# DiamondRock Hospitality Co (DRH) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from DiamondRock Hospitality Co's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1298946/000129894624000011/drh-20231231.htm Accession: 0001298946-24-000011 Filing date: 2024-02-28 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/DRH/ All MD&A years: /company/DRH/mda/ Previous year: /company/DRH/mda/fy2022/ (FY 2022) Next year: /company/DRH/mda/fy2024/ (FY 2024) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements about our business. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in "Special Note About Forward-Looking Statements" and "Risk Factors" contained in this Annual Report on Form 10-K and in our other reports that we file from time to time with the SEC. Overview DiamondRock Hospitality Company (the “Company” or “we”) is a lodging-focused real estate company that owns a portfolio of premium hotels and resorts. As of December 31, 2023, we owned 36 hotels with 9,746 rooms located in 25 different markets in the United States. The markets that we target are those that we believe align with our strategic objectives, which include investing in assets in destination markets with constrained supply trends, those that provide geographic diversity relative to our existing portfolio, and those markets that are considered to have high growth potential. Our hotels are concentrated in major urban markets and in destination resort locations and more than 60% of our hotels are operated under a brand owned by one of the leading global lodging brand companies (Marriott International, Inc., Hilton Worldwide, or IHG Hotels & Resorts). We are an owner, as opposed to an operator, of the hotels in our portfolio. As an owner, we receive all of the operating profits or losses generated by our hotels after we pay fees to the hotel managers and hotel brands, which are based on the revenues and profitability of the hotels. We are a real estate investment trust ("REIT") for United States ("U.S.") federal income tax purposes. We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, DiamondRock Hospitality Limited Partnership, or subsidiaries of our operating partnership. The Company is the sole general partner of our operating partnership and owns 99.7% of the limited partnership units (“common OP units”) of our operating partnership as of December 31, 2023. The remaining 0.3% of the common OP units are held by third parties and executive officers of the Company. See Note 9 for additional disclosures related to common OP units. Key Indicators of Financial Condition and Operating Performance 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 -46- Table of Contents 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: •Occupancy percentage; •Average Daily Rate (“ADR”); •Rooms Revenue per Available Room (“RevPAR”); •Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate (“EBITDAre”), Adjusted EBITDA, and Hotel Adjusted EBITDA; and •Funds From Operations (“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 year ended December 31, 2023 and 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, inflation, interest rates, 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, Hotel Adjusted EBTIDA, FFO and Adjusted FFO as measures of the financial performance of our business. See “Non-GAAP Financial Measures” for further discussion on these financial measures. Our Hotels The following table sets forth certain operating information for the year ended December 31, 2023 for each of the hotels we owned during 2023. -47- Table of Contents [[GREPCENT_TABLE]] [["Property","","Location","","Number of Rooms","","Occupancy (%)","","ADR ($)","","RevPAR($)","","% Changefrom 2022 RevPAR(1)"],["Chicago Marriott Downtown Magnificent Mile","","Chicago, Illinois","","1,200","","","59.5","%","","$","246.73","","","$","146.76","","","11.0","%"],["Westin Boston Seaport District","","Boston, Massachusetts","","793","","","81.9","%","","246.93","","","202.17","","","11.6","%"],["Salt Lake City Marriott Downtown at City Creek","","Salt Lake City, Utah","","510","","","62.6","%","","186.86","","","116.96","","","11.7","%"],["Worthington Renaissance Fort Worth Hotel","","Fort Worth, Texas","","504","","","73.3","%","","197.52","","","144.86","","","11.5","%"],["Westin San Diego Bayview","","San Diego, California","","436","","","76.1","%","","217.02","","","165.18","","","12.5","%"],["Westin Fort Lauderdale Beach Resort","","Fort Lauderdale, Florida","","433","","","74.2","%","","264.71","","","196.48","","","(3.8)","%"],["Westin Washington D.C. City Center","","Washington, D.C.","","410","","","73.0","%","","219.08","","","159.99","","","24.1","%"],["The Dagny Boston (formerly Hilton Boston Downtown)","","Boston, Massachusetts","","403","","","77.8","%","","278.65","","","216.90","","","(4.8)","%"],["The Hythe Vail","","Vail, Colorado","","344","","","56.4","%","","436.67","","","246.16","","","7.3","%"],["Courtyard New York Manhattan/Midtown East","","New York, New York","","321","","","90.9","%","","342.30","","","311.13","","","13.1","%"],["Atlanta Marriott Alpharetta","","Atlanta, Georgia","","318","","","65.7","%","","155.55","","","102.21","","","21.4","%"],["The Gwen","","Chicago, Illinois","","311","","","74.5","%","","297.18","","","221.33","","","1.7","%"],["Hilton Garden Inn New York/Times Square Central","","New York, New York","","282","","","91.4","%","","275.67","","","251.93","","","(2.3)","%"],["Embassy Suites by Hilton Bethesda","","Bethesda, Maryland","","272","","","71.0","%","","163.92","","","116.45","","","55.2","%"],["Hilton Burlington Lake Champlain","","Burlington, Vermont","","258","","","75.7","%","","248.79","","","188.22","","","3.9","%"],["Henderson Beach Resort","","Destin, Florida","","255","","","55.4","%","","432.60","","","239.49","","","(18.2)","%"],["Kimpton Hotel Palomar Phoenix","","Phoenix, Arizona","","242","","","76.0","%","","222.03","","","168.84","","","16.1","%"],["Bourbon Orleans Hotel","","New Orleans, Louisiana","","220","","","75.6","%","","241.00","","","182.23","","","14.7","%"],["Hotel Clio","","Denver, Colorado","","199","","","71.9","%","","313.75","","","225.52","","","6.4","%"],["Courtyard New York Manhattan/Fifth Avenue","","New York, New York","","189","","","95.3","%","","289.73","","","276.15","","","6.7","%"],["Margaritaville Beach House Key West","","Key West, Florida","","186","","","82.7","%","","398.18","","","329.19","","","(8.3)","%"],["The Lodge at Sonoma Resort","","Sonoma, California","","182","","","60.2","%","","451.90","","","272.13","","","(6.0)","%"],["Courtyard Denver Downtown","","Denver, Colorado","","177","","","75.2","%","","216.78","","","163.04","","","7.4","%"],["The Lindy Renaissance Charleston Hotel","","Charleston, South Carolina","","167","","","88.7","%","","347.26","","","307.88","","","0.2","%"],["Kimpton Shorebreak Huntington Beach Resort","","Huntington Beach, California","","157","","","81.9","%","","322.69","","","264.35","","","(5.1)","%"],["Cavallo Point, The Lodge at the Golden Gate","","Sausalito, California","","142","","","55.4","%","","591.89","","","327.66","","","(8.5)","%"],["Chico Hot Springs Resort & Day Spa","","Pray, Montana","","117","","","67.0","%","","183.46","","","122.97","","","5.1","%"],["Havana Cabana Key West","","Key West, Florida","","106","","","83.2","%","","300.60","","","250.01","","","(10.4)","%"],["Tranquility Bay Beachfront Resort","","Marathon, Florida","","103","","","76.8","%","","630.39","","","484.26","","","(11.4)","%"],["Hotel Emblem San Francisco","","San Francisco, California","","96","","","65.8","%","","234.34","","","154.14","","","(4.9)","%"],["Kimpton Shorebreak Fort Lauderdale Beach Resort","","Fort Lauderdale, Florida","","96","","","67.7","%","","211.05","","","142.94","","","(6.0)","%"],["L'Auberge de Sedona","","Sedona, Arizona","","88","","","62.8","%","","926.89","","","581.76","","","(18.2)","%"],["The Landing Lake Tahoe Resort & Spa","","South Lake Tahoe, California","","82","","","51.4","%","","448.48","","","230.43","","","(7.7)","%"],["Orchards Inn Sedona","","Sedona, Arizona","","70","","","59.9","%","","293.83","","","176.08","","","(12.8)","%"],["Lake Austin Spa Resort","","Austin, Texas","","40","","","58.5","%","","1,065.76","","","623.11","","","(17.1)","%"],["Henderson Park Inn","","Destin, Florida","","37","","","68.9","%","","595.38","","","410.13","","","(12.7)","%"],["TOTAL/WEIGHTED AVERAGE","","","","9,746","","","72.1","%","","$","282.11","","","$","203.32","","","2.9","%"]] [[/GREPCENT_TABLE]] ________________ (1)The percentage change from 2022 RevPAR reflects the comparable period in 2022 to our 2023 ownership period. Overview for 2023 While our results for the year ended December 31, 2022 included a strong recovery from the pandemic, the Omicron variant of COVID-19 limited the recovery of our business during the beginning of that period. As such, the results for the year ended December 31, 2023 reflect improvement in comparison to the year ended December 31, 2022, when considering the pandemic. Certain customer segments, particularly business and group travel, continue to recover from the impacts of the pandemic, while other customer segments and markets related to destination leisure travel began stabilizing during the year ended December 31, 2023 after experiencing significant growth since 2021. Our overall growth when comparing periods in 2023 to 2022 is more normalized than it was during the height of the pandemic and our subsequent recovery. Hotel Acquisitions. On August 1, 2023, we acquired the 117-room Chico Hot Springs Resort and an adjacent ranch located in Pray, Montana for $31.9 million, including prorations and transaction costs. On October 25, 2023, we acquired the Chico Day Spa adjacent to the hotel for $0.8 million, including prorations and transaction costs. -48- Table of Contents Outlook for 2024 U.S. economic growth is broadly expected to decelerate in 2024 as the effects of monetary policy, most notably elevated interest rates, impact both businesses and consumers. According to many economic forecasts, a soft landing rather than a recession is the most likely scenario, supported by falling U.S. inflation and prospects for more accommodative policies from the Federal Reserve. The Federal Reserve has indicated it will remain data dependent in determining whether to continue to raise or begin to ease interest rates and may begin to ease interest rates as early as mid-2024 provided there are clear signs inflation is consistent with their target. However, the ultimate timing and impacts of these monetary policy changes and related impacts on the economy are unknown. Travel demand is highly sensitive to changes in macroeconomic factors and the threat of even a mild recession or slowdown creates a backdrop of uncertainty for the hospitality industry. The impact on the hospitality industry for 2024 may be intensified when considered in connection with high interest rates placing pressure on consumer spending and the uneven post-pandemic recovery across markets and demand segments. Our portfolio is composed primarily of luxury and upper-upscale hotels and resorts located in major urban markets and popular leisure destinations. More than 60% of our profits come from our urban hotels, and we believe they are well positioned for outsized growth in 2024. Americans have transitioned back to the office but are not expected to return to a full five-day schedule as seen prior to the pandemic. Accordingly, group meeting activity is expected to be the leading source of revenue growth as the remote/hybrid office environment drives increased offsite employee meetings and events at our urban market hotels. Corporate transient demand is also expected to show steady improvement as office attendance increases. Our destination resorts have outperformed the recovery of the broader U.S. lodging industry and, depending on the macroeconomic environment, we expect the strong consumer preference for drive-to destinations will support resilient revenues and profits at our resorts in 2024. Longer term, we believe robust secular demand for experiential leisure travel, low growth in directly competitive supply, and targeted investments to renovate and reposition destination hotels can extend and intensify our growth. We anticipate industry profitability will be challenged by elevated interest rates and pressures on labor costs, insurance and property taxes as well as a short booking window and emerging and shifting travel patterns. We continue to work closely with our hotel managers to maximize revenue and identify operating efficiencies. We expect the expansion of corporate travel demand will enable the industry to improve profits in 2024 and we enter the year with several favorable factors, including: (1) ownership of a high-quality portfolio, with a strong group revenue pace for 2024, based on group bookings to date (2) internal growth from five recent and three additional in process hotel rebranding or repositionings, (3) internal growth from the continuation of our asset management initiatives and return on investment projects, (4) conservative debt capital structure with limited near-term debt maturities, and (5) liquidity of $623.5million as of December 31, 2023. Results of Operations At December 31, 2023 and 2022, we owned 36 and 35 hotels, respectively. All properties owned during these periods have been included in our results of operations during the respective periods since their date of acquisition. Based on when a property was acquired, operating results for certain properties are not comparable for the year ended December 31, 2023 and 2022. The properties detailed for the non-comparable periods highlighted in the table below are hereinafter referred to as “non-comparable properties” and all other properties are referred to as “comparable properties”: [[GREPCENT_TABLE]] [["Property","","Location","","Acquisition Date"],["Tranquility Bay Beachfront Resort","","Marathon, Florida","","January 6, 2022"],["Kimpton Shorebreak Fort Lauderdale Beach Resort","","Fort Lauderdale, Florida","","April 1, 2022"],["Lake Austin Spa Resort","","Austin, Texas","","November 21, 2022"],["Chico Hot Springs Resort & Day Spa","","Pray, Montana","","August 1, 2023"]] [[/GREPCENT_TABLE]] Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022 Revenue. Revenue consists of the following (in thousands): -49- Table of Contents [[GREPCENT_TABLE]] [["","Year Ended December 31,","","Change"],["","2023","","2022","","$","","%"],["Rooms","$","717,447","","","$","681,269","","","$","36,178","","","5.3","%"],["Food and beverage","259,757","","","238,234","","","21,523","","9.0"],["Other","97,663","","","82,000","","","15,663","","19.1"],["Total revenues","$","1,074,867","","","$","1,001,503","","","$","73,364","","","7.3","%"]] [[/GREPCENT_TABLE]] Our total revenues increased $73.4 million from $1,001.5 million for the year ended December 31, 2022 to $1,074.9 million for the year ended December 31, 2023. Rooms revenues increased by $36.2 million from the year ended December 31, 2022 to the year ended December 31, 2023, $12.7 million of which was due to the acquisition of the non-comparable properties. The remaining increase of $23.5 million was the result of improved occupancy and ADR at our urban hotels as group and corporate travel continued to improve, partially offset by declines in ADR at our resort hotels due to the normalizing of leisure demand. The following are key hotel operating statistics for the years ended December 31, 2023 and 2022. The 2022 operating statistics reflect the period in 2022 comparable to our ownership period in 2023 for hotels acquired in 2023 and 2022. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["","2023","","2022","","% Change"],["Occupancy %","72.1","%","","68.3","%","","3.8","%"],["ADR","$","282.11","","","$","289.07","","","(2.4)","%"],["RevPAR","$","203.32","","","$","197.50","","","2.9","%"]] [[/GREPCENT_TABLE]] Food and beverage revenues increased $21.5 million from the year ended December 31, 2022 to the year ended December 31, 2023, of which $3.8 million was due to the acquisition of non-comparable properties. The remaining increase of $17.7 million was primarily due to increases in both banquet revenues and outlet revenues. Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased $15.7 million from the year ended December 31, 2022 to the year ended December 31, 2023, $11.1 million of which was due to non-comparable properties. The remaining increase of $4.6 million was primarily due to increases in resort fees and parking revenues, partially offset by a decline in attrition and cancellation fees. Hotel operating expenses. The operating expenses consisted of the following (in thousands): [[GREPCENT_TABLE]] [["","Year Ended December 31,","","Change"],["","2023","","2022","","$","","%"],["Rooms","$","176,765","","","$","163,062","","","$","13,703","","","8.4","%"],["Food and beverage","180,546","","","163,622","","","16,924","","","10.3"],["Other departmental and support expenses","261,536","","","233,691","","","27,845","","","11.9"],["Management fees","24,998","","","23,439","","","1,559","","","6.7"],["Franchise fees","35,738","","","32,683","","","3,055","","","9.3"],["Other property-level expenses","102,177","","","80,258","","","21,919","","","27.3"],["Total hotel operating expenses","$","781,760","","","$","696,755","","","$","85,005","","","12.2","%"]] [[/GREPCENT_TABLE]] Our hotel operating expenses increased $85.0 million from $696.8 million for the year ended December 31, 2022 to $781.8 million for the year ended December 31, 2023, $21.6 million of which was due to the acquisition of non-comparable properties. The remaining increase in hotel operating expenses was primarily due to increased occupancy and related labor costs. Other property-level expenses increased due to higher property tax assessments and insurance premiums. Depreciation and amortization. Depreciation and amortization on our hotel buildings is generally recorded over a 40 year period subsequent to an 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 -50- Table of Contents amortization expense increased $2.5 million from the year ended December 31, 2022 primarily due to the properties acquired during 2022 and 2023, as well as the renovations and rebrandings that were completed in 2022 and 2023. Impairment losses. During the year ended December 31, 2023, we recorded impairment losses of $0.9 million related to the write-off of construction in progress that was determined not to be recoverable. During the year ended December 31, 2022, we recorded an impairment loss of $2.8 million on the right-to-manage intangible asset related to the rental management agreements at Tranquility Bay Beachfront Resort upon our acquisition of four third-party owned units. 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 increased $0.2 million, from $31.8 million for the year ended December 31, 2022 to $32.0 million for the year ended December 31, 2023, primarily due to increases in employee-related costs. Additionally, during the year ended December 31, 2022, we recognized the reversal of compensation expense of $0.7 million resulting from the forfeiture of long-term incentive awards related to the resignation of our former Executive Vice President, Asset Management and Chief Operating Officer. Business interruption insurance income. For the year ended December 31, 2023, we recognized $0.5 million of business interruption insurance income related to an electrical fire at the Hilton Garden Inn New York/Times Square Central that caused the hotel to be closed for seven days and $0.1 million related to an insurance claim at the Worthington Renaissance Fort Worth Hotel. During the year ended December 31, 2022, we recognized $0.5 million of 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. Interest expense. Our interest expense increased $26.8 million from $38.3 million for the year ended December 31, 2022 to $65.1 million for the year ended December 31, 2023, and was comprised of the following (in millions): [[GREPCENT_TABLE]] [["","Year Ended December 31,","","Change"],["","2023","","2022","","$","","%"],["Mortgage debt interest","$","16,436","","","$","23,276","","","$","(6,840)","","","(29.4)","%"],["Term loan interest","43,294","","","21,153","","","$","22,141","","","104.7"],["Credit facility interest and unused fees","1,256","","","5,279","","","$","(4,023)","","","(76.2)"],["Amortization of debt issuance costs and debt premium","2,053","","","2,489","","","$","(436)","","","(17.5)"],["Interest rate swap mark-to-market","2,033","","","(13,914)","","","$","15,947","","","(114.6)"],["","$","65,072","","","$","38,283","","","$","26,789","","","70.0","%"]] [[/GREPCENT_TABLE]] The increase in interest expense is primarily related to rising interest rates on our variable rate unsecured term loans and the change in the fair value of certain of our interest rate swaps not designated as cash flow hedges, which were designated as cash flow hedges as of April 1, 2023, partially offset by a decrease in mortgage debt interest related to the payoff of four mortgage loans in 2022. Loss on early extinguishment of debt. In September 2022, we refinanced our senior unsecured credit facility and unsecured term loans. As a result, we recognized a $9.7 million loss on early extinguishment of debt related to the write-off of certain unamortized debt issuance costs and fees paid to the lenders in consideration for our refinancing. We also recognized $0.1 million of loss on early extinguishment of debt related to the write-off of certain unamortized debt issues costs related to the payoff of four mortgage loans during the year ended December 31, 2022. No loss on early extinguishment of debt was recorded for the year ended December 31, 2023. Income taxes. We recorded an income tax expense of $0.3 million in 2023 and income tax expense of $2.6 million in 2022. The 2023 income tax expense was incurred on the $4.3 million pre-tax income of our TRSs. The 2023 income tax provision includes a change in our valuation allowance of $1.0 million. The 2022 income tax expense was incurred on the $11.6 million pre-tax income of our TRSs. The 2022 income tax provision includes a change in our valuation allowance of $3.9 million. Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021 Discussion of the comparison of the results of operations for the year ended December 31, 2022 to the year ended December 31, 2021 was included in our Annual Report on Form 10-K for the year ended December 31, 2022 on page 49 under -51- Table of Contents Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations," which was filed with the SEC on February 24, 2023. Liquidity and Capital Resources Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service, near term debt maturities, operating expenses, ground lease payments, capital expenditures directly associated with our hotels, any share repurchases, distributions to our common and preferred stockholders, and the cost of acquiring additional hotels. Other than scheduled debt service payments, we have one mortgage loan that matures within one year which has a principal balance of $74.3 million as of December 31, 2023. We intend to repay this mortgage loan using cash on hand. 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 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 December 31, 2023, we had no cash traps in place. 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, certain redemptions of limited operating partnership units (“common OP units”), ground lease payments, share repurchases, 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 us. Our Financing 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 periodic borrowings on our senior unsecured credit facility. We have a preference to maintain a significant portion of our portfolio as unencumbered 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 leverage 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 Lodge at the Golden Gate, if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available. We believe that we maintain a reasonable amount of debt. As of December 31, 2023, we had $1.2 billion of debt outstanding with a weighted average interest rate of 5.22% and a weighted average maturity date of approximately 2.7 years, assuming all extension options available in our debt agreements are exercised. We have one mortgage loan maturing in August 2024, which we intend to repay using cash on hand. As of December 31, 2023, 32 of our 36 hotels are unencumbered by mortgage debt. We remain committed to our core strategy of prudent leverage. The following table outlines the timing and extent of our debt principal maturities and estimated interest payments for our mortgage debt and unsecured term loans as of December 31, 2023 (in thousands), assuming all extension options available in our debt agreements are exercised. -52- Table of Contents [[GREPCENT_TABLE]] [["","Principal","","Interest (1)","","Total Principal and Interest"],["2024","$","82,381","","","$","57,970","","","$","140,351"],["2025","295,808","","","48,447","","","344,255"],["2026","300,000","","","36,619","","","336,619"],["2027","\u2014","","","33,019","","","33,019"],["2028","500,000","","","251","","","500,251"],["","$","1,178,189","","","$","176,306","","","$","1,354,495"]] [[/GREPCENT_TABLE]] ______________ (1)The interest expense for our variable rate unsecured term loans is calculated based on the rate as of December 31, 2023 of 6.81%. Information about our financing activities is available in Note 5 to the accompanying consolidated financial statements. ATM Program We maintain 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 during the years ended December 31, 2023 and 2022. Share Repurchase Program Our board of directors has authorized a share repurchase program pursuant to which we are authorized to repurchase up to $200.0 million of our common stock through February 28, 2025. During the year ended December 31, 2023, we repurchased 318,454 shares of common stock at an average price of $7.60 per share for an aggregate purchase price of $2.4 million. Information about our share repurchase program is in Note 9 to the accompanying consolidated financial statements. Short-Term Borrowings Other than borrowings under our senior unsecured credit facility, discussed below, we do not utilize short-term borrowings to meet liquidity requirements. Senior Unsecured Credit Facility and Unsecured Term Loans We are party to a Sixth Amended and Restated Credit Agreement that provides us with a $400 million senior unsecured revolving credit facility and two term loan facilities in the aggregate amount of $800 million. The revolving credit facility matures on September 27, 2026, which we may extend for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions. The term loan facilities consist of a $500 million term loan that matures on January 3, 2028 and a $300 million term loan that matures on January 3, 2025. The maturity date of the $300 million term loan may be extended for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions. We have the right to increase the aggregate amount of the facilities to $1.4 billion upon the satisfaction of certain standard conditions. Additional information about the credit and term loan facilities, including a summary of significant covenants, can be found in Note 5 to the accompanying consolidated financial statements. Sources and Uses of Cash 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 any hotel dispositions. Our principal uses of cash are acquisitions of hotel properties, debt service and maturities, share repurchases, capital expenditures, operating costs, ground lease payments, corporate expenses, and distributions to holders of common stock, common units and preferred stock. As of December 31, 2023, we had $121.6 million of unrestricted corporate cash and $45.6 million of restricted cash, and no outstanding borrowings on our senior unsecured credit facility. Our net cash provided by operations was $237.6 million for the year ended December 31, 2023. Our cash from operations generally consists of the net cash flow from hotel operations, offset by cash paid for corporate expenses, interest payments, and -53- Table of Contents other working capital changes. The increase in cash provided by operations was primarily driven by timing differences related to collections from our hotel managers. Our net cash used in investing activities was $120.8 million for the year ended December 31, 2023, which consisted of $86.3 million of capital expenditures, $32.7 million paid for the acquisition of the Chico Hot Springs Resort & Day Spa and adjacent ranch, and $1.8 million of cash paid for the acquisition of the land parcel underlying the parking structure at the Worthington Renaissance Fort Worth Hotel. Our net cash used in financing activities was $56.7 million for the year ended December 31, 2023, which consisted of $31.9 million of distributions paid to holders of common stock and common units, $9.8 million of distributions paid to holders of preferred stock, $9.5 million of scheduled mortgage debt principal payments, $3.0 million paid to repurchase shares upon the vesting of restricted stock for the payment of tax withholdings obligations, and $2.4 million paid to repurchase shares under our share repurchase program. We currently anticipate our significant sources of cash for the year ending December 31, 2024 will be the net cash flow from hotel operations and any potential hotel dispositions. We expect our estimated uses of cash for the year ending December 31, 2024 will be scheduled debt service and maturity payments, capital expenditures, distributions to preferred and common stockholders, corporate expenses and potential share repurchases. Dividend Policy 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 taxable REIT subsidiaries, 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. We have paid the following dividends to holders of our common stock and distributions to holders of common OP units and LTIP units during 2022 and 2023, and through the date of this report: For the year ended December 31, 2023, we paid an aggregate cash dividend of $0.12 per holder of common stock, OP units, and LTIP units. For the year ended December 31, 2022, we paid an aggregate cash dividend of $0.09 per holder of common stock, OP units, and LTIP units. For each of the years ended December 31, 2023 and 2022, we paid an aggregate cash dividend of $2.0625 per holder of Series A Preferred Stock. Capital Expenditures The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement reserves 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 reserves under the applicable management or franchise agreement. As of December 31, 2023, we have set aside $39.7 million for capital projects in property improvement funds, which are included in restricted cash on our consolidated balance sheets. -54- Table of Contents We invested approximately $86.3 million in capital improvements at our hotels during the year ended December 31, 2023. Significant projects in 2023 included the following: •The Dagny Boston: We completed a comprehensive renovation to rebrand the Hilton Boston Downtown/Faneuil Hall as The Dagny Boston, an independent lifestyle hotel, during the third quarter of 2023. •Salt Lake City Marriott: We completed a renovation of the guestrooms during the third quarter of 2023. We expect to spend approximately $100 million in capital improvements at our hotels in 2024, which includes the completion of certain projects that commenced in 2023. Significant projects in 2024 include the following: •Westin San Diego Bayview: In late 2023, we commenced a comprehensive renovation of the hotel's guestrooms, which is expected to be completed in the second quarter of 2024. •Hilton Burlington Lake Champlain: In 2023, we commenced a repositioning of the hotel to rebrand it as a Curio Collection by Hilton hotel. The repositioning is expected to be completed in the summer of 2024 and includes a new restaurant concept by a well-known, award-winning chef. •Bourbon Orleans Hotel: We expect to reposition and rebrand the hotel during 2024 to capture rate potential against the luxury and lifestyle competitive sets. •Orchards Inn Sedona: We expect to commence a repositioning of Orchards Inn as the Cliffs at L'Auberge. The project will integrate the hotel with the adjacent L'Auberge de Sedona and include construction of a new pool connecting the two properties, renovation of the guestrooms and creation of a new arrival experience and new outdoor event space. The project is expected to be completed in 2025. •The Landing Lake Tahoe Resort and Spa: We expect to commence a renovation of the property to accommodate 14 new keys and construct an adjacent indoor/outdoor event space to be completed in 2025. 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, Hotel 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, Hotel 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, Hotel 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 comprehensive income and consolidated statements of 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 and EBITDAre 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 -55- Table of Contents defined in its September 2017 white 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. FFO The Company computes FFO in accordance with standards established by Nareit, which defines FFO as net income (calculated 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. Adjustments to EBITDAre and FFO 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 and property-level 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 Board promulgates new accounting standards that require or permit the consolidated statement of operations and comprehensive income 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. -56- Table of Contents •Hotel Pre-Opening Costs: We exclude the pre-opening costs associated with the redevelopment or rebranding of a hotel 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: 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 FFO we exclude any unrealized fair value adjustments to interest rate swaps. We exclude these non-cash amounts because they do not reflect the underlying performance of the Company. Hotel Adjusted EBITDA We believe that Hotel Adjusted EBITDA provides our investors a useful financial measure to evaluate our hotel operating performance, excluding the impact of our capital structure (primarily interest), our asset base (primarily depreciation and amortization), and our corporate-level expenses. With respect to Hotel Adjusted EBITDA, we believe that excluding the effect of corporate-level expenses provides a more complete understanding of the operating results over which individual hotels and third-party management companies have direct control. We believe property-level results provide investors with supplemental information on the ongoing operational performance of our hotels and effectiveness of the third-party management companies operating our business on a property-level basis. Hotel Adjusted EBITDA margins are calculated as Hotel Adjusted EBITDA divided by total hotel revenues. The following table is a reconciliation of our U.S. GAAP net income to EBITDA, EBITDAre, Adjusted EBITDA and Hotel Adjusted EBITDA (in thousands): [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Net income (loss)","","$","86,635","","","$","109,705","","","$","(195,405)"],["Interest expense","","65,072","","","38,283","","","37,043"],["Income tax expense","","317","","","2,607","","","3,267"],["Real estate related depreciation and amortization","","111,302","","","108,849","","","102,963"],["EBITDA","","263,326","","","259,444","","","(52,132)"],["Impairment losses","","941","","","2,843","","","126,697"],["Loss on sale of hotel properties (1)","","\u2014","","","1,659","","","\u2014"],["EBITDAre","","264,267","","","263,946","","","74,565"],["Non-cash lease expense and other amortization","","6,156","","","6,226","","","6,673"],["Professional fees and pre-opening costs related to Frenchman's Reef (2)","","\u2014","","","\u2014","","","1,388"],["Uninsured costs related to natural disasters (3)","","\u2014","","","\u2014","","","298"],["Loss on early extinguishment of debt","","\u2014","","","9,766","","","\u2014"],["Hotel pre-opening costs","","1,246","","","\u2014","","","\u2014"],["Hotel manager transition items","","\u2014","","","1,164","","","651"],["Severance costs (4)","","\u2014","","","(532)","","","(37)"],["Adjusted EBITDA","","$","271,669","","","$","280,570","","","$","83,538"],["Corporate expenses","","32,048","","","31,790","","","32,552"],["Interest (income) and other (income) expense, net","","(2,561)","","","(255)","","","(947)"],["Hotel Adjusted EBITDA","","$","301,156","","","$","312,105","","","$","115,143"]] [[/GREPCENT_TABLE]] _______________ -57- Table of Contents [[GREPCENT_TABLE]] [["","(1)","During the year ended December 31, 2022, we recognized an incremental loss of $1.7 million due to post-closing adjustments related to hotels sold in 2021."],["","(2)","Represents pre-opening costs and professional fees related to the reopening of Frenchman's Reef, as well as legal and other costs incurred at Frenchman's Reef as a result of Hurricane Irma that are not covered by insurance."],["","(3)","Represents costs incurred at the Bourbon Orleans Hotel as a result of Hurricane Ida that were not recovered by insurance."],["","(4)","Consists of severance costs incurred, and adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statement of operations."]] [[/GREPCENT_TABLE]] The following table is a reconciliation of our U.S. GAAP net income to FFO and Adjusted FFO (in thousands): [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Net income (loss)","","$","86,635","","","$","109,705","","","$","(195,405)"],["Real estate related depreciation and amortization","","111,302","","","108,849","","","102,963"],["Impairment losses","","941","","","2,843","","","127,282"],["Loss on sale of hotel properties (1)","","\u2014","","","1,659","","","\u2014"],["FFO","","198,878","","","223,056","","","34,840"],["Distributions to preferred stockholders","","(9,817)","","","(9,817)","","","(9,817)"],["FFO available to common stock and unit holders","","189,061","","","213,239","","","25,023"],["Non-cash lease expense and other amortization","","6,156","","","6,226","","","6,673"],["Professional fees and pre-opening costs related to Frenchman's Reef (2)","","\u2014","","","\u2014","","","1,388"],["Uninsured costs related to natural disasters (3)","","\u2014","","","\u2014","","","298"],["Loss on early extinguishment of debt","","\u2014","","","9,766","","","\u2014"],["Hotel pre-opening costs","","1,246","","","\u2014","","","\u2014"],["Hotel manager transition items","","\u2014","","","1,164","","","651"],["Severance costs (4)","","\u2014","","","(532)","","","(37)"],["Fair value adjustments to interest rate swaps","","2,033","","","(13,914)","","","(7,690)"],["Adjusted FFO available to common stock and unit holders","","$","198,496","","","$","215,949","","","$","26,306"]] [[/GREPCENT_TABLE]] _______________ [[GREPCENT_TABLE]] [["","(1)","During the year ended December 31, 2022, we recognized an incremental loss of $1.7 million due to post-closing adjustments related to hotels sold in 2021."],["","(2)","Represents pre-opening costs and professional fees related to the reopening of Frenchman's Reef, as well as legal and other costs incurred at Frenchman's Reef as a result of Hurricane Irma that are not covered by insurance."],["","(3)","Represents costs incurred at the Bourbon Orleans Hotel as a result of Hurricane Ida that were not recovered by insurance."],["","(4)","Consists of severance costs incurred, and adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statement of operations."]] [[/GREPCENT_TABLE]] Critical Accounting Estimates and Policies Our consolidated financial statements include the accounts of DiamondRock Hospitality Company and 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 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. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates: Investment in Hotels Property and equipment are recorded at cost. Costs of improvements that extend the economic life or improve service potential, which generally includes significant improvements, renovations and replacements, are capitalized, while repairs and maintenance are expensed as incurred. -58- Table of Contents Acquisitions of hotel properties are generally accounted for as acquisitions of a group of assets and recorded at relative fair value based upon total accumulated cost of the acquisition. The acquisition cost is allocated to land, buildings, improvements, furniture, fixtures and equipment, as well as identifiable intangible and lease assets and liabilities. In making estimates of fair values for purposes of allocating purchase price we evaluate several factors, including but not limited to comparable sales, expected future cash flows discounted at risk adjusted rates as well as industry and Company data. Direct acquisition-related costs are capitalized as a component of the acquired assets. Depreciation is recorded using the straight-line method over the assets' estimated useful lives, which are generally as follows: 5 to 40 years for buildings and improvements; 1 to 10 years for furniture, fixtures and equipment; and 3 to 5 years for computer equipment and acquired software. We evaluate the carrying value of our property and equipment for indicators of impairment. Indicators of impairment that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the 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 useful life. When such indicators exist, we perform an analysis to determine the recoverability of the asset group by comparing the estimated undiscounted future cash flows, including the proceeds from the ultimate disposition of a hotel, less costs to sell, to the net carrying value of the asset group. If the carrying value of the asset group is not recoverable and it exceeds the estimated fair value of the asset group, we recognize an impairment loss in our consolidated statement of operations and comprehensive income for the amount by which the carrying value exceeds the estimated fair value. We allocate the impairment loss related to the asset group among the various assets within the asset group pro rata based on the relative carrying values of the respective assets. We will classify a hotel as held for sale in the period that we have made the decision to dispose of the hotel, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing or other contingencies exist which could cause the transaction to not be completed in a timely manner. If these criteria are met, we will record an impairment loss if the fair value less costs to sell is lower than the carrying amount of the hotel and related assets and will cease recording depreciation expense. We will classify the assets and related liabilities as held for sale on the balance sheet. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations and comprehensive income. Inflation Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Generally, our management companies may adjust room rates daily, excluding previous contractually committed reservations. 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. Inflation has increased recently to levels not seen in years. The United States Federal Reserve has raised interest rates in response to concerns about inflation. The Federal Reserve has indicated it will remain data dependent in determining whether to continue to raise or slowly ease interest rates during 2024. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty, and increasing the cost of new indebtedness and servicing our outstanding variable rate debt. Seasonality 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 Pronouncements Not Yet Implemented See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.