Annual Statements Open main menu

Summit Hotel Properties, Inc. - Quarter Report: 2022 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2022

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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueINNNew York Stock Exchange
Series E Cumulative Redeemable Preferred Stock, $0.01 par valueINN-PENew York Stock Exchange
Series F Cumulative Redeemable Preferred Stock, $0.01 par valueINN-PFNew York Stock Exchange

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No
 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
 
As of October 21, 2022, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 106,895,912.



TABLE OF CONTENTS
 
  Page
   
   
 
 
 
 
 
   
   
   
   
   
   
   
   
   
   
   
 
i




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Summit Hotel Properties, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
 
September 30, 2022December 31, 2021
 (Unaudited) 
ASSETS  
Investment in hotel properties, net$2,882,143 $2,091,973 
Undeveloped land1,500 1,500 
Assets held for sale, net425 425 
Cash and cash equivalents72,617 64,485 
Restricted cash18,628 32,459 
Right-of-use assets, net35,416 26,942 
Trade receivables, net23,512 14,476 
Prepaid expenses and other15,266 24,496 
Deferred charges, net7,353 4,347 
Other assets19,021 3,799 
Total assets$3,075,881 $2,264,902 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY  
Liabilities:  
Debt, net of debt issuance costs$1,468,341 $1,069,797 
Lease liabilities, net25,753 17,232 
Accounts payable5,901 4,462 
Accrued expenses and other94,623 66,219 
Total liabilities1,594,618 1,157,710 
Commitments and contingencies (Note 11)
Redeemable non-controlling interests50,223 — 
Equity:  
Preferred stock, $0.01 par value per share, 100,000,000 shares authorized:
  
6.25% Series E - 6,400,000 shares issued and outstanding at September 30, 2022 and December 31, 2021 (aggregate liquidation preference of $160,861 at September 30, 2022 and December 31, 2021)
64 64 
5.875% Series F - 4,000,000 shares issued and outstanding at September 30, 2022 and December 31, 2021 (aggregate liquidation preference of $100,506 at September 30, 2022 and December 31, 2021)
40 40 
Common stock, $0.01 par value per share, 500,000,000 shares authorized, 106,893,912 and 106,337,724 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
1,069 1,063 
Additional paid-in capital1,230,848 1,225,184 
Accumulated other comprehensive income (loss)15,533 (15,639)
Accumulated deficit and distributions in excess of retained earnings(271,951)(262,639)
Total stockholders’ equity975,603 948,073 
Non-controlling interests455,437 159,119 
Total equity1,431,040 1,107,192 
Total liabilities, redeemable non-controlling interests and equity$3,075,881 $2,264,902 
 


See Notes to the Condensed Consolidated Financial Statements
1


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Revenues:
Room$160,133 $102,521 $455,747 $235,761 
Food and beverage8,854 2,097 22,180 4,656 
Other9,265 6,068 25,442 14,647 
Total revenues178,252 110,686 503,369 255,064 
Expenses:
Room expense37,525 22,186 101,718 52,320 
Food and beverage expense7,060 1,476 17,187 3,000 
Hotel operating expenses54,883 34,713 154,871 88,672 
Property taxes, insurance and other13,373 10,679 40,036 32,573 
Management fees4,308 2,888 13,145 6,757 
Depreciation and amortization38,130 25,893 112,462 79,776 
Corporate general and administrative6,532 6,099 23,743 18,283 
Hotel acquisition and transaction costs56 — 737 3,849 
Recoveries of credit losses(850)(2,632)(1,100)(2,632)
Loss on impairment of assets— 4,361 — 4,361 
Total expenses161,017 105,663 462,799 286,959 
(Loss) gain on disposal of assets, net(5)— 20,479 81 
Operating income (loss)17,230 5,023 61,049 (31,814)
Other income (expense):
Interest expense(17,645)(10,817)(46,202)(32,567)
Other (expense) income, net(416)2,250 3,099 7,777 
Total other expense, net(18,061)(8,567)(43,103)(24,790)
        (Loss) income from continuing operations before income taxes(831)(3,544)17,946 (56,604)
Income tax expense (Note 13)(210)(695)(4,647)(1,075)
          Net (loss) income(1,041)(4,239)13,299 (57,679)
Less - Loss (income) attributable to non-controlling interests5,148 (265)(4,481)3,118 
Net income (loss) attributable to Summit Hotel Properties, Inc. before preferred dividends and distributions4,107 (4,504)8,818 (54,561)
Less - Distributions and accretion of redeemable non-controlling interests(656)— (1,866)— 
Less - Preferred dividends(3,968)(3,750)(11,906)(11,168)
Premium on redemption of preferred stock— (2,710)— (2,710)
Net loss attributable to common stockholders$(517)$(10,964)$(4,954)$(68,439)
Loss per share:
Basic$— $(0.10)$(0.05)$(0.66)
Diluted$— $(0.10)$(0.05)$(0.66)
Weighted average common shares outstanding:
Basic105,232 104,548 105,110 104,441 
Diluted105,232 104,548 105,110 104,441 
 

See Notes to the Condensed Consolidated Financial Statements
2


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Net (loss) income$(1,041)$(4,239)$13,299 $(57,679)
Other comprehensive income, net of tax:
Changes in fair value of derivative financial instruments16,707 2,265 33,716 9,830 
Comprehensive income (loss)15,666 (1,974)47,015 (47,849)
Comprehensive loss (income) attributable to non-controlling interests2,974 (267)(7,025)3,104 
Comprehensive income (loss) attributable to Summit Hotel Properties, Inc.18,640 (2,241)39,990 (44,745)
Distributions and accretion on redeemable non-controlling interests(656)— (1,866)— 
Preferred dividends(3,968)(3,750)(11,906)(11,168)
Premium on redemption of preferred stock— (2,710)— (2,710)
Comprehensive income (loss) attributable to common stockholders$14,016 $(8,701)$26,218 $(58,623)
 

See Notes to the Condensed Consolidated Financial Statements


3


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Changes in Equity and Redeemable Non-controlling Interests
For the Three Months Ended September 30, 2022 and 2021
(Unaudited)
(in thousands, except share amounts)
Redeemable Non-controlling InterestsShares
 of Preferred
Stock
Preferred
Stock
Shares
of Common
Stock
Common
Stock
Additional
Paid-In Capital
Accumulated Other
Comprehensive
Income (Loss)
Accumulated
Deficit and
Distributions
Total
Shareholders’
Equity
Non-controlling InterestsTotal
Equity
Balance at June 30, 2022$50,223 10,400,000 $104 106,894,011 $1,069 $1,229,660 $1,000 $(267,158)$964,675 $470,391 $1,435,066 
Adjustment of redeemable non-controlling interests to redemption value656 — — — — — — (656)(656)— (656)
Contributions by non-controlling interest in joint venture— — — — — — — — — 20 20 
Common stock redemption of common units— — — 5,000 49 — — 50 (50)— 
Common dividends and distributions— — — — — — — (4,276)(4,276)(639)(4,915)
Preferred dividends and distributions(656)— — — — — — (3,968)(3,968)— (3,968)
Joint venture partner distributions— — — — — — — — — (11,270)(11,270)
Equity-based compensation— — — (5,099)(1)1,231 — — 1,230 — 1,230 
Other— — — — — (92)— — (92)(41)(133)
Other comprehensive income— — — — — — 14,533 — 14,533 2,174 16,707 
    Net income (loss)— — — — — — — 4,107 4,107 (5,148)(1,041)
Balance at September 30, 2022$50,223 10,400,000 $104 106,893,912 $1,069 $1,230,848 $15,533 $(271,951)$975,603 $455,437 $1,431,040 
Balance at June 30, 2021$— 9,400,000 $94 106,416,315 $1,064 $1,195,002 $(23,161)$(236,400)$936,599 $129,123 $1,065,722 
Net proceeds from sale of preferred stock— 4,000,000 40 — — 96,577 — — 96,617 — 96,617 
Common stock redemption of common units— — — 29,445 — 217 (27)— 190 (190)— 
Contribution by non-controlling interest in joint venture— — — — — — — — — 16,000 16,000 
Redemption of preferred stock— (3,000,000)(30)— — (72,260)— (2,710)(75,000)— (75,000)
Preferred dividends— — — — — — — (3,750)(3,750)— (3,750)
Equity-based compensation— — — — — 1,890 — — 1,890 1,892 
Other comprehensive income— — — — — — 2,263 — 2,263 2,265 
    Net loss— — — — — — — (4,504)(4,504)265 (4,239)
Balance at September 30, 2021$— 10,400,000 $104 106,445,760 $1,064 $1,221,426 $(20,925)$(247,364)$954,305 $145,202 $1,099,507 
 

See Notes to the Condensed Consolidated Financial Statements


4


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Changes in Equity and Redeemable Non-controlling Interests
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
(in thousands, except share amounts)
Redeemable Non-controlling InterestsShares
 of Preferred
Stock
Preferred
Stock
Shares
of Common
Stock
Common
Stock
Additional
Paid-In Capital
Accumulated Other
Comprehensive
Income (Loss)
Accumulated
Deficit and
Distributions
Total
Shareholders’
Equity
Non-controlling InterestsTotal
Equity
Balance at December 31, 2021$— 10,400,000 $104 106,337,724 $1,063 $1,225,184 $(15,639)$(262,639)$948,073 $159,119 $1,107,192 
Redeemable non-controlling interests in operating partnership issued for the acquisition of a portfolio of hotel properties50,000 — — — — — — — — — — 
Adjustment of redeemable non-controlling interests to redemption value1,866 — — — — — — (1,866)(1,866)— (1,866)
Non-controlling interests in operating partnership issued for the acquisition of a portfolio of hotel properties— — — — — — — — — 157,513 157,513 
Sale of non-controlling interests in joint venture— — — — — — — — — 674 674 
Contributions by non-controlling interest in joint venture— — — — — 1,218 — — 1,218 209,822 211,040 
Common stock redemption of common units— — — 5,000 49 — — 50 (50)— 
Common dividends and distributions— — — — — — — (4,358)(4,358)(639)(4,997)
Preferred dividends and distributions(1,643)— — — — — — (11,906)(11,906)(83)(11,989)
Joint venture partner distributions— — — — — — — — — (77,903)(77,903)
Equity-based compensation— — — 811,988 7,063 — — 7,070 — 7,070 
Shares acquired for employee withholding requirements— — — (260,800)(2)(2,453)— — (2,455)— (2,455)
Other— — — — — (213)— — (213)(41)(254)
Other comprehensive income— — — — — — 31,172 — 31,172 2,544 33,716 
    Net income— — — — — — — 8,818 8,818 4,481 13,299 
Balance at September 30, 2022$50,223 10,400,000 $104 106,893,912 $1,069 $1,230,848 $15,533 $(271,951)$975,603 $455,437 $1,431,040 
Balance at December 31, 2020$— 9,400,000 $94 105,708,787 $1,057 $1,197,320 $(30,716)$(179,013)$988,742 $63,321 $1,052,063 
Net proceeds from sale of preferred stock— 4,000,000 40 — — 96,577 — — 96,617 — 96,617 
Common stock redemption of common units— — — 31,945 — 232 (25)— 207 (207)— 
Purchase of capped call options— — — — — (21,131)— — (21,131)— (21,131)
Contribution by non-controlling interest in joint venture— — — — — 16,444 — — 16,444 85,229 101,673 
Redemption of preferred stock— (3,000,000)(30)— — (72,260)— (2,710)(75,000)— (75,000)
Preferred dividends— — — — — — — (11,080)(11,080)(45)(11,125)
Equity-based compensation— — — 860,633 5,844 — — 5,853 5,861 
Shares acquired for employee withholding requirements— — — (155,605)(2)(1,600)— — (1,602)— (1,602)
Other comprehensive income— — — — — — 9,816 — 9,816 14 9,830 
    Net loss— — — — — — — (54,561)(54,561)(3,118)(57,679)
Balance at September 30, 2021$— 10,400,000 $104 106,445,760 $1,064 $1,221,426 $(20,925)$(247,364)$954,305 $145,202 $1,099,507 


See Notes to the Condensed Consolidated Financial Statements
5


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 Nine Months Ended
September 30,
 20222021
OPERATING ACTIVITIES  
Net income (loss)$13,299 $(57,679)
Adjustments to reconcile net income to net cash provided by operating activities: 0
Depreciation and amortization112,462 79,776 
Deferred finance cost amortization4,238 3,239 
Loss on impairment of assets— 4,361 
Recoveries of credit losses(1,100)(2,632)
Equity-based compensation7,070 5,861 
Gain on disposal of assets(20,479)(81)
Non-cash interest income(113)(779)
Debt transaction costs1,166 160 
Other303 326 
Changes in operating assets and liabilities:00
Trade receivables, net(9,755)(2,434)
Prepaid expenses and other(4,828)3,130 
Accounts payable(244)2,051 
Accrued expenses33,662 14,990 
NET CASH PROVIDED BY OPERATING ACTIVITIES135,681 50,289 
INVESTING ACTIVITIES  
Acquisitions of hotel and other properties(281,074)(33,170)
Improvements and additions to hotel properties(48,772)(10,659)
Proceeds from asset dispositions, net of closing costs73,758 — 
Escrow deposits for acquisitions— (635)
Funding of real estate loans(2,167)(7,416)
Repayments of real estate loans850 — 
NET CASH USED IN INVESTING ACTIVITIES(257,405)(51,880)
FINANCING ACTIVITIES  
Proceeds from issuance of debt486,500 318,500 
Principal payments on debt(468,874)(350,916)
Proceeds from the sale of non-controlling interests674 — 
Purchases of capped calls for convertible senior notes— (21,131)
Redemption of preferred shares— (75,000)
Proceeds from equity offerings, net of issuance costs— 96,617 
Financing fees on debt and other issuance costs(7,203)(9,062)
Common dividends paid(5,174)— 
Preferred dividends(13,632)(11,213)
Contributions by joint venture partner to acquire a portfolio of hotels204,092 101,673 
Distributions to joint venture partner(77,903)— 
Repurchase of common shares for withholding requirements(2,455)(1,602)
NET CASH PROVIDED BY FINANCING ACTIVITIES116,025 47,866 
Net change in cash, cash equivalents and restricted cash(5,699)46,275 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH  
Beginning of period96,944 38,896 
End of period$91,245 $85,171 

See Notes to the Condensed Consolidated Financial Statements

6


SUMMIT HOTEL PROPERTIES, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 - DESCRIPTION OF BUSINESS
 
General

Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
 
We primarily focus on owning premium-branded hotel properties with efficient operating models primarily in the Upscale segment of the lodging industry. At September 30, 2022, our portfolio consisted of 102 hotel properties with a total of 15,323 guestrooms located in 24 states. As of September 30, 2022, we own 100% of the outstanding equity interests in 61 of our 102 hotel properties. We own a 51% controlling interest in 39 hotel properties through a joint venture that was formed in July 2019 with GIC (the “GIC Joint Venture”), Singapore’s sovereign wealth fund. We also own a 90% controlling interest in two hotel properties that we acquired in June 2022 through another joint venture (the "Brickell Joint Venture").

We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotel properties. Accordingly, all of our hotel properties are leased to our taxable REIT subsidiaries (“TRS Lessees”).

In January and March 2022, the Operating Partnership and the GIC Joint Venture closed on a transaction 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 and various financial incentives for an aggregate purchase price of $822.0 million (the "NCI Transaction"). In June 2022, the Operating Partnership exercised an option to acquire a 90% equity interest in the AC Hotel by Marriott and Element Miami Brickell Hotel in Miami, FL. (together the "AC/Element Hotel") based on a gross hotel option exercise price of $89.0 million (the "Brickell Transaction"). See "Note 3 - Investment in Hotel Properties, net" for further information.

Risks and Uncertainties
 
Beginning in March 2020, we experienced the negative effects of the novel coronavirus, designated as COVID-19
(“COVID-19”) and its variants (collectively, the "Pandemic"), which 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. As such, we experienced a substantial decline in our revenues, profitability and cash flows from operations during the years ended December 31, 2020 and 2021. Additionally, there has been a sharp increase in inflation and interest rates during the nine months ended September 30, 2022. The extended effects of the Pandemic and macroeconomic conditions may result in additional risks and uncertainties related to our business and our ability to recover to pre-Pandemic levels and beyond.

During the three and nine months ended September 30, 2022, we experienced significant improvement in our business, driven primarily by leisure travel and to a lesser extent modest improvement in other demand segments, including corporate and group. 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, continued growth in operating results is dependent upon a continuation in the recovery of travel, further dissipation of concerns related to the Pandemic, geopolitical stability, moderating inflation, a normalized labor market, and maintaining a high-quality portfolio aligned with evolving guest preferences.

For additional information related to the effects of the Pandemic on our business, please see our Annual Report on Form 10-K for the year ended December 31, 2021.

7


NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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. As interim statements, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three and nine months ended September 30, 2022 may not be indicative of the results that may be expected for the full year of 2022. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.

The accompanying Condensed Consolidated Financial Statements consolidate the accounts of all entities in which we have a controlling financial interest, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.

We evaluate joint venture partnerships to determine if they should be consolidated based on whether the partners exercise joint control. For a joint venture where we exercise primary control and we also own a majority of the equity interests, we consolidate the joint venture partnership. We have consolidated the accounts of our joint venture partnerships in our accompanying Condensed Consolidated Financial Statements. See "Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests" for further information.

Non-controlling Interests 

Non-controlling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Non-controlling interests are reported in the Condensed Consolidated Balance Sheets within equity, separately from stockholders’ equity. Revenues, expenses and net income attributable to both the Company and the non-controlling interests are reported in the Condensed Consolidated Statements of Operations. 

Our Condensed Consolidated Financial Statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties and third-party minority ownership interests in our joint ventures.  

Redeemable Non-controlling Interests

Redeemable non-controlling interests represent redeemable preferred units issued by our Operating Partnership ("Redeemable Preferred Units") in connection with the NCI Transaction (see "Note 3 - Investments in Hotel Properties, net" for additional information). The Redeemable Preferred Units are presented as temporary equity related to our Operating Partnership on our Condensed Consolidated Balance Sheets under the caption of "Redeemable Non-controlling Interests." See "Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests" for further information. We record Redeemable non-controlling interests at fair value on the issuance date of the securities. When the carrying value (the acquisition date fair value adjusted for the non-controlling interest’s share of net income (loss) and dividends) is less than the redemption value, we adjust the redeemable non-controlling interest to equal the redemption value with changes recognized as an adjustment to Accumulated deficit and distributions in excess of retained earnings. Any such adjustment, when necessary, is recorded as of the applicable balance sheet date.


8


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 $0.1 million at September 30, 2022 and $0.2 million at December 31, 2021. Bad debt expense was $0.1 million for both the three months ended September 30, 2022 and 2021, and $0.2 million and $0.3 million for the nine months ended September 30, 2022 and 2021, respectively.

Earnings Per Share

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. We apply the two-class method of computing earnings (loss) per share, which requires the calculation of separate earnings (loss) per share amounts for participating securities. 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. Any anti-dilutive securities are excluded from the basic per-share calculation.

Diluted EPS is computed by dividing net income (loss) available to common stockholders, as adjusted for dilutive securities, by the weighted-average number of common shares outstanding plus dilutive securities. Any anti-dilutive securities are excluded from the diluted per-share calculation.

Basic and diluted loss per share for the three and nine month periods ended September 30, 2022 and 2021 are calculated as Net loss attributable to common stockholders for each respective period divided by weighted average common shares outstanding for each respective period as all other securities are antidilutive. Potentially dilutive shares include unvested restricted share grants, unvested performance share grants, common shares issuable upon conversion of convertible debt and common shares issuable upon conversion of Common Units of our Operating Partnership.

Use of Estimates
 
Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP, which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions that affect reported amounts and related disclosures in our Condensed Consolidated Financial Statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations, which could materially affect our expectations for our consolidated financial position and results of operations.

Reclassifications

Certain amounts at December 31, 2021 related to intangible assets totaling approximately $3.5 million and accumulated amortization of approximately $1.0 million have been reclassified within Investments in Hotel Properties, net to conform to the current period presentation.

New Accounting Standards

In March 2020, the Financial Accounting Standards Board 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 the year ended December 31, 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 presentation. The implementation of ASU No. 2020-04 will not have a material effect on our consolidated financial position or results of operations.




9




NOTE 3 - INVESTMENT IN HOTEL PROPERTIES, NET
 
Investment in Hotel Properties, net

Investment in hotel properties, net is as follows (in thousands):

September 30, 2022December 31, 2021
Hotel buildings and improvements$2,849,985 $2,127,782 
Land378,105 323,276 
Furniture, fixtures and equipment259,731 167,245 
Construction in progress44,263 18,321 
Intangible assets39,954 10,834 
Real estate development loan (1)
— 27,595 
3,572,038 2,675,053 
Less accumulated depreciation(689,895)(583,080)
$2,882,143 $2,091,973 

(1) During the year ended December 31, 2019, we executed a mezzanine loan to provide financing of $29.9 million for a mixed-use development project that includes the AC/Element Hotel with 264 guestrooms, retail space, and parking. In connection with the mezzanine loan, we had an option to purchase a 90% equity interest in the AC/Element Hotel (the "Initial Purchase Option") upon completion of construction, which occurred in December 2021. The mezzanine loan was classified as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at December 31, 2021. See "Note 4 - Investment in Real Estate Loans" for further information. In June 2022, the balance of the mezzanine loan was extinguished with the exercise of the Initial Purchase Option to acquire the AC/Element Hotel as part of the Brickell Transaction described below.

Hotel Property Acquisitions

NCI Transaction

During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on the NCI Transaction for the acquisition of a portfolio of 27 hotel properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces, and various financial incentives for an aggregate purchase price of $822.0 million, paid in
the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 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) (the “Series Z Preferred Units”), a cash draw of $410.0 million 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,
$5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the Joint Venture, and approximately
$185.2 million cash contributed by GIC at closing. GIC also contributed to the Joint Venture an additional $18.5 million in cash
for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating
Partnership as reimbursement for transaction costs paid by the Operating Partnership.

We valued the Common Units and Series Z Preferred Units at fair market value on the closing dates of the NCI Transaction,
which resulted in us recording the issued Common Units and Series Z Preferred Units at $157.5 million and $50.0 million,
respectively. The Common Units were recorded at the closing prices of our Common Stock on the closing dates since the
Common Units are redeemable for shares of our Common Stock on a 1:1 basis. We estimated the fair value of the Series Z
Preferred Units based on the features and stated dividend coupon of the Series Z Preferred Units relative to similar securities
with more readily determinable market values. We recorded the Series Z Preferred Units at their redemption value of
$50.0 million which approximates fair value on the closing dates.

Our Joint Venture assumed $335.2 million of debt in connection with the NCI Transaction and immediately repaid
$328.7 million of the assumed debt on the closing date using proceeds from borrowings on the Joint Venture Term Loan (as
described below). We recorded debt assumed in connection with the NCI Transaction at its face amount, which approximated fair market value on the closing date.

10


Incentives and other intangibles include tax incentives totaling approximately $19.8 million associated with certain of the acquired hotel properties in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 9.1 years, which is the period in which we expect to meet the requirements to receive payment of the tax incentives. Other intangible assets totaling approximately $3.9 million are related to key money associated with certain of the hotel properties acquired in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 19.7 years, which is the remaining key money contract period with the franchisor.

Brickell Transaction

On June 10, 2022, we formed the Brickell Joint Venture (see "Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the exercise of our Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. The exercise price of the Initial Purchase Option was $89.0 million and was primarily funded with the conversion of the mezzanine loan of $29.9 million to equity, $7.9 million in cash and the assumption of debt.

A summary of the hotel properties acquired during the nine months ended September 30, 2022 is as follows (in thousands):

Date AcquiredFranchise/BrandLocationGuestroomsPurchase
Price
January 13, 2022
Portfolio of properties - twenty-six hotel properties and two parking garages (1)
Various3,533$767,056 
March 23, 2022
Canopy Hotels by Hilton (1)
New Orleans, LA17656,000 
June 10, 2022
AC/Element Hotel (2)
Miami (Brickell), FL26494,522 
3,973 $917,578

(1)    On January 13, 2022, we acquired a portfolio of twenty-six hotels and two parking garages for an aggregate purchase price of $767.1 million. The hotels acquired included 21 hotels and two parking garages in Texas, two hotels in Louisiana and three hotels in Oklahoma under the following brands: Marriott (13), Hilton (7), Hyatt (4), and IHG (2). On March 23, 2022, we acquired the Canopy New Orleans upon completion of its construction for a purchase price of $56.0 million.

(2)    The purchase price of the AC/Element Hotel was based on the exercise price of the Initial Purchase Option of $89.0 million. The transaction included the
assumption of $47.0 million of debt resulting in a net consideration payment requirement of $42.0 million. We paid 90% of the required net consideration
with the conversion of our $29.9 million mezzanine loan into equity and a cash payment of $7.9 million. The carrying amount of our Initial Purchase
Option of $2.8 million is also included in the total amount allocated to the assets acquired. The Brickell Joint Venture partner’s non-controlling interest
of $6.9 million represents 10% of the fair value of the net assets on the transaction date, determined by a third-party valuation expert based on discounted
forecasted future cash flows of the net assets acquired. We also incurred $0.6 million of transaction costs. The result is a total amount allocated to the
assets acquired of $95.1 million plus an intangible asset totaling $2.0 million related to the assumption of the franchises for the hotel properties and a
related key money liability.

The allocation of the aggregate purchase prices to the relative fair values of the assets and liabilities acquired for the above asset acquisitions is as follows (in thousands):

Land$67,175 
Hotel buildings and improvements751,720 
Incentives and other intangibles25,642 
Furniture, fixtures and equipment82,353 
Other assets5,318 
Total assets acquired (1)
932,208 
Less debt assumed(382,205)
Less lease liabilities assumed(5,100)
Less other liabilities(6,233)
Net assets acquired$538,670 

(1)    The total consideration paid for the acquisitions of $925.8 million includes capitalized transaction costs $3.6 million and deferred financing costs of $4.6 million. Total assets acquired is based on the purchase price of $917.6 million, transaction costs of $3.6 million and intangible assets totaling $11.0 million acquired outside of escrow.
All hotel purchases completed in 2022 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.

On July 9, 2021, the Company acquired the 110-guestroom Residence Inn by Marriott in Steamboat Springs, CO for
$33.0 million through its joint venture with GIC, of which the Company owns 51%.

11


Asset Sales

In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture.

Assets Held for Sale

Assets Held for Sale at September 30, 2022 and December 31, 2021 include a land parcel in Flagstaff, AZ.

Intangible Assets

Intangible assets, net is as follows (in thousands):
September 30, 2022December 31, 2021
Indefinite-lived Intangible assets:
Air rights$10,754 $10,754 
Other80 80 
10,834 10,834 
Finite-lived intangible assets:
Tax incentives19,750 — 
Key money9,370 — 
29,120 — 
Intangible assets39,954 10,834 
Less accumulated amortization(4,104)— 
Intangible assets, net$35,850 $10,834 

We recorded amortization expense related to intangible assets of approximately $1.0 million and $3.0 million for the three and nine months ended September 30, 2022, respectively. We did not record any amortization expense related to intangible assets for the three and nine months ended September 30, 2021.

Future amortization expense related to intangible assets is as follows (in thousands):

2022$1,083 
20234,331 
20244,296 
20251,625 
20261,625 
Thereafter12,056 
$25,016 


During the year ended December 31, 2019, we executed a mezzanine loan to provide financing of $29.9 million for a mixed-use development project that includes the AC/Element Hotel with 264 guestrooms, retail space, and parking. In connection with the mezzanine loan, we had an option to purchase a 90% equity interest in the AC/Element Hotel (the "Initial Purchase Option") upon completion of construction, which occurred in December 2021. The mezzanine loan was classified as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at December 31, 2021. See "Note 4 - Investment in Real Estate Loans" for further information. In June 2022, the balance of the mezzanine loan was extinguished with the exercise of the Initial Purchase Option to acquire the AC/Element Hotel as part of the Brickell Transaction described below.
12


NOTE 4 — INVESTMENT IN REAL ESTATE LOANS

Investment in real estate loans, net is as follows (in thousands):
September 30, 2022December 31, 2021
Real estate loans$1,500 $2,350 
Allowance for credit losses(1,250)(2,350)
$250 $— 

The amortized cost bases of our Investment in real estate loans, net approximate their fair values.

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. 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 due to a borrower default caused by the negative effects of the Pandemic. 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. Under the amended loan terms, interest is accruing at a rate of 9.00% monthly, including 5.00% payable in cash and 4.00% paid-in-kind. Semiannual principal payments of $0.3 million began on April 15, 2022.

On September 15, 2022, we received a $0.6 million payment to repay one of the two loans in full. On September 15, 2022, we amended the terms of the seller-financing loans and extended the maturity date of the remaining loan to December 31, 2023. On October 26, 2022, we received a scheduled $0.3 million principal payment from the borrower on the remaining outstanding loan. The outstanding principal of the remaining seller-financing loan as of October 26, 2022 is $1.3 million. The outstanding principal balance of the seller-financing loan continues to be fully reserved pending further consistent performance by the borrower under the modified terms of the loan.

Real Estate Development Loans

During the year ended December 31, 2019, we executed a mezzanine loan to fund up to $28.9 million for a mixed-use
development project that includes the AC/Element Hotel, retail space, and parking. In December 2021, we modified the loan agreement to increase our funding commitment by $1.0 million. We completed the funding of our entire $29.9 million commitment during the first half of 2022. The loan was converted to equity in June 2022 upon the exercise of our Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. The loan was recorded as Investment in hotel properties, net on our Consolidated Balance Sheets at December 31, 2021.
13



NOTE 5 - DEBT
 
At September 30, 2022, our indebtedness was comprised of borrowings under our 2018 Senior Credit Facility (as defined below), the 2018 Term Loan (as defined below), the GIC Joint Venture Credit Facility (as defined below), the GIC Joint Venture Term Loan (as defined below), the PACE Loan (as defined below), the Brickell Mortgage Loan (as defined below), the Convertible Notes (as defined below), and other 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 4.54% at September 30, 2022 and 3.35% at December 31, 2021.

Debt, net of debt issuance costs, is as follows (in thousands):

 September 30, 2022December 31, 2021
Revolving debt$125,000 $68,500 
Term loans910,000 562,000 
Convertible notes287,500 287,500 
Mortgage loans158,647 163,315 
 1,481,147 1,081,315 
Unamortized debt issuance costs(12,806)(11,518)
Debt, net of debt issuance costs$1,468,341 $1,069,797 

We have entered into interest rate swaps to fix the interest rates on a portion of our variable interest rate indebtedness. See "Note 7 - Derivative Financial Instruments and Hedging" to the Condensed Consolidated Financial Statements for additional information. Our total fixed-rate and variable-rate debt, after considering our interest rate derivative agreements that are currently effective, is as follows (in thousands):
 
 September 30, 2022PercentageDecember 31, 2021Percentage
Fixed-rate debt (1)
$791,389 53%$842,858 78%
Variable-rate debt689,758 47%238,457 22%
$1,481,147 $1,081,315 

(1) At September 30, 2022, debt related to our wholly-owned properties coupled with our pro rata share of joint venture debt results in fixed-rate debt ratio of approximately 67% of our total pro rata indebtedness when including the effect of interest rate swaps.
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
 
 September 30, 2022December 31, 2021 
 Carrying
Value
Fair ValueCarrying
Value
Fair ValueValuation Technique
Convertible notes$287,500 $241,616 $287,500 $300,384 Level 1 - Market approach
Fixed-rate mortgage loans103,890 91,476 155,358 155,765 Level 2 - Market approach
$391,390 $333,092 $442,858 $456,149 
 
At September 30, 2022 and December 31, 2021, we had $400.0 million of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value.  Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional information on our use of derivatives as interest rate hedges, refer to "Note 7 - Derivative Financial Instruments and Hedging."

14


$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”). The 2018 Senior Credit Facility has an accordion feature which allows the Company to increase the total commitments by an aggregate of up to $300.0 million. At September 30, 2022, our $200 Million Term Loan was fully funded and our $400 Million Revolver remains fully undrawn. Borrowings under the 2018 Senior Credit Facility are limited by the value of the Unencumbered Assets.

On July 21, 2022, Bank of America, N.A. entered into successor administrative agent documentation to succeed Deutsche Bank AG New York Branch as administrative agent on the 2018 Senior Credit Facility.

Amendments to the 2018 Senior Credit Facility

Between May 2020 and July 2022, the Company entered into several amendments to the 2018 Senior Credit Facility (the “Credit Facility Amendments”). We entered into the most recent amendment to the 2018 Senior Credit Facility on July 21, 2022 (the "Amendment"). Under the Amendment, the requirement that we grant first lien mortgages and assignments of leases on the unencumbered assets upon any advance that would cause the total amount outstanding under the revolving credit facility to exceed $350.0 million was eliminated in its entirety. The Amendment also provides improvements to certain of the key financial covenants including eliminating the minimum liquidity covenant. At September 30, 2022, we had no borrowings outstanding on the $400 Million Revolver.

Under the Amendment, the $400 Million Revolver and $200 Million Term Loan each now have two additional six-month extension options available, subject to certain conditions. The $400 Million Revolver will mature on March 31, 2023 and can be extended to March 31, 2025 at the Company’s option, subject to certain conditions. The $200 Million Term Loan will mature on April 1, 2024, and can be extended to April 1, 2025 at the Company’s option, subject to certain conditions.

On July 21, 2022, the interest rate on the 2018 Senior Credit Facility was transitioned from LIBOR to the Secured Overnight Financing Rate (“SOFR”). 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 SOFR plus a 10 basis point credit spread adjustment for the $400 Million Revolver and 135 basis points to 235 basis points plus SOFR plus a 10 basis point credit spread adjustment for the $200 Million Term Loan, depending on the Company's leverage ratio. For purposes of the $400 Million Revolver and the 2018 Senior Credit Facility, SOFR is subject to a floor of 25 basis points.

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 equity transactions and indebtedness related thereto.

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 $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 fully drawn as of September 30, 2022. 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.


15


Amendments to the 2018 Term Loan

Between May 2020 and July 2022, the Company entered into several amendments to the First Amended and Restated Credit Agreement (the “2018 Term Loan Amendments”). The amendments to the 2018 Term Loan are substantially the same as the Credit Facility Amendments described above related to the 2018 Senior Credit Facility. There was no modification to the maturity date of the 2018 Term Loan.

We pay interest on advances at varying rates, based upon, at our option, either (i) daily, 1-, 3-, or 6-month SOFR (subject to a floor of 25 basis points), plus a SOFR adjustment equal to 10 basis points and an applicable margin between 1.35% and 2.15%, depending upon our leverage ratio (as defined in the loan documents). We are required to pay other fees, including customary arrangement and administrative fees. The interest rate at September 30, 2022 was 5.29%, without taking into consideration our interest rate swaps.

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. The waivers and adjustments are the same as under the amendments to the Company’s 2018 Senior Credit Facility. At September 30, 2022, 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. 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. The 2017 Term Loan had an original maturity date of November 2022. In May 2022, we repaid in full the balance of the 2017 Term Loan of $62.0 million with our share of the proceeds from the sale of the 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA, along with cash on hand, and formally terminated the facility.

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 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 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 described 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. The Company recorded coupon interest expense of $1.1 million for each of the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, the Company recorded coupon interest expense of $3.2 million and $3.1 million, respectively. The Company incurred debt issuance costs related to the Convertible Notes Offering of $7.6 million of which $0.4 million was amortized for each of the three months ended September 30, 2022 and 2021, and $1.1 million was amortized for each of the nine months ended September 30, 2022 and 2021. Including the amortization of the debt issuance costs, the current effective interest rate on the Convertible Notes was approximately 2.00% for the nine months ended September 30, 2022 and 2021.


16


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. Commensurate with the declaration of dividends on our Common Stock and Common Units on August 31, 2022, the conversion rate of the Convertible Notes was adjusted to 83.7764 shares of Common Stock per $1,000 principal amount of Convertible Notes.

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 was initially $15.26, which represented a premium of 75.0% over the last reported sale price of our 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. The current strike price is $15.19 due to the adjustments related to the dividends paid during the third quarter of 2022.

MetaBank Loan

On June 30, 2017, Summit Meta 2017, LLC (“SM-17”), a subsidiary of our Operating Partnership, 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 hotel properties and is subject to a prepayment penalty if prepaid prior to April 1, 2027. In or around December 2021, MetaBank sold the MetaBank Loan to Bayside MB CRE Loans, LLC (“Bayside”). On October 25, 2022, SM-17 received a letter from Bayside’s counsel alleging various events of default under the MetaBank Loan, primarily related to certain non-monetary covenants and further alleging that default interest is accruing as a result. SM-17 disputes that such events of default have occurred and has engaged counsel to evaluate such allegations.

Mortgage Loans

At September 30, 2022 and December 31, 2021, we had mortgage loans totaling $158.6 million and $163.3 million, respectively, that are secured primarily by first mortgage liens on 10 and 16 hotel properties, respectively.

On August 30, 2022, we entered into agreements to fully defease three commercial mortgage-backed securities ("CMBS") mortgage loans totaling $54.9 million by placing into trust an amount sufficient to cover future principal and interest payments. The defeasance resulted in the nine hotel properties that collateralized the three CMBS mortgage loans becoming unencumbered. The defeasance was recorded as an extinguishment of the debt since we have been fully released from liability under the CMBS mortgage loans. As part of the transaction, we incurred transaction costs of $0.6 million that were recorded as debt transaction costs as Other (loss) income, net in our Statement of Operations for the three months ended September 30, 2022. We will no longer be obligated to make future interest payments of approximately $1.3 million between the defeasance date and maturity date, and $20.1 million of restricted cash reserves were returned to us. We also expensed $0.1 million of unamortized deferred financing costs related to the defeased CMBS mortgage loans as debt transaction costs during the three months ended September 30, 2022.


17


GIC Joint Venture Credit Facility

On October 8, 2019, Summit JV MR 1, LLC (the “Borrower”), as borrower, and Summit Hospitality JV, LP (the “Parent” or "GIC Joint Venture"), as parent of the Borrower, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $200.0 million credit facility (the “GIC 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 Operating Partnership and the Company are not borrowers or guarantors of the GIC Joint Venture Credit Facility. The GIC Joint Venture Credit Facility is guaranteed by all of the Borrower’s existing and future subsidiaries, subject to certain exceptions.

The GIC 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 GIC Joint Venture Credit Facility has an accordion feature which allows us to increase the total commitments by up to $300.0 million, for aggregate potential borrowings of up to $500.0 million on the GIC Joint Venture Credit Facility. At September 30, 2022, we had $125.0 million outstanding under the $125 Million Revolver.

The $125 Million Revolver and the $75 Million Term Loan will mature on October 8, 2023. Each can be extended for a single twelve-month period at the Borrower'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 interest rate at September 30, 2022 was 5.29%. The applicable margin for a term loan advance shall be five basis points less than revolving credit advances referenced above. The GIC Joint Venture Credit Facility has been amended to accommodate the transition from LIBOR to SOFR, when LIBOR is no longer available. At September 30, 2022, we were in compliance with all financial covenants.

Amendments to $200 Million GIC Joint Venture Credit Facility

On June 18, 2020, the Company entered into a Second Amendment to Credit Agreement related to the GIC Joint Venture Credit Facility (“Second Amendment”). The Second Amendment resulted in waivers or adjustments to certain financial and other covenants under the GIC 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 GIC Joint Venture Credit Facility (the “GIC Joint Venture Amendment”).

Certain financial and other covenants under the GIC Joint Venture Credit Facility were waived or adjusted as follows:

• Increase of the Maximum Leverage Ratio through the initial maturity date;
• Increase of the Borrowing Base Leverage through the initial maturity date;

During the covenant waiver period, the applicable margin was increased to 230 basis points and 225 basis points for the $125 million Revolver and $75 million Term Loan, respectively. The covenant waiver period has expired so the applicable margin has reverted to 215 basis points and 210 basis points for the $125 million Revolver and $75 million Term Loan, respectively.

Borrowing Base Assets. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that hold 11 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 11 hotel properties deemed borrowing base assets.


18


GIC Joint Venture Term Loan

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 of which is a subsidiary of the GIC Joint Venture, and are collectively, the “Borrowers”), the GIC 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 “GIC Joint Venture Term Loan”) 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 GIC Joint Venture Term Loan. The GIC Joint Venture Term Loan is guaranteed by the GIC Joint Venture and all of the Borrowers’ existing and future subsidiaries, subject to certain exceptions.

The GIC Joint Venture Term Loan provides for a $410.0 million term loan and has an accordion feature which permits an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan will mature on January 13, 2026 and can be extended for one 12-month period at the option of the GIC Joint Venture, subject to certain conditions.

As of September 30, 2022, we had $410.0 million outstanding on the GIC Joint Venture Term Loan bearing interest at a floating rate of SOFR plus 2.86%. The interest rate at September 30, 2022 was 5.91%.

Borrowing Base Assets

The GIC Joint Venture Term Loan is secured primarily by a first priority pledge of the Borrowers’ equity interests in the subsidiaries that hold a direct or indirect interest in the 27 hotel properties and two parking facilities purchased in the NCI Transaction that constitute borrowing base assets. The GIC Joint Venture Term Loan contains terms, conditions and covenants for typical for similar credit facilities.

For additional information concerning the GIC Joint Venture Term Loan, please see our Current Report on Form 8-K filed on January 14, 2022.

PACE Loan

As part of the NCI Transaction, a subsidiary of the GIC Joint Venture assumed a PACE loan of approximately $6.5 million. The loan bears fixed interest at 6.10%, has an amortization period of 20 years, and matures on July 31, 2040. The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender.

Brickell Mortgage Loan

In June 2022, the Company entered into a joint venture (the "Brickell Joint Venture") with C-F Brickell, LLC, a Delaware limited liability company that was the developer of the AC/Element Hotel ("C-F Brickell"), to facilitate the exercise of the Initial Purchase Option to acquire a 90% equity interest in the Brickell Joint Venture, which owned a 100% interest in the AC/Element Hotel. On June 10, 2022, the Brickell Joint Venture entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida to finance the dual-branded 264-guestroom AC/Element Hotel. The City National Bank Loan provides for an interest rate equal to one-month term SOFR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize based on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank Loan is prepayable at any time without penalty.

19


NOTE 6 - LEASES

The Company has operating leases related to the land under certain hotel properties, conference centers, parking spaces, automobiles, our corporate office and other miscellaneous office equipment. These leases have remaining terms of 1 year to 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.

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 lease certain owned real estate to third parties. We recorded gross third-party tenant income of $2.4 million and $0.5 million during the three months ended September 30, 2022 and 2021, respectively, and $6.9 million and $1.5 million for the nine months ended September 30, 2022 and 2021, respectively, which were recorded in Other income in the Condensed Consolidated Statement of Operations.

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 September 30, 2022, our weighted average incremental borrowing rate was 4.79%.

During the three months ended September 30, 2022 and 2021, the Company's total operating lease cost was $1.0 million and $0.9 million, respectively, and the operating cash outflow from operating leases was $1.0 million and $0.8 million, respectively. During the nine months ended September 30, 2022 and 2021, the Company's total operating lease cost was $3.0 million and $2.4 million, respectively, and the operating cash outflow from operating leases was $2.8 million and $2.2 million, respectively. As of September 30, 2022, the weighted average operating lease term was 33.5 years.

Operating lease maturities as of September 30, 2022 are as follows (in thousands):

2022$549 
20231,942 
20241,904 
20251,925 
20261,959 
Thereafter39,997 
Total lease payments (1)
48,276 
Less interest(22,523)
Total$25,753 

(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.

20


NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
 
Information about our derivative financial instruments at September 30, 2022 and December 31, 2021 is as follows (dollars in thousands): 
Notional AmountFair Value
Contract dateEffective DateExpiration DateAverage Annual Effective Fixed RateSeptember 30, 2022December 31, 2021September 30, 2022December 31, 2021
October 2, 2017January 29, 2018January 31, 20231.98 %$100,000 $100,000 $623 $(1,617)
October 2, 2017January 29, 2018January 31, 20231.98 %100,000 100,000 615 (1,629)
June 11, 2018September 28, 2018September 30, 20242.87 %75,000 75,000 2,006 (3,831)
June 11, 2018December 31, 2018December 31, 20252.93 %125,000 125,000 4,395 (8,646)
July 26, 2022January 31, 2023January 31, 20272.60 %100,000 — 4,533 — 
July 26, 2022January 31, 2023January 31, 20292.56 %100,000 — 5,821 — 
$600,000 $400,000 $17,993 $(15,723)

In July 2022, we entered into two new interest rate swap agreements. One interest rate swap agreement has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of six years. Regions Bank is the counterparty and the swap provides for a fixed rate of 2.5625%. The second interest rate swap has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of four years. Capital One Bank, N.A. is the counterparty and the swap provides for a fixed rate of 2.6%.

Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At September 30, 2022, our six interest rate swaps were in an asset position. At December 31, 2021, all of our interest rate swaps were in a liability position. The substantial change in value related to our interest rate swaps during the first and second quarters of 2022 was due to increases in interest rates. Derivative assets related to our interest rate swaps are recorded in Other assets, and other and derivative liabilities are included in Accrued expenses and other in our Condensed Consolidated Balance Sheets. We are not required to post any collateral related to these agreements and are not in breach of any financial provisions of the agreements.

Changes in the fair value of the hedging instruments are deferred in Other comprehensive income and are reclassified to Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings. In the next twelve months, we estimate that $6.3 million will be reclassified from Other comprehensive income and recorded as an decrease to Interest expense.
 
The table below details the location in the financial statements of the realized and unrealized gain or loss related to derivative financial instruments designated as cash flow hedges (in thousands):
 
 For the
Three Months Ended
September 30,
For the
Nine Months Ended
September 30,
 2022202120222021
Unrealized gain (loss) recorded in Other comprehensive income on derivative financial instruments$16,536 $(138)$29,560 $2,743 
Loss reclassified from Other comprehensive income to Interest expense$(171)$(2,403)$(4,156)$(7,087)
Total interest expense in which the effects of cash flow hedges are recorded$(17,645)$(10,817)$(46,202)$(32,567)
 

21


NOTE 8 - EQUITY
 
Common Stock
 
The Company is authorized to issue up to 500,000,000 shares of common stock, $0.01 par value per share (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 9, 2022, the Company and the Operating Partnership entered into an equity distribution agreement (the “Equity Distribution Agreement”) with a group of underwriters as sales agents for the Company, principals and/or, with certain exceptions, forward sellers (collectively the “Managers”) and certain banks as forward purchasers, providing for the offer and sale of shares of the Company’s Common Stock, having a maximum aggregate offering price of up to $200,000,000 through or to the Managers, as the Company’s sales agents or, if applicable, as forward sellers, or directly to the Managers, as principals (the “2022 ATM Program”). To date, we have not sold any shares of our Common Stock under the 2022 ATM Program.

Changes in Common Stock during the nine months ended September 30, 2022 and 2021 were as follows:

For the Nine Months Ended
September 30,
20222021
Beginning common shares outstanding106,337,724 105,708,787 
Common Unit redemptions5,000 31,945 
Grants under the Equity Plan735,371 860,910 
Annual grants to independent directors84,889 60,546 
Performance share and other forfeitures(8,272)(60,823)
Shares retained for employee tax withholding requirements(260,800)(155,605)
Ending common shares outstanding106,893,912 106,445,760 

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's outstanding shares of preferred stock (collectively, “Preferred Shares”) rank senior to our Common Stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirements. The Company may not redeem the Series E 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 Stock 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.


22


NOTE 9 - NON-CONTROLLING INTERESTS AND REDEEMABLE NON-CONTROLLING INTERESTS
 
Non-controlling Interests in Operating Partnership

Pursuant to the limited partnership agreement of our Operating Partnership, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of Common Stock at the time of redemption; however, the Company has the option to redeem Common Units with shares of our Common Stock on a one-for-one basis. The number of shares of our Common Stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations. On January 13, 2022 and March 23, 2022, in connection with the NCI Transaction, the Operating Partnership issued an aggregate of 15,864,674 Common Units as partial consideration for the purchase.

At September 30, 2022 and December 31, 2021, NewcrestImage and other unaffiliated third parties owned 15,984,471 and 124,797 of Common Units of the Operating Partnership, respectively, representing approximately 13% and less than 1% of the Common Units of the Operating Partnership for each period.
 
We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (loss) allocated to these Common Units is included on the Company’s Condensed Consolidated Statements of Operations as Net income (loss) attributable to non-controlling interests.

Non-controlling Interests in Joint Ventures

At September 30, 2022, the Company is a partner with a majority equity interest in two joint ventures as described below. We classify the non-controlling interests in our joint ventures as a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (losses) allocated to these non-controlling interests is included on the Company’s Condensed Consolidated Statements of Operations as Net income (losses) attributable to non-controlling interests.

GIC Joint Venture

In July 2019, the Company entered into a joint venture agreement with GIC, Singapore’s sovereign wealth fund, to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the GIC 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 GIC Joint Venture and will have the potential to earn incentive fees based on the GIC Joint Venture achieving certain return thresholds. As of September 30, 2022, the GIC Joint Venture owns 39 hotel properties containing 5,414 guestrooms in nine states.

The GIC Joint Venture owns the hotel properties through master real estate investment trusts (“Master REIT”) and subsidiary REITs (“Subsidiary REIT”). All of the hotel properties owned by the GIC Joint Venture are leased to taxable REIT subsidiaries of the Subsidiary REITs (“Subsidiary REIT TRSs”). To qualify as a REIT, the Master REIT and each Subsidiary REIT must meet all of the REIT requirements provided in the the Internal Revenue Code. Taxable income related to the Subsidiary REIT TRSs is subject to federal, state and local income taxes at applicable tax rates.

Brickell Joint Venture

In June 2022, the Company entered into the Brickell Joint Venture to facilitate the exercise of the Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. Our joint venture partner, C-F Brickell, owns the remaining 10% equity interest in the Brickell Joint Venture. The Company has an option to purchase the remaining 10% equity interest in the Brickell Joint Venture from C-F Brickell in December 2026 pursuant to the exercise of the Second Purchase Option at its market value on the exercise date. The Company serves as the managing member of the Brickell Joint Venture.

Redeemable Non-controlling Interests

In connection with the NCI Transaction, Summit Hotel GP, LLC, a wholly-owned subsidiary of the Company and the sole general partner of the Operating Partnership, on its own behalf as general partner of the Operating Partnership and on behalf of the limited partners of the Operating Partnership, on January 13, 2022, entered into the Tenth Amendment (the “Tenth Amendment”) to the First Amended and Restated Agreement of Limited Partnership of the Operating Partnership, to provide for the issuance of up to 2,000,000 Series Z Preferred Units. The Series Z Preferred Units rank on a parity with the Operating
23


Partnership’s Series E and Series F Preferred Units and holders will receive quarterly distributions at a rate of 5.25% per year. From issuance until the tenth anniversary of their issuance, the Series Z Preferred Units will be redeemable at the holder’s request at any time, or in connection with a change of control of the Company, for, at the Company’s election, cash or shares of the Company’s 5.25% Series Z Cumulative Perpetual Preferred Stock (which will be designated and authorized following notice of redemption by holder of the Series Z Preferred Units) on a one-for-one basis. After the fifth anniversary of their issuance, the Company may redeem the Series Z Preferred Units for cash at a redemption amount of $25 per unit. For a 90-day period immediately following both the tenth and the eleventh anniversaries of their issuance or in connection with a change of control of the Company, the Series Z Preferred Units will be redeemable at the holder’s request for cash at a redemption amount of $25 per unit. On January 13, 2022 and March 23, 2022, in connection with the NCI Transaction, the Operating Partnership issued an aggregate of 2,000,000 Series Z Preferred Units as partial consideration for the purchase. At September 30, 2022, the redeemable Series Z Preferred Units issued in connection with the NCI Transaction are recorded as temporary equity and reflected as Redeemable non-controlling interests on our Consolidated Condensed Balance Sheet.

NOTE 10 - FAIR VALUE MEASUREMENT
 
The following table presents information about our financial instruments measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
 
 Fair Value Measurements at September 30, 2022 using
 Level 1Level 2Level 3Total
Assets:
Interest rate swaps$— $17,993 $— $17,993 
 
 Fair Value Measurements at December 31, 2021 using
 Level 1Level 2Level 3Total
Assets:    
Purchase option related to real estate loans (1)
$— $— $2,800 $2,800 
Liabilities:    
Interest rate swaps— 15,723 — 15,723 

(1) The original fair value of the Initial Purchase Option was estimated using the Black-Scholes model. The Initial Purchase Option related to the acquisition of the AC/Element Hotel and did not have a readily determinable fair value at December 31, 2021. As such, the Initial Purchase Option was recorded at historical cost that was estimated using the Black-Scholes model.

NOTE 11 - COMMITMENTS AND CONTINGENCIES
 
Franchise Agreements
 
We expensed fees related to our franchise agreements of $12.7 million and $7.7 million for the three months ended September 30, 2022 and 2021, respectively, and $35.7 million and $17.7 million for the nine months ended September 30, 2022, and 2021, 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, which is 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. Management fee expenses were $4.3 million and $2.9 million for the three months ended September 30, 2022 and 2021, respectively, and $13.1 million and $6.8 million for the nine months ended September 30, 2022, and 2021, respectively.

24


Litigation
 
We are involved from time to time in litigation arising in the ordinary course of business. There are currently no pending legal actions that we believe would have a material effect on our financial position or results of operations.
 
NOTE 12 - EQUITY-BASED COMPENSATION
 
Our currently outstanding equity-based awards were issued under the Equity Plan which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive awards. Stock options granted may be either incentive stock options or non-qualified stock options. Vesting terms may vary with each grant, and stock option terms are generally five to ten years. At September 30, 2022, we only have outstanding restricted stock awards. All of our outstanding equity-based awards are classified as equity awards.

Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
 
The following table summarizes time-based restricted stock award activity under our Equity Plan for the nine months ended September 30, 2022:
 
 Number
 of Shares
Weighted Average
Grant Date 
Fair Value
Aggregate
Current Value
  (per share)(in thousands)
Non-vested at December 31, 2021605,470 $9.98 $5,909 
Granted316,643 9.83  
Vested(259,037)(10.05) 
Forfeited(8,272)(10.29) 
Non-vested at September 30, 2022654,804 $9.85 $4,400 

The awards granted to our non-executive employees prior to 2022 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 non-executive employees in 2022 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).

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 their unvested restricted shares of common stock and receive all dividends declared and paid whether or not vested. The fair value of time-based restricted stock awards granted is calculated based on the market value of our common stock on the date of grant.

Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan

The following table summarizes performance-based restricted stock activity under the Equity Plan for the nine months ended September 30, 2022: 
 Number 
of Shares
Weighted Average
Grant Date 
Fair Value (1)
Aggregate
Current Value
  (per share)(in thousands)
Non-vested at December 31, 20211,002,866 $11.92 $9,788 
Granted306,435 12.26  
Vested(302,327)(12.81) 
Non-vested at September 30, 20221,006,974 $11.76 $6,767 

(1)    The amounts included in this column represent the expected future value of the performance-based restricted stock awards calculated using the Monte Carlo simulation valuation model.

25


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 cliff vest on the third anniversary of the grants based on our percentile ranking within the SNL U.S. REIT Hotel Index at the end of the period or upon a change in control. The awards require continuous 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 accrue and will be subject to the same vesting conditions as the awards.  Further, if additional shares are earned based on our percentile ranking within the index, dividend payments will be issued as if the additional shares had been held throughout the measurement period.

Equity-Based Compensation Expense
 
Equity-based compensation expense included in Corporate general and administrative expenses in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 was as follows (in thousands):
 
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2022202120222021
Time-based restricted stock$566 $891 $1,806 $2,399 
Performance-based restricted stock665 1,001 4,462 2,879 
Director stock— — 802 583 
$1,231 $1,892 $7,070 $5,861 
 
We recognize equity-based compensation expense ratably over the vesting periods. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions. During the nine months ended September 30, 2022, we granted a new member of our Board of Directors 3,234 shares of fully vested shares of our Common Stock at $9.94 per share and we granted members of our Board of Directors an aggregate of 81,655 shares of fully vested shares of our Common stock at $9.43 per share.

Unrecognized equity-based compensation expense for all non-vested awards pursuant to our Equity Plan was $9.6 million at September 30, 2022 and will be recorded as follows (in thousands):
 
 Total2022202320242025
Time-based restricted stock$4,610 $650 $2,315 $1,435 $210 
Performance-based restricted stock4,994 726 2,559 1,483 226 
 $9,604 $1,376 $4,874 $2,918 $436 

The Company's former Executive Vice President and Chief Operating Officer retired in March 2022. The Company recorded $1.3 million of additional stock-based compensation expense during the period related to the modification of certain stock award agreements. This amount was comprised of $0.4 million related to time-based restricted stock awards and $0.9 million related to performance-based restricted stock awards.
 


26


NOTE 13 - INCOME TAXES
 
As a REIT, we generally will not be subject to corporate-level U.S. federal income tax on ordinary income and capital gains income generated by our REIT activities that we distribute to our stockholders. We are subject to federal and state income taxes on the earnings of our TRS Lessees. In addition, our Operating Partnership is subject to tax in a limited number of local and state jurisdictions.

The Company recorded income tax expense of $0.2 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively. The Company recorded income tax expense of $4.6 million and $1.1 million for the nine months ended September 30, 2022 and 2021, respectively. There is variation in the quarterly income tax provision (benefit) recorded in the current year as a result of certain provisions of ASC No. 740, Income Taxes. These variations in the income tax expense (benefit) recorded in the interim periods of the current year is the result of variations in quarterly net income (loss) before taxes.

Due to the effects of the Pandemic, certain of our TRS Lessees have incurred operating losses in the past and are expected to be in a cumulative loss for the foreseeable future.  A cumulative loss is significant negative evidence that the realizability of our deferred tax assets at September 30, 2022 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all our deferred tax assets at September 30, 2022.

The Company files tax returns in federal and various state and local jurisdictions. In the normal course of business, we are subject to examination by federal, state, and local jurisdictions where applicable. We had no unrecognized tax benefits at September 30, 2022. We expect no significant changes in unrecognized tax benefits within the next year.


NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 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.

Supplemental cash flow information for the nine months ended ended September 30, 2022 and 2021 is as follows:

Nine Months Ended
September 30, 2022
20222021
Cash payments for interest$39,901 $29,384 
Accrued acquisitions and improvements to hotel properties$7,458 $1,777 
Cash payments for income taxes, net of refunds$2,627 $526 
Debt assumed to complete acquisition of properties$382,205 $— 
Assumption of leases and other assets and liabilities in connection with the acquisition of a portfolio of properties$9,206 $— 
Conversion of a mezzanine loan to complete acquisition of hotel properties$29,875 $— 
Exercise of purchase option to complete acquisition of hotel properties$2,800 $— 
Non-controlling contribution to complete an acquisition of hotel properties$6,922 $— 
Non-controlling interests in operating partnership issued to complete acquisition of a portfolio of properties$157,513 $— 
Redeemable non-controlling interests in operating partnership issued to complete acquisition of a portfolio of properties$50,000 $— 

27


NOTE 15 - SUBSEQUENT EVENTS

Dividends
 
On October 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 $0.328125 per share of the Operating Partnership's unregistered 5.25% Series Z Cumulative Perpetual Preferred Units. Our Board of Directors also declared a quarterly cash dividend of $0.04 per share on our Common Stock and per Common Unit of the Operating Partnership.

These dividends are payable on November 30, 2022 to holders of record as of November 16, 2022.

Acquisition

On October 26, 2022, we completed the acquisition of a 90% equity interest in a joint venture that owns an 11-unit high-end glamping property for $4.5 million in cash based on a gross valuation of $5.0 million, plus additional contingent consideration limited to a maximum of $1.8 million, payable to the seller based on performance of the property for the 12-month period ending July 31, 2023. The transaction also includes the acquisition of a 90% interest in an adjacent 6.4 acre parcel of undeveloped land for an additional $0.7 million, based on a gross valuation of $0.8 million.
28


PART I - FINANCIAL INFORMATION

Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2021 and our unaudited interim Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
 
Unless stated otherwise or the context otherwise requires, references in this report to “we,” “our,” “us,” “our company” or “the company” mean Summit Hotel Properties, Inc. and its consolidated subsidiaries.
 
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 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, including changes 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 and events, including wars or other hostilities;
supply and demand factors in our markets or sub-markets, the effect of alternative accommodations on our business, or a potential recessionary environment.
levels of spending for business and leisure travel, travel costs affected by changes in energy prices, and consumer confidence;
adverse changes in occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) and other hotel property 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 property acquisitions, including the ability to ramp up and stabilize newly acquired hotel properties 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;
29


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 hotel properties 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;
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 property 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 ventures with our joint venture partners;
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 under the heading "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2021.
 
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.

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 hotel properties. At September 30, 2022, our portfolio consisted of 102 hotel properties with a total of 15,323 guestrooms located in 24 states. We own our hotel properties in fee simple, except for seven hotel properties which are subject to ground leases or subleases. As of September 30, 2022, we own 100% of the outstanding equity interests in 61 of our 102 hotel properties. We own a 51% controlling interest in 39 hotel properties through a joint venture that was formed in July 2019 with GIC (the “GIC Joint Venture”), Singapore’s sovereign wealth fund. We also own a 90% controlling interest in two hotel properties that we acquired in June 2022 through another joint venture (the "Brickell Joint Venture"). Our hotel properties are typically located in markets with multiple demand generators such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, and leisure attractions.
 
Our hotels operate under premium franchise brands owned by Marriott® International, Inc. (“Marriott”), Hilton® Worldwide (“Hilton”), Hyatt® Hotels Corporation (“Hyatt”) and InterContinental® Hotels Group (“IHG”).
 
30


We have elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31, 2011.  To qualify as a REIT, we cannot operate or manage our hotel properties.  Accordingly, all of our hotel properties are leased to our taxable REIT subsidiaries ("TRS Lessees").  All of our hotel properties are operated pursuant to hotel property management agreements between our TRS Lessees and professional third-party hotel property management companies that are not affiliated with us as follows:
 
Management CompanyNumber of
Properties
Number of
Guestrooms
Affiliates of Aimbridge Hospitality, including Interstate Management Company, LLC62 9,166 
OTO Development, LLC15 2,164 
Stonebridge Realty Advisors, Inc. and affiliates1,143 
Affiliates of Marriott, including Courtyard Management Corporation, SpringHill SMC Corporation and Residence Inn by Marriott, Inc.973 
Crestline Hotels & Resorts, LLC570 
White Lodging Services Corporation453 
Hersha Hospitality Management338 
Concord Hospitality Enterprises264 
InterContinental Hotel Group Resources, Inc., an affiliate of IHG252 
Total102 15,323 

Our typical hotel property management agreement requires us to pay a base fee to our hotel property manager calculated as a percentage of hotel property revenues.  In addition, our hotel property management agreements generally provide that the hotel property manager can earn an incentive fee for revenue or Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") over certain thresholds or based on a return over our required preferred return.  Our TRS Lessees may employ other hotel property managers in the future.  We do not, and will not have any ownership or economic interest in any of the hotel property management companies engaged by our TRS Lessees.

Our revenues are derived from hotel property operations and consist of room revenue, food and beverage revenue and other hotel property operations revenue. Revenues from our other hotel property operations consist of ancillary revenues related to meeting rooms and other customer services provided at certain of our hotel properties.

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, experienced a significant downturn as a result of the Pandemic during the years ended December 31, 2020 and 2021. During the three and nine months ended September 30, 2022, we have experienced a significant recovery in hotel demand driven primarily by leisure travelers. Corporate and group demand remain below historical levels and are recovering more slowly; however, we have recently begun to experience an increase in demand related to these segments as return to work trends continue to accelerate and travel restrictions are reduced or eliminated.

We monitor emerging guest preferences, and we may adjust our capital allocation strategy to address investment opportunities that are attractive to our stakeholders. On October 26, 2022, we completed the acquisition of a 90% equity interest in a joint venture that owns an 11-unit high-end glamping property (see "Note 15 – Subsequent Events" to our Condensed Consolidated Financial Statements). This emerging market segment generates above-average RevPAR and operates with an efficient labor-light operating model that is expected to result in higher property-level margins and stabilized yields on invested capital.


31


Effects of the Pandemic on Our Business

Beginning in March 2020, we experienced the negative effects of the Pandemic, which 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. As such, we experienced a substantial decline in our revenues, profitability and cash flows from operations during the years ended December 31, 2020 and 2021. Additionally, there has been a sharp increase in inflation and interest rates during the nine months ended September 30, 2022. The extended effects of the Pandemic and macroeconomic conditions may result in additional risk and uncertainties related to our business and our ability to recover to pre-Pandemic levels.

During the three and nine months ended September 30, 2022, we experienced significant improvement in our business, driven primarily by leisure travel, and to a lesser extent, modest improvement in other demand segments, including corporate and group. 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, geopolitical stability, moderating inflation and maintaining a high-quality portfolio aligned with evolving guest preferences.

For additional information related to the effects of the Pandemic on our business, please see our Annual Report on Form 10-K for the year ended December 31, 2021.

Forward-looking Information and Use of Estimates

Our full recovery from the effects of the Pandemic will depend on future developments, such as the rate at which normal economic conditions, operations, and the demand for lodging resume, and the magnitude of the recessionary conditions in any of our markets. While the potential magnitude and duration of the business and economic effects of the Pandemic are uncertain, we believe that the recovery in our business that began during 2020 and has continued through the three and nine months ended September 30, 2022 will continue through the remainder of 2022. We believe that a recovery in business conditions resulting in positive operating cash flows, together with cash on hand, and the current availability under our credit facilities, will provide sufficient liquidity to fund operations for at least the next twelve months. There can be no assurance that the assumptions used to evaluate the carrying amounts of our assets or to estimate our liquidity requirements will be correct. For additional information please see Item 1A. Risk Factors.

32


Our Hotel Property Portfolio
 
At September 30, 2022, our portfolio consisted of 102 hotel properties with a total of 15,323 guestrooms. According to current chain scales as defined by STR, Inc., six of our hotel properties with a total of 953 guestrooms are categorized as Upper-upscale hotels, 81 of our hotel properties with a total of 12,279 guestrooms are categorized as Upscale hotels and 15 of our hotel properties with a total of 2,091 guestrooms are categorized as Upper-midscale hotels. Information about our hotel properties as of September 30, 2022 is as follows:
 
Franchise/BrandNumber of Hotel
Properties
Number of
Guestrooms
Marriott
Courtyard by Marriott17 3,049 
Residence Inn by Marriott15 2,136 
SpringHill Suites by Marriott983 
AC Hotel by Marriott1,026 
TownePlace Suites225 
Element by Marriott108 
Fairfield Inn & Suites by Marriott140 
Four Points by Sheraton101 
Marriott165 
Total Marriott51 7,933 
Hilton
Hilton Garden Inn1,291 
Hampton Inn & Suites1,162 
Homewood Suites369 
Canopy Hotel326 
Embassy Suites346 
DoubleTree by Hilton210 
Total Hilton25 3,704 
Hyatt
Hyatt Place17 2,419 
Hyatt House466 
Total Hyatt20 2,885 
IHG
Holiday Inn Express & Suites564 
Hotel Indigo116 
Staybridge Suites121 
Total IHG801 
Total102 15,323 

Hotel Property Portfolio Activity
 
We continually consider ways in which 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 Condensed Consolidated Financial Statements.



33



On June 10, 2022, we exercised a purchase option (the "Initial Purchase Option") to acquire a 90% equity interest in the AC/Element Hotel (as defined in "Note 3 - Investments in Hotel Properties, net" of the accompanying Condensed Consolidated Financial Statements). The exercise price of the Initial Purchase Option was based on a gross hotel option exercise price of $89.0 million. The exercise price was funded with the conversion of the mezzanine loan for the development of the AC/Element Hotel of $29.9 million and a cash payment of $7.9 million at closing (the "Brickell Transaction").

In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture during the three months ended September 30, 2022.

On January 13, 2022 and March 23, 2022, the GIC Joint Venture completed the purchase from NewcrestImage Holdings, LLC, a Delaware limited liability company, and NewcrestImage Holdings II, LLC, a Delaware limited liability company (together, “NewcrestImage”), a portfolio of 27 hotel properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces and various financial incentives for an aggregate purchase price of $822.0 million (the "NCI Transaction").

See "Note 3 - Investments in Hotel Properties, net" of the accompanying Condensed Consolidated Financial Statements for further information related to hotel property acquisitions and dispositions.


Results of Operations
 
The comparisons that follow should be reviewed in conjunction with the unaudited interim Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
 
Comparison of the Three Months Ended September 30, 2022 with the Three Months Ended September 30, 2021
 
The following table contains key operating metrics for our total portfolio for the three months ended September 30, 2022 compared with the three months ended September 30, 2021 (dollars in thousands, except ADR and RevPAR). 
 
 For the Three Months Ended September 30,Quarter-over-QuarterQuarter-over-Quarter
 20222021Dollar ChangePercentage Change
Total 
Portfolio
(102 hotels)
Same-Store
Portfolio
(71 hotels)
Total 
Portfolio
(73 hotels)
Same-Store
Portfolio
(71 hotels)
Total 
Portfolio
(102/73 hotels)
Same-Store
Portfolio
(71 hotels)
Total 
Portfolio
(102/73 hotels)
Same-Store
Portfolio
(71 hotels)
Revenues:
Room$160,133$124,001$102,521$99,895$57,612 $24,106 56.2 %24.1 %
Food and beverage8,8543,9652,0972,0236,757 1,942 322.2 %96.0 %
Other9,2656,8886,0685,9433,197 945 52.7 %15.9 %
Total$178,252$134,854$110,686$107,861$67,566 $26,993 61.0 %25.0 %
Expenses:
Room$37,525$28,624$22,186$21,656$15,339 $6,968 69.1 %32.2 %
Food and beverage7,0603,1101,4761,4045,584 1,706 378.3 %121.5 %
Other hotel operating expenses54,88341,50834,71333,87020,170 7,638 58.1 %22.6 %
Total$99,468$73,242$58,375$56,930$41,093 $16,312 70.4 %28.7 %
Operational Statistics:
Occupancy71.7 %73.7 %68.7 %68.5 %n/an/a4.4 %7.6 %
ADR$158.39 $164.46 $142.52 $142.55 $15.87 $21.91 11.1 %15.4 %
RevPAR$113.59 $121.21 $97.85 $97.65 $15.74 $23.56 16.1 %24.1 %


34


Changes from the three months ended September 30, 2022 compared with the three months ended September 30, 2021 were due to the following:

Revenues and RevPAR. The increase in total revenues and RevPAR for our total portfolio during the third quarter of 2022 compared to the third quarter of 2021 was due to continued strength in leisure travel as well improving corporate and group demand resulting in steady improvement in both weekend and weekday results. Additionally, revenues increased due to the NCI Transaction and the Brickell Transaction, which significantly expanded the size of our portfolio. Our increased exposure to the Sunbelt, focused revenue management, and property management initiatives related to the portfolio acquired in the NCI Transaction also contributed to significant revenue growth during the period. On a same store basis, the improvements in our business resulted in an increase of approximately 7.6% in occupancy and 15.4% in average daily rate in the third quarter of 2022, which resulted in an 24.1% increase in same-store RevPAR. For the total portfolio, we experienced an increase of approximately 4.4% in our occupancy and an increase of 11.1% in average daily rate in the third quarter of 2022 in comparison to the third quarter of 2021. This resulted in an increase in RevPAR of 16.1% over the same period in the prior year. See "Industry Trends and Outlook - Effects of the Pandemic on Our Business" for further information.

Room Expenses. The increase in room expenses for both our total and the same-store portfolio is highly correlated to the increase in room revenues driven by increasing occupancy across our portfolio. Room expenses increased at a higher rate than room revenues due to increasing labor costs driven by higher wage rates and the use of more costly contract labor as staffing has increased to meet room demand. Additionally, room costs for the total portfolio increased due to the NCI Transaction and the Brickell Transaction, which significantly expanded the size of our portfolio.

Food and beverage Revenues and Expenses. Total and same-store food and beverage revenues increased during the quarter ended September 30, 2022 as a result of an increase in occupancy across our portfolio and the NCI Transaction and the Brickell Transaction. The Brickell Transaction included the acquisition of a rooftop bar which has meaningfully increased food and beverage revenues during the three months ended September 30, 2022. Food and beverage expenses increased at a higher rate than food and beverage revenues due to an expansion in food and beverage product offerings compared to our offerings during the Pandemic and increased staffing costs.

Other hotel operating Revenues and Expenses. The increase in other hotel operating revenues and expenses in both our total and same-store portfolios was driven by an increase in occupancy during the third quarter of 2022 and the NCI Transaction.

The following table includes other consolidated income and expenses for the three months ended September 30, 2022 compared with the three months ended September 30, 2021 (dollars in thousands).

For the Three Months Ended
September 30,
20222021Dollar ChangePercentage Change
Property taxes, insurance and other$13,373 $10,679 $2,694 25.2 %
Management fees4,308 2,888 1,420 49.2 %
Depreciation and amortization38,130 25,893 12,237 47.3 %
Corporate general and administrative6,532 6,099 433 7.1 %
Hotel acquisition and transaction costs56 — 56 
nm(1)
Recoveries of credit losses(850)(2,632)1,782 (67.7)%
Loss on impairment and write-off of assets— 4,361 (4,361)
nm(1)
Loss on disposal of assets, net(5)— (5)
nm(1)
Interest expense17,645 10,817 6,828 63.1 %
Other (loss) income, net(416)2,250 (2,666)(118.5)%
Income tax expense 210 695 (485)(69.8)%

(1)Not meaningful.


35



Changes from the three months ended September 30, 2022 compared with the three months ended September 30, 2021 were due to the following:

Property Taxes, Insurance and Other. The increase in Property taxes, insurance and other is primarily due to the NCI Transaction, which significantly expanded the size of our portfolio. The higher property taxes due to an increase in the number of hotel properties in our portfolio during the three months ended September 30, 2022 was partially offset by property tax reductions that we have generated through our property tax appeal efforts to reduce the assessed values of our hotel properties for property tax purposes based on the lower operating performance that we experienced during 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 the three months ended September 30, 2022 and due to the NCI Transaction, which significantly expanded the size of our portfolio.

Depreciation and Amortization. The increase in Depreciation and amortization is primarily due to the NCI Transaction, which significantly expanded the size of our portfolio resulting in a substantial increase the our depreciable assets during the first quarter of 2022. Additionally, we have increased renovation activities at our hotel properties as our operating performance has improved.

Corporate General and Administrative. The increase in Corporate, general and administrative expenses during the current period is primarily due to increased corporate staffing to support the growth in the business primarily driven by almost $1.0 billion in acquisitions during the nine months ended September 30, 2022, higher incentive and other compensation costs, and higher legal costs.

Recoveries of Credit Losses. Recoveries of credit losses for the three months ended September 30, 2022 were related to principal payments received related to our seller-financing loans, which are fully reserved. Recoveries of credit losses for the three months ended September 30, 2021 were related to the repayment in full of two mezzanine loans receivable, which resulted in us reversing a $2.6 million allowance for credit losses related to the mezzanine loans.

Loss on Impairment and Write-off of Assets. The loss on impairment and write-off of assets during the three months ended September 30, 2021 relates to the repayment in full of two mezzanine loans, which resulted in us foregoing the exercise of certain purchase options related to the underlying hotel development projects. As a result, we recorded a write-off of the carrying amounts of the purchase options at September 30, 2021 totaling $4.4 million.

Interest Expense. Interest expense increased as a result of the additional debt outstanding during the third quarter of 2022 related to the NCI Transaction, the Brickell Transaction, and higher base rates on our floating rate debt that is not hedged.

Other (Loss) Income, net. Other (loss) income, net was a $0.4 million net loss during the third quarter of 2022 compared to $2.3 million net income during the third quarter of 2021 as a result of a reduction in interest income during the period due to the repayment in full of several mezzanine loans totaling approximately $25.8 million during the fourth quarter of 2021 and approximately $1.1 million of debt defeasance costs and $0.8 million of casualty losses incurred during the third quarter of 2022 offset by the realization of approximately $0.6 million of tax incentives related to the NCI Transaction during the quarter ended September 30, 2022.

Income Tax Expense. The Company recorded a $0.2 million income tax expense during the three months ended September 30, 2022, which represents a decrease of $0.5 million when compared to the same period in the previous year. As discussed in "Note 13 – Income Taxes", as a REIT, we generally are not subject to corporate-level U.S. federal income tax on ordinary income and capital gains income generated by our REIT activities that we distribute to our stockholders. We are subject to federal and state income taxes on the earnings of our TRS lessees. In addition, our Operating Partnership is subject to tax in a limited number of local and state jurisdictions. Seasonality in quarterly net income, and changes in the forecasted earnings causes variability in the income tax recorded in each quarter.



36



Comparison of the Nine months ended September 30, 2022 with the Nine months ended September 30, 2021
 
The following table contains key operating metrics for our total portfolio for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 (dollars in thousands, except ADR and RevPAR). 

 Nine Months Ended September 30,
 20222021Dollar ChangePercentage Change
Total 
Portfolio
(102 hotels)
Same-Store
Portfolio
(71 hotels)
Total 
Portfolio
(73 hotels)
Same-Store
Portfolio
(71 hotels)
Total 
Portfolio
(102/73 hotels)
Same-Store
Portfolio
(71 hotels)
Total 
Portfolio
(102/73 hotels)
Same-Store
Portfolio
(71 hotels)
Revenues:
Room$455,747 $351,871 $235,761 $231,987 $219,986 $119,884 93.3 %51.7 %
Food and beverage22,180 10,666 4,656 4,555 17,524 6,111 376.4 %134.1 %
Other25,442 18,894 14,647 14,378 10,795 4,516 73.7 %31.4 %
Total$503,369 $381,431 $255,064 $250,920 $248,305 $130,511 97.4 %52.0 %
Expenses:
Room$101,718 $78,032 $52,320 $51,465 $49,398 $26,567 94.4 %51.6 %
Food and beverage17,187 8,013 3,000 2,907 14,187 5,106 472.9 %175.7 %
Other hotel operating expenses154,871 117,365 88,672 87,206 66,199 30,159 74.7 %34.6 %
Total$273,776 $203,410 $143,992 $141,578 $129,784 $61,832 90.1 %43.7 %
Operational Statistics:
Occupancy70.1 %70.8 %61.4 %61.5 %n/an/a14.2 %15.2 %
ADR$158.28 $163.66 $124.28 $124.34 $34.00 $39.32 27.4 %31.6 %
RevPAR$110.99 $115.91 $76.28 $76.42 $34.71 $39.49 45.5 %51.7 %


Changes from the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 were due to the following:

Revenues and RevPAR. The increase in total revenues and RevPAR for our total portfolio for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was due to continued strength in leisure travel as well as improving corporate and group demand resulting in steady improvement in both weekend and weekday results. Additionally, revenues increased due to the NCI Transaction and the Brickell Transaction which significantly expanded the size of our portfolio. Our increased exposure to the Sunbelt, focused revenue management, and property management initiatives related to the portfolio acquired in the NCI Transaction also contributed to significant revenue growth during the period. On a same store basis, the improvements in our business resulted in an increase of approximately 15.2% in occupancy and 31.6% in average daily rate during the nine months ended September 30, 2022, which resulted in an 51.7% increase in same-store RevPAR. For the total portfolio, we experienced an increase of approximately 14.2% in our occupancy and an increase of 27.4% in average daily rate during the nine months ended September 30, 2022. This resulted in an increase in RevPAR of 45.5% over the same period in the prior year. See "Industry Trends and Outlook - Effects of the Pandemic on Our Business" for further information.

Room Expenses. The increase in room expenses for both our total and the same-store portfolio is highly correlated to the increase in room revenues driven by increasing occupancy across our portfolio. Room expenses increased at approximately the same rate as room revenues due to increases in our average daily rates, offset by increasing labor costs driven by higher wage rates and the use of more costly contract labor as staffing has increased to meet room demand. Additionally, room costs for the total portfolio increased due to the NCI Transaction and the Brickell Transaction, which significantly expanded the size of our portfolio.

37



Food and beverage Revenues and Expenses. Total and same-store food and beverage revenues increased during the nine months ended September 30, 2022 as a result of an increase in occupancy across our portfolio and the NCI Transaction and Brickell Transaction. The Brickell Transaction included the acquisition of a rooftop bar which has meaningfully increased food and beverage revenues during the nine months ended September 30, 2022. Food and beverage expenses increased at a higher rate than food and beverage revenues due to an expansion in food and beverage product offerings compared to our offerings during the Pandemic and increased staffing costs.

Other hotel operating Revenues and Expenses. The increase in other hotel operating revenues and expenses in both our total and same-store portfolios was driven by an increase in occupancy during the nine months ended September 30, 2022 and the NCI Transaction.

The following table includes other consolidated income and expenses for the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 (dollars in thousands).

For the Nine Months Ended
September 30,
20222021Dollar ChangePercentage Change
Property taxes, insurance and other$40,036 $32,573 $7,463 22.9 %
Management fees13,145 6,757 6,388 94.5 %
Depreciation and amortization112,462 79,776 32,686 41.0 %
Corporate general and administrative23,743 18,283 5,460 29.9 %
Hotel acquisition and transaction costs737 3,849 (3,112)(80.9)%
Recoveries of credit losses(1,100)(2,632)1,532 (58.2)%
Loss on impairment and write-off of assets— 4,361 (4,361)
nm(1)
Gain on disposal of assets, net20,479 81 20,398 
nm(1)
Interest expense46,202 32,567 13,635 41.9 %
Other income, net3,099 7,777 (4,678)(60.2)%
Income tax expense4,647 1,075 3,572 332.3 %

(1)Not meaningful.


Changes from the nine months ended September 30, 2022 compared with the nine months ended September 30, 2021 were due to the following:

Property Taxes, Insurance and Other. The increase in Property taxes, insurance and other is primarily due to the NCI Transaction and the Brickell Transaction which significantly expanded the size of our portfolio. The higher property taxes due to an increase in the number of hotel properties in our portfolio during the nine months ended September 30, 2022 was partially offset by property tax reductions that we have generated through our property tax appeal efforts to reduce the assessed values of our hotel properties for property tax purposes based on the lower operating performance that we experienced during 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 the nine months ended September 30, 2022 and due to the NCI Transaction and the Brickell Transaction, which significantly expanded the size of our portfolio.

Depreciation and Amortization. The increase in Depreciation and amortization is primarily due to the NCI Transaction and the Brickell Transaction which significantly expanded the size of our portfolio and resulted in a substantial increase in our depreciable assets during the nine months ended September 30, 2022. Additionally, we have increased renovation activities at our hotel properties as our operating performance has improved.

38



Corporate General and Administrative. The increase in Corporate, general and administrative expenses during the current period is primarily due to increased corporate staffing to support the growth in the business primarily driven by almost $1.0 billion in acquisitions during the nine months ended September 30, 2022, higher incentive and other compensation costs, including a one-time charge of approximately $1.3 million related to the acceleration of time-based restricted shares and the modification of performance stock-based compensation for our former Chief Operating Officer who retired on March 4, 2022, and higher legal costs.

Hotel Acquisition and Transaction Costs. Hotel acquisition and transactions costs for the nine months ended September 30, 2022 relate to certain one-time costs and other expenses incurred in pursuit of potential hotel acquisitions that ultimately were not consummated. Hotel acquisition and transactions costs for the nine months ended September 30, 2021 include 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. Hotel acquisition and transactions costs for the nine months ended September 30, 2021 also include $1.7 million in costs incurred in pursuit of the acquisition of a company with a portfolio of hotel properties that ultimately was not consummated.

Recoveries of Credit Losses. Recoveries of credit losses for the nine months ended September 30, 2022 were related to principal payments received related to our seller-financing loans, which are fully reserved. Recoveries of credit losses for the nine months ended September 30, 2021 were related to the repayment in full of two mezzanine loans receivable, which resulted in us reversing the $2.6 million allowance for credit losses related to the mezzanine loans.

Loss on Impairment and Write-off of Assets. The loss on impairment and write-off of assets during the nine months ended September 30, 2021 relates to the repayment in full of two mezzanine loans, which resulted in us foregoing the exercise of certain purchase options related to the underlying hotel development projects. As a result, we recorded a write-off of the carrying amounts of the purchase options during the three months ended September 30, 2021 totaling $4.4 million.

Interest Expense. Interest expense increased as a result of the additional debt outstanding during the nine months ended September 30, 2022 related to the NCI Transaction and the Brickell Transaction and higher base rates on our floating rate debt that is not hedged.

Other Income, net. Other income, net decreased during the nine months ended September 30, 2022 as a result of a reduction in interest income during the period due to the repayment in full of several mezzanine loans totaling approximately $25.8 million during the fourth quarter of 2021.

Income Tax Expense. The Company recorded a $4.6 million income tax expense during the nine months ended September 30, 2022, an increase of $3.6 million over the $0.6 million income tax expense recorded during the nine months ended September 30, 2021. As discussed in "Note 13 – Income Taxes", as a REIT, we generally are not subject to corporate-level U.S. federal income tax on ordinary income and capital gains income generated by our REIT activities that we distribute to our stockholders. We are subject to federal and state income taxes on the earnings of our TRS lessees. In addition, our Operating Partnership is subject to tax in a limited number of local and state jurisdictions. Seasonality in quarterly net income, and changes in the forecasted earnings causes variability in the income tax recorded in each quarter.


39


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 lease expense, non-cash interest income and non-cash income tax related adjustments to our deferred tax assets. 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 important supplemental measures of our operational performance and believe they are 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. Our computation of FFO may also differ from the methodology for 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 alternatives to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.  Where indicated in this Quarterly Report on Form 10-Q, FFO is based on our computation of FFO and not the computation of Nareit-defined FFO unless otherwise noted.

40


The following is a reconciliation of our GAAP net (loss) income to FFO and AFFO for the three months ended September 30, 2022 and 2021, and for the nine months ended September 30, 2022 and 2021, (in thousands, except per share/unit amounts): 

For the Three Months Ended
September 30,
For the Nine Months Ended September 30,
2022202120222021
Net (loss) income$(1,041)$(4,239)$13,299 $(57,679)
Preferred dividends(3,968)(3,750)(11,906)(11,168)
Distributions and accretion of redeemable non-controlling interests(656)— (1,866)— 
Premium on redemption of preferred stock— (2,710)— (2,710)
Loss (income) related to non-controlling interests in consolidated joint ventures3,730 (275)(5,219)3,020 
Net loss applicable to common shares and common units(1,935)(10,974)(5,692)(68,537)
Real estate-related depreciation36,804 25,773 108,959 79,421 
Loss on impairment of assets— 4,361 — 4,361 
Loss (gain) on disposal of assets, net— (20,479)(81)
Adjustments related to non-controlling interests in consolidated joint ventures(6,789)(2,319)(13,077)(6,004)
FFO applicable to common shares and common units28,085 16,841 69,711 9,160 
Recoveries of credit losses(850)(2,632)(1,100)(2,632)
Amortization of lease-related intangible assets— 22 — 65 
Amortization of deferred financing costs1,413 1,115 4,238 3,239 
Amortization of franchise fees167 120 504 355 
Amortization of intangible assets892 — 2,732 — 
Equity-based compensation1,231 1,892 7,070 5,861 
Hotel acquisition and transaction costs56 — 737 3,849 
Debt transaction costs1,131 17 1,166 160 
Premium on redemption of preferred stock— 2,710 — 2,710 
Non-cash interest income— (262)(113)(779)
Non-cash lease expense, net115 131 374 388 
Casualty losses, net750 627 1,054 781 
Adjustments related to non-controlling interests in consolidated joint venture(2,123)(97)(2,743)(1,176)
AFFO applicable to common shares and common units (1)
$30,867 $20,484 $83,630 $21,981 
FFO per common share/common unit$0.23 $0.16 $0.57 $0.09 
AFFO per common share/common unit$0.25 $0.19 $0.69 $0.21 
Weighted average diluted common shares/common units
FFO (2)
121,265 105,265 121,289 105,282 
AFFO (2)
121,265 105,265 121,289 105,282 

(1)AFFO applicable to common shares and common units for the three and nine months ended September 30, 2022 and 2021 has not been adjusted for interest related to our 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.

(2)The weighted average diluted common shares/common units used to calculate FFO and AFFO per common share/common unit for the three and nine months ended September 30, 2022 and 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 three and nine months ended September 30, 2022 and 2021 exclude the potential dilution related to our Convertible Notes as we intend to settle the principal value of the Convertible Notes in cash.


41


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):

For the Three Months Ended September 30, For the Nine Months Ended
September 30,
2022202120222021
Weighted average common shares outstanding105,232 104,548 105,110 104,441 
Dilutive effect of unvested restricted stock awards49 425 195 410 
Shares issuable upon conversion of convertible debt24,086 23,978 24,086 23,012 
Adjusted weighted dilutive common shares outstanding129,367 128,951 129,391 127,863 
Non-GAAP adjustment for effect of common units of Operating Partnership15,984 133 15,984 151 
Non-GAAP adjustment for effect of restricted stock awards— 159 — 280 
Non-GAAP adjustment for effect of shares issuable upon conversion of convertible debt(24,086)(23,978)(24,086)(23,012)
Non-GAAP weighted dilutive common shares/common units outstanding121,265 105,265 121,289 105,282 


The increase in AFFO applicable to common shares and common units was due to a substantial improvement in our operating performance during the three and nine months ended September 30, 2022 that has been primarily driven by leisure travel and to a lesser extent modest improvement in other demand segments, and the NCI Transaction which significantly expanded the size of our portfolio. AFFO applicable to common shares and common units increased $10.4 million and $61.6 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

 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
 
EBITDAre 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. 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 to measure 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 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.

42


We make additional adjustments to EBITDAre when evaluating our performance, such as adjustments related to the provision for credit losses, because we believe that the exclusion of certain additional non-recurring or certain non-cash 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 (loss) income to EBITDA, EBITDAre and Adjusted EBITDAre for the three months ended September 30, 2022 and 2021, and for the nine months ended September 30, 2022 and 2021, (in thousands):
 
 For the
Three Months Ended
September 30,
For the
Nine Months Ended
September 30,
 2022202120222021
Net (loss) income$(1,041)$(4,239)$13,299 $(57,679)
Depreciation and amortization38,130 25,893 112,462 79,776 
Interest expense17,645 10,817 46,202 32,567 
Interest income(14)(4)(20)(6)
Income tax expense 210 695 4,647 1,075 
EBITDA54,930 33,162 176,590 55,733 
Loss on impairment of assets— 4,361 — 4,361 
Loss (gain) on disposal of assets, net— (20,479)(81)
EBITDAre
54,935 37,523 156,111 60,013 
Recoveries of credit losses(850)(2,632)(1,100)(2,632)
Amortization of lease-related intangible assets— 22 — 65 
Amortization of intangible liabilities(144)— (267)— 
Equity-based compensation1,231 1,892 7,070 5,861 
Hotel acquisition and transaction costs56 — 737 3,849 
Debt transaction costs1,131 17 1,166 160 
Non-cash interest income— (262)(113)(779)
Non-cash lease expense, net115 131 374 388 
Casualty losses, net750 627 1,054 781 
Loss (income) related to non-controlling interests in consolidated joint ventures3,730 (275)(5,219)3,020 
Adjustments related to non-controlling interests in consolidated joint ventures(13,736)(3,019)(25,082)(8,744)
Adjusted EBITDAre
$47,218 $34,024 $134,731 $61,982 

The increase in Adjusted EBITDAre is due to a substantial improvement in our operating performance during the three and nine months ended September 30, 2022 that has been primarily driven by leisure travel and to a lesser extent modest improvement in other demand segments, and the NCI Transaction which significantly expanded the size of our portfolio. Adjusted EBITDAre increased $13.2 million and $72.7 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.





43


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. In July 2022, the Company entered into amendments to the 2018 Senior Credit Facility, which included improvements to certain of the key financial covenants, provides us with full access to our $400 Million Revolver (as defined in “Note 5 – Debt” to the Condensed Consolidated Financial Statements) and provides an option for us to extend the maturity dates for up to one additional year. See “Note 5 – Debt” to the Condensed Consolidated Financial Statements for additional information.

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 property development costs, acquisitions, interest payments, settlement of interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, our joint venture acquisitions and capital requirements, contractual lease payments, corporate overhead, and distributions to our stockholders when declared. 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 $5.3 million and $4.2 million for the three months ended September 30, 2022 and 2021, respectively, and $16.7 million and $12.4 million for the nine months ended September 30, 2022 and 2021, 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.

During the nine months ended September 30, 2022, we completed the NCI Transaction for an aggregate purchase price of $822.0 million, which included a $382.0 million cash draw from a term loan entered into by subsidiaries of the
GIC Joint Venture and the assumption by a subsidiary of the GIC Joint Venture of approximately $6.5 million in PACE loan debt. Additionally, in June 2022, we exercised our purchase option to acquire a 90% equity interest in the AC/Element Hotel based on a gross hotel option exercise price of $89.0 million. The Brickell Joint Venture assumed $47.0 million of debt as part of the transaction. See "Note 3 - Investment in Hotel Properties, net" to the Condensed Consolidated Financial Statements for additional information.

In January 2021, we sold Convertible Notes totaling approximately $280.0 million before consideration of the related capped call transactions, and after deducting approximately $7.0 million related to 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). 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. See “Note 5 – Debt” to the Condensed Consolidated Financial Statements for additional information concerning the Convertible Notes, Convertible Notes Offering and the Capped Call Transactions.

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 property dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business.


44


Outstanding Indebtedness
 
At October 21, 2022, we had $200.0 million outstanding on our $200 Million Term Loan and $225.0 million outstanding on our 2018 Term Loan. Each of the credit facilities was supported by the 55 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 55 hotel properties, and the respective TRS lessees. We also had $287.5 million of Convertible Notes outstanding.
    
At October 21, 2022, the GIC Joint Venture had $200.0 million outstanding under our GIC Joint Venture Credit Facility, which included borrowings of $75.0 million on its $75.0 million term loan and $125.0 million on its $125.0 million revolving line of credit. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the equity interests in the subsidiaries that hold the 11 hotel property borrowing base assets, and the related TRS entities, which wholly own the TRS lessees. See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information related to our GIC Joint Venture financing arrangements.

To complete the NCI Transaction, the GIC Joint Venture entered into a $410.0 million senior secured term loan facility (the “GIC Joint Venture Term Loan”) secured by the 27 hotel properties and two parking garages acquired in the transaction. The GIC Joint Venture Term Loan 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 GIC Joint Venture Term Loan 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 GIC Joint Venture Term Loan is interest-only and provides for a floating interest rate equal to SOFR plus 2.86%. Subsequent to quarter-end, at April 22, 2022, the GIC Joint Venture had $410.0 million outstanding under the GIC Joint Venture Term Loan. See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information related to our GIC Joint Venture financing arrangements.

On June 10, 2022, the Brickell Joint Venture (the “Borrower”) and Summit Hotel OP, LP (the “Non-Recourse Guarantor”) entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida to finance the dual-branded 264-guestroom AC/Element Hotel.  The City National Bank Loan provides for an interest rate equal to one-month term SOFR plus 300 basis points.  Payment terms include an interest-only period through June 30, 2024 and the loan will amortize on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025.  The City National Bank Loan is prepayable at any time without penalty.

On August 30, 2022, we entered into agreements to fully defease three commercial mortgage-backed securities ("CMBS") mortgage loans totaling $54.9 million by placing into trust an amount sufficient to cover future principal and interest payments. As a result, we will no longer be obligated to make future interest payments of approximately $1.3 million between the defeasance date and maturity date, and $20.1 million of restricted cash reserves were returned to us.

At September 30, 2022, we have scheduled debt principal amortization payments during the next twelve months totaling $2.9 million and $31.8 million of debt maturities. Currently, we have the capacity to pay these scheduled principal payments using cash on hand or draws under 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 equity 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.

Our outstanding indebtedness requires us to comply with various financial and other covenants. At September 30, 2022, we are in compliance with all of our loan agreements. We have entered into certain amendments of the 2018 Senior Credit Facility and the 2018 Term Loan that give us full access to the $400 Million Revolver (subject to certain conditions) and improve certain financial covenant measures through December 31, 2023. Additionally, we have amended the GIC Joint Venture Credit Facility to provide for certain financial covenant waivers and adjustments as described in “Note 5 – Debt” to the Condensed Consolidated Financial Statements. Our outstanding indebtedness requires us to comply with various financial and other covenants. At September 30, 2022, we and our GIC Joint Venture are in compliance with all loan covenants.

See "Note 5 - Debt" to the Condensed Consolidated Financial Statements for additional information concerning our financing arrangements.
    
45


A summary of our gross debt at September 30, 2022 is as follows (dollars in thousands):
 
LenderInterest RateAmortization
Period (Years)
Maturity DateNumber of
Encumbered  Properties
Principal Amount
Outstanding
2018 Senior Credit Facility (1)
Bank of America, NA
$400 Million Revolver5.54% Variablen/aMarch 31, 2023n/a$— 
$200 Million Term Loan5.39% Variablen/aApril 1, 2024n/a200,000 
Total Senior Credit and Term Loan Facility200,000 
Term Loans (1)
KeyBank National Association Term Loan5.29% Variablen/aFebruary 14, 2025n/a225,000 
Convertible Notes1.50% Fixedn/aFebruary 15, 2026n/a287,500 
Secured Mortgage Indebtedness
MetaBank (2)
4.44% Fixed25 July 1, 202744,211 
KeyBank National Association4.95% Fixed30 August 1, 202332,536 
Bank of the Cascades (First Interstate Bank) (3)
5.14% Variable25 December 19, 2024(3)7,758 
4.30% Fixed25 December 19, 2024— (3)7,758 
Total Mortgage Loans92,263 
804,763 
Brickell Joint Venture Mortgage Loan
City National Bank of Florida6.04% Variable25June 30, 202547,000 
GIC Joint Venture Credit Facility and Term Loans (4)
Bank of America, N.A.
$125 Million Revolver5.29% Variablen/aOctober 8, 2023n/a125,000 
$75 Million Term Loan5.24% Variablen/aOctober 8, 2023n/a75,000 
Bank of America, N.A.5.91% Variablen/aJanuary 13, 2026n/a410,000 
Wells Fargo4.99% Fixed30June 6, 2028113,092 
PACE loan (5)
6.10% Fixed20July 31, 2040(4)6,292 
Total GIC Joint Venture Credit Facility and Term Loans629,384 
Total Joint Venture Debt676,384 
Total Debt10 $1,481,147 

(1)The 2018 Senior Credit Facility and Term Loans are supported by a borrowing base of 55 unencumbered hotel properties and a pledge of the equity securities of the entities that own and operate the 55 unencumbered hotel properties.
(2)In or around December 2021, MetaBank sold the MetaBank Loan to Bayside MB CRE Loans, LLC (“Bayside”). On October 25, 2022, Summit Meta 2017, LLC (“SM-17”), a subsidiary of our Operating Partnership, received a letter from Bayside’s counsel alleging various events of default under the MetaBank Loan, primarily related to certain non-monetary covenants and further alleging that default interest is accruing as a result. SM-17 disputes that such events of default have occurred and has engaged counsel to evaluate such allegations. See "Note 4 - Debt" to our Condensed Consolidated Financial Statements.
(3)The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.
(4)The GIC Joint Venture Credit Facilities and Term Loans are secured by a pledge of the equity interests in the subsidiaries that own and operate the borrowing base assets financed by the facility.
(5)The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender.
     


46


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. During the nine months ended September 30, 2022, the fair value of our interest rate swaps increased $33.7 million due to an increase in interest rate expectations.  Each interest rate swap fixes the interest rates on portions of our variable interest rate indebtedness and converts LIBOR from a floating rate to average fixed rates ranging from 1.98% to 2.93%.

Capital Expenditures
 
During the nine months ended September 30, 2022, we funded $48.8 million in capital expenditures at our hotel properties.  We anticipate spending approximately $25.0 million on capital expenditures across our portfolio during the remainder of 2022. We expect to fund these expenditures through a combination of cash flows from operations and borrowings under our $400 Million Revolver, or other potential sources of capital, to the extent available to us.
 
Cash Flows
For the
Nine Months Ended
September 30,
20222021Change
(in thousands)
Net cash provided by operating activities$135,681 $50,289 $85,392 
Net cash used in investing activities(257,405)(51,880)(205,525)
Net cash provided by financing activities116,025 47,866 68,159 
Net change in cash, cash equivalents and restricted cash$(5,699)$46,275 $(51,974)

Changes from the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 were due to the following:

Cash provided by operating activities. The increase in cash provided by operating activities primarily resulted from an increase in net income of $84.3 million after adjusting for non-cash items, such as depreciation and amortization, gains on the sale of assets and recoveries of credit losses, and net changes in working capital of $1.1 million.

Cash used in investing activities. The increase in cash used in investing activities was due to the closing of the NCI Transaction and the Brickell Transaction during the nine months ended September 30, 2022. Cash used in investing activities for the nine months ended September 30, 2022 was partially offset by proceeds from the sale of 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million.

Cash provided by financing activities. Cash provided by financing activities for the nine months ended September 30, 2022 was primarily the result of contributions from our joint venture partners of $204.1 million for the NCI Transaction and the Brickell Transaction, borrowings of $410.0 million under the GIC Joint Venture Term Loan for the NCI Transaction, offset by debt repayments, including the repayment of $328.7 million of debt assumed as part of the NCI Transaction, the repayment of the 2017 Term Loan of $62.0 million in May 2022, debt defeasances of $54.9 million during the three months ended September 30, 2022 and distributions to our joint venture partner of $77.9 million during the nine months ended September 30, 2022.

During the nine months ended September 30, 2021, cash provided by financing activities was primarily the result of the completion of a convertible debt offering of $287.5 million aggregate principal amount, which was used to partially repay obligations under the 2018 Senior Credit Facility and to pay the cost of capped call transactions.



47


Critical Accounting Policies

For critical accounting policies, see "Note 2 - Basis of Presentation and Significant Accounting Policies" to the Condensed Consolidated Financial Statements.

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 at our hotel properties through 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, primarily through the Audit Committee, oversees management's approach to managing cybersecurity risks.

Item 3.         Quantitative and Qualitative Disclosures about 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 affect 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 has ceased to be available for new loans originated 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 loan agreements contain provisions for our lenders and us to establish an alternative interest rate.
    
At September 30, 2022, we were party to six interest rate derivative agreements pursuant to which we receive variable-rate payments in exchange for making fixed-rate payments (dollars in thousands): 
    
Contract dateEffective DateExpiration DateNotional Amount
October 2, 2017January 29, 2018January 31, 2023$100,000 
October 2, 2017January 29, 2018January 31, 2023100,000 
June 11, 2018September 28, 2018September 30, 202475,000 
June 11, 2018December 31, 2018December 31, 2025125,000 
July 26, 2022January 31, 2023January 31, 2027100,000 
July 26, 2022January 31, 2023January 31, 2029100,000 
$600,000 

At September 30, 2022, after giving effect to our interest rate derivative agreements, $791.4 million, or 53%, of our debt had fixed interest rates and $689.8 million, or 47%, had variable interest rates. At September 30, 2022, debt related to our wholly-owned properties coupled with our pro rata share of joint venture debt results in fixed-rate debt ratio of approximately 67% of our total pro rata indebtedness when including the effect of interest rate swaps.

Our variable rate debt increased during the nine months ended September 30, 2022 compared to the same period of the prior year due to additional variable rate debt related to the NCI Transaction. At December 31, 2021, after giving effect to our interest rate derivative agreements, $842.9 million, or 78%, of our debt had fixed interest rates and $238.5 million, or 22%, 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 $6.5 million per year. See "Note 7 - Derivative Financial Instruments and Hedging" to the Condensed Consolidated Financial Statements for additional information.

48


As our fixed-rate debts mature, they will become subject to interest rate risk. In addition, as our variable-rate debts mature, lenders may impose interest rate floors on new financing arrangements because of the low interest rates experienced during the past few years. At September 30, 2022, we have scheduled debt principal amortization payments during the next twelve months totaling $2.9 million and $31.8 million of debt maturities.

In July 2022, we entered into two new interest rate swap agreements. One interest rate swap agreement has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of six years. Regions Bank is the counterparty and the swap provides for a fixed rate of 2.5625%. The second interest rate swap has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of four years. Capital One Bank, N.A. is the counterparty and the swap provides for a fixed rate of 2.6%.

Item 4.  Controls and Procedures.
 
Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management team 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 September 30, 2022. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2022, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that 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.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting during the three-month period covered by this Quarterly Report on Form 10-Q, which were identified in connection with management’s evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


49


PART II — OTHER INFORMATION

Item 1.                                                         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 1A.                                                Risk Factors.
     
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2.                                                         Unregistered Sales of Equity Securities and Use of Proceeds.
     
None.

Item 3.                                                         Defaults Upon Senior Securities.
 
None.
 
Item 4.                                                         Mine Safety Disclosures.
 
Not applicable.
 
Item 5.                                                         Other Information.
 
None.

50


Item 6.                                                         Exhibits.
 
The following exhibits are filed as part of this report:
 
Exhibit  
Number Description of Exhibit
101.INSThe instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document (1)
101.PRE
Inline XBRL Taxonomy Presentation Linkbase Document (1)
104Cover Page Interactive Data File (the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
* - Management contract or compensatory plan or arrangement.
† - Filed herewith
†† - Furnished herewith
(1) - Submitted electronically herewith


51


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: November 2, 2022By:/s/ William H. Conkling
  William H. Conkling
Executive Vice President and Chief Financial Officer
(principal financial officer)

52