voting rights and our charter contains provisions that make removal of our directors difficult.
Our shares of common stock are the only class of our securities that carry full voting rights. Voting rights for holders of our preferred stock exist primarily with respect to the ability to elect two additional directors to our board of directors in the event that six quarterly dividends (whether or not consecutive) payable on the preferred stock are in arrears, and with respect to voting on amendments to our charter or articles supplementary relating to the preferred stock that materially and adversely affect the rights of the holders of preferred stock or create additional classes or series of senior equity securities. Further, our charter provides that a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of holders of shares entitled to cast at least two-thirds of the votes entitled to be cast generally in the election of directors. Our charter also provides that vacancies on our board of directors may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors with their own nominees and may prevent a change in control of our company or effect other management changes that are in the best interests of our stockholders.
The ability of our board of directors to change our major policies without the consent of stockholders may not be in our stockholders’ interest.
Our board of directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to stockholders. Our board of directors may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and those changes could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Our board of directors has the ability to revoke our REIT qualification without stockholder approval.
Our charter provides that our 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. If we cease to be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.
We are a holding company with no direct operations. As a result, we rely on funds received from our Operating Partnership to pay liabilities and dividends, our stockholders’ claims will be structurally subordinated to all liabilities of our Operating Partnership and our stockholders will not have any voting rights with respect to our Operating Partnership activities, including the issuance of additional Common Units or Preferred Units.
We are a holding company and conduct all of our operations through our Operating Partnership. We do not have, apart from our ownership of our Operating Partnership, any independent operations. As a result, we rely on distributions from our Operating Partnership to pay any dividends we might declare on shares of our common or preferred stock. We also rely on distributions from our Operating Partnership to meet any of our obligations, including tax liabilities on taxable income allocated to us from our Operating Partnership (which might make distributions to us that do not equal the tax on such allocated taxable income).
In addition, because we are a holding company, stockholders’ claims will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our Operating Partnership and its subsidiaries, including the Convertible Notes (defined below 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 - Financial Measures and Liquidity). Therefore, in the event of our bankruptcy, liquidation or reorganization, claims of our stockholders will be satisfied only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
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We own approximately 99.9% of the Common Units in the Operating Partnership, all of the issued and outstanding 6.25% Series E Cumulative Redeemable Preferred Units of the Operating Partnership (“Series E Preferred Units”), and all of the issued and outstanding 5.875% Series F Cumulative Redeemable Preferred Units of the Operating Partnership ("Series F Preferred Units"). An unrelated third party owns all of the issued and outstanding Series Z Preferred Units that were issued in January 2022 as part of the NCI Transaction. Any future issuances by our Operating Partnership of additional Common Units or Preferred Units could reduce our ownership percentage in our Operating Partnership. Because our common stockholders do not directly own any Common Units or Preferred Units, they will not have any voting rights with respect to any such issuances or other partnership-level activities of the Operating Partnership.
If we are unable to maintain an effective system of internal controls, we may not be able to produce and report accurate financial information on a timely basis or prevent fraud.
A system of internal controls that is well designed and properly functioning is critical for us to produce and report accurate and reliable financial information and effectively prevent fraud. We must also rely on the quality of the internal control environments of our third-party property managers who provide us with financial information related to our hotel properties. At times, we may identify areas of internal controls that are not properly functioning as designed, that need improvement or that must be developed to ensure that we have an adequate system of internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. We cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and processes. Additionally, as we grow our business, our internal controls will become more complex and we will require significantly more resources to ensure that our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if promptly remedied, could cause our stockholders to lose confidence in our financial results, which could reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency could require management to devote substantial time and incur significant expense to remediate any such conditions. There can be no assurance that management will be able to remediate any material weaknesses in a timely manner.
Risks Related to Ownership of Our Securities
The New York Stock Exchange (“NYSE”) or another nationally-recognized exchange may not continue to list our securities.
Our common stock trades on the NYSE under the symbol “INN,” our 6.25% Series E Cumulative Redeemable Preferred Stock trades on the NYSE under the symbol “INN-PE,” and our 5.875% Series F Cumulative Redeemable Preferred Stock trades on the NYSE under the symbol "INN-PF." In order for our securities to remain listed, we are required to meet the continued listing requirements of the NYSE or, in the alternative, any other nationally-recognized exchange to which we apply. We may be unable to satisfy those listing requirements, and there is no guarantee our securities will remain listed on a nationally-recognized exchange. If our securities are delisted from the NYSE or another nationally-recognized exchange, we could face significant material adverse consequences, including:
•a limited availability of market quotations for our securities;
•a limited ability of our stockholders to make transactions in our securities;
•additional trading restrictions being placed on us;
•reduced liquidity with respect to our securities;
•a determination that our common stock is “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock;
•a limited amount of news and analyst coverage; and
•a decreased ability to issue additional securities or obtain additional financing in the future.
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The cash available for distribution may not be sufficient to make distributions at expected levels and we may use borrowed funds or funds from other sources to make distributions.
Distributions declared by us will be authorized by our board of directors in its sole discretion out of funds legally available for distribution and will depend upon a number of factors, including limitations imposed by our credit facilities, restrictions under applicable law and the capital requirements of our company. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, the requirements for qualification as a REIT, restrictions under applicable law and other factors as our board of directors may deem relevant from time to time. We may be required to fund distributions from working capital, borrowings under our 2018 Senior Credit Facility, proceeds of future stock offerings or a sale of assets to the extent distributions exceed earnings or cash flows from operations. Funding distributions from working capital would restrict our operations. If we borrow from our 2018 Senior Credit Facility to pay distributions, we would be more limited in our ability to execute our strategy of using our 2018 Senior Credit Facility to fund acquisitions or capital expenditures. Finally, selling assets may require us to dispose of assets at a time or in a manner that is not consistent with our disposition strategy. If we borrow to fund distributions, our leverage ratios and future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. We may not be able to make distributions in the future. In addition, some of our distributions may be considered a return of capital for income tax purposes. If we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. If distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock.
The market price of our stock may be volatile due to numerous circumstances beyond our control.
The trading prices of equity securities issued by REITs and other real estate companies historically have been affected by changes in market interest rates. One of the factors that may influence the market price of our common or preferred stock is the annual yield from distributions on our common or preferred stock, respectively, as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our common or preferred stock to demand a higher annual yield, which could reduce the market price of our common or preferred stock, respectively.
Other factors that could affect the market price of our stock include the following:
•actual or anticipated variations in our quarterly results of operations;
•increases in interest rates;
•changes in market valuations of companies in the lodging industry;
•changes in expectations of future financial performance or changes in estimates of securities analysts;
•fluctuations in stock market prices and volumes;
•our issuances of common stock, preferred stock, convertible notes or other securities in the future;
•the inclusion of our common stock and preferred stock in equity indices, which could induce additional purchases;
•the exclusion of our common stock and preferred stock from equity indices;
•the addition or departure of key personnel;
•announcements by us or our competitors of acquisitions, investments or strategic alliances;
•unforeseen events beyond our control, such as instability in the national, European or global economy, terrorist attacks, travel-related health concerns including pandemics and epidemics, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities and travel-related accidents and unusual weather patterns, including natural disasters; and
•changes in the tax laws or regulations to which we are subject.
The market’s perception of our growth potential and our current and potential future cash distributions, whether from operations, sales or refinancings, as well as the real estate market value of the underlying assets, may cause our common and preferred stock to trade at prices that differ from our net asset value per share. If we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common and preferred stock. Our failure to meet the market’s expectations with regard to future earnings and distributions likely would adversely affect the market price of our common and preferred stock.
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The trading market for our stock may rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock or our industry, or the stock of any of our competitors, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we could lose attention in the market, which in turn could cause the price of our stock to decline.
The number of shares of our common stock and preferred stock available for future sale could adversely affect the market price per share of our common stock and preferred stock, respectively, and future sales by us of shares of our common stock, preferred stock, or issuances by our Operating Partnership of Common Units may be dilutive to existing stockholders.
Sales of substantial amounts of shares of our common stock or preferred stock in the public market, or upon exchange of Common Units or exercise of any equity awards, or the perception that such sales might occur, could adversely affect the market price of our common stock and preferred stock. As of February 11, 2022, a total of 15,439,291 Common Units are redeemable and may in the future be converted into shares of our common stock on a one-for-one basis and sold into the public market. Of the outstanding Common Units, 124,797 are currently redeemable, and 15,314,494 will become redeemable on or before July 14, 2022. The exchange of Common Units for common stock, the vesting of any equity-based awards granted to certain directors, executive officers and other employees under the 2011 Equity Incentive Plan which was amended and restated effective May 13, 2021 (as amended and restated, the “Equity Plan”), the issuance of our common stock or Common Units in connection with hotel, portfolio or business acquisitions and other issuances of our common stock or Common Units could have an adverse effect on the market price of the shares of our common stock.
We may execute future offerings of debt securities, which would be senior to our common and preferred stock upon liquidation, and issuances of equity securities (including Common Units).
In the future we may offer debt securities and issue equity securities, including convertible notes, Common Units, preferred stock or other preferred shares that may be senior to our common stock for purposes of dividend distributions or upon liquidation. Upon liquidation, holders of our debt securities and our preferred shares will receive distributions of our available assets prior to the holders of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against us offering senior debt or equity securities. Therefore, additional common share issuances, directly or through convertible or exchangeable securities (including Common Units), warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of our common stock. In addition, new issues of preferred stock could have a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay a dividend or make another distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of future issuances. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interest in us.
Risks Related to Our Status as a REIT
Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation.
The REIT rules and regulations are highly technical and complex. We believe that our organization and method of operation has enabled us to meet the requirements for qualification and taxation as a REIT commencing with our short taxable year ended December 31, 2011. However, we cannot provide assurance that we will remain qualified as a REIT.
Failure to qualify as a REIT could result from a number of situations, including, without limitation:
•if the leases of our hotels to our TRS lessees are not respected as true leases for federal income tax purposes;
•if our Operating Partnership is treated as a publicly traded partnership taxable as a corporation for federal income tax purposes;
•if our existing or future hotel management companies do not qualify as “eligible independent contractors” or if our hotels are not “qualified lodging facilities,” as required by federal income tax law; or
•if we fail to meet any of the required REIT qualifications.
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If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
•we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;
•we could be subject to increased state and local taxes; and
•unless we are entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our stock.
Even if we continue to qualify as a REIT, we may face other tax liabilities.
Even if we continue to qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets including, but not limited to taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our TRSs are subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.
Failure to make required distributions would subject us to federal corporate income tax.
We intend to operate in a manner so as to qualify as a REIT for federal income tax purposes. To qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this 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. In addition, we will be subject to a 4% non-deductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the IRC.
We have significant REIT distribution requirements to maintain our status as a REIT.
To satisfy the requirements for qualification as a REIT and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. 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, limits on our ability or the ability of certain of our subsidiaries to deduct interest expense from borrowings under Section 163(j) of the IRC, the effect of non-deductible capital expenditures, the creation of reserves, required debt service or amortization payments. Our REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions or pay taxable stock dividends. The insufficiency of our cash flows to cover our distribution requirements could have an adverse effect on our ability to raise short- and long-term debt or sell equity securities to fund distributions required to maintain our qualification as a REIT.
The formation of our TRSs increases our overall tax liability.
Our TRSs are subject to federal, state and local income tax on their taxable income, which typically consists of the revenue from the hotels leased by our TRS lessees, net of the operating expenses for such hotels and rent payments to us. In certain circumstances, the ability of our TRSs to deduct interest expense or utilize net operating loss carryforwards for federal income tax purposes may be limited. Accordingly, although our ownership of our TRSs allows us to participate in the operating income from our hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of our TRSs is available for distribution to us.
Our TRS lessee structure subjects us to the risk of increased hotel operating expenses.
Our leases with our TRS lessees require our TRS lessees to pay us rent based in part on revenue from our hotels. Our operating risks include decreases in hotel revenue and increases in hotel operating expenses, including but not limited to increases in wage and benefit costs, repair and maintenance expenses, energy costs and other operating expenses, which would adversely affect our TRSs’ ability to pay us rent due under the leases. Increases in these operating expenses could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
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Our Operating Partnership could be treated as a publicly traded partnership taxable as a corporation for federal income tax purposes.
Although we believe that our Operating Partnership will be treated as a partnership for federal income tax purposes, no assurance can be given that the IRS will not successfully challenge that position. If the IRS were to successfully contend that our Operating Partnership should be treated as a publicly traded partnership taxable as a corporation, we would fail to meet the 75% gross income test and certain of the asset tests applicable to REITs and, unless we qualified for certain statutory relief provisions, we would cease to qualify as a REIT. Also, our Operating Partnership would become subject to federal, state and local income tax, which would reduce significantly the amount of cash available for debt service and for distribution to us.
Our current hotel management companies, or any other hotel management companies that we may engage in the future may not qualify as “eligible independent contractors,” or our hotels may not be considered “qualified lodging facilities.”
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the hotels are managed by an “eligible independent contractor” and certain other requirements are satisfied. We lease all of our hotels to our TRS lessees. All of our hotels are operated pursuant to hotel management agreements with Aimbridge and other hotel management companies, each of which we believe qualifies as an “eligible independent contractor.” Among other requirements, to qualify as an eligible independent contractor, the hotel manager must not own, directly or through its stockholders, more than 35% of our outstanding shares, and no person or group of persons can own more than 35% of our outstanding shares and the shares (or ownership interest) of the hotel manager, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of our shares by our hotel managers and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be exceeded.
In addition, for a hotel management company to qualify as an eligible independent contractor, such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one or more persons not related to the REIT or its TRS at each time that such company enters into a hotel management contract with a TRS or its TRS lessee. As of the date hereof, we believe each of our hotel management companies operates qualified lodging facilities for certain persons who are not related to us or our TRSs. However, no assurances can be provided that our hotel management companies or any other hotel managers that we may engage in the future will in fact comply with this requirement. Failure to comply with this requirement would require us to find other managers for future contracts and if we hired a management company without knowledge of the failure, it could jeopardize our status as a REIT.
Finally, each property with respect to which our TRS lessees pay rent must be a “qualified lodging facility.” A “qualified lodging facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. As of the date hereof, we believe that the properties that are leased to our TRS lessees are qualified lodging facilities. Although we intend to monitor future acquisitions and improvements of properties, REIT provisions of the IRC provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no assurance that these requirements will be satisfied. If any of our properties are not deemed to be a "qualified lodging facility," we may fail to qualify as a REIT.
Our ownership of our TRSs are subject to limitations and our transactions with our TRSs could cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the IRC limits the deductibility of interest paid or accrued by a TRS to its parent REIT to provide assurance that the TRS is subject to an appropriate level of corporate taxation. The IRC 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 our investment in our TRSs for the purpose of ensuring compliance with TRS ownership limitations and 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 20% TRS limitations or to avoid application of the 100% excise tax.
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If any subsidiary REIT failed to qualify as a REIT, we could be subject to higher taxes and could fail to remain qualified as a REIT.
We own and may in the future own interests in entities that have elected to be taxed as a REIT under the U.S. federal income tax laws (each, a “subsidiary REIT”). A subsidiary REIT is subject to the various REIT qualification requirements and other limitations described herein that are applicable to us. If any of our subsidiary REITs were to fail to qualify as a REIT, then (i) such subsidiary REIT would become subject to U.S. federal income tax and (ii) our ownership of shares in such subsidiary REIT would cease to be a qualifying asset for purposes of the asset tests applicable to REITs. If any subsidiary REIT was to fail to qualify as a REIT, it is possible that we would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions. We may make “protective” TRS elections with respect to our subsidiary REITs and may implement other protective arrangements intended to avoid such an outcome if a subsidiary REIT was not to qualify as a REIT, but there can be no assurance that such “protective” election and other arrangements will be effective to avoid the resulting adverse consequences to us. Moreover, even if the “protective” TRS election was to be effective in the event of the failure of our subsidiary REIT to maintain its qualification as a REIT, such subsidiary REIT would be subject to federal income tax and we cannot assure you that we would not fail to satisfy the requirement that not more than 20 percent of the value of our total assets may be represented by the securities of one or more TRSs. In this event, we would fail to qualify as a REIT unless we or such subsidiary REIT could avail ourselves or itself of certain relief provisions.
We may be subject to adverse legislative or regulatory tax changes.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation and we could experience a reduction in the price of our stock. We cannot predict the long-term effect of any recent changes or any future law changes on REITs and their stockholders. In addition, several proposals have been made that would make substantial changes to the federal income tax laws generally. We cannot predict whether any of these proposed changes will become law.
Stockholders may be restricted from acquiring or transferring certain amounts of our stock.
The stock ownership restrictions of the IRC for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.
To qualify as a REIT for each taxable year, five or fewer individuals, as defined in the IRC, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the IRC determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year. To help ensure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT.
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We may pay taxable dividends in our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends.
We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. Under IRS Revenue Procedure 2017-45, as a publicly offered REIT, as long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the stock distribution as a dividend (to the extent applicable rules treat such distribution as being made out of our earnings and profits). If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to pay a taxable dividend of our common stock and cash.
The 100% prohibited transactions tax may limit our ability to dispose of our properties, and we could incur a material tax liability if the IRS successfully asserts that the 100% prohibited transaction tax applies to some or all of our past or future dispositions.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We have selectively disposed of certain of our properties in the past and intend to make additional dispositions in the future. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, some of our past dispositions may not have qualified for that safe harbor and some or all of our future dispositions may not qualify for that safe harbor. We believe that our past dispositions will not be treated as prohibited transactions, and we may avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through our TRSs, which would be subject to federal and state income taxation as a corporation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our past or future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material.
The IRS could determine that certain payments we have received in the nature of liquidated damages may not be ignored for purposes of the gross income tests applicable to REITs.
In connection with our purchases and sales of properties, we have received payments in the nature of liquidated damages. The IRC does not specify the treatment of litigation settlements and liquidated damages for purposes of the gross income tests applicable to REITs. The IRS has issued private letter rulings to other taxpayers ruling that such payments will be ignored for purposes of the gross income tests. A private letter ruling can be relied upon only by the taxpayer to whom it was issued. Based on the IRS’s private letters rulings and the advice of our tax advisors, we believe these payments should be ignored for purposes of the gross income tests. No assurance can be provided that the IRS will not successfully challenge that position. In the event of a successful challenge, we believe that we would be able to maintain our REIT status if we qualified to use a REIT “savings clause” and paid the required penalty.
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Risks Related to Environmental, Social and Governance Factors
We could incur uninsured and underinsured losses.
We intend to maintain comprehensive insurance on our hotels, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by owners of hotels similar to our hotels. Various types of catastrophic losses which can be exacerbated by climate change, such as hurricanes, floods and droughts, or other losses caused by earthquakes, acts of terrorism, data breaches, losses related to business disruption from disputes with franchisors, losses related to business disruption caused by the Pandemic, or losses from customer litigation, may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not be sufficient to cover the operating loss or the full market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the asset. Loan covenants, inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate an asset after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed hotels.
These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Actions by organized labor could have a material adverse effect on our business.
We believe that unions are generally becoming more aggressive about organizing workers at hotels in certain locations and in certain cases are demanding changes to work rules or conditions that are potentially more costly to owners. If the workers employed by the third-party hotel management companies that manage our hotels unionize in the future, potential labor activities at any affected hotel could significantly increase the administrative, labor and legal expenses of the third-party hotel management company that we have engaged to manage that hotel, which likely would adversely affect the operating results of the hotel properties. If hotels in our portfolio are unionized, this could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Our ESG program may be ineffective in meeting stakeholder expectations with respect to goals and objectives related to environmental, climate change, social and governance matters.
We established our Corporate Responsibility program in 2017 to take positive actions to meet our responsibility to be more sustainable, inclusive and equitable and to address increasing investor and societal concern related to climate change, social justice and governance matters. These matters may result in additional legal or regulatory requirements designed to reduce or mitigate the effects of carbon dioxide and other greenhouse gas emissions on the environment or to address increasing pervasive social equity concerns. Increased compliance costs and expenses due to increased legal or regulatory requirements may cause disruptions in, or an increase in the costs associated with the operations of our hotel properties and the Company. The effects of legal or regulatory initiatives to address climate change and social equity could have a long-term adverse impact on our business and results of operations. In addition, from time to time we establish and publicly announce goals and commitments with respect to our sustainability programs and initiatives. If we and our brand and property management partners fail to properly establish, fail to achieve, or fail to adequately report on our progress toward achieving our sustainability goals and commitments, the resulting negative publicity could adversely affect consumer preference for our hotel properties.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
Our Portfolio
A list of our hotel properties as of December 31, 2021 is included in the table below. According to current chain scales as defined by STR, as of December 31, 2021, three of our hotel properties with a total of 400 guestrooms are categorized as Upper-upscale hotels, 61 of our hotel properties with a total of 9,647 guestrooms are categorized as Upscale hotels and 10 of our hotel properties with a total of 1,471 guestrooms are categorized as Upper-midscale hotels. Hotel information for the year ended December 31, 2021 is as follows:
| Franchise/Brand | Location | STR Chain Scale | Number of Guestrooms | |||||||||||||||||
| Marriott | ||||||||||||||||||||
AC Hotel by Marriott(1) | Atlanta, GA | Upscale | 255 | |||||||||||||||||
Courtyard by Marriott(1) | Indianapolis, IN | Upscale | 297 | |||||||||||||||||
Courtyard by Marriott(1) | Fort Lauderdale, FL | Upscale | 261 | |||||||||||||||||
Courtyard by Marriott(1) | Nashville, TN | Upscale | 226 | |||||||||||||||||
Courtyard by Marriott(1) | New Haven, CT | Upscale | 207 | |||||||||||||||||
Courtyard by Marriott(1) | Fort Worth, TX | Upscale | 203 | |||||||||||||||||
Courtyard by Marriott(1) | New Orleans (Convention), LA | Upscale | 202 | |||||||||||||||||
Courtyard by Marriott(4) | Pittsburgh, PA | Upscale | 183 | |||||||||||||||||
Courtyard by Marriott(1) | Charlotte, NC | Upscale | 181 | |||||||||||||||||
Courtyard by Marriott(1) | Atlanta (Decatur), GA | Upscale | 179 | |||||||||||||||||
Courtyard by Marriott(4) | Phoenix (Scottsdale), AZ | Upscale | 153 | |||||||||||||||||
Courtyard by Marriott(1) | New Orleans (Metairie), LA | Upscale | 153 | |||||||||||||||||
Courtyard by Marriott(1) | Atlanta (Downtown), GA | Upscale | 150 | |||||||||||||||||
Courtyard by Marriott(1) | New Orleans (French Quarter), LA | Upscale | 140 | |||||||||||||||||
Courtyard by Marriott(1) | Kansas City, MO | Upscale | 123 | |||||||||||||||||
Courtyard by Marriott(1) | Dallas (Arlington), TX | Upscale | 103 | |||||||||||||||||
Fairfield Inn & Suites by Marriott(2) | Louisville, KY | Upper-midscale | 140 | |||||||||||||||||
Four Points by Sheraton(2) | San Francisco, CA | Upscale | 101 | |||||||||||||||||
Marriott(1) | Boulder, CO | Upper-upscale | 165 | |||||||||||||||||
Residence Inn by Marriott(4) | Portland (Downtown), OR | Upscale | 258 | |||||||||||||||||
Residence Inn by Marriott(1) | Baltimore (Downtown), MD | Upscale | 189 | |||||||||||||||||
Residence Inn by Marriott(1) | Cleveland, OH | Upscale | 175 | |||||||||||||||||
Residence Inn by Marriott(1) | Atlanta, GA | Upscale | 160 | |||||||||||||||||
Residence Inn by Marriott(1) | Boston (Watertown), MA | Upscale | 150 | |||||||||||||||||
Residence Inn by Marriott(1) | Baltimore (Hunt Valley), MD | Upscale | 141 | |||||||||||||||||
Residence Inn by Marriott(2)(3) | Portland (Portland Airport at Cascade Station), OR | Upscale | 124 | |||||||||||||||||
Residence Inn by Marriott(4) | Portland (Hillsboro), OR | Upscale | 122 | |||||||||||||||||
Residence Inn by Marriott(1) | New Orleans (Metairie), LA | Upscale | 120 | |||||||||||||||||
Residence Inn by Marriott(4) | Steamboat Springs, CO | Upscale | 110 | |||||||||||||||||
Residence Inn by Marriott(1) | Branchburg, NJ | Upscale | 101 | |||||||||||||||||
Residence Inn by Marriott(1) | Dallas (Arlington), TX | Upscale | 96 | |||||||||||||||||
SpringHill Suites by Marriott(1) | New Orleans, LA | Upscale | 208 | |||||||||||||||||
SpringHill Suites by Marriott(2) | Louisville, KY | Upscale | 198 | |||||||||||||||||
SpringHill Suites by Marriott(1) | Indianapolis, IN | Upscale | 156 | |||||||||||||||||
SpringHill Suites by Marriott(4) | Phoenix (Scottsdale), AZ | Upscale | 121 | |||||||||||||||||
SpringHill Suites by Marriott(1) | Nashville, TN | Upscale | 78 | |||||||||||||||||
| Total Marriott (36 hotel properties) | 5,929 | |||||||||||||||||||
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| Franchise/Brand | Location | STR Chain Scale | Number of Guestrooms | |||||||||||||||||
| Hilton | ||||||||||||||||||||
DoubleTree(1) | San Francisco, CA | Upscale | 210 | |||||||||||||||||
Embassy Suites(4) | Tucson, AZ | Upper-upscale | 120 | |||||||||||||||||
Hampton Inn & Suites(2) | Minneapolis, MN | Upper-midscale | 211 | |||||||||||||||||
Hampton Inn & Suites(1)(3) | Austin, TX | Upper-midscale | 209 | |||||||||||||||||
Hampton Inn & Suites(4) | Tampa (Ybor City), FL | Upper-midscale | 138 | |||||||||||||||||
Hampton Inn & Suites(1) | Baltimore, MD | Upper-midscale | 116 | |||||||||||||||||
Hampton Inn & Suites(1) | Ventura (Camarillo), CA | Upper-midscale | 116 | |||||||||||||||||
Hampton Inn & Suites(1) | San Diego (Poway), CA | Upper-midscale | 108 | |||||||||||||||||
Hampton Inn & Suites(4) | Silverthorne, CO | Upper-midscale | 88 | |||||||||||||||||
Hilton Garden Inn(1) | Houston (Energy Corridor), TX | Upscale | 190 | |||||||||||||||||
Hilton Garden Inn(1)(3) | Houston (Galleria), TX | Upscale | 182 | |||||||||||||||||
Hilton Garden Inn(4) | San Francisco, CA | Upscale | 169 | |||||||||||||||||
Hilton Garden Inn(4) | San Jose (Milpitas), CA | Upscale | 161 | |||||||||||||||||
Hilton Garden Inn(1) | Boston (Waltham), MA | Upscale | 148 | |||||||||||||||||
Hilton Garden Inn(1) | Greenville, SC | Upscale | 120 | |||||||||||||||||
Hilton Garden Inn(1) | Minneapolis (Eden Prairie), MN | Upscale | 97 | |||||||||||||||||
Homewood Suites(4) | Aliso Viejo (Laguna Beach), CA | Upscale | 129 | |||||||||||||||||
Homewood Suites(2)(4) | Tucson, AZ | Upscale | 122 | |||||||||||||||||
| Total Hilton (18 hotel properties) | 2,634 | |||||||||||||||||||
| Hyatt | ||||||||||||||||||||
Hyatt House(1) | Orlando, FL | Upscale | 168 | |||||||||||||||||
Hyatt House(1) | Miami, FL | Upscale | 163 | |||||||||||||||||
Hyatt House(2) | Denver (Englewood), CO | Upscale | 135 | |||||||||||||||||
Hyatt Place(1) | Minneapolis, MN | Upscale | 213 | |||||||||||||||||
Hyatt Place(1) | Chicago (Downtown), IL | Upscale | 206 | |||||||||||||||||
Hyatt Place(2) | Phoenix (Mesa), AZ | Upscale | 152 | |||||||||||||||||
Hyatt Place(2) | Chicago (Lombard), IL | Upscale | 151 | |||||||||||||||||
Hyatt Place(2) | Orlando (Convention), FL | Upscale | 150 | |||||||||||||||||
Hyatt Place(2) | Orlando (Universal), FL | Upscale | 150 | |||||||||||||||||
Hyatt Place(1)(3) | Portland (Portland Airport/Cascade Station), OR | Upscale | 136 | |||||||||||||||||
Hyatt Place(2) | Denver (Lone Tree), CO | Upscale | 127 | |||||||||||||||||
Hyatt Place(2) | Phoenix (Scottsdale), AZ | Upscale | 126 | |||||||||||||||||
Hyatt Place(2) | Denver (Englewood), CO | Upscale | 126 | |||||||||||||||||
Hyatt Place(2) | Chicago (Hoffman Estates), IL | Upscale | 126 | |||||||||||||||||
Hyatt Place(2) | Baltimore (Owing Mills), MD | Upscale | 123 | |||||||||||||||||
Hyatt Place(1) | Long Island (Garden City), NY | Upscale | 122 | |||||||||||||||||
| Total Hyatt (16 hotel properties) | 2,374 | |||||||||||||||||||
| IHG | ||||||||||||||||||||
Holiday Inn Express & Suites(1) | San Francisco, CA | Upper-midscale | 252 | |||||||||||||||||
Holiday Inn Express & Suites(1) | Minneapolis (Minnetonka), MN | Upper-midscale | 93 | |||||||||||||||||
Hotel Indigo(1) | Asheville, NC | Upper-upscale | 115 | |||||||||||||||||
Staybridge Suites(1) | Denver (Glendale), CO | Upscale | 121 | |||||||||||||||||
| Total IHG (4 hotel properties) | 581 | |||||||||||||||||||
| Total Portfolio (74 hotel properties) | 11,518 | |||||||||||||||||||
(1) These hotel properties are included in our borrowing base for our senior revolving credit and term loan facilities at December 31, 2021.
(2) These hotel properties are subject to mortgage debt at December 31, 2021. For additional information concerning our mortgage debt and lenders, see "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outstanding Indebtedness,” and "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt.”
(3) These hotel properties are subject to ground leases as described below in “Our Hotel Operating Agreements — Ground Leases.”
(4) We own a 51% controlling interest in these hotel properties through our consolidated Joint Venture.
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In January 2022, we completed the NCI transaction which included two parking structures, containing 1,002 spaces, and the 26 hotel properties detailed below:
| Franchise/Brand | Location | STR Chain Scale | Number of Guestrooms | |||||||||||||||||
| Marriott | ||||||||||||||||||||
| AC Hotel by Marriott | Houston, TX | Upscale | 195 | |||||||||||||||||
| AC Hotel by Marriott | Frisco, TX | Upscale | 150 | |||||||||||||||||
| AC Hotel by Marriott | Oklahoma City, OK | Upscale | 142 | |||||||||||||||||
| AC Hotel by Marriott | Dallas, TX | Upscale | 128 | |||||||||||||||||
| Courtyard by Marriott | Grapevine, TX | Upscale | 181 | |||||||||||||||||
| Courtyard by Marriott | Amarillo, TX | Upscale | 107 | |||||||||||||||||
| Residence Inn by Marriott | Frisco, TX | Upscale | 150 | |||||||||||||||||
| Residence Inn by Marriott | Dallas, TX | Upscale | 121 | |||||||||||||||||
| Residence Inn by Marriott | Tyler, TX | Upscale | 119 | |||||||||||||||||
| SpringHill Suites by Marriott | Dallas, TX | Upscale | 148 | |||||||||||||||||
| SpringHill Suites by Marriott | New Orleans, LA | Upscale | 74 | |||||||||||||||||
| TownePlace Suites by Marriott | Grapevine, TX | Upper-midscale | 120 | |||||||||||||||||
| TownePlace Suites by Marriott | New Orleans, LA | Upper-midscale | 105 | |||||||||||||||||
| Total Marriott (13 hotel properties) | 1,740 | |||||||||||||||||||
| Hilton | ||||||||||||||||||||
| Canopy | Frisco, TX | Upper-upscale | 150 | |||||||||||||||||
Embassy Suites | Amarillo, TX | Upper-upscale | 226 | |||||||||||||||||
| Hampton Inn & Suites | Dallas, TX | Upper-midscale | 176 | |||||||||||||||||
| Hilton Garden Inn | Grapevine, TX | Upscale | 152 | |||||||||||||||||
| Hilton Garden Inn | Longview, TX | Upscale | 122 | |||||||||||||||||
| Hilton Garden Inn | Bryan, TX | Upscale | 119 | |||||||||||||||||
| Homewood Suites | Midland, TX | Upscale | 118 | |||||||||||||||||
| Total Hilton (7 hotel properties) | 1,063 | |||||||||||||||||||
| Hyatt | ||||||||||||||||||||
| Hyatt Place | Oklahoma City, OK | Upscale | 134 | |||||||||||||||||
| Hyatt Place | Plano, TX | Upscale | 127 | |||||||||||||||||
| Hyatt Place | Grapevine, TX | Upscale | 125 | |||||||||||||||||
| Hyatt Place | Lubbock, TX | Upscale | 125 | |||||||||||||||||
| Total Hyatt (4 hotel properties) | 511 | |||||||||||||||||||
| IHG | ||||||||||||||||||||
| Holiday Inn Express & Suites | Oklahoma City, OK | Upper-midscale | 124 | |||||||||||||||||
| Holiday Inn Express & Suites | Grapevine, TX | Upper-midscale | 95 | |||||||||||||||||
| Total IHG (2 hotel properties) | 219 | |||||||||||||||||||
| Total Portfolio (26 hotel properties) | 3,533 | |||||||||||||||||||
As part of the same portfolio purchase, we expect also to acquire the 176-guestroom Canopy New Orleans upon completion of its construction, which is expected to occur during the first quarter of 2022.
In addition to our hotel property portfolio, we own two parcels of undeveloped land. One of the parcels is designated as held for sale. The parcels are generally suitable for the development of new hotel properties or the development of restaurants. When unique opportunities to develop hotels utilizing our own resources arise, we may develop our own hotels on occasion. We may also sell these parcels in the future if and when market conditions warrant if we opt not to develop our own hotels on these parcels. To reduce the risk of incurring a prohibited transaction tax on any sales, we may transfer some or all of these parcels to our TRSs.
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Our Hotel Operating Agreements
Ground Leases
At December 31, 2021, four of our hotel properties are subject to ground lease agreements that cover all of the land underlying the respective hotel property.
•The Residence Inn by Marriott located in Portland (Portland Airport at Cascade Station), OR is subject to a ground lease with an initial lease termination date of June 30, 2084 with one option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the time we acquired the leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a formula established in the ground lease.
•The Hyatt Place located in Portland (Portland Airport/Cascade Station), OR is subject to a ground lease with a lease termination date of June 30, 2084 with one option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the time we acquired the leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a formula established in the ground lease.
•The Hampton Inn & Suites located in Austin (Downtown/Convention Center), TX is subject to a ground lease with an initial lease termination date of May 31, 2050. Annual ground rent currently is estimated to be $0.4 million for 2022 including performance based incentive rent. Annual rent is increased every five years with the next adjustment coming in 2025.
•The Hilton Garden Inn located in Houston (Galleria), TX is subject to a ground lease with an initial lease termination date of April 20, 2053 with one option to extend for an additional 10 years. Annual ground rent currently is estimated to be $0.5 million for 2022 including performance based incentive rent. Annual rent is increased every five years with the next adjustment coming in 2023.
These ground leases generally require us to make rental payments and payments for our share of charges, costs, expenses, assessments and liabilities, including real property taxes and utilities. Furthermore, these ground leases generally require us to obtain and maintain insurance covering the subject property.
Franchise Agreements
At December 31, 2021, all of our hotel properties operate under franchise agreements, or similar agreements, that allow for access to reservation systems, with Marriott, Hilton, Hyatt, or IHG. We believe that the public’s perception of the quality associated with a branded hotel is an important feature in its attractiveness to guests. Franchisors provide a variety of benefits to franchisees, including centralized reservation systems, national advertising, marketing programs and publicity designed to increase brand awareness, loyalty programs, training of personnel and maintenance of operational quality at hotels across the brand system.
The terms of our franchise agreements generally range from 10 to 20 years with various extension provisions. Each franchisor receives franchise fees ranging from 2% to 6% of each hotel property’s room revenue, and some agreements require that we pay marketing fees of up to 4% of room revenue. In addition, some of these franchise agreements require that we deposit into a reserve fund for capital expenditures up to 5% of the hotel property’s gross or room revenues depending on the franchisor to insure we comply with the franchisors’ standards and requirements. We also pay fees to our franchisors for services such as reservation and information systems.
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Hotel Management Agreements
At December 31, 2021, all of our hotel properties are operated pursuant to hotel management agreements with professional third-party hotel management companies as follows:
| Management Company | Number of Properties | Number of Guestrooms | ||||||||||||
Affiliates of Aimbridge Hospitality, including Interstate Management Company, LLC (1) | 35 | 5,456 | ||||||||||||
| OTO Development, LLC | 15 | 2,164 | ||||||||||||
| Stonebridge Realty Advisors, Inc. and affiliates | 9 | 1,312 | ||||||||||||
| Affiliates of Marriott, including Courtyard Management Corporation, SpringHill SMC Corporation and Residence Inn by Marriott, Inc. | 6 | 973 | ||||||||||||
| White Lodging Services Corporation | 4 | 791 | ||||||||||||
| Crestline Hotels & Resorts, LLC | 4 | 570 | ||||||||||||
| InterContinental Hotel Group Resources, Inc., an affiliate of IHG | 1 | 252 | ||||||||||||
| Total | 74 | 11,518 | ||||||||||||
(1) As a result of the NCI Transaction, as of February 11, 2022, Aimbridge managed 61 of our 100 hotels.
Our typical hotel management agreement requires us to pay a base fee to our hotel manager calculated as a percentage of total hotel revenues. In addition, our hotel management agreements generally provide that the hotel manager can earn an incentive fee upon achieving EBITDA over certain thresholds. Our TRS lessees may employ other hotel managers in the future. We do not, and will not, have any ownership or economic interest in any of the hotel management companies engaged by our TRS lessees.
Item 3. Legal Proceedings.
We are involved from time to time in litigation arising in the ordinary course of business; however, there are currently no pending legal actions that we believe would have a material adverse effect on our financial position or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the NYSE on February 9, 2011 under the symbol “INN.” Prior to that time, there was no public trading market for our common stock. The last reported sale price for our common stock as reported on the NYSE on February 11, 2022 was $9.85 per share.
Stockholder Information
As of February 11, 2022, our common stock was held of record by 280 holders and there were 106,340,958 shares of our common stock outstanding.
Distribution Information
As a REIT, we must distribute annually to our stockholders an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. Our cash available for distribution may be less than the amount required to meet the distribution requirements for REITs under the IRC and we may be required to borrow money, sell assets or issue capital stock to satisfy the distribution requirements to maintain our REIT status.
The timing and frequency of distributions will be authorized by our Board of Directors, in its sole discretion, and declared by us based upon a variety of factors deemed relevant by our directors, including financial condition, restrictions under applicable law and loan agreements, capital requirements and the REIT requirements of the IRC. Our ability to make distributions will generally depend on receipt of distributions from the Operating Partnership, which depends primarily on lease payments from our TRS lessees with respect to our hotels.
We are generally restricted from declaring or paying any distributions or setting aside any funds for the payment of distributions on our common stock unless full cumulative distributions on our preferred stock have been declared and either paid or set aside for payment in full for all past distribution periods.
As a result of the negative financial effects of the Pandemic on our business, we suspended the declaration and payment of dividends on our common stock and operating partnership units beginning in the first quarter of 2020. In addition, as a result of the modification of our 2018 Senior Credit Facility, 2017 Term Loan and 2018 Term Loan, we are restricted from declaring and paying dividends on our common stock and operating partnership units, other than distributions required to maintain our REIT status, through March 31, 2022 when the financial and other covenant waivers and adjustments under such facilities are no longer effective.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Industry Trends and Outlook
Room-night demand in the U.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 and U.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 ended December 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 the U.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in hotel demand. These conditions resulted in a substantial decline from pre-Pandemic levels in our revenues, profitability and cash flows from operations.
During the twelve months ended December 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.
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Management’s 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 ended December 31, 2021, we have also increased staffing commensurately.
Financial Measures and Liquidity
Beginning in March 2020, we took significant action to enhance our overall liquidity position in response to the Pandemic’s effect on our financial position, which continued into the year ended December 31, 2021.
On January 12, 2021, we sold $287.5 million aggregate principal amount of our 1.50% convertible senior notes due 2026 (the "Convertible Notes").
On May 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.
On August 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. On September 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.
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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.
Hotel Property Portfolio Activity
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.
On May 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.
On July 9, 2021, we acquired a 110-room Residence Inn in Steamboat Springs, CO. through our Joint Venture for $33.0 million. Additionally, on December 21, 2021, through our Joint Venture, we acquired a 120-room Embassy Suites in Tucson, AZ. for $25.5 million.
In January 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.
Hotel Revenues and Operating Expenses
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.
Results of Operations
The comparisons that follow should be reviewed 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 of December 31, 2021 and that we have owned at all times since January 1, 2020.
| 2021 | 2020 | Year-over-Year Dollar Change | Year-over-Year Percentage Change | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Portfolio (74 hotels) | Same-Store Portfolio (72 hotels) | Total Portfolio (72 hotels) | Same-Store Portfolio (72 hotels) | Total Portfolio (74/72 hotels) | Same-Store Portfolio (72 hotels) | Total Portfolio (74/72 hotels) | Same-Store Portfolio (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 “2021 Acquired Hotels”) from the date of acquisition through December 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 2021 Acquired Hotels.
Changes from the year ended December 31, 2021 compared with the year ended December 31, 2020 were due to the following:
•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 ended December 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
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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 ended December 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 ended December 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 other consolidated income and expenses for 2021 compared with 2020 (dollars in thousands).
| For the Years Ended December 31, | ||||||||||||||||||||||||||
| 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 from the year ended December 31, 2021 compared with the year ended December 31, 2020 were due to the following:
•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
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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 ended December 31, 2020 filed with the SEC.
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 (loss) income 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 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 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 ended December 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 in December 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.
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(6) The weighted average diluted common shares/common units used to calculate FFO and AFFO per common share/common unit for the year ended December 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 ended December 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 ended December 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 ended December 31, 2020 filed with the SEC.
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
In September 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
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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 to EBITDAre for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| 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 ended December 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 in December 2021.
During the year ended December 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
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Financial Measures" of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC.
Liquidity and Capital Resources
Due to the Pandemic, we entered into modifications of our 2018 Senior Credit Facility during the years ended December 31, 2020 and 2021, which included a waiver of covenants through March 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 in March 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 in November 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 ended December 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 our January 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 the New York Stock Exchange on January 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.
On May 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.
On July 9, 2021, we acquired the 110-guestroom Residence Inn by Marriott in Steamboat Springs, CO for $33.0 million through our Joint Venture.
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On August 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. On September 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.
On December 21, 2021, we acquired the 120-guestroom Embassy Suites by Hilton in Tucson, 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 of June 2028.
On January 13, 2022, the Operating 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 the Operating Partnership after transaction costs payable by the Operating Partnership are deducted.
In connection with the NCI Transaction, 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.
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 of December 31, 2021, has $2.2 million remaining to be funded, and has a stated interest rate of 9.0% and a maturity date of May 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, at February 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, at February 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 of February 11, 2022, our Joint Venture also owns seven hotel properties that are not collateral for the Joint Venture's senior unsecured credit facility. As of February 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.
At December 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.
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On February 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 through March 31, 2022, and modify certain financial covenant measures through December 31, 2023. Additionally, on April 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. At December 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 at December 31, 2021 is as follows (dollars in thousands):
| Lender | Interest Rate | Amortization Period (Years) | Maturity Date | Number of Encumbered Properties | Principal Amount Outstanding | |||||||||||||||||||||||||||
$600 Million 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.
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In connection with the NCI Transaction completed in January 2022, we entered into the following debt (dollars in thousands):
| Lender | Interest Rate | Amortization Period (Years) | Maturity Date | Number of Encumbered Properties | Principal Amount Outstanding | |||||||||||||||||||||||||||
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 of Tarrant, Texas for the benefit of the lender.
Capital Expenditures
During the year ended December 31, 2021, we funded $20.4 million in capital expenditures. We anticipate spending an estimated $60.0 million to $80.0 million in capital expenditures across our portfolio in 2022. We expect to fund these expenditures through a combination of cash on hand, working capital, borrowings under our $400 Million Revolver, or other potential sources of capital, to the extent available to us.
Cash Flow Analysis
The following table summarizes changes in cash flows for the years ended December 31, 2021 and December 31, 2020 (in thousands):
| 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 December 31, 2021 compared to the year ended December 31, 2020 were due to the following:
•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 ended December 31, 2020 driven by reduced operating activity resulting from the negative effects of the Pandemic. Accrued expenses increased during the year ended December 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 ended December 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 ended December 31, 2020 was primarily the result
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of net borrowings of $78.8 million. The net borrowings were partially offset by dividend payments of approximately $34.2 million and financing fees of $2.8 million.
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 ended December 31, 2020 filed with the SEC.
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.
Critical Accounting Policies and New Accounting Standards
See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 2 – Basis of Presentation and Significant Accounting Policies."
Cybersecurity
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
Management and Board of Directors Transitions
Effective January 1, 2022, we implemented certain changes to the executive management team and our board of directors as described below. See “Part III – Item 10. – Directors, Executive Officers and Corporate Governance.”
Hotel Property Portfolio Transactions
In January, 2022, the Operating 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 the Operating Partnership after transaction costs payable by the Operating 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.
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Equity Transactions
On January 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 the Operating Partnership, a cash dividend of $0.171354 per unit of the Operating Partnership's 5.25% Series Z Cumulative Perpetual Preferred Units that were issued on January 13, 2022 as part of the NCI Transaction.
These dividends are payable February 28, 2022 to stockholders of record on February 14, 2022.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that impact market-sensitive instruments. In pursuing our business strategies, the primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is to 30-day LIBOR. We primarily use derivative financial instruments to manage interest rate risk.
Our interest rate derivatives are based on USD-LIBOR. In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified SOFR as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. The Company has contracts that are indexed to LIBOR and is monitoring and evaluating the related changes and risks. LIBOR will cease to be available after 2021. The transition from LIBOR to SOFR or another benchmark interest rate will result in a different calculation of our variable interest rates that are currently indexed to LIBOR. Our 2018 Senior Credit Facility, 2018 Term Loan, 2017 Term Loan and Joint Venture Credit Facility have each been amended to accommodate the transition from LIBOR to SOFR.
At December 31, 2021, we were party to four interest rate derivative agreements pursuant to which we receive variable-rate payments in exchange for making fixed-rate payments (dollars in thousands):
| Notional Amount | ||||||||||||||||||||
| Contract date | Effective Date | Expiration Date | December 31, 2021 | |||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | $ | 100,000 | ||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | 100,000 | |||||||||||||||||
| June 11, 2018 | September 28, 2018 | September 30, 2024 | 75,000 | |||||||||||||||||
| June 11, 2018 | December 31, 2018 | December 31, 2025 | 125,000 | |||||||||||||||||
| $ | 400,000 | |||||||||||||||||||
At December 31, 2021, after giving effect to our interest rate derivative agreements, $842.9 million, or 77.9%, of our debt had fixed interest rates and $238.5 million, or 22.1%, had variable interest rates. At December 31, 2020, after giving effect to our interest rate derivative agreements, $545.8 million, or 49.5%, of our debt had fixed interest rates and $555.7 million, or 50.5%, had variable interest rates. Taking into consideration our existing interest rate swaps an increase or decrease in interest rates of 1.0% would decrease or increase, respectively, our cash flows by approximately $2.4 million per year.
As our fixed-rate debts mature, they will become subject to interest rate risk. At December 31, 2021, we have scheduled payments of principal on debt in 2022 totaling approximately $4.3 million and maturities of $62.0 million.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this item are included on pages F-1 through F-46 of this Annual Report on Form 10-K and are incorporated by reference herein.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2021. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Management’s Report on the Effectiveness of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and our Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and our expenditures are being made only in accordance with authorizations of our management and our board of directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal 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 the policies or procedures may deteriorate.
In connection with the preparation of this Annual Report on Form 10-K, our management, under the supervision of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) established by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, our management concluded that we had effective internal control over financial reporting as of December 31, 2021.
Ernst & Young LLP, our independent registered public accounting firm, has issued an auditor’s attestation report on our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021. This report is included in "Part II – Item 8. – Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no material changes in our internal control over financial reporting during the three months ended December 31, 2021.
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Item 9B. Other Information.
On February 22, 2022, we filed with the Maryland State Department of Assessments and Taxation articles supplementary to reclassify 5,000,000 authorized but unissued shares of Series D Preferred Stock as shares of our preferred stock without designation. Such articles supplementary are filed with this Annual Report on Form 10-K as Exhibit 3.11.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to our Definitive Proxy Statement on Schedule 14A (the “2022 Proxy Statement”) for the 2022 Annual Meeting of Stockholders.
On December 2, 2021, Daniel P. Hansen, Executive Chairman of the Company, notified the Company of his intent to retire from his position as Executive Chairman effective January 1, 2022. Mr. Hansen will continue to serve as a non-employee director on our board of directors until his term expires at the Company’s 2022 annual meeting of stockholders. There were no disagreements between Mr. Hansen and the Company.
In connection with Mr. Hansen’s retirement, the Company announced the appointment of Jeffrey W. Jones as non-executive Chairman of the Board, effective January 1, 2022.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our 2022 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2021 with respect to our securities that may be issued under existing equity compensation plans:
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |||||||||||||||||
Equity Compensation Plans Approved by Summit Hotel Properties, Inc. Stockholders (1) | — | $ | — | 3,662,423 | ||||||||||||||||
| Total | — | $ | — | 3,662,423 | ||||||||||||||||
(1) Consists of our Equity Plan.
The following table represents common shares retained by the Company for employee taxes due upon vesting of equity awards during the year ended December 31, 2021:
| Period | Total Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| March 1, 2021 - March 31, 2021 | 155,605 | $ | 10.29 | — | — | |||||||||||||||||||||
| December 1, 2021 - December 31, 2021 | 111,863 | $ | 9.76 | — | — | |||||||||||||||||||||
| Total | 267,468 | — | ||||||||||||||||||||||||
The other information required by this item is incorporated by reference to our 2022 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to our 2022 Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item regarding our principal accountant, Ernst & Young LLP (PCAOB ID No. 42), is incorporated by reference to our 2022 Proxy Statement.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements:
Included herein at pages F-1 through F-42
2. Financial Statement Schedules:
The following financial statement schedule is included herein at pages F-43 through F-46.
Schedule III — Real Estate and Accumulated Depreciation
All schedules for which provision is made in Regulation S-X are either not required to be included herein pursuant to the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement.
3. Exhibits:
The following exhibits are filed as part of this report:
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EXHIBITS
| Exhibit Number | Description of Exhibit | ||||||||||
60
61
62
63
101.INS(1) | XBRL Instance Document | ||||||||||
101.SCH(1) | XBRL Taxonomy Extension Schema Document | ||||||||||
101.CAL(1) | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
101.DEF(1) | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
101.LAB(1) | XBRL Taxonomy Extension Labels Linkbase Document | ||||||||||
101.PRE(1) | XBRL Taxonomy Presentation Linkbase Document | ||||||||||
104(1) | The cover page for Summit Hotel Properties, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021 (formatted in Inline XBRL and contained in Exhibit 101). | ||||||||||
* Management contract or compensatory plan or arrangement.
† Filed herewith
(1) Submitted electronically herewith
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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.
SUMMIT HOTEL PROPERTIES, INC. (registrant) | ||||||||
| Date: February 23, 2022 | By: | /s/ Jonathan P. Stanner | ||||||
| Jonathan P. Stanner | ||||||||
| President, Chief Executive Officer and Director | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Jeffrey W. Jones | Chairman of the Board of Directors | February 23, 2022 | ||||||||||||
| Jeffrey W. Jones | ||||||||||||||
| /s/ Jonathan P. Stanner | President, Chief Executive Officer and Director | February 23, 2022 | ||||||||||||
| Jonathan P. Stanner | (principal executive officer) | |||||||||||||
| /s/ William H. Conkling | Executive Vice President and Chief Financial Officer | February 23, 2022 | ||||||||||||
| William H. Conkling | (principal financial officer) | |||||||||||||
| /s/ Paul Ruiz | Senior Vice President and Chief Accounting Officer | February 23, 2022 | ||||||||||||
| Paul Ruiz | (principal accounting officer) | |||||||||||||
| /s/ Amina Belouizdad | Director | February 23, 2022 | ||||||||||||
| Amina Belouizdad | ||||||||||||||
| /s/ Daniel P. Hansen | Director | February 23, 2022 | ||||||||||||
| Daniel P. Hansen | ||||||||||||||
| /s/ Bjorn R. L. Hanson | Director | February 23, 2022 | ||||||||||||
| Bjorn R. L. Hanson | ||||||||||||||
| /s/ Kenneth J. Kay | Director | February 23, 2022 | ||||||||||||
| Kenneth J. Kay | ||||||||||||||
| /s/ Mehulkumar B. Patel | Director | February 23, 2022 | ||||||||||||
| Mehulkumar B. Patel | ||||||||||||||
| /s/ Thomas W. Storey | Director | February 23, 2022 | ||||||||||||
| Thomas W. Storey | ||||||||||||||
| /s/ Hope S. Taitz | Director | February 23, 2022 | ||||||||||||
| Hope S. Taitz | ||||||||||||||
65
SUMMIT HOTEL PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
| Page | |||||
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42) | |||||
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Summit Hotel Properties, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Summit Hotel Properties, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (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 at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 23, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the 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 in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
F-2
| Loss on Impairment of Assets | |||||
| Description of the Matter | Investment in hotel properties, net, including hotel properties under development totaled $2.1 billion at December 31, 2021. As explained in Note 2 of the consolidated financial statements, hotel properties are evaluated by management for impairment when indicators are present. When such indicators are identified, management prepares a recoverability analysis using undiscounted cash flows and if this analysis fails, management recognizes an impairment when the estimated fair value of the property is less than the carrying value. Auditing the Company's impairment assessment for investment in hotel properties is challenging because of the subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment and the related assessment of the severity of such indicators in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the asset. | ||||
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s hotel properties impairment review process. For example, we tested controls over management’s process for identifying and evaluating potential impairment indicators. Our procedures with regards to the Company’s evaluation for indicators of impairment included, among others, testing the completeness and accuracy of management’s impairment analysis and evaluating management’s judgments determining whether indicators of impairment on hotel properties were present. For example, we performed inquiries of management, considered historical operating results and the current market conditions, performed an assessment using both internally and externally available information, and read the minutes of the meetings of the Board of Directors. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Austin, Texas
February 23, 2022
F-3
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Summit Hotel Properties, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Summit Hotel Properties, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Summit Hotel Properties, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 23, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on the Effectiveness of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s 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 generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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 the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Austin, Texas
February 23, 2022
F-4
Summit Hotel Properties, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| ASSETS | ||||||||||||||
| Investment in hotel properties, net | $ | 2,091,973 | $ | 2,105,946 | ||||||||||
| Undeveloped land | 1,500 | 1,500 | ||||||||||||
| Assets held for sale, net | 425 | 425 | ||||||||||||
| Cash and cash equivalents | 64,485 | 20,719 | ||||||||||||
| Restricted cash | 32,459 | 18,177 | ||||||||||||
| Investment in real estate loans, net | — | 23,689 | ||||||||||||
| Right-of-use assets, net | 26,942 | 28,420 | ||||||||||||
| Trade receivables, net | 14,476 | 11,775 | ||||||||||||
| Prepaid expenses and other | 24,496 | 9,763 | ||||||||||||
| Deferred charges, net | 4,347 | 4,429 | ||||||||||||
| Other assets | 3,799 | 8,176 | ||||||||||||
| Total assets | $ | 2,264,902 | $ | 2,233,019 | ||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Liabilities: | ||||||||||||||
| Debt, net of debt issuance costs | $ | 1,069,797 | $ | 1,094,745 | ||||||||||
| Lease liabilities, net | 17,232 | 18,438 | ||||||||||||
| Accounts payable | 4,462 | 2,674 | ||||||||||||
| Accrued expenses and other | 66,219 | 65,099 | ||||||||||||
| Total liabilities | 1,157,710 | 1,180,956 | ||||||||||||
| Commitments and contingencies (Note 11) | ||||||||||||||
| Equity: | ||||||||||||||
Preferred stock, $0.01 par value per share, 100,000,000 shares authorized: | ||||||||||||||
6.45% Series D - 3,000,000 shares issued and outstanding at December 31, 2020 (aggregate liquidation preference of $75,417 at December 31, 2020) | — | 30 | ||||||||||||
6.25% Series E - 6,400,000 shares issued and outstanding at December 31, 2021 and 2020 (aggregate liquidation preference of $160,861 at December 31, 2021 and 2020) | 64 | 64 | ||||||||||||
5.875% Series F - 4,000,000 shares issued and outstanding at December 31, 2021 (aggregate liquidation preference of $100,506 at December 31, 2021) | 40 | — | ||||||||||||
Common stock, $0.01 par value per share, 500,000,000 shares authorized, 106,337,724 and 105,708,787 shares issued and outstanding at December 31, 2021 and 2020, respectively | 1,063 | 1,057 | ||||||||||||
| Additional paid-in capital | 1,225,184 | 1,197,320 | ||||||||||||
| Accumulated other comprehensive loss | (15,639) | (30,716) | ||||||||||||
| Accumulated deficit and distributions in excess of retained earnings | (262,639) | (179,013) | ||||||||||||
| Total stockholders’ equity | 948,073 | 988,742 | ||||||||||||
| Non-controlling interests in operating partnership | 793 | 1,111 | ||||||||||||
| Non-controlling interests in joint venture (Note 9) | 158,326 | 62,210 | ||||||||||||
| Total equity | 1,107,192 | 1,052,063 | ||||||||||||
| Total liabilities and equity | $ | 2,264,902 | $ | 2,233,019 | ||||||||||
See Notes to Consolidated Financial Statements
F-5
Summit Hotel Properties, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Room | $ | 334,338 | $ | 215,506 | $ | 505,342 | ||||||||||||||
| Food and beverage | 7,299 | 6,444 | 23,785 | |||||||||||||||||
| Other | 20,289 | 12,513 | 20,221 | |||||||||||||||||
| Total revenues | 361,926 | 234,463 | 549,348 | |||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Room | 74,781 | 53,784 | 112,244 | |||||||||||||||||
| Food and beverage | 4,856 | 5,416 | 18,552 | |||||||||||||||||
| Other hotel operating expenses | 123,626 | 96,506 | 158,181 | |||||||||||||||||
| Property taxes, insurance and other | 41,350 | 44,691 | 44,220 | |||||||||||||||||
| Management fees | 9,858 | 6,276 | 16,575 | |||||||||||||||||
| Depreciation and amortization | 105,955 | 109,619 | 99,445 | |||||||||||||||||
| Corporate general and administrative | 29,428 | 20,985 | 23,622 | |||||||||||||||||
| Transaction costs | 3,849 | — | — | |||||||||||||||||
| (Reversal of) provision for credit losses | (2,632) | 4,821 | — | |||||||||||||||||
| Loss on impairment and write-off of assets | 4,361 | 1,759 | 2,521 | |||||||||||||||||
| Total expenses | 395,432 | 343,857 | 475,360 | |||||||||||||||||
| Gain (loss) on disposal of assets, net | 240 | (16) | 45,418 | |||||||||||||||||
| Operating (loss) income | (33,266) | (109,410) | 119,406 | |||||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (43,368) | (43,300) | (41,030) | |||||||||||||||||
| Other income, net | 9,523 | 4,841 | 5,472 | |||||||||||||||||
| Total other expense | (33,845) | (38,459) | (35,558) | |||||||||||||||||
| (Loss) income from continuing operations before income taxes | (67,111) | (147,869) | 83,848 | |||||||||||||||||
| Income tax expense (Note 14) | (1,473) | (1,376) | (1,500) | |||||||||||||||||
| Net (loss) income | (68,584) | (149,245) | 82,348 | |||||||||||||||||
| Less: Loss (income) attributable to non-controlling interests: | ||||||||||||||||||||
| Operating Partnership | 115 | 271 | (157) | |||||||||||||||||
| Joint venture | 2,896 | 5,635 | 419 | |||||||||||||||||
| Net (loss) income attributable to Summit Hotel Properties, Inc. | (65,573) | (143,339) | 82,610 | |||||||||||||||||
| Preferred dividends | (15,431) | (14,838) | (14,838) | |||||||||||||||||
| Premium on redemption of preferred stock | (2,710) | — | — | |||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (83,714) | $ | (158,177) | $ | 67,772 | ||||||||||||||
| (Loss) earnings per share: | ||||||||||||||||||||
| Basic and diluted | $ | (0.80) | $ | (1.52) | $ | 0.65 | ||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||
| Basic | 104,471 | 104,141 | 103,887 | |||||||||||||||||
| Diluted | 104,471 | 104,141 | 103,939 | |||||||||||||||||
| Dividends per common share | $ | — | $ | 0.18 | $ | 0.72 | ||||||||||||||
See Notes to Consolidated Financial Statements
F-6
Summit Hotel Properties, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net (loss) income | $ | (68,584) | $ | (149,245) | $ | 82,348 | ||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||
| Changes in fair value of derivative financial instruments | 15,127 | (14,673) | (14,596) | |||||||||||||||||
| Comprehensive (loss) income | (53,457) | (163,918) | 67,752 | |||||||||||||||||
| Comprehensive loss (income) attributable to non-controlling interests: | ||||||||||||||||||||
| Operating Partnership | 94 | 296 | (123) | |||||||||||||||||
| Joint venture | 2,896 | 5,635 | 419 | |||||||||||||||||
| Comprehensive (loss) income attributable to Summit Hotel Properties, Inc. | (50,467) | (157,987) | 68,048 | |||||||||||||||||
| Preferred dividends | (15,431) | (14,838) | (14,838) | |||||||||||||||||
| Premium on redemption of preferred stock | (2,710) | — | — | |||||||||||||||||
| Comprehensive (loss) income attributable to common stockholders | $ | (68,608) | $ | (172,825) | $ | 53,210 | ||||||||||||||
See Notes to Consolidated Financial Statements
F-7
Summit Hotel Properties, Inc.
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2021, 2020 and 2019
(in thousands, except share amounts)
| Shares of Preferred Stock | Preferred Stock | Shares of Common Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Accumulated Deficit and Distributions in Excess of Retained Earnings) | Total Shareholders’ Equity | Non-controlling Interests | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Partnership | Joint Venture | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 9,400,000 | $ | 94 | 104,783,179 | $ | 1,048 | $ | 1,185,310 | $ | (1,441) | $ | 4,838 | $ | 1,189,849 | $ | 2,295 | $ | — | $ | 1,192,144 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Contribution by non-controlling interest in joint venture | — | — | — | — | — | — | — | — | — | 68,712 | 68,712 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock redemption of common units | — | — | 50,244 | 1 | 475 | (31) | — | 445 | (445) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | — | (89,731) | (89,731) | (178) | (490) | (90,399) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 410,432 | 4 | 6,201 | — | — | 6,205 | 14 | — | 6,219 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares acquired for employee withholding requirements | — | — | (74,340) | (1) | (838) | — | — | (839) | — | — | (839) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | (199) | — | — | (199) | — | — | (199) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (14,562) | — | (14,562) | (34) | — | (14,596) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | 82,610 | 82,610 | 157 | (419) | 82,348 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 9,400,000 | 94 | 105,169,515 | 1,052 | 1,190,949 | (16,034) | (2,283) | 1,173,778 | 1,809 | 67,803 | 1,243,390 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contribution by non-controlling interest in joint venture | — | — | — | — | — | — | — | — | — | 622 | 622 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock redemption of common units | — | — | 47,279 | — | 410 | (34) | — | 376 | (376) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | — | (33,391) | (33,391) | (37) | (580) | (34,008) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 557,338 | 6 | 6,459 | — | — | 6,465 | 11 | — | 6,476 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares acquired for employee withholding requirements | — | — | (65,345) | (1) | (468) | — | — | (469) | — | — | (469) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | (30) | — | — | (30) | — | — | (30) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (14,648) | — | (14,648) | (25) | — | (14,673) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (143,339) | (143,339) | (271) | (5,635) | (149,245) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 9,400,000 | 94 | 105,708,787 | 1,057 | 1,197,320 | (30,716) | (179,013) | 988,742 | 1,111 | 62,210 | 1,052,063 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net proceeds from sale of preferred stock | 4,000,000 | 40 | — | — | 96,577 | — | — | 96,617 | — | — | 96,617 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of preferred stock | (3,000,000) | (30) | — | — | (72,260) | — | (2,710) | (75,000) | — | — | (75,000) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contribution by non-controlling interest in joint venture | — | — | — | — | 16,444 | — | — | 16,444 | — | 99,102 | 115,546 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of capped call options | — | — | — | — | (21,131) | — | — | (21,131) | — | — | (21,131) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock redemption of common units | — | — | 36,945 | — | 268 | (29) | — | 239 | (239) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | — | (15,343) | (15,343) | — | (90) | (15,433) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 859,460 | 9 | 10,657 | — | — | 10,666 | 15 | — | 10,681 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares acquired for employee withholding requirements | — | — | (267,468) | (3) | (2,691) | — | — | (2,694) | — | — | (2,694) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 15,106 | — | 15,106 | 21 | — | 15,127 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (65,573) | (65,573) | (115) | (2,896) | (68,584) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 10,400,000 | $ | 104 | 106,337,724 | $ | 1,063 | $ | 1,225,184 | $ | (15,639) | $ | (262,639) | $ | 948,073 | $ | 793 | $ | 158,326 | $ | 1,107,192 | ||||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
F-8
Summit Hotel Properties, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||
| Net (loss) income | $ | (68,584) | $ | (149,245) | $ | 82,348 | ||||||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation and amortization | 105,955 | 109,619 | 99,445 | |||||||||||||||||
| Amortization of deferred financing costs | 4,353 | 2,267 | 1,485 | |||||||||||||||||
| Loss on impairment and write-off of assets | 4,361 | 1,759 | 2,521 | |||||||||||||||||
| (Reversal of) provision for credit losses | (2,632) | 4,821 | — | |||||||||||||||||
| Equity-based compensation | 10,681 | 6,476 | 6,219 | |||||||||||||||||
| Deferred tax asset, net | (19) | 2,056 | (12) | |||||||||||||||||
| (Gain) loss on disposal of assets, net | (240) | 16 | (45,418) | |||||||||||||||||
| Non-cash interest income | (1,042) | (2,848) | (2,477) | |||||||||||||||||
| Debt transaction costs | 220 | 365 | 1,892 | |||||||||||||||||
| Other | 412 | 384 | 469 | |||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Trade receivables, net | (2,701) | 1,286 | 511 | |||||||||||||||||
| Prepaid expenses and other | (1,362) | (997) | 552 | |||||||||||||||||
| Accounts payable | 1,854 | (1,422) | (314) | |||||||||||||||||
| Accrued expenses and other | 14,795 | (16,589) | 1,257 | |||||||||||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 66,051 | (42,052) | 148,478 | |||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||
| Acquisitions of hotel properties and land | (59,036) | — | (282,557) | |||||||||||||||||
| Improvements to hotel properties | (20,356) | (22,632) | (59,268) | |||||||||||||||||
| Proceeds from asset dispositions, net | — | — | 165,724 | |||||||||||||||||
| Contract termination payment for asset disposition | — | (2,200) | — | |||||||||||||||||
| Funding of real estate loans and related expenses | (10,045) | (9,909) | (8,363) | |||||||||||||||||
| Proceeds from principal payments on real estate loans | 25,800 | 4,031 | 2,300 | |||||||||||||||||
| Increase in escrow deposits and deferred acquisition costs | (10,607) | — | — | |||||||||||||||||
| NET CASH USED IN INVESTING ACTIVITIES | (74,244) | (30,710) | (182,164) | |||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||
| Proceeds from issuance of debt | 331,767 | 202,500 | 360,000 | |||||||||||||||||
| Principal payments on debt | (351,932) | (123,748) | (302,287) | |||||||||||||||||
| Proceeds from equity offerings, net of issuance costs | 96,617 | — | — | |||||||||||||||||
| Redemption of preferred stock | (75,000) | — | — | |||||||||||||||||
| Purchases of capped call options | (21,131) | — | — | |||||||||||||||||
| Dividends paid | (15,521) | (34,248) | (90,783) | |||||||||||||||||
| Proceeds from contribution by non-controlling interests in joint venture | 115,546 | 622 | 68,712 | |||||||||||||||||
| Financing fees on debt and other issuance costs | (11,411) | (2,832) | (3,840) | |||||||||||||||||
| Repurchase of common shares for withholding requirements | (2,694) | (469) | (839) | |||||||||||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 66,241 | 41,825 | 30,963 | |||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | 58,048 | (30,937) | (2,723) | |||||||||||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||||||||||||||
| Beginning of period | 38,896 | 69,833 | 72,556 | |||||||||||||||||
| End of period | $ | 96,944 | $ | 38,896 | $ | 69,833 | ||||||||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||||||||||
| Cash payments for interest | $ | 37,509 | $ | 40,927 | $ | 41,648 | ||||||||||||||
| Accrued improvements to hotel properties | $ | (3,399) | $ | (2,142) | $ | (4,856) | ||||||||||||||
| Cash payments for income taxes, net of refunds | $ | (557) | $ | (463) | $ | (229) | ||||||||||||||
| Mortgage debt assumed for acquisitions of hotel properties | $ | 13,267 | $ | — | $ | — | ||||||||||||||
See Notes to Consolidated Financial Statements
F-9
SUMMIT HOTEL PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 –– DESCRIPTION OF BUSINESS
General
Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we”, “us”, and “our” refer to the Company and its consolidated subsidiaries.
We focus on owning premium-branded hotels with efficient operating models primarily in the Upscale segment of the lodging industry. At December 31, 2021, our portfolio consisted of 74 hotels with a total of 11,518 guestrooms located in 23 states. At December 31, 2021, we own 100% of the outstanding equity interests in 61 of 74 of our hotels. We own a 51% controlling interest in 13 hotels through a joint venture.
As of December 31, 2021, 90% of our guestrooms were located in the top 50 metropolitan statistical areas (“MSAs”), 96% were located within the top 100 MSAs and all of our hotel guestrooms operated under premium franchise brands owned by Marriott® International, Inc. (“Marriott”), Hilton® Worldwide (“Hilton”), Hyatt® Hotels Corporation (“Hyatt”) and InterContinental® Hotels Group (“IHG”).
In January 2022, we significantly expanded the size of our portfolio with the acquisition of 26 hotel properties, containing an aggregate of 3,533 guestrooms, and two parking structures, containing 1,002 spaces for an aggregate purchase price of $766.0 million from NewcrestImage (the "NCI Transaction"). As part of the same portfolio purchase, we expect to complete the purchase of one additional hotel, the 176-guestroom Canopy by Hilton New Orleans (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. The portfolio acquisition was completed through our joint venture. For additional information, see our Current Report on Form 8-K filed on January 14, 2022.
As of February 11, 2022, including the NCI Transaction, our portfolio consisted of 100 hotels with a total of 15,051 guestrooms located in 24 states. We own our hotels fee simple, except for five hotels which are subject to ground leases. As of February 11, 2022, we own 100% of the outstanding equity interests in 61 of 100 of our hotels. We own a 51% controlling interest in 39 hotels through a joint venture. As of February 11, 2022, 86% of our guestrooms were located in the top 50 MSAs and 91% were located within the top 100 MSAs.
We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to our taxable REIT subsidiaries (“TRS Lessees”).
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the effects of the pandemic caused by the novel coronavirus, designated as COVID-19 (“COVID-19”) and its variants (the "Pandemic"), for at least the near future. The Pandemic has had a significant negative effect on the U.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in hotel demand. These conditions resulted in a substantial decline in our revenues, profitability and cash flows from operations beginning in March 2020.
During 2021, we experienced improvement in our business driven primarily by leisure travel and to a lesser extent modest improvement in other demand segments. 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 growth in leisure travel and a recovery of business travel. More broadly, a return to normalized levels of operations is dependent upon the 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.
Beginning in March 2020, the Company took several actions to reduce costs and manage liquidity to mitigate the effects of the Pandemic on the Company. We continue to engage in certain steps to reduce costs and manage liquidity while taking appropriate actions to maintain guest safety and satisfaction.
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It is currently extremely difficult to predict the length of time it will take for us to return to pre-pandemic operational and financial performance. Despite the uncertainty, based on the actions we have taken, we believe we have sufficient cash and access to liquidity to meet our obligations for at least the next twelve months and beyond, and to continue to pursue selective growth opportunities.
NOTE 2 –– BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepare our Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenues and expenses in the reporting period. Actual results could differ from those estimates.
The accompanying Consolidated Financial Statements consolidate the accounts of all entities in which we have a controlling financial interest, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.
We evaluate joint venture partnerships to determine if they should be consolidated based on whether the partners exercise joint control. For a joint venture where we exercise primary control and we also own a majority of the equity interests, we consolidate the joint venture partnership. We have consolidated the accounts of our joint venture partnership with GIC (see "Part II – Item 8. – Financial Statements and Supplementary Data – Note 9 – Equity - Non-controlling Interests in Joint Venture") in our accompanying Consolidated Financial Statements.
Segment Disclosure
Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, for activities related to investing in real estate. Our investments in real estate are geographically diversified and the chief operating decision makers evaluate operating performance on an individual asset level. As each of our assets has similar economic characteristics, the assets have been aggregated into one reportable segment.
Investment in Hotel Properties
The Company allocates the purchase price of acquired hotel properties based on the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Intangible assets may include certain value associated with the on-going operations of the hotel business being acquired as part of the hotel property acquisition. Acquired intangible assets that derive their values from real property or an interest in real property, are inseparable from that real property or interest in real property, and do not produce or contribute to the production of income other than consideration for the use or occupancy of space, are recorded as a component of the related real estate asset in our Consolidated Financial Statements. We allocate the purchase price of acquired hotel properties to land, building and furniture, fixtures and equipment based on independent third-party appraisals.
If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the asset or asset group is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.
Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize hotel development costs and the costs of significant additions and improvements that materially upgrade, increase the value or extend the useful life of the property. These costs may include hotel development, refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. If an asset requires a period of time in which to carry out the activities necessary to bring it to the condition necessary for its intended use, the interest cost incurred during that period as a result of expenditures for the asset is capitalized as part of the cost of the asset. We expense the cost of repairs and maintenance as incurred.
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We generally depreciate our hotel properties and related assets using the straight-line method over their estimated useful lives as follows:
| Classification | Estimated Useful Lives | |||||||
| Buildings and improvements | 6 to 40 years | |||||||
| Furniture, fixtures and equipment | 2 to 15 years | |||||||
We periodically re-evaluate asset lives based on current assessments of remaining utilization, which may result in changes in estimated useful lives. Such changes are accounted for prospectively and will increase or decrease future depreciation expense.
When depreciable property and equipment is retired or disposed, the related costs and accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in current operations.
On a limited basis, we provide financing to developers of hotel properties for development projects. We evaluate these arrangements to determine if we participate in residual profits of the hotel property through the loan provisions or other agreements. Where we conclude that these arrangements are more appropriately treated as an investment in the hotel property, we reflect the loan as an Investment in hotel properties, net in our Consolidated Balance Sheets.
We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or undeveloped land may be impaired. Additionally, we perform at least annual reviews to monitor the factors that could trigger an impairment. Factors that we consider for an impairment analysis include, among others: i) significant underperformance relative to historical or anticipated operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, including changes in the estimated holding periods for hotel properties and land parcels, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, v) changes in values of comparable land or hotel sales, and vi) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows of the specific property and determine if the carrying amount of the asset is recoverable. If the carrying amount of the asset is not recoverable, we estimate the fair value of the property based on discounted cash flows or sales price if the property is under contract and an adjustment is made to reduce the carrying value of the property to its estimated fair value.
Intangible Assets
We amortize intangible assets with determined finite useful lives using the straight-line method. We do not amortize intangible assets with indefinite useful lives, but we evaluate these assets for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired.
Assets Held for Sale
We periodically review our hotel properties and our undeveloped land based on established criteria such as age, type of franchise, adverse economic and competitive conditions, and strategic fit to identify properties that we believe are either non-strategic or no longer complement our business. Based on our review, we periodically market properties for sale that no longer meet our investment criteria. We also periodically receive unsolicited external inquiries that result in the sale of hotel properties.
We classify assets as Assets held for sale in the period in which certain criteria are met, including when the sale of the asset within one year is probable. Assets classified as Assets held for sale are no longer depreciated and are carried at the lower of carrying amount or fair value less selling costs.
Variable Interest Entities
We consolidate variable interest entities (each a “VIE”) if we determine that we are the primary beneficiary of the entity. When evaluating the accounting for a VIE, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance relative to other economic interest holders. We determine our rights, if any, to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE by considering the economic interest in the entity, regardless of form, which may include debt, equity, management and servicing fees, or other contractual arrangements. We consider other relevant factors including each entity’s capital structure, contractual rights to earnings or obligations for losses,
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subordination of our interests relative to those of other investors, contingent payments, and other contractual arrangements that may be economically significant.
Additionally, we have in the past and may in the future enter into purchase and sale transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (“IRC”), for the exchange of like-kind property to defer taxable gains on the sale of real estate properties (“1031 Exchange”). For reverse transactions under a 1031 Exchange in which we purchase a new property prior to selling the property to be matched in the like-kind exchange (we refer to a new property being acquired by us in the 1031 Exchange prior to the sale of the related property as a “Parked Asset”), legal title to the Parked Asset is held by a qualified intermediary engaged to execute the 1031 Exchange until the sale transaction and the 1031 Exchange is completed. We retain essentially all of the legal and economic benefits and obligations related to a Parked Asset prior to completion of a 1031 Exchange. As such, a Parked Asset is included in our Consolidated Balance Sheets and Consolidated Statements of Operations as a consolidated VIE until legal title is transferred to us upon completion of the 1031 Exchange.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may exceed the federally insured limit. We maintain our cash with high credit quality financial institutions.
Restricted Cash
Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
Trade Receivables and Credit Policies
We grant credit to qualified customers, generally without collateral, in the form of trade accounts receivable. Trade receivables result from the rental of hotel guestrooms and the sales of food, beverage, and banquet services and are payable under normal trade terms. Trade receivables also include credit and debit card transactions that are in the process of being settled. Trade receivables are stated at the amount billed to the customer and do not accrue interest.
We regularly review the collectability of our trade receivables. A provision for losses is determined on the basis of previous loss experience and current economic conditions. Our allowance for doubtful accounts was $0.2 million at December 31, 2021 and $0.4 million at December 31, 2020. Bad debt expense was $0.4 million, $0.6 million and $0.5 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Leases
In accordance with ASU No. 2016-02, Leases (Topic 842), we record the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet for all leases with a term of greater than 12 months regardless of their classification.
Several of our hotels lease retail or restaurant space to third-party tenants. The majority of our third-party tenants requested rent deferrals to ease the negative financial effects of the Pandemic on their businesses. We have primarily negotiated rent deferrals with these tenants that defer rent for a specified number of months and require repayment of the deferred rent over a negotiated period of time. We have adopted a policy that the deferrals are not a change in the provisions of the lease. As such, we are accounting for the concessions using the rights and obligations of the existing lease and recognizing a short-term lease receivable in the period that the cash payment is owed.
Notes Receivables
We selectively provide mezzanine financing to developers, where we also have the opportunity to acquire the hotel at or after the completion of the development project, and we also may provide seller financing in connection with a hotel disposition under limited circumstances. We classify notes receivable as held-to-maturity and carry the notes receivable at cost less the unamortized discount, if any. On January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost
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basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We routinely evaluate our notes receivable and interest receivables for collectability. Probable losses on notes receivable are recognized in a valuation account that is deducted from the amortized cost basis of the notes receivable and recorded as Provision for credit losses in our Consolidated Statements of Operations. When we place notes receivable on nonaccrual status, we suspend the recognition of interest income until cash interest payments are received. Generally, we return notes receivable to accrual status when all delinquent interest becomes current and collectability of interest is reasonably assured. We do not measure an allowance for credit losses for accrued interest receivable. Accrued interest receivable is written-off to bad debt expense when collection is not reasonably assured.
Deferred Charges, net
Initial franchise fees are capitalized and amortized over the term of the franchise agreement using the straight-line method.
Deferred Financing Fees
Debt issuance costs are presented as a direct deduction from the carrying value of the debt liability on the Consolidated Balance Sheets. Debt issuance costs are amortized as a component of interest expense over the term of the related debt using the straight-line method, which approximates the interest method.
Non-controlling Interests
Non-controlling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Non-controlling interests are reported in the Consolidated Balance Sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income attributable to both the Company and the non-controlling interests are reported in the Consolidated Statements of Operations.
Our Consolidated Financial Statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties and third-party ownership of a 49% interest in a consolidated joint venture.
Revenue Recognition
In accordance with ASU No. 2014-09, revenues from the operation of our hotels are recognized when guestrooms are occupied, services have been rendered or fees have been earned. Revenues are recorded net of any discounts and sales and other taxes collected from customers. Revenues consist of room sales, food and beverage sales, and other hotel revenues and are presented on a disaggregated basis on our Consolidated Statements of Operations.
Room revenue is generated through short-term contracts with customers whereby customers agree to pay a daily rate for the right to occupy hotel rooms for one or more nights. Our performance obligations are fulfilled at the end of each night that the customers have the right to occupy the rooms. Room revenues are recognized daily at the contracted room rate in effect for each room night.
Food and beverage revenues are generated when customers purchase food and beverage at a hotel's restaurant, bar or other facilities. Our performance obligations are fulfilled at the time that food and beverage is purchased and provided to our customers.
Other revenues such as for parking, cancellation fees, meeting space or telephone services are recognized at the point in time or over the time period that the associated good or service is provided. Ancillary services such as parking at certain hotels are provided by third parties and we assess whether we are the principal or agent in such arrangements. If we are determined to be the agent, revenue is recognized based upon the commission paid to us by the third party for the services rendered to our customers. If we are determined to be the principal, revenues are recognized based upon the gross contract price of the service provided. Certain of our hotels have retail spaces, restaurants or other spaces that we lease to third parties. Lease revenues are recognized on a straight line basis over the respective lease terms and are included in Other income on our Consolidated Statement of Operations.
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Cash received prior to customer arrival is recorded as an advance deposit from the customer and is recognized as revenue at the time of occupancy.
Sales and Other Taxes
We have operations in states and municipalities that impose sales or other taxes on certain sales. We collect these taxes from our customers and remit the entire amount to the various governmental units. The taxes collected and remitted are excluded from revenues and are included in accrued expenses until remitted.
Equity-Based Compensation
Our 2011 Equity Incentive Plan, which was amended and restated effective May 13, 2021 (as amended, the “Equity Plan”), provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other stock-based awards. We account for time-based and performance-based stock awards using the grant date fair value of those equity awards. We have elected to account for forfeitures as they occur. Restricted stock awards with performance-based vesting conditions are market-based awards tied to total stockholder return and are valued using a Monte Carlo simulation model in accordance with ASC Topic 718, Compensation — Stock Compensation. We expense the fair value of awards under the Equity Plan ratably over the vesting period and market-based awards are not adjusted for performance. The amount of stock-based compensation expense may be subject to adjustment in future periods due to forfeitures or modification of previously granted awards.
Derivative Financial Instruments and Hedging
All derivative financial instruments are recorded at fair value in our Consolidated Balance Sheets. We use interest rate derivatives to hedge our risks on variable-rate debt. Interest rate derivatives could include interest rate swaps, caps and collars. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction. The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts in Other comprehensive income will be reclassified to Interest expense in our Consolidated Statements of Operations in the period in which the hedged item affects earnings.
Income Taxes
We have elected to be taxed as a REIT under certain provisions of the IRC. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at least 90% of our REIT taxable income, subject to certain adjustments and excluding any capital gain. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRSs at regular corporate income tax rates) to the extent we distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions.
Substantially all of our assets are held by and all of our operations are conducted through our Operating Partnership or our subsidiary REITs. Partnerships are not subject to U.S. federal income taxes as revenues and expenses pass through to and are taxed on the owners. Generally, the states and cities where partnerships operate follow the U.S. federal income tax treatment. However, there are a limited number of local and state jurisdictions that tax the taxable income of the Operating Partnership. Accordingly, we provide for income taxes in these jurisdictions for the Operating Partnership.
Taxable income related to our TRSs are subject to federal, state and local income taxes at applicable tax rates. Our consolidated income tax provision includes the income tax provision related to the operations of the TRSs as well as state and local income taxes related to the Operating Partnership.
Where required, we account for federal and state income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for: i) the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and the respective carrying amounts for tax purposes, and ii) operating losses and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized based on
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consideration of available evidence. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. Due to the effects of the Pandemic, certain of our TRSs have incurred operating losses in the past and are expected to be in a cumulative loss for the foreseeable future. As such, the realizability of our deferred tax assets at December 31, 2021 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all of our deferred tax assets at December 31, 2021.
We perform a review of any uncertain tax positions and if necessary, will record expected future tax consequences of uncertain tax positions in the financial statements.
Fair Value Measurement
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| Level 1: | Observable inputs such as quoted prices in active markets. | |||||||
| Level 2: | Directly or indirectly observable inputs, other than quoted prices in active markets. | |||||||
| Level 3: | Unobservable inputs in which there is little or no market information, which require a reporting entity to develop its own assumptions. | |||||||
Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
| Market approach: | Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. | |||||||
| Cost approach: | Amount required to replace the service capacity of an asset (replacement cost). | |||||||
| Income approach: | Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models). | |||||||
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
We have elected a measurement alternative for equity investments, such as our purchase option, that do not have readily determinable fair values. Under the alternative, our purchase option is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, if any.
Use of Estimates
Our Consolidated Financial Statements are prepared in conformity with GAAP, which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions that affect reported amounts and related disclosures in our Consolidated Financial Statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations, which could materially affect our consolidated financial position and results of operations. In particular, a number of estimates have been and will continue to be affected by the ongoing Pandemic.
New Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). ASU No. 2020-04 contains practical expedients for reference rate reform related activities that affect debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past
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presentation. The Company continues to evaluate the effect of the guidance and may apply other elections as applicable as additional changes in the market occur.
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The objective of ASU No. 2020-06 is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity.
The amendments in ASU No. 2020-06 reduce the number of accounting models for convertible debt instruments and convertible preferred stock. For convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features no longer are separated from the host contract. The amendments in ASU No. 2020-06 remove certain conditions that should be considered in the derivatives scope exception evaluation under Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and clarify the scope and certain requirements under Subtopic 815-40. The amendments also improve the guidance related to the disclosures and earnings-per-share (EPS) for convertible instruments and contracts in an entity’s own equity.
ASU No. 2020-06 is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. We elected to adopt ASU No. 2020-06 effective January 1, 2021 in connection with our Convertible Notes Offering closed on January 12, 2021 as described in "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt." In accordance with the provisions of ASU No. 2020-06, we recorded the convertible notes entirely as a liability and we will use the if-converted method for diluted share calculations.
NOTE 3 –– INVESTMENT IN HOTEL PROPERTIES, NET
Investment in Hotel Properties, net
Investment in hotel properties, net at December 31, 2021 and 2020 include (in thousands):
| 2021 | 2020 | |||||||||||||
| Land | $ | 323,276 | $ | 319,603 | ||||||||||
| Hotel buildings and improvements | 2,127,782 | 2,066,986 | ||||||||||||
| Furniture, fixtures and equipment | 167,245 | 173,351 | ||||||||||||
| Construction in progress | 18,321 | 8,903 | ||||||||||||
| Intangible assets | 10,834 | 11,231 | ||||||||||||
| Real estate development loan | 27,595 | 16,508 | ||||||||||||
| 2,675,053 | 2,596,582 | |||||||||||||
| Less - accumulated depreciation | (583,080) | (490,636) | ||||||||||||
| $ | 2,091,973 | $ | 2,105,946 | |||||||||||
During the year ended December 31, 2019, we provided a mezzanine loan to fund up to $28.9 million for a mixed-use development project that includes a hotel property, retail space, and parking. In December 2021, we modified the loan agreement to increase the Company's funding commitment by $1.0 million. We have classified the mezzanine loan as Investment in hotel properties, net in our Consolidated Balance Sheets at December 31, 2021 and 2020 (See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 4 – Investment in Real Estate Loans" for further information).
Depreciation expense was $105.5 million, $109.2 million, and $99.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
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Intangible assets included in Investment in hotel properties, net in our Consolidated Balance Sheets include the following (in thousands):
| Weighted Average Amortization Period (in Years) | 2021 | 2020 | ||||||||||||||||||
| Intangible assets: | ||||||||||||||||||||
Air rights (1) | n/a | $ | 10,754 | $ | 10,754 | |||||||||||||||
| In-place lease agreements | — | 397 | ||||||||||||||||||
| Other | n/a | 80 | 80 | |||||||||||||||||
| 10,834 | 11,231 | |||||||||||||||||||
| Less - accumulated amortization | — | (310) | ||||||||||||||||||
| Intangible assets, net | $ | 10,834 | $ | 10,921 | ||||||||||||||||
(1) In conjunction with the acquisition of the Courtyard by Marriott - Charlotte, NC, the Company acquired certain air rights related to the hotel property.
Hotel Property Acquisitions
Hotel property acquisitions in 2021 were as follows (in thousands):
| Date Acquired | Franchise/Brand | Location | Guestrooms | Purchase Price | |||||||||||||||||||||||||
| Year Ended December 31, 2021 | |||||||||||||||||||||||||||||
| July 9, 2021 | Residence Inn by Marriott | Steamboat Springs, CO | 110 | $ | 33,000 | ||||||||||||||||||||||||
| December 21, 2021 | Embassy Suites | Tucson, AZ | 120 | 25,500 | |||||||||||||||||||||||||
| 230 | $ | 58,500 | (1) | ||||||||||||||||||||||||||
(1) The net assets acquired in 2021 were purchased for $58.5 million plus the purchase of $0.2 million of net working capital assets, capitalized transaction costs of $0.4 million, and restricted cash reserves of $5.1 million. Additionally, the Company assumed debt of $13.3 million and paid deferred financing costs totaling $0.2 million. We own a 51% controlling interest in these hotel properties through a consolidated joint venture.
The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands):
| 2021 | ||||||||
| Land | $ | 3,673 | ||||||
| Hotel buildings and improvements | 52,226 | |||||||
| Furniture, fixtures and equipment | 2,946 | |||||||
| Restricted cash reserves | 5,118 | |||||||
| Other assets | 405 | |||||||
| Total assets acquired | 64,368 | |||||||
| Debt assumed | (13,267) | |||||||
| Deferred financing costs | 236 | |||||||
| Other liabilities | (214) | |||||||
Net assets acquired (1) | $ | 51,123 | ||||||
(1) The net assets acquired in 2021 were purchased for $58.5 million plus the purchase of $0.2 million of net working capital assets, capitalized transaction costs of $0.4 million, and restricted cash reserves of $5.1 million. Additionally, the Company assumed debt of $13.3 million and paid deferred financing costs totaling $0.2 million.
All hotel purchases completed in 2021 were deemed to be the acquisition of assets. Therefore, acquisition costs related to these transactions have been capitalized as part of the recorded amount of the acquired assets.
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On May 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. The transfer of the six hotel properties was recorded by the joint venture at the Company's net book values as of the transfer date since the transaction was a transfer of assets between entities under common control. The excess of the $84.3 million of cash contributed by GIC over 49% of the net carrying amount of the assets transferred totaling $16.4 million was recorded in Additional paid-in capital. Transfer taxes of $1.8 million and legal costs of $0.3 million related to this transaction were recorded as Transaction costs during 2021. 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.
On November 2, 2021, the Operating Partnership and Summit Hospitality JV, LP, the Company’s joint venture with GIC, Singapore’s sovereign wealth fund (the “Joint Venture”), entered into a Contribution and Purchase Agreement (the “Contribution and Purchase Agreement”) with NewcrestImage Holdings, LLC, a Delaware limited liability company, and NewcrestImage Holdings II, LLC, a Delaware limited liability company (together, “NewcrestImage”), to purchase from NewcrestImage a portfolio of 27 hotel properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces (such hotels and parking structures, the “Portfolio”), and various financial incentives for an aggregate purchase price of $822.0 million.
On January 13, 2022, the Operating Partnership and the Joint Venture completed the acquisition of the Portfolio except for one hotel property, the 176-guestroom Canopy New Orleans, which is still under construction, for an aggregate purchase price of $766.0 million, paid in the form of 15,314,494 Common Units (deemed value of $10.0853 per unit), 1,958,429 preferred units of limited partnership of the Operating Partnership newly designated as 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation Preference $25 Per Unit) (“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 the Operating Partnership after transaction costs payable by the Operating Partnership are deducted. The purchase price paid to complete the NCI Transaction has not been allocated to the net assets acquired as we are in the process of determining the values of the assets and liabilities. The purchase price allocation for the NCI Transaction will be completed during the first quarter of 2022.
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.
Loss on Impairment and Write-off of Assets
During the years ended December 31, 2021 and 2020, the Company recorded charges to Loss on impairment and write-off of assets of $4.4 million and $1.8 million, respectively, on its purchase options related to real estate development loans. See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 10 – Fair Value Measurement" for further information.
NOTE 4 — INVESTMENT IN REAL ESTATE LOANS
Investment in real estate loans, net at December 31, 2021 and 2020 is as follows (in thousands):
| 2021 | 2020 | |||||||||||||
| Real estate loans | $ | 2,350 | $ | 28,671 | ||||||||||
| Allowance for credit losses | (2,350) | (4,982) | ||||||||||||
| $ | — | $ | 23,689 | |||||||||||
The amortized cost bases of our Investment in real estate loans, net approximate their fair value.
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Real Estate Development Loans
We provided mezzanine loans on three real estate development projects to fund up to an aggregate of $29.6 million for the development of three hotel properties. The three real estate development loans closed in the fourth quarter of 2017 and each had a stated interest rate of 8% and an initial term of approximately three years. During the year ended December 31, 2020, one of the real estate development loans with a principal balance of $3.8 million was repaid in full. We had separate options related to each remaining loan (each the "Initial Option") to purchase a 90% interest in each joint venture that owns the respective hotel upon completion of construction. We recorded the aggregate estimated fair value of the Initial Options totaling $4.4 million in Other assets.
The Pandemic adversely affected the operations of the hotels that collateralize the remaining mezzanine loans. As a result, we had an allowance for credit losses of $2.6 million that was recorded in March 2020, to reduce the carrying amounts of the loans to their estimated net realizable values.
We reached an agreement with the borrowers of the mezzanine loans on the two remaining real estate development projects for the full repayment of the loans in the fourth quarter of 2021, which resulted in us foregoing the exercise of the Initial Options. Accordingly, the Company reversed the $2.6 million allowance for credit losses and recorded a Loss on impairment to write-off the carrying amounts of the Initial Options totaling $4.4 million.
During the year ended December 31, 2019, we provided a mezzanine loan to fund up to $28.9 million for a mixed-use development project that includes a hotel property, retail space, and parking. The loan closed in the third quarter of 2019 and has a stated interest rate of 9%. In November 2020, we extended the maturity date of the loan from February 15, 2022 to May 15, 2022. In December 2021, we modified the loan agreement to increase the Company's funding commitment by $1.0 million. The loan is secured by a second mortgage on the development project and a pledge of the equity in the project owner. As of December 31, 2021, we have funded $27.7 million of the loan commitment. Upon completion of construction, we have an option to purchase a 90% interest in the hotel (the “Initial Purchase Option”). We also have the right to purchase the remaining interest in the hotel five years after the completion of construction. We have issued a $10.0 million letter of credit under our senior revolving credit facility to secure the exercise of the Initial Purchase Option. As such, we have classified the loan as Investment in hotel properties, net on our Consolidated Balance Sheets at December 31, 2021. Interest income on the mezzanine loan is recorded in our Consolidated Statement of Operations as it is earned. We have recorded the aggregate estimated fair value of the Initial Purchase Option totaling $2.8 million in Other assets and as a contra-asset to Investment in hotel properties, net. The contra-asset will be amortized as a component of non-cash interest income over the term of the real estate development loan using the straight-line method, which approximates the interest method. During each of the years ended December 31, 2021 and 2020, we amortized $1.1 million as non-cash interest income. Including the amortization of the contra-asset, the current effective interest rate on this loan is approximately 10.6%.
Seller-Financing Loans
On June 29, 2018, we sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling price of $24.9 million. We provided seller financing totaling $3.6 million on the sale of these properties under two, 3.5 year second mortgage notes with a blended interest rate of 7.38% that are further collateralized by a personal guarantee from the principal of the borrower. As of December 31, 2021, there was $2.4 million outstanding on the seller-financing loans. During the year ended December 31, 2020, we recorded an allowance for credit losses in an amount equal to the outstanding balance of the loans.
On June 1, 2021, we amended the terms of the seller-financing loans and extended the maturity date of each loan to December 31, 2022. Interest will accrue at a rate of 9.00% monthly, including 5.00% payable in cash and 4.00% paid-in-kind. Semi-annual principal payments of $0.3 million are scheduled to begin on April 1, 2022. In connection with the modifications, the borrower paid all interest due through May 31, 2021. As a result, the Company recognized interest income related to these loans of $0.4 million during the year ended December 31, 2021.
NOTE 5 — SUPPLEMENTAL BALANCE SHEET INFORMATION
Assets Held for Sale, net
Assets held for sale at December 31, 2021 and 2020 consists of a land parcel in Flagstaff, AZ, which is being marketed for sale.
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Restricted Cash
Restricted cash at December 31, 2021 and 2020 was as follows (in thousands):
| 2021 | 2020 | |||||||||||||
| FF&E reserves | $ | 23,587 | $ | 16,094 | ||||||||||
| Property taxes | 2,132 | 1,469 | ||||||||||||
| Other | 6,740 | 614 | ||||||||||||
| $ | 32,459 | $ | 18,177 | |||||||||||
The Company maintains reserve funds for property taxes, insurance, capital expenditures and replacement or refurbishment of furniture, fixtures and equipment at some of our hotel properties in accordance with management, franchise or mortgage loan agreements. These agreements generally require us to reserve cash ranging from 2% to 5% of the revenues of the individual hotel in restricted cash escrow accounts. Any unused restricted cash balances revert to us upon the termination of the underlying agreement or may be released to us from the restricted cash escrow accounts upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
On April 13, 2020, as a result of the Pandemic, Marriott International, Inc. (“Marriott”) agreed to allow us to use $1.6 million of cash deposited in FF&E Reserve Accounts for seven of our Marriott-branded hotels managed by Marriott affiliates (“Marriott Hotels”) to pay for the working capital needs of the respective hotels. In addition, Marriott released $8.9 million to us from the FF&E Reserve Accounts (“Borrowed Reserve”) of the Marriott Hotels for general corporate purposes. The Borrowed Reserve must be replenished into the respective FF&E Reserve Accounts in ten equal monthly installments beginning on the date that is twelve months prior to the next scheduled renovation date for each of the Marriott Hotels (“Renovation Date”) or in a lump sum payment no later than sixty days prior to each respective Renovation Date. We do not expect to replenish any of the Borrowed Reserve over the next twelve months. During January 2021, we transitioned the management of the Courtyard by Marriott - Fort Worth, TX from Marriott to Aimbridge Hospitality. As such, we are no longer obligated to replenish $0.5 million of the Borrowed Reserve.
Furthermore, Marriott suspended our obligation to fund monthly FF&E reserves for the Marriott Hotels through December 31, 2021.
Prepaid Expenses and Other
Prepaid expenses and other at December 31, 2021 and 2020 included the following (in thousands):
| 2021 | 2020 | |||||||||||||
Deferred acquisition costs(1) | $ | 6,763 | $ | — | ||||||||||
| Prepaid insurance | 6,713 | 4,123 | ||||||||||||
Escrow deposits(1) | 6,000 | — | ||||||||||||
| Other | 3,329 | 3,018 | ||||||||||||
| Prepaid taxes | 1,691 | 2,622 | ||||||||||||
| $ | 24,496 | $ | 9,763 | |||||||||||
(1) Prepaid acquisition costs and escrow deposits primarily relate to the NCI Transaction which was completed in January 2022. See Note 3 - Investment in Hotel Properties, net.
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Deferred Charges
Deferred charges at December 31, 2021 and 2020 were as follows (in thousands):
| 2021 | 2020 | |||||||||||||
| Initial franchise fees | $ | 7,034 | $ | 6,795 | ||||||||||
| Less - accumulated amortization | (2,687) | (2,366) | ||||||||||||
| $ | 4,347 | $ | 4,429 | |||||||||||
Amortization expense for the years ended December 31, 2021, 2020, and 2019 was $0.5 million, $0.5 million and $0.4 million, respectively.
Other Assets
Other assets at December 31, 2021 and 2020 included the following (in thousands):
| 2021 | 2020 | |||||||||||||
| Purchase options related to real estate loans | $ | 2,800 | $ | 7,161 | ||||||||||
| Other | 950 | 1,013 | ||||||||||||
| Deferred tax asset, net | 49 | 2 | ||||||||||||
| $ | 3,799 | $ | 8,176 | |||||||||||
Accrued Expenses and Other
Accrued expenses and other at December 31, 2021 and 2020 included the following (in thousands):
| 2021 | 2020 | |||||||||||||
| Accrued property, sales and income taxes | $ | 17,448 | $ | 17,713 | ||||||||||
| Derivative financial instruments | 15,723 | 30,850 | ||||||||||||
| Accrued salaries and benefits | 13,679 | 6,632 | ||||||||||||
| Other accrued expenses at hotels | 11,880 | 5,922 | ||||||||||||
| Other | 4,794 | 2,793 | ||||||||||||
| Accrued interest | 2,695 | 1,189 | ||||||||||||
| $ | 66,219 | $ | 65,099 | |||||||||||
NOTE 6 –– DEBT
At December 31, 2021, our indebtedness was comprised of borrowings under the 2018 Senior Credit Facility (as defined below), the 2018 Term Loan (as defined below), the 2017 Term Loan (as defined below), the Joint Venture Credit Facility (as defined below), the Convertible Notes (as defined below), and indebtedness secured by first priority mortgage liens on various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 3.35% and 3.43% at December 31, 2021 and 2020, respectively.
$600 Million Senior Credit and Term Loan Facility
On December 6, 2018, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into a $600.0 million senior credit facility (the “2018 Senior Credit Facility”) with Deutsche Bank AG New York Branch, as administrative agent, and a syndicate of lenders. The 2018 Senior Credit Facility is comprised of a $400.0 million revolver (the "$400 Million Revolver") and a $200.0 million term loan facility (the “$200 Million Term Loan”). At December 31, 2021, we had $200.0 million borrowed and $340.0 million available to borrow, after consideration of a $10.0 million letter of credit outstanding, plus an additional $50.0 million available to borrow subject to certain security requirements to be provided to the lender.
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Amendments to $600.0 Million Senior Credit Facility
Between May 2020 and November 2021, the Company entered into several amendments to the Credit Agreement of the 2018 Senior Credit Facility (the “Credit Facility Amendments”).
As of December 31, 2021, the cumulative effect of the Credit Facility Amendments resulted in the waiver or adjustment of certain financial and other covenants under the 2018 Senior Credit Facility, for the periods described below:
•Waivers of key financial and certain other covenants in the 2018 Senior Credit Facility for the period April 1, 2020 through March 31, 2022; and
•Beginning on April 1, 2022, adjustments to certain of the key financial covenants go into effect including:
◦Reduction of the Minimum Consolidated Fixed Charge Coverage Ratio through December 31, 2022;
◦Increase of the Maximum Unsecured Leverage Ratio through December 31, 2022;
◦Reduction of the Minimum Unsecured Interest Coverage Ratio through December 31, 2022; and
◦Increases to the Maximum Leverage Ratio, adjusting down beginning in the second quarter of 2022 and continuing through December 31, 2023.
The interest rate on the 2018 Senior Credit Facility is based on a pricing grid ranging from 140 basis points to 240 basis points plus LIBOR for the $400 Million Revolver and 135 basis points to 235 basis points plus LIBOR for the $200 Million Term Loan, depending upon the Company's leverage ratio. The pricing grid was modified under the Credit Facility Amendments such that during the period ending December 31, 2021, or earlier at the Company's election subject to certain requirements (the "Amendment Period"), the applicable margin was at Pricing Level VII, as defined in the 2018 Senior Credit Facility documents. The applicable margin is currently set at Pricing Level VIII. The interest rate at December 31, 2021 for the $200 Million Term Loan was 2.60%. The 2018 Senior Credit Facility has been amended to accommodate the transition from LIBOR to SOFR, when LIBOR is no longer available.
The Credit Facility Amendments require the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own all properties included in the unencumbered asset pool supporting the facility (“Unencumbered Properties”), as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for their release. The Credit Facility Amendments also permitted the Company to complete the Convertible Notes Offering (defined below), the Series F preferred shares offering (defined below), and close on the NCI Transaction and enter into the equity transactions and indebtedness related thereto.
The Credit Facility Amendments allow the borrower to advance up to $350 million on the $400 Million Revolver. Furthermore, the Credit Facility Amendments permit the borrower to advance an additional $50 million, in addition to the $350 million advance described in the preceding sentence, upon filing mortgages and related security agreements on all Unencumbered Properties, with such security documents to be released upon the borrower meeting certain conditions for their release.
The Credit Facility Amendments revise the restrictions that were previously placed on certain investments in assets, equity offerings and securing of permitted indebtedness to permit the borrower and Company to take such actions, provided that (i) portions of the proceeds from such events will be used to pay down the balance of the 2018 Senior Credit Facility, the 2018 Term Loan (defined below) and 2017 Term Loan (defined below) in accordance with the terms of the Credit Facility Amendments, and (ii) the borrower and Company comply with the other conditions to taking such actions, including maintaining a minimum of $150 million in liquidity.
Certain other typical limitations and conditions for credit facilities of this nature include, among other provisions, limitations on the use of revolving facility advances, certain restrictions on payments of dividends and establishment of a minimum liquidity requirement as indicated above. At December 31, 2021, we were in compliance with all financial covenants.
The 2018 Senior Credit Facility has an accordion feature which will allow the Company to increase the total commitments by an aggregate of up to $300.0 million. The $400 Million Revolver will mature on March 31, 2023 and can be extended to March 31, 2024 at the Company’s option, subject to certain conditions. The $200 Million Term Loan will mature on April 1, 2024.
Term Loans
2018 Term Loan
On February 15, 2018, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a new $225.0 million term loan (the “2018 Term Loan”) with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation, which is
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fully drawn as of December 31, 2021. The 2018 Term Loan has an accordion feature that allows us to increase the total commitments by $150.0 million prior to the maturity date of February 14, 2025, subject to certain conditions.
Amendments to $225.0 Million 2018 Term Loan
Between May 2020 and November 2021, the Company entered into several amendments to the First Amended and Restated Credit Agreement (the “2018 Term Loan Amendments”). As of December 31, 2021, the cumulative effect of the changes to the 2018 Term Loan effected by the 2018 Term Loan Amendments are substantially similar to the changes described above effected by the Credit Facility Amendments.
We pay interest on advances at varying rates, based upon, at our option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a LIBOR margin between 1.35% and 1.95%, depending upon our leverage ratio (as defined in the loan documents). The pricing grid was modified under the 2018 Term Loan Amendments such that during the Amendment Period the applicable margin will be set at Pricing Level VII, as defined in the 2018 Term Loan documents. We are required to pay other fees, including customary arrangement and administrative fees. The interest rate at December 31, 2021 was 2.40%. The 2018 Term Loan has been amended to accommodate the transition from LIBOR to SOFR, when LIBOR is no longer available.
Financial and Other Covenants. We are required to comply with various financial and other covenants to draw and maintain borrowings under the 2018 Term Loan. The 2018 Term Loan Amendments provide that certain financial and other covenants under the 2018 Term Loan were waived or adjusted, which waivers and adjustments are the same as under the amendments to the Company’s 2018 Senior Credit Facility. At December 31, 2021, we were in compliance with all financial covenants.
Unencumbered Assets. The 2018 Term Loan Amendments require the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the Unencumbered Properties, as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for the release of such pledges. During the period that the pledges are in place, as well as at all other times during the term of the facility, borrowings under the 2018 Term Loan are limited by the value of the Unencumbered Assets.
2017 Term Loan
On September 26, 2017, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a $225.0 million term loan (the "2017 Term Loan") with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation, which 2017 Term Loan has a principal balance of $62.0 million as of December 31, 2021 and matures in November 2022.
Amendments to $225.0 Million 2017 Term Loan
Between May 2020 and November 2021, the Company entered into various amendments to the 2017 Term Loan (the “2017 Term Loan Amendments”). As of December 31, 2021, the cumulative effect of the changes to the 2017 Term Loan effected by the 2017 Term Loan Amendments are substantially similar to the changes described above effected by the Credit Facility Amendments.
The 2017 Term Loan has an accordion feature which allows us to increase the total commitments by an aggregate of $175.0 million prior to the maturity date, subject to certain conditions.
We pay interest on advances at varying rates, based upon, at our option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a LIBOR margin between 1.45% and 2.25%, depending upon our leverage ratio (as defined in the loan documents). The pricing grid was modified under the 2017 Term Loan Amendments such that during the Amendment Period the applicable margin will be set at Pricing Level VI, as defined in the 2017 Term Loan documents. We are required to pay other fees, including customary arrangement and administrative fees. The interest rate at December 31, 2021 was 2.70%. The 2017 Term Loan has been amended to accommodate the transition from LIBOR to SOFR, when LIBOR is no longer available.
Financial and Other Covenants. We are required to comply with a series of financial and other covenants to draw and maintain borrowings under the 2017 Term Loan. The 2017 Term Loan Amendments provide that certain financial and other covenants under the 2017 Term Loan were waived or adjusted, which waivers and adjustments are the same as under the amendments to the Company’s 2018 Senior Credit Facility. At December 31, 2021, we were in compliance with all financial covenants.
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Unencumbered Assets. The 2017 Term Loan Amendments require the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the Unencumbered Properties, as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for the release of such pledges. During the period that the pledges are in place, as well as at all other times during the term of the facility, borrowings under the 2017 Term Loan are limited by the value of the Unencumbered Assets.
Joint Venture Credit Facility
On October 8, 2019, Summit JV MR 1, LLC (the “Borrower”), as borrower, Summit Hospitality JV, LP (the “Parent”), as parent, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $200.0 million credit facility (the “Joint Venture Credit Facility”) with Bank of America, N.A., as administrative agent and sole initial lender, and BofA Securities, Inc., as sole lead arranger and sole bookrunner.
The Parent is the joint venture including the Operating Partnership and an affiliate of GIC, Singapore's sovereign wealth fund. See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 9 – Equity – Non-controlling Interests in Joint Venture" for additional information. The Operating Partnership and the Company are not borrowers or guarantors of the Joint Venture Credit Facility. The Joint Venture Credit Facility is guaranteed by all of the Borrower’s existing and future subsidiaries, subject to certain exceptions.
The Joint Venture Credit Facility is comprised of a $125.0 million revolving credit facility (the “$125 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). The Joint Venture Credit Facility has an accordion feature which will allow us to increase the total commitments by up to $300.0 million, for aggregate potential borrowings of up to $500.0 million on the Joint Venture Credit Facility. At December 31, 2021, we had $68.5 million outstanding under the $125 Million Revolver.
The $125 Million Revolver and the $75 Million Term Loan will mature on October 8, 2023. Each individually can be extended for a single consecutive twelve-month period at the Joint Venture's option, subject to certain conditions.
Interest is paid on revolving credit advances at varying rates based upon, at the Borrower's option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a margin of 2.15% for Eurodollar rate advances, or (ii) LIBOR, plus a margin of 2.15% for LIBOR floating rate advances. The applicable margin for a term loan advance shall be five basis points less than revolving credit advances referenced above. The Joint Venture Credit Facility has been amended to accommodate the transition from LIBOR to SOFR, when LIBOR is no longer available.
Amendments to $200 Million Joint Venture Credit Facility
On June 18, 2020, the Company entered into a Second Amendment to Credit Agreement concerning the Joint Venture Credit Facility (“Second Amendment”). The Second Amendment resulted in waivers or adjustments to certain financial and other covenants under the Joint Venture Credit Facility, which are described in the Current Report on Form 8-K filed by the Company on June 24, 2020.
On April 29, 2021, the Borrower, Parent, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a Third Amendment to Credit Agreement concerning the Joint Venture Credit Facility (the “Joint Venture Amendment”).
Certain financial and other covenants under the Joint Venture Credit Facility were waived or adjusted as follows:
•Increase of the Maximum Leverage Ratio through the initial maturity date;
•Reduction of the Fixed Charge Coverage Ratio through March 31, 2022;
•Increase of the Borrowing Base Leverage through the initial maturity date;
•Reduction of the Minimum Borrowing Base Interest Coverage Ratio through March 1, 2022
During the covenant waiver period, the applicable margin was increased to 230 basis points and 225 basis points for the revolver and term loan, respectively. After the covenant waiver period, the applicable margin will revert to 215 basis points and 210 basis points for the revolver and term loan, respectively.
The Joint Venture Amendment confirmed that the Borrower may make additional advances on the $125 Million Revolver, subject to certain financial covenant limitations. Certain other typical limitations and conditions for credit facilities of this nature were included among the provisions in the amendments including, among other provisions, limitations on the use of revolving facility advances, certain restrictions on payments of dividends and limitations on investments and dispositions. We
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retain the right to opt out of certain additional restrictive covenants upon demonstration of compliance with the required financial covenants.
Borrowing Base Assets. The Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that hold the borrowing base assets financed by the facility, and the related TRS entities, which wholly own the TRS Lessees that lease each of the borrowing base assets. There are currently five hotel properties deemed borrowing base assets and an additional seven hotel properties that may be contributed to the borrowing base to increase borrowing availability.
Convertible Senior Notes and Capped Call Options
On January 7, 2021, we entered into an underwriting agreement (the “Convertible Notes Offering”) pursuant to which the Company agreed to offer and sell $287.5 million aggregate principal amount of the Company’s 1.50% convertible senior notes due 2026 (the “Convertible Notes"). The net proceeds from the Convertible Notes Offering, 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 Capped Call Transactions (as defined below). 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 Convertible Notes bear interest at a rate of 1.50% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. The Convertible Notes will mature on February 15, 2026 (the “Maturity Date”), unless earlier converted, purchased or redeemed. Prior to August 15, 2025, the Convertible Notes will be convertible only upon certain circumstances and during certain periods. On or after August 15, 2025 and through the Maturity Date, holders may convert any of their Convertible Notes into shares of the Company’s common stock, at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day prior to the Maturity Date, unless the Convertible Notes have been previously purchased or redeemed by the Company. During the year ended December 31, 2021, the Company recorded coupon interest expense of $4.2 million and amortized $1.5 million of the $7.6 million debt issuance costs related to the Convertible Notes Offering. Including the amortization of the debt issuance costs, the current effective interest rate on the Convertible Notes is approximately 2.00%.
The initial conversion rate of the Convertible Notes is 83.4028 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of $11.99 per share of common stock based on the 37.5% base conversion premium on the reference price of $8.72 per share. In no event will the conversion rate exceed 114.6788 shares of common stock per $1,000 principal amount of Convertible Notes, subject to certain adjustments defined in the Convertible Notes Offering.
On January 7, 2021, in connection with the pricing of the Convertible Notes, and on January 8, 2021, in connection with the full exercise by the Underwriters of their option to purchase additional Convertible Notes pursuant to the Underwriting Agreement, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters or their respective affiliates and another financial institution (the “Capped Call Counterparties”). The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of shares of common stock underlying the Convertible Notes. The Capped Call Transactions are generally expected to reduce the potential dilution to holders of shares of common stock upon conversion of the Convertible Notes or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction or offset subject to a cap.
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 the New York Stock Exchange on January 7, 2021, and is subject to certain adjustments under the terms of the Capped Call transactions.
MetaBank Loan
On June 30, 2017, we entered into a $47.6 million secured, non-recourse loan with MetaBank (the "MetaBank Loan"). The MetaBank Loan provides for a fixed interest rate of 4.44%, amortizes over 25 years, and matures on July 1, 2027. The MetaBank Loan is secured by three hotels and is subject to a prepayment penalty if prepaid prior to April 1, 2027. On May 1, 2020, MetaBank waived the annual minimum debt service covenant ratio for the year ended December 31, 2020, and on April 12, 2021, MetaBank extended such waiver for the year ended December 31, 2021. The next covenant measurement date is December 31, 2022.
F-26
At December 31, 2021 and 2020 our outstanding indebtedness was as follows (in thousands):
| Lender | Reference | Interest Rate | Amortization Period (Years) | Maturity Date | Number of Properties Encumbered | Balance at | ||||||||||||||||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 12/31/2021 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||
$600 Million 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 | $ | — | $ | 155,000 | ||||||||||||||||||||||||||||||||||||
$200 Million Term Loan | 2.60% Variable | n/a | April 1, 2024 | n/a | 200,000 | 200,000 | ||||||||||||||||||||||||||||||||||||||
| Total Senior Credit and Term Loan Facility | 200,000 | 355,000 | ||||||||||||||||||||||||||||||||||||||||||
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 | 67,500 | ||||||||||||||||||||||||||||||||||||||
$75 Million Term Loan | 2.50% Variable | n/a | October 8, 2023 | n/a | 75,000 | 75,000 | ||||||||||||||||||||||||||||||||||||||
| Total Joint Venture Credit Facility | 143,500 | 142,500 | ||||||||||||||||||||||||||||||||||||||||||
Term Loans (1) | ||||||||||||||||||||||||||||||||||||||||||||
| Term Loan (KeyBank National Association, as Administrative Agent) | 2.70% Variable | n/a | November 25, 2022 | n/a | 62,000 | 225,000 | ||||||||||||||||||||||||||||||||||||||
| Term Loan (KeyBank National Association, as Administrative Agent) | 2.40% Variable | n/a | February 14, 2025 | n/a | 225,000 | 225,000 | ||||||||||||||||||||||||||||||||||||||
| Convertible Notes | 1.50% Fixed | n/a | February 15, 2026 | n/a | 287,500 | — | ||||||||||||||||||||||||||||||||||||||
| Secured Mortgage Indebtedness | ||||||||||||||||||||||||||||||||||||||||||||
| KeyBank National Association | (3) | 4.46% Fixed | 30 | February 1, 2023 | 3 | 18,545 | 19,039 | |||||||||||||||||||||||||||||||||||||
| (4) | 4.52% Fixed | 30 | April 1, 2023 | 3 | 19,024 | 19,520 | ||||||||||||||||||||||||||||||||||||||
| (5) | 4.30% Fixed | 30 | April 1, 2023 | 3 | 18,358 | 18,852 | ||||||||||||||||||||||||||||||||||||||
| (6) | 4.95% Fixed | 30 | August 1, 2023 | 2 | 33,155 | 33,947 | ||||||||||||||||||||||||||||||||||||||
| MetaBank | (7) | 4.44% Fixed | 25 | July 1, 2027 | 3 | 45,070 | 46,172 | |||||||||||||||||||||||||||||||||||||
| Bank of Cascades | (8) | 2.10% Variable | 25 | December 19, 2024 | 1 | 7,957 | 8,224 | |||||||||||||||||||||||||||||||||||||
| (8) | 4.30% Fixed | 25 | December 19, 2024 | — | 7,957 | 8,224 | ||||||||||||||||||||||||||||||||||||||
| Wells Fargo | (9) | 4.99% Fixed | 30 | June 6, 2028 | 1 | 13,249 | — | |||||||||||||||||||||||||||||||||||||
| Total Mortgage Loans | 16 | 163,315 | 153,978 | |||||||||||||||||||||||||||||||||||||||||
| Total Debt | 1,081,315 | 1,101,478 | ||||||||||||||||||||||||||||||||||||||||||
| Unamortized debt issuance costs | (11,518) | (6,733) | ||||||||||||||||||||||||||||||||||||||||||
| Debt, net of issuance costs | $ | 1,069,797 | $ | 1,094,745 | ||||||||||||||||||||||||||||||||||||||||
(1) The $600 million Senior Revolving Credit and Term Loan 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 the 46 properties and their affiliates.
(2) The Joint Venture Credit Facility is secured by pledges of the equity in the entities (and affiliated entities) that own the borrowing base hotels.
(3) On January 25, 2013, we closed on a $29.4 million loan with a fixed rate of 4.46% and a maturity of February 1, 2023. This loan is secured by three of the Hyatt Place hotels we acquired in October 2012. These hotels are located in Chicago (Lombard), IL; Denver (Lone Tree), CO; and Denver (Englewood), CO. This loan is subject to defeasance costs if prepaid. On March 19, 2019, we defeased $6.3 million of the principal balance to have the encumbrance released on one property, the Hyatt Place in Arlington, TX, to facilitate the sale of the property. As a result of this transaction, we recorded debt transaction costs of $0.6 million in 2019 primarily related to the debt defeasance premium.
(4) On March 7, 2013, we closed on a $22.7 million loan with a fixed rate of 4.52% and a maturity of April 1, 2023. This loan is secured by three of the Hyatt hotels we acquired in October 2012. These hotels include a Hyatt House in Denver (Englewood), CO and Hyatt Place hotels in Baltimore (Owings Mills), MD and Scottsdale, AZ. This loan is subject to defeasance if prepaid.
(5) On March 8, 2013, we closed on a $22.0 million loan with a fixed rate of 4.30% and a maturity of April 1, 2023. This loan is secured by the three Hyatt Place hotels we acquired in January 2013. These hotels are located in Chicago (Hoffman Estates), IL; Orlando (Convention), FL; and Orlando (Universal), FL. This loan is subject to defeasance if prepaid.
(6) On July 22, 2013, we closed on a $38.7 million loan with a fixed rate of 4.95% and a maturity of August 1, 2023. This loan is secured by two Marriott hotels we acquired in May 2013. These hotels include a Fairfield Inn & Suites and SpringHill Suites in Louisville, KY. This loan is subject to defeasance if prepaid.
F-27
(7) On June 30, 2017, we entered into the MetaBank Loan. The MetaBank Loan is secured by the Hampton Inn & Suites in Minneapolis, MN, the Four Points by Sheraton Hotel & Suites in South San Francisco, CA, and the Hyatt Place in Mesa, AZ. The MetaBank Loan is subject to a prepayment penalty if prepaid prior to April 1, 2027.
(8) On December 19, 2014, we refinanced our loan with Bank of the Cascades and increased the amount financed by $7.9 million. As part of the refinance the loan was split into two notes. Note A carries a variable interest rate of 30-day LIBOR plus 200 basis points and Note B carries a fixed interest rate of 4.3%. Both notes have amortization periods of 25 years and maturity dates of December 19, 2024. The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.
(9) On December 21, 2021, we assumed a $13.3 million loan with a fixed rate of 4.99% and a maturity of June 6, 2028. This loan is secured by the Embassy Suites by Hilton in Tucson, AZ. This loan is subject to defeasance if prepaid.
There are currently no defaults under any of the Company's mortgage loan agreements.
Our total fixed-rate and variable-rate debt at December 31, 2021 and 2020, after giving effect to our interest rate derivatives, is as follows (in thousands):
| 2021 | Percentage | 2020 | Percentage | |||||||||||||||||||||||
| Fixed-rate debt | $ | 842,858 | 78 | % | $ | 545,754 | 50 | % | ||||||||||||||||||
| Variable-rate debt | 238,457 | 22 | % | 555,724 | 50 | % | ||||||||||||||||||||
| $ | 1,081,315 | $ | 1,101,478 | |||||||||||||||||||||||
Contractual principal payments for each of the next five years are as follows (in thousands):
| 2022 | $ | 66,308 | ||||||
| 2023 | 232,183 | |||||||
| 2024 | 216,365 | |||||||
| 2025 | 226,594 | |||||||
| 2026 | 289,169 | |||||||
| Thereafter | 50,696 | |||||||
| $ | 1,081,315 | |||||||
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | Valuation Technique | ||||||||||||||||||||||||||||
| Convertible notes | $ | 287,500 | $ | 300,384 | $ | — | $ | — | Level 1 - Market approach | |||||||||||||||||||||||
| Fixed-rate debt | 155,358 | 155,765 | 145,754 | 143,244 | Level 2 - Market approach | |||||||||||||||||||||||||||
| $ | 442,858 | $ | 456,149 | $ | 145,754 | $ | 143,244 | |||||||||||||||||||||||||
At December 31, 2021 and 2020, we had $400.0 million of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional information on our use of derivatives as interest rate hedges, refer to “Part II – Item 8. – Financial Statements and Supplementary Data – Note 8 – Derivative Financial Instruments and Hedging.”
NOTE 7 –– LEASES
The Company has operating leases related to the land under certain hotel properties, conference centers, parking spaces, automobiles, our corporate office and other miscellaneous office equipment. These leases have remaining terms of 1 year to 77 years, some of which include options to extend the leases for additional years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
F-28
Certain of our lease agreements include rental payments based on a percentage of revenue over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or restrictive covenants that materially affect our business. In addition, we rent or sublease certain owned real estate to third parties. In 2021, 2020, and 2019, we recorded gross third party tenant income of $2.2 million, $1.9 million, and $2.2 million, respectively, which were recorded in Other income in the Consolidated Statements of Operations.
The majority of our third-party tenants requested rent deferrals to ease the negative financial effects of the Pandemic on their businesses. We have generally negotiated with these tenants and granted rent deferrals that defer rent for a specified number of months and require repayment of the deferred rent over a negotiated period of time.
On January 1, 2019, the Company adopted ASC No. 842, Leases, and recognized right-of-use assets and related liabilities. The right-of-use assets and related liabilities include renewal options reasonably certain to be exercised. We base our lease calculations on our estimated incremental borrowing rate. As of December 31, 2021, our weighted average incremental borrowing rate was 4.9%.
In 2021, 2020, and 2019, the Company's total operating lease cost was $3.3 million, $3.1 million, and $3.3 million, respectively, and the operating cash outflows from operating leases was $3.1 million, $2.8 million, and $3.0 million, respectively. As of December 31, 2021, the weighted average operating lease term was 28.25 years.
Operating lease maturities as of December 31, 2021 are as follows (in thousands):
| 2022 | $ | 1,845 | ||||||
| 2023 | 974 | |||||||
| 2024 | 913 | |||||||
| 2025 | 914 | |||||||
| 2026 | 925 | |||||||
| Thereafter | 27,069 | |||||||
Total lease payments (1) | 32,640 | |||||||
| Less imputed interest | (15,408) | |||||||
| Total | $ | 17,232 | ||||||
(1) Certain payments above include future increases to the minimum fixed rent based on the Consumer Price Index in effect at the initial measurement of the lease balances.
NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
We are exposed to interest rate risk through our variable-rate debt. We manage this risk primarily by managing the amount, sources, and duration of our debt funding and through the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage our exposure to known or expected cash payments related to our variable-rate debt. The maximum length of time over which we have hedged our exposure to variable interest rates with our existing derivative financial instruments is approximately seven years.
Our objectives in using derivative financial instruments are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Our interest rate swaps are designated as cash flow hedges and involve the receipt of variable-rate payments from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
Our agreements with our derivative counterparties contain provisions such that if we default, or can be declared in default, on any of our indebtedness, then we could also be declared in default on our derivative financial instruments.
F-29
Information about our derivative financial instruments at December 31, 2021 and 2020 is as follows (dollar amounts in thousands):
| Average Annual Effective Fixed Rate | Notional Amount | Fair Value | ||||||||||||||||||||||||||||||||||||||||||
| Contract date | Effective Date | Expiration Date | December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | 1.98 | % | $ | 100,000 | $ | 100,000 | $ | (1,617) | $ | (3,831) | ||||||||||||||||||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | 1.98 | % | 100,000 | 100,000 | (1,629) | (3,853) | ||||||||||||||||||||||||||||||||||||
| June 11, 2018 | September 28, 2018 | September 30, 2024 | 2.87 | % | 75,000 | 75,000 | (3,831) | (7,371) | ||||||||||||||||||||||||||||||||||||
| June 11, 2018 | December 31, 2018 | December 31, 2025 | 2.93 | % | 125,000 | 125,000 | (8,646) | (15,795) | ||||||||||||||||||||||||||||||||||||
| $ | 400,000 | $ | 400,000 | $ | (15,723) | $ | (30,850) | |||||||||||||||||||||||||||||||||||||
Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At December 31, 2021 and 2020, all of our interest rate swaps were in a liability position as a result of a decline in short term interest rates and a continued flattening of the forward yield curve. Our interest rate swaps are recorded in Accrued expenses and other in our Consolidated Balance Sheets. We are not required to post any collateral related to these agreements and we are not in breach of any financial provisions of the agreements.
Changes in the fair value of the hedging instruments are deferred in Other comprehensive income and are reclassified to Interest expense in our Consolidated Statements of Operations in the period in which the hedged item affects earnings. In 2022, we estimate that an additional $8.0 million will be reclassified from Other comprehensive income and recorded as an increase to Interest expense.
The table below details the location in the financial statements of the gain or loss recognized on derivative financial instruments designated as cash flow hedges (in thousands):
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Gain (loss) recognized in Accumulated other comprehensive loss on derivative financial instruments | $ | 5,631 | $ | (22,090) | $ | (15,327) | ||||||||||||||
| Loss reclassified from Accumulated other comprehensive loss to Interest expense | $ | (9,496) | $ | (7,417) | $ | (731) | ||||||||||||||
| Total interest expense and other finance expense presented in the Consolidated Statement of Operations in which the effects of cash flow hedges are recorded | $ | (43,368) | $ | (43,300) | $ | (41,030) | ||||||||||||||
NOTE 9 — EQUITY
Common Stock
The Company is authorized to issue up to 500,000,000 shares of common stock, $0.01 par value per share (the "Common Stock"). Each outstanding share of our Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power.
On May 25, 2017, the Company and the Operating Partnership entered into separate sales agreements (collectively, the “Sales Agreements”) with several underwriters ( the “Sales Agents”), pursuant to which the Company may sell our Common Stock having an aggregate offering price of up to $200.0 million (the “Shares”), from time to time through the Sales Agents, each acting as a sales agent and/or principal (the "2017 ATM Program"). At the same time, the Company terminated each of the sales agreements entered into in connection with its prior at-the-market offering program. To date, we have not sold any shares of our Common Stock under the 2017 ATM Program.
F-30
Changes in Common Stock during the years ended December 31, 2021 and 2020 were as follows:
| 2021 | 2020 | |||||||||||||
| Beginning common shares outstanding | 105,708,787 | 105,169,515 | ||||||||||||
| Grants under the Equity Plan | 860,910 | 676,171 | ||||||||||||
| Common Unit redemptions | 36,945 | 47,279 | ||||||||||||
| Annual grants to independent directors | 60,546 | 93,810 | ||||||||||||
| Performance share and other forfeitures | (61,996) | (212,643) | ||||||||||||
| Shares retained for employee tax withholding requirements | (267,468) | (65,345) | ||||||||||||
| Ending common shares outstanding | 106,337,724 | 105,708,787 | ||||||||||||
At December 31, 2021 and 2020, the Company had reserved 15,864,515 and 13,760,920 shares of Common Stock, respectively, for the issuance of Common Stock (i) upon the exercise of stock options, issuance of time-based restricted stock awards, issuance of performance-based restricted stock awards, grants of director stock awards, or other awards issued pursuant to our Equity Plan, (ii) upon redemption of Common Units, or (iii) under the 2017 ATM Program.
Preferred Stock
The Company is authorized to issue up to 100,000,000 shares of preferred stock, $0.01 par value per share, of which 89,600,000 is currently undesignated, 6,400,000 shares have been designated as 6.25% Series E Cumulative Redeemable Preferred Stock (the "Series E preferred shares") and 4,000,000 shares have been designated as 5.875% Series F Cumulative Redeemable Preferred Stock (the "Series F preferred shares").
The Company completed the offering of 4,000,000 Series F preferred shares on August 12, 2021 for net proceeds of $96.6 million, after the underwriting discount and offering-related expenses of $3.4 million.
On September 4, 2021, 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 premium on redemption of $2.7 million was recorded as a reduction to retained earnings.
The Company's preferred shares (collectively, “Preferred Shares”) rank senior to our Common Stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirements. The Company may not redeem the Series E preferred shares or Series F preferred shares prior to November 13, 2022 and August 12, 2026, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25 per share, plus any accumulated, accrued and unpaid distributions up to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each Series E preferred share is 3.1686 shares of Common Stock and each Series F preferred share is 5.8275 shares of common stock, all subject to certain adjustments.
The Company pays dividends at an annual rate of $1.5625 for each Series E preferred share and $1.46875 for each Series F preferred share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
On January 13, 2022, in connection with the NCI Transaction, the Company issued 1,958,429 Series Z Preferred Units. The Series Z Preferred Units will be entitled to distributions at a rate of 5.25% per annum, may be redeemed by the holder on the tenth or eleventh anniversary of the issuance date and may be called by the Company at any time after the fifth anniversary of the issuance date.
F-31
Non-controlling Interests in Operating Partnership
Pursuant to the limited partnership agreement of our Operating Partnership, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of Common Stock at the time of redemption; however, the Company has the option to redeem with shares of our Common Stock on a one-for-one basis. The number of shares of our Common Stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations.
At December 31, 2021 and 2020, unaffiliated third parties owned 124,797 and 161,742, respectively, of Common Units of the Operating Partnership, representing less than a 1% limited partnership interest in the Operating Partnership.
We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s Consolidated Balance Sheets. The portion of net income allocated to these Common Units is reported on the Company’s Consolidated Statement of Operations as net income attributable to non-controlling interests of the Operating Partnership.
Non-controlling Interests in Joint Venture
In July 2019, the Company entered into a joint venture with GIC, Singapore’s sovereign wealth fund, to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the joint venture and intends to invest 51% of the equity capitalization of the limited partnership, with GIC investing the remaining 49%. The Company earns fees for providing services to the joint venture and will have the potential to earn incentive fees based on the joint venture achieving certain return thresholds. As of December 31, 2021, the joint venture owns the five hotel properties acquired in 2019, the six hotels contributed to the joint venture in the second quarter of 2021 and the two hotels acquired by the joint venture in 2021.
The joint venture owns the hotels through a master real estate investment trust (“Master REIT”) and subsidiary REITs (“Subsidiary REITs”). All of the hotels owned by the joint venture are leased to taxable REIT subsidiaries of the Subsidiary REITs (“Subsidiary REIT TRSs”). To qualify as a REIT, the Master REIT must meet all of the REIT requirements summarized under “Part II – Item 8. – Financial Statements and Supplementary Data – Note 2 – Basis of Presentation and Significant Accounting Policies – Income Taxes.” Taxable income related to the Subsidiary REIT TRSs is subject to federal, state and local income taxes at applicable tax rates.
We classify the non-controlling interests in the joint venture as a component of equity in the Company’s Consolidated Balance Sheets. The portion of net income allocated to the non-controlling interests is reported on the Company’s Consolidated Statements of Operations as net income attributable to non-controlling interests of the joint venture.
F-32
NOTE 10 — FAIR VALUE MEASUREMENT
The following table presents information about our financial instruments measured at fair value on a recurring basis as of December 31, 2021 and 2020. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
| Fair Value Measurement at December 31, 2021 using | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Purchase options related to real estate loans | $ | — | $ | — | $ | 2,800 | $ | 2,800 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Interest rate swaps | — | 15,723 | — | 15,723 | ||||||||||||||||||||||
| Fair Value Measurement at December 31, 2020 using | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Purchase options related to real estate loans | $ | — | $ | — | $ | 7,161 | $ | 7,161 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Interest rate swaps | — | 30,850 | — | 30,850 | ||||||||||||||||||||||
Our Purchase Options related to real estate loans do not have readily determinable fair values. The original fair value of each Purchase Option was estimated using a Black-Scholes model.
Due to the adverse effects of the Pandemic, we evaluated our Purchase Options for impairment during the year ended December 31, 2020. The fair value of each Purchase Option was estimated using the Black-Scholes model. The estimated fair values of the Purchase Options were based on unobservable inputs for which there is little or no market information available and required us to develop our own assumptions as follows (dollar amounts in thousands):
| Real Estate Loan 1 | Real Estate Loan 2 | Real Estate Loan 3 | |||||||||||||||||||||
| Exercise price | $ | 15,143 | $ | 17,377 | $ | 37,800 | |||||||||||||||||
| Term | 2.59 | (1) | 2.68 | (1) | 1.42 | (2) | |||||||||||||||||
| Expected volatility | 65.0 | % | 55.0 | % | 55.0 | % | |||||||||||||||||
| Risk-free rate | 0.3 | % | 0.3 | % | 0.2 | % | |||||||||||||||||
| Expected annualized equity dividend yield | 6.5 | % | 7.5 | % | — | % | |||||||||||||||||
(1) The option term is the period from April 1, 2020 through the fully extended maturity dates of the respective mezzanine loans.
(2) The option term is the period from April 1, 2020 through the date in which the development project is completed and the option becomes exercisable.
During the year ended December 31, 2021, we recorded a Loss on impairment and write-off of assets of $4.4 million as follows (dollar amounts in thousands):
| Real Estate Loan 1 | Real Estate Loan 2 | Real Estate Loan 3 | ||||||||||||||||||
Purchase option value at December 31, 2020 | $ | 1,600 | $ | 2,761 | $ | 2,800 | ||||||||||||||
| Loss on impairment and write-off of assets | (1,600) | (1) | (2,761) | (1) | — | |||||||||||||||
Purchase option value at December 31, 2021 | $ | — | $ | — | $ | 2,800 | ||||||||||||||
(1) Real estate loans 1 and 2 were repaid in full during the year ended December 31, 2021. As the Company elected not to exercise its purchase options, we have recorded a Loss on impairment and write-off of assets of $4.4 million.
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There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2021 or 2020.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Franchise Agreements
All of our hotel properties operate under franchise agreements with major hotel franchisors. The terms of our franchise agreements generally range from 10 to 20 years with various extension provisions. Each franchisor receives franchise fees ranging from 2% to 6% of each hotel property’s gross revenue, and some agreements require that we pay marketing fees of up to 4% of gross revenue. In addition, some of these franchise agreements require that we deposit a percentage of the hotel property’s gross revenue, generally not more than 5%, into a reserve fund for capital expenditures. We also pay fees to our franchisors for services related to reservation and information systems. In 2021, 2020, and 2019, we expensed fees related to our franchise agreements of $25.0 million, $20.7 million, and $47.8 million, respectively.
Management Agreements
Our hotel properties operate pursuant to management agreements with various professional third-party management companies. The terms of our management agreements range from month-to-month to twenty-five years with various extension provisions. Each management company receives a base management fee, generally a percentage of total hotel property revenues. In some cases there are also monthly fees for certain services, such as accounting, based on the number of guestrooms. Generally, there are also incentive fees based on attaining certain financial thresholds. In 2021, 2020, and 2019, we expensed fees related to our hotel management agreements of $9.9 million, $6.3 million, and $16.6 million, respectively.
Litigation
We are involved from time to time in litigation arising in the ordinary course of business. We are not currently aware of any actions against us that would have a material effect on our financial condition or results of operations.
NOTE 12 — EQUITY-BASED COMPENSATION
Our currently outstanding equity-based awards were issued under our Equity Plan which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive awards.
Stock options granted may be either incentive stock options or non-qualified stock options. Vesting terms may vary with each grant, and stock option terms are generally to ten years. We have outstanding equity-based awards in the form of restricted stock awards. All of our outstanding equity-based awards are classified as equity.
Stock Options Granted Under Our Equity Plan
The 235,000 stock options outstanding as of December 31, 2020 expired unexercised on February 13, 2021 and were forfeited.
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Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes time-based restricted stock activity under our Equity Plan for 2021 and 2020:
| Number of Shares | Weighted Average Grant Date Fair Value per Share | Aggregate Current Value | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Non-vested December 31, 2019 | 448,467 | $ | 12.51 | |||||||||||||||||
| Granted | 299,562 | 8.47 | ||||||||||||||||||
| Vested | (172,170) | 13.31 | ||||||||||||||||||
| Forfeited | (2,282) | 8.64 | ||||||||||||||||||
| Non-vested December 31, 2020 | 573,577 | 10.18 | ||||||||||||||||||
| Granted | 536,980 | 10.27 | ||||||||||||||||||
| Vested | (503,914) | 10.51 | ||||||||||||||||||
| Forfeited | (1,173) | 9.98 | ||||||||||||||||||
| Non-vested December 31, 2021 | 605,470 | $ | 9.98 | $ | 5,909 | |||||||||||||||
The awards granted to our non-executive employees generally vest over a four-year period based on continuous service (20% on the first, second and third anniversary of the grant date and 40% on the fourth anniversary of the grant date).
The awards granted to our executive officers generally vest over a three-year period based on continuous service (25% on the first and second anniversary of the grant date and 50% on the third anniversary of the grant date) or in certain circumstances upon a change in control.
The holders of these awards have the right to vote the related shares of Common Stock and receive all dividends declared and paid whether or not vested. The fair value of time-based restricted stock awards granted is calculated based on the market value of our Common Stock on the date of grant.
During the years ended December 31, 2021, 2020, and 2019, the total fair value of time-based restricted stock awards that vested was $5.3 million, $2.3 million and $2.0 million, respectively. The total fair value of time-based stock awards that vested during the year ended December 31, 2021 includes $1.5 million of time-based restricted stock for which the vesting was accelerated related to the retirement of our Executive Chairman.
Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes performance-based restricted stock activity under our Equity Plan for 2021 and 2020:
| Number of Shares | Weighted Average Grant Date Fair Value per Share | Aggregate Current Value | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Non-vested December 31, 2019 | 755,991 | $ | 14.31 | |||||||||||||||||
| Granted | 376,609 | 9.38 | ||||||||||||||||||
| Vested | — | — | ||||||||||||||||||
| Forfeited | (210,361) | 17.13 | ||||||||||||||||||
| Non-vested December 31, 2020 | 922,239 | 11.65 | ||||||||||||||||||
| Granted | 323,930 | 14.05 | ||||||||||||||||||
| Vested | (182,480) | 13.73 | ||||||||||||||||||
| Forfeited | (60,823) | 13.73 | ||||||||||||||||||
| Non-vested December 31, 2021 | 1,002,866 | $ | 11.92 | $ | 9,788 | |||||||||||||||
Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our Common Stock on the grant date. The fair value of the performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model. These awards generally vest over a three-year period based on our percentile
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ranking within the SNL U.S. REIT Hotel Index at the end of the period or upon a change in control. The awards require continued service during the measurement period and are subject to the other conditions described in the Equity Plan or award document.
The number of shares the executive officers may earn under these awards range from zero shares to twice the number of shares granted based on our percentile ranking within the index at the end of the measurement period. In addition, a portion of the performance-based shares may be earned based on the Company's absolute total shareholder return calculated during the performance period.
The holders of these grants have the right to vote the granted shares of Common Stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards. Further, if additional shares are earned based on our percentile ranking within the index, dividend payments will be issued as if the additional shares had been held throughout the measurement period.
The fair value of performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model and the following assumptions:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Expected dividend yield | — | % | 8.16 | % | 6.17 | % | ||||||||||||||
| Expected stock price volatility | 63.7 | % | 23.7 | % | 23.2 | % | ||||||||||||||
| Risk-free interest rate | 0.34 | % | 0.53 | % | 2.43 | % | ||||||||||||||
| Monte Carlo iterations | 100,000 | 100,000 | 100,000 | |||||||||||||||||
| Weighted average estimated fair value of performance-based restricted stock awards | $ | 14.05 | $ | 9.38 | $ | 12.81 | ||||||||||||||
The expected dividend yield was calculated based on our annual expected dividend payments at the time of grant. The expected volatility was based on historical price changes of our Common Stock for a period comparable to the performance period. The risk-free interest rates were interpolated from the Federal Reserve Bond Equivalent Yield rates for “on-the-run” U.S. Treasury securities.
Director Stock Awards Made Pursuant to Our Equity Plan
During the years ended December 31, 2021 and 2020, we granted 60,546 and 93,810 shares of Common Stock, respectively, to our non-employee directors as a part of our director compensation program. These grants were made pursuant to our Equity Plan and were vested upon grant.
Equity-Based Compensation Expense
Equity-based compensation expense included in Corporate General and Administrative expense in the Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019 was as follows (in thousands):
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Time-based restricted stock | $ | 4,784 | $ | 2,470 | $ | 2,327 | ||||||||||||||
| Performance-based restricted stock | 5,314 | 3,559 | 3,396 | |||||||||||||||||
| Director stock | 583 | 447 | 496 | |||||||||||||||||
| $ | 10,681 | $ | 6,476 | $ | 6,219 | |||||||||||||||
We recognize equity-based compensation expense ratably over the vesting terms. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions.
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Unrecognized equity-based compensation expense for all non-vested awards pursuant to our Equity Plan was $8.0 million at December 31, 2021 as follows (in thousands):
| Total | 2022 | 2023 | 2024 | 2025 | ||||||||||||||||||||||||||||
| Time-based restricted stock | $ | 3,823 | $ | 1,929 | $ | 1,468 | $ | 404 | $ | 22 | ||||||||||||||||||||||
| Performance-based restricted stock | 4,153 | 2,261 | 1,637 | 255 | — | |||||||||||||||||||||||||||
| $ | 7,976 | $ | 4,190 | $ | 3,105 | $ | 659 | $ | 22 | |||||||||||||||||||||||
The Company's former Executive Chairman retired in January 2022. In connection with his retirement, the Company recorded $2.9 million of additional stock-based compensation expense during the year ended December 31, 2021 related to the modification of certain stock award agreements. This amount was comprised of $1.5 million related to time-based restricted stock awards and $1.4 million related to performance-based restricted stock awards.
NOTE 13 — BENEFIT PLANS
On August 1, 2011, we initiated a qualified contributory retirement plan (the “Plan”) under Section 401(k) of the IRC, which covers all full-time employees who meet certain eligibility requirements. Voluntary contributions may be made to the Plan by employees. The Plan is a Safe Harbor Plan and requires a mandatory employer contribution. The employer contribution expense for the years ended December 31, 2021, 2020 and 2019 was $0.3 million in each period.
NOTE 14 — INCOME TAXES
We have elected to be taxed as a REIT. As a REIT, we are generally not subject to corporate level income taxes on taxable income we distribute to our shareholders. We believe we have met the annual REIT distribution requirement by distribution of at least 90% of our taxable income to our shareholders.
Income related to our TRSs is subject to federal, state and local taxes at applicable tax rates. Our consolidated tax provision includes the income tax provision related to the operations of the TRSs as well as state and local income taxes related to the Operating Partnership. Due to the adverse effects of the Pandemic, certain of our TRSs have incurred operating losses and are expected to be in a cumulative loss for the foreseeable future. As such, the realizability of our deferred tax assets at December 31, 2021 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all of our deferred tax assets at December 31, 2021.
The components of income tax expense (benefit) for the years ended December 31, 2021, 2020, and 2019 are as follows (in thousands):
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | 1,036 | $ | (904) | $ | 869 | ||||||||||||||
| State and local | 456 | 224 | 643 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | (19) | 1,548 | (32) | |||||||||||||||||
| State and local | — | 508 | 20 | |||||||||||||||||
| Income tax expense | $ | 1,473 | $ | 1,376 | $ | 1,500 | ||||||||||||||
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Below is a reconciliation between the provision for income taxes and the amounts computed by applying the federal statutory income tax rate to the income or loss before taxes:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Statutory federal income tax provision | $ | (14,093) | $ | (31,052) | $ | 17,608 | ||||||||||||||
| Nontaxable income of the REITs | 16,812 | 19,963 | (16,996) | |||||||||||||||||
| State income taxes, net of federal tax benefit | 891 | (3,079) | 568 | |||||||||||||||||
| Provision to return and deferred adjustment | — | (16) | (6) | |||||||||||||||||
| Effect of permanent differences and other | 99 | 319 | 326 | |||||||||||||||||
| Change in valuation allowance | (2,236) | 15,241 | — | |||||||||||||||||
| Income tax provision | $ | 1,473 | $ | 1,376 | $ | 1,500 | ||||||||||||||
The Company evaluates its deferred tax assets each reporting period to determine if it is more-likely-than-not that those assets will be realized. In its evaluation, the Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the Company’s existing deferred tax assets. At December 31, 2021, certain TRSs had a three-year cumulative loss. As such, realizability of the Company's deferred tax assets is not reasonably assured. Therefore, a valuation allowance of $13.0 million was recorded against the balance of deferred tax assets at December 31, 2021.
Deferred tax assets and liabilities are included within Other assets in the accompanying Consolidated Balance Sheets.
Significant components of our TRSs deferred tax assets (liabilities) are as follows (in thousands):
| 2021 | 2020 | |||||||||||||
| Tax carryforwards | $ | 11,251 | $ | 13,521 | ||||||||||
| Accrued expenses | 1,704 | 1,537 | ||||||||||||
| Other | 71 | 185 | ||||||||||||
| Valuation allowance | (13,005) | (15,241) | ||||||||||||
| Net deferred tax assets | $ | 21 | $ | 2 | ||||||||||
| Gross deferred tax assets | $ | 13,066 | $ | 15,267 | ||||||||||
| Gross deferred tax liabilities | (40) | (24) | ||||||||||||
| Valuation allowance | (13,005) | (15,241) | ||||||||||||
| Net deferred tax assets | $ | 21 | $ | 2 | ||||||||||
At December 31, 2021, our TRSs had federal net operating losses of $40.5 million which are not subject to expiration and state net operating losses of $41.9 million, which expire beginning in 2025. At December 31, 2021, Summit Hotel Properties Inc. and our Subsidiary REITs had federal net operating loss carryforwards of $54.7 million and $3.0 million, respectively, which are not subject to expiration.
We had no unrecognized tax benefits at December 31, 2021 or in the three year period then ended. We expect no significant increase or decrease in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2021. We have no material interest or penalties relating to unrecognized tax benefits in the Consolidated Statements of Operations for the years ended December 31, 2021, 2020 or 2019 or in the Consolidated Balance Sheets as of December 31, 2021 or 2020.
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. In general, we are not subject to tax examinations by tax authorities for years before 2017.
The American Rescue Plan Act of 2021 was signed into law on March 11, 2021. Some of the key income tax provisions include:
•An extension of the employee retention tax credit through September 30, 2021. To be eligible for the credit in 2021, an organization’s gross receipts must be less than 80% of the same quarter in 2019. The credit is calculated based on 70% of qualifying wages, capped at $10,000 of compensation each quarter in 2021. We recorded a credit totaling $1.1 million for the year ended December 31, 2021.
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•Expanded limits on executive compensation deductions. Section 162(m) limits the deduction for compensation paid to each covered employee to $1 million for public companies. Covered employees generally include the CEO, CFO, and the next three highest paid officers as determined under the SEC rules. For tax years after December 31, 2026, Section 162(m) applies to the CEO, CFO, and the next five highest paid employees.
Characterization of Distributions
For income tax purposes, distributions paid consist of ordinary income and capital gains or a combination thereof. For the years ended December 31, 2021, 2020, and 2019 distributions paid per share were characterized as follows (unaudited):
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||
| Ordinary income | $ | — | — | % | $ | 0.0944 | 52.46 | % | $ | 0.6132 | 85.16 | % | ||||||||||||||||||||||||||
| Capital gain distributions | — | — | % | — | — | % | 0.1068 | 14.84 | % | |||||||||||||||||||||||||||||
| Return of capital | — | — | % | 0.0856 | 47.54 | % | — | — | % | |||||||||||||||||||||||||||||
| Total | $ | — | — | % | $ | 0.1800 | 100.00 | % | $ | 0.7200 | 100.00 | % | ||||||||||||||||||||||||||
| Preferred Stock - Series D | ||||||||||||||||||||||||||||||||||||||
| Ordinary income | $ | — | — | % | $ | 0.4031 | 25.00 | % | $ | 1.3732 | 85.16 | % | ||||||||||||||||||||||||||
| Capital gain distributions | — | — | % | — | — | % | 0.2393 | 14.84 | % | |||||||||||||||||||||||||||||
| Return of capital | 1.2228 | 100.00 | % | 1.2094 | 75.00 | % | — | — | % | |||||||||||||||||||||||||||||
| Total | $ | 1.2228 | 100.00 | % | $ | 1.6125 | 100.00 | % | $ | 1.6125 | 100.00 | % | ||||||||||||||||||||||||||
| Preferred Stock - Series E | ||||||||||||||||||||||||||||||||||||||
| Ordinary income | $ | — | — | % | $ | 0.3906 | 25.00 | % | $ | 1.3307 | 85.16 | % | ||||||||||||||||||||||||||
| Capital gain distributions | — | — | % | — | — | % | 0.2318 | 14.84 | % | |||||||||||||||||||||||||||||
| Return of capital | 1.5625 | 100.00 | % | 1.1719 | 75.00 | % | — | — | % | |||||||||||||||||||||||||||||
| Total | $ | 1.5625 | 100.00 | % | $ | 1.5625 | 100.00 | % | $ | 1.5625 | 100.00 | % | ||||||||||||||||||||||||||
| Preferred Stock - Series F | ||||||||||||||||||||||||||||||||||||||
| Ordinary income | $ | — | — | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||||||||||||
| Capital gain distributions | — | — | % | — | — | % | — | — | % | |||||||||||||||||||||||||||||
| Return of capital | 0.4406 | 100.00 | % | — | — | % | — | — | % | |||||||||||||||||||||||||||||
| Total | $ | 0.4406 | 100.00 | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||||||||||||
The 2021 Preferred D, Preferred E and Preferred F dividends were 100.0% return of capital.
The common dividends that were taxable to our stockholders in 2020 were 52.46% ordinary income and 47.54% return of capital. The 2020 Preferred D and Preferred E dividends were 25.0% ordinary income and 75.0% return of capital. The 2020 ordinary income dividends are eligible for the 20% deduction provided by Section 199A for qualified REIT dividends.
The dividends that were taxable to our stockholders in 2019 were 85.16% ordinary income and 14.84% capital gain distributions. The 2019 capital gain distribution was 100% related to unrecaptured Section 1250 gain. The 2019 ordinary income dividends are eligible for the 20% deduction provided by Section 199A for qualified REIT dividends.
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NOTE 15 — EARNINGS PER SHARE
We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested time-based restricted stock awards with non-forfeitable dividends and for our Common Stock. Our non-vested time-based restricted stock awards with non-forfeitable rights to dividends are considered securities which participate in undistributed earnings with Common Stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested time-based restricted stock awards with non-forfeitable dividends do not have such an obligation so they are not allocated losses.
All outstanding stock options were included in the computation of diluted earnings per share for the year ended December 31, 2019 due to their dilutive effect. The Common Units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income would also be added to derive net income attributable to common stockholders. For the years ended December 31, 2021, 2020, and 2019, we had unvested performance-based restricted stock awards of 1,002,866 shares, 922,239 shares and 755,991 shares, respectively, which were excluded from the denominator of the diluted earnings per share as the awards had not achieved the requisite performance conditions for vesting at each period end. Our outstanding convertible notes have been excluded from the denominator of the diluted earnings per share calculation as their inclusion would be antidilutive.
Below is a summary of the components used to calculate basic and diluted earnings per share (in thousands, except per share amounts):
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net (loss) income | $ | (68,584) | $ | (149,245) | $ | 82,348 | ||||||||||||||
| Less: Preferred dividends | (15,431) | (14,838) | (14,838) | |||||||||||||||||
| Premium on redemption of preferred stock | (2,710) | — | — | |||||||||||||||||
| Allocation to participating securities | — | (81) | (309) | |||||||||||||||||
| Attributable to non-controlling interest in Operating Partnership | 115 | 271 | (157) | |||||||||||||||||
| Attributable to non-controlling interest in joint venture | 2,896 | 5,635 | 419 | |||||||||||||||||
| Net (loss) income attributable to common stockholders, net of amount allocated to participating securities | $ | (83,714) | $ | (158,258) | $ | 67,463 | ||||||||||||||
| Denominator: | ||||||||||||||||||||
| Weighted average common shares outstanding - basic | 104,471 | 104,141 | 103,887 | |||||||||||||||||
| Dilutive effect of equity-based compensation awards | — | — | 52 | |||||||||||||||||
| Weighted average common shares outstanding - diluted | 104,471 | 104,141 | 103,939 | |||||||||||||||||
| (Loss) earnings per share: | ||||||||||||||||||||
| Basic and diluted | $ | (0.80) | $ | (1.52) | $ | 0.65 | ||||||||||||||
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NOTE 16 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 2021 and 2020 are as follows (in thousands, except per share amounts):
| 2021 | ||||||||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||||
| Total revenues | $ | 57,854 | $ | 86,524 | $ | 110,686 | $ | 106,862 | ||||||||||||||||||
| Net loss | $ | (32,871) | $ | (20,569) | $ | (4,239) | $ | (10,905) | ||||||||||||||||||
| Net loss attributable to Summit Hotel Properties, Inc. | $ | (31,365) | $ | (18,692) | $ | (4,504) | $ | (11,012) | ||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||||
| Basic and diluted | $ | (0.34) | $ | (0.21) | $ | (0.10) | $ | (0.15) | ||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||||
| Total revenues | $ | 108,385 | $ | 25,436 | $ | 52,412 | $ | 48,230 | ||||||||||||||||||
| Net loss | $ | (16,214) | $ | (52,548) | $ | (35,775) | $ | (44,708) | ||||||||||||||||||
| Net loss attributable to Summit Hotel Properties, Inc. | $ | (15,322) | $ | (50,417) | $ | (34,546) | $ | (43,054) | ||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||||
| Basic and diluted | $ | (0.18) | $ | (0.52) | $ | (0.37) | $ | (0.45) | ||||||||||||||||||
NOTE 17 — SUBSEQUENT EVENTS
Hotel Property Portfolio Transactions
In January 2022, we completed the NCI Transaction for an aggregate purchase price of $766.0 million. As part of the same portfolio purchase, we will complete the purchase of 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. The portfolio acquisition was completed through our Joint Venture. The purchase price paid to complete the NCI Transaction has not been allocated to the net assets acquired as we are in the process of determining the values of the assets and liabilities. The purchase price allocation for the NCI Transaction will be completed during the first quarter of 2022. For additional information, see our Current Report on Form 8-K filed on January 14, 2022.
Debt Transactions
In connection with the NCI Transaction, on January 13, 2022, Summit JV MR 2, LLC, Summit JV MR 3, LLC and Summit NCI NOLA BR 184, LLC (each a subsidiary of the Joint Venture and collectively, the “Borrowers”), the Joint Venture, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $410.0 million senior secured term loan facility (the “NCI Credit Facility”) with Bank of America, N.A., as administrative agent and initial lender, Wells Fargo Bank, National Association, as syndication agent and an initial lender, and BofA Securities, Inc. and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners. Neither the Operating Partnership nor the Company are borrowers or guarantors of the NCI Credit Facility. The NCI Credit Facility is guaranteed by the Joint Venture and all of the Borrowers’ existing and future subsidiaries, subject to certain exceptions. The NCI Credit Facility provides for a $410.0 million term loan. The NCI Credit Facility has an accordion feature which will permit an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The NCI Credit Facility will mature on January 13, 2026 and can be extended for one 12-month period at the Company’s option, subject to certain conditions. The NCI Credit Facility is interest-only and provides for a floating interest rate equal to SOFR plus 2.86%. The Joint Venture's initial draw on the NCI Credit Facility was $382.0 million and the remaining $28.0 million is expected to be funded with the future closing of the Canopy New Orleans. For additional information, see our Current Report on Form 8-K filed on January 14, 2022.
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Equity Transactions
On January 13, 2022, in connection with the NCI Transaction, the Operating Partnership issued 15,314,494 Common Units, having a deemed valued of $10.0853 per unit, and 1,958,429 Series Z Preferred Units, having a deemed valued of $25.00 per unit, in reliance in each case on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.
On January 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.
The Board of Directors also declared on behalf of the Operating Partnership, a cash dividend of $0.171354 per share of the Operating Partnership's unregistered 5.25% Series Z Cumulative Perpetual Preferred Units that were issued on January 13, 2022 as part of the NCI Transaction.
These dividends are payable February 28, 2022 to stockholders of record on February 14, 2022.
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SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2021
(in thousands)
| Initial Cost | Cost Capitalized Subsequent to Acquisition | Total Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Location | Franchise | Year Acquired/ Constructed | Land | Building & Improvements | Land, Building & Improvements | Land | Building & Improvements | Total | Accumulated Depreciation | Total Cost Net of Accumulated Depreciation | Mortgage Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aliso Viejo, CA | Homewood Suites | 2017 | $ | 5,599 | $ | 32,367 | $ | 480 | $ | 5,599 | $ | 32,847 | $ | 38,446 | $ | (6,897) | $ | 31,549 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Arlington, TX | Courtyard | 2012 | 1,497 | 15,573 | (412) | 1,497 | 15,161 | 16,658 | (5,114) | 11,544 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Arlington, TX | Residence Inn | 2012 | 1,646 | 15,440 | 92 | 1,646 | 15,532 | 17,178 | (5,124) | 12,054 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asheville, NC | Hotel Indigo | 2015 | 2,100 | 34,755 | 1,266 | 2,100 | 36,021 | 38,121 | (9,546) | 28,575 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta, GA | Courtyard | 2012 | 2,050 | 27,969 | 3,221 | 2,050 | 31,190 | 33,240 | (8,168) | 25,072 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta, GA | Residence Inn | 2016 | 3,381 | 34,820 | 1,528 | 3,381 | 36,348 | 39,729 | (6,971) | 32,758 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta, GA | AC Hotel | 2017 | 5,670 | 51,922 | 747 | 5,670 | 52,669 | 58,339 | (9,746) | 48,593 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Austin, TX | Hampton Inn & Suites | 2014 | — | (2) | 56,394 | 4,553 | — | 60,947 | 60,947 | (13,564) | 47,383 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Austin, TX | Corporate Office | 2017 | — | 6,048 | 340 | — | 6,388 | 6,388 | (2,531) | 3,857 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Baltimore, MD | Hampton Inn & Suites | 2017 | 2,205 | 16,013 | 5,590 | 2,205 | 21,603 | 23,808 | (3,853) | 19,955 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Baltimore, MD | Residence Inn | 2017 | 1,986 | 37,016 | 6,604 | 1,986 | 43,620 | 45,606 | (9,016) | 36,590 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Boulder, CO | Marriott | 2016 | 11,115 | 49,204 | 9,177 | 11,115 | 58,381 | 69,496 | (12,789) | 56,707 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Branchburg, NJ | Residence Inn | 2015 | 2,374 | 24,411 | 93 | 2,374 | 24,504 | 26,878 | (6,570) | 20,308 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Brisbane, CA | DoubleTree | 2014 | 3,300 | 39,686 | 1,293 | 3,300 | 40,979 | 44,279 | (15,857) | 28,422 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Camarillo, CA | Hampton Inn & Suites | 2013 | 2,200 | 17,366 | 607 | 2,200 | 17,973 | 20,173 | (7,689) | 12,484 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charlotte, NC | Courtyard | 2017 | — | 41,094 | 1,917 | — | 43,011 | 43,011 | (8,354) | 34,657 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Chicago, IL | Hyatt Place | 2016 | 5,395 | 68,355 | 269 | 5,395 | 68,624 | 74,019 | (15,022) | 58,997 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cleveland, OH | Residence Inn | 2017 | 10,075 | 33,340 | 2,081 | 10,075 | 35,421 | 45,496 | (7,774) | 37,722 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Decatur, GA | Courtyard | 2015 | 4,046 | 34,151 | 3,715 | 4,046 | 37,866 | 41,912 | (9,034) | 32,878 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eden Prairie, MN | Hilton Garden Inn | 2013 | 1,800 | 11,211 | 188 | 1,800 | 11,399 | 13,199 | (4,897) | 8,302 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Englewood, CO | Hyatt Place | 2012 | 2,000 | 11,950 | (321) | 2,000 | 11,629 | 13,629 | (4,949) | 8,680 | 18,545 | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Englewood, CO | Hyatt House | 2012 | 2,700 | 16,267 | 856 | 2,700 | 17,123 | 19,823 | (7,843) | 11,980 | 19,024 | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fort Lauderdale, FL | Courtyard | 2017 | 37,950 | 47,002 | 5,083 | 37,950 | 52,085 | 90,035 | (9,814) | 80,221 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fort Worth, TX | Courtyard | 2017 | 1,920 | 38,070 | 9,869 | 1,920 | 47,939 | 49,859 | (9,101) | 40,758 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Garden City, NY | Hyatt Place | 2012 | 4,200 | 27,775 | 343 | 4,283 | 28,035 | 32,318 | (7,649) | 24,669 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Glendale, CO | Staybridge Suites | 2011 | 2,100 | 10,151 | 333 | 2,100 | 10,484 | 12,584 | (4,272) | 8,312 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Greenville, SC | Hilton Garden Inn | 2013 | 1,200 | 14,566 | 3,101 | 1,200 | 17,667 | 18,867 | (5,938) | 12,929 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hillsboro, OR | Residence Inn | 2019 | 4,943 | 42,541 | 440 | 4,943 | 42,981 | 47,924 | (4,224) | 43,700 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hoffman Estates, IL | Hyatt Place | 2013 | 1,900 | 8,917 | (1,793) | 1,900 | 7,124 | 9,024 | (3,879) | 5,145 | 18,358 | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
F-43
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2021
(in thousands)
| Initial Cost | Cost Capitalized Subsequent to Acquisition | Total Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Location | Franchise | Year Acquired/ Constructed | Land | Building & Improvements | Land, Building & Improvements | Land | Building & Improvements | Total | Accumulated Depreciation | Total Cost Net of Accumulated Depreciation | Mortgage Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Houston, TX | Hilton Garden Inn | 2014 | $ | — | (2) | $ | 41,838 | $ | 2,923 | $ | — | $ | 44,761 | $ | 44,761 | $ | (12,043) | $ | 32,718 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Houston, TX | Hilton Garden Inn | 2014 | 2,800 | 33,777 | 4,440 | 2,800 | 38,217 | 41,017 | (7,234) | 33,783 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hunt Valley, MD | Residence Inn | 2015 | — | 35,436 | 1,166 | 1,076 | 35,526 | 36,602 | (8,987) | 27,615 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indianapolis, IN | SpringHill Suites | 2013 | 4,012 | 27,910 | (630) | 4,012 | 27,280 | 31,292 | (7,769) | 23,523 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indianapolis, IN | Courtyard | 2013 | 7,788 | 54,384 | (2,097) | 7,788 | 52,287 | 60,075 | (14,266) | 45,809 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Kansas City, MO | Courtyard | 2017 | 3,955 | 20,608 | 2,598 | 3,955 | 23,206 | 27,161 | (4,419) | 22,742 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lombard, IL | Hyatt Place | 2012 | 1,550 | 17,351 | 80 | 1,550 | 17,431 | 18,981 | (6,629) | 12,352 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lone Tree, CO | Hyatt Place | 2012 | 1,300 | 11,704 | (141) | 1,314 | 11,549 | 12,863 | (5,098) | 7,765 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Louisville, KY | Fairfield Inn & Suites | 2013 | 3,120 | 24,231 | (534) | 3,120 | 23,697 | 26,817 | (7,573) | 19,244 | 33,155 | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Louisville, KY | SpringHill Suites | 2013 | 4,880 | 37,361 | (590) | 4,880 | 36,771 | 41,651 | (11,743) | 29,908 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mesa, AZ | Hyatt Place | 2017 | 2,400 | 19,848 | 1,184 | 2,400 | 21,032 | 23,432 | (5,236) | 18,196 | 45,070 | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Metairie, LA | Courtyard | 2013 | 1,860 | 25,168 | 643 | 1,860 | 25,811 | 27,671 | (9,718) | 17,953 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Metairie, LA | Residence Inn | 2013 | 1,791 | 23,386 | 122 | 1,791 | 23,508 | 25,299 | (10,519) | 14,780 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Miami, FL | Hyatt House | 2015 | 4,926 | 40,087 | 2,575 | 4,926 | 42,662 | 47,588 | (13,532) | 34,056 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Milpitas, CA | Hilton Garden Inn | 2019 | 7,921 | 46,141 | 912 | 7,921 | 47,053 | 54,974 | (5,379) | 49,595 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minneapolis, MN | Hyatt Place | 2013 | — | 34,026 | 2,154 | — | 36,180 | 36,180 | (10,006) | 26,174 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minneapolis, MN | Hampton Inn & Suites | 2015 | 3,502 | 35,433 | 261 | 3,502 | 35,694 | 39,196 | (10,209) | 28,987 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minnetonka, MN | Holiday Inn Express & Suites | 2013 | 1,000 | 7,662 | 219 | 1,000 | 7,881 | 8,881 | (3,449) | 5,432 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nashville, TN | SpringHill Suites | 2004 | 777 | 5,598 | 644 | 777 | 6,242 | 7,019 | (3,794) | 3,225 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nashville, TN | Courtyard | 2016 | 8,792 | 62,759 | 7,824 | 8,792 | 70,583 | 79,375 | (13,950) | 65,425 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Haven, CT | Courtyard | 2017 | 11,990 | 51,497 | 1,809 | 11,990 | 53,306 | 65,296 | (8,969) | 56,327 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA | Courtyard | 2013 | 1,944 | 25,120 | 3,296 | 1,944 | 28,416 | 30,360 | (12,347) | 18,013 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA | Courtyard | 2013 | 2,490 | 34,220 | 1,848 | 2,490 | 36,068 | 38,558 | (14,314) | 24,244 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA | SpringHill Suites | 2013 | 2,046 | 33,270 | 5,918 | 2,046 | 39,188 | 41,234 | (14,959) | 26,275 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Orlando, FL | Hyatt Place | 2013 | 3,100 | 11,343 | (167) | 3,100 | 11,176 | 14,276 | (4,808) | 9,468 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Orlando, FL | Hyatt Place | 2013 | 2,716 | 11,221 | 1,655 | 2,716 | 12,876 | 15,592 | (5,045) | 10,547 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Orlando, FL | Hyatt House | 2018 | 2,800 | 34,423 | 147 | 2,800 | 34,570 | 37,370 | (7,848) | 29,522 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Owings Mills, MD | Hyatt Place | 2012 | 2,100 | 9,799 | 156 | 2,100 | 9,955 | 12,055 | (3,995) | 8,060 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pittsburgh, PA | Courtyard | 2017 | 1,652 | 40,749 | 6,057 | 1,652 | 46,806 | 48,458 | (8,163) | 40,295 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portland, OR | Hyatt Place | 2009 | — | (2) | 14,700 | 664 | — | 15,364 | 15,364 | (5,935) | 9,429 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portland, OR | Residence Inn | 2009 | — | (2) | 15,629 | 353 | — | 15,982 | 15,982 | (6,664) | 9,318 | 15,914 | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portland, OR | Residence Inn | 2019 | 12,813 | 76,868 | 2,458 | 12,813 | 79,326 | 92,139 | (9,614) | 82,525 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Poway, CA | Hampton Inn & Suites | 2013 | 2,300 | 14,728 | 1,097 | 2,300 | 15,825 | 18,125 | (5,560) | 12,565 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Francisco, CA | Hilton Garden Inn | 2019 | 12,346 | 45,730 | 410 | 12,346 | 46,140 | 58,486 | (5,433) | 53,053 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Francisco, CA | Holiday Inn Express & Suites | 2013 | 15,545 | 49,469 | 3,899 | 15,545 | 53,368 | 68,913 | (18,576) | 50,337 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Francisco, CA | Four Points | 2014 | 1,200 | 21,397 | 3,107 | 1,200 | 24,504 | 25,704 | (7,891) | 17,813 | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
F-44
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2021
(in thousands)
| Initial Cost | Cost Capitalized Subsequent to Acquisition | Total Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Location | Franchise | Year Acquired/ Constructed | Land | Building & Improvements | Land, Building & Improvements | Land | Building & Improvements | Total | Accumulated Depreciation | Total Cost Net of Accumulated Depreciation | Mortgage Debt | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Scottsdale, AZ | Hyatt Place | 2012 | $ | 1,500 | $ | 10,171 | $ | (336) | $ | 1,500 | $ | 9,835 | $ | 11,335 | $ | (3,835) | $ | 7,500 | $ | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Scottsdale, AZ | Courtyard | 2003 | 3,225 | 12,571 | 3,533 | 3,225 | 16,104 | 19,329 | (7,940) | 11,389 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Scottsdale, AZ | SpringHill Suites | 2003 | 2,195 | 9,496 | 1,660 | 2,195 | 11,156 | 13,351 | (5,547) | 7,804 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Silverthorne, CO | Hampton Inn & Suites | 2019 | 6,845 | 21,125 | 1,159 | 6,845 | 22,284 | 29,129 | (1,977) | 27,152 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Steamboat Springs, CO | Residence Inn | 2021 | 1,832 | 31,214 | 21 | 1,832 | 31,235 | 33,067 | (670) | 32,397 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tampa, FL | Hampton Inn & Suites | 2012 | 3,600 | 20,366 | 4,446 | 3,600 | 24,812 | 28,412 | (7,516) | 20,896 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tucson, AZ | Embassy Suites | 2021 | 1,841 | 23,958 | — | 1,841 | 23,958 | 25,799 | — | 25,799 | 13,249 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tucson, AZ | Homewood Suites | 2017 | 2,570 | 22,802 | 1,156 | 2,570 | 23,958 | 26,528 | (5,419) | 21,109 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Waltham, MA | Hilton Garden Inn | 2017 | 10,644 | 21,713 | 6,277 | 10,644 | 27,990 | 38,634 | (5,787) | 32,847 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Watertown, MA | Residence Inn | 2018 | 25,083 | 45,917 | 307 | 25,083 | 46,224 | 71,307 | (6,530) | 64,777 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land Parcels | Land Parcels | 4,645 | — | (2,720) | 1,925 | — | 1,925 | — | 1,925 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 326,748 | $ | 2,178,578 | $ | 133,223 | $ | 325,201 | $ | 2,313,348 | $ | 2,638,549 | $ | (583,080) | $ | 2,055,469 | $ | 163,315 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Properties cross-collateralize the related loan, refer to "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt" in the Consolidated Financial Statements.
(2) Properties subject to ground lease, refer to "Part II – Item 8. – Financial Statements and Supplementary Data – Note 7 – Leases" in the Consolidated Financial Statements.
F-45
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2021
(in thousands)
(a) ASSET BASIS
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Reconciliation of land, buildings and improvements: | ||||||||||||||||||||
| Balance at beginning of period | $ | 2,570,768 | $ | 2,553,428 | $ | 2,406,269 | ||||||||||||||
| Additions to land, buildings and improvements | 80,496 | 19,918 | 336,480 | |||||||||||||||||
| Disposition of land, buildings and improvements | (12,715) | (2,578) | (186,800) | |||||||||||||||||
| Impairment loss | — | — | (2,521) | |||||||||||||||||
| Balance at end of period | $ | 2,638,549 | $ | 2,570,768 | $ | 2,553,428 | ||||||||||||||
(b) ACCUMULATED DEPRECIATION
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Reconciliation of accumulated depreciation: | ||||||||||||||||||||
| Balance at beginning of period | $ | 490,326 | $ | 383,763 | $ | 351,821 | ||||||||||||||
| Depreciation | 105,462 | 109,159 | 99,013 | |||||||||||||||||
| Depreciation on assets sold or disposed | (12,708) | (2,596) | (67,071) | |||||||||||||||||
| Balance at end of period | $ | 583,080 | $ | 490,326 | $ | 383,763 | ||||||||||||||
(c) The aggregate cost of real estate for Federal income tax purposes was approximately $2,448 million.
(d) Depreciation is computed based upon the following useful lives:
Buildings and improvements 6-40 years
Furniture and equipment 2-15 years
(e) We have mortgages payable on the properties as noted. Additional mortgage information can be found in "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt" to the Consolidated Financial Statements.
(f) The negative balance for costs capitalized subsequent to acquisition include out-parcels sold, disposal of assets, and recorded impairment losses.
F-46