Watermark Lodging Trust, Inc. - Quarter Report: 2021 March (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 March 31, 2021

or

☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

						For the transition period from to

Commission File Number: 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 167,634,718 shares of Class A common stock, $0.001 par value, and 61,095,773 shares of Class T common stock, $0.001 par value, outstanding at May 5, 2021.

INDEX


		Page No.
Explanatory Note		2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020	4
	C onsolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2021 and 202 0	5
	Consolidated Statements of Equity for the Three Months Ended March 31, 2021 and 2020	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	7
	Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		39

PART II — OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities		40
Item 6. Exhibits		41
Signatures		42

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: 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, 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 our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on March 12, 2021 (the “2020 Annual 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 3/31/2021 10-Q – 1

Explanatory Note

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

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

As used throughout this document, unless the context indicates otherwise, 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 3/31/2021 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)


	March 31, 2021		December 31, 2020
Assets
Investments in real estate:
Hotels, at cost	$	3,206,566	$	3,315,792
Accumulated depreciation	(362,337)		(356,328)
Net investments in hotels	2,844,229		2,959,464
Assets held for sale	89,359		—
Equity investments in real estate	16,338		18,639
Operating lease right-of-use assets	39,509		40,729
Cash and cash equivalents	117,524		160,383
Intangible assets, net	71,506		72,285
Restricted cash	93,781		91,081
Accounts receivable, net	64,298		46,010
Other assets	34,168		30,735
Total assets	$	3,370,712	$	3,419,326
Liabilities
Non-recourse debt, net, including debt attributable to Assets held for sale	$	2,173,920	$	2,169,902
Mandatorily redeemable preferred stock	216,944		214,158
Accounts payable, accrued expenses and other liabilities	200,115		174,217
Other liabilities held for sale	301		—
Operating lease liabilities	74,730		74,633
Total liabilities	2,666,010		2,632,910
Commitments and contingencies (Note 10)
Equity
Class A common stock, $0.001 par value; 320,000,000 shares authorized;167,466,774 and 167,441,281 shares, respectively, issued and outstanding	167		167
Class T common stock, $0.001 par value; 80,000,000 shares authorized; 61,095,773 and 61,102,438 shares, respectively, issued and outstanding	61		61
Additional paid-in capital	1,655,956		1,655,554
Distributions and accumulated losses	(987,430)		(911,863)
Accumulated other comprehensive loss	(487)		(724)
Total stockholders’ equity	668,267		743,195
Noncontrolling interests	36,435		43,221
Total equity	704,702		786,416
Total liabilities and equity	$	3,370,712	$	3,419,326

See Notes to Consolidated Financial Statements.

WLT 3/31/2021 10-Q – 3

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except share and per share amounts)


	Three Months Ended March 31,
	2021		2020
Revenues
Hotel Revenues
Rooms	$	61,250	$	67,850
Food and beverage	21,463		34,994
Other operating revenue	13,015		11,941
Business interruption income	545		193
Total Hotel Revenues	96,273		114,978
Expenses
Rooms	14,627		17,671
Food and beverage	17,167		24,776
Other hotel operating expenses	4,783		5,908
Property taxes, insurance, rent and other	24,224		17,944
General and administrative	12,286		13,410
Sales and marketing	8,480		11,259
Repairs and maintenance	5,557		4,580
Utilities	4,667		3,401
Management fees	2,513		2,976
Depreciation and amortization	31,882		18,785
Total Hotel Operating Expenses	126,186		120,710
Corporate general and administrative expenses	7,257		3,589
Gain on property-related insurance claims	(1,166)		—
Impairment charges	—		120,220
Asset management fees to affiliate	—		3,316
Transaction costs	—		1,809
Total Expenses	132,277		249,644
Operating Loss	(36,004)		(134,666)
Interest expense	(42,383)		(14,429)
Equity in losses of equity method investments in real estate, net	(3,920)		(23,393)
Other income (expense)	77		(20)
Loss before income taxes	(82,230)		(172,508)
(Provision for) benefit from income taxes	(125)		3,363
Net loss	(82,355)		(169,145)
Loss (income) attributable to noncontrolling interests	6,788		(860)
Net Loss Attributable to the Common Stockholders	(75,567)		(170,005)

Class A Common Stock
Net loss attributable to Common Stockholders	$	(55,367)	$	(170,005)
Basic and diluted weighted-average shares outstanding	167,466,809		130,999,153
Basic and diluted loss per share	$	(0.33)	$	(1.30)

Class T Common Stock
Net loss attributable to Common Stockholders	$	(20,200)	$	—
Basic and diluted weighted-average shares outstanding	61,099,580		—
Basic and diluted loss per share	$	(0.33)	$	—

See Notes to Consolidated Financial Statements.

WLT 3/31/2021 10-Q – 4

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(in thousands)


	Three Months Ended March 31,
	2021		2020
Net Loss	$	(82,355)	$	(169,145)
Other Comprehensive Income (Loss)
Unrealized gain (loss) on derivative instruments	239		(1,285)
Comprehensive Loss	(82,116)		(170,430)

Amounts Attributable to Noncontrolling Interests
Net loss (income)	6,788		(860)
Unrealized gain on derivative instruments	(2)		(11)
Comprehensive loss (income) attributable to noncontrolling interests	6,786		(871)
Comprehensive Loss Attributable to Common Stockholders	$	(75,330)	$	(171,301)

See Notes to Consolidated Financial Statements.

WLT 3/31/2021 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 January 1, 2021	167,441,281	$	167	61,102,438	$	61	$	1,655,554	$	(911,863)	$	(724)	$	743,195	$	43,221	$	786,416
Net loss									(75,567)				(75,567)		(6,788)		(82,355)
Shares issued under share incentive plans	—	—					296						296				296
Stock-based compensation to directors	27,223	—					150						150				150
Other comprehensive income											237		237		2		239
Repurchase of shares	(1,730)	—		(6,665)	—		(44)						(44)				(44)
Balance at March 31, 2021	167,466,774	$	167	61,095,773	$	61	$	1,655,956	$	(987,430)	$	(487)	$	668,267	$	36,435	$	704,702

Balance at January 1, 2020	130,083,865	$	130	—	$	—	$	1,209,691	$	(562,747)	$	(172)	$	646,902	$	50,977	$	697,879
Net (loss) income									(170,005)				(170,005)		860		(169,145)
Shares issued, net of offering costs	925,762	1		—	—		10,537						10,538				10,538
Shares issued to affiliates	378,976	—		—	—		4,324						4,324				4,324
Shares issued under share incentive plans	—	—		—	—		138						138				138
Other comprehensive (loss) income											(1,296)		(1,296)		11		(1,285)
Repurchase of shares	(63,755)	—		—	—		(703)						(703)				(703)
Balance at March 31, 2020	131,324,848	$	131	—	$	—	$	1,223,987	$	(732,752)	$	(1,468)	$	489,898	$	51,848	$	541,746

See Notes to Consolidated Financial Statements.

WLT 3/31/2021 10-Q – 6

WATERMARK LODGING TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Three Months Ended March 31,
	2021		2020
Cash Flows — Operating Activities
Net loss	$	(82,355)	$	(169,145)
Adjustments to net loss:
Depreciation and amortization	31,882		18,785
Amortization of fair value adjustments, deferred financing costs and other	11,560		736
Equity in losses of equity method investments in real estate, net	3,920		23,393
Gain on property-related insurance claims	(1,166)		—
Business interruption income	(545)		(193)
Amortization of stock-based compensation expense	446		138
Impairment charges	—		120,220
Asset management fees to affiliates settled in shares	—		3,219
Net changes in other assets and liabilities	5,822		(9,593)
Net decrease in operating lease right-of-use assets	1,245		1,702
(Repayment) receipt of key money and other deferred incentive payments	(748)		65
Business interruption insurance proceeds	545		193
(Decrease) increase in due to related parties and affiliates	(206)		12
Net increase in operating lease liabilities	97		191
Funding of remediation work	(36)		—
Insurance proceeds for remediation work due to property damage	16		326
Net Cash Used in Operating Activities	(29,523)		(9,951)

Cash Flows — Investing Activities
Capital expenditures	(4,717)		(6,511)
Property insurance proceeds	1,309		—
Capital contributions to equity investments in real estate	(790)		(904)
Payment of Watermark commitment fee	—		(1,151)
Net Cash Used in Investing Activities	(4,198)		(8,566)

Cash Flows — Financing Activities
Payments and prepayments of mortgage principal	(5,889)		(4,496)
Proceeds from mortgage financing	839		—
Payment of distribution and shareholder servicing fee	(798)		—
Deferred financing costs	(602)		(70)
Other financing activities, net	56		—
Repurchase of shares	(44)		(703)
Distributions paid	—		(20,357)
Net proceeds from issuance of shares	—		10,554
Net Cash Used in Financing Activities	(6,438)		(15,072)

Change in Cash and Cash Equivalents and Restricted Cash During the Period
Net decrease in cash and cash equivalents and restricted cash	(40,159)		(33,589)
Cash and cash equivalents and restricted cash, beginning of period	251,464		125,304
Cash and cash equivalents and restricted cash, end of period	$	211,305	$	91,715

See Notes to Consolidated Financial Statements.

WLT 3/31/2021 10-Q – 7

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 March 31, 2021. 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 March 31, 2021.

On April 13, 2020, Merger Sub merged with and into 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. Concurrently with the closing of the Merger, CWI 2 completed an internalization transaction through which it became self-managed.

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 as of March 31, 2021, including 29 hotels that we consolidated (“Consolidated Hotels”) and two hotels that we recorded as equity investments (“Unconsolidated Hotels”).

July 2020 Capital Raise

On July 21, 2020, we entered into a securities purchase agreement (the “Purchase Agreement”) with ACP Watermark Investment LLC (the “Purchaser”) and, solely with respect to a guaranty, certain other parties thereto. Pursuant to the Purchase Agreement, the Company, 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 13 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.

WLT 9/30/2020 10-Q – 8

Notes to Consolidated Financial Statements (Unaudited)

COVID-19, Management’s Plans and Liquidity

The COVID-19 pandemic has had a material adverse effect on our business, results of operations, financial condition and cash flows and will continue to do so for the reasonably foreseeable future. As of May 12, 2021, all of our hotels are open but the majority are operating at significantly reduced levels of occupancy, staffing and expenses. While we have seen improving demand at some of our properties as government-imposed restrictions and limitations on travel and large gatherings have loosened and as the vaccine has become more widely available, we expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. 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 while demand remained low;

•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;

•Funding expenses using existing reserve accounts and temporarily suspending required contributions to reserves to the extent permitted by our lenders; and

•Reducing a portion of the cash compensation paid to our senior management and the Board of Directors in 2020.

As of March 31, 2021, we had cash and cash equivalents of $117.5 million. Additionally, under the terms of our agreements with the investors in the July Capital Raise, we have the option to require such investors to purchase up to $150.0 million aggregate liquidation preference of additional shares of Series B Preferred Stock during the 18 months after the closing of the July Capital Raise for additional working capital needs, including the repayment, refinancing or restructuring of indebtedness, subject to our satisfaction of customary conditions. As of March 31, 2021, the mortgage loans for our Consolidated Hotels had an aggregate principal balance totaling $2.2 billion outstanding, all of which is mortgage indebtedness and is generally non-recourse, subject to customary non-recourse carve-outs, except that we have provided certain lenders with limited corporate guaranties aggregating $7.3 million for items such as taxes, deferred debt service and amounts drawn from furniture, fixtures and equipment reserves to pay expenses, in connection with loan modification agreements. Of the $2.2 billion of indebtedness outstanding as of March 31, 2021, approximately $813.1 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 May 12, 2021, we have executed loan modifications on 24 of our 29 Consolidated Hotel mortgage loans, aggregating $1.9 billion of indebtedness, which had resulted in a temporary deferral of interest and principal payments and/or the granting of temporary covenant relief, which generally lasted for periods ranging from three months to four months. Although these loan modifications have generally expired, we are continuing to work with our lenders on longer-term modifications that will help preserve our liquidity. In addition, we refinanced or extended the maturity date of eight Consolidated Hotel mortgage loans, aggregating $585.6 million of indebtedness, to address loans with near-term mortgage maturities. As of March 31, 2021, we have effectively entered into cash management agreements with the lenders on 27 of our 29 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. The cash management agreements generally permit cash generated from the operations of each hotel to fund the hotel’s operating expenses, debt service, taxes and insurance but restrict distributions of excess cash flow, if any, to the Company to fund corporate expenses. If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender. Even if we are able to obtain payment or covenant relief, we may incur increased costs and increased interest rates and we may agree to additional restrictive covenants and other lender protections related to the mortgage loans.

Our primary cash uses through June 30, 2022 are expected to be payment of debt service, costs associated with the refinancing or restructuring of indebtedness, funding corporate and hotel level operations, payment of real estate taxes and insurance and payment of preferred stock dividends. Our primary capital sources to meet such uses are expected to be funds generated by

WLT 3/31/2021 10-Q – 9

Notes to Consolidated Financial Statements (Unaudited)

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 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.

Note 2. Basis of Presentation

Basis of Presentation

The unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the rules and regulations of the SEC applicable to financial information. The unaudited financial statements include all adjustments that are necessary, in the opinion of management, to fairly state the consolidated balance sheets, statements of operations, statements of comprehensive loss, statements of equity and statements of 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, 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.

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.

Merger

The Merger was accounted for as a business combination in accordance with current authoritative accounting guidance. CWI 1 was the accounting acquirer in the Merger as (i) CWI 1’s pre-merger stockholders had a majority of the voting power in the Company after the Merger and (ii) CWI 1 was significantly larger than CWI 2 when considering assets and revenues. As CWI 1 was the accounting acquirer while CWI 2 was the legal acquirer, the Merger was accounted for as a reverse acquisition, and therefore, the historical financial information included in the Company’s financial statements as of any date, or for any periods prior to April 13, 2020, represents the pre-merger information of CWI 1. The financial statements of the Company, as set forth herein, represent a continuation of the financial information of CWI 1 as the accounting acquirer, except that the equity structure of WLT is adjusted to reflect the equity structure of the legal acquirer, CWI 2, including for comparative periods, by applying the exchange ratio of 0.9106.

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 2020 Annual Report.

WLT 3/31/2021 10-Q – 10

Notes to Consolidated Financial Statements (Unaudited)

As of both March 31, 2021 and December 31, 2020, we considered three entities to be VIEs, all of which we consolidated 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):


	March 31, 2021		December 31, 2020
Net investments in hotels	$	457,721	$	461,142
Intangible assets, net	36,034		36,234
Total assets	535,818		520,833

Non-recourse debt, net	$	325,685	$	327,597
Total liabilities	358,308		354,193

Reclassifications

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

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):


	March 31, 2021		December 31, 2020
Cash and cash equivalents	$	117,524	$	160,383
Restricted cash	93,781		91,081
Total cash and cash equivalents and restricted cash	$	211,305	$	251,464

Note 3. Agreements and Transactions with Related Parties

Pre-Merger 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, 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 March 31,
	2021		2020
Amounts Included in the Consolidated Statements of Operations
Personnel and overhead reimbursements	$	108	$	1,565
Asset management fees	—		3,316
	$	108	$	4,881

WLT 3/31/2021 10-Q – 11

Notes to Consolidated Financial Statements (Unaudited)

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, the Advisory Agreement was terminated and these fees ceased being incurred. For the three months ended March 31, 2020, we settled $4.3 million of asset management fees in shares of our common stock at the former Advisor’s election. No such fees were settled during the three months ended March 31, 2021. As of March 31, 2021, 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.

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, 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.

Available Cash Distributions

As of March 31, 2020, Carey Watermark Holdings’ 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) generated by CWI OP, LP, subject to certain limitations. In connection with the internalization of the management of the Company in connection with the Merger, 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. 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.

Post Merger Transactions with Affiliates

Transition Services Agreement

Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and WPC, WPC will continue to make available to the Company all of the services that WPC provided to CWI 2 prior to the Merger. The term of the Transition Services Agreement is generally 12 months from the effective date of the internalization transaction, with certain services surviving for up to 18 months. WPC will be paid its costs of providing the services and will be reimbursed for all expenses of providing the services. As of March 31, 2021 and December 31, 2020, the amount due to WPC was $0.1 million and $0.2 million, respectively.

Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and Watermark Capital, Watermark Capital will continue to make available to the Company all of the services that Watermark Capital provided to CWI 2 prior to the Merger and for the Company to provide certain services to Watermark Capital or its affiliates. Except with respect to particular services provided by the Company to Watermark Capital, the term of the Transition Services Agreement has expired. The Company, in its respective capacity as service provider under such Transition Services Agreement, will be paid its respective costs of providing the services and will be reimbursed for all expenses of providing the services.

WLT 3/31/2021 10-Q – 12

Notes to Consolidated Financial Statements (Unaudited)

Note 4. Net Investments in Hotels

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


	March 31, 2021		December 31, 2020
Buildings	$	2,210,394	$	2,289,031
Land	609,086		627,296
Building and site improvements	187,842		194,162
Furniture, fixtures and equipment	185,398		193,517
Construction in progress	13,846		11,786
Hotels, at cost	3,206,566		3,315,792
Less: Accumulated depreciation	(362,337)		(356,328)
Net investments in hotels	$	2,844,229	$	2,959,464

During the three months ended March 31, 2021 and 2020, we retired fully depreciated furniture, fixtures and equipment aggregating $5.9 million and $6.3 million, respectively, and recorded net write-offs of fixed assets resulting from property damage insurance claims of $0.1 million and $0.3 million, respectively. Depreciation expense was $31.1 million and $18.4 million for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021 and December 31, 2020, accrued capital expenditures were $1.3 million and $0.5 million, respectively, representing non-cash investing activity.

Assets and Liabilities Held for Sale

As of March 31, 2021, we had one property classified as held for sale, the Sheraton Austin Hotel at the Capitol. This property was sold subsequent to March 31, 2021 (Note 14). No properties were classified as held for sale as of December 31, 2020.

Below is a summary of our assets and liabilities held for sale (in thousands):


	March 31, 2021
Net investments in hotels	$	89,307
Other assets	52
Assets held for sale	$	89,359

Non-recourse debt, net	$	70,253

Other liabilities held for sale	$	301

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 three months ended March 31, 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 March 31, 2021.

WLT 3/31/2021 10-Q – 13

Notes to Consolidated Financial Statements (Unaudited)

Note 5. Equity Investments in Real Estate

As of March 31, 2021, 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
						March 31, 2021		December 31, 2020
Ritz-Carlton Philadelphia Venture (a)	PA	301	60.0	%	Full-service	$	15,862	$	18,157
Hyatt Centric French Quarter Venture(b)	LA	254	80.0	%	Full-service	476		482
		555				$	16,338	$	18,639

___________

(a)We contributed $0.8 million to this investment during the three months ended March 31, 2021.

(b)We contributed $0.9 million to this investment during the three months ended March 31, 2021. On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party for $2.1 million, bringing our ownership interest to 100% (Note 14).

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 March 31,
Unconsolidated Hotels	2021		2020
Ritz-Carlton Philadelphia Venture	$	(3,063)	$	(3,058)
Hyatt Centric French Quarter Venture	(857)		(6)
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)	—		(20,456)
Marriott Sawgrass Golf Resort & Spa Venture (a)	—		127
Total equity in losses of equity method investments in real estate, net	$	(3,920)	$	(23,393)

___________

(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 three months ended March 31, 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 March 31, 2021.

As of both March 31, 2021 and December 31, 2020, the unamortized basis differences on our equity investments were $2.1 million. Net amortization of the basis differences reduced the carrying values of our equity investments by less than $0.1 million and $0.1 million during the three months ended March 31, 2021 and 2020, respectively.

WLT 3/31/2021 10-Q – 14

Notes to Consolidated Financial Statements (Unaudited)

Note 6. Intangible Assets

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


		March 31, 2021						December 31, 2020
	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	$	(9,906)	$	62,494	$	72,400	$	(9,529)	$	62,871
Trade name	8	9,400		(1,138)		8,262		9,400		(844)		8,556
Other intangible assets	2 - 10	1,633		(883)		750		1,633		(775)		858
Total intangible assets, net		$	83,433	$	(11,927)	$	71,506	$	83,433	$	(11,148)	$	72,285

Net amortization of intangibles was $0.8 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively. Amortization of intangibles is included in Depreciation and amortization and Property tax, insurance, rent and other in the consolidated financial statements.

Note 7. 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 8).

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 three months ended March 31, 2021 or 2020. 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 as of both March 31, 2021 and December 31, 2020, respectively, and an estimated fair value of $2.2 billion as of both March 31, 2021 and December 31, 2020, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.

Our Series A and Series B preferred stock, which we have classified as Level 3, had carrying values of $52.8 million and $164.2 million, respectively, as of March 31, 2021, and $52.0 million and $162.1 million, respectively, as of December 31,

WLT 3/31/2021 10-Q – 15

Notes to Consolidated Financial Statements (Unaudited)

2020, and estimated fair values of $56.7 million and $201.7 million, respectively, as of March 31, 2021, and $54.2 million and $194.9 million, respectively, as of December 31, 2020. We determined the estimated fair value using a discounted cash flow analysis of the interest and anticipated redemption payments associated with the preferred stock.

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values as of both March 31, 2021 and December 31, 2020.

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

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. No impairments were recognized during the three months ended March 31, 2021. See Note 4 and Note 5 for a description of impairment charges recognized during the three months ended March 31, 2020.

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 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 for impairment tests for our long-lived real estate and related intangible assets during the three months ended March 31, 2020, we used discount rates ranging from 7.0% to 10.5%, with a weighted-average rate of 8.4%, and capitalization rates ranging from 5.0% to 8.5%, with a weighted-average rate of 6.5%.

See Note 13 for information on the measurement of fair value of the Series A and Series B Preferred Stock and Warrants.

Note 8. 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

There have been no significant changes in our derivative financial instruments policies from what was disclosed in the 2020 Annual Report. At both March 31, 2021 and December 31, 2020, no cash collateral had been posted nor received for any of our derivative positions.

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	March 31, 2021		December 31, 2020		March 31, 2021		December 31, 2020
Interest rate caps	Other assets	$	42	$	9	$	—	$	—
Interest rate swaps	Accounts payable, accrued expenses and other liabilities	—		—		(4,331)		(5,080)
		$	42	$	9	$	(4,331)	$	(5,080)

WLT 3/31/2021 10-Q – 16

Notes to Consolidated Financial Statements (Unaudited)

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 income of $0.1 million and unrealized losses of $1.3 million in Other comprehensive income (loss) on derivatives in connection with our interest rate swaps and caps during both the three months ended March 31, 2021 and 2020, respectively.

We reclassified $0.1 million from Other comprehensive income (loss) on derivatives into Interest expense during both the three months ended March 31, 2021 and 2020.

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. As of March 31, 2021, 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 as of March 31, 2021 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		March 31, 2021
Interest rate swaps	2	$	186,800	$	(4,331)
Interest rate caps	9	427,475		42
				$	(4,289)

Credit Risk-Related Contingent Features

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. As of both March 31, 2021 and December 31, 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 $4.6 million and $5.3 million as of March 31, 2021 and December 31, 2020, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions as of March 31, 2021 or December 31, 2020, we could have been required to settle our obligations under these agreements at their aggregate termination value of $4.8 million and $5.6 million, respectively.

WLT 3/31/2021 10-Q – 17

Notes to Consolidated Financial Statements (Unaudited)

Note 9. 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)	March 31, 2021		December 31, 2020
Fixed rate	3.6% – 5.9%	06/21 – 04/24	$	1,286,839	$	1,286,839
Variable rate (b)	2.4% – 8.5%	06/21 – 11/23	887,081		883,063
			$	2,173,920	$	2,169,902

___________

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

(b)The interest rate range presented for these mortgage loans reflect the rates in effect as of March 31, 2021 through the use of an interest rate swap or cap, when applicable.

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. As of March 31, 2021, we have effectively entered into cash management agreements with the lenders on 27 of our 29 mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. See Note 1 for further discussion.

Financing Activity During 2021

On March 5, 2021, we refinanced the $190.0 million Ritz-Carlton Key Biscayne non-recourse mortgage loan, which extended the maturity date of the loan from August 1, 2021 to August 1, 2023. The principal balance and interest rate of 4.0% remain unchanged. This refinancing was accounted for as a loan modification and no gain or loss was recognized.

On March 15, 2021, we refinanced the $45.5 million Equinox Golf Resort & Spa non-recourse mortgage loan, which extended the maturity date of the loan from March 1, 2021 to March 1, 2023. The principal balance and interest rate of 4.5% remain unchanged. This refinancing was accounted for as a loan modification and no gain or loss was recognized.

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2021 and each of the next four calendar years following December 31, 2021 are as follows (in thousands):


Years Ending December 31,	Total
2021 (remainder)	$	460,208
2022	1,105,347
2023	602,893
2024	50,252
2025	—
Total principal payments	2,218,700
Unamortized debt discount	(38,428)
Unamortized deferred financing costs	(6,352)
Total	$	2,173,920

WLT 3/31/2021 10-Q – 18

Notes to Consolidated Financial Statements (Unaudited)

Note 10. Commitments and Contingencies

As of March 31, 2021, 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 March 31, 2021, our hotel properties were operated pursuant to long-term management agreements with 11 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 $2.5 million and $3.0 million for the three months ended March 31, 2021 and 2020, respectively.

Franchise Agreements

Sixteen of our hotel properties operated under franchise or license agreements with national brands that are separate from our management agreements. As of March 31, 2021, we had 11 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. Three 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 $2.3 million for the three months ended March 31, 2021 and 2020, respectively.

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures sufficient to cover the cost of routine improvements and alterations at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of March 31, 2021 and December 31, 2020, $48.9 million and $51.0 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 used a portion of the available restricted cash reserves to cover operating costs at our properties, of which $2.7 million is subject to replenishment requirements.

WLT 3/31/2021 10-Q – 19

Notes to Consolidated Financial Statements (Unaudited)

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. As of March 31, 2021, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts as of March 31, 2021 totaled $16.4 million. As discussed in Note 1, as a response to the COVID-19 pandemic, 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 86 years (excluding extension options not reasonably certain of being exercised).

Lease Cost

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


	Three Months Ended March 31,
	2021		2020
Fixed lease cost	$	2,850	$	3,309
Variable lease cost (a)	28		99
Total lease cost	$	2,878	$	3,408

___________

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

Note 11. 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 March 31, 2021					Three Months Ended March 31, 2020
	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 (a)	167,466,809	$	(55,367)	$	(0.33)	130,999,153	$	(170,005)	$	(1.30)
Class T common stock	61,099,580	(20,200)		(0.33)		—	—		—
Net loss attributable to Common Stockholders		$	(75,567)				$	(170,005)

___________

(a)For purposes of determining the weighted-average number of shares of Class A common stock outstanding and loss per share, amounts for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 2).

The allocation of net loss attributable to common stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the period.

WLT 3/31/2021 10-Q – 20

Notes to Consolidated Financial Statements (Unaudited)

Noncontrolling Interest in the Operating Partnership

We consolidate the Operating Partnership, which is a majority-owned limited partnership that has a noncontrolling interest. As of March 31, 2021 and December 31, 2020, the Operating Partnership had 230,980,543 and 230,961,715 OP Units outstanding, respectively, of which 99.0% of the outstanding OP Units were owned by the Company, and the noncontrolling 1.0% ownership interest was owned by Mr. Medzigian.

As of both March 31, 2021 and December 31, 2020, Mr. Medzigian owned 2,417,996 OP Units. The outstanding OP Units held by Mr. Medzigian are exchangeable on a one-for-one basis into shares of WLT Class A common stock. Additionally, we had 16,778,446 Warrant Units outstanding as of both March 31, 2021 and December 31, 2020. The noncontrolling interest is included in noncontrolling interest on the consolidated balance sheet.

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 March 31,
Gains and Losses on Derivative Instruments	2021		2020
Beginning balance	$	(724)	$	(172)
Other comprehensive income (loss) before reclassifications	90		(1,342)
Amounts reclassified from accumulated other comprehensive loss to:
Interest expense	149		62
Equity in losses of equity method investments in real estate, net	—		(5)
Total	149		57
Net current period other comprehensive income (loss)	239		(1,285)
Net current period other comprehensive income attributable to noncontrolling interests	(2)		(11)
Ending balance	$	(487)	$	(1,468)

Note 12. 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, 2021, 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 three months ended March 31, 2021 and 2020. 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 resulted in a single federal tax filing for the WLT combined TRS, which included 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 months ended March 31, 2021 and 2020. Current income tax expense was $0.1 million for the three months ended March 31, 2021 and current income tax benefit was $3.4 million for the three months ended March 31, 2020. We have historically 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 used a discrete effective tax rate method to calculate taxes for the three months ended March 31, 2020 as we

WLT 3/31/2021 10-Q – 21

Notes to Consolidated Financial Statements (Unaudited)

determined that, since estimates of “ordinary” income were unreliable due to the impact of the COVID-19 pandemic, the historical method would not provide a reliable estimate for the three months ended March 31, 2020. For purposes of the interim period provision for the three months ended March 31, 2021, we determined that our estimates of ordinary income were reliable, therefore we computed the interim provision consistent with our historical method.

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 a current tax benefit of $3.6 million during the three months ended March 31, 2020, which is included within current tax benefit described in the previous paragraph. No such benefit was recorded during the three months ended March 31, 2021.

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. The majority of our deferred tax assets relate to net operating losses, accrued expenses and deferred key money liabilities. (Provision for) benefit from income taxes included net deferred income tax expense of less than $0.1 million for both the three months ended March 31, 2021 and 2020.

Note 13. Mandatorily Redeemable Preferred Stock

As of both March 31, 2021 and December 31, 2020, we had authorized 50,000,000 shares of preferred stock, $0.001 par value per share.

Series A Preferred Stock

On April 13, 2020, we 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”) to WPC.

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.

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 Accounting Standards Codification 480 and which we recorded 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

WLT 3/31/2021 10-Q – 22

Notes to Consolidated Financial Statements (Unaudited)

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.

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 sheets totaling $14.2 million and $19.8 million as of March 31, 2021 and December 31, 2020, respectively. 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.

Dividends accrued included in interest expense in the consolidated financial statements related to our Series A and Series B Preferred Stock during the three months ended March 31, 2021 totaled $7.1 million.

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


	March 31, 2021
	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	2,082		4,171		6,253
Deferred financing costs	—		(11,177)		(11,177)
Accumulated amortization of deferred financing costs	—		1,536		1,536
	$	52,772	$	164,172	$	216,944

Note 14. Subsequent Events

On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party for $2.1 million, bringing our ownership interest to 100%, and refinanced the $29.7 million non-recourse mortgage

WLT 3/31/2021 10-Q – 23

Notes to Consolidated Financial Statements (Unaudited)

loan on the property, which extended the maturity date of the loan from April 26, 2021 to April 6, 2023 and provides for a one-year extension option, subject to certain conditions. The principal balance remains unchanged.

On May 5, 2021, the Sheraton Austin Hotel at the Capitol venture sold the Sheraton Austin Hotel at the Capitol to an unaffiliated third-party. The venture received net proceeds of approximately $36.4 million from the sale after the repayment of the related mortgage loan.

On May 7, 2021, we refinanced the Ritz-Carlton Fort Lauderdale $47.0 million senior mortgage loan and the $28.3 million mezzanine loan with new mortgage loans of up to $61.1 million for the senior mortgage loan and up to $16.9 million for the mezzanine loan, with an aggregate $76.0 million funded at closing, comprised of $59.5 million for the senior mortgage loan and $16.5 million for the mezzanine loan. The loans have a maturity date of June 1, 2024, with two one-year extension options, subject to certain conditions.

WLT 3/31/2021 10-Q – 24

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 2020 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Business Overview

We are a self-managed, publicly owned, non-traded REIT that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States. We own a diversified lodging portfolio, including full-service, select-service and resort hotels. Our 2021 results of operations were significantly affected by the COVID-19 pandemic, as discussed further below. Our results of operations are significantly impacted by seasonality and by hotel renovations. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations. As of March 31, 2021, we held ownership interests in 31 hotels, with a total of 9,612 rooms.

Significant Developments

COVID-19 Pandemic

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 transaction, as discussed above;

•Significantly reducing hotel operating costs while demand remained low;

•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;

•Funding expenses using existing reserve accounts and temporarily suspending required contributions to reserves to the extent permitted by our lenders; and

•Reducing a portion of the cash compensation paid to our senior management and the Board of Directors in 2020.

We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of the date of this Report, we have executed loan modifications on 24 of our 29 Consolidated Hotel mortgage loans. In addition, we refinanced or extended the maturity date of eight mortgage loans to address loans with near-term mortgage maturities.

WLT 3/31/2021 10-Q – 25

Financial and Operating Highlights

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


	Three Months Ended March 31,
	2021			2020
Hotel revenues	$	96,273		$	114,978
Net loss attributable to Common Stockholders	(75,567)			(170,005)

Cash distributions paid	—			20,357

Net cash used in operating activities	(29,523)			(9,951)
Net cash used in investing activities	(4,198)			(8,566)
Net cash used in financing activities	(6,438)			(15,072)

Supplemental Financial Measures: (a)
FFO attributable to Common Stockholders	(43,168)			(9,891)
MFFO attributable to Common Stockholders	(33,733)			(5,874)

Consolidated Hotel Operating Statistics
Occupancy	30.7		%	55.7		%
ADR	$	244.95		$	243.59
RevPAR	75.26			133.65

___________

(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.

The comparison of our results year over year is influenced by both the number and size of the hotels consolidated in each of the respective years. As of March 31, 2021 and 2020 we owned 29 and 20 Consolidated Hotels, respectively.

WLT 3/31/2021 10-Q – 26

Portfolio Overview

The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels as of March 31, 2021:

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)

417

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)

198

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

9,057

Unconsolidated Hotels

Hyatt Centric New Orleans French Quarter (d)

254

80%

Full-service

Ritz-Carlton Philadelphia

301

60%

Full-service

555

_________

(a)Includes 240 privately owned villas that participate in the villa/condo rental program as of March 31, 2021.

(b)Includes 32 condo-hotel units that participate in the villa/condo rental program as of March 31, 2021.

(c)Includes 141 condo-hotel units that participate in the resort rental program as of March 31, 2021.

(d)On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party, bringing our ownership interest to 100% (Note 14).

WLT 3/31/2021 10-Q – 27

Results of Operations

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

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

The results of operations for the three months ended March 31, 2021 will not be comparable to the same period in 2020 as a result of the impact of the COVID-19 pandemic and the Merger. Beginning in March 2020, we experienced a significant decline in occupancy and RevPAR. The economic downturn and restrictions on travel resulting from the COVID-19 pandemic has significantly impacted our business and the overall lodging industry. As discussed above, certain of our hotel properties temporarily suspended all operations and our other hotel properties had operated, and continue to operate, in a limited capacity. Additionally, as a result of the Merger, the historical financial information included herein as of any date, or for any periods, prior to April 13, 2020, represents the pre-merger financial information of CWI 1 on a stand-alone basis, therefore comparisons of the period to period financial information of WLT as set forth herein may not be meaningful.

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


	Three Months Ended March 31,
	2021		2020		Change
Hotel Revenues	$	96,273	$	114,978	$	(18,705)

Hotel Operating Expenses	126,186		120,710		5,476
Corporate general and administrative expenses	7,257		3,589		3,668
Gain on property-related insurance claims	(1,166)		—		(1,166)
Impairment charges	—		120,220		(120,220)
Asset management fees to affiliate	—		3,316		(3,316)
Transaction costs	—		1,809		(1,809)
Total Expenses	132,277		249,644		(117,367)
Operating Loss	(36,004)		(134,666)		98,662
Interest expense	(42,383)		(14,429)		(27,954)
Equity in losses of equity method investments in real estate, net	(3,920)		(23,393)		19,473
Other income (expense)	77		(20)		97
Loss Before Income Taxes	(82,230)		(172,508)		90,278
(Provision for) benefit from income taxes	(125)		3,363		(3,488)
Net Loss	(82,355)		(169,145)		86,790
Loss (income) attributable to noncontrolling interests	6,788		(860)		7,648
Net Loss Attributable to the Common Stockholders	(75,567)		(170,005)		94,438
Supplemental Financial Measure:(a)
MFFO Attributable to Common Stockholders	$	(33,733)	$	(5,874)	$	(27,859)

___________

(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

WLT 3/31/2021 10-Q – 28

to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definition of non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

As of March 31, 2021 and 2020, we owned 29 and 20 Consolidated Hotels, respectively. Based on when a hotel is acquired or sold, the operating results for certain hotel properties are not comparable for the three months ended March 31, 2021 and 2020. Our Same Store Hotels included 17 Consolidated Hotels and excluded the hotels acquired in the Merger, two hotels that were disposed of between January 1, 2020 and March 31, 2021 and one hotel that was accounted for as held for sale as of March 31, 2021.

The following table sets forth the average occupancy rate, ADR and RevPAR for the three months ended March 31, 2021 and 2020 for our Same Store Hotels.


	Three Months Ended March 31,
Same Store Hotels		2021			2020
Occupancy Rate (a)		35.1		%	56.8		%
ADR		$	285.57		$	248.74
RevPAR		100.18			141.21

___________

(a)Occupancy rates for our Same Store Hotels for January, February and March 2021 were 23.2%, 34.6% and 47.4%, respectively, as compared to occupancy rates for January, February and March 2020 of 64.3%, 74.7% and 31.5%, respectively.

Hotel Revenues

For the three months ended March 31, 2021 as compared to the same period in 2020, hotel revenues decreased by $18.7 million. Our Same Store Hotel revenue decreased by $40.6 million primarily due to the impact of the COVID-19 pandemic on our hotel operations and revenue decreased by $6.2 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 $28.1 million.

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 months ended March 31, 2021 as compared to the same period in 2020, aggregate hotel operating expenses increased by $5.5 million. Our Same Store Hotel expenses decreased by $34.6 million primarily due to the impact of the COVID-19 pandemic on our hotel operations and expenses decreased by $8.0 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 $48.1 million.

Corporate General and Administrative Expenses

For the three months ended March 31, 2021 as compared to the same period in 2020, corporate general and administrative expenses increased by $3.7 million primarily as a result of the impact of the Merger. Corporate general and administrative expenses for the three months ended March 31, 2021 reflect the impact of the Company being self-managed and includes the compensation of our employees.

Impairment Charges

During the three months ended March 31, 2020, we recognized impairment charges totaling $120.2 million on six Consolidated Hotels in order to reduce the carrying value of the properties to their estimated fair values, resulting from the adverse effect of the COVID-19 pandemic on our hotel operations. No impairments were recognized during the three months ended March 31, 2021.

Our impairment charges are more fully described in Note 4.

WLT 3/31/2021 10-Q – 29

Asset Management Fees to Affiliate

For the three months ended March 31, 2021, as compared to the same period in 2020, asset management fees to affiliates decreased by $3.3 million. Upon completion of the Merger on April 13, 2020, the Advisory Agreement was terminated and these fees ceased being incurred.

Interest Expense

For the three months ended March 31, 2021, as compared to the same period in 2020, interest expense increased by $28.0 million primarily due to assuming the mortgage loans of the hotels acquired in the Merger totaling $9.6 million, the aggregate amortization of the debt discount related to the mortgage loans assumed in the Merger and the fair value discount related to the Series A Preferred Stock and Series B Preferred Stock totaling $10.3 million and the dividends recorded in connection with our Series A Preferred Stock and Series B Preferred Stock totaling $7.1 million.

Equity in Losses of Equity Method Investments in Real Estate, Net

Equity in losses 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 5). 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 three months ended March 31, 2020. No such charges were recognized during the three months ended March 31, 2021.

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 March 31,
Venture	2021		2020
Ritz-Carlton Philadelphia Venture	$	(3,063)	$	(3,058)
Hyatt Centric French Quarter Venture (a) (b)	(857)		(6)
Ritz-Carlton Bacara, Santa Barbara Venture (c) (d)	—		(20,456)
Marriott Sawgrass Golf Resort & Spa Venture (c)	—		127
Total equity in losses of equity method investments in real estate, net	$	(3,920)	$	(23,393)

___________

(a)The increase in our share of equity in losses for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily a result of the impact of the COVID-19 pandemic on our hotel operations.

(b)On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party for $2.1 million, bringing our ownership interest to 100% (Note 14).

(c)Upon closing of the Merger on April 13, 2020, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore the amounts for the three months ended March 31, 2020 represent the equity in (losses) earnings prior to the Merger.

(d)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.

(Provision for) Benefit from Income Taxes

For the three months ended March 31, 2021, we recognized a provision for income taxes of $0.1 million compared to a benefit from income taxes of $3.4 million for the three months ended March 31, 2020. Benefit from income taxes during the three months ended March 31, 2020 included a $3.6 million current tax benefit resulting from carrying back certain net operating losses allowable under the CARES Act.

WLT 3/31/2021 10-Q – 30

Loss (Income) Attributable to Noncontrolling Interests

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


	Three Months Ended March 31,
Venture	2021		2020
Sheraton Austin Hotel at the Capitol Venture	$	516	$	49
Ritz-Carlton Fort Lauderdale Venture	(86)		245
Ritz-Carlton Key Biscayne Venture	(8)		(1,154)
Operating Partnership — Noncontrolling interest (a)	6,366		—
Total loss (income) attributable to noncontrolling interests	$	6,788	$	(860)

___________

(a)Reflects the OP Units’ and Warrant Units’ proportionate share of net loss.

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 Common Stockholders, see Supplemental Financial Measures below.

For the three months ended March 31, 2021 as compared to the same period in 2020, MFFO decreased by $27.9 million primarily as a result of the impact that the COVID-19 pandemic had on hotel operations, as discussed above.

Liquidity and Capital Resources

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

Due to the COVID-19 pandemic and as a result of numerous government mandates, health official mandates and significantly reduced demand, as of the date of this Report, the Company has limited operations at a majority of 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.

WLT 3/31/2021 10-Q – 31

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.

Sources and Uses of Cash During the Period

Operating Activities — For the three months ended March 31, 2021, net cash used in operating activities was $29.5 million as compared to $10.0 million for the three months ended March 31, 2020. This change in operating cash flows primarily reflects the impact of the COVID-19 pandemic on our hotel operations.

Investing Activities — During the three months ended March 31, 2021, net cash used in investing activities was $4.2 million as a result of funding $4.7 million for capital expenditures at our Consolidated Hotels and capital contributions to equity investments in real estate totaling $0.8 million, partially offset by property insurance proceeds of $1.3 million.

Financing Activities — Net cash used in financing activities for the three months ended March 31, 2021 was $6.4 million primarily as a result of payments of mortgage financing totaling $5.9 million.

Distributions and Redemptions

On March 18, 2020, in light of the impact that the COVID-19 pandemic has had on our business, we announced that we were suspending future distributions on our common stock. We also announced that redemptions would be suspended including, as of December 2, 2020, special circumstances redemptions. Requests for special circumstances redemptions may continue to be submitted, however, the Company will not take any action with regard to those requests until the Board of Directors has elected to lift the suspension and provided the terms and conditions for any continuation of the program. Distributions and redemptions in respect of future periods will be evaluated by the Board of Directors based on circumstances and expectations existing at the time of consideration, and are also subject to the terms of the Series A and Series B Preferred Stock.

WLT 3/31/2021 10-Q – 32

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.

Summary of Financing

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


	March 31, 2021			December 31, 2020
Carrying Value
Fixed rate (a)	$	1,286,839		$	1,286,839
Variable rate (a):
Amount subject to interest rate caps	363,269			362,193
Amount subject to floating interest rate	347,811			345,712
Amount subject to interest rate swaps	176,001			175,158
	887,081			883,063
	$	2,173,920		$	2,169,902
Percent of Total Debt
Fixed rate	59		%	59		%
Variable rate	41		%	41		%
	100		%	100		%
Weighted-Average Interest Rate at End of Period
Fixed rate	4.3		%	4.3		%
Variable rate (b)	4.1		%	4.1		%

_________

(a)Aggregate debt balance includes unamortized debt discount of $38.4 million and $46.5 as of March 31, 2021 and December 31, 2020, respectively, and unamortized deferred financing costs totaling $6.4 million and $6.9 million as of March 31, 2021 and December 31, 2020, respectively.

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

Covenants

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. As of March 31, 2021, we have effectively entered into cash management agreements with the lenders on 27 of our 29 Consolidated Hotel mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. See Note 1 for further discussion.

Cash Resources

At March 31, 2021, our cash resources consisted of cash and cash equivalents totaling $117.5 million, of which $28.3 million was designated as hotel operating cash and was held at our hotel operating properties.

WLT 3/31/2021 10-Q – 33

Cash Requirements

Our primary cash uses through March 31, 2022 are expected to be payments of debt service, real estate taxes and insurance, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be cash on hand, funds generated by hotel operations, any additional issuances of Series B Preferred Stock and proceeds from additional asset sales. We expect to satisfy certain debt maturities during this period by turning the properties back to the lenders.

Capital Expenditures and Reserve Funds

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

WLT 3/31/2021 10-Q – 34

over year, reflects the impact on our operations from trends in occupancy rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. It should be noted, however, that the property’s asset group’s estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value. While impairment charges are excluded from the calculation of FFO described above due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP measures FFO and MFFO and the adjustments to GAAP in calculating FFO and MFFO.

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

WLT 3/31/2021 10-Q – 35

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

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

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

WLT 3/31/2021 10-Q – 36

FFO and MFFO were as follows (in thousands):


	Three Months Ended March 31,
	2021		2020
Net loss attributable to Common Stockholders	$	(75,567)	(170,005)
Adjustments:
Depreciation and amortization of real property	31,920		18,856
Impairment charges	—		120,220
Proportionate share of adjustments for partially-owned entities — FFO adjustments (a)	479		21,038
Total adjustments	32,399		160,114
FFO attributable to Common Stockholders (as defined by NAREIT)	(43,168)		(9,891)
Adjustments:
Amortization of fair value adjustments	9,723		—
Straight-line and other rent adjustments	1,336		1,935
Gain on property-related insurance claims (b)	(1,166)		—
Transaction costs (b)	—		1,809
Proportionate share of adjustments for partially owned entities — MFFO adjustments	(458)		273
Total adjustments	9,435		4,017
MFFO attributable to Common Stockholders	$	(33,733)	$	(5,874)

___________

(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 5).

(b)We have excluded these costs because of their non-recurring nature. By excluding such costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties.

WLT 3/31/2021 10-Q – 37

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 8 for additional information on our interest rate swaps and caps.

As of March 31, 2021, all of our debt bore interest at fixed rates, was swapped to a fixed rate or was subject to an interest rate cap, with the exception of three mortgage loans with an outstanding balance totaling $347.8 million. Our debt obligations are more fully described in Note 9 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 as of March 31, 2021 and excludes deferred financing costs (in thousands):


	2021 (Remainder)		2022		2023		2024		2025		Total		Fair Value
Fixed-rate debt	$	103,710	$	725,117	$	433,513	$	50,252	$	—	$	1,312,592	$	1,275,172
Variable-rate debt	$	356,498	$	380,230	$	169,380	$	—	$	—	$	906,108	$	899,116

The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of an interest rate swap, or that has been subject to an interest rate cap, is affected by changes in interest rates. A decrease or increase in interest rates of 1.0% would change the estimated fair value of this debt as of March 31, 2021 by an aggregate increase of $21.5 million or an aggregate decrease of $29.3 million, respectively. Annual interest expense on our variable-rate debt that is subject to an interest rate cap as of March 31, 2021 would increase or decrease by $3.6 million for each respective 1.0% change in annual interest rates.

WLT 3/31/2021 10-Q – 38

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 March 31, 2021, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of March 31, 2021 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 3/31/2021 10-Q – 39

PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities.

Issuer Purchases of Equity

Our redemption plan has been suspended as we seek to preserve liquidity in light of the COVID-19 pandemic, however, we completed the following redemptions during the three months ended March 31, 2021 because they were in process prior to the suspension:


	Class A			Class T
2021 Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
January 1 – 31	—	—		—	—		N/A	N/A
February 1 – 28	1,730	$	5.23	6,208	$	5.18	N/A	N/A
March 1 – 31	—	—		457	5.18		N/A	N/A
Total	1,730			6,665

WLT 3/31/2021 10-Q – 40

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

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 3/31/2021 10-Q – 41

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:	May 12, 2021
		By:	/s/ Mallika Sinha
			Mallika Sinha
			Chief Financial Officer
			(Principal Financial Officer)

Date:	May 12, 2021
		By:	/s/ Noah K. Carter
			Noah K. Carter
			Chief Accounting Officer
			(Principal Accounting Officer)

WLT 3/31/2021 10-Q – 42

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

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 3/31/2021 10-Q – 43