# Summit Hotel Properties, Inc. (INN) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Summit Hotel Properties, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1497645/000149764523000006/inn-20221231.htm
Accession: 0001497645-23-000006
Filing date: 2023-02-27
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/INN/
All MD&A years: /company/INN/mda/
Previous year: /company/INN/mda/fy2021/ (FY 2021)
Next year: /company/INN/mda/fy2023/ (FY 2023)

Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Industry Trends and Outlook

Room-night demand in the U.S. lodging industry is generally correlated to certain macroeconomic trends. Key drivers of lodging demand include changes in gross domestic product, corporate profits, capital investments, employment and more recently, travel-related health and safety restrictions and concerns. Volatility in the economy and risks arising from global and domestic political or economic conditions may cause slowing economic growth, which would have an adverse effect on lodging demand. The global and U.S. economies, and the travel and lodging industries, have experienced a significant downturn as a result of the Pandemic. During the twelve months ended December 31, 2022, we experienced a significant recovery in demand for our lodging properties driven primarily by leisure travel. Business and group demand remain below historical levels and are recovering more slowly; however, we have recently begun to experience an increase in demand related to these segments as the effects of the Pandemic have diminished.

Rising inflation was pervasive throughout 2022 increasing the cost of salaries, wages, material, freight, and energy. Higher costs due to general business inflation were partially offset by lodging price increases, which offset the effect of inflation on our operating results. We expect relatively higher inflation to continue in 2023 resulting in higher costs. If customers are unwilling to accept these price increases, inflation could have an adverse effect on our operations and financial condition.

Effects of the Pandemic on Our Business

The effects of the Pandemic and the restrictions implemented in response to the Pandemic had a significant negative effect on the U.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in demand for lodging. These conditions resulted in a substantial decline from pre-Pandemic levels in our revenues, profitability and cash flows from operations during the years ended December 31, 2020 and 2021.

During the twelve months ended December 31, 2022, we experienced significant improvement in our business, driven primarily by leisure travel and to a lesser extent modest improvement in other demand segments, including business and group travel. We anticipate that continued improvement in operating trends will be dependent on sustained strength in leisure travel and an ongoing recovery of business and group travel. More broadly, a return to normalized levels of operations is dependent upon a continuation in the recovery of our business, and maintaining a high-quality portfolio aligned with evolving guest preferences.

Management’s Actions in Response to the Effects of the Pandemic on Our Operations

We implemented the following actions to mitigate the negative effects of the Pandemic on our consolidated financial position, results of operations and cash flows:

Operational Adjustments

In response to the rapid decline in demand for room nights and loss of revenues as a result of the Pandemic, we and our property managers evaluated each lodging property in our portfolio and initially adjusted labor and cost structures for lodging properties based on existing market conditions. As demand at our lodging properties has increased during the years ended December 31, 2022 and 2021, we have also increased staffing commensurately.

Financial Measures and Liquidity

Beginning in March 2020, we took significant action to enhance our overall liquidity position in response to the Pandemic’s effect on our financial position, which continued into the year ended December 31, 2022.

On January 12, 2021, we sold $287.5 million aggregate principal amount of our 1.50% convertible senior notes due 2026 (the "Convertible Notes").

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On May 1, 2021, we contributed a portfolio of six lodging properties containing 846 guestrooms to the GIC Joint Venture. The estimated market value of the portfolio of lodging properties was $172.0 million and GIC contributed $84.3 million in cash for its 49% interest in the GIC Joint Venture after the completion of the transfer of the six lodging properties. Net proceeds from the transaction were used to repay $62.5 million of our senior debt and $20.9 million was applied to our Cash and cash equivalents balances.

On August 12, 2021, we completed the offering of 4,000,000 Series F preferred shares for net proceeds of $96.6 million, after the underwriting discount and offering-related expenses of $3.4 million. On September 4, 2021, using proceeds from the issuance of the Series F preferred shares, we paid $75.0 million to redeem all 3,000,000 of its outstanding 6.45% Series D Cumulative Redeemable Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends. The remaining net proceeds from the Series F preferred share offering was used to repay $22.0 million of our senior debt.

See “Part II - Item 7. – Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Part II - Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt,” for additional information.

Health and Well-being

Substantially all of our lodging properties are licensed with national franchise brands, and we have worked closely with our brand partners to develop and implement comprehensive protocols for the safety and well-being of employees and guests to address a broad spectrum of pathogens and viruses, including COVID-19 and variants thereof. We continue to apply advanced cleaning procedures developed during the Pandemic to all of our lodging properties.

Operating Performance Metrics

We use a variety of performance indicators 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 GAAP, as well as other financial information that is not prepared in accordance with 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 lodging properties, groups of lodging properties 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 — Occupancy represents the total number of guestrooms occupied divided by the total number of guestrooms available.

•Average Daily Rate (ADR) — ADR represents total room revenues divided by the total number of guestrooms occupied.

•Revenue Per Available Room (RevPAR) — RevPAR is the product of ADR and Occupancy.

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important metric for monitoring operating performance at the individual lodging property level and across our business as a whole. We evaluate individual lodging property RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and market-by-market basis. ADR and RevPAR are based only on room revenue. Room revenue depends on demand (as measured by occupancy), pricing (as measured by ADR), and our available supply of lodging property guestrooms. Our ADR, occupancy and RevPAR performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, air travel and other business and leisure travel, new lodging property construction, and the pricing strategies of competitors. In addition, our ADR, occupancy and RevPAR performance is dependent on the continued success of our partners, franchisors and brands.

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Lodging Property Portfolio Activity

We continuously evaluate alternatives to refine our portfolio to drive growth and create value. In the normal course of business, we evaluate opportunities to acquire additional properties that meet our investment criteria and opportunities to recycle capital through the disposition of properties. As such, the composition and size of our portfolio of properties may change materially over time. Significant changes to our portfolio of properties could have a material effect on our Consolidated Financial Statements.

On May 1, 2021, we contributed a portfolio of six lodging properties containing 846 guestrooms to our GIC Joint Venture. The estimated market value of the portfolio of lodging properties was $172.0 million and GIC, our GIC Joint Venture partner, paid us $84.3 million in cash to maintain its 49% interest in the GIC Joint Venture after the completion of the transfer of the six lodging properties. See "Part II – Item 8. – Financial Statements and Supplementary Data - Note 3 – Investments in Lodging Property, net for additional information."

On July 9, 2021, we acquired a 110-room Residence Inn in Steamboat Springs, CO through our GIC Joint Venture for $33.0 million. Additionally, on December 21, 2021, through our GIC Joint Venture, we acquired a 120-room Embassy Suites in Tucson, AZ for $25.5 million.

During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on the NCI Transaction for the acquisition of a portfolio of 27 lodging properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces, and various financial incentives for an aggregate purchase price of $822.0 million.

In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture.

On June 10, 2022, we formed the Brickell Joint Venture (see "See Part II – Item 8. – Financial Statements and Supplementary Data - Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the exercise of our purchase option to acquire a 90% equity interest in the AC/Element Hotel. The exercise price of the purchase option was $89.0 million and was primarily funded with the conversion of the mezzanine loan of $29.9 million to equity, $7.9 million in cash and the assumption of debt.

On October 26, 2022, we completed the acquisition of a 90% equity interest in the Onera Joint Venture that owns a high-end glamping property for $5.2 million in cash, plus additional contingent consideration limited to a maximum of $1.8 million, payable to the seller based on performance of the property for the 12-month period ending July 31, 2023. The Onera Joint Venture has a 100% fee simple interest in real property and improvements consisting of 11 glamping lodging units and a 6.4-acre parcel of undeveloped land that will be developed as phase two of the lodging site in the future.

Subsequent to December 31, 2022, we entered into a purchase and sale agreement with a third-party to sell a portfolio of four lodging properties for $28.1 million. We reclassified the properties to Assets held for sale, net at December 31, 2022 and recorded a write-down of $2.9 million in the fourth quarter of 2022 for the excess of the net carrying amount of the portfolio of properties over the expected net selling price less costs to sell. In addition, we entered into a purchase and sale agreement with a third-party to sell a 6.0-acre parcel of undeveloped land for $1.3 million. We reclassified the property to Assets held for sale, net at December 31, 2022 and recorded a write-down of $0.3 million in the fourth quarter of 2022 for the excess of the net carrying amount of the undeveloped land over the expected net selling price less costs to sell. Subsequent to December 31, 2022, we also entered into an agreement for the sale of two lodging properties for $50.5 million. We reclassified the properties to Assets held for sale, net at December 31, 2022 and recorded a write-down of $7.2 million at December 31, 2022 for the excess of the net carrying amount of the properties over the expected net selling price less costs to sell.

See “Part II – Item 8. – Financial Statements and Supplementary Data –Note 3 - Investments in Lodging Property, net” to the Consolidated Financial Statements for additional information concerning our asset acquisitions, development, and dispositions.

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Revenues and Operating Expenses

Our revenues are derived from lodging operations and consist of room revenue, food and beverage revenue and other revenue. As a result of our focus on lodging properties with efficient operating models, substantially all of our revenues are related to the sales of guestrooms. Our other revenue consists of ancillary revenues related to meeting rooms, parking and other guest services provided at certain of our properties.

Our property operating expenses consist primarily of expenses incurred in the day-to-day operation of our lodging properties. Many of our expenses are fixed, such as essential lodging property staff, real estate taxes, insurance, and depreciation. These expenses generally do not decrease even if the revenues at our lodging properties decrease. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with administrative departments, sales and marketing, repair and maintenance, utility costs and franchise fees.

As discussed above under “Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Management’s Actions in Response to the Effects of the Pandemic on Our Operations – Operational Adjustments,” in response to the rapid decline in demand for room nights and loss of revenues throughout the Pandemic, we and our property managers evaluated each lodging in our portfolio to determine if market conditions warranted the temporary suspension of operations, and to adjust labor cost structures for lodging that would continue to operate. Although the vast majority of our lodging properties remained open throughout the Pandemic, staffing levels were temporarily reduced to levels that safely and effectively maintain reasonable accommodations for our guests. As demand at our lodging properties has increased, we have also increased staffing commensurately. Our lodging properties implemented and have continued to modify health and safety protocols aligned with brand guidelines to allay guest concerns about COVID-19 and its variants.

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Results of Operations

The comparisons that follow should be reviewed in conjunction with the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Comparison of 2022 to 2021

The following table contains key operating metrics for our total portfolio and our same-store portfolio for 2022 compared with 2021 (dollars in thousands, except ADR and RevPAR). Our same-store portfolio consists of properties that we owned as of December 31, 2022 and that we have owned at all times since January 1, 2021.

[[GREPCENT_TABLE]]
[["","","2022","","2021","","Year-over-Year Dollar Change","","Year-over-Year Percentage Change"],["","","Total Portfolio (103 Properties)","","Same-Store Portfolio (71 properties)","","Total Portfolio (74 properties)","","Same-Store Portfolio (71 properties)","","Total Portfolio (103/71 properties)","","Same-Store Portfolio (71 properties)","","Total Portfolio (103/71 properties)","","Same-Store Portfolio (71 properties)"],["Revenues:"],["Room","","$","609,370","","","$","465,162","","","$","334,338","","","$","327,918","","","$","275,032","","","$","137,244","","","82.3","%","","41.9","%"],["Food and beverage","","32,117","","","14,992","","","7,299","","","7,114","","","24,818","","","7,878","","","340.0","%","","110.7","%"],["Other","","34,208","","","25,214","","","20,289","","","19,870","","","13,919","","","5,344","","","68.6","%","","26.9","%"],["Total","","$","675,695","","","$","505,368","","","$","361,926","","","$","354,902","","","$","313,769","","","$","150,466","","","86.7","%","","42.4","%"],["Expenses:"],["Room","","$","136,999","","","$","104,322","","","$","74,781","","","$","73,317","","","$","62,218","","","$","31,005","","","83.2","%","","42.3","%"],["Food and beverage","","24,897","","","11,356","","","4,856","","","4,671","","","20,041","","","6,685","","","412.7","%","","143.1","%"],["Other hotel operating expenses","","207,975","","","5,422","","","123,626","","","4,433","","","84,349","","","989","","","68.2","%","","22.3","%"],["Total","","$","369,871","","","$","121,100","","","$","203,263","","","$","82,421","","","$","166,608","","","$","38,679","","","82.0","%","","46.9","%"],["Occupancy","","69.7","%","","70.0","%","","62.3","%","","62.3","%","","n/a","","n/a","","11.9","%","","12.4","%"],["ADR","","$","158.58","","","$","163.61","","","$","129.70","","","$","129.73","","","$","28.88","","","$","33.88","","","22.3","%","","26.1","%"],["RevPAR","","$","110.46","","","$","114.61","","","$","80.74","","","$","80.80","","","$","29.72","","","$","33.81","","","36.8","%","","41.8","%"]]
[[/GREPCENT_TABLE]]

The total portfolio information above includes revenues and expenses from the lodging properties that we acquired during the year ended December 31, 2022 (the “2022 Acquired Properties”) from the date of acquisition through December 31, 2022, and operating information (occupancy, ADR, and RevPAR) for the period each lodging property was owned. Accordingly, the information does not reflect a full twelve months of operations for the year ended December 31, 2022 for the 2022 Acquired Properties.

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Changes from the year ended December 31, 2022 compared with the year ended December 31, 2021 were due to the following:

•Revenues and RevPAR. The increase in total revenues and RevPAR for our total portfolio for the year ended December 31, 2022 compared to the year ended December 31, 2021 was due to continued strength in leisure travel as well as improving corporate and group demand resulting in steady improvement in both weekend and weekday results. Additionally, revenues increased due to the NCI Transaction, the Brickell Transaction and the Onera Transaction, which significantly expanded the size of our portfolio. Our increased exposure to the Sunbelt, focused revenue management, and property management initiatives related to the portfolio acquired in the NCI Transaction also contributed to significant revenue growth during the period. On a same store basis, the improvements in our business resulted in an increase of approximately 12.4% in occupancy and a 26.1% in average daily rate during the year ended December 31, 2022, which resulted in an 41.8% increase in same-store RevPAR. For the total portfolio, we experienced an increase of approximately 11.9% in occupancy and an increase of 22.3% in average daily rate during the year ended December 31, 2022. This resulted in an increase in RevPAR of 36.8% over the same period in the prior year. See "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Effects of Pandemic on Our Business" for further information.

•Room Expenses. The increase in room expenses for both our total and the same-store portfolio is highly correlated to increasing occupancy across the portfolio. Additional factors contributing to higher room expenses include increasing labor costs driven by higher wage rates and more costly contract labor needed to meet room demand. Additionally, room costs for the total portfolio increased due to the NCI Transaction, the Brickell Transaction, and the Onera Transaction, which significantly expanded the size of our portfolio during the year ended December 31, 2022.

•Food and Beverage Revenues and Expenses. Total and same-store food and beverage revenues increased during the year ended December 31, 2022 as a result of an increase in occupancy across our portfolio and the completion of the NCI Transaction, the Brickell Transaction and the Onera Transaction. The Brickell Transaction included the acquisition of a rooftop bar which has meaningfully increased food and beverage revenues during the year ended December 31, 2022. Food and beverage expenses increased at a higher rate than food and beverage revenues due to an expansion in food and beverage product offerings compared to our offerings in prior years during the Pandemic and increased staffing costs during the year ended December 31, 2022.

•Other Hotel Operating Revenues and Expenses. The increase in other hotel operating revenues and expenses in both our total and same-store portfolios was driven by an increase in occupancy during the year ended December 31, 2022 and the completion of the NCI Transaction, the Brickell Transaction, and the Onera Transaction.

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The following table includes other consolidated income and expenses for 2022 compared with 2021 (dollars in thousands).

[[GREPCENT_TABLE]]
[["","","For the Years Ended December 31,"],["","","2022","","2021","","Dollar Change","","Percentage Change"],["Property taxes, insurance and other","","$","49,921","","","$","41,350","","","$","8,571","","","20.7","%"],["Management fees","","17,442","","","9,858","","","7,584","","","76.9","%"],["Depreciation and amortization","","150,160","","","105,955","","","44,205","","","41.7","%"],["Corporate general and administrative","","30,765","","","29,428","","","1,337","","","4.5","%"],["Transaction costs","","749","","","3,849","","","(3,100)","","","(80.5)","%"],["Recoveries of credit losses","","(1,100)","","","(2,632)","","","1,532","","","(58.2)","%"],["Loss on write-down or impairment of assets","","10,420","","","4,361","","","6,059","","","138.9","%"],["Gain on disposal of assets, net","","20,315","","","240","","","20,075","","","nm(1)"],["Interest expense","","65,581","","","43,368","","","22,213","","","51.2","%"],["Other income, net","","2,627","","","9,523","","","(6,896)","","","(72.4)","%"],["Income tax expense","","3,611","","","1,473","","","2,138","","","145.1","%"]]
[[/GREPCENT_TABLE]]

(1)    Not meaningful

Changes from the year ended December 31, 2022 compared with the year ended December 31, 2021 were due to the following:

•Property Taxes, Insurance and Other. The increase in Property taxes, insurance and other is primarily due to the NCI Transaction, the Brickell Transaction and the Onera Transaction, which significantly expanded the size of our portfolio during the year ended December 31, 2022. The higher property taxes resulting from an increase in the number of lodging properties in our portfolio during the year ended December 31, 2022 was partially offset by property tax reductions that we have generated through our property tax appeal efforts to reduce the assessed values of our lodging properties for property tax purposes.

•Management Fees. The increase in Management fees during the year ended December 31, 2022 is primarily due to increased consolidated revenues as our business has experienced a steady improvement in performance during the year ended December 31, 2022 and due to the completion of the NCI Transaction, the Brickell Transaction, and the Onera Transaction, which significantly expanded the size of our portfolio.

•Depreciation and Amortization. The increase in Depreciation and amortization during the year ended December 31, 2022 is primarily due to the completion of the NCI Transaction, the Brickell Transaction and the Onera Transaction, which significantly expanded the size of our portfolio and resulted in a substantial increase in our depreciable assets during the year ended December 31, 2022. Additionally, we have substantially increased capital expenditures related to renovation activities at our lodging properties during the year ended December 31, 2022 as the operating performance of our portfolio has improved.

•Corporate General and Administrative. The increase in Corporate, general and administrative expenses during the current period is primarily due to increase corporate staffing to support the growth in the business primarily driven by almost $1.0 billion in acquisitions during the year ended December 31, 2022, higher incentive and other compensation costs of approximately $2.9 million, including a one-time charge of approximately $1.3 million related to the acceleration of time-based restricted shares and the modification of performance stock-based compensation for our former Chief Operating Officer who retired on March 4, 2022, and higher legal and professional costs of approximately $2.4 million. These increases were partially offset by a net reduction in stock-based compensation of $2.7 million from the year ended December 31, 2021 to the year ended December 31, 2022. Stock-based compensation for the year ended December 31, 2021 included a one-time charge of $2.9 million of additional stock-based compensation related to the modification of certain stock award agreements due to the non-renewal of the employment contract for our former Executive Chairman in December 2021.

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•Transaction Costs. Transactions costs for the year ended December 31, 2022 relate to certain one-time costs and other expenses incurred in pursuit of potential lodging property acquisitions that ultimately were not consummated. For the year ended December 31, 2021, we incurred costs of $2.1 million in transfer taxes and legal fees related to the contribution of six lodging properties to the GIC Joint Venture. GIC, our GIC Joint Venture partner, paid 49%, or $0.9 million, of the $1.8 million transfer tax which is reflected in non-controlling interest on our Consolidated Statement of Operations. We also incurred $1.7 million in transaction costs in pursuit of the acquisition of a portfolio of lodging properties that ultimately was not consummated.

•Recoveries of Credit Losses. Recoveries of credit losses for the year ended December 31, 2022 related to principal payments received related to our seller-financing loans, which are fully reserved. Recoveries of credit losses for the year ended December 31, 2021 were related to the repayment in full of two mezzanine loans receivable, which resulted in us reversing the $2.6 million allowance for credit losses related to the mezzanine loans. See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 4 – Investment in Real Estate Loans" for further information.

•Loss on Write-down or Impairment of Assets. Subsequent to December 31, 2022, we entered into a purchase and sale agreement with a third-party to sell a portfolio of four lodging properties for $28.1 million. We recorded a write-down of $2.9 million at December 31, 2022 to write-down certain assets held for sale to their estimated fair values less costs to sell. Additionally, we entered into a purchase and sale agreement with a third-party to sell a 6.0-acre parcel of undeveloped land for $1.3 million. We recorded a write-down of $0.3 million at December 31, 2022 for the excess of the net carrying amount of the undeveloped land over its estimated fair value less costs to sell. We also signed a purchase and sale agreement for the sale of two lodging properties for $50.5 million that is expected to close during the second quarter of 2023. We recorded a write-down of $7.2 million at December 31, 2022 for the excess of the net carrying amount of the properties over its estimated fair value less costs to sell. During the year ended December 31, 2021, we reached an agreement with the borrowers of the mezzanine loans on two real estate development projects for the full repayment of the loans in the fourth quarter of 2021, which resulted in us foregoing the exercise of the related purchase options to acquire the properties. As a result, we recorded a loss on impairment totaling $4.4 million during the year ended December 31, 2021 to write-off the carrying amounts of the purchase options.

•Gain (Loss) on Disposal of Assets. The gain on disposal of assets, net for the year ended December 31, 2022 is due to the sale of the Hilton Garden Inn San Francisco Airport North in San Francisco, CA in May 2022 for a gross selling price of $75.0 million.

•Interest Expense. Interest expense increased as a result of the additional debt outstanding during the year ended December 31, 2022 related to the NCI Transaction and the Brickell Transaction and higher base rates on our floating rate debt that is not hedged.

•Other Income, net. Other income, net decreased during the year ended December 31, 2022 as a result of a reduction in interest income during the period due to the repayment in full of several mezzanine loans totaling approximately $25.8 million during the fourth quarter of 2021. See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 4 – Investment in Real Estate Loans" for further information.

•Income Tax Expense. We recorded a $3.6 million income tax expense during the year ended December 31, 2022, an increase of $2.1 million over the $1.5 million income tax expense recorded during the year ended December 31, 2021. Our income tax expense relates to federal and state income taxes on the earnings of our TRS Lessees. The increase in income tax expense relates to an increase in taxable income of our TRS Lessees due to an increase in the size of our portfolio as a result of acquisitions during the year ended December 31, 2022 and due to a substantial improvement in our business during the year ended December 31, 2022 with the decreased effects of the Pandemic.

For information about our key operating metrics and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to "Part II – Item 7. – Management's Discussion and Analysis of Financial Conditions and Results of Operations - Results of Operations" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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Non-GAAP Financial Measures

We disclose certain “non-GAAP financial measures,” which are measures of our historical financial performance. Non-GAAP financial measures are financial measures not prescribed by Generally Accepted Accounting Principles ("GAAP"). These measures are as follows: (i) Funds From Operations (“FFO”) and Adjusted Funds from Operations ("AFFO"), (ii) Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"), Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate ("EBITDAre") and Adjusted EBITDAre (as described below). We caution investors that amounts presented in accordance with our definitions of non-GAAP financial measures may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP financial measures in the same manner. Our non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss) as a measure of our operating performance. Our non-GAAP financial measures may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, debt service obligations and other commitments and uncertainties. Although we believe that our non-GAAP financial measures can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures are not necessarily better indicators of any trend as compared to a comparable measure prescribed by GAAP such as net income (loss).

FFO and AFFO

As defined by Nareit, FFO represents net income or loss (computed in accordance with GAAP), excluding preferred dividends, gains (or losses) from sales of real property, impairment losses on real estate assets, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization related to real estate assets, and adjustments for unconsolidated partnerships, and joint ventures. AFFO represents FFO excluding amortization of deferred financing costs, franchise fees, equity-based compensation expense, transaction costs, debt transaction costs, premiums on redemption of preferred shares, losses from net casualties, non-cash interest income and non-cash income tax related adjustments to our deferred tax asset. Unless otherwise indicated, we present FFO and AFFO applicable to our common shares and common units. We present FFO and AFFO because we consider FFO and AFFO an important supplemental measure of our operational performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO and AFFO when reporting their results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and AFFO exclude depreciation and amortization related to real estate assets, gains and losses from real property dispositions and impairment losses on real estate assets, and certain transaction costs related to lodging property acquisition activities and debt, FFO and AFFO provide performance measures that, when compared year over year, reflect the effect to operations from trends in occupancy, guestroom rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. Our computation of FFO differs slightly from the computation of Nareit-defined FFO related to the reporting of depreciation and amortization expense on assets at our corporate offices, which is de minimus. Our computation of FFO may also differ from the methodology for calculating FFO used by other equity REITs and, accordingly, may not be comparable to such other REITs. FFO and AFFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. Where indicated in this Annual Report on Form 10-K, FFO is based on our computation of FFO and not the computation of Nareit-defined FFO unless otherwise noted.

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The following is a reconciliation of our GAAP net income to FFO and AFFO for the years ended December 31, 2022, 2021 and 2020 (in thousands, except per share/unit amounts): 

[[GREPCENT_TABLE]]
[["","","2022","","2021","","2020"],["Net income (loss)","","$","1,217","","","$","(68,584)","","","$","(149,245)"],["Preferred dividends","","(15,875)","","","(15,431)","","","(14,838)"],["Distributions to and accretion of redeemable non-controlling interests","","(2,520)","","","\u2014","","","\u2014"],["Premium on redemption of preferred stock","","\u2014","","","(2,710)","","","\u2014"],["(Income) loss related to non-controlling interests in consolidated joint ventures","","(2,321)","","","2,896","","","5,635"],["Net loss applicable to common shares and common units","","(19,499)","","","(83,829)","","","(158,448)"],["Real estate-related depreciation","","145,492","","","105,462","","","109,159"],["Loss on write-down or impairment of assets","","10,420","","","4,361","","","1,759"],["(Gain) loss on disposal of assets, net","","(20,315)","","","(240)","","","16"],["Adjustments related to non-controlling interests in consolidated joint ventures","","(20,845)","","","(8,454)","","","(5,949)"],["FFO applicable to common shares and common units","","95,253","","","17,300","","","(53,463)"],["(Recoveries of) provision for credit losses","","(1,100)","","","(2,632)","","","4,821"],["Amortization of lease-related intangible assets","","\u2014","","","87","","","86"],["Amortization of deferred financing costs","","5,708","","","4,353","","","2,267"],["Amortization of franchise fees","","663","","","493","","","460"],["Amortization of intangible assets","","3,643","","","\u2014","","","\u2014"],["Equity-based compensation (1)","","8,446","","","10,681","","","6,476"],["Executive transition costs (2)","","\u2014","","","1,065","","","\u2014"],["Transaction costs","","749","","","3,849","","","\u2014"],["Debt transaction costs","","1,528","","","220","","","365"],["Premium on redemption of preferred stock","","\u2014","","","2,710","","","\u2014"],["Non-cash interest income","","(113)","","","(1,042)","","","(2,848)"],["Non-cash lease expense, net","","505","","","521","","","329"],["Casualty losses, net","","2,505","","","468","","","1,132"],["Increase in deferred tax asset valuation allowance","","\u2014","","","\u2014","","","2,056"],["Adjustments related to non-controlling interests in consolidated joint ventures","","(3,400)","","","(1,291)","","","(341)"],["Special allocation related to sale of joint venture asset(3)","","(417)","","","\u2014","","","\u2014"],["Other","","\u2014","","","\u2014","","","91"],["AFFO applicable to common shares and common units","","$","113,970","","","$","36,782","","","$","(38,569)"],["FFO per common share/common unit","","$","0.79","","","$","0.16","","","$","(0.51)"],["AFFO per common share/common unit (4)","","$","0.94","","","$","0.35","","","$","(0.37)"],["Weighted average diluted common shares/common units:"],["FFO and AFFO (5)(6)","","121,163","","","105,455","","","104,320"]]
[[/GREPCENT_TABLE]]

(1)      The total equity-based compensation expense for the years ended December 31, 2022 and 2021 includes $1.3 million and $2.9 million, respectively, of incremental expense related to the modification of certain restricted stock awards as a result of the retirement of our Chief Operating Officer and Executive Chairman.

(2)      Executive transition costs are cash payments due to our former Executive Chairman as a result of the non-renewal of his employment contract in December 2021.

(3)    During the year ended December 31, 2022, we earned a $0.4 million promote related to the sale by the GIC Joint Venture of the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture. Our promote is earned when the internal rate of return to GIC related to capital transactions exceeds a specified investment hurdle rate. We have adjusted this amount from our calculation of AFFO because it relates to the gain on the sale of the property and not on-going operations.

52

(4)      AFFO for the years ended December 31, 2022 and 2021 has not been adjusted for interest related to the Convertible Notes for purposes of calculating AFFO per common share/common unit because we intend to settle the principal portion of the Convertible Notes in cash and we did not include in the denominator of our calculation of AFFO per common share/common unit the potential dilutive effect of shares that would be issued if the principal portion of the Convertible Notes were converted into shares of our common stock.

(5)       Includes Common Units in the Operating Partnership held by limited partners (other than us and our subsidiaries) because the Common Units are redeemable for cash or, at our election, shares of our common stock.

(6)      The weighted average diluted common shares/common units used to calculate FFO and AFFO per common share/common unit for the years ended December 31, 2022 and 2021 includes the dilutive effect of our outstanding restricted stock awards. These shares were excluded from our weighted average shares outstanding used to calculate net loss per share because they would have been antidilutive. The weighted average common shares/common units used to calculate FFO and AFFO per common share/common unit for the year ended December 31, 2021 exclude the potential dilution related to our Convertible Notes as we intend to settle the principal value of the Convertible Notes in cash.

A reconciliation of weighted average diluted common shares to non-GAAP weighted average diluted common shares/common units for FFO and AFFO is as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","2021","","2020"],["Weighted average dilutive common shares outstanding","","105,142","","","104,471","","","104,141"],["Dilutive effect of restricted stock awards","","221","","","402","","","52"],["Dilutive effect of performance stock awards","","7","","","\u2014","","","\u2014"],["Dilutive effect of shares issuable upon conversion of convertible debt","","24,193","","","23,256","","","\u2014"],["Adjusted weighted average dilutive common shares outstanding","","129,563","","","128,129","","","104,193"],["Non-GAAP adjustment for dilutive effects of common units","","15,360","","","144","","","179"],["Non-GAAP adjustment for dilutive effects of restricted stock awards","","433","","","438","","","(52)"],["Non-GAAP adjustment for dilutive effect of shares issuable upon conversion of convertible debt","","(24,193)","","","(23,256)","","","\u2014"],["Non-GAAP weighted dilutive common shares/common units outstanding","","121,163","","","105,455","","","104,320"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2022, AFFO applicable to common stock and Common Units increased $77.2 million over the prior year due to an improvement in our business that was primarily driven by strong leisure travel and improving demand for business and group travel and increases in our operating results due to acquisitions. See "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Effects of Pandemic on Our Business" for further information.

For information about our AFFO for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

EBITDA, EBITDAre and Adjusted EBITDAre

EBITDA

EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions.

53

EBITDAre and Adjusted EBITDAre

In September 2017, Nareit proposed a standardized performance measure, called EBITDAre, which is based on EBITDA and is expected to provide additional relevant information about REITs as real estate companies in support of growing interest among generalist investors. The conclusion was reached that, while dedicated REIT investors have long been accustomed to utilizing the industry’s supplemental measures such as FFO and net operating income (“NOI”) to evaluate the investment quality of REITs as real estate companies, it would be helpful to generalist investors for REITs as real estate companies to also present EBITDAre as a more widely known and understood supplemental measure of performance. EBITDAre is intended to be a supplemental non-GAAP performance measure that is independent of a company’s capital structure and will provide a uniform basis for one measurement of the enterprise value of a company compared to other REITs.

EBITDAre, as defined by Nareit, is calculated as EBITDA, excluding: (i) loss and gains on disposition of property and (ii) asset impairments, if any. We believe EBITDAre is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.

We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional non-recurring or unusual items described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of Adjusted EBITDAre, when combined with the primary GAAP presentation of net income, is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.

54

The following is a reconciliation of our GAAP net income to EBITDAre for the years ended December 31, 2022, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","2021","","2020"],["Net income (loss)","","$","1,217","","","$","(68,584)","","","$","(149,245)"],["Depreciation and amortization","","150,160","","","105,955","","","109,619"],["Interest expense","","65,581","","","43,368","","","43,300"],["Interest income","","(65)","","","(8)","","","(145)"],["Income tax expense","","3,611","","","1,473","","","1,376"],["EBITDA","","220,504","","","82,204","","","4,905"],["Loss on write-down or impairment of assets","","10,420","","","4,361","","","1,759"],["(Gain) loss on disposal of assets, net","","(20,315)","","","(240)","","","16"],["EBITDAre","","210,609","","","86,325","","","6,680"],["(Recoveries of) provision for credit losses","","(1,100)","","","(2,632)","","","4,821"],["Amortization of lease-related intangible assets","","\u2014","","","87","","","86"],["Amortization of key money liabilities","","(363)","","","\u2014","","","\u2014"],["Equity-based compensation(1)","","8,446","","","10,681","","","6,476"],["Executive transition costs(2)","","\u2014","","","1,065","","","\u2014"],["Transaction costs","","749","","","3,849","","","\u2014"],["Debt transaction costs","","1,528","","","220","","","365"],["Non-cash interest income","","(113)","","","(1,042)","","","(2,848)"],["Non-cash lease expense, net","","505","","","521","","","329"],["Casualty losses, net","","2,505","","","468","","","1,132"],["(Income) loss related to non-controlling interests in consolidated joint ventures","","(2,321)","","","2,896","","","5,635"],["Adjustments related to non-controlling interests in consolidated joint ventures","","(39,213)","","","(11,943)","","","(8,353)"],["Special allocation related to sale of joint venture asset(3)","","(417)","","","\u2014","","","\u2014"],["Other","","\u2014","","","\u2014","","","91"],["Adjusted EBITDAre","","$","180,815","","","$","90,495","","","$","14,414"]]
[[/GREPCENT_TABLE]]

(1)      The total equity-based compensation expense for the years ended December 31, 2022 and 2021 includes $1.3 million and $2.9 million of incremental expense related to the modification of certain restricted stock awards as a result of the retirement of our Chief Operating Officer and Executive Chairman, respectively.

(2)      Executive transition costs are cash payments due to our former Executive Chairman as a result of the non-renewal of his employment contract in December 2021.

(3)    During the year ended December 31, 2022, we earned a $0.4 million promote related to the sale by the GIC Joint Venture of the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture. Our promote is earned when the internal rate of return to GIC related to capital transactions exceeds a specified investment hurdle rate. We have adjusted this amount from our calculation of AFFO because it relates to the gain on the sale of the property and not on-going operations.

During the year ended December 31, 2022, Adjusted EBITDAre increased $90.3 million from the prior year primarily due to an improvement in our business that was primarily driven by strong leisure travel and improving demand for business and group travel and increases in our operating results due to acquisitions. See "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Effects of Pandemic on Our Business" for further information.

For information about our Adjusted EBITDAre for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

55

Liquidity and Capital Resources

Due to the Pandemic, we entered into modifications of our 2018 Senior Credit Facility during the years ended December 31, 2020 and 2021, which included a waiver of covenants through March 31, 2022. In July 2022, we entered into an amendment to the 2018 Senior Credit Facility which modified the requirements of certain key financial covenants, renewed our full access to our $400 Million Revolver (as defined in “Part II - Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt”), and granted us the option to extend the maturity dates for up to one additional year. See “Part II - Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt,” for additional information concerning our 2018 Senior Credit Facility.

Our short-term cash obligations consist primarily of operating expenses and other expenditures directly associated with our lodging properties, recurring maintenance and capital expenditures necessary to maintain our lodging properties in accordance with internal and brand standards, capital expenditures to improve our lodging properties, interest payments, settlement of any applicable interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, our joint venture acquisitions and capital requirements, contractual lease payments, corporate overhead, and distributions to our stockholders when declared. Our corporate overhead primarily consists of employee compensation expenses, professional fees, corporate insurance and rent expenses. Cash requirements for our corporate overhead expenses (excluding non-cash stock-based compensation), which are generally paid from operating cash flows, were $22.3 million, $18.7 million and $14.5 million for 2022, 2021 and 2020, respectively. We generally expect our corporate overhead expenses to remain consistent with the level of our operating activities and market conditions for goods and services.

Our long-term cash obligations consist primarily of the costs of acquiring additional lodging properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our lodging properties, dividend distributions and scheduled debt payments, including maturing loans.

During the first quarter of 2022, we completed the NCI Transaction for an aggregate purchase price of $822.0 million paid in the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 preferred units of limited partnership of the Operating Partnership newly designated as 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation Preference $25 Per Unit) (the “Series Z Preferred Units”), cash draws totaling $410.0 million from a term loan entered into by subsidiaries of the Joint Venture, the assumption by a subsidiary of the Joint Venture of approximately $6.5 million in PACE loan debt, $5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the GIC Joint Venture, and approximately $185.2 million cash contributed by GIC at closing. GIC also contributed to the GIC Joint Venture an additional $18.5 million in cash for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating Partnership as reimbursement for transaction costs paid by the Operating Partnership.

In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture.

Additionally, in June 2022, we exercised our purchase option to acquire a 90% equity interest in the AC/Element Hotel based on a gross hotel option exercise price of $89.0 million. The Brickell Joint Venture assumed $47.0 million of debt as part of the transaction. In October 2022, the Company entered into the Onera Joint Venture with the acquisition of a 90% equity interest in the Onera Joint Venture for $5.2 million in cash, plus additional contingent consideration limited to a maximum of $1.8 million, payable to the seller based on performance of the property for the 12-month period ending July 31, 2023. The Onera Joint Venture has a 100% fee simple interest in real property and improvements located in Fredericksburg, Texas consisting of 11 glamping lodging units and a 6.4-acre parcel of undeveloped land that will be developed as phase two of the lodging site in the future.

In January 2021, we sold Convertible Notes totaling $287.5 million before consideration of the related capped call transactions. We also paid approximately $7.0 million related to underwriting discounts and commissions and estimated offering expenses (including net proceeds from the full exercise by the underwriters of their over-allotment option to purchase additional Convertible Notes). These proceeds were used to pay the cost of the Capped Call Transactions and to partially repay outstanding obligations under the 2018 Senior Credit Facility and 2017 Term Loan. See “Note 5 – Debt” to the Condensed Consolidated Financial Statements for additional information concerning the Convertible Notes, Convertible Notes Offering and the Capped Call Transactions.

56

On May 1, 2021, the Company contributed a portfolio of six hotels containing 846 guestrooms to our consolidated joint venture with an affiliate of GIC, Singapore’s sovereign wealth fund. The estimated market value of the portfolio of hotel properties was $172.0 million and GIC contributed $84.3 million in cash for its 49% interest in our Joint Venture after the completion of the transfer of the six hotels. Net proceeds from the transaction were used to repay $62.5 million of our senior debt and $20.9 million was recorded as Cash and cash equivalents.

On July 9, 2021, we acquired the 110-guestroom Residence Inn by Marriott in Steamboat Springs, CO for $33.0 million through our Joint Venture.

On August 12, 2021, the Company sold 4,000,000 Series F preferred shares for net proceeds of $96.6 million, after the underwriting discount and offering-related expenses of $3.4 million. On September 4, 2021, using proceeds from the issuance of the Series F preferred shares, the Company paid $75.0 million to redeem all 3,000,000 of its outstanding 6.45% Series D Cumulative Redeemable Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends. The remaining net proceeds from the Series F preferred share offering was used to repay $22.0 million of our senior debt.

On December 21, 2021, we acquired the 120-guestroom Embassy Suites by Hilton in Tucson, AZ for $25.5 million through our Joint Venture. The Joint Venture acquired the property with a combination of cash and an assumed loan that had a balance of approximately $13.3 million. The loan has a fixed interest rate of 4.99% and a maturity date of June 2028.

To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to distribute a sufficient amount of our taxable income to maintain our status as a REIT and to avoid tax on undistributed income. Because we anticipate distributing a substantial amount of our available cash from operations, if sufficient funds are not available to us from lodging property dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business.

Outstanding Indebtedness

At December 31, 2022, we had $15.0 million outstanding on our $400 Million Revolver, $200.0 million outstanding on our $200 Million Term Loan and $225.0 million outstanding on our 2018 Term Loan. Each of the credit facilities was supported by the 57 lodging properties included in the credit facility borrowing base and a pledge of the equity securities in each of the entities which own one or more of the 57 lodging properties, and the respective TRS Lessees. We also had $287.5 million of Convertible Notes outstanding and $59.3 million of Secured Mortgage Indebtedness.

At December 31, 2022, the GIC Joint Venture had $200.0 million outstanding under our GIC Joint Venture Credit Facility, which included borrowings of $75.0 million on its $75.0 million term loan and $125.0 million on its $125.0 million revolving line of credit. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the equity interests in the subsidiaries that hold the 11-lodging property borrowing base assets, and the related TRS entities, which wholly own the TRS Lessees.

To complete the NCI Transaction, the GIC Joint Venture entered into a $410.0 million senior secured term loan facility (the “GIC Joint Venture Term Loan”) secured by the 27 lodging properties and two parking garages acquired in the transaction and assumed a PACE loan totaling $6.5 million. The GIC Joint Venture Term Loan has an accordion feature which will permit an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan will mature on January 13, 2026 and can be extended for one 12-month period at the Company’s option, subject to certain conditions. The GIC Joint Venture Term Loan is interest-only and provides for a floating interest rate equal to SOFR plus 2.86%. The outstanding balance of the PACE loan is $6.3 million at December 31, 2022.

Additionally, the GIC Joint Venture has a mortgage loan outstanding totaling $13.0 million at December 31, 2022 related to the acquisition of the Embassy Suites in Tucson, AZ in December 2021.

57

On June 10, 2022, the Brickell Joint Venture, as borrower, and the Operating Partnership, as the non-recourse guarantor, entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida to finance the dual-branded 264-guestroom AC/Element Hotel. The City National Bank Loan provides for an interest rate equal to one-month term SOFR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank Loan is prepayable at any time without penalty.

On August 30, 2022, we entered into agreements to fully defease three commercial mortgage-backed securities ("CMBS") mortgage loans totaling $54.9 million. On December 1, 2022, we entered into an agreement to fully defease a fourth commercial mortgage-backed securities ("CMBS") mortgage loan totaling $32.3 million. To defease the CMBS mortgage loans, we were required to place into trust an amount sufficient to cover future principal and interest payments related to the loans. As a result, we are no longer obligated to make future interest payments of approximately $2.4 million between the defeasance dates and maturity dates. Finally, as part of the defeasances, $26.8 million of restricted cash reserves were returned to us.

At December 31, 2022, we have scheduled debt principal amortization payments during the next twelve months totaling $2.2 million and no debt maturities until the fourth quarter of 2024 when taking into consideration available extension options. Currently, we have the capacity to pay these scheduled principal payments using cash on hand or draws under our $400 Million Revolver.

We have obtained financing through debt instruments having staggered maturities and intend to continue to do so in the future. Our debt includes, and may include in the future, debt secured by equity pledges, debt secured by first priority mortgage liens on certain lodging properties and unsecured debt. We believe that we will have adequate liquidity to meet the requirements for scheduled maturities and principal repayments. However, we can provide no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable terms.

Our outstanding indebtedness requires us to comply with various financial and other covenants. At December 31, 2022, we are in compliance with all of our loan agreements. In July 2022, we entered into amendments to each of the 2018 Senior Credit Facility and the 2018 Term Loan that give us full access to the $400 Million Revolver (subject to certain conditions) and improved certain financial covenant measures through December 31, 2023. Additionally, we have amended the GIC Joint Venture Credit Facility to provide for certain financial covenant waivers and adjustments as described in “Part II - Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt.” Our outstanding indebtedness requires us to comply with various financial and other covenants. At December 31, 2022, we and our GIC Joint Venture are in compliance with all loan covenants.

See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt" for additional information concerning our loans, loan amendments and our financing arrangements.

58

     A summary of our debt at December 31, 2022 is as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["Lender","","Interest Rate","","Amortization Period (Years)","","Maturity Date","","Number of Properties Encumbered"],["","","","","","Principal Amount"],["","","","","12/31/2022","","Outstanding"],["2018 Senior Credit Facility"],["Bank of America, NA"],["$400 Million Revolver(1)","","6.37% Variable","","n/a","","3/31/2023(6)","","n/a","","$","15,000"],["$200 Million Term Loan(1)","","6.32% Variable","","n/a","","4/1/2024","","n/a","","200,000"],["Total Senior Credit and Term Loan Facility","","","","","","","","","","215,000"],["Term Loans"],["KeyBank National Association Term Loan(1)","","6.11% Variable","","n/a","","2/14/2025","","n/a","","225,000"],["Convertible Notes","","1.50% Fixed","","n/a","","2/15/2026","","n/a","","287,500"],["Secured Mortgage Indebtedness"],["MetaBank(4)","","4.44% Fixed","","25","","7/1/2027","","3","","43,917"],["Bank of the Cascades (First Interstate Bank)(4)","","6.39% Variable","","25","","12/19/2024","","1","","7,691"],["Bank of the Cascades (First Interstate Bank)(4)","","4.30% Fixed","","25","","12/19/2024","","\u2014","","7,691"],["Total Mortgage Loans","","","","","","","","4","","59,299"],["","","","","","","","","4","","786,799"],["Brickell Joint Venture Mortgage Loan"],["City National Bank of Florida(5)","","7.36% Variable","","25","","6/30/2025","","2","","47,000"],["GIC Joint Venture Credit Facility and Term Loans"],["Bank of America, N.A."],["$125 Million Revolver(2)","","6.53% Variable","","n/a","","10/28/2023(7)","","n/a","","125,000"],["$75 Million Term Loan(2)","","6.48% Variable","","n/a","","10/28/2023(7)","","n/a","","75,000"],["Bank of America, N.A.(3)","","7.19% Variable","","n/a","","1/13/2026","","n/a","","410,000"],["Wells Fargo(5)","","4.99% Fixed","","30","","6/6/2028","","1","","13,032"],["PACE loan(5)","","6.10% Fixed","","20","","7/31/2040","","1","","6,293"],["Total GIC Joint Venture Credit Facility and Term Loans","","","","","","","","2","","629,325"],["Total Joint Venture Debt","","","","","","","","4","","676,325"],["Total Debt","","","","","","","","8","","$","1,463,124"]]
[[/GREPCENT_TABLE]]

(1) The 2018 Senior Credit Facility and Term Loans are supported by a borrowing base of 57 unencumbered hotel properties and a pledge of the equity securities of the entities that own and operate the 57 unencumbered hotels.

(2) The $125 Million Revolver and the $75 Term Loan are secured by pledges of the equity in the entities (and affiliated entities) that own 11 lodging properties.

(3) The $410 term loan with Bank of America, N.A. is secured by pledges of the equity in the entities (and affiliated entities) that own 27 lodging properties.

(4) The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.

(5) These loans are subject to mortgage debt and secured by the same collateral.

(6) We have exercised our option to extend the maturity date for the $400 Million Revolver to September 30, 2023 and we have additional options to extend the maturity date to March 31, 2025, subject to certain conditions.

(7) The maturity date for the $200 Million Term Loan can be extended to April 1, 2025 at the Company’s option, subject to certain conditions.

Capital Expenditures

During the year ended December 31, 2022, we funded $76.5 million in capital expenditures. We anticipate spending an estimated $60.0 million to $80.0 million in capital expenditures across our portfolio (excluding the pro rata portion related to our joint venture partners) during the year ended December 31, 2023. We expect to fund these expenditures through a combination of cash on hand, working capital, cash flows from operations, restricted cash, borrowings under our $400 Million Revolver, or other potential sources of capital, to the extent available to us.

59

Cash Flow Analysis

The following table summarizes changes in cash flows for the years ended December 31, 2022 and December 31, 2021 (in thousands):

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Changes from the year ended December 31, 2022 compared to the year ended December 31, 2021 were due to the following:

•Cash provided by operating activities. The increase in cash provided by operating activities primarily resulted from an increase in net income of $102.7 million after adjusting for non-cash items, such as depreciation and amortization, gains on the sale of assets and recoveries of credit losses, coupled with net changes in working capital of $0.9 million. The increase in net income during the year ended December 31, 2022 is the result of a significant improvement in our business that was primarily driven by an increase in leisure travel and to a lesser extent modest improvement in business and group travel and increases in our operating results due to acquisitions. Net cash provided by operating activities during the year ended December 31, 2021 were also negatively affected by the effects of the Pandemic.

•Cash used in investing activities. The increase in cash used in investing activities was due to the closing of the NCI Transaction, the Brickell Transaction, and the Onera Transaction during the year ended December 31, 2022 and an increase in capital expenditures related to renovation costs of $56.1 million during the year ended December 31, 2022. Cash used in investing activities during the year ended December 31, 2022 was partially offset by proceeds from the sale of 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. Other changes were due to a reduction in the funding of a mezzanine loan of $7.8 million and a reduction in principal payments received from the repayment of mezzanine loans of $24.7 million during the year ended December 31, 2021.

•Cash provided by financing activities. Cash provided by financing activities during the year ended December 31, 2022 was primarily the result of contributions from our joint venture partners of $204.1 million for the NCI Transaction and the Brickell Transaction, borrowings of $410.0 million under the GIC Joint Venture Term Loan for the NCI Transaction, offset by debt repayments, including the repayment of $328.7 million of debt assumed as part of the NCI Transaction, the repayment of the 2017 Term Loan of $62.0 million in May 2022, debt defeasances of $87.3 million and distributions to our joint venture partner of $80.4 million during the year ended December 31, 2022.

During the year ended December 31, 2021, cash provided by financing activities was primarily the result of the completion of a convertible debt offering of $287.5 million aggregate principal amount, which was used to partially repay obligations under the 2018 Senior Credit Facility and to pay the cost of capped call transactions.

For information about our consolidated cash flows for the year ended December 31, 2021 compared to the year ended December 31, 2020, refer to "Part II – Item 7. – Management's Discussion and Analysis of Financial Conditions and Results of Operations – Cash Flow Analysis" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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Critical Accounting Estimates

Asset Impairment

Each quarter, we evaluate the net carrying amounts of our long-term assets for impairment when impairment indicators are present. We evaluate for impairment triggers based on qualitative factors such as macroeconomic trends, trends related to demand for travel and lodging, and current and projected trends related to local market conditions. We also evaluate for impairment triggers based on quantitative factors such as historical and projected revenue and profitability performance trends. When an impairment indicator is identified, we perform a recoverability analysis based on estimated future undiscounted cash flows for the asset. Forecasted undiscounted cash flows require substantial management judgment related to estimates of future revenues, which is based on historical results, our expectations related to revenue trends and future performance of the asset, our assessment of current and future market conditions and competition, our expectations related to performance of the overall economy, and third-party industry published forecasts. Revenue performance has been volatile as a result of the Pandemic making revenue forecasts particularly challenging in the current environment.

Critical Accounting Policies and New Accounting Standards

See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 2 – Basis of Presentation and Significant Accounting Policies."

Cybersecurity

The hospitality industry and certain of the major brand and franchise companies have experienced cybersecurity breaches. We are not aware of any material cybersecurity losses at any of our properties. Cybersecurity risks at our lodging properties are managed through our franchisors and property management companies. An important part of our cybersecurity risk mitigation efforts includes maintaining cybersecurity insurance and indemnifications in certain of our property management agreements. Our board of directors, primarily through the audit committee, oversees management's approach to managing cybersecurity risks.

Recent Developments

Lodging Property Portfolio Transactions

Disposition of Lodging Properties and Undeveloped Land

Subsequent to December 31, 2022, we entered into a purchase and sale agreement with a third-party to sell a portfolio of four lodging properties for $28.1 million. We reclassified the properties as Assets held for sale, net at December 31, 2022 and recorded a loss on impairment of $2.9 million in the fourth quarter of 2022 for the excess of the net carrying amount of the portfolio of properties over the expected net selling price less costs to sell. Additionally, we entered into a purchase and sale agreement with a third-party to sell a 6.0-acre parcel of undeveloped for $1.3 million. We reclassified the property as Assets held for sale, net at December 31, 2022 and recorded a write-down of $0.3 million at December 31, 2022 for the excess of the net carrying amount of the undeveloped land over the expected net selling price less costs to sell. We also entered into an agreement for the sale of two lodging properties for $50.5 million. We reclassified the properties as Assets held for sale, net at December 31, 2022 and recorded a write-down of $7.2 million at December 31, 2022 for the excess of the net carrying amount of the properties over the expected net selling price less costs to sell.

Investment in Development Property

On January 10, 2023, we entered into an agreement with affiliates of Onera to provide a mezzanine loan to fund up to $4.6 million for the development of a glamping property. Additionally, we issued a $3.0 million letter of credit to the senior lender of the project as additional support for the borrower's construction loan. The development is expected to be completed in 2024. In addition, we have an option to purchase 90% of the equity of the entity that owns the development property upon completion of construction at a pre-determined price.

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Equity Transactions

On January 26, 2023, our Board of Directors declared cash dividends of $0.390625 per share of 6.25% Series E Cumulative Redeemable Preferred Stock and $0.3671875 per share of 5.875% Series F Cumulative Redeemable Preferred Stock. The Board of Directors also declared on behalf of the Operating Partnership, a cash dividend of $0.328125 per share of the Operating Partnership's unregistered 5.25% Series Z Cumulative Perpetual Preferred Units.

Our Board of Directors also declared a quarterly cash dividend of $0.04 per share on our Common Stock and per Common Unit of the Operating Partnership. These dividends are payable on February 28, 2023 to holders of record as of February 14, 2023.