Sunstone Hotel Investors, Inc. (SHO) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report. This discussion focuses on our financial condition and results of operations for the year ended December 31, 2023 as compared to the year ended December 31, 2022. A discussion and analysis of the year ended December 31, 2022 as compared to the year ended December 31, 2021 is included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 23, 2023, under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust. A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust for federal income tax purposes. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC, which is the entity that directly or indirectly owns our hotels. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which, directly or indirectly, leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.
We own hotels in urban and resort destinations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of December 31, 2023, we owned 14 hotels (the “14 Hotels”). All of our hotels are operated under nationally recognized brands, except the Oceans Edge Resort & Marina, which has established itself in a resort destination market.
The following tables summarize our total portfolio and room data from January 1, 2022 through December 31, 2023:
| | | | | | |
|---|---|---|---|---|---|
| | 2023 | 2022 | |||
| Portfolio Data—Hotels | | | | | |
| Number of hotels—beginning of year | 15 | 17 | | ||
| Add: Acquisitions | | — | | 1 | (1) |
| Less: Dispositions | (1) | (3) | | ||
| Number of hotels—end of year | 14 | | 15 | |
| | | | | | |
|---|---|---|---|---|---|
| | 2023 | 2022 | |||
| Portfolio Data—Rooms | | | | | |
| Number of rooms—beginning of year | 7,735 | 8,544 | | ||
| Add: Acquisitions | | — | | 339 | (1) |
| Less: Dispositions | (1,060) | (1,148) | | ||
| Number of rooms—end of year | 6,675 | 7,735 | | ||
| Average rooms per hotel—end of year | 477 | 516 | |
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| Column 1 | Column 2 |
|---|---|
| (1) | Does not include the Company’s 2022 acquisition of the 25.0% noncontrolling partner’s ownership interest in the 1,190-room Hilton San Diego Bayfront as the hotel was already fully consolidated in the Company’s results and portfolio information. |
2023 Summary
Demand. Occupancy during 2023 improved as compared to 2022 at the 13 hotels we owned during both years (the “Existing Portfolio”) and was as follows:
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quarters Ended | | Year Ended | ||||||||
| | March 31 | June 30 | September 30 | December 31 | | December 31 | |||||
| 2023 | 69.7 | % | 75.3 | % | 70.6 | % | 65.4 | % | | 70.3 | % |
| 2022 | 53.7 | % | 72.6 | % | 68.7 | % | 65.1 | % | | 65.1 | % |
During 2023, demand for both urban and convention travel improved, with strong occupancy growth in Boston, Portland, New Orleans, San Diego and San Francisco. In 2023, we experienced some softness in demand at our resort properties as leisure demand continues to normalize post-pandemic and was negatively impacted by a surge in U.S. travelers going abroad, combined with lower levels of international travelers visiting the United States. In addition, the Wailea Beach Resort was negatively impacted by the Maui wildfires.
Dispositions. In October 2023, we sold the Boston Park Plaza for gross proceeds of $370.0 million, excluding closing costs, and recorded a gain of $123.8 million.
Significant Renovations. During 2023, our significant renovations primarily consisted of the conversion and launch of the Renaissance Washington DC to The Westin Washington, DC Downtown in October 2023 and the commencement of the transformational conversion of The Confidante Miami Beach to Andaz Miami Beach. In addition, during the fourth quarter of 2023, we began a substantial renovation of the Renaissance Long Beach in preparation for its conversion to Marriott Long Beach Downtown.
Debt Transactions. In May 2023, we entered into a term loan agreement (“Term Loan 3”) and drew a total of $225.0 million. Term Loan 3’s variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on our leverage ratios, plus SOFR and a 0.10% adjustment. Term Loan 3 matures in May 2025, with a one-time option to extend the loan by twelve months to May 2026 upon the payment of applicable fees and the satisfaction of certain customary conditions.
In May 2023, we repaid the $220.0 million mortgage secured by the Hilton San Diego Bayfront, using proceeds received from Term Loan 3, and the mortgage’s related interest rate cap derivative was terminated.
For more details on our 2023 debt transactions, see “Liquidity and Capital Resources” below.
Capital Transactions. During 2023, we repurchased 5,971,192 shares of our common stock under our stock repurchase program at an average purchase price of $9.43 per share. As of December 31, 2023, approximately $454.7 million of authorized capacity remained under our stock repurchase program.
Operating Activities
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Room revenue, which is comprised of revenue realized from the sale of rooms at our hotels; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Food and beverage revenue, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other operating revenue, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone/internet, parking, spa, facility and resort fees, entertainment and other guest services. Additionally, this category includes, among other things, attrition and cancellation revenue, tenant revenue derived from hotel space and marina slips leased by third parties, winery revenue, any business interruption proceeds and any performance guarantee or reimbursements to offset net losses. |
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Expenses. Our expenses consist of the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Food and beverage expense, which is primarily driven by hotel food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities and franchise costs; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, however property tax is subject to regular revaluations based on the specific tax regulations and practices of each municipality, along with our cash and noncash operating lease expenses, general excise tax assessed by Hawaii and city taxes imposed by San Francisco; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other property-level expenses, which includes our property-level general and administrative expenses, such as payroll, benefits and other employee-related expenses, contract and professional fees, credit and collection expenses, employee recruitment, relocation and training expenses, labor dispute expenses, consulting fees, management fees and other expenses; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Corporate overhead expense, which includes our corporate-level expenses, such as payroll, benefits and other employee-related expenses, amortization of deferred stock compensation, business acquisition and due diligence expenses, legal expenses, association, contract and professional fees, board of director expenses, entity-level state franchise and minimum taxes, travel expenses, office rent and other customary expenses; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements and FF&E, along with amortization on our finance lease right-of-use asset (prior to the related hotel’s sale in February 2022), franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to FF&E for our corporate office; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Impairment losses, which includes the charges we have recognized to reduce the carrying values of certain hotels or our corporate headquarters on our balance sheet to their fair values in association with our impairment evaluations, along with the write-off of any development costs associated with abandoned projects or any hurricane-related property damage. |
Other Revenue and Expense. Other revenue and expense consists of the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts, as well as any energy or other rebates, property insurance proceeds we have received, miscellaneous income and any gains or losses we have recognized on sales or redemptions of assets other than real estate investments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Interest expense, which includes interest expense incurred on our outstanding fixed and variable rate debt and finance lease obligation (prior to the related hotel’s sale in February 2022), gains or losses on interest rate derivatives, amortization of deferred financing costs, and any loan or waiver fees incurred on our debt; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Gain on sale of assets, which includes the gains we recognized on our hotel sales that do not qualify as discontinued operations; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Gain (loss) on extinguishment of debt, net which includes gains related to the resolution of contingencies on extinguished debt and losses recognized on amendments or early repayments of mortgages or other debt obligations from the accelerated amortization of deferred financing costs, along with any other costs; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Income tax provision, net which includes federal and state income taxes charged to the Company net of any refundable credits or refunds received, any adjustments to deferred tax assets, liabilities or valuation allowances, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Income from consolidated joint venture attributable to noncontrolling interest, which includes net income attributable to a third-party’s 25.0% ownership interest in the joint venture that owned the Hilton San Diego Bayfront prior to our acquisition of the interest in June 2022; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Preferred stock dividends, which includes dividends accrued on our Series G Cumulative Redeemable Preferred Stock (the “Series G preferred stock”), Series H Cumulative Redeemable Preferred Stock (the “Series H preferred stock”) and Series I Cumulative Redeemable Preferred Stock (the “Series I preferred stock”). |
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Occupancy, which is the quotient of total rooms sold divided by total rooms available; |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Average daily room rate, or ADR, which is the quotient of room revenue divided by total rooms sold; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Revenue per available room, or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | RevPAR index, which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than the average of its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | EBITDAre, which is net income (loss) excluding: interest expense; benefit or provision for income taxes, including any changes to deferred tax assets, liabilities or valuation allowances and income taxes applicable to the sale of assets; depreciation and amortization; gains or losses on disposition of depreciated property (including gains or losses on change in control); and any impairment write-downs of depreciated property; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted EBITDAre, excluding noncontrolling interest, which is EBITDAre adjusted to exclude: the net income allocated to a third-party’s 25.0% ownership interest in the joint venture that owned the Hilton San Diego Bayfront prior to our acquisition of the interest in June 2022, along with the noncontrolling partner’s pro rata share of any EBITDAre components; amortization of deferred stock compensation; amortization of contract intangibles; amortization of right-of-use assets and obligations; the cash component of ground lease expense for any finance lease obligation that was included in interest expense; the impact of any gain or loss from undepreciated asset sales or property damage from natural disasters; any lawsuit settlement costs; the write-off of development costs associated with abandoned projects; property-level restructuring, severance, pre-opening and management transition costs; debt resolution costs; and any other nonrecurring identified adjustments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Funds from operations (“FFO”) attributable to common stockholders, which is net income (loss) and preferred stock dividends and any redemption charges, excluding: gains and losses from sales of property; real estate-related depreciation and amortization (excluding amortization of deferred financing costs and right-of-use assets and obligations); any real estate-related impairment losses; and the noncontrolling partner’s pro rata share of net income and any FFO components prior to our acquisition of the noncontrolling partner’s interest in June 2022; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted FFO attributable to common stockholders, which is FFO attributable to common stockholders adjusted to exclude: amortization of deferred stock compensation; amortization of contract intangibles; real estate-related amortization of right-of-use assets and obligations; noncash interest on our derivatives and any finance lease obligations; income tax benefits or provisions associated with any changes to deferred tax assets, liabilities or valuation allowances, the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets; gains or losses due to property damage from natural disasters; any lawsuit settlement costs; the write-off of development costs associated with abandoned projects; non-real estate-related impairment losses; property-level restructuring, severance, pre-opening and management transition costs; debt resolution costs; preferred stock redemption charges; the noncontrolling partner’s pro rata share of any Adjusted FFO components prior to our acquisition of the noncontrolling partner’s interest in June 2022; and any other nonrecurring identified adjustments. |
Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Demand. The demand for lodging has traditionally been closely linked with the performance of the general economy. Our hotels are classified as either upper upscale or luxury hotels. In an economic downturn or recession, these types of hotels may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates in part because upper upscale and luxury hotels generally target business and leisure travelers, and these groups may seek to curtail spending in periods of economic decline. In addition, operating results at our hotels in resort markets may be negatively affected by reduced demand from domestic travelers due to pent up desire for international travel as pandemic-era travel restrictions have been lifted, and by changes in the value of the U.S. dollar in relation to other currencies which may make international travel more affordable; whereas operating results at our hotels in key gateway markets may be negatively affected by reduced demand from international travelers due to financial conditions in their home countries or a material strengthening of the U.S. dollar in relation to other currencies which makes travel to the U.S. less affordable. Also, volatility in transportation fuel costs, increases in air and ground travel costs, decreases in airline capacity, and prolonged periods of inclement weather in our markets may reduce the demand for our hotels. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Supply. The addition of new competitive hotels affects the ability of existing hotels to absorb demand for lodging and, therefore, impacts the ability to generate growth in RevPAR and profits. The development of new hotels is largely driven by construction costs, the cost and availability of financing, and the expected performance of existing hotels. Prior to the COVID-19 pandemic, U.S. hotel supply continued to increase. On a market-by-market basis, some markets experienced new hotel room openings at or greater than historic levels. Additionally, an increase in the supply of vacation rental or |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| sharing services such as Airbnb affects the ability of existing hotels to generate growth in RevPAR and profits. We believe that both new full-service hotel construction and new hotel openings will be delayed in the near-term due to several factors, including increased borrowing costs and increased materials and construction costs. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Revenues and Expenses. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators’ effectiveness in maximizing revenues. Similarly, we also evaluate our operators’ effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues. Inflationary pressures could increase operating costs, which could limit our operators’ effectiveness in minimizing expenses. |
Operating Results. The following table presents our operating results for our total portfolio for the years ended December 31, 2023 and 2022, including the amount and percentage change in the results between the two periods.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2023 | 2022 | Change $ | Change % | ||||||||
| | | (in thousands, except statistical data) | ||||||||||
| REVENUES | | | | | | | | | | | | |
| Room | | $ | 619,277 | | $ | 576,170 | | $ | 43,107 | | 7.5 | % |
| Food and beverage | | | 277,514 | | 240,564 | | | 36,950 | | 15.4 | % | |
| Other operating | | | 89,689 | | 95,319 | | | (5,630) | | (5.9) | % | |
| Total revenues | | | 986,480 | | 912,053 | | | 74,427 | | 8.2 | % | |
| OPERATING EXPENSES | | | | | | | | | | | | |
| Hotel operating | | | 589,103 | | 537,731 | | | 51,372 | | 9.6 | % | |
| Other property-level expenses | | | 120,247 | | 113,336 | | | 6,911 | | 6.1 | % | |
| Corporate overhead | | | 31,412 | | 35,246 | | | (3,834) | | (10.9) | % | |
| Depreciation and amortization | | | 127,062 | | | 126,396 | | | 666 | | 0.5 | % |
| Impairment losses | | | — | | 3,466 | | | (3,466) | | (100.0) | % | |
| Total operating expenses | | | 867,824 | | 816,175 | | | 51,649 | | 6.3 | % | |
| | | | | | | | | | | | | |
| Interest and other income | | | 10,535 | | 5,242 | | | 5,293 | | 101.0 | % | |
| Interest expense | | | (51,679) | | (32,005) | | | (19,674) | | (61.5) | % | |
| Gain on sale of assets | | | 123,820 | | 22,946 | | | 100,874 | | 439.6 | % | |
| Gain (loss) on extinguishment of debt, net | | | 9,938 | | | (936) | | | 10,874 | | 1,161.8 | % |
| Income before income taxes | | | 211,270 | | 91,125 | | | 120,145 | | 131.8 | % | |
| Income tax provision, net | | | (4,562) | | (359) | | (4,203) | | (1,170.8) | % | ||
| NET INCOME | | | 206,708 | | 90,766 | | | 115,942 | | 127.7 | % | |
| Income from consolidated joint venture attributable to noncontrolling interest | | | — | | (3,477) | | 3,477 | | 100.0 | % | ||
| Preferred stock dividends | | | (13,988) | | (14,247) | | | 259 | | 1.8 | % | |
| INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | | $ | 192,720 | | $ | 73,042 | | $ | 119,678 | | 163.8 | % |
Summary of Operating Results. The following items significantly impact the year-over-year comparability of our operations:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | COVID-19: Operations at most of our hotels were negatively impacted by COVID-19’s Omicron variant and subvariants, primarily during the first quarter of 2022. Consequently, the results of our operations in 2023 are not comparable to 2022. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Hotel Acquisitions: In June 2022, we purchased The Confidante Miami Beach, resulting in increased revenues, operating expenses and depreciation expense in 2023 as compared to 2022. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Hotel Dispositions: In October 2023, we sold the Boston Park Plaza. In addition, we sold the Hyatt Centric Chicago Magnificent Mile in February 2022, and in March 2022 we sold both the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile. As a result of these four hotel dispositions (the “Four Disposed Hotels”), our revenues, operating expenses and depreciation expense in 2023 are not comparable to 2022. |
Room Revenue. Room revenue increased $43.1 million, or 7.5%, in 2023 as compared to 2022 as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Room revenue at the Existing Portfolio increased $35.6 million. Occupancy increased 520 basis points and the average daily room rate decreased 0.8%, resulting in a 7.1% increase in RevPAR. |
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| | | | | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2023 | | 2022 | | Change | |||||||||||||||||
| | Occ% | ADR | RevPAR | Occ% | ADR | RevPAR | Occ% | ADR | RevPAR | ||||||||||||||
| Existing Portfolio | | 70.3 | % | $ | 326.76 | | $ | 229.71 | 65.1 | % | $ | 329.39 | | $ | 214.43 | | 520 | bps | (0.8) | % | 7.1 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| The Confidante Miami Beach | | 60.7 | % | $ | 277.44 | | $ | 168.41 | N/A | | | N/A | | | N/A | | N/A | | N/A | | N/A | |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Confidante Miami Beach caused room revenue to increase by $8.5 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Four Disposed Hotels caused room revenue to decrease by $1.0 million. |
Food and Beverage Revenue. Food and beverage revenue increased $37.0 million, or 15.4%, in 2023 as compared to 2022 as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Food and beverage revenue at the Existing Portfolio increased $34.0 million, primarily due to increased group and transient demand, resulting in increased banquet and outlet revenue, partially offset by wildfire disruption at the Wailea Beach Resort. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Confidante Miami Beach caused food and beverage revenue to increase by $2.8 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Four Disposed Hotels caused food and beverage revenue to decrease by $0.1 million. |
Other Operating Revenue. Other operating revenue decreased $5.6 million, or 5.9%, in 2023 as compared to 2022 as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other operating revenue at the Existing Portfolio decreased $5.7 million, primarily due to $10.0 million in business interruption proceeds recognized in 2022 related to COVID-19 disruption at our hotels with no corresponding proceeds recognized in 2023. In addition, other operating revenue included $0.5 million and $1.0 million in 2023 and 2022, respectively, in business interruption proceeds at the Hilton New Orleans St. Charles related to Hurricane Ida disruption. Other operating revenue at the Existing Portfolio was negatively impacted in 2023 by decreases in COVID-19-related cancellation and attrition fees. These decreases were partially offset by the Existing Portfolio’s increased occupancy, which resulted in increased revenue from facility and resort fees, parking fees, winery revenue and spa revenue. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Confidante Miami Beach caused other operating revenue to increase by $0.9 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Four Disposed Hotels caused other operating revenue to decrease by $0.8 million. |
Hotel Operating Expenses. Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance and other hotel operating expenses increased $51.4 million, or 9.6%, in 2023 as compared to 2022 as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Hotel operating expenses at the Existing Portfolio increased $50.5 million, primarily corresponding to the increases in the Existing Portfolio’s revenues and occupancy rates, along with increased property and liability insurance and property taxes. In addition, utility expenses at the Existing Portfolio increased due to increases in the cost of natural gas. Partially offsetting these increased expenses, repairs and maintenance expense in 2022 includes $1.6 million in Hurricane Ida-related restoration expenses at our New Orleans hotels and $0.3 million in Hurricane Ian-related restoration expenses at two of our Florida hotels with no corresponding expense recognized in 2023. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Confidante Miami Beach caused hotel operating expenses to increase by $8.3 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Four Disposed Hotels caused hotel operating expenses to decrease by $7.4 million. |
Other Property-Level Expenses. Other property-level expenses increased $6.9 million, or 6.1%, in 2023 as compared to 2022 as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other property-level expenses at the Existing Portfolio increased $6.1 million, including a $2.8 million increase in management fees related to the increases in the Existing Portfolio’s revenues. Additional increases to other property-level expenses at the Existing Portfolio included payroll and related expenses, credit card commissions, supply expenses, travel expenses and license and permit fees. These increased expenses were partially offset by decreased contract and professional fees and employee recruiting and training expenses. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Confidante Miami Beach caused other property-level expenses to increase by $2.2 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Four Disposed Hotels caused other property-level expenses to decrease by $1.4 million. |
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Corporate Overhead Expense. Corporate overhead expense decreased $3.8 million, or 10.9%, in 2023 as compared to 2022, primarily due to decreased payroll and related expenses and deferred stock amortization expense related to the chief executive officer transition costs recognized in 2022. Additional decreases to corporate overhead expense included office rent expense due to the relocation of our corporate office in January 2023, professional fees and due diligence expenses. These decreased expenses were partially offset by increased entity-level state franchise and minimum taxes, board of director expenses and Corporate Responsibility program reporting and administration expenses.
Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.7 million, or 0.5%, in 2023 as compared to 2022 as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Depreciation and amortization expense related to the Existing Portfolio increased $4.4 million due to increased depreciation and amortization at our newly renovated hotels, partially offset by decreased expense due to fully depreciated assets. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Confidante Miami Beach caused depreciation and amortization to increase by $2.1 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Four Disposed Hotels resulted in a decrease in depreciation and amortization of $5.9 million. |
Impairment Losses. Impairment losses totaled zero in 2023 and $3.5 million in 2022. In 2022, in connection with an initiative to reduce future operating expenses, we recorded a noncash impairment loss of $3.5 million related to the relocation of our corporate headquarters. The $3.5 million consisted of a $1.4 million write-down of tenant improvements, net at our former corporate headquarters and a $2.1 million write-down of the related office operating lease right-of-use asset, net.
Interest and Other Income. Interest and other income totaled income of $10.5 million and $5.2 million in 2023 and 2022, respectively. In 2023, we recognized interest income of $6.8 million and received insurance proceeds of $3.7 million for Hurricane Ida-related property damage at the Hilton New Orleans St. Charles.
In 2022, we recognized $4.4 million in insurance proceeds for Hurricane Ida-related property damage at our New Orleans hotels and $0.8 million in interest income.
Interest Expense. We incurred interest expense as follows (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | | 2023 | | 2022 | ||
| Interest expense on debt and finance lease obligation | | $ | 48,727 | | $ | 31,713 |
| Noncash interest on derivatives, net | | 252 | | (2,194) | ||
| Amortization of deferred financing costs | | 2,700 | | 2,486 | ||
| Total interest expense | | $ | 51,679 | | $ | 32,005 |
Interest expense increased $19.7 million, or 61.5%, in 2023 as compared to 2022 as follows:
Interest expense on our debt and finance lease obligation increased $17.0 million in 2023 as compared to 2022 primarily due to increased interest on our variable rate debt, our draw of the $225.0 million available under Term Loan 3 in May 2023 and the additional amounts borrowed under two of our term loans in July 2022. These increases were partially offset due to our repayment of the $220.0 million loan secured by the Hilton San Diego Bayfront in May 2023, partial repayments of the senior notes in February 2022, decreases in the interest rates on our senior notes due to our exiting the covenant relief period in March 2022, and decreased interest on our finance lease obligation due to our sale of the Hyatt Centric Chicago Magnificent Mile in February 2022.
Noncash changes in the fair market value of our derivatives caused interest expense to increase $2.4 million in 2023 as compared to 2022.
The amortization of deferred financing costs caused interest expense to increase $0.2 million in 2023 as compared to 2022 due to costs incurred on Term Loan 3.
Our weighted average interest rate per annum, including our variable rate debt obligation, was approximately 5.8% and 5.0% at December 31, 2023 and 2022, respectively. Approximately 51.2% and 42.4% of our outstanding notes payable had fixed interest rates or had been swapped to fixed interest rates at December 31, 2023 and 2022, respectively.
Gain on Sale of Assets. Gain on sale of assets totaled $123.8 million and $22.9 million in 2023 and 2022, respectively. In 2023, we recognized a $123.8 million gain on the sale of the Boston Park Plaza.
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In 2022, we recognized an $11.3 million gain on the sale of the Hyatt Centric Chicago Magnificent Mile and an $11.6 million gain on the combined sale of the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown Magnificent Mile.
Gain (loss) on Extinguishment of Debt, Net. Gain (loss) on extinguishment of debt, net totaled a gain of $9.9 million in 2023 as compared to a net loss of $0.9 million in 2022. During 2023, we recognized a gain of $9.9 million associated with our assignment of the Hilton Times Square to the hotel’s mortgage holder in 2020, comprised of $9.8 million from the relief of the majority of the Hilton Times Square potential employee-related obligations, with the funds released to us from escrow, and $0.1 million due to reassessments of the remaining potential employee-related obligations currently held in escrow.
During 2022, we recognized a loss of $1.0 million related to lender fees and the accelerated amortization of deferred financing costs associated with our July 2022 Amended Credit Agreement and the February 2022 repayments of a portion of our senior notes. In addition, we recognized a $0.1 million gain associated with the assignment of the Hilton Times Square to the hotel’s mortgage holder due to reassessments of the potential employee-related obligations currently held in escrow.
Income Tax Provision, Net. We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and the Operating Partnership may also be subject to various state and local income taxes.
In 2023, we recognized a net current income tax provision of $4.6 million resulting from current state and federal income tax expenses, of which $3.7 million related to the gain we recognized on the sale of the Boston Park Plaza.
In 2022, we recognized a net current income tax provision of $0.4 million, resulting from $0.8 million in current state income tax expense, partially offset by a state tax credit of $0.4 million associated with solar improvements at the Wailea Beach Resort.
Income from Consolidated Joint Venture Attributable to Noncontrolling Interest. Income from consolidated joint venture attributable to noncontrolling interest, which represents the outside 25.0% interest in the entity that owned the Hilton San Diego Bayfront, totaled zero and $3.5 million in 2023 and 2022, respectively.
In June 2022, we acquired the outside 25.0% interest in the entity that owned the Hilton San Diego Bayfront, resulting in our 100% ownership of the hotel.
Preferred Stock Dividends. Preferred stock dividends were incurred as follows (in thousands):
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | 2023 | | 2022 | | ||
| Series G preferred stock | | $ | 1,244 | | $ | 1,503 | |
| Series H preferred stock | | | 7,044 | | | 7,044 | |
| Series I preferred stock | | | 5,700 | | | 5,700 | |
| | | $ | 13,988 | | $ | 14,247 | |
Non-GAAP Financial Measures. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDAre; Adjusted EBITDAre, excluding noncontrolling interest; FFO attributable to common stockholders; and Adjusted FFO attributable to common stockholders. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with accounting principles generally accepted in the United States (“GAAP”). In addition, our calculation of these measures may not be comparable to other companies that do not define such terms exactly the same as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to net income (loss), cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding 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.
We present EBITDAre in accordance with guidelines established by the National Association of Real Estate Investment Trusts (“Nareit”), as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate.” We believe EBITDAre is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. Nareit defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in
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unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates.
We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDAre, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions.
We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre, excluding noncontrolling interest:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Amortization of deferred stock compensation: we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Amortization of contract intangibles: we exclude the noncash amortization of any favorable or unfavorable contract intangibles recorded in conjunction with our hotel acquisitions. We exclude the noncash amortization of contract intangibles because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Amortization of right-of-use assets and obligations: we exclude the amortization of our right-of-use assets and related lease obligations, as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Finance lease obligation interest – cash ground rent: we include an adjustment for the cash finance lease expense recorded on the building lease at the Hyatt Centric Chicago Magnificent Mile (prior to the hotel’s sale in February 2022). We determined that the building lease was a finance lease, and, therefore, we included a portion of the lease payment each month in interest expense. We adjusted EBITDAre for the finance lease in order to more accurately reflect the actual rent due to the hotel’s lessor in the respective period, as well as the operating performance of the hotel. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Undepreciated asset transactions: we exclude the effect of gains and losses on the disposition of undepreciated assets because we believe that including them in Adjusted EBITDAre, excluding noncontrolling interest is not consistent with reflecting the ongoing performance of our assets. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Noncontrolling interest: we exclude the noncontrolling partner’s pro rata share of the net income allocated to the Hilton San Diego Bayfront partnership prior to our acquisition of the noncontrolling partner’s interest in June 2022, as well as the noncontrolling partner’s pro rata share of any EBITDAre and Adjusted EBITDAre components. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Cumulative effect of a change in accounting principle: from time to time, the Financial Accounting Standards Board (“FASB”) promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for the period and/or the ongoing operations of our hotels. Such items may include: lawsuit settlement costs; the write-off of development costs associated with abandoned projects; property-level restructuring, severance, pre-opening and management transition costs; debt resolution costs; lease terminations; property insurance restoration proceeds or uninsured losses; and other non-recurring identified adjustments. |
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The following table reconciles our net income to EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest for our total portfolio for the years ended December 31, 2023 and 2022 (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | 2023 | 2022 | ||||
| Net income | | $ | 206,708 | | $ | 90,766 |
| Operations held for investment: | | | | | | |
| Depreciation and amortization | | | 127,062 | | 126,396 | |
| Interest expense | | | 51,679 | | 32,005 | |
| Income tax provision, net | | | 4,562 | | 359 | |
| Gain on sale of assets | | | (123,820) | | (22,946) | |
| Impairment losses - depreciable assets | | | — | | | 1,379 |
| EBITDAre | | | 266,191 | | 227,959 | |
| | | | | | | |
| Operations held for investment: | | | | | | |
| Amortization of deferred stock compensation | | | 10,775 | | 10,891 | |
| Amortization of right-of-use assets and obligations | | | (102) | | (1,409) | |
| Amortization of contract intangibles, net | | | (55) | | | (61) |
| Finance lease obligation interest - cash ground rent | | | — | | (117) | |
| (Gain) loss on extinguishment of debt, net | | | (9,938) | | 936 | |
| Hurricane-related insurance restoration proceeds net of losses | | | (3,722) | | | (2,755) |
| Property-level severance | | | 297 | | 729 | |
| Costs associated with financing no longer pursued | | | — | | | 697 |
| Impairment loss - right-of-use asset | | | — | | | 2,087 |
| Noncontrolling interest | | | — | | | (5,175) |
| Adjustments to EBITDAre, net | | | (2,745) | | 5,823 | |
| Adjusted EBITDAre, excluding noncontrolling interest | | $ | 263,446 | | $ | 233,782 |
Adjusted EBITDAre, excluding noncontrolling interest increased $29.7 million, or 12.7%, in 2023 as compared to 2022 primarily due to the following:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted EBITDAre at the Existing Portfolio increased $14.2 million, or 6.3%, in 2023 as compared to 2022, primarily due to the changes in the Existing Portfolio’s revenues and expenses included in the discussion above regarding the operating results for 2023. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Confidante Miami Beach recorded Adjusted EBITDAre of $5.9 million and $3.8 million in 2023 and 2022, respectively. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | The Four Disposed Hotels recorded Adjusted EBITDAre of $32.0 million and $22.0 million in 2023 and 2022, respectively. |
We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the Nareit definition of “FFO applicable to common shares.” Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current Nareit definition, or that interpret the current Nareit definition differently than we do.
We also present Adjusted FFO attributable to common stockholders when evaluating our operating 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 may facilitate comparisons of operating performance between periods and our peer companies.
We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Amortization of deferred stock compensation: we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels. |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Amortization of contract intangibles: we exclude the noncash amortization of any favorable or unfavorable contract intangibles recorded in conjunction with our hotel acquisitions. We exclude the noncash amortization of contract intangibles because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Real estate amortization of right-of-use assets and obligations: we exclude the amortization of our real estate right-of-use assets and related lease obligations, which includes the amortization of both our finance and operating lease intangibles (with the exception of our corporate operating lease), as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired, as well as the noncash interest on our derivatives and finance lease obligation. We believe that these items are not reflective of our ongoing finance costs. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Noncontrolling interest: we deduct the noncontrolling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership prior to our acquisition of the noncontrolling partner’s interest in June 2022. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: lawsuit settlement costs; the write-off of development costs associated with abandoned projects; changes to deferred tax assets, liabilities or valuation allowances; property-level restructuring, severance, pre-opening and management transition costs; debt resolution costs; preferred stock redemption charges; lease terminations; property insurance restoration proceeds or uninsured losses; income tax benefits or provisions associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets; and other nonrecurring identified adjustments. |
The following table reconciles our net income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our total portfolio for the years ended December 31, 2023 and 2022 (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | 2023 | 2022 | ||||
| Net income | | $ | 206,708 | | $ | 90,766 |
| Preferred stock dividends | | (13,988) | | (14,247) | ||
| Operations held for investment: | | | | | | |
| Real estate depreciation and amortization | | 126,435 | | 124,819 | ||
| Gain on sale of assets | | (123,820) | | (22,946) | ||
| Noncontrolling interest | | | — | | | (4,933) |
| FFO attributable to common stockholders | | 195,335 | | 173,459 | ||
| | | | | | | |
| Operations held for investment: | | | | | | |
| Amortization of deferred stock compensation | | | 10,775 | | | 10,891 |
| Real estate amortization of right-of-use assets and obligations | | (505) | | (1,155) | ||
| Amortization of contract intangibles, net | | | 357 | | | 422 |
| Noncash interest on derivatives, net | | 252 | | (2,194) | ||
| (Gain) loss on extinguishment of debt, net | | (9,938) | | 936 | ||
| Hurricane-related insurance restoration proceeds net of losses | | | (3,722) | | | (2,755) |
| Property-level severance | | | 297 | | | 729 |
| Income tax related to hotel disposition | | | 3,662 | | | — |
| Costs associated with financing no longer pursued | | | — | | | 697 |
| Impairment losses - right-of-use and depreciable assets | | | — | | | 3,466 |
| Noncontrolling interest | | | — | | | 132 |
| Adjustments to FFO attributable to common stockholders, net | | 1,178 | | 11,169 | ||
| Adjusted FFO attributable to common stockholders | | $ | 196,513 | | $ | 184,628 |
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Adjusted FFO attributable to common stockholders increased $11.9 million, or 6.4%, in 2023 as compared to 2022 primarily due to the same reasons noted in the discussion above regarding Adjusted EBITDAre, excluding noncontrolling interest.
Liquidity and Capital Resources
During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from hotel dispositions, our credit facility and term loans, and business interruption and property insurance. Our primary uses of cash were for capital expenditures for hotels and other assets, acquisitions of hotels and other assets, operating expenses, repurchases of our common stock, repayments of notes payable and our credit facility, dividends and distributions on our preferred and common stock, and a distribution to our former joint venture partner. We cannot be certain that traditional sources of funds will be available in the future.
Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in the net cash generated by our hotels, offset by the cash paid for corporate expenses. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $198.1 million in 2023 as compared to $209.4 million in 2022. The net decrease in cash provided by operating activities in 2023 as compared to 2022 was primarily due to a decrease in operating cash caused by the sales of the Four Disposed Hotels as well as higher interest payments on our variable rate debt, partially offset by additional operating cash provided by the newly-acquired The Confidante Miami Beach as well as the increase in travel demand benefiting our hotels.
Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels and other assets. Net cash provided by (used in) investing activities in 2023 and 2022 was as follows (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | | 2023 | | 2022 | ||
| Proceeds from sales of assets | | $ | 364,491 | | $ | 191,291 |
| Acquisitions of hotel properties and other assets | | — | | (232,506) | ||
| Proceeds from property insurance | | 3,722 | | 4,369 | ||
| Renovations and additions to hotel properties and other assets | | (110,131) | | (128,576) | ||
| Payment for interest rate derivative | | | — | | | (299) |
| Net cash provided by (used in) investing activities | | $ | 258,082 | | $ | (165,721) |
In 2023, we received proceeds of $364.5 million from the sale of the Boston Park Plaza and insurance proceeds of $3.7 million for hurricane-related property damage at the Hilton New Orleans St. Charles. These cash inflows were partially offset by $110.1 million invested for renovations and additions to our portfolio and other assets.
In 2022, we received total proceeds of $191.3 million from the sales of three hotels, consisting of $63.2 million for the Hyatt Centric Chicago Magnificent Mile (having already received a $4.0 million deposit in December 2021) and $128.1 million for the Embassy Suites Chicago and the Hilton Garden Inn Chicago Downtown/Magnificent Mile. In addition, we received insurance proceeds of $4.4 million for hurricane-related property damage at the Hilton New Orleans St. Charles. These cash inflows were offset by $232.5 million paid to acquire hotel properties and other assets, consisting of $232.0 million for The Confidante Miami Beach, including closing costs and prorations, and $0.5 million to acquire additional wet and dry boat slips at the Oceans Edge Resort & Marina. In addition, we invested $128.6 million for renovations and additions to our portfolio and other assets and paid $0.3 million for an interest rate cap derivative on debt secured by the Hilton San Diego Bayfront.
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Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our dividends and distributions paid, issuance and repurchase of common stock, issuance and repayment of notes payable and our credit facility, and issuance and redemption of other forms of capital, including preferred equity. Net cash used in financing activities in 2023 and 2022 was as follows (in thousands):
| | | | | | | |
|---|---|---|---|---|---|---|
| | | 2023 | | 2022 | ||
| Acquisition of noncontrolling interest, including transaction costs | | $ | (299) | | $ | (104,261) |
| Payment of common stock offering costs | | | (428) | | | (91) |
| Repurchases of outstanding common stock | | | (56,403) | | | (108,442) |
| Repurchases of common stock for employee tax obligations | | | (3,348) | | | (3,351) |
| Proceeds from credit facility | | | — | | | 230,000 |
| Payments on credit facility | | | — | | | (230,000) |
| Proceeds from notes payable | | | 225,000 | | | 243,615 |
| Payments on notes payable | | | (222,086) | | | (38,916) |
| Payments of deferred financing costs | | | (2,332) | | | (7,404) |
| Dividends and distributions paid | | | (59,825) | | | (24,824) |
| Distribution to noncontrolling interest | | | — | | | (5,500) |
| Net cash used in financing activities | | $ | (119,721) | | $ | (49,174) |
During 2023, we paid an additional $0.3 million to true-up the total acquisition cost of the outside 25.0% equity interest in the entity that owns the Hilton San Diego Bayfront and $0.4 million in common stock offering costs related to our shelf registration statement. In addition, we paid $56.4 million to acquire 5,971,192 shares of our outstanding common stock, $3.3 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees, and $59.8 million in dividends and distributions to our preferred and common stockholders. We also entered into Term Loan 3, receiving $225.0 million in proceeds and paying $2.3 million in related deferred financing costs. We utilized the proceeds received from Term Loan 3 to repay the $220.0 million loan secured by the Hilton San Diego Bayfront. We also paid $2.1 million in scheduled principal payments on our notes payable.
During 2022, we paid $104.3 million to acquire the outside 25.0% equity interest in the entity that owns the Hilton San Diego Bayfront, $108.4 million to repurchase 10,245,324 shares of our outstanding common stock and $0.1 million in common stock offering costs related to restricted common stock issued to employees. We also paid $3.4 million to repurchase common stock to satisfy the tax obligations in connection with the vesting of restricted common stock issued to employees, $24.8 million in dividends and distributions to our preferred and common stockholders and $5.5 million in distributions to our former joint venture partner. In July 2022, we entered into the Amended Credit Agreement and received $243.6 million in proceeds associated with additional borrowing on our two term loans. We utilized the proceeds received from the incremental borrowing on the term loans to fully repay the $230.0 million we drew on our credit facility in the second quarter of 2022. In addition, we paid $38.9 million in principal payments on our notes payable, including $35.0 million to repay a portion of our senior notes, $2.0 million in scheduled principal payments on our notes payable and $1.9 million in principal payments associated with our Amended Credit Agreement, and we paid $7.4 million in deferred financing costs related to the Amended Credit Agreement.
Future. We expect our primary sources of cash will continue to be our working capital, credit facility, additional issuances of notes payable, dispositions of hotel properties and proceeds from offerings of common and preferred stock. However, there can be no assurance that our future asset sales, debt issuances or equity offerings will be successfully completed. As a result of potential increases in inflation rates and interest rates, as well as possible recessionary periods in the future, certain sources of capital may not be as readily available to us as they have in the past or may only be available at higher costs.
We expect our primary uses of cash to be for operating expenses, capital investments in our hotels, repayment of principal on our notes payable and credit facility, interest expense, repurchases of our common stock, distributions on our common stock, dividends on our preferred stock and acquisitions of hotels or interests in hotels.
The recent increases in inflation and interest rates have had, and we expect will continue to have, a negative effect on our operations. We have experienced increases in wages, employee-related benefits, food costs, commodity costs, including those used to renovate or reposition our hotels, property taxes, property and liability insurance, utilities and borrowing costs. The ability of our hotel operators to adjust rates has mitigated the impact of increased operating costs on our financial position and results of operations. However, the increases in interest rates are negatively affecting our variable rate debt, resulting in increased interest payments.
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Cash Balance. As of December 31, 2023, our unrestricted cash balance was $426.4 million. We believe that our current unrestricted cash balance and our ability to draw the $500.0 million capacity available for borrowing under the unsecured revolving credit facility will enable us to successfully manage our Company.
Debt. As of December 31, 2023, we had $819.1 million of debt, $493.7 million of cash and cash equivalents, including restricted cash, and total assets of $3.1 billion. We believe that by maintaining appropriate debt levels, staggering maturity dates and maintaining a highly flexible structure, we will have lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive covenants.
In May 2023, we entered into Term Loan 3 and drew a total of $225.0 million. Term Loan 3’s variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on our leverage ratios, plus SOFR and a 0.10% adjustment. Term Loan 3 matures in May 2025, with a one-time option to extend the loan by twelve months to May 2026 upon the payment of applicable fees and the satisfaction of certain customary conditions.
In May 2023, we repaid the $220.0 million mortgage secured by the Hilton San Diego Bayfront, using proceeds received from Term Loan 3, and the mortgage’s related interest rate cap derivative was terminated.
As of December 31, 2023, 51.2% of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, including the loan secured by the JW Marriott New Orleans, unsecured corporate-level Term Loan 1 and two unsecured corporate-level senior notes. In March 2023, we entered into two interest rate swaps on Term Loan 1, the first of which was effective March 17, 2023, expires March 17, 2026, and fixes the SOFR rate on $75.0 million of Term Loan 1 to 3.675%, and the second of which was effective September 14, 2023, expires September 14, 2026, and fixes the SOFR rate on the remaining $100.0 million of Term Loan 1 to 3.931%.
The Company’s floating rate debt as of December 31, 2023 included the $175.0 million unsecured corporate-level Term Loan 2, which was subject to an interest rate swap derivative until the derivative matured in January 2023, and the $225.0 million unsecured corporate-level Term Loan 3.
We may in the future seek to obtain mortgages on one or more of our 13 unencumbered hotels (subject to certain stipulations under our unsecured term loans and senior notes), all of which were held by subsidiaries whose interests were pledged to our credit facility as of December 31, 2023. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility or future unsecured borrowings may be reduced.
Contractual Obligations
The following table summarizes our payment obligations and commitments as of December 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Payment due by period | ||||||||||||||
| | | | | | Less Than | | 1 to 3 | | 3 to 5 | | More than | | ||||
| | | Total | | 1 year | | years | | years | | 5 years | ||||||
| Notes payable (1) | | $ | 819,050 | | $ | 74,050 | | $ | 290,000 | | $ | 455,000 | | $ | — | |
| Interest obligations on notes payable (1) (2) | | | 160,650 | | | 48,626 | | | 82,812 | | | 29,212 | | | — | |
| Operating lease obligations, including imputed interest (3) | | | 15,976 | | | 5,783 | | | 7,461 | | | 1,525 | | | 1,207 | |
| Construction commitments | | | 64,302 | | | 64,302 | | | — | | — | | — | | ||
| Total | | $ | 1,059,978 | | $ | 192,761 | | $ | 380,273 | | $ | 485,737 | | $ | 1,207 | |
| Column 1 | Column 2 |
|---|---|
| (1) | Notes payable and interest obligations on notes payable include the $225.0 million unsecured Term Loan 3 assuming the Company has exercised its one-time option to extend the maturity of the loan from May 1, 2025 to May 1, 2026 upon payment of applicable fees and the satisfaction of certain customary conditions. |
| Column 1 | Column 2 |
|---|---|
| (2) | Interest is calculated based on the loan balances and variable rates, as applicable, at December 31, 2023, and includes the effect of our interest rate derivatives. |
| Column 1 | Column 2 |
|---|---|
| (3) | Operating lease obligations include the lease on our current corporate headquarters and the sublease on our former corporate headquarters. In addition, operating lease obligations include a ground lease that expires in 2071 and requires a reassessment of rent payments due after 2025, agreed upon by both us and the lessor; therefore, no amounts are included in the above table for this ground lease after 2025. |
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Capital Expenditures and Reserve Funds
We believe we maintain all of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground lease, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested $110.1 million in our portfolio and other assets during 2023 and $128.6 million in 2022. As of December 31, 2023, we have contractual construction commitments totaling $64.3 million for ongoing renovations. During 2024, we expect to continue to incur significant capital expenditures as we complete a substantial renovation and rebranding of The Confidante Miami Beach to Andaz Miami Beach. If we renovate additional hotels in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and our hotel subject to a first mortgage lien, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between 1.0% and 5.0% of the respective hotel’s applicable annual revenue. As of December 31, 2023, our balance sheet includes restricted cash of $66.9 million, which was held in FF&E reserve accounts for future capital expenditures at the majority of our hotels. According to certain loan and management agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year.
Inflation
Inflation affects our expenses, including, without limitation, by increasing such costs as wages, employee-related benefits, food costs, commodity costs, including those used to renovate or reposition our hotels, property taxes, property and liability insurance, utilities and borrowing costs. We rely on our hotel operators to adjust room rates and pricing for hotel services to reflect the effects of inflation. However, previously contracted rates, competitive pressures or other factors may limit the ability of our operators to respond to inflation. As a result, our expenses may increase at higher rates than revenue.
Seasonality and Volatility
As is typical of the lodging industry, we experience seasonality in our business. Demand at certain of our hotels is affected by seasonal business patterns that can cause quarterly fluctuations in our revenues.
Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as economic and business conditions, including a U.S. recession or increased inflation, trade conflicts and tariffs, changes impacting global travel, regional or global economic slowdowns, any flu or disease-related pandemic that impacts travel or the ability to travel, weather patterns, the adverse effects of climate change, the threat of terrorism, terrorist events, civil unrest, government shutdowns, events that reduce the capacity or availability of air travel, increased competition from other hotels in our markets, new hotel supply or alternative lodging options and unexpected changes in business, commercial travel, leisure travel and tourism.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Impairment of investments in hotel properties. Impairment losses are recorded on investments in hotel properties to be held and used by us whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors we consider when assessing whether impairment indicators exist include hotel disposition strategy and hold period, a significant decline in operating results not related to renovations or repositionings, significant changes in the manner in which the Company uses the asset, physical damage to the property due to unforeseen events such as natural disasters, and other market and economic conditions. |
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Recoverability of assets that will continue to be used is measured by comparing the carrying amount of the asset to the related total future undiscounted net cash flows. If an asset’s carrying value is not recoverable through those cash flows, the asset is considered to be impaired. The impairment is measured by the difference between the asset’s carrying amount and its fair value. We perform a fair value assessment using valuation techniques such as discounted cash flows and comparable sales transactions in the market to estimate the fair value of the hotel and, if appropriate and available, current estimated net sales proceeds from pending offers. Our judgment is required in determining the discount rate, terminal capitalization rate, the estimated growth of revenues and expenses, revenue per available room and margins, as well as specific market and economic conditions.
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five years to forty years for buildings and improvements and three years to twelve years for FF&E. Intangible assets are amortized using the straight-line method over the shorter of their estimated useful life or the length of the related agreement. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels. We have not changed the useful lives of any of our assets during the periods discussed. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Income taxes. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to our stockholders. As a REIT, we generally will not be subject to federal corporate income tax on that portion of our taxable income that is currently distributed to stockholders. We are subject to certain state and local taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income. In addition, our wholly owned TRS, which leases our hotels from the Operating Partnership, is subject to federal and state income taxes. We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. |
We review any uncertain tax positions and, if necessary, we will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.
New Accounting Standards and Accounting Changes
See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.