Watermark Lodging Trust, Inc. - Quarter Report: 2020 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, 2020

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: 000-55461

WATERMARK LODGING TRUST, INC.

(Exact name of registrant as specified in its charter)


Maryland		46-5765413
(State of incorporation)		(I.R.S. Employer Identification No.)

150 N. Riverside Plaza
Chicago,	Illinois	60606
(Address of principal executive office)		(Zip Code)

(847) 482-8600

(Registrant’s telephone numbers, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

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 þ

Registrant has 167,573,091 shares of Class A common stock, $0.001 par value, and 61,175,258 shares of Class T common stock, $0.001 par value, outstanding at November 4, 2020.

INDEX


		Page No.
Explanatory Note		2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	4
	Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2020 and 2019	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	8
	Notes to Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
Item 4. Controls and Procedures		50

PART II — OTHER INFORMATION
Item 1A. Risk Factors		51
Item 2. Unregistered Sales of Equity Securities		53
Item 6. Exhibits		54
Signatures		55

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements regarding: the impact of the Merger (as defined herein) and management internalization that occurred in April 2020, the impact of the July Capital Raise (as defined herein), our expectations regarding the impacts on our business of the outbreak of the novel coronavirus (“COVID-19”) pandemic and the impact of hurricanes and other natural disasters on certain hotels, including the condition of the properties and cost estimates. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Other unknown or unpredictable risks or uncertainties, like the risks related to effects of pandemics and global outbreaks of contagious diseases or the fear of such outbreaks, like the current COVID-19 pandemic and those additional factors discussed in reports filed with the SEC by us under the heading “Risk Factors” could also have material adverse effects on our business, financial condition, liquidity, results of operations, Modified funds from operations (“MFFO”), and prospects. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission (“SEC”), including but not limited to those described in Part I, Item 1A. Risk Factors in Carey Watermark Investors 2 Incorporated’s (“CWI 2”) Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 12, 2020 (the “2019 Annual Report”) and in Part II, Item 1A Risk Factors of this Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).

WLT 9/30/2020 10-Q – 1

Explanatory Note

Watermark Lodging Trust, Inc. ("WLT" or the “Company”) is the legal successor of CWI 2. On April 13, 2020, a direct, wholly-owned subsidiary (“Merger Sub”) of CWI 2 merged with and into Carey Watermark Investors Incorporated (“CWI 1”) in an all-stock transaction in which the former stockholders of CWI 1 became stockholders of CWI 2 (the “Merger”). After giving effect to the Merger, CWI 1 became a wholly owned subsidiary of CWI 2 and CWI 2 changed its name to WLT. Immediately after the completion of the Merger, the former stockholders of CWI 1 owned approximately 60%, and the former stockholders of CWI 2 owned approximately 40%, of the outstanding common stock of WLT. Concurrently with the closing of the Merger, CWI 2 completed an internalization transaction through which it became self-managed.

For accounting and financial reporting purposes, the Merger is treated as a reverse acquisition. The financial information for WLT, as set forth herein has been prepared on a basis consistent with the foregoing and reflects CWI 1 as the accounting acquirer. Consequently, the historical financial information included herein as of any date, or for any periods prior to April 13, 2020 (the closing date of the Merger), is the pre-Merger financial information of CWI 1. The results of operations of CWI 2, as the acquired company for accounting and financial reporting purposes, are incorporated into WLT effective April 13, 2020. See Note 2 of the financial statements included in this Report for more information.

As used throughout this document, the terms "WLT," the "Company," "we," "our" and "us" mean:

•WLT beginning April 13, 2020, following the closing of the Merger; and;

•CWI 1 on a standalone basis for all periods prior to the closing of the Merger on April 13, 2020.

The term “CWI 2” refers to CWI 2 on a standalone basis for all periods prior to the closing of the Merger.

Accordingly, comparisons of the period to period financial information of WLT as set forth herein with those of CWI 1 and CWI 2 may not be meaningful.

WLT 9/30/2020 10-Q – 2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

WATERMARK LODGING TRUST, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)


	September 30, 2020		December 31, 2019
Assets
Investments in real estate:
Hotels, at cost	$	3,316,842	$	2,008,496
Accumulated depreciation	(332,042)		(298,949)
Net investments in hotels	2,984,800		1,709,547
Equity investments in real estate	19,798		100,297
Operating lease right-of-use assets	41,935		45,727
Cash and cash equivalents	246,690		70,605
Intangible assets, net	73,067		64,786
Restricted cash	74,846		54,699
Accounts receivable, net	46,460		23,753
Other assets	29,673		25,277
Total assets	$	3,517,269	$	2,094,691
Liabilities
Non-recourse debt, net	$	2,161,694	$	1,206,067
Mandatorily redeemable preferred stock	211,304		—
Accounts payable, accrued expenses and other liabilities	190,013		94,849
Operating lease liabilities	74,534		71,733
Due to related parties and affiliates	352		3,806
Distributions payable	—		20,357
Total liabilities	2,637,897		1,396,812
Commitments and contingencies (Note 11)
Equity
Class A common stock, $0.001 par value; 320,000,000 shares authorized;167,573,091 and 130,083,865 shares, respectively, issued and outstanding	168		130
Class T common stock, $0.001 par value; 80,000,000 shares authorized; 61,175,258 and 0 shares, respectively, issued and outstanding	61		—
Additional paid-in capital	1,656,108		1,209,691
Distributions and accumulated losses	(827,669)		(562,747)
Accumulated other comprehensive loss	(815)		(172)
Total stockholders’ equity	827,853		646,902
Noncontrolling interests	51,519		50,977
Total equity	879,372		697,879
Total liabilities and equity	$	3,517,269	$	2,094,691

See Notes to Consolidated Financial Statements.

WLT 9/30/2020 10-Q – 3

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues
Hotel Revenues
Rooms	$	47,147	$	95,825	$	128,291	$	298,126
Food and beverage	14,847		38,481		52,651		127,126
Other operating revenue	11,248		13,997		27,059		40,483
Business interruption income	426		2,815		942		3,627
Total Hotel Revenues	73,668		151,118		208,943		469,362
Expenses
Rooms	12,321		21,616		37,358		66,227
Food and beverage	14,059		27,696		46,484		86,866
Other hotel operating expenses	3,646		7,213		10,829		21,366
Property taxes, insurance, rent and other	22,913		17,052		58,952		55,539
General and administrative	15,091		13,859		34,463		41,624
Sales and marketing	6,384		14,492		21,955		43,672
Repairs and maintenance	5,496		4,920		14,009		15,013
Utilities	5,381		4,124		11,598		11,510
Management fees	1,636		3,484		4,810		12,971
Depreciation and amortization	31,920		19,102		82,629		57,845
Total Hotel Operating Expenses	118,847		133,558		323,087		412,633
Corporate general and administrative expenses	6,715		3,052		15,900		9,211
Gain on hurricane-related property damage	(1,030)		(880)		(1,030)		(880)
Transaction costs	27		728		18,376		1,483
Asset management fees to affiliate	—		3,547		3,795		10,673
Impairment charges	—		—		120,220		—
Total Expenses	124,559		140,005		480,348		433,120
Operating (Loss) Income before net gain on sale of real estate	(50,891)		11,113		(271,405)		36,242
Net gain on sale of real estate	3,227		5,881		2,738		5,881
Operating (Loss) Income	(47,664)		16,994		(268,667)		42,123
Interest expense	(38,719)		(17,219)		(83,449)		(50,205)
Equity in (losses) earnings of equity method investments in real estate, net	(3,201)		(759)		(31,139)		101
Other (expense) and income	(55)		438		2		205
Bargain purchase gain	—		—		78,696		—
Net gain on change in control of interests	—		—		22,250		—
Net loss on extinguishment of debt	—		—		—		(136)
Loss before income taxes	(89,639)		(546)		(282,307)		(7,912)
Benefit from (provision for) income taxes	1,549		(1,030)		7,525		(2,133)
Net loss	(88,090)		(1,576)		(274,782)		(10,045)
Loss (income) attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $0, $2,537, $0 and $4,905, respectively)	6,714		(878)		8,848		(6,474)
Net Loss Attributable to the Company	(81,376)		(2,454)		(265,934)		(16,519)
Preferred dividends	(401)		—		(1,742)		—
Net Loss Attributable to Stockholders	$	(81,777)	$	(2,454)	$	(267,676)	$	(16,519)

Class A Common Stock
Net loss attributable to Stockholders	$	(59,880)	$	(2,454)	$	(214,394)	$	(16,519)
Basic and diluted weighted-average shares outstanding	167,571,806		129,261,612		153,838,492		128,697,027
Basic and diluted loss per share	$	(0.35)	$	(0.02)	$	(1.38)	$	(0.13)

Class T Common Stock
Net loss attributable to Stockholders	$	(21,897)	$	—	$	(53,282)	$	—
Basic and diluted weighted-average shares outstanding	61,175,258		—		38,178,719		—
Basic and diluted loss per share	$	(0.35)	$	—	$	(1.38)	$	—

See Notes to Consolidated Financial Statements.

WLT 9/30/2020 10-Q – 4

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net Loss	$	(88,090)	$	(1,576)	$	(274,782)	$	(10,045)
Other Comprehensive Income (Loss)
Unrealized gain (loss) on derivative instruments	114		160		(625)		28
Comprehensive Loss	(87,976)		(1,416)		(275,407)		(10,017)

Amounts Attributable to Noncontrolling Interests
Net loss (income)	6,714		(878)		8,848		(6,474)
Unrealized gain on derivative instruments	(1)		(6)		(18)		(8)
Comprehensive loss (income) attributable to noncontrolling interests	6,713		(884)		8,830		(6,482)
Comprehensive Loss Attributable to Stockholders	$	(81,263)	$	(2,300)	$	(266,577)	$	(16,499)

See Notes to Consolidated Financial Statements.

WLT 9/30/2020 10-Q – 5

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(in thousands, except share and per share amounts)


	WLT Stockholders
	Common Stock						Additional Paid-In Capital		Distributions and Accumulated Losses		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity		Noncontrolling Interests		Total Stockholders’ Equity
	Class A			Class T
	Shares	Amount		Shares	Amount
Balance at July 1, 2020	167,565,204	$	168	61,175,258	$	61	$	1,655,626	$	(748,646)	$	(928)	$	906,281	$	27,395	$	933,676
Net loss									(81,376)				(81,376)		(6,714)		(88,090)
Shares issued under share incentive plans	—	—					392						392				392
Stock-based compensation to directors	7,887	—					90						90				90
Contributions from noncontrolling interests													—		480		480
Issuance of warrants													—		30,357		30,357
Fair value adjustment on reclassification of Series A Preferred Stock									2,754				2,754				2,754
Preferred dividends									(401)				(401)				(401)
Other comprehensive income											113		113		1		114
Balance at September 30, 2020	167,573,091	$	168	61,175,258	$	61	$	1,656,108	$	(827,669)	$	(815)	$	827,853	$	51,519	$	879,372

Balance at July 1, 2019	128,431,059	$	129	—	$	—	$	1,190,123	$	(525,386)	$	(420)	$	664,446	$	54,688	$	719,134
Net (loss) income									(2,454)				(2,454)		878		(1,576)
Shares issued, net of offering costs	936,537	1		—	—		10,684						10,685				10,685
Shares issued to affiliates	312,263	—		—	—		3,562						3,562				3,562
Distributions to noncontrolling interests													—		(3,774)		(3,774)
Shares issued under share incentive plans	—	—		—	—		134						134				134
Distributions declared $0.1298 and $0.0000 per share to Class A and Class T, respectively)									(20,171)				(20,171)				(20,171)
Other comprehensive income											154		154		6		160
Repurchase of shares	(785,672)	(1)					(8,541)						(8,542)				(8,542)
Balance at September 30, 2019	128,894,187	$	129	—	$	—	$	1,195,962	$	(548,011)	$	(266)	$	647,814	$	51,798	$	699,612

WLT 9/30/2020 10-Q – 6

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

(Continued)

(in thousands, except share and per share amounts)


	WLT Stockholders
	Common Stock						Additional Paid-In Capital		Distributions and Accumulated Losses		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity		Noncontrolling Interests		Total Stockholders’ Equity
	Class A			Class T
	Shares	Amount		Shares	Amount
Balance at January 1, 2020	130,083,865	$	130	—	$	—	$	1,209,691	$	(562,747)	$	(172)	$	646,902	$	50,977	$	697,879
Net loss									(265,934)				(265,934)		(8,848)		(274,782)
Shares issued to affiliates	417,261	—					4,761						4,761				4,761
Redemption of special general partnership interest	2,840,549	3					(65,464)						(65,461)		12,861		(52,600)
Merger consideration	94,480,247	95					496,485						496,580		(34,571)		462,009
Merger recapitalization	(61,175,258)	(61)		61,175,258	61								—				—
Shares issued, net of offering costs	925,762	1					10,514						10,515				10,515
Shares issued under share incentive plans	56,533	—					734						734				734
Stock-based compensation to directors	7,887	—					90						90				90
Contributions from noncontrolling interests													—		725		725
Issuance of warrants													—		30,357		30,357
Fair value adjustment on reclassification of Series A Preferred Stock									2,754				2,754				2,754
Preferred dividends									(1,742)				(1,742)				(1,742)
Other comprehensive (loss) income											(643)		(643)		18		(625)
Repurchase of shares	(63,755)	—					(703)						(703)				(703)
Balance at September 30, 2020	167,573,091	$	168	61,175,258	$	61	$	1,656,108	$	(827,669)	$	(815)	$	827,853	$	51,519	$	879,372

Balance at January 1, 2019	127,144,688	$	127	—	$	—	$	1,174,900	$	(471,130)	$	(286)	$	703,611	$	53,771	$	757,382
Net (loss) income									(16,519)				(16,519)		6,474		(10,045)
Shares issued, net of offering costs	2,831,306	3		—	—		32,299		—				32,302				32,302
Shares issued to affiliates	934,582	1		—	—		10,669		—				10,670				10,670
Contributions from noncontrolling interests													—		175		175
Distributions to noncontrolling interests													—		(8,630)		(8,630)
Shares issued under share incentive plans	22,742	—		—	—		226		—				226				226
Stock-based compensation to directors	18,400	—		—	—		210						210				210
Distributions declared ($0.3893 and $0.0000 per share to Class A and Class T, respectively)									(60,362)				(60,362)				(60,362)
Other comprehensive income											20		20		8		28
Repurchase of shares	(2,057,531)	(2)		—	—		(22,342)						(22,344)				(22,344)
Balance at September 30, 2019	128,894,187	$	129	—	$	—	$	1,195,962	$	(548,011)	$	(266)	$	647,814	$	51,798	$	699,612

See Notes to Consolidated Financial Statements.

WLT 9/30/2020 10-Q – 7

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash Flows — Operating Activities
Net loss	$	(274,782)	$	(10,045)
Adjustments to net loss:
Impairment charges	120,220		—
Depreciation and amortization	82,629		57,845
Bargain purchase gain	(78,696)		—
Equity in losses (earnings) of equity method investments in real estate, net	31,139		(101)
Net gain on change in control of interests	(22,250)		—
Amortization of fair value adjustments, deferred financing costs and other	18,763		2,507
Asset management fees to affiliates settled in shares	3,656		10,673
Gain on sale of real estate	(2,738)		(5,881)
Amortization of stock-based compensation expense	1,113		560
Gain on hurricane-related property damage	(1,030)		(880)
Business interruption income	(942)		(3,627)
Net loss on extinguishment of debt	—		136
Net changes in other assets and liabilities	24,206		12,341
Net decrease in operating lease right-of-use assets	3,635		4,978
Decrease in due to related parties and affiliates	(3,032)		(3,393)
Insurance proceeds for remediation work due to hurricane damage	1,763		2,773
Net increase in operating lease liabilities	966		1,142
Business interruption insurance proceeds	942		3,627
Receipt of key money and other deferred incentive payments	565		500
Distributions of earnings from equity method investments	—		2,888
Funding of hurricane-related remediation work	—		(3)
Net Cash (Used in) Provided by Operating Activities	(93,873)		76,040

Cash Flows — Investing Activities
Cash and restricted cash acquired in Merger	109,475		—
Proceeds from sale of real estate investments	89,398		77,447
Capital expenditures	(16,983)		(29,991)
Capital contributions to equity investments in real estate	(3,063)		(3,429)
Payment of Watermark commitment fee	(1,151)		—
Hurricane-related property insurance proceeds	337		11,661
Repayments of loan receivable	58		167
Distributions from equity investments in excess of cumulative equity income	—		6,421
Net Cash Provided by Investing Activities	178,071		62,276

Cash Flows — Financing Activities
Proceeds from issuance of mandatorily redeemable preferred stock and warrants	200,000		—
Payments and prepayments of mortgage principal	(65,119)		(136,563)
Distributions paid	(20,357)		(60,089)
Deferred financing costs	(11,311)		(2,323)
Net proceeds from issuance of shares	10,553		32,301
Payment of distribution and shareholder servicing fee	(2,307)		—
Proceeds from mortgage financing	875		85,430
Repurchase of shares	(703)		(22,312)
Other financing activities, net	403		(349)
Repayment of WPC Credit Facility	—		(11,637)
Distributions to noncontrolling interests	—		(8,630)
Proceeds from WPC Credit Facility	—		5,000
Net Cash Provided by (Used in) Financing Activities	112,034		(119,172)

Change in Cash and Cash Equivalents and Restricted Cash During the Period
Net increase in cash and cash equivalents and restricted cash	196,232		19,144
Cash and cash equivalents and restricted cash, beginning of period	125,304		121,130
Cash and cash equivalents and restricted cash, end of period	$	321,536	$	140,274

See Notes to Consolidated Financial Statements.

WLT 9/30/2020 10-Q – 8

WATERMARK LODGING TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business

Organization

WLT, formerly known as CWI 2, is a self-managed, publicly owned, non-traded real estate investment trust (“REIT”) that, together with its consolidated subsidiaries, invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States.

Substantially all of our assets and liabilities are held by, and all of our operations are conducted through CWI 2 OP, LP (the “Operating Partnership”) and we are a general partner and a limited partner of, and own a 99.0% capital interest in, the Operating Partnership, as of September 30, 2020. Watermark Capital Partners, LLC (“Watermark Capital”), which is 100% owned by Mr. Michael G. Medzigian, our Chief Executive Officer, held the remaining 1.0% in the Operating Partnership as of September 30, 2020.

Until April 13, 2020, we were managed by Carey Lodging Advisors, LLC (the “Advisor”), an indirect subsidiary of W. P. Carey Inc. (“WPC”). The Advisor managed our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that managed our hotels. CWA, LLC (the “CWI 1 Subadvisor”), a subsidiary of Watermark Capital, provided services to the Advisor, primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that managed the day-to-day operations of our hotels. In addition, the CWI 1 Subadvisor provided us with the services of our Chief Executive Officer, subject to the approval of our independent directors.

We held ownership interests in 31 hotels at September 30, 2020, including 29 hotels that we consolidated (“Consolidated Hotels”) and two hotels that we recorded as equity investments (“Unconsolidated Hotels”).

July Capital Raise

On July 21, 2020, we entered into a securities purchase agreement (the “Purchase Agreement”) with ACP Watermark Investment LLC (the “Purchaser”) and, solely with respect to a guaranty, certain other parties thereto. Pursuant to the Purchase Agreement, the Company, in a private placement made in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, agreed to issue and sell to the Purchaser 200,000 shares of 12% Series B Cumulative Redeemable Preferred Stock, liquidation preference $1,000.00 per share (the “Series B Preferred Stock”) and warrants (the “Warrants”) to purchase 16,778,446 units of limited partnership interest of the Operating Partnership (“OP Units”) (“Warrant Units”), for an aggregate purchase price of $200.0 million (the “July Capital Raise”). See Note 14 for additional information on the Series B Preferred Stock and Warrants.

The Purchaser has also committed to provide, upon satisfaction of certain conditions, up to an additional $250.0 million to purchase additional shares of the Series B Preferred Stock during the 18 months following the consummation of the July Capital Raise, of which $150.0 million is allocated to working capital needs and other general corporate purposes and $100.0 million is allocated to approved acquisitions. The July Capital Raise closed on July 24, 2020. Among other terms of the Series B Preferred Stock, the Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless the Company has first paid all accrued dividends (and dividends thereon) on the Series B Preferred Stock in cash for all past dividend periods and the current dividend period. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's distribution reinvestment plan. Additionally, the Company appointed two designees of the Purchaser as members of the Board of Directors at the closing of the July Capital Raise.

COVID-19, Management’s Plans and Liquidity

In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. The pandemic has had a material adverse effect on our business, results of operations, financial condition and cash flows and will continue to do so for the reasonably foreseeable future. As of November 12, 2020, 30 of our hotels are open but the majority are operating at significantly reduced levels of occupancy, staffing and expenses, and operations at our remaining one hotel are fully suspended. While we have seen improving demand at some of our properties as certain states and cities across the United States have

WLT 9/30/2020 10-Q – 9

Notes to Consolidated Financial Statements (Unaudited)

loosened stay-at-home restrictions, we expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. In addition, resurgences of the COVID-19 virus in certain areas where our hotels are located may cause us to have to suspend operations at hotels that have remained open or reopened until the resurgence subsides. Given the uncertainty as to the ultimate severity and duration of the COVID‑19 outbreak and its effects, and the potential for its recurrence, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.

We have taken actions to help mitigate the effects of the COVID-19 pandemic on our operating results and to preserve our liquidity at both the operating level and corporate level, including:

•Completing the July Capital Raise transaction, as discussed above;

•Significantly reducing hotel operating costs: in March, April and May 2020, we suspended all operations at 16 hotels and significantly reduced operations at the remaining hotels, primarily by reducing staffing, furloughing employees, eliminating non-essential amenities and services and closing several floors and food and beverage outlets. One of these hotels reopened in May, seven hotels reopened in June, five hotels reopened in July and two hotels reopened in August;

•Working with our lenders on debt forbearance plans, as discussed below;

•Suspending distributions on, and redemptions of, our common stock, subject to limited exceptions;

•Actively pursuing certain asset sales;

•Significantly reducing our planned renovation activity by either canceling or deferring this activity to future periods, other than completing projects that are near completion;

•Using a portion of our furniture, fixtures and equipment reserve accounts for expenses at our properties, as well as temporarily suspending required contributions to the furniture, fixture and equipment replacement reserves at certain of our hotels, to the extent permitted by our lenders; and

•Reducing the cash compensation payable to our senior management and the Board of Directors.

At September 30, 2020, we had cash and cash equivalents of $246.7 million. Additionally, under the terms of our agreements with the investors in the July Capital Raise, we have the option to require such investors to purchase up to $150.0 million aggregate liquidation preference of additional shares of Series B Preferred Stock during the 18 months after the closing of the July Capital Raise for additional working capital needs, including the repayment, refinancing or restructuring of indebtedness, subject to our satisfaction of customary conditions. We had total indebtedness of $2.2 billion outstanding at September 30, 2020, all of which is mortgage indebtedness and is generally non-recourse, subject to customary non-recourse carve-outs, except that we have provided certain lenders with limited corporate guaranties aggregating $6.6 million for items such as taxes, deferred debt service and amounts drawn from furniture, fixtures and equipment reserves to pay expenses, in connection with loan modification agreements. Of the $2.2 billion of indebtedness outstanding at September 30, 2020, approximately $862.1 million is scheduled to mature during the 12 months after the date of this Report. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of November 12, 2020, we have either executed loan modifications or refinanced 25 of our 31 mortgage loans, aggregating $1.9 billion of indebtedness, under which interest and principal payments have been temporarily deferred and/or temporary covenant relief has been granted, generally for periods ranging from three months to four months. At September 30, 2020, we have effectively entered into cash management agreements with the lenders on 28 of our 31 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. The cash management agreements generally permit cash generated from the operations of each hotel to fund the hotel’s operating expenses, debt service, taxes and insurance but restrict distributions of excess cash flow, if any, to the Company to fund corporate expenses. We have determined that we are likely to be unable to satisfy certain covenants in the future on most, if not all, of our mortgage loans depending on the length of the pandemic, and we may seek additional relief from our lenders. If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels. We may also choose to turn over one or more hotels back to the related mortgage lender. Even if we are able to obtain payment or covenant relief, we may incur increased costs and increased interest rates and we may agree to additional restrictive covenants and other lender protections related to the mortgage loans.

During the nine months ended September 30, 2020, we sold two hotels with an aggregate contractual sales price of $93.0 million, and we received net aggregate proceeds of $34.8 million after the repayment of the related mortgage loans. We recognized a net gain of $2.7 million on the sale of these hotels. We may choose to market additional assets for sale.

WLT 9/30/2020 10-Q – 10

Notes to Consolidated Financial Statements (Unaudited)

Our primary cash uses through September 30, 2021 are expected to be payment of debt service, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be funds generated by hotel operations, proceeds from the July Capital Raise, any additional issuances of Series B Preferred Stock and proceeds from additional asset sales.

We cannot predict with reasonable certainty when our hotels will return to normalized levels of operations after the effects of the pandemic subside or whether hotels that have recommenced operations will be forced to shut down operations or impose additional restrictions due to a resurgence of COVID-19 cases in the future. Therefore, as a consequence of these unprecedented trends resulting from the impact of the pandemic, we are unable to estimate future financial performance with reasonable certainty.

DRIP

From inception through September 30, 2020, $267.2 million of distributions were reinvested in our common stock through our distribution reinvestment plan (“DRIP”).

Note 2. Merger of CWI 1 and CWI 2

On April 13, 2020, the Merger of Merger Sub, with and into CWI 1, was completed in an all-stock transaction to create Watermark Lodging Trust, Inc. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of October 22, 2019 (as amended, the “Merger Agreement”), by and among CWI 2, CWI 1 and Merger Sub.

In accordance with the Merger Agreement, at the effective time of the Merger (the “effective time”) each issued and outstanding share of CWI 1’s common stock (or fraction thereof), $0.001 par value per share (“CWI 1 common stock”), was converted into the right to receive 0.9106 shares (the “exchange ratio”) of WLT Class A common stock, $0.001 par value per share (“WLT Class A common stock”). Also at the effective time, all CWI 1 restricted stock units (“RSUs”) outstanding and unvested immediately prior to the effective time were converted into a WLT RSU with respect to a whole number of shares of WLT Class A common stock equal to (i) the number of shares of CWI 1 common stock subject to such unvested CWI 1 RSU, multiplied by (ii) the exchange ratio.

Immediately following the effective time of the Merger, the internalization of the management of the Company (the “Internalization”) was consummated pursuant to the Internalization Agreement, dated as of October 22, 2019 (as amended, the “Internalization Agreement”), by and among CWI 1, CWI OP, LP, the Operating Partnership, WPC, Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, the Advisor, Watermark Capital, the CWI 1 Subadvisor and CWA2, LLC (the “CWI 2 Subadvisor” and together with CWI 1 Subadvisor, the “Subadvisors”).

In accordance with the Internalization Agreement, CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively (the “Redemption”). As consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, WLT or the Operating Partnership (as applicable) issued equity consisting of (x) 2,840,549 shares of CWI 2 Class A common stock, to affiliates of WPC, (y) 1,300,000 shares of WLT Series A preferred stock, $0.001 par value per share, to affiliates of WPC, with a liquidation preference of $50.00 per share ($65,000,000 in the aggregate) (Note 14), and (z) 2,417,996 limited partnership units in the Operating Partnership, to affiliates of Watermark Capital. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively.

Immediately following the Redemption, the existing advisory agreements, as amended, between CWI 1 or CWI 2 (as applicable) and the Advisor, and the existing sub‑advisory agreements, as amended, between the Advisor and the Subadvisors (as applicable), were automatically terminated. The secured credit facilities entered into by CWI OP, LP or the Operating Partnership (as applicable) as borrower, and CWI 1 or CWI 2 (as applicable) as guarantor, with WPC as lender, each matured at the time of the expiration of such existing advisory agreements and the applicable loan agreements and loan documents were terminated. Neither CWI 1 nor CWI 2 had any outstanding obligations under the respective facilities.

The Merger was accounted for as a business combination in accordance with current authoritative accounting guidance. CWI 1 was the accounting acquirer in the Merger as (i) CWI 1’s pre-merger stockholders had a majority of the voting power in the Company after the Merger and (ii) CWI 1 was significantly larger than CWI 2 when considering assets and revenues. As CWI 1

WLT 9/30/2020 10-Q – 11

Notes to Consolidated Financial Statements (Unaudited)

was the accounting acquirer while CWI 2 was the legal acquirer, the Merger was accounted for as a reverse acquisition, and therefore, the historical financial information included in the Company’s financial statements as of any date, or for any periods prior to April 13, 2020, represents the pre-merger information of CWI 1. The financial statements of the Company, as set forth herein, represent a continuation of the financial information of CWI 1 as the accounting acquirer, except that the equity structure of WLT is adjusted to reflect the equity structure of the legal acquirer, CWI 2, including for comparative periods, by applying the exchange ratio of 0.9106.

As a result of the Merger, the Company acquired an ownership interest in the following 12 hotel properties:

Hotels

State

Number
of Rooms

% Acquired

Hotel Type

Charlotte Marriott City Center

446

100%

Full-Service

Courtyard Nashville Downtown

192

100%

Select-Service

Embassy Suites by Hilton Denver-Downtown/Convention Center

403

100%

Full-Service

Le Méridien Arlington

154

100%

Full-Service

Marriott Sawgrass Golf Resort & Spa (a)

514

50%

Resort

Renaissance Atlanta Midtown Hotel

304

100%

Full-Service

Ritz-Carlton Bacara, Santa Barbara (a)

358

60%

Resort

Ritz-Carlton Key Biscayne (b)

443

19.3%

Resort

Ritz-Carlton San Francisco

336

100%

Full-Service

San Diego Marriott La Jolla

376

100%

Full-Service

San Jose Marriott

510

100%

Full-Service

Seattle Marriott Bellevue

384

100%

Full-Service

4,420

___________

(a)Upon closing of the Merger, the Company owns 100% of this hotel.

(b)Upon closing of the Merger, the Company owns 66.7% of this hotel.

As the Merger is accounted for as a reverse acquisition, the fair value of the consideration transferred is measured based upon the number of shares of CWI 1 common stock, as the accounting acquirer, would theoretically have to issue to the stockholders of CWI 2 to achieve the same ratio of ownership in the combined company upon completion of the Merger and applying the fair value per implied share of CWI 1 common stock issued in consideration.

As a result, the implied shares of CWI 1 common stock issued in consideration was computed based on the number of outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger divided by the exchange ratio of 0.9106.

(Dollars in thousands, except per share amounts)


Total Merger Consideration
Outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger	94,480,247
Exchange ratio	0.9106
Implied shares of CWI 1 common stock issued in consideration	103,756,037
Fair value per implied share of CWI 1 common stock issued in consideration	$	4.83271
Fair value of implied shares of CWI 1 common stock issued in consideration	501,423
Fair value of noncontrolling interest acquired	(39,414)
Fair value of purchase consideration	$	462,009

WLT 9/30/2020 10-Q – 12

Notes to Consolidated Financial Statements (Unaudited)

The following tables present a summary of assets acquired and liabilities assumed in this business combination, at the date of acquisition; as well as and revenues and earnings thereon, from the date of acquisition through September 30, 2020 (in thousands):


	Preliminary Purchase Price Allocation
Assets
Net investments in hotels	$	1,556,383
Operating lease right-of-use assets	974
Cash and cash equivalents	71,881
Intangible assets	10,200
Restricted cash	37,594
Accounts receivable, net	25,664
Other assets	15,593
Total Assets	1,718,289
Liabilities
Non-recourse debt, net	(1,002,753)
Accounts payable, accrued expenses and other liabilities	(97,843)
Operating lease liabilities	(1,874)
Due to related parties and affiliates	(1,520)
Total Liabilities	(1,103,990)
Total Identifiable Net Assets	614,299
Fair value of CWI 1's equity interests in jointly-owned investments with CWI 2 prior to the merger	(73,594)
Bargain purchase gain	(78,696)
Fair value of purchase consideration	$	462,009


	From April 13, 2020 through September 30, 2020
Revenues	$	41,971
Net loss	$	(99,920)

We recognized a bargain purchase gain of $78.7 million in connection with the Merger resulting from the estimated fair values of the assets acquired net of liabilities assumed exceeding the consideration paid. The estimated fair values for the assets acquired and the liabilities assumed are preliminary and are subject to change during the measurement period as additional information related to the inputs and assumptions used in determining the fair value of the assets and liabilities becomes available. Subsequent adjustments to the preliminary purchase price allocation are not expected to have a material impact to the Company's consolidated financial statements.

The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the noncontrolling interests acquired:

Net investments in hotels — The Company estimated the fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the income capitalization and sales comparison approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth.

Intangible assets — The Company estimated the fair market value of the trade name through a relief-from-royalty discounted cash flow method whereby the Company valued the avoided third-party license payment for the right to employ the asset to earn benefits. Our intangibles are included in Intangible assets, net in the consolidated financial statements. Amortization of intangibles is included in Depreciation and amortization in the consolidated financial statements.

WLT 9/30/2020 10-Q – 13

Notes to Consolidated Financial Statements (Unaudited)

In connection with the Merger, we have recorded intangibles comprised as follows (life in years, dollars in thousands):


	Weighted-Average Life	Amount
Amortizable Intangible Assets
Trade name	8.0	$	9,400
In-place leases	3.2	800
Total intangible assets		$	10,200

Non-recourse debt — We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate, which are Level 3 inputs in the fair value hierarchy. We recognized a discount of approximately $69.5 million on the mortgage loans assumed in the Merger, which is included in non-recourse debt, net in the consolidated balance sheet. The discount is amortized over the remaining terms of the respective debt instruments as adjustments to interest expense in the consolidated statements of operations.

Noncontrolling interest — The Company estimated the fair value of the consolidated joint venture by using the same valuation methodologies for the investment in hotel properties noted above. The Company then recognized the fair value of the noncontrolling interest in the consolidated joint venture based on the joint venture partner's ownership interest in the consolidated joint venture. This valuation methodology is based on Level 3 inputs and assumptions in the fair value hierarchy.

Cash and cash equivalents, restricted cash, accounts receivable, net, other assets, accounts payable, accrued expenses and other liabilities, and due to related parties and affiliates —The carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities.

Transaction costs are costs incurred in connection with the Merger and related transactions and included legal, accounting, financial advisory and other transaction costs. These costs were expensed as incurred in the consolidated statements of operations.

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Transaction costs	$	27	$	728	$	18,376	$	1,483

WLT 9/30/2020 10-Q – 14

Notes to Consolidated Financial Statements (Unaudited)

Pro Forma Financial Information

The following unaudited consolidated pro forma financial information presents the results of operations as if the Merger had taken place on January 1, 2019. The unaudited consolidated pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Merger had taken place on January 1, 2019, nor is it indicative of the results of operations for future periods. The unaudited consolidated pro forma financial information is as follows:

(Dollars in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Pro forma total revenues	$	73,668	$	264,042	$	295,237	$	813,562

Pro forma net (loss) income	$	(88,457)	$	(3,562)	$	(360,751)	$	57,576
Pro forma net (loss) income attributable to Stockholders (a)	$	(81,743)	$	(3,143)	$	(348,194)	$	56,183

Pro forma (loss) income per Class A share:
Net (loss) income attributable to Stockholders	$	(59,855)	$	(2,240)	$	(255,018)	$	41,539
Basic and diluted pro forma weighted-average shares outstanding	167,571,806		166,412,758		167,567,658		166,008,739
Basic and diluted pro forma (loss) income per share	$	(0.36)	$	(0.01)	$	(1.52)	$	0.25

Pro forma (loss) income per Class T share:
Net (loss) income attributable to Stockholders	$	(21,888)	$	(903)	$	(93,176)	$	14,644
Basic and diluted pro forma weighted-average shares outstanding	61,175,258		60,157,028		61,175,258		59,845,797
Basic and diluted pro forma (loss) income per share	$	(0.36)	$	(0.02)	$	(1.52)	$	0.24

__________

(a)The pro forma net income attributable to Stockholders through the nine months ended September 30, 2020 reflects the following income and expenses related to the Merger as if the Merger had taken place on January 1, 2019: (i) bargain purchase gain of $78.7 million, (ii) transaction costs of $27.5 million through September 30, 2020 and (iii) net gain on change in control of interests of $22.3 million.

Compensation

Mr. Medzigian, the Company’s Chief Executive Officer, entered into an employment agreement with WLT that took effect at the closing of the Merger, effected pursuant to the Employment Agreement, dated as of October 22, 2019, pursuant to which Mr. Medzigian is entitled to receive, among other things, an annual base salary of $775,000, an annual cash bonus opportunity equal to 150% of his annual base salary based on performance goals, and an award of RSUs of WLT common stock equal to $6.0 million. Mr. Medzigian subsequently entered into a letter agreement with CWI 2 to confirm his agreement to reduce by 50% the pro rata portion of Mr. Medzigian’s annual base salary payable by the Company through July 15, 2020. Mr. Medzigian agreed to continue to reduce his annual base salary payable by the Company, with a reduction of 25% from July 15, 2020 through September 30, 2020.

WLT 9/30/2020 10-Q – 15

Notes to Consolidated Financial Statements (Unaudited)

Note 3. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States (“GAAP”).

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements of and accompanying notes for the year ended December 31, 2019, included as Exhibit 99.2 of Form 8-K/A filed by WLT on June 29, 2020, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year. Additionally, see Note 2 for a description of the impact of accounting for the Merger as a reverse acquisition.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity (“VIE”), and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the audited consolidated financial statements of CWI 1 and accompanying notes as of and for the year ended December 31, 2019 included as Exhibit 99.2 of Form 8-K/A filed by WLT on June 29, 2020.

At September 30, 2020 and December 31, 2019, we considered three and five entities to be VIEs, respectively, of which we consolidated three and four, respectively, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):


	September 30, 2020		December 31, 2019
Net investments in hotels	$	464,076	$	494,304
Intangible assets, net	36,434		37,045
Total assets	522,047		566,075

Non-recourse debt, net	328,177		$	341,263
Total liabilities	354,620		376,004

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

WLT 9/30/2020 10-Q – 16

Notes to Consolidated Financial Statements (Unaudited)

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):


	September 30, 2020		December 31, 2019
Cash and cash equivalents	$	246,690	$	70,605
Restricted cash	74,846		54,699
Total cash and cash equivalents and restricted cash	$	321,536	$	125,304

Recent Accounting Pronouncements

Pronouncements Adopted as of September 30, 2020

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Accounting Standards Update (“ASU”) 2020-04 contains practical expedients for reference rate reform-related activities that impact debt, leases, derivatives, and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate (“LIBOR”) indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses. ASU 2016-13 replaces the “incurred loss” model with an “expected loss” model, resulting in the earlier recognition of credit losses even if the risk of loss is remote. This standard applies to financial assets measured at amortized cost and certain other instruments, including loans receivable. This standard does not apply to receivables arising from operating leases, which are within the scope of Topic 842. We adopted this guidance for our interim and annual periods beginning January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.

Note 4. Agreements and Transactions with Related Parties

Agreements with Our Advisor and Affiliates

Prior to the Merger, we had an advisory agreement with the Advisor (the “Advisory Agreement”) to perform certain services for us under a fee arrangement, including managing our overall business, our investments and certain administrative duties. The Advisor also had a subadvisory agreement with the CWI 1 Subadvisor (the “Subadvisory Agreement”) whereby the Advisor paid 20% of its fees earned under the Advisory Agreement to the CWI 1 Subadvisor in return for certain personnel services. Upon completion of the Merger on April 13, 2020 (Note 2), both the Advisory Agreement and Subadvisory Agreement were terminated.

The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to the Advisor, the CWI 1 Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Amounts Included in the Consolidated Statements of Operations
Personnel and overhead reimbursements	$	353	$	1,679	$	3,377	$	4,948
Asset management fees	—		3,547		3,795		10,673
Available Cash Distributions	—		2,537		—		4,905
Interest expense	—		375		—		1,133
	$	353	$	8,138	$	7,172	$	21,659

WLT 9/30/2020 10-Q – 17

Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of the amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):


	September 30, 2020		December 31, 2019
Amounts Due to Related Parties and Affiliates
Due to other related parties and affiliates	$	352	$	26
Reimbursable costs due to the Advisor	—		1,524
Watermark commitment agreement	—		1,151
Other amounts due to the Advisor	—		1,105
	$	352	$	3,806

Asset Management Fees, Disposition Fees and Loan Refinancing Fees

Prior to the Merger, we paid the Advisor an annual asset management fee equal to 0.50% of the aggregate average market value of our investments, as described in the Advisory Agreement. The Advisor was also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement were met. If the Advisor elected to receive all or a portion of its fees in shares of our common stock, the number of shares issued was determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share (“NAV”). Upon completion of the Merger on April 13, 2020 (Note 2), the Advisory Agreement was terminated and these fees ceased being incurred. For the nine months ended September 30, 2020 and 2019, we settled $4.8 million and $10.7 million, respectively, of asset management fees in shares of our common stock at the former Advisor’s election. At September 30, 2020, the former Advisor owned 12,208,243 shares (5.3%) of our total outstanding common stock. Asset management fees are included in Asset management fees to affiliate in the consolidated financial statements.

Available Cash Distributions

Prior to the Merger, Carey Watermark Holdings, LLC’s special general partner interest entitled it to receive distributions of 10% of Available Cash (as defined in the limited partnership agreement of CWI OP, LP) (“Available Cash Distributions”) generated by CWI OP, LP, subject to certain limitations. Available Cash Distributions are included in (Income) loss attributable to noncontrolling interests in the consolidated financial statements. In connection with the internalization of the management of the Company (Note 2), the CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively, as further described in Note 2. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively.

Personnel and Overhead Reimbursements/Reimbursable Costs

Prior to the Merger, under the terms of the Advisory Agreement, the Advisor generally allocated expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and CWI 2, based on total pro rata hotel revenues on a quarterly basis. Pursuant to the Subadvisory Agreement, after we reimbursed the Advisor, it would subsequently reimburse the CWI 1 Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our Board of Directors. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements. We also granted RSUs to employees of the CWI 1 Subadvisor pursuant to our 2010 Equity Incentive Plan. Upon completion of the Merger on April 13, 2020 (Note 2), both the Advisory Agreement and Subadvisory Agreement were terminated and those expenses ceased being incurred. Subsequent to the Merger, subject to the terms of the Transition Services Agreement, as discussed below, WPC is paid its costs of providing services under this agreement and will be reimbursed for all expenses of providing the services.

Other Amounts Due to the Advisor

At December 31, 2019, this balance primarily represented asset management fees payable to the Advisor.

WLT 9/30/2020 10-Q – 18

Notes to Consolidated Financial Statements (Unaudited)

Other Transactions with Affiliates

Watermark Commitment Agreement

On October 1, 2019, we, CWI 2, Watermark Capital and Mr. Medzigian, entered into a commitment agreement pursuant to which we and CWI 2 agreed to pay Watermark Capital a total of $6.95 million in consideration of the commitments of Watermark Capital and Mr. Medzigian to wind down and ultimately liquidate a private fund that was formed to raise capital to invest in lodging properties, and to devote their business activities exclusively to the affairs of us and CWI 2 and certain other activities set forth in the commitment agreement, with the exception of the wind-down of the private fund and performing asset management services for two hotels owned by WPC (one of which was subsequently sold). At September 30, 2020, $6.95 million was included in Other assets in the consolidated balance sheet, representing goodwill related to the internalization of Watermark Capital. At December 31, 2019, $4.2 million was included in Other assets in the consolidated balance sheet as a deferred cost, representing the portion of the payment allocated to us.

Transition Services Agreement

Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and WPC, WPC will continue to make available to the Company all of the services that WPC provided to CWI 2 prior to the Merger. The term of the Transition Services Agreement is generally 12 months from the effective date of the internalization transaction. WPC will be paid its costs of providing the services and will be reimbursed for all expenses of providing the services.

Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and Watermark Capital, Watermark Capital will continue to make available to the Company all of the services that Watermark Capital provided to CWI 2 prior to the Merger and for the Company to provide certain services to Watermark Capital or its affiliates. Except with respect to particular services provided by the Company to Watermark Capital, the term of the Transition Services Agreement is 12 months from the effective date of the internalization transaction. Watermark Capital or the Company, in their respective capacities as service providers under such Transition Services Agreement, will be paid their respective costs of providing the services and will be reimbursed for all expenses of providing the services.

Working Capital Facility

On September 26, 2017, we entered into a secured credit facility (the “WPC Credit Facility”) with CWI OP, LP as borrower and WPC as lender. The WPC Credit Facility consisted of (i) a bridge term loan of up to $75.0 million (the “Bridge Loan”) for the purpose of acquiring an interest in the Ritz-Carlton Bacara, Santa Barbara Venture and (ii) a $25.0 million revolving working capital facility (the “Working Capital Facility”) to be used for our working capital needs. The Bridge Loan, which was scheduled to mature on December 31, 2019, was repaid in full during the fourth quarter of 2019. The Working Capital Facility that was scheduled to mature on December 31, 2019, was extended to the later of March 31, 2020 or the closing date of the Merger. We served as guarantor of the WPC Credit Facility and pledged our unencumbered equity interests in certain properties as collateral, as further described in the pledge and security agreement entered into between the borrower and lender. At both March 31, 2020 and December 31, 2019, there were no outstanding balances under either the Bridge Loan or the Working Capital Facility. Upon completion of the Merger on April 13, 2020, all applicable loan documents were terminated.

Note 5. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):


	September 30, 2020		December 31, 2019
Buildings	$	2,287,663	$	1,400,251
Land	627,296		331,681
Furniture, fixtures and equipment	198,540		103,920
Building and site improvements	196,317		160,726
Construction in progress	7,026		11,918
Hotels, at cost	3,316,842		2,008,496
Less: Accumulated depreciation	(332,042)		(298,949)
Net investments in hotels	$	2,984,800	$	1,709,547

WLT 9/30/2020 10-Q – 19

Notes to Consolidated Financial Statements (Unaudited)

During the nine months ended September 30, 2020 and 2019, we retired fully depreciated furniture, fixtures and equipment aggregating $19.0 million and $9.8 million, respectively.

Depreciation expense was $31.2 million and $18.7 million for the three months ended September 30, 2020 and 2019, respectively, and $80.8 million and $56.7 million for the nine months ended September 30, 2020 and 2019, respectively.

Property Dispositions

On June 8, 2020, we sold our 100% ownership interest in the Hutton Hotel Nashville to an unaffiliated third party for a contractual sales price of $70.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $26.8 million, including the release of $0.4 million of restricted cash. We recognized a loss on sale of $0.5 million during the nine months ended September 30, 2020 in connection with this transaction.

On August 27, 2020, the Lake Arrowhead Resort and Spa venture sold the Lake Arrowhead Resort and Spa to an unaffiliated third party for a contractual sales price of $23.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $8.0 million. We owned a 97.35% controlling ownership interest in the venture. We recognized a gain on sale of $3.2 million during the three and nine months ended September 30, 2020 in connection with this transaction.

Impairments

As a result of the adverse effect the COVID-19 pandemic has had, and continues to have, on our hotel operations, we reviewed all of our hotel properties for impairment and recognized impairment charges during the nine months ended September 30, 2020 totaling $120.2 million on six Consolidated Hotels with an aggregate fair value measurement of $266.6 million in order to reduce the carrying value of the properties to their estimated fair values. For five of the hotel properties, the fair value measurements were determined using a future net cash flow analysis, discounted for the inherent risk associated with each investment and for one property, the fair value measurement approximated its estimated selling price. No impairments were recognized during the three months ended September 30, 2020 or the three and nine months ended September 30, 2019.

Hurricane-Related Disruption

Below is a summary of the items that comprised the (gain) loss recognized related to Hurricane Irma (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net write-off of fixed assets	$	3,095	$	1,012	$	2,540	$	3,071
Insurance proceeds in excess of receivables	(1,030)		—		(1,030)		—
Property damage insurance receivables	(3,095)		(1,892)		(2,540)		(3,951)
Gain on hurricane-related property damage	$	(1,030)	$	(880)	$	(1,030)	$	(880)

As the restoration work continues to be performed, the estimated total cost will change. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional remediation work will be recorded in the periods in which it is performed.

Construction in Progress

At September 30, 2020 and December 31, 2019, construction in progress, recorded at cost, was $7.0 million and $11.9 million, respectively, and related to planned renovations at certain of our hotels. Upon substantial completion of renovation work, costs are reclassified from construction in progress to buildings, building and site improvements and furniture, fixtures and equipment, as applicable, and depreciation will commence.

We capitalize qualifying interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.1 million and $0.7 million of such costs during the three months ended September 30, 2020 and 2019, respectively, and $0.4 million and $1.2 million during the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and December 31, 2019, accrued capital expenditures were $1.4 million and $2.5 million, respectively, representing non-cash investing activity.

WLT 9/30/2020 10-Q – 20

Notes to Consolidated Financial Statements (Unaudited)

Note 6. Equity Investments in Real Estate

At September 30, 2020, we owned equity interests in two Unconsolidated Hotels with unrelated third parties. We did not control the ventures that own these hotels, but we exercised significant influence over them. We accounted for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our Advisor that we incur and other-than-temporary impairment charges, if any).

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income or loss to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate if the venture’s capital structure gives different rights and priorities to its investors. Therefore, we followed the hypothetical liquidation at book value (“HLBV”) method in determining our share of these ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments were recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):


Unconsolidated Hotels	State	Number of Rooms	% Owned		Hotel Type	Carrying Value at
						September 30, 2020		December 31, 2019
Ritz-Carlton Philadelphia Venture (a)	PA	301	60.0	%	Full-service	$	19,310	$	27,247
Hyatt Centric French Quarter Venture	LA	254	80.0	%	Full-service	488		505
Ritz-Carlton Bacara, Santa Barbara Venture (b)	CA	358	40.0	%	Resort	—		51,965
Marriott Sawgrass Golf Resort & Spa Venture (b)	FL	514	50.0	%	Resort	—		$	20,580
		1,427				$	19,798	$	100,297

___________

(a)We contributed $2.0 million to this investment during the nine months ended September 30, 2020.

(b)Upon completion of the Merger on April 13, 2020, the Company consolidates its 100% real estate interest in this hotel.

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which is based on the HLBV model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
Unconsolidated Hotels	2020		2019		2020		2019
Ritz-Carlton Philadelphia Venture	$	(3,074)	$	16	$	(9,975)	$	(1,045)
Hyatt Centric French Quarter Venture	(127)		(19)		(138)		1,085
Marriott Sawgrass Golf Resort & Spa Venture (a)	—		(955)		(58)		2,185
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)	—		199		(20,968)		(2,124)
Total equity in (losses) earnings of equity method investments in real estate, net	$	(3,201)	$	(759)	$	(31,139)	$	101

___________

(a) Upon closing of the Merger on April 13, 2020, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore these amounts represent the equity in (losses) earnings for the respective periods prior to the Merger.

(b) Includes an other-than-temporary impairment charge of $17.8 million recognized on this investment during the nine months ended September 30, 2020 to reduce the carrying value of our equity investment in the venture to its estimated fair value.

No other-than-temporary impairment charges were recognized during the three months ended September 30, 2020 or the three and nine months ended September 30, 2019.

At September 30, 2020 and December 31, 2019, the unamortized basis differences on our equity investments were $2.2 million and $6.3 million. Net amortization of the basis differences reduced the carrying values of our equity investments by less than

WLT 9/30/2020 10-Q – 21

Notes to Consolidated Financial Statements (Unaudited)

$0.1 million and $0.1 million during the three months ended September 30, 2020 and 2019, respectively, and by $0.2 million and $0.3 million during the nine months ended September 30, 2020 and 2019, respectively.

Note 7. Intangible Assets

Intangible assets are summarized as follows (dollars in thousands):


		September 30, 2020						December 31, 2019
	Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-Lived Intangible Assets
Villa/condo rental programs	45 - 55	$	72,400	$	(9,153)	$	63,247	$	72,400	$	(8,025)	$	64,375
Trade name	8	9,400		(549)		8,851		—		—		—
Other intangible assets	2 - 10	1,633		(664)		969		855		(444)		411
Total intangible assets, net		$	83,433	$	(10,366)	$	73,067	$	73,255	$	(8,469)	$	64,786

Net amortization of intangibles was $0.7 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively, and $1.9 million and $1.1 million for the nine months ended September 30, 2020 and 2019, respectively. Amortization of intangibles is included in Depreciation and amortization in the consolidated financial statements.

Note 8. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

Derivative Assets and Liabilities — Our derivative assets, which are included in Other assets in the consolidated financial statements, are comprised of interest rate caps and our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps (Note 9).

The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the nine months ended September 30, 2020 or 2019. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income in the consolidated financial statements.

Our non-recourse debt, net which we have classified as Level 3, had a carrying value of $2.2 billion and $1.2 billion at September 30, 2020 and December 31, 2019, respectively, and an estimated fair value of $2.1 billion and $1.2 billion at September 30, 2020 and December 31, 2019, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.

WLT 9/30/2020 10-Q – 22

Notes to Consolidated Financial Statements (Unaudited)

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both September 30, 2020 and December 31, 2019.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

The Company estimated the fair values of our long-lived real estate and related intangible assets using Level 3 inputs, using a combination of the income capitalization and sales comparison approaches, specifically utilizing a discounted cash flow analysis and recent comparable sales transactions. The estimate of the fair value of the assets acquired in the Merger, as discussed in Note 2 and the evaluation of the assets for potential impairment, as discussed below, required the Company’s management to exercise significant judgment and make certain key assumptions, including, but not limited to, the following: (i) capitalization rate; (ii) discount rate; (iii) net operating income; and (iv) number of years the property will be held or benefit realized. There are inherent uncertainties in making these estimates, including the impact of the COVID-19 pandemic. For our estimate of the fair value of the assets acquired in the Merger and impairment tests for our long-lived real estate and related intangible assets during the nine months ended September 30, 2020, we used discount rates ranging from 7.0% to 10.5%, with a weighted-average rate of 8.4%, and capitalization rates ranging from 5.0% to 8.5%, with a weighted-average rate of 6.5%.

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated cost to sell. See Note 5 and Note 6 for a description of impairment charges recognized during the nine months ended September 30, 2020. No impairments were recognized during the three months ended September 30, 2020 or the three and nine months ended September 30, 2019.

See Note 14 for information on the measurement of fair value of the Series A and Series B Preferred Stock and Warrants.

Note 9. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities.

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

WLT 9/30/2020 10-Q – 23

Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):


Derivatives Designated as Hedging Instruments		Asset Derivatives Fair Value at				Liability Derivatives Fair Value at
	Balance Sheet Location	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Interest rate caps	Other assets	$	2	$	18	$	—	$	—
Interest rate swaps	Accounts payable, accrued expenses and other liabilities	—		—		(5,751)		—
		$	2	$	18	$	(5,751)	$	—

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements.

We recognized unrealized losses of less than $0.1 million in Other comprehensive income (loss) on derivatives in connection with our interest rate swaps and caps during both the three months ended September 30, 2020 and 2019, respectively, and unrealized losses of $0.9 million and $0.2 million during the nine months ended September 30, 2020 and 2019, respectively.

We reclassified $0.2 million from Other comprehensive income (loss) on derivatives into Interest expense during both the three months ended September 30, 2020 and 2019, respectively and $0.3 million and $0.2 million during the nine months ended September 30, 2020 and 2019, respectively.

Amounts reported in Other comprehensive income (loss) related to our interest rate swap and caps will be reclassified to Interest expense as interest is incurred on our variable-rate debt. At September 30, 2020, we estimated that an additional $0.5 million will be reclassified as Interest expense during the next 12 months related to our interest rate swaps and caps.

Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and caps that we had outstanding on our Consolidated Hotels at September 30, 2020 were designated as cash flow hedges and are summarized as follows (dollars in thousands):


	Number of	Notional		Fair Value at
Interest Rate Derivatives	Instruments	Amount		September 30, 2020
Interest rate swaps	2	$	188,300	$	(5,751)
Interest rate caps	10	634,985		2
				$	(5,749)

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2020. At September 30, 2020, both our total credit exposure and the maximum exposure to any single counterparty was less than $0.1 million.

WLT 9/30/2020 10-Q – 24

Notes to Consolidated Financial Statements (Unaudited)

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2020, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $6.0 million at September 30, 2020, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at September 30, 2020, we could have been required to settle our obligations under these agreements at their aggregate termination value of $6.3 million. At December 31, 2019, we had no derivatives that were in a net liability position.

Note 10. Debt

Our debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):


			Carrying Amount at
	Interest Rate Range	Current Maturity Date Range (a)	September 30, 2020		December 31, 2019
Fixed rate	3.0% – 5.9%	11/2020 – 4/2024	$	1,408,338	$	884,849
Variable rate (b)	2.4% – 6.0%	6/2021 – 11/2023	753,356		321,218
			$	2,161,694	$	1,206,067

___________

(a)Many of our mortgage loans have extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.

(b)The interest rate range presented for these mortgage loans reflect the rates in effect at September 30, 2020 through the use of an interest rate swap or cap, when applicable.

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. At September 30, 2020, we have effectively entered into cash management agreements with the lenders on 28 of our 31 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. See Note 1 for further discussion.

Financing Activity During 2019

During the third quarter of 2019, we refinanced the $10.0 million Hilton Garden Inn New Orleans French Quarter/CBD mortgage loan with a new mortgage loan of up to $18.0 million, of which $15.0 million was funded at closing. The loan has a floating annual interest rate of LIBOR plus 2.8% (subject to an interest rate cap) and a maturity date of July 1, 2022, with two one-year extension options. No gain or loss was recognized on the extinguishment of debt. This hotel was subsequently sold on October 9, 2019.

During the second quarter of 2019, we refinanced the $67.0 million Sheraton Austin Hotel at the Capitol mortgage loan with a new mortgage loan that has a maximum principal amount of $92.4 million, of which we drew $68.4 million at closing, with the remaining balance available to fund planned renovations at the hotel. The loan has a floating annual interest rate of LIBOR plus 3.5% (subject to an interest rate cap) and a maturity date of July 9, 2022 with two one-year extension options. We recognized a loss on extinguishment of debt of $0.1 million on this refinancing.

WLT 9/30/2020 10-Q – 25

Notes to Consolidated Financial Statements (Unaudited)

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2020 and each of the next four calendar years following December 31, 2020 are as follows (in thousands):


Years Ending December 31,	Total
2020 (remainder)	$	198,372
2021	777,031
2022	896,062
2023	298,385
2024	50,253
Total principal payments	2,220,103
Unamortized debt discount	(54,505)
Unamortized deferred financing costs	(3,904)
Total	$	2,161,694

Note 11. Commitments and Contingencies

At September 30, 2020, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, including liens for which we may obtain a bond, provide collateral or provide an indemnity, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Hotel Management Agreements

As of September 30, 2020, our hotel properties were operated pursuant to long-term management agreements with 12 different management companies, with initial terms ranging from five to 40 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.5% to 3.5% of hotel revenues. Twelve of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee ranging from 3.0% to 7.0% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. We incurred management fee expense, including amortization of deferred management fees, of $1.6 million and $3.5 million for the three months ended September 30, 2020 and 2019, respectively, and $4.8 million and $13.0 million for the nine months ended September 30, 2020 and 2019, respectively.

Franchise Agreements

Seventeen of our hotel properties operated under franchise or license agreements with national brands that are separate from our management agreements. As of September 30, 2020, we had 12 franchise agreements with Marriott-owned brands, two with Hilton-owned brands, one with InterContinental Hotels-owned brands and two with a Hyatt-owned brand related to our hotels. Our typical franchise agreements have initial terms ranging from 15 to 25 years. Two of our hotels are not operated with a hotel brand so the hotels do not have franchise agreements. Generally, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.5% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. We incurred franchise fee expense, including amortization of deferred franchise fees, of $0.9 million and $4.4 million for the three months ended September 30, 2020 and 2019, respectively, and $3.7 million and $12.7 million for the nine months ended September 30, 2020 and 2019, respectively.

WLT 9/30/2020 10-Q – 26

Notes to Consolidated Financial Statements (Unaudited)

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures sufficient to cover the cost of routine improvements and alterations at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. At September 30, 2020 and December 31, 2019, $46.6 million and $34.6 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures and is included in Restricted cash in the consolidated financial statements. In addition, due to the effects of the COVID-19 pandemic on our operations, we have been working with the brands, management companies and lenders and have been using a portion of the available restricted cash reserves to cover operating costs at our properties, some of which is subject to replenishment requirements.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. At September 30, 2020, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts at September 30, 2020 totaled $25.3 million. As discussed in Note 1, we have significantly reduced our planned renovation activity by either canceling or deferring this activity to future periods, other than completing projects that are near completion. Funding for a renovation will first come from our furniture, fixtures and equipment reserve accounts, to the extent permitted by the terms of the management agreement. Should these reserves be unavailable or insufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with existing cash resources or other sources of available capital, including cash flow from operations.

Leases

Lease Obligations

We recognize an operating right-of-use asset and a corresponding lease liability for ground lease arrangements, hotel parking leases and various hotel equipment leases for which we are the lessee. Our leases have remaining lease terms ranging from less than one year to 87 years (excluding extension options not reasonably certain of being exercised).

Lease Cost

Certain information related to the total lease cost for operating leases is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Fixed lease cost	$	2,853	$	3,317	$	9,045	$	10,281
Variable lease cost (a)	4		239		103		614
Total lease cost	$	2,857	$	3,556	$	9,148	$	10,895

___________

(a)Our variable lease payments consist of payments based on a percentage of revenue.

WLT 9/30/2020 10-Q – 27

Notes to Consolidated Financial Statements (Unaudited)

Note 12. Loss Per Share and Equity

Loss Per Share

The computation of basic and diluted earnings per share is as follows (in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss attributable to the Company	$	(81,376)	$	(2,454)	$	(265,934)	$	(16,519)
Less: Preferred dividends	(401)		—		(1,742)		—
Less: Fair value adjustment on reclassification of Series A Preferred Stock	2,754		—		2,754		—
Net loss attributable to WLT Stockholders including amounts attributable to fair value adjustment	$	(79,023)	$	(2,454)	$	(264,922)	$	(16,519)


	Three Months Ended September 30, 2020					Three Months Ended September 30, 2019
	Basic and Diluted Weighted-Average Shares Outstanding	Allocation of Loss		Basic and Diluted Loss Per Share		Basic and Diluted Weighted-Average Shares Outstanding	Allocation of Loss		Basic and Diluted Income Per Share
Class A common stock	167,571,806	$	(57,863)	$	(0.35)	129,261,612	$	(2,454)	$	(0.02)
Class T common stock	61,175,258	(21,160)		(0.35)		—	—		—
Net loss attributable to WLT stockholders including amounts attributable to fair value adjustment		$	(79,023)				$	(2,454)


	Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2019
	Basic and Diluted Weighted-Average Shares Outstanding	Allocation of Loss		Basic and Diluted Loss Per Share		Basic and Diluted Weighted-Average Shares Outstanding	Allocation of Loss		Basic and Diluted Loss Per Share
Class A common stock	153,838,492	$	(212,188)	$	(1.38)	128,697,027	$	(16,519)	$	(0.13)
Class T common stock	38,178,719	(52,734)		(1.38)		—	—		—
Net loss attributable to WLT stockholders including amounts attributable to fair value adjustment		$	(264,922)				$	(16,519)

The allocation of net loss attributable to WLT stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the period. The allocation for the Class A common stock excludes the accretion of interest on the annual distribution and shareholder servicing fee of less than $0.1 million and $0.1 million for the three and nine months ended September 30, 2020, respectively, since this fee is only applicable to holders of Class T common stock. No such fees were incurred for the three and nine months ended September 30, 2019.

The distribution and shareholder servicing fee is 1.0% of the NAV of our Class T common stock; it accrues daily and is payable quarterly in arrears. We currently expect that we will cease incurring the distribution and shareholder servicing fee during the fourth quarter of 2020, at which time the total underwriting compensation paid in respect of the offering will reach 10.0% of the gross offering proceeds. We paid distribution and shareholder servicing fees to selected dealers of $1.1 million and $2.3 million during the three and nine months ended September 30, 2020, respectively.

Noncontrolling Interest in the Operating Partnership

We consolidate the Operating Partnership, which is a majority-owned limited partnership that has a noncontrolling interest. At September 30, 2020, the Operating Partnership had 231,166,346 OP Units outstanding, of which 99.0% of the outstanding OP Units were owned by the Company, and the noncontrolling 1.0% ownership interest was owned by Mr. Medzigian.

At September 30, 2020, Mr. Medzigian owned 2,417,996 OP Units. The outstanding OP Units held by Mr. Medzigian are exchangeable on a one-for-one basis into shares of WLT Class A common stock. Additionally, we had 16,778,446 Warrant Units outstanding at September 30, 2020. The noncontrolling interest is included in noncontrolling interest on the consolidated balance sheet at September 30, 2020.

WLT 9/30/2020 10-Q – 28

Notes to Consolidated Financial Statements (Unaudited)

Reclassifications Out of Accumulated Other Comprehensive Loss

The following table presents a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):


	Three Months Ended September 30,
Gains and Losses on Derivative Instruments	2020		2019
Beginning balance	$	(928)	$	(420)
Other comprehensive loss before reclassifications	(45)		(22)
Amounts reclassified from accumulated other comprehensive loss to:
Interest expense	159		176
Equity in earnings of equity method investments in real estate, net	—		6
Total	159		182
Net current period other comprehensive income	114		160
Net current period other comprehensive income attributable to noncontrolling interests	(1)		(6)
Ending balance	$	(815)	$	(266)


	Nine Months Ended September 30,
Gains and Losses on Derivative Instruments	2020		2019
Beginning balance	$	(172)	$	(286)
Other comprehensive loss before reclassifications	(891)		(199)
Amounts reclassified from accumulated other comprehensive loss to:
Interest expense	260		217
Equity in earnings of equity method investments in real estate, net	6		10
Total	266		227
Net current period other comprehensive (loss) income	(625)		28
Net current period other comprehensive income attributable to noncontrolling interests	(18)		(8)
Ending balance	$	(815)	$	(266)

Note 13. Income Taxes

We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100% of our taxable income annually and intend to do so for the tax year ending December 31, 2020, if applicable. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the nine months ended September 30, 2020 and 2019. We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.

Certain of our subsidiaries have elected taxable REIT subsidiary (“TRS”) status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. On April 20, 2020, the TRSs that were previously wholly-owned by CWI 1 were contributed into the wholly-owned WLT combined TRS in a tax-free restructuring. This restructuring will result in a single federal tax filing for the WLT combined TRS, which will include the contributed entities. The WLT combined TRS values the deferred tax assets and liabilities of the combined entities based on the WLT combined TRS’s deferred tax rate.

The accompanying consolidated financial statements include an interim tax provision for our TRSs for the three and nine months ended September 30, 2020 and 2019. Current income tax expense was $0.1 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively, and current income tax benefit was $8.0 million and current income tax expense was $1.9 million for the nine months ended September 30, 2020 and 2019, respectively. We have historically

WLT 9/30/2020 10-Q – 29

Notes to Consolidated Financial Statements (Unaudited)

calculated the provision for income taxes during interim periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the interim period. We have used a discrete effective tax rate method to calculate taxes for the three and nine months ended September 30, 2020. We determined that, since estimates of “ordinary” income are unreliable due to the impact of the COVID-19 pandemic, the historical method would not provide a reliable estimate for the three and nine months ended September 30, 2020.

In light of the COVID-19 outbreak during the first quarter of 2020, we monitored tax considerations and the potential impact on our consolidated financial statements. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (U.S. federal legislation enacted on March 27, 2020 in response to the COVID-19 pandemic) provides that net operating losses generated in 2018, 2019, or 2020 may be carried back to offset taxable income earned during the five-year period prior to the year in which the net operating loss was generated. By carrying back certain net operating losses, we recognized current tax benefits of $0.3 million and $8.3 million during the three and nine months ended September 30, 2020, respectively, which is included within current tax benefit described in the previous paragraph.

Our TRSs are subject to U.S. federal and state income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause us to change our judgment about whether a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. During the second quarter of 2020, we established a full valuation allowance related to the economic impact of the COVID-19 pandemic on our hotel properties. The majority of our deferred tax assets relate to net operating losses, accrued expenses and deferred key money liabilities. Benefit from (provision for) income taxes included net deferred income tax benefits of $1.7 million and deferred income tax expense of $0.1 million for the three months ended September 30, 2020 and 2019, respectively, and deferred income tax expense of $0.5 million and $0.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Note 14. Mandatorily Redeemable Preferred Stock

Series A Preferred Stock

As discussed in Note 2, as consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, affiliates of WPC were issued 1,300,000 shares of WLT Series A preferred stock, $0.001 par value per share, with a liquidation preference of $50.00 per share (the “Series A Preferred Stock”).

Dividends

Dividends are comprised of cumulative preferential dividends that holders of the Series A Preferred Stock are entitled to receive at a rate of 5% per year, with the rate increasing to 7% on the second anniversary of the Merger and increasing to 8% on the third anniversary of the Merger. Dividends accrue annually. Any dividend payable on the Series A Preferred Stock will be computed on the basis of a 360-day year consisting of twelve 30-day months.

Redemption

Partial Redemption – On both April 13, 2023 and April 13, 2024, the holders of the Series A Preferred Stock may elect to have the Company redeem 25% of the shares of the Series A Preferred Stock outstanding as of the respective dates for cash at a redemption price per share equal to $50.00, plus all accrued and unpaid dividends thereon up to and including the date of redemption, without interest, to the extent the Company has funds legally available therefor.

Full Redemption – At the earlier of April 13, 2025 or a redemption event (as defined in the Articles Supplementary governing the Series A Preferred Stock), the holders of the Series A Preferred Stock may elect to have the Company redeem all of the outstanding shares of the Series A Preferred Stock for cash at a redemption price per share equal to $50.00, plus all accrued and unpaid dividends thereon up to and including the date of redemption, without interest, to the extent the Company has funds legally available therefor.

WLT 9/30/2020 10-Q – 30

Notes to Consolidated Financial Statements (Unaudited)

Series B Preferred Stock and Warrants

On July 24, 2020, we issued 200,000 shares of our newly designated Series B Preferred Stock, with a liquidation preference of $1,000.00 per share and Warrants to purchase 16,778,446 Warrant Units, for an aggregate purchase price of $200.0 million. The Warrant exercise price is $0.01 per Warrant Unit, and the Warrants expire on July 24, 2027. The Warrant Units are recorded as noncontrolling interest in the consolidated balance sheet totaling $26.2 million at September 30, 2020, discussed further below. The Warrants require that, if the Operating Partnership pays any distribution to holders of OP Units, then the Operating Partnership shall concurrently distribute the same securities, cash, indebtedness, rights or other property to the holders of Warrants as if the Warrants had been exercised into Warrant Units on the date of such distribution. The Warrants include a call option that will allow the Company to purchase Warrants, Warrant Units and Common Stock issued on redemption of Warrant Units from the Purchaser or its transferees at a specified call price until the Common Stock is approved for trading on any securities exchange registered as a national securities exchange under Section 6 of the Securities and Exchange Act of 1934, as amended (or the equivalent thereof in a jurisdiction outside the United States).

Dividends

The holders are entitled to receive cumulative dividends per share of Series B Preferred Stock at the rate of 12% per year. Dividends can be paid in cash or in the form of additional shares of Series B Preferred Stock with the value thereof equal to the liquidation preference of such shares, at the option of the Company. The dividends are cumulative, compound quarterly and accrue, whether or not earned or declared, from and after the date of issue.

Redemption

On July 24, 2025, the Company is obligated to redeem all shares of Series B Preferred Stock at a redemption price, payable in cash, equal to the then applicable liquidation preference plus all accrued and unpaid dividends. The Company, at its option, may redeem for cash, in whole or in part from time to time, any or all of the outstanding shares of Series B Preferred Stock upon giving the notice described in the Articles Supplementary governing the Series B Preferred Stock at a price determined in the Articles Supplementary.

Accounting Treatment

ASC 480, “Distinguishing Liabilities from Equity”, generally requires liability classification for financial instruments that are certain to be redeemed, represent obligations to purchase shares of stock or represent obligations to issue a variable number of common shares. Upon issuance of the Series A Preferred Stock during the second quarter of 2020, we concluded that the Series A Preferred Stock was not within the scope of ASC 480 because none of the three conditions for liability classification was present and we recorded it in the mezzanine equity section and accreted it to its redemption value through charges to stockholders’ equity using the effective interest method as redemption was probable. As a result of the issuance of the Series B Preferred Stock during the third quarter of 2020, which we concluded was within the scope of ASC 480 and recorded it as a liability as a result of its certainty to be redeemed, we reevaluated the classification of our Series A Preferred Stock and because of certain protective provisions that prohibit the Company from purchasing or redeeming capital stock of the Company for as long as any shares of Series A Preferred Stock remain outstanding (as more fully described in the Articles Supplementary governing the Series A Preferred Stock), we concluded that Series A Preferred Stock was now certain to be redeemed and this modification resulted in the reclassification of the Series A Preferred Stock from mezzanine to a liability and we recognized a decrease to distributions and accumulated losses of $2.8 million representing the difference between the carrying value and estimated fair value.

Dividends accrued included in interest expense in the consolidated financial statements related to our Series A and Series B Preferred Stock for both the three and nine months ended September 30, 2020 totaled $5.2 million.

WLT 9/30/2020 10-Q – 31

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the carrying value of our Series A and Series B Preferred Stock:


	September 30, 2020
	Series A		Series B
	Preferred Stock		Preferred Stock		Total
Liquidation value	$	65,000	$	200,000	$	265,000
Fair value discount	(14,310)		(30,358)		(44,668)
	50,690		169,642		220,332
Accumulated amortization of fair value discount	572		1,147		1,719
Deferred financing costs	—		(11,169)		(11,169)
Accumulated amortization of deferred financing costs	—		422		422
	$	51,262	$	160,042	$	211,304

Upon closing of the July Capital Raise, the Series A Preferred Stock had both an estimated fair value and carrying value of $50.7 million and the Series B Preferred Stock and Warrant Units had an estimated fair value of $185.8 million and $33.2 million, respectively. We allocated the $200.0 million of gross proceeds received in the July Capital Raise based upon the relative fair values of the Series B Preferred Stock and Warrant Units, and recorded $169.6 million and $30.4 million, respectively, on the consolidated balance sheet. The fair values of the Series A and Series B Preferred Stock were primarily determined by a discounted cash flow analysis of the interest and anticipated redemption payments associated with the preferred stock. We classified this investment as Level 3 because the discounted cash flow valuation model incorporates unobservable inputs to determine its fair value.

Note 15. Subsequent Events

During October 2020, we refinanced two non-recourse mortgage loans totaling $70.9 million with new non-recourse mortgage loans totaling $77.8 million. Both loans have floating annual interest rate that we have entered into interest rate cap agreements for and terms to maturity of 3 years.

WLT 9/30/2020 10-Q – 32

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 is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements of CWI 1 and accompanying notes as of and for the year ended December 31, 2019 included as Exhibit 99.2 of Form 8-K/A filed by WLT on June 29, 2020.

Business Overview

We are a self-managed, publicly owned, non-traded REIT that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States. We have fully invested our offering proceeds in a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations are significantly impacted by seasonality and by hotel renovations. We have invested in hotels and then initiated significant renovations at certain hotels. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations. At September 30, 2020, we held ownership interests in 31 hotels, with a total of 9,614 rooms.

Significant Developments

COVID-19 Pandemic

As of the date of this Report, 30 of our hotels are open but the majority are operating at significantly reduced levels of occupancy, staffing, and expenses and operations at our remaining one hotel are fully suspended. While we have seen improving demand at some of our properties as certain states and cities across the United States have loosened stay-at-home restrictions, we expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. In addition, resurgences of the COVID-19 virus in certain areas where our hotels are located may cause us to have to suspend operations at hotels that have remained open or reopened until the resurgence subsides. Given the uncertainty as to the ultimate severity and duration of the COVID‑19 outbreak and its effects, and the potential for its recurrence, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.

We have taken decisive actions to help mitigate the effects of the COVID-19 pandemic on our operating results and to preserve our liquidity at both the operating level and corporate level, including:

•Completing the July Capital Raise

•Significantly reducing hotel operating costs: in March, April and May 2020, we suspended all operations at 16 hotels and significantly reduced operations at the remaining hotels, primarily by reducing staffing, furloughing employees, eliminating non-essential amenities and services and closing several floors and food and beverage outlets. One of these hotels reopened in May, seven hotels, five hotels reopened in July and two hotels reopened in August;

•Working with our lenders on debt forbearance plans, as discussed below;

•Suspending distributions on, and redemptions of, our common stock, subject to limited exceptions;

•Actively pursuing certain asset sales;

•Significantly reducing our planned renovation activity by either canceling or deferring this activity to future periods, other than completing projects that are near completion;

•Reducing the cash compensation payable to our senior management and the Board of Directors.

WLT 9/30/2020 10-Q – 33

During the nine months ended September 30, 2020, we sold two hotels with an aggregate contractual sales price of $93.0 million, and we received net aggregate proceeds of $34.8 million after the repayment of the related mortgage loans. We may choose to market additional assets for sale and these may be at discounted valuations.

Financial and Operating Highlights

(Dollars in thousands, except average daily rate (“ADR”) and revenue per available room (“RevPAR”))


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Hotel revenues	$	73,668		$	151,118		$	208,943		$	469,362
Net loss attributable to stockholders	(81,777)			(2,454)			(267,676)			(16,519)

Cash distributions paid	—			20,099			20,357			60,089

Net cash (used in) provided by operating activities							(93,873)			76,040
Net cash provided by investing activities							178,071			62,276
Net cash provided by (used in) financing activities							112,034			(119,172)

Supplemental Financial Measures: (a)
FFO attributable to WLT stockholders	(46,635)			17,322			(50,274)			43,026
MFFO attributable to WLT stockholders	(36,800)			20,183			(89,572)			50,827

Consolidated Hotel Operating Statistics
Occupancy	25.7		%	75.9		%	26.2		%	75.3		%
ADR	$	217.81		$	220.48		$	227.17		$	232.12
RevPAR	55.95			167.26			59.63			174.89

___________

(a)We consider funds from operations (“FFO”) and MFFO, which are supplemental measures that are not defined by GAAP (“non-GAAP measures”), to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

WLT 9/30/2020 10-Q – 34

Portfolio Overview

The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels at September 30, 2020:

Hotels

State

Number
of Rooms

% Owned

Hotel Type

Consolidated Hotels

Charlotte Marriott City Center

446

100%

Full-Service

Courtyard Nashville Downtown

192

100%

Select-Service

Courtyard Pittsburgh Shadyside

132

100%

Select-service

Courtyard Times Square West

224

100%

Select-service

Embassy Suites by Hilton Denver-Downtown/Convention Center

403

100%

Full-Service

Equinox, a Luxury Collection Golf Resort & Spa

199

100%

Resort

Fairmont Sonoma Mission Inn & Spa

226

100%

Resort

Hawks Cay Resort (a)

421

100%

Resort

Hilton Garden Inn/Homewood Suites Atlanta Midtown

228

100%

Select-service

Holiday Inn Manhattan 6th Avenue Chelsea

226

100%

Full-service

Hyatt Place Austin Downtown

296

100%

Select-service

Le Méridien Arlington

154

100%

Full-Service

Le Méridien Dallas, The Stoneleigh

176

100%

Full-service

Marriott Kansas City Country Club Plaza

295

100%

Full-service

Marriott Raleigh City Center

401

100%

Full-service

Marriott Sawgrass Golf Resort & Spa

514

100%

Resort

Renaissance Atlanta Midtown Hotel

304

100%

Full-Service

Renaissance Chicago Downtown

560

100%

Full-service

Ritz-Carlton Bacara, Santa Barbara

358

100%

Resort

Ritz-Carlton Fort Lauderdale (b)

196

70%

Resort

Ritz-Carlton Key Biscayne (c)

443

66.7%

Resort

Ritz-Carlton San Francisco

336

100%

Full-Service

Sanderling Resort

128

100%

Resort

San Diego Marriott La Jolla

376

100%

Full-Service

San Jose Marriott

510

100%

Full-Service

Seattle Marriott Bellevue

384

100%

Full-Service

Sheraton Austin Hotel at the Capitol

367

80%

Full-Service

Westin Minneapolis

214

100%

Full-Service

Westin Pasadena

350

100%

Full-Service

9,059

Unconsolidated Hotels

Hyatt Centric New Orleans French Quarter

254

80%

Full-service

Ritz-Carlton Philadelphia

301

60%

Full-service

555

_________

(a)Includes 244 privately owned villas that participate in the villa/condo rental program at September 30, 2020.

(b)Includes 30 condo-hotel units that participate in the villa/condo rental program at September 30, 2020.

(c)The number of rooms presented includes 141 condo-hotel units that participate in the resort rental program.

Results of Operations

We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing the value in our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net (loss) income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation.

WLT 9/30/2020 10-Q – 35

In addition, we use other information that may not be financial in nature, including statistical information, to evaluate the operating performance of our business, including occupancy rate, ADR and RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy rate, is an important statistic for monitoring operating performance at our hotels. Our occupancy rate, ADR and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions, regional and local employment growth, personal income and corporate earnings, business relocation decisions, business and leisure travel, new hotel construction and the pricing strategies of competitors.

Due to the COVID-19 pandemic, beginning in March 2020, we experienced a significant decline in occupancy and RevPAR. The economic downturn resulting from the COVID-19 pandemic has significantly impacted our business and the overall lodging industry. As discussed above, certain of our hotel properties temporarily suspended all operations and, while our other hotel properties are operating in a limited capacity, as a result of these operational changes, the results of operations for the three and nine months ended September 30, 2020 will not be comparable to the same period in 2019.

Additionally, as a result of the Merger, comparisons of the period to period financial information of WLT as set forth herein may not be meaningful. The historical financial information included herein as of any date, or for any periods, prior to April 13, 2020, represents the pre-merger financial information of CWI 1 on a stand-alone basis.

WLT 9/30/2020 10-Q – 36

The following table presents our comparative results of operations (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		Change		2020		2019		Change
Hotel Revenues	$	73,668	$	151,118	$	(77,450)	$	208,943	$	469,362	$	(260,419)

Hotel Operating Expenses	118,847		133,558		(14,711)		323,087		412,633		(89,546)
Corporate general and administrative expenses	6,715		3,052		3,663		15,900		9,211		6,689
Gain on hurricane-related property damage	(1,030)		(880)		(150)		(1,030)		(880)		(150)
Transaction costs	27		728		(701)		18,376		1,483		16,893
Asset management fees to affiliate	—		3,547		(3,547)		3,795		10,673		(6,878)
Impairment charges	—		—		—		120,220		—		120,220
Total Expenses	124,559		140,005		(15,446)		480,348		433,120		47,228
Operating (Loss) Income before net gain on sale of real estate	(50,891)		11,113		(62,004)		(271,405)		36,242		(307,647)
Net gain on sale of real estate	3,227		5,881		(2,654)		2,738		5,881		(3,143)
Operating (Loss) Income	(47,664)		16,994		(64,658)		(268,667)		42,123		(310,790)
Bargain purchase gain	—		—		—		78,696		—		78,696
Interest expense	(38,719)		(17,219)		(21,500)		(83,449)		(50,205)		(33,244)
Equity in (losses) earnings of equity method investments in real estate, net	(3,201)		(759)		(2,442)		(31,139)		101		(31,240)
Other (expense) and income	(55)		438		(493)		2		205		(203)
Net gain on change in control of interests	—		—		—		22,250		—		22,250
Net loss on extinguishment of debt	—		—		—		—		(136)		136
Loss Before Income Taxes	(89,639)		(546)		(89,093)		(282,307)		(7,912)		(274,395)
Benefit from (provision for) income taxes	1,549		(1,030)		2,579		7,525		(2,133)		9,658
Net Loss	(88,090)		(1,576)		(86,514)		(274,782)		(10,045)		(264,737)
Loss (income) attributable to noncontrolling interests	6,714		(878)		7,592		8,848		(6,474)		15,322
Net Loss Attributable to the Company	(81,376)		(2,454)		(78,922)		(265,934)		(16,519)		(249,415)
Preferred dividends	(401)		—		(401)		(1,742)		—		(1,742)
Net Loss Attributable to Stockholders	$	(81,777)	$	(2,454)	$	(79,323)	$	(267,676)	$	(16,519)	$	(251,157)
Supplemental Financial Measure:(a)
MFFO Attributable to Stockholders	$	(36,800)	$	20,183	$	(56,983)	$	(89,572)	$	50,827	$	(140,399)

___________

(a)We consider MFFO, a non-GAAP measure, to be an important metric in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definition of non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

At September 30, 2020 and 2019, we owned 29 and 22 Consolidated Hotels, respectively. Based on when a hotel is acquired or sold, the operating results for certain hotel properties are not comparable for the three and nine months ended September 30, 2020 and 2019. Our Same Store Hotels included 18 Consolidated Hotels and excluded the hotels acquired in the Merger and five hotels that were disposed of between January 1, 2019 and September 30, 2020.

WLT 9/30/2020 10-Q – 37

The following table sets forth the average occupancy rate, ADR and RevPAR for the three and nine months ended September 30, 2020 and 2019 for our Same Store Hotels.


	Three Months Ended September 30,				Nine Months Ended September 30,
Same Store Hotels		2020			2019			2020			2019
Occupancy Rate (a)		24.6		%	73.5		%	29.8		%	73.7		%
ADR		$	215.45		$	231.75		$	231.59		$	246.97
RevPAR		52.91			170.33			69.02			181.97

___________

(a)Occupancy rates for our Same Store Hotels for July, August and September 2020 were 21.0%, 25.9% and 26.8%, respectively, as compared to occupancy rates for July, August and September 2019 of 74.4%, 74.3% and 71.7%, respectively.

Hotel Revenues

For the three and nine months ended September 30, 2020 as compared to the same periods in 2019, hotel revenues decreased by $77.5 million and $260.4 million, respectively. Our Same Store Hotel revenue decreased by $90.4 million and $249.3 million, respectively, primarily due to the impact of the COVID-19 pandemic on our hotel operations and revenue decreased by $19.0 million and $53.1 million as a result of dispositions. These decreases were partially offset by an increase in revenue resulting from the hotels acquired in the Merger totaling $32.0 million and $42.0 million for the three and nine months ended September 30, 2020, respectively. We have experienced cancellations of rooms and conferences, and expect that we will continue to do so until the spread of the virus, or the fear of its spread, subsides. In addition, government-imposed restrictions on travel and large gatherings have adversely affected the performance of our hotels.

Hotel Operating Expenses

Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including occupancy, labor costs, utilities and insurance costs.

For the three and nine months ended September 30, 2020 as compared to the same periods in 2019, aggregate hotel operating expenses decreased by $14.7 million and $89.5 million, respectively. Our Same Store Hotel expenses decreased by $50.5 million and $135.9 million, respectively, primarily due to the impact of the COVID-19 pandemic on our hotel operations and expenses decreased by $16.8 million and $41.6 million as a result of dispositions. These decreases were partially offset by an increase in hotel operating expenses resulting from the hotels acquired in the Merger totaling $52.6 million and $87.9 million for the three and nine months ended September 30, 2020, respectively.

Transaction Costs

For the three and nine months ended September 30, 2020, as compared to the same periods in 2019, transactions costs decreased by $0.7 million and increased by $16.9 million, respectively, and represented legal, accounting, investor relations and other transaction costs related to the Merger and related transactions.

Corporate General and Administrative Expenses

For the three and nine months ended September 30, 2020 as compared to the same periods in 2019, corporate general and administrative expenses increased by $3.7 million and $6.7 million, respectively, primarily as a result of the impact of the Merger.

Asset Management Fees to Affiliate

For the three and nine months ended September 30, 2020, as compared to the same periods in 2019, asset management fees to affiliates decreased by $3.5 million and $6.9 million, respectively. Upon completion of the Merger on April 13, 2020 (Note 2), the Advisory Agreement was terminated and these fees ceased being incurred, therefore no costs were incurred during the three months ended September 30, 2020.

WLT 9/30/2020 10-Q – 38

Impairment Charges

Our impairment charges are more fully described in Note 5.

During the nine months ended September 30, 2020, we recognized impairment charges totaling $120.2 million on six Consolidated Hotels in order to reduce the carrying value of the properties to their estimated fair values, resulting from the adverse effect of the COVID-19 pandemic on our hotel operations. No impairments were recognized during the three months ended September 30, 2020 or the three and nine months ended September 30, 2019.

Net Gain on Sale of Real Estate

During the three and nine months ended September 30, 2020, we recognized a gain on sale on real estate of $3.2 million from the sale of the Lake Arrowhead Resort and Spa to an unaffiliated third party by the Lake Arrowhead Resort and Spa venture for a contractual sales price of $23.0 million. We owned an 97.35% controlling ownership interest in the venture.

During the nine months ended September 30, 2020, we recognized a loss on sale on real estate of $0.5 million from the sale of our 100% ownership interest in the Hutton Hotel Nashville to an unaffiliated third party for a contractual sales price of $70.0 million.

During the three and nine months ended September 30, 2019, we recognized a gain on sale of real estate of $5.9 million from the sale of our 100% ownership interest in the Courtyard San Diego Mission Valley to an unaffiliated third party for a contractual sales price of $79.0 million in September 2019.

Bargain Purchase Gain

During the nine months ended September 30, 2020, we recognized a bargain purchase gain of $78.7 in connection with the Merger resulting from the estimated fair values of the assets acquired net of liabilities assumed exceeding the consideration paid. See Note 2 for additional disclosure regarding the Merger.

Interest Expense

For the three and nine months ended September 30, 2020, as compared to the same periods in 2019, interest expense increased by $21.5 million and $33.2 million, respectively, primarily due to assuming the mortgage loans of 12 hotels in the Merger.

Net Gain on Change in Control of Interests

In connection with the Merger, we acquired the remaining interests in the Marriott Sawgrass Golf Resort and Spa and the Ritz-Carlton Bacara, Santa Barbara, in which we already had joint interests, and which were accounted for under the equity method of accounting. Due to the change in control of these two jointly owned investments, we recorded a net gain on change in control of interests during the nine months ended September 30, 2020 of $22.3 million, reflecting the difference between our carrying values and the preliminary estimated fair values of our previously held equity investments on April 13, 2020. Subsequent to the Merger, we own 100% of these hotels and consolidate our real estate interest in these hotels.

Equity in (Losses) Earnings of Equity Method Investments in Real Estate, Net

Equity in (losses) earnings of equity method investments in real estate, net represents (losses) earnings from our equity investments in Unconsolidated Hotels recognized in accordance with each investment agreement and based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period (Note 6). We are required to periodically compare an investment’s carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds the estimated fair value and is determined to be other than temporary. We recognized $17.8 million of other-than-temporary impairment charges on our equity method investments in real estate during the nine months ended September 30, 2020. No such charges were recognized during the nine months ended September 30, 2019.

WLT 9/30/2020 10-Q – 39

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which are based on the HLBV model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
Venture	2020		2019		2020		2019
Ritz-Carlton Philadelphia Venture (a)	$	(3,074)	$	16	$	(9,975)	$	(1,045)
Hyatt Centric French Quarter Venture (a)	(127)		(19)		(138)		1,085
Marriott Sawgrass Golf Resort & Spa Venture (b)	—		(955)		(58)		2,185
Ritz-Carlton Bacara, Santa Barbara Venture (b) (c)	—		199		(20,968)		(2,124)
Total equity in (losses) earnings of equity method investments in real estate, net	$	(3,201)	$	(759)	$	(31,139)	$	101

___________

(a)The change in our share of equity in (losses) earnings for the three and nine months ended September 30, 2020 as compared to the same periods in 2019 was primarily a result of the impact of the COVID-19 pandemic on our hotel operations.

(b)Upon closing of the Merger on April 13, 2020, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore these amounts represent the equity in (losses) earnings for the respective periods prior to the Merger.

(c)Includes an other-than-temporary impairment charge of $17.8 million recognized on this investment during the three months ended March 31, 2020 to reduce the carrying value of our equity investment in the venture to its estimated fair value.

Benefit from (Provision for) Income Taxes

For the three months ended September 30, 2020, we recognized a benefit from income taxes of $1.5 million compared to a provision for income taxes of $1.0 million for the three months ended September 30, 2019 and for the nine months ended September 30, 2020, we recognized a benefit from income taxes of $7.5 million compared to a provision for income taxes of $2.1 million for the nine months ended September 30, 2019. Benefit from income taxes during the three and nine months ended September 30, 2020 included a $0.3 million and $8.3 million current tax benefit, respectively, resulting from carrying back certain net operating losses allowable under the CARES Act, partially offset for the nine months ended September 30, 2020 by a deferred expense due to the establishment of a valuation allowance of $2.5 million.

Loss (Income) Attributable to Noncontrolling Interests

The following table sets forth our loss (income) attributable to noncontrolling interests (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
Venture	2020		2019		2020		2019
Ritz-Carlton Fort Lauderdale Venture (a)	$	1,297	$	924	$	2,751	$	552
Sheraton Austin Hotel at the Capitol Venture (a)	476		85		922		(373)
Ritz-Carlton Key Biscayne Venture	(13)		1,270		(946)		(1,038)
Hilton Garden Inn New Orleans French Quarter/CBD Venture	—		(620)		—		(710)
Operating Partnership — Noncontrolling interest (b)	4,954		—		6,121		—
Operating Partnership — Available Cash Distribution (c)	—		(2,537)		—		(4,905)
	$	6,714	$	(878)	$	8,848	$	(6,474)

___________

(a)The change in loss (income) attributable to noncontrolling interest for the three and nine months ended September 30, 2020 as compared to the same periods in 2019 were primarily the result of the impact of the COVID-19 pandemic on our hotel operations.

(b)Reflects the OP Units proportionate share of net loss for the three and nine months ended September 30, 2020.

(c)In accordance with the Internalization Agreement and the Redemption, as further described in Note 2, Available Cash Distributions have ceased.

WLT 9/30/2020 10-Q – 40

Modified Funds from Operations

MFFO is a non-GAAP measure that we use to evaluate our business. For a definition of MFFO and a reconciliation to net income or loss attributable to WLT stockholders, see Supplemental Financial Measures below.

For the three and nine months ended September 30, 2020 as compared to the same periods in 2019, MFFO decreased by $57.0 million and $140.4 million, respectively, primarily as a result of the impact that the COVID-19 pandemic had on hotel operations, as discussed above.

Liquidity and Capital Resources

Our primary cash uses over the next 12 months are expected to be payment of debt service, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be funds generated by hotel operations, proceeds from the July Capital Raise and any additional issuances of Series B Preferred Stock, and proceeds from additional asset sales.

Due to the COVID-19 pandemic and as a result of numerous government mandates, health official mandates and significantly reduced demand, as of the date of this Report, the Company has fully suspended operations at one of our 31 hotel properties and has limited operations at our remaining 30 hotel properties. Significant events affecting travel, including the COVID-19 pandemic, typically have an impact on booking patterns, with the full extent of the impact generally determined by the duration of the event and its impact on travel decisions. We believe the ongoing effects of the COVID-19 pandemic on our operations have had, and will continue to have, a material adverse impact on our financial results and liquidity, and such adverse impact may continue well beyond the containment of such outbreak.

In addition to raising capital in the July Capital Raise and through asset sales, we have taken various actions to help mitigate the effects of the COVID-19 pandemic on our operational results and to preserve our liquidity at both the operational and corporate level, including among others: reducing capital expenditures and reducing operating expenses, suspending distributions on and redemption of our common stock and temporarily suspending required contributions to the furniture, fixture and equipment replacement reserve at certain of our hotels.

We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of the date of this Report, we have either executed loan modifications or refinanced 25 of our 31 mortgage loans, aggregating $1.9 billion of indebtedness, under which interest and principal payments have been temporarily deferred and/or temporary covenant relief has been granted, generally for periods ranging from three months to four months. At September 30, 2020, we have effectively entered into cash management agreements with the lenders on 28 of our 31 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. The cash management agreements generally permit cash generated from the operations of each hotel to fund the hotel’s operating expenses, debt service, taxes and insurance but restrict distributions of excess cash flow, if any, to the Company to fund corporate expenses. We have determined that we are likely to be unable to satisfy certain covenants in the future on most, if not all, of our mortgage loans depending on the length of the pandemic, and we may seek additional relief from our lenders. If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels. We may also choose to turn over one or more hotels back to the related mortgage lender. Even if we are able to obtain payment or covenant relief, we may incur increased costs and increased interest rates and we may agree to additional restrictive covenants and other lender protections related to the mortgage loans.

During the nine months ended September 30, 2020, we sold two hotels with an aggregate contractual sales price of $93.0 million, and we received net aggregate proceeds of $34.8 million after the repayment of the related mortgage loans. We may choose to market additional assets for sale and these may be at discounted valuations.

Sources and Uses of Cash During the Period

Operating Activities — For the nine months ended September 30, 2020, net cash used in operating activities was $93.9 million as compared to net cash provided by operating activities of $76.0 million for the nine months ended September 30, 2019. This change in operating cash flows primarily reflects the impact of the COVID-19 pandemic on our hotel operations.

WLT 9/30/2020 10-Q – 41

Investing Activities — During the nine months ended September 30, 2020, net cash provided by investing activities was $178.1 million, primarily as a result of $109.5 million of cash acquired in the Merger and proceeds of $89.4 million from the sales of the Hutton Hotel Nashville and Lake Arrowhead Resort and Spa, partially offset by funding of $17.0 million for capital expenditures at our Consolidated Hotels.

Financing Activities — Net cash provided by financing activities for the nine months ended September 30, 2020 was $112.0 million primarily as a result of the proceeds from the July Capital Raise of $200.0 million, partially offset by payments of mortgage financing totaling $65.1 million, due largely to our 2020 disposition activity, and cash distributions paid to stockholders of $20.4 million.

Distributions and Redemptions

In the first quarter of 2020, we paid out the common stock distributions that our Board of Directors declared in the fourth quarter of 2019 in an aggregate amount of $20.4 million. Of this aggregate cash distribution amount, $10.6 million was reinvested in shares of our common stock by stockholders through our DRIP. From Inception through September 30, 2020, we declared distributions to stockholders totaling $462.0 million, which were comprised of cash distributions of $194.8 million and distributions that were reinvested by stockholders in shares of our common stock pursuant to our DRIP of $267.2 million.

On March 18, 2020, in light of the impact that the COVID-19 outbreak has had on our business, we announced that we were suspending future distributions on our common stock. We have also announced that redemptions would be suspended, with limited exceptions for special circumstances redemptions. Requests for special circumstances redemptions may continue to be submitted, however, all such requests will be deferred for consideration by our Board of Directors until after the announcement of our estimated NAV as of September 30, 2020. If any special circumstances redemptions are approved at that time, they will be effectuated at a redemption price equal to 95% of the NAV. Distributions and regular redemptions in respect of future periods will be evaluated by the Board of Directors based on circumstances and expectations existing at the time of consideration, and are also subject to the terms of the Series A and Series B Preferred Stock.

Among other terms of the Series A and Series B Preferred Stock, the Series A and Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless all accrued dividends on the Series A and Series B Preferred Stock are paid in cash for all past dividend periods and the dividend for the current dividend period is also paid in cash. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's DRIP.

During the nine months ended September 30, 2020, we redeemed 70,015 shares of our common stock pursuant to our redemption plan (which were adjusted to 63,755 shares of Class A common stock to reflect the equity structure of the legal acquirer, CWI 2, by applying the exchange ratio of .9106), comprised of 29 redemption requests at an average share price of $10.04. We fulfilled all of the valid redemption requests that we received during the three months ended March 31, 2020 and funded these share redemptions from distributions that were reinvested by stockholders in our common stock pursuant to our DRIP.

WLT 9/30/2020 10-Q – 42

Summary of Financing

The table below summarizes our non-recourse debt, net (dollars in thousands):


	September 30, 2020			December 31, 2019
Carrying Value
Fixed rate (a)	$	1,408,338		$	884,849
Variable rate (a):
Amount subject to interest rate caps	579,042			306,918
Amount subject to interest rate swap	174,314			—
Amount subject to floating interest rate	—			14,300
	753,356			321,218
	$	2,161,694		$	1,206,067
Percent of Total Debt
Fixed rate	65		%	73		%
Variable rate	35		%	27		%
	100		%	100		%
Weighted-Average Interest Rate at End of Period
Fixed rate	4.2		%	4.4		%
Variable rate (b)	3.9		%	5.0		%

_________

(a)Aggregate debt balance includes unamortized debt discount of $54.5 million and $0 as of September 30, 2020 and December 31, 2019, respectively, and unamortized deferred financing costs totaling $3.9 million and $6.0 million as of September 30, 2020 and December 31, 2019, respectively.

(b)The impact of our derivative instruments is reflected in the weighted-average interest rates.

Covenants

Cash Resources

At September 30, 2020, our cash resources consisted of cash and cash equivalents totaling $246.7 million, of which $22.2 million was designated as hotel operating cash and was held at our hotel operating properties.

Cash Requirements

Our primary cash uses through September 30, 2021 are expected to be payments of debt service, real estate taxes and insurance, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be funds generated by hotel operations, proceeds from the July Capital Raise and any additional issuances of Series B Preferred Stock, and proceeds from additional asset sales. We expect to satisfy certain debt maturities during this period by turning the properties back to the lenders.

WLT 9/30/2020 10-Q – 43

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures sufficient to cover the cost of routine improvements and alterations at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. At September 30, 2020 and December 31, 2019, $46.6 million and $34.6 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures. In addition, due to the effects of the COVID-19 pandemic on our operations, we have been working with the brands, management companies and lenders and have been using a portion of the available restricted cash reserves to cover operating costs at our properties, some of which is subject to replenishment requirements.

Off-Balance Sheet Arrangements and Contractual Obligations

The table below summarizes our debt, off-balance sheet arrangements, and other contractual obligations (primarily our capital commitments) at September 30, 2020, and the effect that these arrangements and obligations are expected to have on our liquidity and cash flow in the specified future periods (in thousands):


	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Non-recourse debt — principal (a)	$	2,220,103	$	932,905	$	1,236,671	$	50,527	$	—
Interest on borrowings (b)	9,182		2,627		5,105		1,450		—
Operating lease commitments (c)	923,095		6,093		11,986		11,254		893,762
Contractual capital commitments (d)	25,339		1,822		22,297		1,220		—
Annual distribution and shareholder servicing fee (e)	1,868		1,868		—		—		—
	$	3,179,587	$	945,315	$	1,276,059	$	64,451	$	893,762

___________

(a)Excludes unamortized debt discount totaling $54.5 million and unamortized deferred financing costs totaling $3.9 million.

(b)For variable-rate debt, interest on borrowings is calculated using the capped or swapped interest rate, when in effect.

(c)At September 30, 2020, this balance primarily related to our commitments on ground leases for two hotels, which expire in 2087 and 2099 and have contractual rent increases throughout their respective terms; therefore, the most significant commitments occur near the conclusion of the leases.

(d)Capital commitments represent our remaining contractual renovation commitments at our Consolidated Hotels, which does not reflect any renovation work to be undertaken as a result of Hurricane Irma.

(e)Represents the estimated liability for the present value of the future distribution and shareholder servicing fees in connection with our Class T common stock.

WLT 9/30/2020 10-Q – 44

Supplemental Financial Measures

In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO, and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, are provided below.

FFO and MFFO

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to, nor a substitute for, net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as restated in December 2018. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above. However, NAREIT’s definition of FFO does not distinguish between the conventional method of equity accounting and the HLBV method of accounting for unconsolidated partnerships and jointly owned investments.

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization, as well as impairment charges of real estate-related assets, provides a more complete understanding of our performance to investors and to management; and when compared year over year, reflects the impact on our operations from trends in occupancy rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. It should be noted, however, that the property’s asset group’s estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value. While impairment charges are excluded from the calculation of FFO described above due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP measures FFO and MFFO and the adjustments to GAAP in calculating FFO and MFFO.

WLT 9/30/2020 10-Q – 45

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect subsequent to the establishment of NAREIT’s definition of FFO. Management believes these cash-settled expenses, such as acquisition fees that are typically accounted for as operating expenses, do not affect our overall long-term operating performance. Publicly-registered, non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-traded REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-traded REITs, the Institute for Portfolio Alternatives (formerly known as the Investment Program Association) (“IPA”), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-traded REITs and which we believe to be another appropriate non-GAAP measure to reflect the operating performance of a non-traded REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our offering has been completed and once essentially all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance, with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. MFFO should only be used to assess the sustainability of a company’s operating performance after a company’s offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company’s operating performance during the periods in which properties are acquired.

We define MFFO consistent with the IPA’s Practice Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”), issued by the IPA in November 2010. This Practice Guideline defines MFFO as FFO further adjusted for the following items, included in the determination of GAAP net income or loss, as applicable: acquisition fees and expenses; accretion of discounts and amortization of premiums on debt investments; where applicable, payments of loan principal made by our equity investees accounted for under the HLBV model where such payments reduce our equity in earnings of equity method investments in real estate, nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income or loss; nonrecurring gains or losses included in net income or loss from the extinguishment or sale of debt, hedges, derivatives or securities holdings, where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for Consolidated and Unconsolidated Hotels, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses that are unrealized and may not ultimately be realized.

Our MFFO calculation complies with the Practice Guideline described above. In calculating MFFO, we exclude acquisition-related expenses, fair value adjustments of derivative financial instruments and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities. We account for certain of our equity investments using the HLBV model which is based on distributable cash as defined in the operating agreement.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-traded REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not

WLT 9/30/2020 10-Q – 46

continue to operate in this manner. We believe that MFFO and the adjustments used to calculate it allow us to present our performance in a manner that takes into account certain characteristics unique to non-traded REITs, such as their limited life, defined acquisition period and targeted exit strategy, and is therefore a useful measure for investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income or loss as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly.

FFO and MFFO were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss attributable to WLT stockholders	$	(81,777)	$	(2,454)	$	(267,676)	$	(16,519)
Adjustments:
Depreciation and amortization of real property	31,966		19,186		82,791		58,175
Gain on sale of real estate	(3,227)		(5,881)		(2,738)		(5,881)
Impairment charges	—		—		120,220		—
Net gain on change in control of interests	—		—		(22,250)		—
Proportionate share of adjustments for partially-owned entities — FFO adjustments (a)	6,403		6,471		39,379		7,251
Total adjustments	35,142		19,776		217,402		59,545
FFO attributable to WLT stockholders (as defined by NAREIT)	(46,635)		17,322		(50,274)		43,026
Adjustments:
Amortization of fair value adjustments	9,958		—		16,924		—
Straight-line and other rent adjustments	1,366		1,946		4,655		6,246
Gain on hurricane-related property damage (b)	(1,030)		(880)		(1,030)		(880)
Transaction costs (b)	27		1,483		18,376		1,483
Bargain purchase gain	—		—		(78,696)		—
Net loss on extinguishment of debt	—		—		—		136
Proportionate share of adjustments for partially owned entities — MFFO adjustments	(486)		312		473		816
Total adjustments	9,835		2,861		(39,298)		7,801
MFFO attributable to WLT stockholders	$	(36,800)	$	20,183	$	(89,572)	$	50,827

___________

(a)This adjustment includes an other-than-temporary impairment charge of $17.8 million recognized on our equity investment in the Ritz-Carlton Bacara, Santa Barbara Venture during the three months ended March 31, 2020 (Note 8).

WLT 9/30/2020 10-Q – 47

(b)We have excluded these costs because of their non-recurring nature. By excluding such costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Transaction costs are costs incurred in connection with the Merger and related transactions and included legal, accounting, investor relations and other transaction costs.

WLT 9/30/2020 10-Q – 48

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

We currently have limited exposure to financial market risks, including changes in interest rates. We currently have no foreign operations and are not exposed to foreign currency fluctuations.

Interest Rate Risk

The values of our real estate and related fixed-rate debt obligations are subject to fluctuations based on changes in interest rates. The value of our real estate is also subject to fluctuations based on local and regional economic conditions, which may affect our ability to refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the fair value of our assets to decrease.

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we generally seek non-recourse mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our joint investment partners have obtained, and may in the future obtain, variable-rate non-recourse mortgage loans, and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. See Note 9 for additional information on our interest rate swaps and caps.

At September 30, 2020, all of our debt bore interest at fixed rates, was swapped to a fixed rate or was subject to an interest rate cap. Our debt obligations are more fully described in Note 10 and Summary of Financing in Item 2 above. The following table presents principal cash outflows for our Consolidated Hotels based upon existing maturity dates of our debt obligations outstanding at September 30, 2020 and excludes deferred financing costs (in thousands):


	2020 (Remainder)		2021		2022		2023		2024		Total		Fair Value
Fixed-rate debt	$	126,650	$	419,781	$	637,514	$	206,835	$	50,253	$	1,441,033	$	1,388,037
Variable-rate debt	$	71,722	$	357,250	$	258,548	$	91,550	$	—	$	779,070	$	758,469

The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of an interest rate swap, or that has been subject to an interest rate cap, is affected by changes in interest rates. A decrease or increase in interest rates of 1.0% would change the estimated fair value of this debt at September 30, 2020 by an aggregate increase of $26.8 million or an aggregate decrease of $29.9 million, respectively. Annual interest expense on our variable-rate debt that is subject to an interest rate cap at September 30, 2020 would increase or decrease by $5.8 million for each respective 1.0% change in annual interest rates.

WLT 9/30/2020 10-Q – 49

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our disclosure controls and procedures include internal controls and other procedures designed to provide reasonable assurance that information required to be disclosed in this and other reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and forms; and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. It should be noted that no system of controls can provide complete assurance of achieving a company’s objectives and that future events may impact the effectiveness of a system of controls.

Our Chief Executive Officer and Chief Financial Officer, after conducting an evaluation, together with members of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of September 30, 2020 at a reasonable level of assurance.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

WLT 9/30/2020 10-Q – 50

PART II — OTHER INFORMATION

Item 1A. Risk Factors.

Our business, results of operations, financial condition and ability to pay distributions could be materially adversely affected by various risks and uncertainties, including but not limited to those described in Part I, Item 1A of our 2019 Annual Report under the heading “Risk Factors,” and the risk factors discussed below, any one or more of which could, directly or indirectly, affect our actual operating and financial results and could cause such results to differ materially from our expectations as expressed in any forward-looking statements.

The effects of the current COVID-19 pandemic are materially and adversely affecting our current business, results of operations, financial condition, cash flows, ability to meet financial covenants under financing arrangements, ability to pay dividends, and asset valuations, and they are expected to continue to do so for the foreseeable future.

The full extent of the effects of the COVID-19 pandemic on the Company's business for the foreseeable future cannot be predicted with certainty. As of the date of this Report, we still have fully suspended operations at one of our 31 hotels and the majority of our remaining hotels are operating at significantly reduced levels of occupancy, staffing and expenses. The Company has incurred and will continue to incur significant costs related to the reductions in service at the hotels, primarily as a result of employee terminations or furlough arrangements.

As discussed further below, we have substantial indebtedness. A number of the Company’s hotels have entered into cash management arrangements with the lenders on the related mortgage loan agreements and we expect more to do so in the coming months, absent relief from lenders or government intervention. We have sought relief from all of our lenders to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. In addition, approximately $862.1 million of indebtedness is scheduled to mature during the 12 months after the date of this Report. This indebtedness is non-recourse mortgage indebtedness. If the Company's lenders do not provide covenant relief or if the Company is unable to repay, refinance or extend any such indebtedness, the lenders may declare events of default and seek to foreclose on the underlying hotels. We may also seek to give properties back to the lenders.

The Company's operations for the foreseeable future will continue to be significantly impacted by the pandemic. Even when all of our hotels are able to reopen, we expect demand for our hotels to recover slowly and over time until the spread of the virus, resurgences of the virus, the fear of its spread and resurgence and government-imposed quarantines and restrictions on travel and large gatherings subside. In addition, resurgences of the COVID-19 virus in certain areas where our hotels are located may cause us to have to suspend operations at hotels that have remained open or reopened until the resurgence subsides. The Company has already incurred and may incur additional or continuing costs to reconfigure the layout of its properties, add cleaning services and systems and take other steps to seek to address customer concerns, which could require the Company to incur expenditures which may be material.

These and other effects of the COVID-19 pandemic are materially and adversely affecting our current business, results of operations, financial condition, cash flows, ability to meet financial covenants under financing arrangements, ability to pay dividends, and asset valuations, and they are expected to continue to do so for the foreseeable future. The severity of the impact will depend on the duration of these conditions. We will continue to assess the financial impacts of the COVID-19 outbreak to our business, which currently is highly uncertain. The disruption to the global economy and to our business caused by the COVID-19 pandemic has led, and may continue to lead, to triggering events that may indicate that the carrying value of certain assets, including investments in real estate, equity investments in real estate, and intangibles, may not be recoverable, resulting in impairment charges. These conditions could also magnify the adverse effects of the other risks described in the Company's joint proxy statement/prospectus filed with the Securities and Exchange Commissions on January 13, 2020, as supplemented from time to time, and in Item 1A. Risk Factors in the Company’s 2019 Annual Report.

We have substantial indebtedness. If we are unable to repay, refinance or extend maturing mortgage loans, or if we breach a covenant and do not get a waiver from the applicable lenders, the lenders may declare events of default and seek to foreclose on the underlying hotels. There is no assurance that we will be able to obtain additional payment or covenant relief from our lenders, and even if we do, we may still be adversely affected.

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. As discussed above in “Liquidity and Capital Resources,” as of the date of this Report, we have either executed loan modifications or refinanced 25 of our 31 mortgage loans,

WLT 9/30/2020 10-Q – 51

aggregating $1.9 billion of indebtedness, under which interest and principal payments have been temporarily deferred and/or temporary covenant relief has been granted. At September 30, 2020, we have effectively entered into cash management agreements with the lenders on 28 of our 31 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement.

We have determined that we are likely to be unable to satisfy certain covenants in the future on most, if not all, of our mortgage loans depending on the length of the pandemic and we may seek additional relief from our lenders; however, there is no assurance that we will obtain such further relief, and even if we do, we may incur increased costs and increased interest rates and we may agree to additional restrictive covenants and other lender protections related to the mortgage loans.

Of the aggregate $2.2 billion of indebtedness outstanding at September 30, 2020, approximately $862.1 million is scheduled to mature during the 12 months after the date of this Report.

If we are unable to repay, refinance or extend maturing mortgage loans, or if we breach a covenant and do not get a waiver from the applicable lenders, the lenders may declare events of default and seek to foreclose on the underlying hotels. We may choose to turn over one or more hotels back to the related mortgage lender. If an event of default were to occur, we may need to continue seeking to raise capital through asset sales or strategic financing transactions, potentially on unfavorable terms, but there is no assurance as to the certainty or timing of any such transactions. Any such consequences could negatively affect our results of operations, financial condition, cash flows, ability to pay dividends, and asset valuations.

The financial condition and results of operations of the Company will depend on access to cash flow from operations, our ability to refinance maturing indebtedness and possibly, additional equity capital and asset sales, all of which are subject to the performance of our hotel portfolio as well as general market and economic conditions and other factors, many of which are beyond the Company's control.

The ability of the Company to execute its near and longer-term business strategy depends on access to an appropriate blend of cash flow from our hotel operations, its ability to refinance upcoming debt maturities, and potentially additional equity financing, joint venture financing and asset sales, the availability of which will be affected by the performance of our hotel portfolio as well as general market and economic conditions and other factors, many of which are beyond our control. The COVID-19 outbreak has resulted in severe volatility and disruption in the financial markets. There can also be no guarantee that financing will be available in sufficient amounts, on favorable terms or at all, to enable the Company to refinance upcoming debt maturities. While the Company may require the purchaser of its Series B Preferred Stock in the July Capital Raise to purchase additional shares of Series B Preferred Stock to fund working capital needs, the Company must satisfy certain customary closing conditions at the times of such additional purchases, and there is no assurance that the Company may be able to do so. If we are unable to repay, refinance or extend maturing mortgage loans, the lenders may declare events of default and seek to foreclose on the underlying hotels. Any such consequences could negatively affect our results of operations, financial condition, cash flows, ability to pay dividends, and asset valuations.

In light of the impact that the COVID-19 outbreak has had on the Company's business, the Company has suspended distributions and redemptions, subject to limited exceptions, and there is no assurance as to when the Company will commence paying distributions or accepting redemptions. In addition, the terms of the Series A and Series B Preferred Stock restricts the Company’s ability to pay distributions on, and to effectuate redemptions of, its common stock.

On March 18, 2020, in light of the impact that the COVID-19 outbreak has had on our business, we announced that we were suspending future distributions on our common stock. We have also announced that redemptions would be suspended, with limited exceptions for special circumstances redemptions. Requests for special circumstances redemptions may continue to be submitted, however, all such requests (including requests received in the second quarter) will be deferred for consideration by our Board of Directors until after the announcement of our estimated NAV as of September 30, 2020. If any special circumstances redemptions are approved at that time, they will be effectuated at a redemption price equal to 95% of the NAV. Distributions and regular redemptions in respect of future periods will be evaluated by the Board of Directors based on circumstances and expectations existing at the time of consideration, and are also subject to the terms of the Series A and Series B Preferred Stock.

WLT 9/30/2020 10-Q – 52

required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's DRIP.

Item 2. Unregistered Sales of Equity Securities.

None

WLT 9/30/2020 10-Q – 53

Item 6. Exhibits.

The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.

Exhibit No.

Description

Method of Filing

2.1

Letter agreement, dated March 27, 2020, by and among Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Apex Merger Sub LLC.

Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on March 31, 2020

2.2

Letter agreement, dated April 13, 2020, by and between Carey Watermark Investors 2 Incorporated and Michael G. Medzigian

Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on April 13, 2020

3.1

Articles of Amendment of Carey Watermark Investors 2 Incorporated

Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K, filed on April 13, 2020

3.2

Articles of Amendment of Watermark Lodging Trust Incorporated

Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K, filed on April 13, 2020

3.3

Articles Supplementary of 12% Series B Cumulative Redeemable Preferred Stock of Watermark Lodging Trust, Inc.

Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K, filed on July 24, 2020

4.1

Warrant Certificate, dated July 24, 2020, of Watermark Lodging Trust, Inc.

Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K, filed on July 24, 2020

10.1

Securities Purchase Agreement, dated July 21, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP, ACP Watermark Investment LLC and certain other parties thereto

Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on July 24, 2020

10.2

Investor Rights Agreement, dated July 24, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP and ACP Watermark Investment LLC

Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed on July 24, 2020

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document

Filed herewith

101.SCH

XBRL Taxonomy Extension Schema Document

Filed herewith

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

Filed herewith

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith

WLT 9/30/2020 10-Q – 54

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


			Watermark Lodging Trust, Inc.
Date:	November 12, 2020
		By:	/s/ Mallika Sinha
			Mallika Sinha
			Chief Financial Officer
			(Principal Financial Officer)

Date:	November 12, 2020
		By:	/s/ Noah K. Carter
			Noah K. Carter
			Chief Accounting Officer
			(Principal Accounting Officer)

WLT 9/30/2020 10-Q – 55

EXHIBIT INDEX

The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.

Exhibit No.

Description

Method of Filing

2.1

Letter agreement, dated March 27, 2020, by and among Carey Watermark Investors Incorporated, Carey Watermark Investors 2 Incorporated, and Apex Merger Sub LLC.

Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on March 31, 2020

2.2

Letter agreement, dated April 13, 2020, by and between Carey Watermark Investors 2 Incorporated and Michael G. Medzigian

Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on April 13, 2020

3.1

Articles of Amendment of Carey Watermark Investors 2 Incorporated

Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K, filed on April 13, 2020

3.2

Articles of Amendment of Watermark Lodging Trust Incorporated

Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K, filed on April 13, 2020

3.3

Articles Supplementary of 12% Series B Cumulative Redeemable Preferred Stock of Watermark Lodging Trust, Inc.

Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K, filed on July 24, 2020

4.1

Warrant Certificate, dated July 24, 2020, of Watermark Lodging Trust, Inc.

Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K, filed on July 24, 2020

10.1

Securities Purchase Agreement, dated July 21, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP, ACP Watermark Investment LLC and certain other parties thereto

Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, filed on July 24, 2020

10.2

Investor Rights Agreement, dated July 24, 2020, by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP and ACP Watermark Investment LLC

Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K, filed on July 24, 2020

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document

Filed herewith

101.SCH

XBRL Taxonomy Extension Schema Document

Filed herewith

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

Filed herewith

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith

WLT 9/30/2020 10-Q – 56