This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. These forward-looking statements are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on management's current expectations and assumptions and are not guarantees of future performance. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risks discussed herein and the risk factors discussed from time to time in our periodic filings with the
Securities and Exchange Commission, including in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021as updated by our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Accordingly, there is no assurance that the Company's expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect events, circumstances or changes in expectations after the date of this report.
Some of the risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements include, among others, the following:
•negative developments in the economy, including, but not limited to, job loss or growth trends, an increase in unemployment or a decrease in corporate earnings and investment; •increased competition in the lodging industry and from alternative lodging channels or third party internet intermediaries in the markets in which we own properties; •failure to effectively execute our long-term business strategy and successfully identify and complete acquisitions and dispositions; •risks and uncertainties affecting hotel management, operations and renovations (including, without limitation, construction delays, increased construction costs, disruption in hotel operations and the risks associated with our management and franchise agreements); •risks associated with the availability and terms of financing and the use of debt to fund acquisitions and renovations or refinance existing indebtedness, including the impact of higher interest rates on the cost and/or availability of financing; •risks associated with our level of indebtedness and our ability to satisfy our obligations under our debt agreements; •risks associated with the lodging industry overall, including, without limitation, decreases in the frequency of travel and increases in operating costs; •risks and uncertainties associated with our obligations under our management agreements; •risks associated with natural disasters and other unforeseen catastrophic events, including the emergence of a pandemic or other widespread health emergency; •the adverse impact of COVID-19 on the
U.S., regional and global economies, travel, the hospitality industry, and on our financial condition and results of operations and our hotels; •costs of compliance with government regulations, including, without limitation, the Americans with Disabilities Act; •potential liability for uninsured losses and environmental contamination; •risks associated with security breaches through cyber-attacks or otherwise, as well as other significant disruptions of our and our hotel managers' information technologies and systems, which support our operations and those of our hotel managers; •risks associated with our potential failure to maintain our qualification as a REIT (as defined below) under the Internal Revenue Code of 1986, as amended (the "Code"); •possible adverse changes in tax and environmental laws; and •risks associated with our dependence on key personnel whose continued service is not guaranteed. Overview
As an owner, rather than an operator, of lodging properties, we receive all of the operating profits or losses generated by our hotels after the payment of fees due to hotel managers and hotel brands, which are calculated based on the revenues and profitability of each hotel. -20- --------------------------------------------------------------------------------
Our strategy is to apply aggressive asset management, prudent financial strategy, and disciplined capital allocation to high quality lodging properties in North American urban and resort markets with superior growth prospects and high barriers-to-entry. Our goal is to deliver long-term stockholder returns that exceed those generated by our peers through a combination of dividends and enduring capital appreciation. Our primary business is to acquire, own, asset manage and renovate premium hotel properties in
the United States. Our portfolio is concentrated in major urban market cities and destination resort locations. Each of our hotels is managed by a third party-either an independent operator or a brand operator, such as Marriott International, Inc. We critically evaluate each of our hotels to ensure that we own a portfolio of hotels that conforms to our vision, supports our mission and corresponds with our strategy. On a regular basis, we analyze our portfolio to identify opportunities to invest capital in certain projects or market non-core assets for sale in order to increase our portfolio quality. We are committed to a conservative capital structure with prudent leverage. We regularly assess the availability and affordability of capital in order to maximize stockholder value and minimize enterprise risk. In addition, we are committed to following sound corporate governance practices and to being open and transparent in our communications with our stockholders.
Key financial position and operational performance indicators
We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with
U.S.Generally Accepted Accounting Principles (" U.S.GAAP"), as well as other financial information that is not prepared in accordance with U.S.GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:
•Percentage of occupancy;
•Average daily rate (or ADR);
• Income by
•Earnings Before Interest, Income Taxes, Depreciation and Amortization (or EBITDA), Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate (or EBITDAre), and Adjusted EBITDA; and
•Funds From Operations (or FFO) and Adjusted FFO.
Occupancy, 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 percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 67% of our total revenues for the three months ended
March 31, 2022and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms. Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as U.S.economic conditions generally, regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, increased use of lodging alternatives, new hotel construction and the pricing strategies of our competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of our hotels' global brands.
We also use EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO as measures of our business financial performance. See “Non-GAAP Financial Measures”.
The novel coronavirus (COVID-19) has had and continues to have a significant effect on our industry in general and our business in particular. The demand for lodging materially decreased beginning in
March 2020and remains at historically low -21- --------------------------------------------------------------------------------
levels. Three of our hotels suspended operations for a period of time during the three months ended
March 31, 2021. All of our hotels were open during the three months ended March 31, 2022. The comparability of our results of operations for the three months ended March 31, 2022to the three months ended March 31, 2021has been impacted by the effects of the pandemic. COVID-19 case counts increased early in the first quarter of 2022 following the emergence of the Omicron variant, but quickly decreased during the latter half of the quarter. Demand at our leisure-focused hotels improved in 2021 and 2022 to date. Demand at our other hotels remains at historically low levels. The COVID-19 pandemic has had a significant negative impact on our operations and financial results and is expected to continue to have a negative impact on our results of operations, financial position and cash flows for the remainder of 2022. Our portfolio's operating results have improved during the three months ended March 31, 2022relative to the three months ended March 31, 2021. As the recovery continues, we expect that the pace will vary from market to market and may be uneven in nature. Although there are signs of a a robust recovery in business travel in 2022 to date relative to 2021, there remains significant uncertainty regarding the future pace of recovery and whether and when business travel and larger group meetings will return to pre-pandemic levels. The emergence of new variant strains of COVID-19 has the potential to slow or reverse positive trends expected in 2022 and beyond.
The following tables present certain operating information for the three months ended
Table of Contents % Change Number of from 2021 Property Location Rooms Occupancy (%) ADR ($) RevPAR ($) RevPAR(1)
Chicago Marriott DowntownMagnificent Mile (2) Chicago, Illinois 1,200 27.4 % $ 168.57 $ 46.13N/A Westin Boston Seaport District Boston, Massachusetts 793 53.7 % 194.05 104.27 482.3 % Salt Lake City Marriott Downtownat City Creek Salt Lake City, Utah 510 49.0 % 176.07 86.21 161.2 % Worthington Renaissance Fort Worth Hotel Fort Worth, Texas 504 64.3 % 194.19 124.90 162.7 % Westin San Diego Bayview San Diego, California 436 53.0 % 175.00 92.81 198.8 %
433 87.7 % 336.96 295.38 106.9 % Westin Washington, D.C. City Center Washington, D.C. 410 35.2 % 175.98 62.02 368.8 % Hilton Boston Downtown/Faneuil Hall Boston, Massachusetts 403 63.0 % 174.41 109.95 386.4 % The Hythe Vail Vail, Colorado 344 67.0 % 663.43 444.73 61.9 % Courtyard New York Manhattan/Midtown East New York, New York 321 63.6 % 199.77 127.03 50.3 % Atlanta Marriott Alpharetta Atlanta, Georgia 318 41.6 % 141.87 59.03 173.1 % The Gwen Hotel Chicago, Illinois 311 58.2 % 213.18 124.11 176.8 %
Hilton Garden Inn New York/TimesSquare Central (2) New York, New York 282 77.8 % 162.46 126.40 N/A Embassy Suites by Hilton Bethesda Bethesda, Maryland 272 26.4 % 113.40 29.97 53.8 % Hilton Burlington Lake Champlain Burlington, Vermont 258 58.6 % 157.63 92.30 145.3 % Hotel Palomar Phoenix Phoenix, Arizona 242 76.8 % 247.83 190.39 158.6 % Bourbon Orleans Hotel New Orleans, Louisiana 220 49.6 % 244.94 121.61 N/A Henderson Beach Resort Destin, Florida 216 44.3 % 411.26 182.13 22.1 % Hotel Clio Denver, Colorado 199 62.4 % 258.96 161.68 104.3 % Courtyard New York Manhattan/Fifth Avenue (2) New York, New York 189 82.9 % 161.28 133.69 N/A Margaritaville Beach House Key West Key West, Florida 186 92.0 % 579.43 532.94 84.5 % The Lodge at Sonoma Resort Sonoma, California 182 48.0 % 367.07 176.30 194.7 % Courtyard Denver Downtown Denver, Colorado 177 60.0 % 151.12 90.65 169.8 % Renaissance Charleston Historic District Hotel Charleston, South Carolina 167 80.3 % 311.69 250.35 105.0 % Kimpton Shorebreak Resort Huntington Beach, California 157 71.8 % 297.03 213.36 114.0 % Cavallo Point, The Lodgeat the Golden Gate Sausalito, California 142 44.6 % 683.10 304.93 188.2 % Havana Cabana Key West Key West, Florida 106 93.8 % 411.65 386.07 62.6 % Tranquility Bay Beachfront Resort Marathon, Florida 103 83.3 % 947.75 789.49 29.4 % Hotel Emblem San Francisco San Francisco, California 96 53.4 % 189.44 101.10 418.1 % L'Auberge de Sedona Sedona, Arizona 88 68.5 % 1,046.12 716.30 23.8 %
82 46.5 % 408.90 189.99 13.5 % Orchards Inn Sedona Sedona, Arizona 70 63.7 % 309.21 196.91 24.9 % Henderson Park Inn Destin, Florida 37 60.6 % 511.93 310.39 38.4 % TOTAL/WEIGHTED AVERAGE 9,454 55.8 %
$ 278.57 $ 155.43122.4 % ____________________ (1)The percentage change from 2021 RevPAR reflects the comparable period in 2021 to our 2022 ownership period for our 2022 and 2021 acquisitions. (2)The hotel was closed for all or a portion of the three months ended March 31, 2021. Results of Operations Our results of operations for the three months ended March 31, 2022improved relative to the three months ended March 31, 2021as all of our hotels were open for the entire quarter, government mandates eased, vaccines were distributed, and travel demand increased.
Comparison of the three months ended
In response to the COVID-19 pandemic, operations were suspended at three of our hotels for all or a portion of the three months ended
March 31, 2021. All of our hotels were open during the three months ended March 31, 2022.
Revenue. Revenue consists primarily of rooms, food and beverage and other operating revenue from our hotels, as follows (in millions of dollars):
Table of Contents Three Months Ended March 31, 2022 2021 % Change Rooms $ 132.2
$ 50.4162.3 % Food and beverage 45.7 13.9 228.8 % Other 18.9 8.6 119.8 % Total revenues $ 196.8 $ 72.9170.0 %
Our total revenues have increased
The following are key hotel operating statistics for the three months ended
March 31, 2022and 2021. The 2021 operating statistics reflect the period in 2021 comparable to our ownership period in 2022 for hotels acquired in 2021 and 2022. Three Months Ended March 31, 2022 2021 % Change Occupancy % 55.8 % 29.6 % 26.2 % ADR $ 278.57 $ 236.1018.0 % RevPAR $ 155.43 $ 69.88122.4 % Rooms revenues increased by $81.8 millionfrom the three months ended March 31, 2021to the three months ended March 31, 2022primarily due to increases in occupancy and ADR as our hotels continued to recover from the COVID-19 pandemic. Additionally, the acquisitions of the Bourbon Orleans Hoteland Henderson Park Innin July 2021, Henderson Beach Resortin December 2021and Tranquility Bay Beachfront Resortin January 2022(collectively, our "2021/2022 acquisitions") contributed to the increase in rooms revenue by $13.9 million. Food and beverage revenues increased $31.8 millionfrom the three months ended March 31, 2021to the three months ended March 31, 2022primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic. Additionally, our 2021/2022 acquisitions contributed to the increase in food and beverage revenues by $3.5 million. Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased by $10.3 millionfrom the three months ended March 31, 2021to the three months ended March 31, 2022primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic, as well as increases in attrition and cancellation fees. Additionally, our 2021/2022 acquisitions contributed to the increase in other revenues by $2.0 million.
Hotel running costs. Operating expenses were broken down as follows (in millions of dollars):
Table of Contents Three Months Ended March 31, 2022 2021 % Change Rooms departmental expenses $ 33.8
$ 13.8144.9 % Food and beverage departmental expenses 33.2 11.6 186.2 Other departmental expenses 4.8 2.0 140.0 General and administrative 16.8 9.9 69.7 Utilities 5.6 4.1 36.6 Repairs and maintenance 8.8 5.8 51.7 Sales and marketing 12.4 5.8 113.8 Franchise fees 5.8 2.4 141.7 Base management fees 3.6 1.1 227.3 Incentive management fees 0.4 - 100.0 Property taxes 10.8 14.1 (23.4) Other fixed charges 8.9 3.8 134.2 Severance costs (0.5) 0.1 (600.0) Professional fees and pre-opening costs related to Frenchman's Reef - 0.6 (100.0) Lease expense 3.0 2.8 7.1 Total hotel operating expenses $ 147.4 $ 77.989.2 % Our hotel operating expenses increased $69.5 millionfrom the three months ended March 31, 2021to the three months ended March 31, 2022primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic and other related operating costs stemming from the timing and extent of the COVID-19 pandemic. Additionally, our 2021/2022 acquisitions contributed to the increase in hotel operating expenses by $15.0 million. The increase in hotel operating expenses was partially offset by a $3.3 milliondecrease due to our dispositions of Frenchman's Reef & Morning Star Marriott Beach Resortin April 2021and The Lexington Hotelin June 2021. Depreciation and amortization. Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense decreased $0.3 million, or 1.1%, from the three months ended March 31, 2021primarily due to the sale of The Lexington Hotelin June 2021. Impairment losses. During the three months ended March 31, 2022, we recorded an impairment loss of $2.8 millionon the right-to-manage intangible asset related to the rental management agreements at Tranquility Bay Beachfront Resortupon entering into purchase agreements during the three months ended March 31, 2022to acquire four third-party owned units. During the three months ended March 31, 2021, we recorded impairment losses of $122.6 millionrelated to the dispositions of The Lexington Hoteland Frenchman's Reef & Morning Star Marriott Beach Resort. Corporate expenses. Corporate expenses principally consist of employee-related costs, including base payroll, bonus, restricted stock and severance. Corporate expenses also include corporate operating costs, professional fees and directors' fees. Our corporate expenses decreased $1.2 million, or 15.7%, from $7.2 millionfor the three months ended March 31, 2021to $6.0 millionfor the three months ended March 31, 2022primarily due to the reversal of compensation expense during the three months ended March 31, 2022resulting from the forfeiture of long-term incentive awards related to the resignation of our former Executive Vice President and Chief Operating Officer. Business interruption insurance income. During the three months ended March 31, 2022, we recognized $0.5 millionof business interruption insurance income related to the impact of the Caldor wildfire at The Landing Lake Tahoe Resort & Spa, which caused the hotel to be closed for 21 days in 2021. We did not recognize any business interruption insurance income during the three months ended March 31, 2021. Interest expense. Our interest expense was $4.1 millionand $8.5 millionfor the three months ended March 31, 2022and 2021, respectively, and was comprised of the following (in millions): -25- --------------------------------------------------------------------------------
Table of Contents Three Months Ended March 31, 2022 2021 Mortgage debt interest $ 6.0
$ 6.3Unsecured term loan interest 3.6 3.6 Credit facility interest and unused fees 1.3
Amortization of debt issuance costs and debt premium 0.7
Interest rate swap mark-to-market and net settlements (7.5) (2.7) $ 4.1
The decrease in interest expense is primarily related to the mark-to-market of our interest rate swaps.
Cash and capital resources
Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service and operating expenses, ground lease payments (see Note 4 to the accompanying consolidated financial statements), capital expenditures directly associated with our hotels and distributions to our preferred stockholders, as well as the maturities of four mortgage loans in the next 12 months. We have suspended our quarterly common stock dividend. We currently expect that our existing cash balances and available capacity on our senior unsecured credit facility will be sufficient to meet our short-term liquidity requirements. Our mortgage debt agreements contain "cash trap" provisions that are triggered when the hotel's operating results fall below a certain debt service coverage ratio. When these cash trap provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio is reached and maintained for a certain period of time. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt. As of
March 31, 2022, the debt service coverage ratios or debt yields for all of our mortgage loans, except for the mortgage loan secured by the Salt Lake City Marriott Downtownat City Creek, were below the minimum thresholds such that the cash trap provision of each respective loan was triggered. We do not expect that such cash traps will affect our ability to satisfy our short-term liquidity requirements. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, redemption of limited operating partnership units ("common OP units"), ground lease payments, and making distributions to our common and preferred stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including common OP units, and/or debt securities and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about the Company.
Our funding strategy
Since our formation in 2004, we have been committed to a conservative capital structure with prudent leverage. Our outstanding debt consists of fixed interest rate mortgage debt, unsecured term loans and borrowings on our senior unsecured credit facility. We have a preference to maintain a significant portion of our portfolio as unencumbered assets in order to provide balance sheet flexibility. We expect that our strategy will enable us to maintain a balance sheet with an appropriate amount of debt throughout all phases of the lodging cycle. We believe that it is prudent to reduce the inherent risk of highly cyclical lodging fundamentals through a low leveraged capital structure. We prefer a relatively simple but efficient capital structure. We generally structure our hotel acquisitions to be straightforward and to fit within our capital structure; however, we will consider a more complex transaction, such as the issuance of common OP units in connection with the acquisition of
Cavallo Point, The Lodgeat the Golden Gate, if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available. -26- --------------------------------------------------------------------------------
We believe that we maintain a reasonable amount of debt. As of
March 31, 2022, we had $1.2 billionof debt outstanding with a weighted average interest rate of 3.78% and a weighted average maturity date of approximately 2.2 years. We have four mortgage debt maturities within 12 months of May 6, 2022, and 25 of our 33 hotels unencumbered by mortgage debt. We remain committed to our core strategy of prudent leverage.
Information on our financing activities is available in note 8 of the accompanying consolidated financial statements.
August 2021, our board of directors approved an "at-the-market" equity offering program (the "ATM Program"), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200.0 million. We have not sold any shares under the ATM Program.
Other than borrowings under our senior unsecured credit facility, discussed below, we do not use short-term borrowings to meet our liquidity needs.
Senior unsecured credit facility and unsecured term loans
We are party to a
$400 millionsenior unsecured credit facility expiring in July 2023, a $350 millionunsecured term loan maturing in July 2024and a $50 millionunsecured term loan maturing in October 2023. The maturity date for the senior unsecured credit facility may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions. As of March 31, 2022, we had $200.0 millionof borrowings outstanding under our senior unsecured credit facility. On each of June 9, 2020, August 14, 2020, January 20, 2021and February 4, 2022, we executed amendments to the credit agreements for our corporate credit facility and term loans. These amendments provided for a waiver of the quarterly tested financial covenants beginning with the second quarter of 2020 through the first quarter of 2022 and allow for certain other modifications to the covenants thereafter through the second quarter of 2023. As of March 31, 2022, we were in compliance with all of the original financial covenants under the credit agreements. We expect to exit the covenant waiver restrictions as of the second quarter of 2022.
Additional information about the credit agreements, including a summary of material covenants, a description of the restrictions imposed by the amendments and their impacts on our liquidity, our sources of capital and our ability to incur additional debt, can be found at note 8 of the attached annex. consolidated financial statements.
Sources and uses of species
We expect that our principal sources of cash will include one or more of the following: net cash flow from hotel operations, sales of our equity and debt securities, debt financings and proceeds from hotel dispositions. Our principal uses of cash are for potential acquisitions of hotel properties, debt service and maturities, share repurchases, capital expenditures, operating costs, ground lease payments, corporate expenses, and any distributions to holders of common stock, common units and preferred stock. As of
March 31, 2022, we had $41.6 millionof unrestricted cash, $38.9 millionof restricted cash and $200.0 millionof outstanding borrowings on our senior unsecured credit facility. Our net cash used in operations was $13.2 millionfor the three months ended March 31, 2022. Our cash from operations generally consists of the net cash flow from hotel operations, offset by cash paid for corporate expenses and other working capital changes. Our net cash used in investing activities was $110.9 millionfor the three months ended March 31, 2022, which consisted of $11.6 millionof capital expenditures at our operating hotels, $64.1 millionpaid for the acquisition of Tranquility Bay Beachfront Resortand the subsequent purchase of two third-party owned units at the resort, and $36.2 millionpaid in purchase deposits for the acquisition of the Kimpton Fort Lauderdale Beach Resort, which closed on April 1, 2022, offset by $1.0 millionof deferred key money received for the Henderson Beach Resort. Our net cash provided by financing activities was $102.7 millionfor the three months ended March 31, 2022, which consisted of draws of $110.0 millionon our senior unsecured credit facility, offset by $2.5 millionof distributions paid to holders of preferred stock, $3.9 millionof scheduled mortgage debt principal payments, $0.1 millionpaid for financing costs for the credit agreements, and $0.8 millionpaid to repurchase shares for the payment of tax withholding obligations and for accrued dividends upon the vesting of restricted stock. -27- --------------------------------------------------------------------------------
We currently anticipate our significant sources of cash for the remainder of the year ending
December 31, 2022will be the net cash flow from hotel operations as the lodging disruptions from COVID-19 continue to subside and draws on our senior unsecured credit facility. We expect our estimated uses of cash for the remainder of the year ending December 31, 2022will be scheduled debt service payments, payments of outstanding borrowings on our unsecured credit facility, capital expenditures, potential funding of hotel working capital requirements, distributions to preferred stockholders, corporate expenses and potential hotel acquisitions. Additionally, we expect uses of cash in 2023 will include our scheduled debt maturities.
We intend to distribute to our stockholders dividends at least equal to our REIT taxable income to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our TRS, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least: •90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, plus •90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus •any excess non-cash income. The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including our financial performance, restrictions under applicable law and our current and future loan agreements, our debt service requirements, our capital expenditure requirements, the requirements for qualification as a REIT under the Code and other factors that our board of directors may deem relevant from time to time. Our board of directors suspended our quarterly common dividend commencing with the first quarter dividend that would have been paid in
April 2020. The payment of future dividends is determined by our board of directors after considering our projected taxable income, obligations under our financing agreements, expected capital requirements, and risks affecting our business. We currently expect to recommence the quarterly common dividend beginning in the third quarter of 2022.
We paid the following dividends per share to holders of our Series A Preferred Shares in 2022 and up to the date of this report:
Dividend Payment Date Record Date per Share March 31, 2022 March 18, 2022
The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement funds to cover, among other things, the cost of replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. Contributions to the property improvement fund are calculated as a percentage of hotel revenues. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement fund under the applicable management or franchise agreement. As of
March 31, 2022, we have set aside $26.0 millionfor capital projects in property improvement funds, which are included in restricted cash.
In 2022, we expect to spend approximately
•JW Marriott Denver Cherry Creek: We completed renovations in
March 2022to rebrand the hotel as Hotel Clio, a Luxury Collection Hotel. •Kimpton Hotel Palomar Phoenix: We plan to complete a comprehensive rebranding and repositioning this year of the rooftop bar and pool at the hotel. The new rooftop will be named The Eden and offer an extraordinary food and beverage experience. •Hilton Boston Downtown/Faneuil Hall: We expect to commence a comprehensive renovation in the fourth quarter of 2022 to reposition the hotel as an experiential lifestyle property to be completed in mid-2023. -28- --------------------------------------------------------------------------------
•Orchards Inn Sedona: We expect to commence the first phase of an upgrade renovation of the resort in late-2022. The two phase renovation, which is expected to be completed in 2023, will reposition the hotel as The Cliffs at L'Auberge. •Hilton Burlington
Lake Champlain: We are working with Hilton Worldwide to potentially rebrand the hotel as a Curio Collection. The repositioning is expected to be completed in early 2023 and include a new restaurant concept by a local renowned chef.
We have invested approx.
Non-GAAP Financial Measures
We use the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with
U.S.GAAP. EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company.
Use and Limitations of Non-GAAP Financial Measures
Our management and Board of Directors use EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO to evaluate the performance of our hotels and to facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital intensive companies. The use of these non-GAAP financial measures has certain limitations. These non-GAAP financial measures as presented by us, may not be comparable to non-GAAP financial measures as calculated by other real estate companies. These measures do not reflect certain expenses or expenditures that we incurred and will incur, such as depreciation, interest and capital expenditures. We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparable
U.S.GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with U.S.GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by U.S.GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our U.S.GAAP results and the reconciliations to the corresponding U.S.GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.
EBITDA, EBITDAre and FFO
EBITDA represents net income (calculated in accordance with
U.S.GAAP) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. The Company computes EBITDAre in accordance with the National Association of Real Estate Investment Trusts("Nareit") guidelines, as defined in its September 2017white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate." EBITDAre represents net income (calculated in accordance with U.S.GAAP) adjusted for: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization; (4) gains or losses on the disposition of depreciated property, including gains or losses on change of control; (5) impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate; and (6) adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates. We believe EBITDA and EBITDAre are useful to an investor in evaluating our operating performance because they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization, and in the case of EBITDAre, impairment and gains or losses on dispositions of depreciated property) from our operating results. In addition, covenants included in our debt agreements use EBITDA as a measure of financial compliance. We also use EBITDA and EBITDAre as measures in determining the value of hotel acquisitions and dispositions. -29- --------------------------------------------------------------------------------
The Company computes FFO in accordance with standards established by the Nareit, which defines FFO as net income determined in accordance with
U.S.GAAP, excluding gains or losses from sales of properties and impairment losses, plus real estate related depreciation and amortization. The Company believes that the presentation of FFO provides useful information to investors regarding its operating performance because it is a measure of the Company's operations without regard to specified non-cash items, such as real estate related depreciation and amortization and gains or losses on the sale of assets. The Company also uses FFO as one measure in assessing its operating results.
EBITDAre and FFO adjustments
We adjust EBITDAre and FFO when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA and Adjusted FFO, when combined with
U.S.GAAP net income, EBITDAre and FFO, is beneficial to an investor's complete understanding of our consolidated operating performance. We adjust EBITDAre and FFO for the following items: •Non-Cash Lease Expense and Other Amortization: We exclude the non-cash expense incurred from the straight line recognition of expense from our ground leases and other contractual obligations and the non-cash amortization of our favorable and unfavorable contracts, originally recorded in conjunction with certain hotel acquisitions. We exclude these non-cash items because they do not reflect the actual cash amounts due to the respective lessors in the current period and they are of lesser significance in evaluating our actual performance for that period. •Cumulative Effect of a Change in Accounting Principle: The Financial Accounting Standards Boardpromulgates new accounting standards that require or permit the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude the effect of these adjustments, which include the accounting impact from prior periods, because they do not reflect the Company's actual underlying performance for the current period. •Gains or Losses from Early Extinguishment of Debt: We exclude the effect of gains or losses recorded on the early extinguishment of debt because these gains or losses result from transaction activity related to the Company's capital structure that we believe are not indicative of the ongoing operating performance of the Company or our hotels. •Hotel Acquisition Costs: We exclude hotel acquisition costs expensed during the period because we believe these transaction costs are not reflective of the ongoing performance of the Company or our hotels. •Severance Costs: We exclude corporate severance costs, or reversals thereof, incurred with the termination of corporate-level employees and severance costs incurred at our hotels related to lease terminations or structured severance programs because we believe these costs do not reflect the ongoing performance of the Company or our hotels. •Hotel Manager Transition Items: We exclude the transition items associated with a change in hotel manager because we believe these items do not reflect the ongoing performance of the Company or our hotels. •Other Items: From time to time we incur costs or realize gains that we consider outside the ordinary course of business and that we do not believe reflect the ongoing performance of the Company or our hotels. Such items may include, but are not limited to the following: pre-opening costs incurred with newly developed hotels; lease preparation costs incurred to prepare vacant space for marketing; management or franchise contract termination fees; gains or losses from legal settlements; costs incurred related to natural disasters; and gains on property insurance claim settlements, other than income related to business interruption insurance.
In addition, to derive adjusted FFOs, we exclude any unrealized fair value adjustments to interest rate swaps. We exclude these non-cash amounts as they do not reflect the underlying performance of the Company.
The following table is a reconciliation of our
Table of Contents Three Months Ended March 31, 2022 2021 Net income (loss)
$ 10,060 $ (171,567)Interest expense 4,119 8,484 Income tax (benefit) expense (54) 1,613 Real estate related depreciation and amortization 26,655 26,962 EBITDA 40,780 (134,508) Impairment losses 2,843 122,552 EBITDAre 43,623 (11,956) Non-cash lease expense and other amortization 1,568 1,672
Professional fees and pre-opening costs related to Frenchman’s Reef (1)
- 575 Hotel manager transition items 249 128 Severance costs (2) (532) 10 Adjusted EBITDA
$ 44,908 $ (9,571)____________________
(1) Represents pre-opening costs and professional fees related to the reopening of
Frenchman’s Reef, as well as legal and other fees incurred at Frenchman’s Reef
following Hurricane Irma that were not covered by insurance.
(2) Includes severance pay incurred following the elimination of positions at our
hotels, which are classified under other hotel expenses on the
state of operations.
The following table is a reconciliation of our
U.S.GAAP net income to FFO and Adjusted FFO (in thousands): Three Months Ended March 31, 2022 2021 Net income (loss) $ 10,060 $ (171,567)Real estate related depreciation and amortization 26,655 26,962 Impairment losses 2,843 122,552 FFO 39,558 (22,053) Distributions to preferred stockholders (2,454) (2,454) FFO available to common stock and unit holders 37,104 (24,507) Non-cash lease expense and other amortization 1,568 1,672
Professional fees and pre-opening costs related to Frenchman’s Reef (1)
- 575 Hotel manager transition items 249 128 Severance costs (2) (532) 10 Fair value adjustments to interest rate swaps (7,502) (2,731)
Adjusted FFO available to common stock and unitholders
(1) Represents pre-opening costs and professional fees related to the reopening of
Frenchman’s Reef, as well as legal and other fees incurred at Frenchman’s Reef
following Hurricane Irma that were not covered by insurance.
(2) Includes severance pay incurred following the elimination of positions at our
hotels, which are classified under other hotel expenses on the
state of operations.
Critical accounting estimates and policies
Our unaudited consolidated financial statements include the accounts of
DiamondRock Hospitality Companyand all consolidated subsidiaries. The preparation of financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future -31- --------------------------------------------------------------------------------
uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2021. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates: Investment in Hotels Investment purchases of hotel properties, land, land improvements, building and furniture, fixtures and equipment, lease assets and liabilities, and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based upon total accumulated cost of the acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost. Identifiable intangible assets are typically related to contracts, including ground lease agreements and hotel management agreements, which are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates for corresponding contracts. Contracts acquired that are at market do not have significant value. We enter into a hotel management agreement at the time of acquisition and such agreements are generally based on market terms. Intangible assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired. We review our investments in hotels for impairment whenever events or changes in circumstances indicate that the carrying amount of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform a review include, but are not limited to, adverse changes in the demand for lodging at our properties, current or projected losses from operations, and an expectation that the property is more likely than not to be sold significantly before the end of its previously estimated useful life. If such events or circumstances are identified, management performs an analysis to compare the estimated undiscounted future cash flows from operations and the net proceeds from the ultimate disposition of a hotel to the carrying amount of the asset. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotels' estimated fair value is recorded and an impairment loss is recognized. The fair value is determined through various valuation techniques, including discounted cash flow models with estimated discount and terminal capitalization rates, comparable market transactions, third-party appraisals, the net sales proceeds from pending offers, or from transactions that closed subsequent to the end of the reporting period. Inflation Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures or other factors may limit the ability of our management companies to raise room rates. Inflation may also affect our expenses and cost of capital improvements, including, without limitation, by increasing the costs of labor, employee-related benefits, food, commodities and other materials, taxes, property and casualty insurance and utilities.
The periods during which our hotels experience higher revenues vary from property to property, depending principally upon location and the customer base served. Accordingly, we expect some seasonality in our business. Volatility in our financial performance from the seasonality of the lodging industry could adversely affect our financial condition and results of operations.
New accounting statements not yet implemented
See Note 2 to the accompanying consolidated financial statements for additional information regarding recently issued accounting pronouncements.
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