Watermark Lodging Trust, Inc. - Quarter Report: 2022 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, 2022 | ||||||||
| or | ||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
For the transition period from to | ||||||||
Commission File Number: 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 | o | Accelerated filer | o | Non-accelerated filer | ☑ | ||||||||||||
| Smaller reporting company | o | Emerging growth company | o | ||||||||||||||
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 168,067,403 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, 2022.
INDEX
| Page No. | ||||||||
| PART I — FINANCIAL INFORMATION | ||||||||
| Item 1. Financial Statements (Unaudited) | ||||||||
Item 4. Controls and Procedures | ||||||||
| PART II — OTHER INFORMATION | ||||||||
Item 6. Exhibits | ||||||||
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements regarding: the impact of the July 2020 Capital Raise (as defined herein), our expectations regarding the impacts on our business of the outbreak of the novel coronavirus (“COVID-19”) pandemic, the impact of hurricanes and other natural disasters on certain hotels, including the condition of the properties and cost estimates, and the impact of rising fuel prices and inflation generally on the travel industry and demand for hotels. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. There are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Other unknown or unpredictable risks or uncertainties, like the risks related to effects of pandemics and global outbreaks of contagious diseases or the fear of such outbreaks, like the current COVID-19 pandemic, and risks relating to the outbreak of hostilities in Ukraine, 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, 2021 as filed with the SEC on March 28, 2022 (the “2021 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 3/31/2022 10-Q – 1
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, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Investments in real estate: | |||||||||||
| Hotels, at cost | $ | 2,962,592 | $ | 2,956,929 | |||||||
| Accumulated depreciation | (407,282) | (383,337) | |||||||||
| Net investments in hotels | 2,555,310 | 2,573,592 | |||||||||
| Equity investment in real estate | 11,425 | 12,705 | |||||||||
| Operating lease right-of-use assets | 42,077 | 43,671 | |||||||||
| Cash and cash equivalents | 178,705 | 249,478 | |||||||||
| Intangible assets, net | 68,766 | 69,464 | |||||||||
| Restricted cash | 106,032 | 99,000 | |||||||||
| Accounts receivable, net | 89,467 | 82,925 | |||||||||
| Other assets | 36,531 | 30,690 | |||||||||
| Total assets | $ | 3,088,313 | $ | 3,161,525 | |||||||
| Liabilities | |||||||||||
| Non-recourse debt, net | $ | 1,961,382 | $ | 1,958,741 | |||||||
| Mandatorily redeemable preferred stock | 204,387 | 256,731 | |||||||||
| Accounts payable, accrued expenses and other liabilities | 205,854 | 190,701 | |||||||||
| Operating lease liabilities | 83,229 | 83,089 | |||||||||
| Total liabilities | 2,454,852 | 2,489,262 | |||||||||
| Equity | |||||||||||
Class A common stock, $0.001 par value; 320,000,000 shares authorized; 167,689,164 and 167,689,164 shares, respectively, issued and outstanding | 168 | 168 | |||||||||
Class T common stock, $0.001 par value; 80,000,000 shares authorized; 61,095,773 and 61,095,773 shares, respectively, issued and outstanding | 61 | 61 | |||||||||
| Additional paid-in capital | 1,643,271 | 1,642,495 | |||||||||
| Distributions and accumulated losses | (1,034,721) | (994,634) | |||||||||
| Accumulated other comprehensive income | 4,297 | 148 | |||||||||
| Total stockholders’ equity | 613,076 | 648,238 | |||||||||
| Noncontrolling interests | 20,385 | 24,025 | |||||||||
| Total equity | 633,461 | 672,263 | |||||||||
| Total liabilities and equity | $ | 3,088,313 | $ | 3,161,525 | |||||||
See Notes to Consolidated Financial Statements.
WLT 3/31/2022 10-Q – 2
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues | |||||||||||
| Hotel Revenues | |||||||||||
| Rooms | $ | 118,308 | $ | 61,250 | |||||||
| Food and beverage | 49,961 | 21,463 | |||||||||
| Other operating revenue | 21,825 | 13,015 | |||||||||
| Business interruption income | — | 545 | |||||||||
| Total Hotel Revenues | 190,094 | 96,273 | |||||||||
| Expenses | |||||||||||
| Rooms | 27,350 | 14,627 | |||||||||
| Food and beverage | 36,432 | 17,167 | |||||||||
| Other hotel operating expenses | 7,712 | 4,783 | |||||||||
| Property taxes, insurance, rent and other | 25,133 | 24,224 | |||||||||
| General and administrative | 19,169 | 12,286 | |||||||||
| Sales and marketing | 14,264 | 8,480 | |||||||||
| Repairs and maintenance | 7,618 | 5,557 | |||||||||
| Management fees | 6,399 | 2,513 | |||||||||
| Utilities | 5,540 | 4,667 | |||||||||
| Depreciation and amortization | 26,045 | 31,882 | |||||||||
| Total Hotel Operating Expenses | 175,662 | 126,186 | |||||||||
| Corporate general and administrative expenses | 7,478 | 7,257 | |||||||||
| Loss (gain) on property-related insurance claims, net | 250 | (1,166) | |||||||||
| Total Expenses | 183,390 | 132,277 | |||||||||
| Operating Income (Loss) | 6,704 | (36,004) | |||||||||
| Interest expense | (34,537) | (42,383) | |||||||||
| Loss on extinguishment of debt | (13,863) | — | |||||||||
| Equity in losses of equity method investments in real estate, net | (1,670) | (3,920) | |||||||||
| Other income, net | 469 | 77 | |||||||||
| Loss before income taxes | (42,897) | (82,230) | |||||||||
| Provision for income taxes | (531) | (125) | |||||||||
| Net Loss | (43,428) | (82,355) | |||||||||
| Loss attributable to noncontrolling interests | 3,341 | 6,788 | |||||||||
| Net Loss Attributable to Common Stockholders | (40,087) | (75,567) | |||||||||
| Class A Common Stock | |||||||||||
| Net loss attributable to Common Stockholders | $ | (29,382) | $ | (55,367) | |||||||
| Basic and diluted weighted-average shares outstanding | 167,689,164 | 167,466,809 | |||||||||
| Basic and diluted loss per share | $ | (0.18) | $ | (0.33) | |||||||
| Class T Common Stock | |||||||||||
| Net loss attributable to Common Stockholders | $ | (10,705) | $ | (20,200) | |||||||
| Basic and diluted weighted-average shares outstanding | 61,095,773 | 61,099,580 | |||||||||
| Basic and diluted loss per share | $ | (0.18) | $ | (0.33) | |||||||
See Notes to Consolidated Financial Statements.
WLT 3/31/2022 10-Q – 3
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net Loss | $ | (43,428) | $ | (82,355) | |||||||
| Other Comprehensive Income | |||||||||||
| Unrealized gain on derivative instruments | 4,149 | 239 | |||||||||
| Comprehensive Loss | (39,279) | (82,116) | |||||||||
Amounts Attributable to Noncontrolling Interests | |||||||||||
| Net loss | 3,341 | 6,788 | |||||||||
| Unrealized gain on derivative instruments | — | (2) | |||||||||
| Comprehensive loss attributable to noncontrolling interests | 3,341 | 6,786 | |||||||||
| Comprehensive Loss Attributable to Common Stockholders | $ | (35,938) | $ | (75,330) | |||||||
See Notes to Consolidated Financial Statements.
WLT 3/31/2022 10-Q – 4
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 Income (Loss) | Total Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class T | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 167,689,164 | $ | 168 | 61,095,773 | $ | 61 | $ | 1,642,495 | $ | (994,634) | $ | 148 | $ | 648,238 | $ | 24,025 | $ | 672,263 | |||||||||||||||||||||||||||||||||||||||||
| Net loss | (40,087) | (40,087) | (3,341) | (43,428) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued under share incentive plans | — | — | — | — | 776 | 776 | — | 776 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | (299) | (299) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 4,149 | 4,149 | — | 4,149 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 167,689,164 | $ | 168 | 61,095,773 | $ | 61 | $ | 1,643,271 | $ | (1,034,721) | $ | 4,297 | $ | 613,076 | $ | 20,385 | $ | 633,461 | |||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
WLT 3/31/2022 10-Q – 5
WATERMARK LODGING TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flows — Operating Activities | |||||||||||
| Net loss | $ | (43,428) | $ | (82,355) | |||||||
| Adjustments to net loss: | |||||||||||
| Depreciation and amortization | 26,045 | 31,882 | |||||||||
| Net loss on extinguishment of debt | 13,863 | — | |||||||||
| Amortization of fair value adjustments, deferred financing costs and other | 6,409 | 11,560 | |||||||||
| Equity in losses of equity method investments in real estate, net | 1,670 | 3,920 | |||||||||
| Amortization of stock-based compensation expense | 776 | 446 | |||||||||
| Loss (gain) on property-related insurance claims | 250 | (1,166) | |||||||||
| Business interruption income | — | (545) | |||||||||
| Net changes in other assets and liabilities | 9,422 | 5,822 | |||||||||
| Net decrease in operating lease right-of-use assets | 1,571 | 1,245 | |||||||||
| Funding of remediation work | (917) | (36) | |||||||||
| Insurance proceeds for remediation work due to property damage | 585 | 16 | |||||||||
| Net increase in operating lease liabilities | 140 | 97 | |||||||||
| Repayment of key money and other deferred incentive payments | — | (748) | |||||||||
| Business interruption insurance proceeds | — | 545 | |||||||||
| Decrease in due to related parties and affiliates | — | (206) | |||||||||
| Net Cash Provided by (Used in) Operating Activities | 16,386 | (29,523) | |||||||||
| Cash Flows — Investing Activities | |||||||||||
| Capital expenditures | (7,853) | (4,717) | |||||||||
| Capital contributions to equity investments in real estate | (390) | (790) | |||||||||
| Property insurance proceeds | 273 | 1,309 | |||||||||
| Net Cash Used in Investing Activities | (7,970) | (4,198) | |||||||||
| Cash Flows — Financing Activities | |||||||||||
| Payments and prepayments of mortgage principal | (211,995) | (5,889) | |||||||||
| Proceeds from mortgage financings | 209,979 | 839 | |||||||||
| Redemption of Series A Preferred Stock | (65,000) | — | |||||||||
| Deferred financing costs | (4,253) | (602) | |||||||||
| Other financing activities, net | (589) | 56 | |||||||||
| Distributions to noncontrolling interests | (299) | — | |||||||||
| Payment of distribution and shareholder servicing fee | — | (798) | |||||||||
| Repurchase of shares | — | (44) | |||||||||
| Net Cash Used in Financing Activities | (72,157) | (6,438) | |||||||||
| Change in Cash and Cash Equivalents and Restricted Cash During the Period | |||||||||||
| Net decrease in cash and cash equivalents and restricted cash | (63,741) | (40,159) | |||||||||
| Cash and cash equivalents and restricted cash, beginning of period | 348,478 | 251,464 | |||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 284,737 | $ | 211,305 | |||||||
See Notes to Consolidated Financial Statements.
WLT 3/31/2022 10-Q – 6
WATERMARK LODGING TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Business
Organization
Watermark Lodging Trust, Inc. (“WLT” or the “Company”), 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 owned a 99.0% capital interest in, the Operating Partnership, as of March 31, 2022. 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, 2022.
We held ownership interests in 25 hotels as of March 31, 2022, including 24 hotels that we consolidated (“Consolidated Hotels”) and one hotel that we recorded as an equity investment (“Unconsolidated Hotels”).
Proposed Merger
On May 6, 2022, the Company, along with the Operating Partnership, entered into a definitive merger agreement with affiliates of private real estate funds managed by Brookfield (“Brookfield”) under which Brookfield will acquire all of the outstanding shares of common stock of the Company in an all-cash transaction. Completion of the transaction is subject to certain closing conditions, including the approval of our shareholders. The proposed transaction is expected to close in the fourth quarter of 2022. See Note 13 for further information.
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, 2022, all of our hotels are open but many are operating at significantly reduced levels of occupancy and staffing. Although results improved relative to 2021, we cannot estimate with certainty when travel demand will fully recover or how new variants of COVID-19 could impact recovery. We have generally seen improving demand at our properties as government-imposed restrictions and limitations on travel and large gatherings have loosened and as the vaccines have become more widely available. We expect the recovery to continue to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. Governmental and business efforts to encourage or mandate vaccinations, and public adoption rates of vaccines, have impacted and continue to impact the recovery from the COVID-19 pandemic and have had and may continue to have disruptive effects on certain segments of the labor market. Individual ability or desire to travel and corporate travel policies will continue to be impacted by the COVID-19 pandemic and affect the recovery of our properties. The ultimate severity and duration of the COVID-19 pandemic and its effects, and the emergence of variants, are uncertain, including whether COVID-19 will become
WLT 3/31/2022 10-Q – 7
Notes to Consolidated Financial Statements (Unaudited)
endemic or cyclical in nature. Given these uncertainties, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.
As of March 31, 2022, we had cash and cash equivalents of $178.7 million. As of March 31, 2022, the mortgage loans for our Consolidated Hotels had an aggregate principal balance totaling $2.0 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 $25.0 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. We have continued to work with our lenders to address loans with near-term mortgage maturities and have refinanced or extended the maturity date of four Consolidated Hotel mortgage loans, aggregating $285.4 million of indebtedness, during the three months ended March 31, 2022. Of the $2.0 billion aggregate principal balance indebtedness outstanding as of March 31, 2022, approximately $1.1 billion is scheduled to mature during the 12 months after the date of this Report, which included a total of $251.9 million that has been refinanced subsequent to March 31, 2022. 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.
We cannot predict with reasonable certainty when our hotels will return to normalized levels of operations after the effects of the COVID-19 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 COVID-19 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, 2021, 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.
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 2021 Annual Report.
WLT 3/31/2022 10-Q – 8
Notes to Consolidated Financial Statements (Unaudited)
As of both March 31, 2022 and December 31, 2021, we considered one entity to be a VIE, which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of the consolidated VIE included in the consolidated balance sheets (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Net investments in hotels | $ | 263,692 | $ | 264,984 | |||||||
| Intangible assets, net | 28,655 | 28,819 | |||||||||
| Total assets | 324,555 | 315,088 | |||||||||
| Non-recourse debt, net | $ | 177,450 | $ | 178,029 | |||||||
| Total liabilities | 202,439 | 201,557 | |||||||||
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, 2022 | December 31, 2021 | ||||||||||
Cash and cash equivalents | $ | 178,705 | $ | 249,478 | |||||||
Restricted cash | 106,032 | 99,000 | |||||||||
Total cash and cash equivalents and restricted cash | $ | 284,737 | $ | 348,478 | |||||||
Note 3. Net Investments in Hotels
Net investments in hotels are summarized as follows (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Buildings | $ | 2,001,119 | $ | 2,002,614 | |||||||
| Land | 574,648 | 574,648 | |||||||||
| Building and site improvements | 188,228 | 187,019 | |||||||||
| Furniture, fixtures and equipment | 166,537 | 166,316 | |||||||||
| Construction in progress | 32,060 | 26,332 | |||||||||
| Hotels, at cost | 2,962,592 | 2,956,929 | |||||||||
| Less: Accumulated depreciation | (407,282) | (383,337) | |||||||||
| Net investments in hotels | $ | 2,555,310 | $ | 2,573,592 | |||||||
During the three months ended March 31, 2022 and 2021, we retired fully depreciated furniture, fixtures and equipment aggregating $1.0 million and $5.9 million, respectively. During the three months ended March 31, 2022 and 2021, we recorded net write-offs of fixed assets resulting from property damage insurance claims of $1.6 million and $0.1 million, respectively. Depreciation expense was $25.3 million and $31.1 million for the three months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022 and December 31, 2021, accrued capital expenditures were $1.8 million and $1.0 million, respectively, representing non-cash investing activity.
Note 4. Equity Investments in Real Estate
As of March 31, 2022, we owned an equity interest in one Unconsolidated Hotel with an unrelated third party. We did not control the venture that owns this hotel, but we exercised significant influence over it. We accounted for this investment 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 former advisor that we incur and other-than-temporary impairment charges, if any).
WLT 3/31/2022 10-Q – 9
Notes to Consolidated Financial Statements (Unaudited)
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 the 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 interest in our equity investment in real estate and its carrying value. The carrying value of this venture is 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, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
Ritz-Carlton Philadelphia Venture (a) | PA | 301 | 60.0 | % | Full-service | $ | 11,425 | $ | 12,705 | |||||||||||||||||||||||||||||
___________
(a)We contributed $0.4 million to this investment during the three months ended March 31, 2022.
The following table sets forth our share of equity in losses 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 | 2022 | 2021 | ||||||||||||
| Ritz-Carlton Philadelphia Venture | $ | (1,670) | $ | (3,063) | ||||||||||
Hyatt Centric French Quarter Venture (a) | — | (857) | ||||||||||||
| Total equity in losses of equity method investments in real estate, net | $ | (1,670) | $ | (3,920) | ||||||||||
___________
(a) On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party. Upon completion of the acquisition, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore these amounts represent the equity in losses prior to the acquisition.
No other-than-temporary impairment charges were recognized during the three months ended March 31, 2022 or 2021.
As of March 31, 2022 and December 31, 2021, the unamortized basis difference on our equity investment was $1.4 million and $1.5 million, respectively. Net amortization of basis differences reduced the carrying values of our equity investments by less than $0.1 million during both the three months ended March 31, 2022 and 2021.
Note 5. Intangible Assets
Intangible assets are summarized as follows (dollars in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
| 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 | $ | (11,411) | $ | 60,989 | $ | 72,400 | $ | (11,037) | $ | 61,363 | ||||||||||||||||||||||||||||
| Trade name | 8 | 9,400 | (2,314) | 7,086 | 9,400 | (2,024) | 7,376 | ||||||||||||||||||||||||||||||||||
| Other intangible assets | 5 - 17 | 900 | (209) | 691 | 1,013 | (288) | 725 | ||||||||||||||||||||||||||||||||||
| Total intangible assets, net | $ | 82,700 | $ | (13,934) | $ | 68,766 | $ | 82,813 | $ | (13,349) | $ | 69,464 | |||||||||||||||||||||||||||||
Net amortization of intangibles was $0.7 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively. Amortization of intangibles is included in Depreciation and amortization and Property tax, insurance, rent and other in the consolidated financial statements.
WLT 3/31/2022 10-Q – 10
Notes to Consolidated Financial Statements (Unaudited)
Note 6. 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 7).
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, 2022 or 2021. 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 and (expense) in the consolidated financial statements.
Our non-recourse debt, net which we have classified as Level 3, had a carrying value of $2.0 billion as of both March 31, 2022 and December 31, 2021, and an estimated fair value of $2.0 billion as of both March 31, 2022 and December 31, 2021. 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 B preferred stock, which we have classified as Level 3, had a carrying value of $204.4 million and $201.7 million as of March 31, 2022 and December 31, 2021, respectively, and an estimated fair value of $242.8 million and $247.0 million as of March 31, 2022 and December 31, 2021, respectively.
Our Series A preferred stock, which we had classified as Level 3, had a carrying value of $55.1 million as of December 31, 2021 and an estimated fair value of $65.0 million as of December 31, 2021. On January 25, 2022, the Company redeemed the 1,300,000 shares of Series A Preferred Stock at the liquidation preference of $50.00 per share for a total of $65.0 million. See Note 12 for further discussion.
See Note 12 for information on the measurement of fair value of the Series A and Series B Preferred Stock and Warrants.
We estimated that our other financial assets and liabilities had fair values that approximated their carrying values as of both March 31, 2022 and December 31, 2021.
WLT 3/31/2022 10-Q – 11
Notes to Consolidated Financial Statements (Unaudited)
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. We did not recognize any impairment charges during the three months ended March 31, 2022 or 2021.
Note 7. 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 2021 Annual Report.
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, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||
| Interest rate caps | Other assets | $ | 3,835 | $ | 381 | $ | — | $ | — | |||||||||||||||||||||||
| Interest rate swaps | Accounts payable, accrued expenses and other liabilities | — | — | (406) | (2,023) | |||||||||||||||||||||||||||
| $ | 3,835 | $ | 381 | $ | (406) | $ | (2,023) | |||||||||||||||||||||||||
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.
At both March 31, 2022 and December 31, 2021, no cash collateral had been posted nor received for any of our derivative positions.
We recognized unrealized gains of $4.0 million and $0.1 million in Other comprehensive income on derivatives in connection with our interest rate swaps and caps during the three months ended March 31, 2022 and 2021, respectively.
We reclassified $0.2 million and $0.1 million from Other comprehensive income on derivatives into Interest expense during the three months ended March 31, 2022 and 2021, respectively.
Amounts reported in Other comprehensive income 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, 2022, we estimated that an additional $0.8 million will be reclassified, resulting in a reduction to 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
WLT 3/31/2022 10-Q – 12
Notes to Consolidated Financial Statements (Unaudited)
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, 2022 and December 31, 2021 were designated as cash flow hedges and are summarized as follows (dollars in thousands):
| Number of Instruments at | Notional Amount at | Fair Value at | ||||||||||||||||||||||||||||||||||||
| Interest Rate Derivatives | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||
| Interest rate caps | 12 | 10 | $ | 858,772 | $ | 627,955 | $ | 3,835 | $ | 381 | ||||||||||||||||||||||||||||
| Interest rate swaps | 2 | 2 | 185,295 | 185,295 | (406) | (2,023) | ||||||||||||||||||||||||||||||||
| $ | 1,044,067 | $ | 813,250 | $ | 3,429 | $ | (1,642) | |||||||||||||||||||||||||||||||
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, 2022 and December 31, 2021, 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 $0.6 million and $2.3 million as of March 31, 2022 and December 31, 2021, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions as of March 31, 2022 or December 31, 2021, we could have been required to settle our obligations under these agreements at their aggregate termination value of $0.6 million and $2.3 million, respectively.
Note 8. 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, 2022 | December 31, 2021 | |||||||||||||||||||||||
Fixed rate | 3.8% – 4.9% | 06/21(b) – 08/23 | $ | 870,478 | $ | 951,318 | ||||||||||||||||||||
Variable rate (c) | 2.5% – 9.0% | 08/22 – 01/25 | 1,090,904 | 1,007,423 | ||||||||||||||||||||||
| $ | 1,961,382 | $ | 1,958,741 | |||||||||||||||||||||||
___________
(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)See discussion below on the Courtyard Times Square West mortgage loan, which matured on June 1, 2021.
(c)The interest rate range presented for these mortgage loans reflect the rates in effect as of March 31, 2022 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, 2022, we have effectively entered into cash management agreements with the lenders on 18 of our 24 Consolidated Hotel 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.
WLT 3/31/2022 10-Q – 13
Notes to Consolidated Financial Statements (Unaudited)
Financing Activity During 2022
On January 14, 2022, we refinanced the $81.4 million San Diego Marriott La Jolla non-recourse mortgage loan with a new mortgage loan of $97.7 million, of which $83.2 million was funded at closing, with the remaining balance available to fund planned renovations at the hotel. The loan has a floating annual interest rate, subject to an interest rate cap, and a maturity date of January 2025, with two one-year extension options, subject to certain conditions. We recognized a loss on extinguishment of debt of $4.1 million during the three months ended March 31, 2022.
On January 21, 2022, we refinanced the $87.1 million San Jose Marriott non-recourse mortgage loan and the $34.6 million Le Méridien Arlington non-recourse mortgage loan with a new mortgage loan of $135.5 million encumbering both hotels, of which $126.2 million was funded at closing, with the remaining balance available to fund planned renovations at the hotel. The hotels encumbered by the mortgage loan are cross-collateralized. The loan has a floating annual interest rate, subject to an interest rate cap, and a maturity date of January 2025, with two one-year extension options, subject to certain conditions. We recognized a loss on extinguishment of debt of less than $0.1 million during the three months ended March 31, 2022.
On March 14, 2022, the $80.0 million outstanding non-recourse mortgage loan on Renaissance Chicago Downtown was modified to extend the maturity date from July 1, 2022 to January 1, 2023 and included a principal paydown of $4.0 million. This extension was accounted for as a loan modification and no gain or loss was recognized.
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 2021 to August 2023. The principal balance and interest rate 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 2021 to March 2023. The principal balance and interest rate remain unchanged. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
Courtyard Times Square West
The $59.2 million outstanding mortgage loan on Courtyard Times Square West matured on June 1, 2021 and we have not paid off the outstanding principal balance. The loan does not have any cross-default provisions with our other mortgage obligations. We are currently in the process of exploring various options as it relates to this asset, including but not limited to, surrendering the property back to the lender.
Scheduled Debt Principal Payments
Scheduled debt principal payments during the remainder of 2022 and each of the next four calendar years following December 31, 2022 are as follows (in thousands):
| Years Ending December 31, | Total | |||||||
| 2022 (remainder) | $ | 910,965 | ||||||
| 2023 | 527,464 | |||||||
| 2024 | 329,910 | |||||||
| 2025 | 209,417 | |||||||
| 2026 | — | |||||||
| Total principal payments | 1,977,756 | |||||||
| Unamortized deferred financing costs | (10,401) | |||||||
| Unamortized fair value discount | (5,973) | |||||||
| Total | $ | 1,961,382 | ||||||
WLT 3/31/2022 10-Q – 14
Notes to Consolidated Financial Statements (Unaudited)
Note 9. Commitments and Contingencies
As of March 31, 2022, 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, 2022, our hotel properties were operated pursuant to long-term management agreements with nine different management companies, with initial terms ranging from 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. Eleven 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 4.0% 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 $6.4 million and $2.5 million for the three months ended March 31, 2022 and 2021, respectively.
Franchise Agreements
Eleven of our hotel properties operated under franchise or license agreements with national brands that are separate from our management agreements. As of March 31, 2022, we had eight franchise agreements with Marriott-owned brands, one with Hilton-owned brands, one with InterContinental Hotels-owned brands and one 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 4.0% 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 $2.2 million and $0.9 million for the three months ended March 31, 2022 and 2021, 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, 2022 and December 31, 2021, $55.7 million and $58.7 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 $1.3 million is subject to replenishment requirements as of March 31, 2022.
WLT 3/31/2022 10-Q – 15
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, 2022, 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, 2022 totaled $54.9 million. 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 88 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Fixed lease cost | $ | 3,474 | $ | 2,850 | |||||||
Variable lease cost (a) | 84 | 28 | |||||||||
| Total lease cost | $ | 3,558 | $ | 2,878 | |||||||
___________
(a)Our variable lease payments consist of payments based on a percentage of revenue.
Note 10. Loss Per Share and Equity
Loss Per Share
The following table presents loss per share (in thousands, except share and per share amounts):
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| 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 | 167,689,164 | $ | (29,382) | $ | (0.18) | 167,466,809 | $ | (55,367) | $ | (0.33) | |||||||||||||||||||||||||
| Class T common stock | 61,095,773 | (10,705) | (0.18) | 61,099,580 | (20,200) | (0.33) | |||||||||||||||||||||||||||||
| Net loss attributable to Common Stockholders | $ | (40,087) | $ | (75,567) | |||||||||||||||||||||||||||||||
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 3/31/2022 10-Q – 16
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 both March 31, 2022 and December 31, 2021, the Operating Partnership had 231,202,933 OP Units outstanding, of which 99.0% of the outstanding OP Units were owned by the Company, and the noncontrolling 1.0% ownership interest was beneficially owned by Mr. Medzigian as of both period ends.
As of both March 31, 2022 and December 31, 2021, Mr. Medzigian indirectly owned 2,417,996 OP Units. The outstanding OP Units indirectly 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, 2022 and December 31, 2021. The noncontrolling interest is included in noncontrolling interest on the consolidated balance sheet.
Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
The following table presents a reconciliation of changes in Accumulated other comprehensive income (loss) by component for the periods presented (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| Gains on Derivative Instruments | 2022 | 2021 | ||||||||||||
| Beginning balance | $ | 148 | $ | (724) | ||||||||||
| Other comprehensive income before reclassifications | 3,978 | 90 | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income to: | ||||||||||||||
| Interest expense | 171 | 149 | ||||||||||||
| Total | 171 | 149 | ||||||||||||
| Net current period other comprehensive income | 4,149 | 239 | ||||||||||||
| Net current period other comprehensive income attributable to noncontrolling interests | — | (2) | ||||||||||||
| Ending balance | $ | 4,297 | $ | (487) | ||||||||||
Note 11. 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, 2022, 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, 2022. 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.
The accompanying consolidated financial statements include an interim tax provision for our TRSs for the three months ended March 31, 2022 and 2021. Current income tax expense was $0.1 million for both the three months ended March 31, 2022 and 2021. We have 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.
WLT 3/31/2022 10-Q – 17
Notes to Consolidated Financial Statements (Unaudited)
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. Due to significant negative evidence, including cumulative losses in the most recent three-year period, our assessment as of March 31, 2021 is that our net deferred tax assets are not more likely than not to be realized and we reported a valuation allowance against those balances. Provision for income taxes included deferred income tax expense of $0.4 million and less than $0.1 million for the three months ended March 31, 2022 and 2021, respectively.
Note 12. Mandatorily Redeemable Preferred Stock
As of both March 31, 2022 and December 31, 2021, 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.
On January 25, 2022, the Company redeemed the 1,300,000 shares of Series A Preferred Stock at the liquidation preference of $50.00 per share for a total of $65.0 million. All accrued and unpaid dividends, which totaled $0.1 million, were paid at redemption. We recognized a loss of $9.7 million during the three months ended March 31, 2022 related to the write-off of the unamortized fair value discount at the date of redemption, which is included in Loss on extinguishment of debt in the consolidated statement of operations.
WLT 3/31/2022 10-Q – 18
Notes to Consolidated Financial Statements (Unaudited)
Series B Preferred Stock and Warrants
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 2020 Capital Raise”), both of which were issued on July 24, 2020. 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 $10.7 million and $13.7 million as of March 31, 2022 and December 31, 2021, 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).
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.
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. In the event of a change of control, as defined in the Articles Supplementary, the holders have the right, but not the obligation, to require the Company to redeem for cash, in whole or in part, the outstanding shares of Series B Preferred Stock owned by the holder at the applicable Optional Redemption Price in effect at the date of the Fundamental Change Notice, as defined in the Articles Supplementary. 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 as of March 31, 2022 and December 31, 2021 totaled $5.9 million and $6.5 million, respectively.
WLT 3/31/2022 10-Q – 19
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the carrying value of our Series A and Series B Preferred Stock as of March 31, 2022 and December 31, 2021:
| Series A Preferred Stock at | Series B Preferred Stock at | ||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| Liquidation value | $ | — | $ | 65,000 | $ | 231,255 | $ | 231,255 | |||||||||||||||
| Fair value discount | — | (14,310) | (30,358) | (30,358) | |||||||||||||||||||
| — | 50,690 | 200,897 | 200,897 | ||||||||||||||||||||
| Accumulated amortization of fair value discount | — | 4,364 | 10,235 | 8,740 | |||||||||||||||||||
| Deferred financing costs | — | — | (10,177) | (11,177) | |||||||||||||||||||
| Accumulated amortization of deferred financing costs | — | — | 3,432 | 3,217 | |||||||||||||||||||
| $ | — | $ | 55,054 | $ | 204,387 | $ | 201,677 | ||||||||||||||||
Note 13. Subsequent Event
Proposed Merger
On May 6, 2022, the Company, along with the Operating Partnership, entered into a definitive merger agreement with affiliates of private real estate funds managed by Brookfield, under which Brookfield will acquire all of the outstanding shares of common stock of the Company for $6.768 per Class A share and $6.699 per Class T share in an all-cash transaction, including the assumption of mortgage debt and Series B Preferred Stock and Warrants. Further details concerning the proposed merger are described in a Form 8-K that we filed with the SEC on May 9, 2022.
Refinancings
On April 29, 2022, we refinanced the $83.6 million Westin Pasadena non-recourse mortgage loan with a new mortgage loan of $86.4 million. The loan has a floating annual interest rate, subject to an interest rate cap, and a maturity date of May 2025, with two one-year extension options, subject to certain conditions.
On May 11, 2022, we refinanced the $65.0 million Marriott Raleigh City Center non-recourse mortgage loan with a new mortgage loan of $68.0 million. The loan has a floating annual interest rate, subject to an interest rate cap, and a maturity date of May 2025, with two one-year extension options, subject to certain conditions.
On May 11, 2022, we refinanced the $103.0 million Charlotte Marriott City Center non-recourse mortgage loan with a new senior mortgage loan of $86.0 million and a $22.0 million mezzanine loan. The loans have floating annual interest rates, subject to an interest rate cap, and maturity dates of June 2025, each with two one-year extension options, subject to certain conditions.
WLT 3/31/2022 10-Q – 20
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 2021 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 results of operations were significantly affected by the COVID-19 pandemic, as discussed further below. Our results of operations are also 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, 2022, we held ownership interests in 25 hotels, with a total of 8,142 rooms.
Significant Developments
Proposed Merger
On May 6, 2022, the Company, along with the Operating Partnership, entered into a definitive merger agreement with affiliates of private real estate funds managed by Brookfield, under which Brookfield will acquire all of the outstanding shares of common stock of the Company for $6.768 per Class A share and $6.699 per Class T share in an all-cash transaction, including the assumption of mortgage debt and Series B Preferred Stock and Warrants. Further details concerning the proposed merger are described in a Form 8-K that we filed with the SEC on May 9, 2022.
COVID-19 Pandemic
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, 2022, all of our hotels are open but many are operating at significantly reduced levels of occupancy and staffing. Although results improved relative to 2021, we cannot estimate with certainty when travel demand will fully recover or how new variants of COVID-19 could impact recovery. We have generally seen improving demand at our properties as government-imposed restrictions and limitations on travel and large gatherings have loosened and as the vaccines have become more widely available. We expect the recovery to continue to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. Governmental and business efforts to encourage or mandate vaccinations, and public adoption rates of vaccines, have impacted and continue to impact the recovery from the COVID-19 pandemic and have had and may continue to have disruptive effects on certain segments of the labor market. Individual ability or desire to travel and corporate travel policies will continue to be impacted by the COVID-19 pandemic and affect the recovery of our properties. The ultimate severity and duration of the COVID-19 pandemic and its effects, and the emergence of variants, are uncertain, including whether COVID-19 will become endemic or cyclical in nature. Given these uncertainties, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.
WLT 3/31/2022 10-Q – 21
Financial and Operating Highlights
(Dollars in thousands, except average daily rate (“ADR”) and revenue per available room (“RevPAR”))
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Hotel revenues | $ | 190,094 | $ | 96,273 | |||||||
| Net loss attributable to Common Stockholders | (40,087) | (75,567) | |||||||||
| Net cash provided by (used in) operating activities | 16,386 | (29,523) | |||||||||
| Net cash used in investing activities | (7,970) | (4,198) | |||||||||
| Net cash used in financing activities | (72,157) | (6,438) | |||||||||
Supplemental Financial Measures: (a) | |||||||||||
| FFO attributable to Common Stockholders | (21,745) | (43,168) | |||||||||
| MFFO attributable to Common Stockholders | (781) | (33,733) | |||||||||
Consolidated Hotel Operating Statistics (b) | |||||||||||
| Occupancy | 53.6 | % | 30.7 | % | |||||||
| ADR | $ | 312.82 | $ | 244.95 | |||||||
| RevPAR | 167.61 | 75.26 | |||||||||
Comparable Consolidated Hotel Operating Statistics (c) | |||||||||||
| Occupancy | 53.6 | % | 31.0 | % | |||||||
| ADR | $ | 312.82 | $ | 265.12 | |||||||
| RevPAR | 167.61 | 82.27 | |||||||||
___________
(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.
(b)Our consolidated hotel operating statistics represent statistical data for our Consolidated Hotels during our ownership period.
(c)Our comparable hotel operating statistics represent statistical data for Consolidated Hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale. Statistical data prior to our ownership was included for hotels that were not owned for the entirety of the comparison periods. Due to the impact of COVID-19 on hotel operations and the effect on comparability between periods, we have included the operating statistics of our Comparable Consolidated Hotel Portfolio for the three months ended March 31, 2019 for comparative purposes. Occupancy, ADR and RevPAR for our Comparable Consolidated Hotel Portfolio for the three months ended March 31, 2019 were 72.5%, $271.25 and $196.68, respectively.
WLT 3/31/2022 10-Q – 22
Portfolio Overview
The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotel as of March 31, 2022:
| Hotels | State | Number of Rooms | % Owned | Hotel Type | ||||||||||||||||||||||
Consolidated Hotels | ||||||||||||||||||||||||||
Charlotte Marriott City Center | NC | 446 | 100% | Full-Service | ||||||||||||||||||||||
Courtyard Times Square West | NY | 224 | 100% | Select-service | ||||||||||||||||||||||
Embassy Suites by Hilton Denver-Downtown/Convention Center | CO | 403 | 100% | Full-Service | ||||||||||||||||||||||
| Equinox Golf Resort & Spa | VT | 199 | 100% | Resort | ||||||||||||||||||||||
Fairmont Sonoma Mission Inn & Spa | CA | 226 | 100% | Resort | ||||||||||||||||||||||
Hawks Cay Resort (a) | FL | 393 | 100% | Resort | ||||||||||||||||||||||
Holiday Inn Manhattan 6th Avenue Chelsea | NY | 226 | 100% | Full-service | ||||||||||||||||||||||
Hyatt Centric French Quarter New Orleans (b) | LA | 254 | 100% | Full-service | ||||||||||||||||||||||
Le Méridien Arlington | VA | 154 | 100% | Full-Service | ||||||||||||||||||||||
Le Méridien Dallas, The Stoneleigh | TX | 176 | 100% | Full-service | ||||||||||||||||||||||
Marriott Kansas City Country Club Plaza | MO | 295 | 100% | Full-service | ||||||||||||||||||||||
Marriott Raleigh City Center | NC | 401 | 100% | Full-service | ||||||||||||||||||||||
Marriott Sawgrass Golf Resort & Spa | FL | 514 | 100% | Resort | ||||||||||||||||||||||
Renaissance Atlanta Midtown Hotel | GA | 304 | 100% | Full-Service | ||||||||||||||||||||||
Renaissance Chicago Downtown | IL | 560 | 100% | Full-service | ||||||||||||||||||||||
Ritz-Carlton Bacara, Santa Barbara | CA | 358 | 100% | Resort | ||||||||||||||||||||||
Ritz-Carlton Fort Lauderdale (c) | FL | 198 | 100% | Resort | ||||||||||||||||||||||
Ritz-Carlton Key Biscayne (d) | FL | 426 | 66.7% | Resort | ||||||||||||||||||||||
Ritz-Carlton San Francisco | CA | 336 | 100% | Full-Service | ||||||||||||||||||||||
Sanderling Resort | NC | 128 | 100% | Resort | ||||||||||||||||||||||
San Diego Marriott La Jolla | CA | 376 | 100% | Full-Service | ||||||||||||||||||||||
San Jose Marriott | CA | 510 | 100% | Full-Service | ||||||||||||||||||||||
Seattle Marriott Bellevue | WA | 384 | 100% | Full-Service | ||||||||||||||||||||||
Westin Pasadena | CA | 350 | 100% | Full-Service | ||||||||||||||||||||||
| 7,841 | ||||||||||||||||||||||||||
| Unconsolidated Hotel | ||||||||||||||||||||||||||
Ritz-Carlton Philadelphia | PA | 301 | 60% | Full-service | ||||||||||||||||||||||
| 8,142 | ||||||||||||||||||||||||||
_________
(a)Includes 216 privately owned villas that participate in the villa/condo rental program as of March 31, 2022.
(b)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%.
(c)Includes 32 condo-hotel units that participate in the villa/condo rental program as of March 31, 2022. Also, on November 9, 2021, we acquired the remaining 30% interest in the Ritz-Carlton Fort Lauderdale Venture from an unaffiliated third party, bringing our ownership interest to 100%.
(d)Includes 135 condo-hotel units that participate in the resort rental program as of March 31, 2022.
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
WLT 3/31/2022 10-Q – 23
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.
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. Although results improved relative to 2021, we cannot estimate with certainty when travel demand will fully recover or how new variants of COVID-19 could impact recovery.
The following table presents our comparative results of operations (in thousands):
| Three Months Ended March 31, | |||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||
| Hotel Revenues | $ | 190,094 | $ | 96,273 | $ | 93,821 | |||||||||||
| Hotel Operating Expenses | 175,662 | 126,186 | 49,476 | ||||||||||||||
| Corporate general and administrative expenses | 7,478 | 7,257 | 221 | ||||||||||||||
| Loss (gain) on property-related insurance claims, net | 250 | (1,166) | 1,416 | ||||||||||||||
| Total Expenses | 183,390 | 132,277 | 51,113 | ||||||||||||||
| Operating Income (Loss) | 6,704 | (36,004) | 42,708 | ||||||||||||||
| Interest expense | (34,537) | (42,383) | 7,846 | ||||||||||||||
| Loss on extinguishment of debt | (13,863) | — | (13,863) | ||||||||||||||
Equity in losses of equity method investments in real estate, net | (1,670) | (3,920) | 2,250 | ||||||||||||||
| Other income, net | 469 | 77 | 392 | ||||||||||||||
| Loss Before Income Taxes | (42,897) | (82,230) | 39,333 | ||||||||||||||
| Provision for income taxes | (531) | (125) | (406) | ||||||||||||||
| Net Loss | (43,428) | (82,355) | 38,927 | ||||||||||||||
| Loss attributable to noncontrolling interests | 3,341 | 6,788 | (3,447) | ||||||||||||||
| Net Loss Attributable to Common Stockholders | $ | (40,087) | $ | (75,567) | $ | 35,480 | |||||||||||
Supplemental Financial Measure:(a) | |||||||||||||||||
| MFFO Attributable to Common Stockholders | $ | (781) | $ | (33,733) | $ | 32,952 | |||||||||||
___________
(a)We consider MFFO, a non-GAAP measure, to be an important metric in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definition of non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
Hotel Revenues
For the three months ended March 31, 2022 as compared to the same period in 2021, hotel revenues increased by $93.8 million. We benefited from significant growth in demand due to an increase in vaccinations and corresponding loosening of government-imposed restrictions on travel and large gatherings relative to the prior year. The increase in room revenue was attributable to an increase in RevPAR resulting from an increase in demand as compared to the prior period.
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, 2022 as compared to the same period in 2021, aggregate hotel operating expenses increased by $49.5 million with the increase in line with the change in revenue discussed above, driven by an increase in demand as compared to the prior period.
WLT 3/31/2022 10-Q – 24
Interest Expense
For the three months ended March 31, 2022, as compared to the same period in 2021, interest expense decreased by $7.8 million primarily due to a decrease in the amortization of the fair value discount related to the mortgage loans assumed in the merger of Carey Watermark Investors Incorporated and Carey Watermark Investors 2 Incorporated in April 2020 of $4.7 million and a decrease of $3.4 million resulting from dispositions of hotels during 2021 and payoff of related mortgage debt, partially offset by an increase in interest expense of $0.9 million largely the result of an increase in the weighted average interest rate relative to the prior year period.
Loss on Extinguishment of Debt
During the three months ended March 31, 2022 we recognized a loss on extinguishment of debt of $13.9 million, comprised primarily of a $9.7 million loss related to the Series A Preferred Stock redemption, representing the write-off of the unamortized fair value discount at the date of redemption and a $4.1 million loss resulting from the refinancing of the San Diego Marriott La Jolla non-recourse mortgage loan.
Equity in Losses of Equity Method Investments in Real Estate, Net
Equity in losses of equity method investments in real estate, net represents losses 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 4). 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.
The following table sets forth our share of equity in losses 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 | 2022 | 2021 | ||||||||||||
Ritz-Carlton Philadelphia Venture (a) | $ | (1,670) | $ | (3,063) | ||||||||||
Hyatt Centric French Quarter Venture (b) | — | (857) | ||||||||||||
| Total equity in losses of equity method investments in real estate, net | $ | (1,670) | $ | (3,920) | ||||||||||
___________
(a)The results for the three months ended March 31, 2022 reflect an improvement in the performance of the hotel during 2022 as compared to comparable period in 2021.
(b)On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party. Upon completion of the acquisition, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore these amounts represent the equity in losses prior to the acquisition.
Provision for Income Taxes
For the three months ended March 31, 2022, as compared to the same period in 2021, provision for income taxes increased by $0.4 million primarily due to a change in the jurisdictional mix of earnings, which increased the Company’s effective tax rate.
WLT 3/31/2022 10-Q – 25
Loss Attributable to Noncontrolling Interests
The following table sets forth our (income) loss attributable to noncontrolling interests (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| Venture | 2022 | 2021 | ||||||||||||
| Ritz-Carlton Key Biscayne Venture | $ | (24) | $ | (8) | ||||||||||
Sheraton Austin Hotel at the Capitol Venture (a) | 3 | 516 | ||||||||||||
Ritz-Carlton Fort Lauderdale Venture (b) | — | (86) | ||||||||||||
Operating Partnership — Noncontrolling interest (c) | 3,362 | 6,366 | ||||||||||||
| Loss attributable to noncontrolling interests | $ | 3,341 | $ | 6,788 | ||||||||||
___________
(a)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. We owned an 80% controlling interest in the venture.
(b)On November 9, 2021, we acquired the remaining 30% interest in the Ritz-Carlton Fort Lauderdale Venture from an unaffiliated third party, bringing our ownership interest to 100%.
(c)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, 2022 as compared to the same period in 2021, MFFO improved by $33.0 million. Relative to the prior year period, we benefited from significant growth in demand due to an increase in vaccinations and corresponding loosening of government-imposed restrictions on travel and large gatherings relative to the prior year.
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 and proceeds from additional asset sales.
As of May 12, 2022, all of our hotels are open but many are operating at significantly reduced levels of occupancy and staffing. Although results improved relative to 2021, we cannot estimate with certainty when travel demand will fully recover or how new variants of COVID-19 could impact recovery. We have generally seen improving demand at our properties as government-imposed restrictions and limitations on travel and large gatherings have loosened and as the vaccines have 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. Governmental and business efforts to encourage or mandate vaccinations, and public adoption rates of vaccines, impact the recovery from the COVID-19 pandemic and may have disruptive effects on certain segments of the labor market. Individual ability or desire to travel and corporate travel policies will continue to be impacted by the COVID-19 pandemic and affect the recovery of our properties. The ultimate severity and duration of the COVID-19 pandemic and its effects, and the emergence of variants, are uncertain, including whether COVID-19 will become endemic or
WLT 3/31/2022 10-Q – 26
cyclical in nature. Given these uncertainties, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.
As of March 31, 2022, we had cash and cash equivalents of $178.7 million. As of March 31, 2022, the mortgage loans for our Consolidated Hotels had an aggregate principal balance totaling $2.0 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 $25.0 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. We have continued to work with our lenders to address loans with near-term mortgage maturities and have refinanced or extended the maturity date of four Consolidated Hotel mortgage loans, aggregating $285.4 million of indebtedness, during the three months ended March 31, 2022. Of the $2.0 billion aggregate principal balance indebtedness outstanding as of March 31, 2022, approximately $1.1 billion is scheduled to mature during the 12 months after the date of this Report, which included a total of $251.9 million that has been refinanced subsequent to March 31, 2022. 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.
Sources and Uses of Cash During the Period
Operating Activities — For the three months ended March 31, 2022, net cash provided by operating activities was $16.4 million as compared to net cash used in operating activities of $29.5 million for the three months ended March 31, 2021. Relative to the prior year period, we benefited from significant growth in demand due to an increase in vaccinations and corresponding loosening of government-imposed restrictions on travel and large gatherings relative to the prior year.
Investing Activities — During the three months ended March 31, 2022, net cash used in investing activities was $8.0 million primarily as a result of funding $7.9 million for capital expenditures at our Consolidated Hotels.
Financing Activities — Net cash used in financing activities for the three months ended March 31, 2022 was $72.2 million primarily as a result of payments and prepayments of mortgage financing totaling $212.0 million and the redemption of the Series A Preferred Stock of $65.0 million, partially offset by $210.0 million of proceeds from mortgage financing.
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 B Preferred Stock.
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 all accrued dividends on the 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 distribution reinvestment plan.
WLT 3/31/2022 10-Q – 27
Summary of Financing
The table below summarizes our non-recourse debt, net (dollars in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Carrying Value | |||||||||||
Fixed rate (a) | $ | 870,478 | $ | 951,318 | |||||||
Variable rate (a): | |||||||||||
| Amount subject to interest rate caps | 711,793 | 507,919 | |||||||||
| Amount subject to floating interest rate | 196,157 | 317,497 | |||||||||
| Amount subject to interest rate swaps | 182,954 | 182,007 | |||||||||
| 1,090,904 | 1,007,423 | ||||||||||
| $ | 1,961,382 | $ | 1,958,741 | ||||||||
| Percent of Total Debt | |||||||||||
| Fixed rate | 44 | % | 49 | % | |||||||
| Variable rate | 56 | % | 51 | % | |||||||
| 100 | % | 100 | % | ||||||||
| Weighted-Average Interest Rate at End of Period | |||||||||||
| Fixed rate | 4.3 | % | 4.3 | % | |||||||
Variable rate (b) | 4.3 | % | 4.0 | % | |||||||
_________
(a)Aggregate debt balance includes unamortized fair value discount of $6.0 million and $13.4 million as of March 31, 2022 and December 31, 2021, respectively, and unamortized deferred financing costs totaling $10.4 million and $7.6 million as of March 31, 2022 and December 31, 2021, 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, 2022, we have effectively entered into cash management agreements with the lenders on 18 of our 24 Consolidated Hotel 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.
Courtyard Times Square West
The $59.2 million outstanding mortgage loan on Courtyard Times Square West matured on June 1, 2021 and we have not paid off the outstanding principal balance. The loan does not have any cross-default provisions with our other mortgage obligations. We are currently in the process of exploring various options as it relates to this asset, including but not limited to, surrendering the property back to the lender.
Cash Resources
At March 31, 2022, our cash resources consisted of cash and cash equivalents totaling $178.7 million, of which $48.7 million was designated as hotel operating cash and was held at our hotel operating properties.
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Cash Requirements
Our primary cash uses through March 31, 2023 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 and proceeds from additional asset sales. We may satisfy certain debt maturities during this period by turning the properties back to the lenders.
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, 2022 and December 31, 2021, $55.7 million and $58.7 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 $1.3 million is subject to replenishment as of March 31, 2022.
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
WLT 3/31/2022 10-Q – 29
assets, provides a more complete understanding of our performance to investors and to management; and when compared year over year, reflects the impact on our operations from trends in occupancy rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. It should be noted, however, that the property’s asset group’s estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value. While impairment charges are excluded from the calculation of FFO described above due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP measures FFO and MFFO and the adjustments to GAAP in calculating FFO and MFFO.
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,
WLT 3/31/2022 10-Q – 30
equity accounting, and after adjustments for Consolidated and Unconsolidated Hotels, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses that are unrealized and may not ultimately be realized.
Our MFFO calculation complies with the Practice Guideline described above. In calculating MFFO, we exclude acquisition-related expenses, fair value adjustments of derivative financial instruments and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities. We account for certain of our equity investments using the HLBV model which is based on distributable cash as defined in the operating agreement.
Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-traded REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not 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 3/31/2022 10-Q – 31
FFO and MFFO were as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss attributable to Common Stockholders | $ | (40,087) | $ | (75,567) | |||||||
| Adjustments: | |||||||||||
| Depreciation and amortization of real property | 26,085 | 31,920 | |||||||||
| Proportionate share of adjustments for partially-owned entities — FFO adjustments | (7,743) | 479 | |||||||||
| Total adjustments | 18,342 | 32,399 | |||||||||
| FFO attributable to Common Stockholders (as defined by NAREIT) | (21,745) | (43,168) | |||||||||
| Adjustments: | |||||||||||
| Net loss on extinguishment of debt | 13,863 | — | |||||||||
| Amortization of fair value adjustments | 4,478 | 9,723 | |||||||||
| Straight-line and other rent adjustments | 1,728 | 1,336 | |||||||||
Loss (gain) on property-related insurance claims, net (a) | 250 | (1,166) | |||||||||
| Proportionate share of adjustments for partially owned entities — MFFO adjustments | 645 | (458) | |||||||||
| Total adjustments | 20,964 | 9,435 | |||||||||
| MFFO attributable to Common Stockholders | $ | (781) | $ | (33,733) | |||||||
___________
(a)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.
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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 7 for additional information on our interest rate swaps and caps.
As of March 31, 2022, 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 two mortgage loans with an outstanding balance totaling $196.2 million. Our debt obligations are more fully described in Note 8 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, 2022 and excludes deferred financing costs and fair value discounts (in thousands):
| 2022 (Remainder) | 2023 | 2024 | 2025 | 2026 | Total | Fair Value | |||||||||||||||||||||||||||||||||||
| Fixed-rate debt | $ | 452,831 | $ | 422,265 | $ | — | $ | — | $ | — | $ | 875,096 | $ | 875,096 | |||||||||||||||||||||||||||
| Variable-rate debt | $ | 458,134 | $ | 105,199 | $ | 329,910 | $ | 209,417 | $ | — | $ | 1,102,660 | $ | 1,104,658 | |||||||||||||||||||||||||||
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, 2022 by an aggregate increase of $13.3 million or an aggregate decrease of $23.7 million, respectively. Annual interest expense on our variable-rate debt that is subject to an interest rate cap as of March 31, 2022 would increase or decrease by $7.1 million for each respective 1.0% change in annual interest rates.
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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 or submitted 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 principal executive and 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 principal executive and 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, 2022, has concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective as of March 31, 2022 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.
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PART II — OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities.
None.
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Item 6. Exhibits.
The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
| Exhibit No. | Description | Method of Filing | ||||||||||||
| 2.3 | Agreement and Plan of Merger dated as of May 6, 2022 by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP, The Parent Entities Named Herein, Ruby Merger Sub I LLC and Ruby Merger Sub II LP | Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K, filed on May 9, 2022 | ||||||||||||
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||||||||||||
| 32 | 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 | ||||||||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Watermark Lodging Trust, Inc. | |||||||||||
| Date: | May 12, 2022 | ||||||||||
| By: | /s/ Michael G. Medzigian | ||||||||||
| Michael G. Medzigian | |||||||||||
| Chief Executive Officer | |||||||||||
| (Principal Executive and Financial Officer) | |||||||||||
| /s/ Matthew W. Miller | |||||||||||
| Matthew W. Miller | |||||||||||
| Chief Accounting Officer | |||||||||||
| (Principal Accounting Officer) | |||||||||||
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EXHIBIT INDEX
The following exhibits are filed with this Report. Documents other than those designated as being filed herewith are incorporated herein by reference.
| Exhibit No. | Description | Method of Filing | ||||||||||||
| 2.3 | Agreement and Plan of Merger dated as of May 6, 2022 by and among Watermark Lodging Trust, Inc., CWI 2 OP, LP, The Parent Entities Named Herein, Ruby Merger Sub I LLC and Ruby Merger Sub II LP | |||||||||||||
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||||||
| 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 3/31/2022 10-Q – 38