Company Quick10K Filing
Hospitality Investors Trust
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 39 $-0
10-Q 2019-11-07 Quarter: 2019-09-30
10-Q 2019-08-08 Quarter: 2019-06-30
10-Q 2019-05-13 Quarter: 2019-03-31
10-K 2019-04-16 Annual: 2018-12-31
10-Q 2018-11-08 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-10 Quarter: 2018-03-31
10-K 2018-03-27 Annual: 2017-12-31
10-Q 2017-11-13 Quarter: 2017-09-30
10-Q 2017-08-10 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-31 Annual: 2016-12-31
10-Q 2016-11-10 Quarter: 2016-09-30
10-Q 2016-08-12 Quarter: 2016-06-30
10-Q 2016-05-11 Quarter: 2016-03-31
10-K 2016-03-28 Annual: 2015-12-31
10-Q 2015-11-16 Quarter: 2015-09-30
10-Q 2015-08-12 Quarter: 2015-06-30
10-Q 2015-05-15 Quarter: 2015-03-31
10-K 2015-03-31 Annual: 2014-12-31
10-Q 2014-11-14 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-15 Quarter: 2014-03-31
10-K 2014-04-07 Annual: 2013-12-31
8-K 2020-02-20 Other Events, Exhibits
8-K 2020-02-12 Officers, Exhibits
8-K 2019-11-06 Shareholder Vote
8-K 2019-05-24 Regulation FD, Exhibits
8-K 2019-05-23 Regulation FD, Exhibits
8-K 2019-05-23 Regulation FD
8-K 2019-05-22 Enter Agreement, Exhibits
8-K 2019-05-17 Regulation FD
8-K 2019-05-13 Other Events
8-K 2019-05-03 Officers, Exhibits
8-K 2019-05-01 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-04-24 Officers
8-K 2019-04-05 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-28 Other Events
8-K 2018-11-26 Regulation FD, Exhibits
8-K 2018-11-16 Regulation FD
8-K 2018-09-24 Other Events, Exhibits
8-K 2018-08-29 Regulation FD, Exhibits
8-K 2018-08-21 Regulation FD
8-K 2018-06-26 Shareholder Vote
8-K 2018-06-11 Regulation FD, Exhibits
8-K 2018-05-14 Other Events, Exhibits
8-K 2018-04-26 Regulation FD, Exhibits
8-K 2018-04-23 Other Events
8-K 2018-04-17 Regulation FD
HIT 2019-09-30
Part I - Financial Information
Item 1. Financial Statements.
Note 1 - Organization
Note 2 - Summary of Significant Accounting Policies
Note 3 - Brookfield Investment
Note 4 - Leases
Note 5 - Mortgage Notes Payable
Note 6 - Mandatorily Redeemable Preferred Securities
Note 7 - Accounts Payable and Accrued Expenses
Note 8 - Common Stock
Note 9 - Share-Based Payments
Note 10 - Fair Value Measurements
Note 11 - Commitments and Contingencies
Note 12 - Related Party Transactions and Arrangements
Note 13 - Sale of Hotels and Assets Held for Sale
Note 14 - Impairments
Note 15 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.2 ex_161091.htm
EX-31.1 ex_154764.htm
EX-31.2 ex_154765.htm
EX-32 ex_154766.htm

Hospitality Investors Trust Earnings 2019-09-30

HIT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ENDL 0 0 0 0 -0 -0 -0 0.5 -184%
CAT9 1 1 2 2 -0 -0 -1 65% 8.5 -6%
HIT 2,346 1,670 609 -15 -121 -15 1,463 -2% -96.3 -5%
STCB 0 1 0 0 -0 -0 -0 0% 0.1 -82%
DGJI 3 1 0 0 0 0 -0 0%
GLFO 0 0 0 0 -0 -0 -0 0.0 -114%
USO 1,639 177 476 0 -320 -320 -1,486 0% 4.6 -20%
CLSH 47 21 10 4 -16 -12 12 43% -1.0 -34%
BBII 0 0 0 0 -0 -0 0 0% -0.5 -10,083%
FRZT 1 1 2 2 -0 0 -0 86% -4.0 -10%

10-Q 1 arct20190930_10q.htm FORM 10-Q arct20190331_10q.htm
 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-55394

HOSPITALITY INVESTORS TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Maryland

80-0943668

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

Park Avenue Tower, 65 East 55th Street, Suite 801, New York, NY

10022

(Address of Principal Executive Office)

(Zip Code)

 

(571) 529-6390

(Registrant’s Telephone Number, Including Area Code)

 

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to section 12(b) of the Act: None.

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “ emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

 

 

Non-accelerated filer ☒

Smaller reporting company ☐

 

 

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. Yes ☒   No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

The number of shares of the registrant's common stock, $0.01 par value, outstanding as of November 1, 2019 was 39,151,201.

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I

Item 1.

Financial Statements

1

 

Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018

1

 

Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three Months Ended September 30, 2019 and the Three Months Ended September 30, 2018 and for the Nine Months Ended September 30, 2019 and the Nine Months Ended September 30, 2018

2

 

Consolidated Statement of Changes in Equity (Unaudited) for the Three Months Ended September 30, 2019 and the Three Months Ended September 30, 2018 and for the Nine Months Ended September 30, 2019 and the Nine Months Ended September 30, 2018

3

 

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and the Nine Months Ended September 30, 2018

4

 

Notes to Consolidated Financial Statements (Unaudited)

6

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

38

PART II

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3.

Defaults Upon Senior Securities

40

Item 4.

Mine Safety Disclosures

40

Item 5.

Other Information

40

Item 6.

Exhibits

41

Signatures

42

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

HOSPITALITY INVESTORS TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)

 

   

September 30, 2019

   

December 31, 2018

 
   

(unaudited)

         

ASSETS

               

Real estate investments:

               

Land

  $ 312,144     $ 337,858  

Buildings and improvements

    1,775,865       1,947,619  

Furniture, fixtures and equipment

    239,722       257,314  

Total real estate investments

    2,327,731       2,542,791  

Less: accumulated depreciation and amortization

    (379,186 )     (347,929 )

Total real estate investments, net

    1,948,545       2,194,862  

Cash and cash equivalents

    87,757       54,886  
Assets held for sale     106,866        

Restricted cash

    38,919       27,959  

Investments in unconsolidated entities

    3,319       3,684  

Right of use assets

    59,020        

Below-market lease asset, net

          9,030  

Prepaid expenses and other assets

    40,247       35,836  

Goodwill

    10,800       11,030  

Total Assets

  $ 2,295,473     $ 2,337,287  
                 

LIABILITIES, NON-CONTROLLING INTEREST AND EQUITY

               

Mortgage notes payable, net

  $ 1,524,297     $ 1,507,509  

Mandatorily redeemable preferred securities, net

          219,596  

Accounts payable and accrued expenses

    67,075       62,965  

Lease liabilities

    52,251        

Total Liabilities

  $ 1,643,623     $ 1,790,070  
                 

Commitments and Contingencies

               

Contingently Redeemable Class C Units in operating partnership; 27,568,687 and 11,767,678 units issued and outstanding, respectively ($406,638 and $173,573 liquidation preference, respectively)

    391,912       163,148  
                 

Stockholders' Equity

               

Preferred stock, $0.01 par value, 50,000,000 shares authorized, one share issued and outstanding

           

Common stock, $0.01 par value, 300,000,000 shares authorized, 39,151,201 and 39,134,628 shares issued and outstanding, respectively

    392       391  

Additional paid-in capital

    871,328       870,251  

Deficit

    (614,221 )     (489,108 )

Total equity of Hospitality Investors Trust, Inc. stockholders

    257,499       381,534  

Non-controlling interest - consolidated variable interest entity

    2,439       2,535  

Total Equity

  $ 259,938     $ 384,069  

Total Liabilities, Contingently Redeemable Class C Units, and Stockholders' Equity

  $ 2,295,473     $ 2,337,287  

 

The accompanying notes are an integral part of these statements.

 

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except for share and per share data)

(Unaudited)

 

    Three Months Ended September 30, 2019     Three Months Ended September 30, 2018     Nine Months Ended September 30, 2019     Nine Months Ended September 30, 2018  

Revenues

                               

Rooms

  $ 150,133     $ 152,058     $ 439,402     $ 439,661  

Food and beverage

    4,622       4,707       14,953       14,906  

Other

    3,931       3,560       11,597       10,551  

Total revenue

    158,686       160,325       465,952       465,118  

Operating expenses

                               

Rooms

    38,960       38,919       113,301       112,482  

Food and beverage

    4,025       4,080       12,566       12,414  

Management fees

    4,410       4,331       12,867       12,718  

Other property-level operating expenses

    64,199       61,798       188,043       183,010  

Transaction related costs

    234             780       27  

General and administrative

    5,105       5,193       15,163       14,874  

Depreciation and amortization

    26,934       28,446       83,702       83,070  

Impairment of goodwill and long-lived assets

    11,677             55,168       17,255  

Rent

    1,674       1,701       4,989       5,038  

Total operating expenses

    157,218       144,468       486,579       440,888  
Gain on sale of assets, net     1,232       46       1,272       215  

Operating income (loss)

  $ 2,700     $ 15,903     $ (19,355 )   $ 24,445  

Interest expense

    (22,123 )     (27,083 )     (72,648 )     (78,423 )

Other income, net

    983       88       1,315       32  

Equity in earnings of unconsolidated entities

    49       199       276       101  

Total other expenses, net

    (21,091 )     (26,796 )     (71,057 )     (78,290 )

Loss before taxes

  $ (18,391 )   $ (10,893 )   $ (90,412 )   $ (53,845 )

Income tax benefit

    (897 )     (112 )     (2,041 )     (1,022 )

Net loss and comprehensive loss

  $ (17,494 )   $ (10,781 )   $ (88,371 )   $ (52,823 )

Less: Net income (loss) attributable to non-controlling interest

    102       44       (9 )     63  

Net loss before dividends and accretion

  $ (17,596 )   $ (10,825 )   $ (88,362 )   $ (52,886 )

Dividends on Class C Units (cash and PIK)

    (12,825 )     (5,405 )     (33,295 )     (15,355 )

Accretion of Class C Units

    (1,309 )     (663 )     (3,456 )     (1,890 )

Net loss attributable to common stockholders

  $ (31,730 )   $ (16,893 )   $ (125,113 )   $ (70,131 )
                                 

Basic and Diluted net loss attributable to common stockholders per common share

  $ (0.81 )   $ (0.43 )   $ (3.20 )   $ (1.78 )
                                 

Basic and Diluted weighted average shares of common stock outstanding

    39,140,267       39,336,099       39,131,368       39,444,858  

 

The accompanying notes are an integral part of these statements.

 

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In thousands, except for share data)

(Unaudited)

 

   

Nine-Month Period Ended September 30, 2019

 
   

Common Stock

                                         
   

Number of Shares

   

Par Value

   

Additional Paid-in Capital

   

Deficit

   

Total Equity of Hospitality Investors Trust, Inc. Stockholders

   

Non-controlling Interest

   

Total Equity

 

December 31, 2018

    39,134,628     $ 391     $ 870,251     $ (489,108 )   $ 381,534     $ 2,535     $ 384,069  

Repurchase and retirement of common stock

    (2,177 )           (20 )           (20 )           (20 )

Net loss before dividends and accretion

                      (32,328 )     (32,328 )           (32,328 )

Net loss attributable to non-controlling interest

                                  (92 )     (92 )

Cash distributions on Class C Units

                      (4,765 )     (4,765 )           (4,765 )

Accretion on Class C Units

                      (883 )     (883 )           (883 )

PIK distributions on Class C Units

                      (3,177 )     (3,177 )           (3,177 )

Share-based payments

                448             448             448  

March 31, 2019

    39,132,451     $ 391     $ 870,679     $ (530,261 )   $ 340,809     $ 2,443     $ 343,252  

Net loss before dividends and accretion

                      (38,438 )     (38,438 )           (38,438 )

Net loss attributable to non-controlling interest

                                  (19 )     (19 )

Dividends paid or declared

                                  (87 )     (87 )

Cash distributions on Class C Units

                      (7,517 )     (7,517 )           (7,517 )

Accretion on Class C Units

                      (1,264 )     (1,264 )           (1,264 )

PIK distributions on Class C Units

                      (5,011 )     (5,011 )           (5,011 )

Share-based payments

    7,892             274             274             274  

June 30, 2019

    39,140,343     $ 391     $ 870,953     $ (582,491 )   $ 288,853     $ 2,337     $ 291,190  

Net loss before dividends and accretion

                      (17,596 )     (17,596 )           (17,596 )

Net income attributable to non-controlling interest

                                  102       102  

Cash distributions on Class C Units

                      (7,695 )     (7,695 )           (7,695 )

Accretion on Class C Units

                      (1,309 )     (1,309 )           (1,309 )

PIK distributions on Class C Units

                      (5,130 )     (5,130 )           (5,130 )

Share-based payments

    10,858       1       375             376             376  

September 30, 2019

    39,151,201     $ 392     $ 871,328     $ (614,221 )   $ 257,499     $ 2,439     $ 259,938  

 

 

   

Nine-Month Period Ended September 30, 2018

 
   

Common Stock

                                         
   

Number of Shares

   

Par Value

   

Additional Paid-in Capital

   

Deficit

   

Total Equity of Hospitality Investors Trust, Inc. Stockholders

   

Non-controlling Interest

   

Total Equity

 

December 31, 2017

    39,505,742     $ 395     $ 871,840     $ (379,559 )   $ 492,676     $ 2,646     $ 495,322  

Net loss before dividends and accretion

                      (18,541 )     (18,541 )           (18,541 )

Net loss attributable to non-controlling interest

                                  (28 )     (28 )

Cash distributions on Class C Units

                      (2,801 )     (2,801 )           (2,801 )

Accretion on Class C Units

                      (589 )     (589 )           (589 )

PIK distributions on Class C Units

                      (1,868 )     (1,868 )           (1,868 )

Share-based payments

                361             361             361  

March 31, 2018

    39,505,742     $ 395     $ 872,201     $ (403,358 )   $ 469,238     $ 2,618     $ 471,856  

Repurchase and retirement of common stock

    (170,260 )     (2 )     (1,198 )           (1,200 )           (1,200 )

Net loss before dividends and accretion

                      (23,520 )     (23,520 )           (23,520 )

Net income attributable to non-controlling interest

                                  47       47  

Dividends paid or declared

                                  (109 )     (109 )

Cash distributions on Class C Units

                      (3,169 )     (3,169 )           (3,169 )

Accretion on Class C Units

                      (638 )     (638 )           (638 )

PIK distributions on Class C Units

                      (2,112 )     (2,112 )           (2,112 )

Share-based payments

                361             361             361  

June 30, 2018

    39,335,482     $ 393     $ 871,364     $ (432,797 )   $ 438,960     $ 2,556     $ 441,516  

Repurchase and retirement of common stock

    912             6             6             6  

Net loss before dividends and accretion

                      (10,825 )     (10,825 )           (10,825 )

Net income attributable to non-controlling interest

                                  44       44  

Cash distributions on Class C Units

                      (3,243 )     (3,243 )           (3,243 )

Accretion on Class C Units

                      (663 )     (663 )           (663 )

PIK distributions on Class C Units

                      (2,162 )     (2,162 )           (2,162 )

Share-based payments

    7,210             385             385             385  

September 30, 2018

    39,343,604     $ 393     $ 871,755     $ (449,690 )   $ 422,458     $ 2,600     $ 425,058  

 

The accompanying notes are an integral part of these statements.

 

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30, 2019

   

Nine Months Ended September 30, 2018

 

Cash flows from operating activities:

               

Net loss

  $ (88,371 )   $ (52,823 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    83,702       83,070  

Impairment of goodwill and long-lived assets

    55,168       17,255  

Amortization and write-off of deferred financing costs

    7,578       9,421  

Other adjustments, net

    487       1,675  

Changes in assets and liabilities:

               

Prepaid expenses and other assets

    (2,842 )     (3,858 )

Accounts payable and accrued expenses

    16,806       16,392  

Net cash provided by operating activities

  $ 72,528     $ 71,132  
                 

Cash flows from investing activities:

               

Payment received on note for sale of hotel

          1,625  

Real estate investment improvements and purchases of property and equipment

    (44,167 )     (85,189 )

Payments related to Property Management Transactions

          (1,000 )

Proceeds from sales of hotels, net

    35,452       5,461  

Other adjustments, net

    67        

Net cash used in investing activities

  $ (8,648 )   $ (79,103 )
                 

Cash flows from financing activities:

               

Proceeds from Class C Units

    219,746       25,000  

Payment of Class C Units issuance costs

    (7,756 )     (875 )

Dividends/Distributions paid

    (20,064 )     (9,322 )
Payments of mortgage notes payable     (1,060,665 )      
Proceeds from mortgage notes payable     1,086,100        
Deferred financing fees     (17,644 )      

Mandatorily redeemable preferred securities redemptions

    (219,746 )     (14,370 )

Repurchase of shares of common stock

    (20 )     (1,194 )

Net cash used in financing activities

  $ (20,049 )   $ (761 )

Net change in cash and cash equivalents and restricted cash

    43,831       (8,732 )

Cash and cash equivalents and restricted cash, beginning of period

    82,845       119,180  

Cash and cash equivalents and restricted cash, end of period

  $ 126,676     $ 110,448  

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30, 2019

   

Nine Months Ended September 30, 2018

 

Supplemental disclosure of cash flow information:

               

Interest paid

  $ 60,363     $ 63,256  

Income taxes paid, net

  $ (592 )   $ 722  

Non-cash investing and financing activities:

               

Accretion of Class C Units

  $ (3,456 )   $ (1,890 )

PIK accrual on Class C Units

  $ (13,318 )   $ (6,142 )

Real estate investment improvements and purchases of property and equipment in accounts payable and accrued expenses

  $ 1,118     $ 8,205  

 

The accompanying notes are an integral part of these statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 

Note 1 - Organization

 

Hospitality Investors Trust, Inc. (the "Company"), incorporated on July 25, 2013, is a self-managed real estate investment trust ("REIT") that invests primarily in premium-branded select-service lodging properties in the United States. As of September 30, 2019, the Company owns or has an interest in a total of 138 hotels with a total of 16,765 guest rooms located in 33 states. As of September 30, 2019, all but one of these hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., Hyatt Hotels Corporation, and Intercontinental Hotels Group or one of their respective subsidiaries or affiliates. The Company's one unbranded hotel has a direct affiliation with a leading university in Atlanta.

 

As part of its investment strategy to continue to pursue the sale of non-core hotels and reallocate capital into more attractive acquisition and capital investment opportunities, as well as debt reduction, the Company commenced marketing for sale a total of 45 hotels during the nine months ended September 30, 2019. As of September 30, 2019, six of these hotels have been sold and 16 were subject to definitive sale agreements where the buyer has made, or was obligated to make, a non-refundable deposit. See Note 13 - Sale of Hotels and Assets Held for Sale for additional information.

 

The Company conducted its initial public offering ("IPO"), from January 2014 until November 2015 without listing shares of its common stock on a national securities exchange, and it has not subsequently listed its shares. There currently is no established trading market for the Company’s shares and there may never be one.

 

The Company is required to annually publish an estimated net asset value per share of common stock ("Estimated Per-Share NAV") pursuant to the rules and regulations of the Financial Industry Regulatory Authority. On May 9, 2019, the Company's board of directors unanimously approved an updated Estimated Per-Share NAV equal to $9.21 based on an estimated fair value of the Company's assets less the estimated fair value of the Company's liabilities, divided by 39,134,628 shares of common stock outstanding on a fully diluted basis as of December 31, 2018 (the "2019 NAV"), and the Company published its 2019 NAV on May 13, 2019. The Company intends to publish an updated Estimated Per-Share NAV on at least an annual basis. 

 

Substantially all of the Company’s business is conducted through its operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (the "OP"). On January 12, 2017, the Company, along with the OP, entered into the Securities Purchase, Voting and Standstill Agreement ("SPA") with Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the "Brookfield Investor"), to secure a commitment of up to $400 million by the Brookfield Investor to make capital investments in the Company necessary for the Company to meet its short-term and long-term liquidity requirements and obligations by purchasing units of limited partner interest in the OP entitled “Class C Units” (“Class C Units”) through February 2019. Following the final closing pursuant to the SPA on February 27, 2019 (the "Final Closing"), the Brookfield Investor no longer has any obligations or rights to purchase Class C Units pursuant to the SPA or otherwise.

 

The Brookfield Investor holds all the issued and outstanding Class C Units and the sole issued and outstanding Redeemable Preferred Share (as defined herein), and, as a result, has significant governance and other rights that could be used to control or influence the Company's decisions or actions. As of September 30, 2019, the total liquidation preference of the issued and outstanding Class C Units was $406.6 million. The Class C Units are convertible into units of limited partner interest in the OP entitled “OP Units” (“OP Units”), which may be redeemed for shares of the Company’s common stock or, at the Company’s option, the cash equivalent. As of the date of this Quarterly Report on Form 10-Q, the Brookfield Investor owns or controls 41.4% of the voting power of the Company’s common stock on an as-converted basis (See Note 3 - Brookfield Investment for additional information).

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 

Note 2 - Summary of Significant Accounting Policies

 

The accompanying consolidated financial statements of the Company included herein were prepared in accordance with United States Generally Accepted Accounting Principles ("GAAP"). The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. These adjustments are considered to be of a normal, recurring nature.

 

The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2018, which are included in the Company's Annual Report on Form 10-K filed with the SEC on April 16, 2019.

 

Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as percentage ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

 

Certain amounts in prior periods have been reclassified in order to conform to current period presentation, specifically, the Company changed the presentation of its Consolidated Statements of Operations and Comprehensive Income (Loss) with respect to "Gain (loss) on sale of assets." The change in presentation was to reclassify this line item so that it is included as a component of Operating income (loss) and represented as a separate line item, rather than as a component of "Other income." The Company made this change in presentation for all periods presented.

 

Use of Estimates

 

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Real Estate Investments

 

The Company allocates the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and furniture, fixtures and equipment. The Company utilizes various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which are recorded at fair value. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

 

The Company's acquisitions of hotel properties are accounted for as acquisitions of groups of assets rather than business combinations, although the determination will be made on a transaction-by-transaction basis. If the Company concludes that an acquisition will be accounted for as a group of assets, the transaction costs associated with the acquisition will be capitalized as part of the assets acquired.

 

The Company's investments in real estate, including transaction costs, that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of the Company's long-lived assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.

 

The Company is required to make subjective assessments as to the useful lives of the Company’s assets for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company’s investments in real estate. These assessments have a direct impact on the Company’s net income because if the Company were to shorten the expected useful lives of the Company’s investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

 

Impairment of Long-Lived Assets

 

Upon the occurrence of certain “triggering events” under the provisions of the Accounting Standards Codification ("ASC") section 360-Property, Plant and Equipment, the Company reviews its hotel investments which are considered to be long-lived assets under GAAP for impairment.  These triggering events include significant declines in market value of the asset, significant declines in operating performance, significant adverse changes in economic conditions and potential sales of hotel properties which result in shorter holding periods. If a triggering event occurs and circumstances indicate the carrying amount of the property may not be recoverable, the Company performs a recoverability test which compares the carrying amount to an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If the Company determines it is unable to recover the carrying amount of the asset over the useful life, impairment is deemed to exist, and an impairment loss will be recorded to the extent that the carrying amount exceeds the estimated fair value of the property. See Note 14 - Impairments for impairment disclosures.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Assets Held for Sale (Long Lived-Assets)

 

When the Company initiates the sale of long-lived assets, it assesses whether the assets meet the criteria to be considered assets held for sale. The review is based on whether the following criteria are met:

 

 

Management and the Company's board of directors have committed to a plan to sell the asset;

 

 

The subject assets are available for immediate sale in their present condition;

 

 

The Company is actively locating buyers as well as other initiatives required to complete the sale;

 

 

The sale is probable and the transfer is expected to qualify for recognition as a complete sale in one year;

 

 

The long-lived asset is being actively marketed for sale at a price that is reasonable in relation to fair value; and

 

 

Actions necessary to complete the plan indicate it is unlikely significant changes will be made to the plan or the plan will be withdrawn.

 

If all the criteria are met, a long-lived asset held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and the Company will cease recording depreciation. Any adjustment to the carrying amount is recorded as an impairment loss. See Note 13 - Sale of Hotels and Assets Held for Sale for assets held for sale disclosures.

 

Goodwill

 

The Company allocates goodwill to each reporting unit. For the Company’s purposes, each of its wholly-owned hotels is considered a reporting unit. The Company tests goodwill for impairment at least annually, as of March 31, or upon the occurrence of any "triggering events" under ASC section 360, if sooner. Upon the occurrence of any "triggering events," the Company is required to compare the fair value of each reporting unit to which goodwill has been allocated, to the carrying amount of such reporting unit including the allocation of goodwill. If the carrying amount of a reporting unit exceeds its fair value, the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of the reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to such reporting unit.

 

There was no goodwill impairment recognized during the three or nine months ended September 30, 2019As of September 30, 2019, the goodwill allocated to two hotels was reclassified to become part of “Assets held for sale,” resulting in a reduction of the goodwill balance to $10.8 million. 

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less at purchase.

 

Restricted Cash

 

Restricted cash consists of amounts required under mortgage agreements for future capital improvements to owned assets, future interest and property tax payments and cash flow deposits while subject to mortgage agreement restrictions.

 

Deferred Financing Fees

 

Deferred financing fees represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized as a component of interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing fees are expensed in full when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful. Deferred financing fees are deducted from their related liabilities on the Company's Consolidated Balance Sheets.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Revenue Recognition

 

The Company's revenue is primarily from rooms, food and beverage, and other, and is disaggregated on the Company's Consolidated Statement of Operations and Comprehensive Loss.

 

Room sales are driven by a fixed fee charged to a hotel guest to stay at the hotel property for an agreed-upon period. A majority of the Company's room reservations are cancellable and the Company transfers promised goods and services to the hotel guest as of the date upon which the hotel guest occupies a room and at the same time earns and recognizes revenue. The Company offers advance purchase reservations that are paid for by the hotel guest in advance and the Company recognizes deferred revenue as a result of such reservations. The Company's obligation to the hotel guest is satisfied as of the date upon which the hotel guest occupies a room. The Company's room revenue accounted for 94.6% and 94.8% of the Company's total revenue for the three months ended September 30, 2019 and 2018, respectively. The Company's room revenue accounted for 94.3% and 94.5% of the Company's total revenue for the nine months ended September 30, 2019 and 2018, respectively. Food, beverage, and other revenue are recognized at the point of sale on the date of the transaction as the hotel guest simultaneously obtains control of the good or service.

 

Income Taxes

 

The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") commencing with its tax year ended December 31, 2014. In order to continue to qualify as a REIT, the Company must annually distribute to its stockholders 90% of its REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. The Company generally will not be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. The Company may be subject to certain state and local taxes on its income, property taxes and federal income and excise taxes on its undistributed income. The Company's hotels are leased to taxable REIT subsidiaries, which are owned by the OP. The taxable REIT subsidiaries are subject to federal, state and local income taxes.

 

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, capital loss, and tax credit carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which such amounts are expected to be realized or settled. The effect on 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 available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.

 

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement in order to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes. As of September 30, 2019, the Company's tax years that remain subject to examination by major tax jurisdictions are 2014, 2015, 2016, 2017 and 2018.

 

Earnings/Loss per Share

 

The Company calculates basic income or loss per share by dividing net income or loss attributable to common stockholders for the period by the weighted-average shares of its common stock outstanding for such period. Diluted income per share takes into account the effect of dilutive instruments, such as unvested restricted shares of common stock ("restricted shares") and unvested restricted share units in respect of shares of common stock ("RSUs"), except when doing so would be anti-dilutive.

 

The Company currently has outstanding restricted shares whose holders are entitled to participate in dividends when and if paid on shares of common stock. The Company also currently has outstanding RSUs whose holders generally are credited with dividend or other distribution equivalents when and if paid on shares of common stock. These dividends or other distribution equivalents will be regarded as having been reinvested in RSUs and will only be paid to the extent the corresponding RSUs vest. To the extent the Company were to have distributions in the future, it would be required to calculate earnings per share using the two-class method with regard to restricted shares, whereby earnings or losses are reduced by distributed earnings as well as any available undistributed earnings allocable to holders of restricted shares.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Fair Value Measurements

 

In accordance with ASC section 820 - Fair Value Measurement, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.

 

The Company’s financial instruments recorded at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:

 

 

Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets.

 

 

Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment.

 

 

Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

See Note 10 - Fair Value Measurements for fair value disclosures.

 

Class C Units

 

The Company initially measured the Class C Units which were issued to the Brookfield Investor at fair value net of issuance costs. The Company is required to accrete the carrying value of the Class C Units to the liquidation preference using the effective interest method over the five-year period prior to the holder's redemption option becoming exercisable (See "Accretion of Class C Units" on the Company's Consolidated Statements of Operations and Comprehensive Loss). However, if it becomes probable that the Class C Units will become redeemable prior to such date, the Company will adjust the carrying value of the Class C Units to the maximum liquidation preference.

 

Until the Final Closing, the Company could have become obligated pursuant to the SPA with the Brookfield Investor to issue additional Class C Units. This obligation was considered a contingent forward contract under ASC section 480 - Distinguishing Liabilities from Equity, and the Company accounted for it as a liability. The fair value of the contingent forward liability was recognized through current earnings at December 31, 2018, and the Company had no contingent forward liability as of either December 31, 2018 or September 30, 2019 and will not have such liability in the future (See Note 11 - Commitments and Contingencies).

 

Leases

 

Effective January 1, 2019, the Company adopted ASU 2016-02 Leases, which requires companies to recognize operating leases under GAAP as “right of use assets” (“ROU assets”) and lease liabilities on the balance sheet. The Company has $59.0 million of ROU assets and $52.3 million of lease liabilities as of September 30, 2019 for its operating leases. The Company's below-market lease intangible, net, of $8.1 million is also included in the ROU assets on the Company's Consolidated Balance Sheets. 

 

The Company's leases are primarily comprised of: ground or operating leases of certain of its hotel properties; one corporate office lease; and leases of vans, copiers and other miscellaneous equipment. All of the foregoing are classified as operating leases under GAAP. The Company determines if an agreement is considered a lease under GAAP at commencement of the agreement. The Company determines the lease term by assuming the exercise of all renewal options that are reasonably certain.

 

The Company includes leases of its hotel properties, and its corporate office space lease, in ROU assets and lease liabilities on the Company’s Consolidated Balance Sheet.  The Company's below-market lease intangible, net, which is attributed to its ground leases is also included in the ROU assets on the Company's Consolidated Balance Sheet. The Company determined that its vans, copiers, and other miscellaneous equipment were immaterial to the Company’s financial statements and therefore they have been excluded from the Company's ROU assets and lease liabilities. 

 

Operating lease ROU assets and lease liabilities are recognized at the commencement date and are calculated using the present value of future lease payments over the lease term. The discount rate used in the present value calculation is the Company's estimate of its incremental borrowing rate based on the information available at the lease commencement date. ASU 2016-02 did not result in any changes to how operating lease payments are expensed under GAAP, and therefore, the Company's total operating lease payments continue to be expensed on a straight-line basis over the life of the lease commencing upon possession of the property. The below-market lease intangible is based on the difference between the market rent and the contractual rent for the Company’s ground lease obligations and is discounted to a present value using an interest rate reflecting the Company’s assessment of the risk associated with the leases acquired. Acquired lease intangible assets are amortized over the remaining lease term. See Note 4 - Leases for lease disclosures.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Advertising Costs

 

The Company expenses advertising costs for hotel operations as incurred. These costs were $5.7 million for the three months ended September 30, 2019, and $4.8 million for the three months ended September 30, 2018. Advertising costs were $16.5 million for the nine months ended September 30, 2019, and $13.8 million for the nine months ended September 30, 2018

 

Allowance for Doubtful Accounts

 

Receivables consist principally of trade receivables from customers and are generally unsecured and are due within 30 to 90 days. The Company records a provision for uncollectible accounts using the allowance method. Expected credit losses associated with trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon historical patterns of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accounts have been exhausted, the accounts are written off and the associated allowance for doubtful accounts is reduced. Trade and note receivable balances, net of the allowance for doubtful accounts, are included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets, and are as follows (in thousands):

 

   

September 30, 2019

   

December 31, 2018

 

Trade receivables

  $ 10,221     $ 8,329  

Allowance for doubtful accounts

    (501 )     (338 )

Trade and Note receivables, net of allowance

  $ 9,720     $ 7,991  

 

Reportable Segments

 

The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total consolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level, and therefore each property is considered a reporting unit. Each of the Company's reporting units are also considered to be operating segments, but none of these individual operating segments represents a reportable segment and they meet the criteria in GAAP to aggregate all properties into one reportable segment.

 

Derivative Transactions

 

The Company at certain times enters into derivative instruments to hedge exposure to changes in interest rates. The Company’s derivatives as of September 30, 2019, consist of interest rate cap agreements which it believes will help to mitigate its exposure to increasing borrowing costs under floating rate indebtedness, and a variable interest-only bond which it has acquired in connection with the securitization of one of its mortgage loans to effectively reduce its borrowing costs. The Company has elected not to designate its interest rate cap agreements and the variable interest-only bond as cash flow hedges. The impact of the interest rate caps for the three and nine months ended September 30, 2019 and September 30, 2018, was immaterial to the consolidated financial statements. See Note 5 - Mortgage Notes Payable and Note 10 - Fair Value Measurements for variable interest-only bond disclosures.

 

Recently Issued Accounting Pronouncements 

 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13 replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019. The Company anticipates that the adoption of ASU 2016-13 will not have a material impact on the Company's consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurements (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). Among other changes, ASU 2018-13 addresses changes in disclosures related to unrealized gains and losses and transfers between levels in the fair value hierarchy. ASU 2018-13 is effective for the Company for fiscal years beginning after December 15, 2019. The Company anticipates that the adoption of ASU 2018-13 will not have any impact on the Company's consolidated financial statements.

 

In March 2019, the FASB issued ASU 2019-01 Leases (Topic 842): Codification Improvements ("ASU 2019-01").  The amendments in ASU 2019-01 clarifies the existing codification as well as corrects unintended application of the existing guidance. The amendment provides additional guidance on determining the fair value of underlying assets by lessors that are not manufacturers or dealers, how to present sales-type and direct financing leases on the cash flow statement and transition disclosures related to topic 250, Accounting Changes and Error Corrections. ASU 2019-01 is effective for the Company for fiscal years beginning after December 15, 2019, with the transition disclosures related to Topic 250 effective for the fiscal year beginning on January 1, 2019. Transition disclosures related to Topic 250 were adopted by the Company on January 1, 2019, did not have a material impact on the Company's consolidated financial statements. The Company anticipates that the adoption of other additional guidance from ASU 2019-01 will not have any impact on the Company's consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 

Note 3 - Brookfield Investment

 

On March 31, 2017, the initial closing under the SPA (the “Initial Closing”) occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:

 

 

the sale by the Company and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share (the “Redeemable Preferred Share”), for a nominal purchase price; and

 

 

the sale by the Company and purchase by the Brookfield Investor of 9,152,542.37 Class C Units for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.

 

On February 27, 2018, the second closing under the SPA (the “Second Closing”) occurred, pursuant to which the Company sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate.

 

On February 27, 2019, the Final Closing occurred, pursuant to which we sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.

 

Without obtaining the prior approval of the majority of the then outstanding Class C Units and/or at least one of the two directors (each, a "Redeemable Preferred Director") elected to the Company’s board of directors by the Brookfield Investor pursuant to its rights as the holder of the Redeemable Preferred Share, the Company is restricted from taking certain operational and governance actions. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions. See “Brookfield Approval Rights” below.

 

The Redeemable Preferred Share

 

The Redeemable Preferred Share held by the Brookfield Investor has been classified as permanent equity on the Consolidated Balance Sheets.

 

The Redeemable Preferred Share ranks on parity with the Company’s common stock, with the same rights with respect to preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, terms and conditions of redemption and other terms and conditions as the Company’s common stock, with certain exceptions.

 

For so long as the Brookfield Investor holds the Redeemable Preferred Share, the Brookfield Investor has certain rights with respect to the election of members of the Company's board of directors and its committees, including the right to elect two Redeemable Preferred Directors to the Company’s board of directors and to approve two additional independent directors (each, an "Approved Independent Director") to be recommended and nominated by the Company's board of directors for election by the stockholders at each annual meeting. In addition, each committee of the Company's board of directors, subject to limited exceptions, must include at least one of the Redeemable Preferred Directors.

 

The holder of the Redeemable Preferred Share has certain rights in the event the OP fails to redeem Class C Units when required to do so, including the right to increase the size of the Company's board of directors by a number of directors that would result in the holder of the Redeemable Preferred Share being entitled to nominate and elect a majority of the Company's board of directors, subject to compliance with the provisions of the Company's charter requiring at least a majority of the Company's directors to be Independent Directors (as defined in the Company's charter).

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Class C Units

 

As of September 30, 2019, the Class C Units reflected on the Consolidated Balance Sheets is reconciled in the following table (in millions):

 

 

   

As of September 30, 2019

 

Gross Proceeds

  $ 379.7  

Less:

       

Class C Unit issuance costs(1)

  $ (22.5 )

Plus:

       

PIK Distributions Paid to holders of Class C Units

  $ 26.9  

Accretion of carrying value to liquidation preference of Class C Units

  $ 7.7  

Change in contingent forward liability

  $ 0.1  

Contingently Redeemable Class C Units in operating partnership

  $ 391.9  

                                            

(1) Class C Unit issuance costs include $6.0 million paid directly to the Brookfield Investor at the Initial Closing in the form of expense reimbursements and a commitment fee.

 

The Class C Units have been classified as temporary equity due to the contingent redemption features described in more detail below. At the Initial Closing, the Class C Units were deemed to have a “beneficial conversion feature” as the effective conversion price of the Class C Units under GAAP as of March 31, 2017 was less than the fair value of the Company's common stock on such date. As a result, the Company recognized the beneficial conversion feature as a deemed dividend of $4.5 million during the three months ended March 31, 2017, thereby reducing income available to common stockholders for purposes of calculating earnings per share.

 

Rank

 

The Class C Units rank senior to the OP Units and all other equity interests in the OP with respect to priority in payment of distributions and in the distribution of assets in the event of the liquidation, dissolution or winding-up of the OP, whether voluntary or involuntary, or any other distribution of the assets of the OP among its equity holders for the purpose of winding up its affairs.

 

Distributions

 

Commencing on June 30, 2017, holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If the Company fails to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero.

 

Commencing on June 30, 2017, holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum ("PIK Distributions"). If the Company fails to redeem the Brookfield Investor when required to do so pursuant to the amendment and restatement of the OP's existing agreement of limited partnership (the "A&R LPA"), the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%.

 

The number of Class C Units delivered in respect of the PIK Distributions on any distribution payment date will be equal to the number obtained by dividing the amount of PIK Distribution by $14.75.

 

The Brookfield Investor is also entitled to receive tax distributions under certain limited circumstances. As of September 30, 2019, no tax distributions have been paid.

 

For the three months ended September 30, 2019 and September 30, 2018, the Company paid cash distributions of $7.7 million and $3.2 million and PIK Distributions of 347,822.16 and 146,594.53 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units.  For the nine months ended September 30, 2019 and September 30, 2018, the Company paid cash distributions of $20.0 million and $9.2 million and PIK Distributions of 902,948.37 and 416,402.87 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units. 

 

Conversion Rights

 

The Class C Units are generally convertible into OP Units at any time at the option of the holder thereof at an initial conversion price of $14.75 (the "Conversion Price"). The Conversion Price is subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions.

 

Liquidation Preference

 

The liquidation preference with respect to each Class C Unit as of a particular date is the original purchase price paid under the SPA or the value upon issuance of any Class C Unit received as a PIK Distribution, plus, with respect to such Class C Unit up to but not including such date, (i) any accrued and unpaid cash distributions and (ii) any accrued and unpaid PIK Distributions.

 

Mandatory Redemption

 

The Class C Units are generally subject to mandatory redemption at a premium to liquidation preference if the OP consummates any liquidation, sale of all or substantially all of the assets, dissolution or winding-up, whether voluntary or involuntary, sale, merger, reorganization, reclassification or recapitalization or other similar event (a “Fundamental Sale Transaction”) prior to March 31, 2022. The amount of the premium, which may be substantial, varies based on the timing of consummation of the Fundamental Sale Transaction.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Holder Redemptions

 

The holders of the Class C Units may redeem such Class C Units at any time on or after March 31, 2022 for a redemption price in cash equal to the liquidation preference and also have certain other redemption rights in connection with the Company’s failure to maintain REIT status or material breaches of the A&R LPA.

 

Remedies Upon Failure to Redeem

 

If the OP fails to redeem Class C Units when required to do so pursuant to the terms of the A&R LPA, beginning three months after such failure BSREP II Hospitality II Special GP OP LLC (the "Special General Partner"), an affiliate of the Brookfield Investor, has the exclusive right, power and authority to sell the assets or properties of the OP for cash at such time or times as the Special General Partner may determine, upon engaging a reputable, national third party sales broker or investment bank reasonably acceptable to holders of a majority of the then outstanding Class C Units to conduct an auction or similar process designed to maximize the sales price. The proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on the Company or the OP.

 

The foregoing rights of the Special General Partner are in addition to the other rights described herein if the OP fails to redeem Class C Units when required to do so pursuant to the terms of the A&R LPA.

 

Company Redemption After Five Years

 

At any time and from time to time on or after March 31, 2022, the Company has the right to elect to redeem all or any part of the issued and outstanding Class C Units for an amount in cash equal to the liquidation preference.

 

Transfer Restrictions

 

The Brookfield Investor is generally permitted to make transfers of Class C Units without the prior consent of the Company, provided that any transferee must customarily invest in these types of securities or real estate investments of any type or have in excess of $100.0 million of assets.

 

Preemptive Rights

 

If the Company or the OP proposes to issue additional equity securities, subject to certain exceptions and in accordance with the procedures in the A&R LPA, any holder of Class C Units that owns Class C Units representing more than 5% of the outstanding shares of the Company’s common stock on an as-converted basis has certain preemptive rights.

 

Brookfield Approval Rights

 

The articles supplementary with respect to the Redeemable Preferred Share restrict the Company from taking certain actions without the prior approval of at least one of the Redeemable Preferred Directors, and the A&R LPA restricts the OP from taking certain actions without the prior approval of the majority of the then outstanding Class C Units.

 

In general, subject to certain exceptions, prior approval is required before the Company or its subsidiaries (including the OP) are permitted to take any of the following actions: equity issuances; organizational document amendments; debt incurrences; affiliate transactions; sale of all or substantially all assets; bankruptcy or insolvency declarations; declarations or payments of dividends or other distributions; redemptions or repurchases of securities; adoption of, and amendments to, the annual business plan (including the annual operating and capital budget) required under the terms of the Redeemable Preferred Share; hiring and compensation decisions related to certain key personnel (including executive officers); property acquisitions and property sales and dispositions that do not meet transaction-size limits and other defined criteria and would be outside of the OP’s normal course of business; entry into new lines of business; settlement of material litigation; changes to material agreements; increasing or decreasing the number of directors on the Company’s board of directors; nominating or appointing a director (other than a Redeemable Preferred Director) who is not independent; nominating or appointing the chairperson of the Company’s board of directors; and certain other matters.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 

Note 4 - Leases

 

As of September 30, 2019, the Company recorded leases of its hotel properties and its corporate office space lease in ROU assets and lease liabilities on the Company’s Consolidated Balance Sheet. The Company's below-market lease intangible, net, which is attributed to its ground leases is also included in the Company's ROU assets. The Company’s leases have remaining lease terms of five to 47 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from five to 50 years. One Company lease includes a purchase option. Lease extension and termination options require written notice by the Company in accordance with specific parameters addressed in each individual lease. Certain of the leases require variable lease payments typically based on a percentage of hotel revenue but no less than a minimum base rent. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

During the nine months ended September 30, 2019, the Company paid rental obligations of $4.1 million, which was included in the measurement of lease liabilities and ROU assets. The cash paid is included in operating cash flows on the Company Statement of Cash Flows.

 

Supplemental balance sheet information related to the Company's leases was as follows:

 

   

Weighted Average Remaining Lease Term

    Weighted Average Discount Rate  

September 30, 2019

 

17.7 years

      6.33 %

 

Supplemental income statement information related to the Company's leases was as follows:

 

 

   

Variable Lease Expense (in thousands)

   

Rent Expense (in thousands)

   

Amortization of Below-Market Lease Intangible, net (in thousands)

 

For the three months ended September 30, 2019

  $ 201     $ 1,440     $ 96  

For the nine months ended September 30, 2019

  $ 597     $ 4,281     $ 295  

 

Rent expense for the Company’s leases of its hotel properties which includes variable lease payments is recorded in Rent expense on the Consolidated Statement of Operations and Comprehensive Loss. Rent expense for the Company's corporate office space is included in General and administrative expense on the Consolidated Statement of Operations and Comprehensive Loss.
 

Maturity of Lease Liabilities Analysis as of September 30, 2019 for the Company's operating leases of hotel properties and corporate office space were as follows (in thousands):

 

   

Minimum Rental Commitments

   

Amortization of Above Market Lease Intangible to Rent Expense

   

Amortization of Below Market Lease Intangible to Rent Expense

   

Amortization of Below Market Lease Intangible, net, to Rent Expense

 

For the three months ending December 31, 2019

  $ 1,372     $ (38 )   $ 134     $ 96  

Year ending December 31, 2020

    5,505       (153 )     535       382  

Year ending December 31, 2021

    5,533       (153 )     535       382  

Year ending December 31, 2022

    5,554       (153 )     535       382  

Year ending December 31, 2023

    5,560       (153 )     535       382  

Thereafter

    71,019       (1,722 )     8,161       6,439  

Total lease payments

  $ 94,543     $ (2,372 )   $ 10,435     $ 8,063  

Less: Imputed Interest

    42,292                          

Present value of lease liability

  $ 52,251                          

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

The following table summarizes future minimum rental commitments for the Company's operating leases comprised of leases of certain of the Company's hotel properties as of December 31, 2018 (in thousands):

 

   

Minimum Rental Commitments

   

Amortization of Above Market Lease Intangible to Rent Expense

   

Amortization of Below Market Lease Intangible to Rent Expense

   

Amortization of Below Market Lease Intangible, net, to Rent Expense

 

Year ending December 31, 2019

  $ 5,227     $ (153 )   $ 551     $ 398  

Year ending December 31, 2020

    5,265       (153 )     551       398  

Year ending December 31, 2021

    5,271       (153 )     551       398  

Year ending December 31, 2022

    5,292       (153 )     551       398  

Year ending December 31, 2023

    5,298       (153 )     551       398  

Thereafter

    71,153       (1,722 )     8,762       7,040  

Total

  $ 97,506     $ (2,487 )   $ 11,517     $ 9,030  

 

The Company has allocated values to certain above and below-market lease intangibles based on the difference between market rents and rental commitments under the leases. During the three and nine months ended September 30, 2018, amortization of below-market lease intangibles, net, to rent expense was $0.1 million and $0.3 million, respectively. Rent expense for the three and nine months ended September 30, 2018 was $1.6 million and $4.7 million, respectively.

 

 

Note 5 - Mortgage Notes Payable

 

The Company’s mortgage notes payable as of September 30, 2019 and December 31, 2018 consist of the following, respectively (in thousands):

 

 

   

Outstanding Mortgage Notes Payable

Encumbered Properties

 

September 30, 2019

   

Interest Rate

 

Payment

 

Maturity

Hilton Garden Inn Blacksburg Joint Venture

  $ 10,500     4.31%  

Interest Only, Principal paid at Maturity

 

June 2020

92 - Pack Mortgage Loan(1)

    855,878    

One-month LIBOR plus 2.14%

 

Interest Only, Principal paid at Maturity

 

Nov 2021, subject to three, one year extension rights

92 - Pack Senior Mezzanine Loan

    98,377    

One-month LIBOR plus 5.60%

 

Interest Only, Principal paid at Maturity

 

Nov 2021, subject to three, one year extension rights

92 - Pack Junior Mezzanine Loan

    68,864    

One-month LIBOR plus 8.50%

 

Interest Only, Principal paid at Maturity

 

Nov 2021, subject to three, one year extension rights

Additional Grace Mortgage Loan -20 properties in Grace Portfolio and one additional property     232,000     4.96%   Interest Only, Principal paid at Maturity   October 2020

Term Loan -25 properties

    272,816    

One-month LIBOR plus 3.00%

 

Interest Only, Principal paid at Maturity

 

May 2020, subject to three, one year extension rights

Total Mortgage Notes Payable

  $ 1,538,435              

Less: Deferred Financing, Net

  $ 15,707              
Plus: Premium on Variable Interest-Only Bond   $ 1,569              

Total Mortgage Notes Payable, Net

  $ 1,524,297              

                                                    

(1) As a result of asset sale activity, the number of hotel properties serving as collateral for this loan has been reduced to 89 as of September 30, 2019.

 

   

Outstanding Mortgage Notes Payable

Encumbered Properties

 

December 31, 2018

   

Interest Rate

 

Payment

 

Maturity

Baltimore Courtyard & Providence Courtyard

  $ 45,500    

4.30 %

 

Interest Only, Principal paid at Maturity

 

April 2019

Hilton Garden Inn Blacksburg Joint Venture

    10,500    

4.31 %

 

Interest Only, Principal paid at Maturity

 

June 2020

87 - Pack Mortgage Loan - 87 properties in Grace Portfolio

    805,000    

One-month LIBOR plus 2.56%

 

Interest Only, Principal paid at Maturity

 

May 2019, subject to three, one year extension rights

87 - Pack Mezzanine Loan - 87 properties in Grace Portfolio

    110,000    

One-month LIBOR plus 6.50%

 

Interest Only, Principal paid at Maturity

 

May 2019, subject to three, one year extension rights

Additional Grace Mortgage Loan - 20 properties in Grace Portfolio and one additional property

    232,000    

4.96 %

 

Interest Only, Principal paid at Maturity

 

October 2020

Term Loan -28 properties

    310,000    

One-month LIBOR plus 3.00%

 

Interest Only, Principal paid at Maturity

 

May 2019, subject to three, one year extension rights

Total Mortgage Notes Payable

  $ 1,513,000              

Less: Deferred Financing, Net

  $ 5,491              

Total Mortgage Notes Payable, Net

  $ 1,507,509              

 

Interest expense related to the Company's mortgage notes payable for the three months ended September 30, 2019 and for the three months ended September 30, 2018, was $20.4 million and $19.6 million, respectively. Interest expense related to the Company's mortgage notes payable for the nine months ended September 30, 2019 and for the nine months ended September 30, 2018, was $62.7 million and $56.0 million, respectively.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Baltimore Courtyard and Providence Courtyard    

 

On April 5, 2019, the Company refinanced mortgage debt on two of its hotel properties: the Courtyard Baltimore Downtown/Inner Harbor, a 205-key select service hotel located in Baltimore, MD (the “Baltimore Courtyard”), and the Courtyard Providence Downtown, a 219-key select service hotel located in downtown Providence, RI (the “Providence Courtyard”).  The new mortgage and mezzanine loans were in an aggregate principal amount of $46.1 million (such loans, the “Baltimore Courtyard and Providence Courtyard Bridge Loans”).

 

At the closing of the Baltimore Courtyard and Providence Courtyard Bridge Loans, the net proceeds after accrued interest and certain closing costs were used to repay the $45.5 million principal amount then outstanding under the Company’s existing mortgage indebtedness on the Baltimore Courtyard and the Providence Courtyard properties.

 

The new loan dated April 5, 2019 was then refinanced and prepaid in full at par in accordance with its terms on May 1, 2019, with proceeds from the 92-Pack Loans.

 

Hilton Garden Inn Blacksburg Joint Venture    

 

The Hilton Garden Inn Blacksburg Joint Venture Loan matures June 6, 2020. On July 6, 2015 and each month thereafter, the Company is required to make an interest only payment based on the outstanding principal and a fixed annual interest rate of 4.31%. The entire principal amount is due at maturity.

 

87-Pack Loans

 

During the quarter ended March 31, 2019 and the year ended December 31, 2018, a total of 87 of the Company’s hotels, all of which were originally acquired in February 2015 as part of a portfolio initially comprising 116 hotel properties (the “Grace Portfolio”), were financed pursuant to a mortgage loan agreement (the “87-Pack Mortgage Loan”) and a mezzanine loan agreement (the “87-Pack Mezzanine Loan” and, collectively with the 87-Pack Mortgage Loan, the “87-Pack Loans”), with an aggregate principal balance of $915.0 million. The principal amount of the 87-Pack Mortgage Loan was $805.0 million and the 87-Pack Mortgage Loan was secured by the 87 Company hotel properties (each, a “87-Pack Collateral Property”). The principal amount of the 87-Pack Mezzanine Loan was $110.0 million and the 87-Pack Mezzanine Loan was secured by the ownership interest in the entities which own the 87-Pack Collateral Properties and the related operating lessees.

 

On May 1, 2019, the 87-Pack Loans matured and were refinanced as part of the 92-Pack Loans. 

 

The 87-Pack Mortgage Loan required monthly interest payments at a variable rate equal to one-month LIBOR plus 2.56%, and the 87-Pack Mezzanine Loan required monthly interest payments at a variable rate equal to one-month LIBOR plus 6.50%, for a combined weighted average interest rate of LIBOR plus 3.03%. Pursuant to an interest rate cap agreement, the LIBOR portions of the interest rates due under the 87-Pack Loans were effectively capped at the greater of (i) 4.0% and (ii) a rate that would result in a debt service coverage ratio specified in the loan documents.

 

In connection with a sale or disposition to a third party of an individual 87-Pack Collateral Property, such 87-Pack Collateral Property was entitled to be released from the 87-Pack Loans, subject to certain conditions and limitations, by prepayment of a portion of the 87-Pack Loans at a release price calculated in accordance with the terms of the 87-Pack Loans.

 

The 87-Pack Loans also provided for certain amounts to be deposited into reserve accounts, including with respect to a portion of the costs associated with the PIPs required pursuant to the franchise agreements related to the 87-Pack Collateral Properties.

 

For the term of the 87-Pack Loans, the Company and the OP were required to maintain, on a consolidated basis, a net worth of $250.0 million (excluding accumulated depreciation and amortization). The Company was in compliance with the financial covenants during the life of the loan. 

 

92-Pack Loans

 

On May 1, 2019, the Company refinanced the 87-Pack Loans and the Baltimore Courtyard and Providence Courtyard Bridge Loans with new mortgage and mezzanine indebtedness of $1,040 million secured by 92 of the Company’s hotel properties (the “92-Pack Loans”). 

 

At closing, the Company used the net proceeds from the 92-Pack Loans after accrued interest and closing costs to repay $961.1 million outstanding under the 87-Pack Loans and the Baltimore Courtyard and Providence Courtyard Bridge Loans.  The Company also used $10.0 million of proceeds to fund a reserve with the lenders that the Company can utilize to fund expenditures for work required to be performed under property improvement plans (“PIPs”) required by franchisors of the 92 hotel properties. During the term of the 92-Pack Loans, the Company will be required to periodically deposit additional reserves with the lenders that the Company can utilize to fund a portion of future PIP work and other capital improvements.

 

The 92-Pack Loans are fully prepayable with certain prepayment fees applicable on or prior to May 7, 2020, provided, however, that the first 25% of each of the 92-Pack Loans is prepayable at par. Following May 7, 2020, each of the 92-Pack Loans may be prepaid without payment of any prepayment fee or any other fee or penalty.  Prepayments under the mortgage loan are generally conditioned on a pro-rata prepayment being made under the mezzanine loans.

 

The 92-Pack Mortgage Loan requires monthly interest payments at a variable rate equal to one-month LIBOR plus 2.14%, the 92-Pack Senior Mezzanine Loan required monthly interest payments at a variable rate equal to one-month LIBOR plus 5.60%, and the 92-Pack Junior Mezzanine Loan requires monthly interest payments at a variable rate equal to one-month LIBOR plus 8.50% for a combined weighted average interest rate of LIBOR plus 2.90%. Pursuant to an interest rate cap agreement, the LIBOR portions of the interest rates due under the 92-Pack Loans were effectively capped at 4.0%.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 In connection with a sale or disposition to a third party of any of the 92 hotel properties serving as collateral, such property may be released from the 92-Pack Loans, subject to certain conditions and limitations, by prepayment of a portion of the 92-Pack Loans at a release price calculated in accordance with the terms of the 92-Pack Loans. As of September 30, 2019, the Company has sold three hotel properties pursuant to these provisions and prepaid approximately $14.1 million of principal under the mortgage loan and approximately $2.8 million of principal under the mezzanine loans, thereby reducing the number of hotel properties serving as collateral under the 92-Pack Loans to 89 hotels. 

 

For the term of the 92-Pack Loans, the Company and the OP are required to maintain, on a consolidated basis, a net worth of (i) $250.0 million (excluding their interest in the hotel properties serving as collateral and excluding accumulated depreciation and amortization) and (ii) $500.0 million (including their interest in the hotel properties serving as collateral but excluding accumulated depreciation and amortization). As of September 30, 2019, the Company was in compliance with this financial covenant.

 

Variable Interest-Only Bond 

 

During the nine months ended September 30, 2019, the Company recorded a derivative asset associated with a variable interest-only bond issued as part of the lenders' securitization of the 92-Pack Mortgage Loan and acquired by the Company in connection with such securitization. The interest-only bond was acquired to effectively reduce the Company’s borrowing cost on the 92-Pack Loans. The premium on the interest-only bond is amortized on a straight-line basis over the life of the bond and is included in the Mortgage notes payable on the Company's Consolidated Balance Sheet as of September 30, 2019. The Company values the variable interest-only bond at fair value (See Note 10 - Fair Value Measurements).

 

Additional Grace Mortgage Loan

 

A portion of the purchase price of the Grace Portfolio was financed through additional mortgage financing which loan was refinanced during October 2015 (the “Additional Grace Mortgage Loan”). The Additional Grace Mortgage Loan carries a fixed annual interest rate of 4.96% per annum with a maturity date on October 6, 2020. Pursuant to the Additional Grace Mortgage Loan, the Company agreed to make periodic payments into an escrow account for the PIPs required by the franchisors, and the Company made the final PIP reserve payment during June 2018. The Additional Grace Mortgage Loan includes the following financial covenants: minimum consolidated net worth and minimum consolidated liquidity. As of September 30, 2019, the Company was in compliance with these financial covenants.

 

Term Loan

 

On April 27, 2017, the Company and the OP, as guarantors, and certain wholly-owned subsidiaries of the OP, as borrowers, entered into a Second Amended and Restated Term Loan Agreement (as amended, the “Term Loan”) in an aggregate principal amount of $310.0 million, initially collateralized by 28 of the Company’s hotel properties (each, a “Term Loan Collateral Property”).

 

Prior to the closing of the 92-Pack Loans, the Term Loan was scheduled to mature on May 1, 2019, subject to three one-year extension rights at the Company's option which, if all three extension rights were exercised, would have resulted in an outside maturity date of May 1, 2022. At the closing of the 92-Pack Loans, $25.0 million of the net proceeds were used to prepay principal under the Term Loan. This prepayment reduced the amount outstanding under the Term Loan to $285.0 million, and concurrently, the Company extended the maturity of the Term Loan in accordance with its terms to May 1, 2020. On May 22, 2019, the Company entered into an amendment to the Term Loan which reduced the commitment under the Term Loan from $310.0 million to $285.0 million and added one additional extension term of one-year to the term of the Term Loan, such that if the Company exercises all extension rights, the maturity date of the Term Loan would be May 1, 2023.

 

The Term Loan is prepayable in whole or in part at any time, subject to payment of LIBOR breakage, if any.

 

The Term Loan requires monthly interest payments at a variable rate of one-month LIBOR plus 3.00%. Pursuant to an interest rate cap agreement, the LIBOR portions of the interest rates due under the Term Loan is capped at 4.00% during the initial term, and a rate based on a debt service coverage ratio during any extension term.

 

In connection with a sale or disposition to a third party of an individual Term Loan Collateral Property, such Term Loan Collateral Property may be released from the Term Loan, subject to certain conditions and limitations, by prepayment of a portion of the Term Loan at a release price calculated in accordance with the terms of the Term Loan. As of September 30, 2019, the Company has sold three hotel properties pursuant to these provisions and prepaid approximately $12.2 million of principal under the Term Loan, thereby reducing the number of hotel properties serving as collateral under the Term Loan to 25 hotels.

 

The Term Loan also provides for certain amounts to be deposited into reserve accounts, including with respect to all costs associated with the PIPs required pursuant to the franchise agreements related to the Term Loan Collateral Properties.

 

For the term of the Term Loan, the Company and the OP are required to maintain, on a consolidated basis, a net worth of $250.0 million (excluding accumulated depreciation and amortization). As of September 30, 2019, the Company was in compliance with this financial covenant.

 

 

Note 6 - Mandatorily Redeemable Preferred Securities

 

In February 2015, a portion of the contract purchase price for the Grace Portfolio was satisfied by the issuance to the sellers of the Grace Portfolio of approximately $447.1 million of liquidation value of preferred equity interests (the "Grace Preferred Equity Interests") in two newly-formed Delaware limited liability companies, HIT Portfolio I Holdco, LLC and HIT Portfolio II Holdco, LLC (together, the "Holdco entities"). Each of the Holdco entities is an indirect subsidiary of the Company and an indirect owner of the hotels comprising the Grace Portfolio. 

 

The holders of the Grace Preferred Equity Interests were entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing, through August 2016, and entitled to 8.00% per annum thereafter. The Company was required to reduce the liquidation value of the Grace Preferred Equity Interests to 50.0% of the $447.1 million originally issued by February 27, 2018, and to redeem the Grace Preferred Equity Interests in full by February 27, 2019.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Interest expense related to the Grace Preferred Equity Interests for the three months ended September 30, 2019 and September 30, 2018 was zero and $4.3 million, respectively. Interest expense related to the Grace Preferred Equity Interests for the nine months ended September 30, 2019 and September 30, 2018 was $2.7 million and $13.0 million, respectively.

 

On February 27, 2019, the Company used proceeds from the concurrent sale of Class C Units to the Brookfield Investor at the Final Closing to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests.

 

Due to the fact that the Grace Preferred Equity Interests were mandatorily redeemable and certain of their other characteristics, the Grace Preferred Equity Interests were treated as debt in accordance with GAAP.

 

 

Note 7 - Accounts Payable and Accrued Expenses

 

The following is a summary of the components of accounts payable and accrued expenses (in thousands):

 

    September 30, 2019     December 31, 2018  

Trade accounts payable

  $ 10,958     $ 22,247  

Accrued expenses

    56,117       40,718  

Total

  $ 67,075     $ 62,965  

 

 

Note 8 - Common Stock

 

The Company had 39,151,201 and 39,134,628 shares of common stock outstanding as of each of September 30, 2019 and December 31, 2018, respectively.

 

Share Repurchase Program

 

On September 24, 2018, the Company announced that its board of directors had adopted a new share repurchase program (the "SRP"), effective as of October 1, 2018, pursuant to which the Company was offering, subject to certain terms and conditions, liquidity to stockholders by offering to make quarterly repurchases of common stock at a price to be established by the board of directors. In February 2019, the board of directors suspended the SRP. The suspension will remain in effect unless and until the board takes further action to reactivate the SRP. There can be no assurance the SRP will be reactivated on its current terms, different terms or at all. Prior to such suspension, the Company repurchased a total of 211,154 shares of common stock pursuant to the SRP for a total purchase price of $1.9 million, including 208,977 shares for a total purchase price of $1.9 million during the quarter and year ended December 31, 2018

 

 

Note 9 - Share-Based Payments

 

The Company has an employee and director incentive restricted share plan (as amended and/or restated, the “RSP”), which provides it with the ability to grant awards of restricted shares and RSUs to the Company’s directors, officers and employees, as well as the directors and employees of entities that provide services to the Company. The total number of shares of common stock that may be granted under the RSP may not exceed 5% of the authorized shares of common stock at any time and in any event may not exceed 4,000,000 shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).

 

Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient’s employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash or stock distributions when and if paid prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock are generally subject to the same restrictions as the underlying restricted shares. The restricted shares are measured at fair value and expensed over the applicable vesting period. The Company recognizes the impact of forfeited restricted share awards as they occur.

 

RSUs represent a contingent right to receive shares of common stock at a future settlement date, subject to satisfaction of applicable vesting conditions and/or other restrictions, as set forth in the RSP and an award agreement evidencing the grant of RSUs. RSUs may not, in general, be sold or otherwise transferred until restrictions are removed and the rights to the shares of common stock have vested. Holders of RSUs do not have or receive any voting rights with respect to the RSUs or any shares underlying any award of RSUs, but such holders generally are credited with dividend or other distribution equivalents that are regarded as having been reinvested in RSUs which are subject to the same vesting conditions and/or other restrictions as the underlying RSUs. The RSUs are measured at fair value and expensed over the applicable vesting period. The Company recognizes the impact of forfeited RSUs as they occur.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Restricted Share Awards

 

A summary of the Company's restricted share awards for the nine months ended September 30, 2019 is presented below.

 

   

Number of

Shares

   

Weighted Average

Grant Date Fair Value

(per share)

   

Aggregate Intrinsic

Value

(in thousands)

 

Non-vested December 31, 2018

    7,210     $ 14.18     $ 102  

Granted

    10,858     $ 6.91     $ 75  

Vested

    7,210     $ 14.18     $ 102  

Forfeitures

        $     $  

Non-vested September 30, 2019

    10,858     $ 6.91     $ 75  

 

Prior to the Initial Closing, the Company made annual restricted share awards to its independent directors that vested annually over a five-year period following the date of grant, subject to continued service. In connection with the Initial Closing, the Company implemented a new director compensation program. Following the Initial Closing and pursuant to a compensation payment agreement, restricted share awards are made to an affiliate of the Brookfield Investor in respect of the Redeemable Preferred Directors’ service on the board of directors and vest on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable Redeemable Preferred Director. As of September 30, 2019, the Company anticipates that all unvested restricted share awards will vest in accordance with their terms.

 

The compensation expense related to restricted shares for the three months ended September 30, 2019 and the three months ended September 30, 2018 was less than $0.1 million. The compensation expense related to restricted shares for the nine months ended September 30, 2019 and the nine months ended September 30, 2018 was less than $0.1 million. As of September 30, 2019, there was less than $0.1 million of unrecognized compensation expense remaining.

 

RSU Awards

 

A summary of the Company's RSU awards for the nine months ended September 30, 2019 is presented below:

 

   

Number of

Shares

   

Weighted Average

Grant Date Fair Value

(per share)

   

Aggregate Intrinsic

Value

(in thousands)

 

Non-vested December 31, 2018

    332,364     $ 14.34     $ 4,765  

Granted

    219,959     $ 6.91     $ 1,520  

Vested

    97,335     $ 14.42     $ 1,404  

Forfeited

    71,558     $ 10.67     $ 763  

Non-vested September 30, 2019

    383,430     $ 10.74     $ 4,118  

 

RSU awards to the Company’s executive officers and other employees generally vest annually over a four-year vesting period following the date of grant, subject to continued service. RSU awards to directors vest on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable director. Vested RSUs may only be settled in shares of common stock and such settlement generally will be on the earliest of (i) in the calendar year in which the third anniversary of each applicable vesting date occurs, (ii) termination of the recipient’s services to the Company and (iii) a change in control event. As of September 30, 2019, the Company anticipated that all unvested RSUs would vest in accordance with their terms.

 

The compensation expense related to RSUs for the three months ended September 30, 2019 and the three months ended September 30, 2018 was approximately $0.4 million and $0.4 million, respectively. The compensation expense related to RSUs for the nine months ended September 30, 2019 and the nine months ended September 30, 2018 was approximately $1.1 million and $1.0 million, respectively. As of September 30, 2019, there was $3.3 million of unrecognized compensation expense remaining.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 

Note 10 - Fair Value Measurements

 

The Company is required to disclose the fair value of financial instruments which it is practicable to estimate. The fair value of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these items. The following table shows the carrying amounts and the fair values of material liabilities, excluding deferred financing fees, that qualify as financial instruments (in thousands):

 

   

September 30, 2019

 
   

Carrying Amount

   

Fair Value

 

Mortgage notes payable

  $ 1,538,435     $ 1,525,372  

Total

  $ 1,538,435     $ 1,525,372  

 

The fair value of the mortgage notes payable was determined using the discounted cash flow method and applying current market rates and is classified as level 3 under the fair value hierarchy. Market rates take into consideration general market conditions and maturity.

 

During the three and nine months ended September 30, 2019, the Company recorded impairment losses on its hotel properties (See Note 14 - Impairments). The fair value of these hotel properties was based on the observable market data which is considered level 2 input under the fair value hierarchy and unobservable inputs that reflect the Company's internal assumptions, which are considered level 3 input under the fair value hierarchy.

 

During the nine months ended September 30, 2019, the Company recorded a derivative asset associated with a variable interest-only bond that the Company acquired in connection with the lenders' securitization of the 92-Pack Mortgage Loan (See Note 5 - Mortgage Notes Payable). The fair value of the variable interest-only bond of $1.7 million was based on the observable market data which is considered level 2 input under the fair value hierarchy.

 

 

Note 11 - Commitments and Contingencies

 

Litigation

 

In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company at the date of this filing, other than as set forth below.

 

A special litigation committee (the “SLC”) of the Company’s board of directors (the “Board”) has been empowered to investigate claims asserted in shareholder demand letters sent to the Board by counsel for two of the Company’s stockholders, Tom Milliken and Stuart Wollman, as well as the allegations contained in a complaint filed by Mr. Milliken on behalf of the Company and against the Company, as well as American Realty Capital Hospitality Advisors, LLC (the "Former Advisor"), the Company's former external advisor and various affiliates of the Former Advisor, including the Company's former property managers (together, the "Former Advisor Defendants"), and certain current and former directors and officers of the Company (the “Director and Officer Defendants”). The complaint was filed in the United States District Court for the Southern District of New York on February 26, 2018 and amended on May 25, 2018 (the “Federal Court Action”). In May 2018, the Company filed a motion to stay the complaint pending the outcome of the investigation, and, in August 2018, the District Court granted the Company’s motion. The amended complaint alleges, among other things, that the Former Advisor and the Director and Officer Defendants breached their fiduciary duties to the Company by putting their own interests above the Company’s interests, which breach was aided and abetted by certain of the Former Advisor Defendants. The amended complaint also asserts a claim for corporate waste against the Former Advisor and Director and Officer Defendants, which was aided and abetted by certain of the Former Advisor Defendants, breach of contract against the Director and Officer Defendants, and unjust enrichment against certain of the Director and Officer Defendants and Former Advisor Defendants.

 

The SLC, which is represented by independent counsel, has substantially completed its investigation of the claims contained in the demand letters and the Federal Court Action (collectively “the Claims”). On October 11, 2019, the SLC submitted to the District Court its report with respect to its investigation (the “Report”).

 

The SLC also has been empowered to determine whether it is in the best interest of the Company for the Claims against the defendants in the Federal Court Action to proceed.  The Report includes the SLC’s previously disclosed determination that some but not all of the Claims should proceed. The Report also indicates that, as previously disclosed, the SLC has reached an agreement in principle with the Company’s current Chief Executive Officer, Jonathan P. Mehlman, to resolve the Claims against Mr. Mehlman with prejudice whereby he will pay back to the Company a portion of certain fees and stock he received.  This agreement is subject to signing a definitive settlement agreement and receiving court approval. In the Report, the SLC concluded that: (1) the claims against the Company’s Independent Directors and the former Chief Financial Officer should be dismissed with prejudice, and it is not, therefore, in the best interest of the Company for any Claims to proceed against the following defendants: current or former directors of the Company Stanley Perla, Abby Wenzel and Robert Burns, and the Company’s former Chief Financial Officer, Edward Hoganson; and (2) it is in the best interest of the Company for certain Claims to proceed against the remaining defendants. 

 

Settlement discussions have taken place which led to a mediation that occurred on September 11, 2019.  None of the parties reached a settlement at that mediation.  Settlement discussions have continued to take place since that time. The parties expect a second mediation session to occur on Friday, November 8, 2019.

 

The Federal Court Action is currently stayed pending a November 15, 2019 status conference with the District Court. At the status conference, the Company anticipates that the parties will discuss, and the District Court will set, a schedule for future proceedings. 

 

The Claims do not seek recovery of losses from or damages against the Company, but instead allege that the Company has sustained damages as a result of actions by the defendants, and therefore no accrual of any potential liability was necessary as of September 30, 2019, other than for incurred out-of-pocket legal fees and expenses.

 

Environmental Matters

 

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

Contingent Forward Liability

 

Until the Final Closing, the Company could have become obligated pursuant to the SPA with the Brookfield Investor to issue additional Class C Units. This obligation was considered a contingent forward contract under ASC section 480 - Distinguishing Liabilities from Equity, and the Company accounted for it as a liability.  On February 27, 2019, the Company used the proceeds from the concurrent sale of Class C Units to the Brookfield Investor to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests, and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units. Accordingly, at December 31, 2018, the Company recognized the fair value of the liability as income through current earnings, and thereby extinguished the contingent forward liability of $1.3 million. The Company had no contingent forward liability as of September 30, 2019.

 

Note 12 - Related Party Transactions and Arrangements

 

Relationships with the Brookfield Investor and its Affiliates

 

As described in Note 3 - Brookfield Investment, on January 12, 2017, the Company and the OP entered into the SPA and the Framework Agreement. On March 31, 2017, the Initial Closing occurred and a variety of transactions contemplated by the SPA and the Framework Agreement were consummated, including the issuance and sale of the Redeemable Preferred Share and 9,152,542.37 Class C Units and the execution or taking of various agreements and actions required to effectuate the Company's transition to self-management. On February 27, 2018, the Second Closing occurred, pursuant to which the Company sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate. On February 27, 2019, the Final Closing occurred, pursuant to which the Company sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.

 

Holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, fixed, quarterly, cumulative PIK Distributions payable in Class C Units at a rate of 5% per annum. For the three months ended September 30, 2019 and September 30, 2018, the Company paid cash distributions of $7.7 million and $3.2 million and PIK Distributions of 347,822.16 and 146,594.53 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units.  For the nine months ended September 30, 2019 and September 30, 2018, the Company paid cash distributions of $20.0 million and $9.2 million and PIK Distributions of 902,948.37 and 416,402.87 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units. 

 

Two of the Company’s directors, Bruce G. Wiles, who also serves as Chairman of the Board, and Lowell G. Baron, have been elected to the Company’s board of directors as the Redeemable Preferred Directors pursuant to the Brookfield Investor’s rights as the holder of the Redeemable Preferred Share and pursuant to the SPA. Mr. Wiles serves as a Senior Advisor for Brookfield Property Group's lodging investment platform, a subsidiary of Brookfield Asset Management Inc., an affiliate of the Brookfield Investor, and Mr. Baron serves as a Managing Partner of Brookfield Asset Management Inc. and Chief Investment Officer of its global real estate business.

 

Note 13 - Sale of Hotels and Assets Held for Sale

 

Sale of Hotels

 

During the three and nine months ended September 30, 2019, the Company completed the sale of six hotels for a sales price of $37.3 million, resulting in a net gain of approximately $1.2 million, which is included in gain on sale of assets on the Company’s Consolidated Statement of Operations and Comprehensive Loss. The Company had previously recognized impairment losses on five of these hotels in anticipation of their expected sale. These sales generated net proceeds to the Company of approximately $6.4 million, after prepayment of approximately $31.0 million of related mortgage debt obligations and closing costs. The Company has not yet determined what the use of the excess proceeds will be. 

 

See Note 15 – Subsequent Events for discussion about 11 hotels that were sold between October 1, 2019 and November 7, 2019. 

 

During the nine months ended September 30, 2018, the Company completed the sale of one hotel for a sales price of $5.7 million, resulting in a net loss of approximately $0.1 million. The Company used the proceeds from the sale of the hotel to redeem $3.8 million in Grace Preferred Equity Interests in accordance with their terms and for other general corporate purposes.

 

Assets Held for Sale 

 

As part of its investment strategy to continue to pursue the sale of non-core hotels and reallocate capital into more attractive acquisition and capital investment opportunities, as well as debt reduction, the Company commenced marketing for sale a total of 26 hotels during the quarter ended June 30, 2019, and an additional 19 hotels during the quarter ended September 30, 2019. 

 

As of September 30, 2019, 16 hotels were subject to definitive sale agreements where the buyer has made, or was obligated to make, a non-refundable deposit and have been classified as held for sale. During the three months ended September 30, 2019, the Company recognized an impairment loss on four of these 16 hotels, and made certain adjustments to previous impairment estimates, totaling $11.7 million, which includes the estimated costs to sell those assets (See Note 14 - Impairments). The aggregate contract purchase price of these sales is $116.0 million, and the sales are expected to generate net proceeds to the Company of approximately $38.4 million, after prepayment of approximately $77.6 million of related mortgage debt obligations and estimated closing costs.

 

The Company expects to close on the sale of the above 16 hotels during the fourth quarter of 2019 and the first quarter of 2020. These sales are subject to customary closing conditions, and there can be no assurance they will be completed on their current terms, or at all. The sales of these hotels do not represent a strategic shift of the Company’s operations, and therefore the Company has included the operating results for these properties in income from continuing operations for the three months ended and nine months ended September 30, 2019. 

 

See Note 15 – Subsequent Events for discussion about 11 of these 16 hotels that were sold between October 1, 2019 and November 7, 2019.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

 

 

Note 14 - Impairments

 

Impairments of Long-Lived Assets

 

During the three months ended September 30, 2019, the Company identified a total of four hotel properties where the carrying value of the properties exceeded their fair value and management determined the excess carrying value was unrecoverable. These hotels were among the 16 hotels as of September 30, 2019, that were subject to definitive sale agreements where the buyer has made, or was obligated to make, a non-refundable deposit and have been classified as held for sale. (See Note 13-Sale of Hotels and Assets Held for Sale). The Company recorded cumulative impairment losses of $11.7 million during the three months ended September 30, 2019. The goodwill previously allocated to these properties by the Company had been fully written off as part of impairment of goodwill in prior periods and therefore no further impairment of goodwill was recorded. These hotels were identified for impairment review based on their potential sale, resulting in shorter holding periods. The Company determined the fair value of each hotel was equal to the purchase price in the applicable definitive sales agreement. During the nine months ended September 30, 2019, the Company recorded cumulative impairment losses on 17 hotel properties of $55.2 million. All but one of these 17 hotel properties were either sold or subject to definitive sale agreements as of September 30, 2019.

 

During the nine months ended September 30, 2018, the Company identified four hotel properties where the carrying value of the properties exceeded their fair value and management determined the excess carrying value was unrecoverable. The Company recorded an aggregate impairment loss of $17.3 million on the four hotel properties during the nine months ended September 30, 2018. These four hotels were identified for impairment review because of a long-term change in market conditions and the potential future sale of such properties. The Company determined the fair value of each hotel using a market and income-based approach. There was no impairment loss during the three months ended September 30, 2018.

 

 

Note 15 - Subsequent Events

 

Between October 1, 2019 and November 7, 2019, the Company completed the sale of 11 hotels for a sales price of $73.9 million. The sales generated net proceeds of $22.3 million after prepayment of approximately $51.6 million of related mortgage debt obligations and closing costs. The Company has not yet determined what the use of the excess proceeds will be. These hotels were classified as held for sale during the quarter ended September 30, 2019. 

 

 

 

       Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Hospitality Investors Trust, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our," "our company" or "us" refer to Hospitality Investors Trust, Inc., a Maryland corporation, including, as required by context, to Hospitality Investors Trust Operating Partnership, L.P. (the "OP"), the Company’s operating partnership and a Delaware limited partnership, and to its subsidiaries.

 

Forward-Looking Statements

 

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of our company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

 

The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

 

 

We may require funds, which may not be available on favorable terms or at all, in addition to our operating cash flow and cash on hand to meet our capital requirements.

 

The interests of the Brookfield Investor may conflict with our interests and the interests of our stockholders, and the Brookfield Investor owns all $406.6 million in liquidation preference units of limited partner interests in our operating partnership entitled “Class C Units” (the “Class C Units”) issued and outstanding as of the date hereof and has significant governance and other rights that could be used to control or influence our decisions or actions.

 

The prior approval rights of the Brookfield Investor will restrict our operational and financial flexibility and could prevent us from taking actions that we believe would be in the best interest of our business.

 

We no longer pay distributions and there can be no assurance we will resume paying distributions in the future.

 

Our hotel sale program is subject to market conditions and there can be no assurance we will be successful in selling hotels at our target prices or at all. Additionally, the proceeds from some of the hotels we have sold during 2019 as part of our hotel sale program were below, and we expect that the proceeds from certain of the additional hotels for which we have entered into definitive sale agreements or have commenced marketing for sale (if completed) will be below, the corresponding estimated value of such hotel included in our most recent estimated net asset value per share of common stock ("Estimated Per-Share NAV"),  which could negatively impact Estimated Per-Share NAV as of December 31, 2019.
  Unless the value of our assets grows in excess of the fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum ("PIK Distributions") we pay to the holders of the Class C Units, continued accrual of PIK Distributions will have a negative impact on the value of shares of our common stock. 
  Our pursuit of any acquisition and capital investment opportunities is also subject to market conditions, as well as capital availability and the Brookfield Approval Rights (as defined below), and there can be no assurance we will be able to acquire additional assets or make additional investments. 
 

We have a history of operating losses and there can be no assurance that we will ever achieve profitability.

 

No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.

 

Because no public trading market for our shares currently exists and our share repurchase program has been suspended, it is difficult for our stockholders to sell their shares of our common stock.

 

All of the properties we own are hotels, and we are subject to risks inherent in the hospitality industry.

 

We primarily own older hotels, which makes us more susceptible to declines in consumer demand, the impact of increases in hotel supply and downturns in economic conditions.

  New hotel supply has contributed to declines in occupancy at our hotels in prior periods and may continue to have this effect.
 

Increases in interest rates could increase the amount of our debt payments.

 

We have incurred substantial indebtedness, which may limit our future operational and financial flexibility.

 

We depend on our operating partnership and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to their obligations, which include distribution and redemption obligations to holders of Class C Units.

 

The amount we would be required to pay holders of Class C Units in a fundamental sale transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.

 

We are subject to a variety of risks related to our brand-mandated property improvement plans ("PIPs"), such as we may spend more than budgeted amounts to make necessary renovations and the renovations we make may not have the desired effect of improving the competitive position and enhancing the performance of the hotels renovated.

 

Increases in labor costs have adversely affected the profitability of our hotels and may continue to do so.

 

Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we may not be profitable or realize growth in the value of our real estate properties.

 

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.

 

Our real estate investments are relatively illiquid and subject to some restrictions on sale, and therefore we may not be able to dispose of properties at the time of our choosing or on favorable terms.

  Our hotels have been and may continue to be subject to impairment charges.
 

Our failure to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT") could have a material adverse effect on us.

 

All forward-looking statements should also be read in light of the risks identified in Item 1A of our Annual Report on Form 10-K.

 

 

Overview

 

Hospitality Investors Trust, Inc. is a self-managed real estate investment trust (" REIT") that invests primarily in premium-branded select-service lodging properties in the United States. As of September 30, 2019, we own or have an ownership interest in a total of 138 hotels, with a total of 16,765 guestrooms in 33 states.

 

We believe in affiliating our hotels with premium brands owned by leading international franchisors such as Hilton, Marriott and Hyatt. As of September 30, 2019, all but one of our hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., Hyatt Hotels Corporation and Intercontinental Hotels Group or one of their respective subsidiaries or affiliates. Our one unbranded hotel has a direct affiliation with a leading university in Atlanta.

 

As part of our investment strategy to continue to pursue the sale of non-core hotels and reallocate capital into more attractive acquisition and capital investment opportunities, as well as debt reduction, we commenced marketing for sale a total of 45 hotels during the nine months ended September 30, 2019. As of September 30, 2019, six of these hotels have been sold and 16 were subject to definitive sale agreements where the buyer has made, or was obligated to make, a non-refundable deposit. See “Results of Operations” below for more detail. 

 

We have primarily acquired lodging properties in the upscale select-service, upscale extended stay and upper midscale select-service chain scale segments located in secondary markets with strong demand generators, such as state capitals, major universities and hospitals, as well as corporate, leisure and retail attractions. We believe properties in these chain scale segments can be operated with fewer employees and provide more stable cash flows than full service hotels, and with less market volatility than similar hotels in primary market locations.

 

We conducted our initial public offering ("IPO") from January 2014 until November 2015 without listing shares of our common stock on a national securities exchange, and we have not subsequently listed our shares. There currently is no established trading market for our shares and there may never be one. We are required to annually publish an Estimated Per-Share NAV pursuant to the rules and regulations of Financial Industry Regulatory Authority (“FINRA”). On May 9, 2019, our board of directors unanimously approved an updated 2019 Estimated Per-Share NAV equal to $9.21 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 39,134,628 shares of our common stock outstanding on a fully diluted basis as of December 31, 2018 (the "2019 NAV"), and we published our 2019 NAV on May 13, 2019. We intend to publish an updated Estimated Per-Share NAV on at least an annual basis. 

    

On January 12, 2017, we, along with our operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (the "OP"), entered into the Securities Purchase, Voting and Standstill Agreement ("SPA") with the Brookfield Investor to secure a commitment by the Brookfield Investor to make capital investments in us necessary for us to meet our short-term and long-term liquidity requirements and obligations.

 

On March 31, 2017, the Initial Closing occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:

 

 

the sale by us and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share ("the "Redeemable Preferred Share"), for a nominal purchase price; and

 

the sale by us and purchase by the Brookfield Investor of 9,152,542.37 Class C Units, for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.

 

On February 27, 2018, the Second Closing occurred, pursuant to which we sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate.

 

On February 27, 2019, the Final Closing occurred, pursuant to which we sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.

 

Holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum and are also entitled to receive, with respect to each Class C Unit, fixed, quarterly, cumulative PIK Distributions payable in Class C Units at a rate of 5% per annum. As of September 30, 2019, the Brookfield Investor has made $379.7 million of capital investments in us by purchasing Class C Units in the OP, and the total liquidation preference of the Class C Units was $406.6 million. The Class C Units are convertible into units of limited partner interest in the OP entitled “OP Units” (“OP Units”), which may be redeemed for shares of our common stock or, at our option, the cash equivalent. As of September 30, 2019, the Brookfield Investor owns or controls 41.4% of the voting power of our common stock on an as-converted basis. With respect to share ownership limitations contained in our charter intended to ensure our ongoing compliance with REIT requirements, we have granted the Brookfield Investor and its affiliates a waiver of the applicable limitations which permits the Brookfield Investor and its affiliates to own up to 49.9% in value of the aggregate of the outstanding shares of our common stock, subject to terms and conditions set forth in an ownership limit waiver agreement. The SPA also contains certain standstill and voting restrictions applicable to the Brookfield Investor and certain of its affiliates.

 

 

Without obtaining the prior approval of the majority of the then outstanding Class C Units, and/or at least one of the two directors elected to our board of directors by the Brookfield Investor pursuant to its rights as the holder of the Redeemable Preferred Share, we are restricted from taking certain operational and governance actions. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions.

 

An affiliate of the Brookfield Investor, BSREP II Hospitality II Special GP OP LLC (the “Special General Partner”), is the special general partner of the OP, with certain non-economic rights that apply if we fail to redeem the Class C Units when required to do so, including the ability to commence selling the OP’s assets until the Class C Units have been fully redeemed.

 

We conduct substantially all of our business through the OP. We are a general partner and hold all of the OP Units. The Brookfield Investor holds all the issued and outstanding Class C Units, which rank senior in payment of distributions and in the distribution of assets to the OP Units held by us.

 

We do not currently pay distributions to our stockholders, and have not paid cash distributions since April 2016, when they were suspended to preserve liquidity, or stock distributions since January 2017, when we entered into the SPA. Currently, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.

 

Prior to the Initial Closing, we had no employees, and we depended on our former external advisor, American Realty Capital Hospitality Advisors, LLC (the "Former Advisor") to manage certain aspects of our affairs on a day-to-day basis pursuant to our advisory agreement. In connection with, and as a condition to, the Brookfield Investor’s investment in us at the Initial Closing, the advisory agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at that time, Crestline) who had been involved in the management of our day-to-day operations, including all of our executive officers, became our employees.

 

We contract directly or indirectly, through our taxable REIT subsidiaries, with third-party property management companies to manage our hotel properties.  As of September 30, 2019, 75 of the hotel assets we have acquired were managed by Crestline and 63 of the hotel assets we have acquired were managed by the following other property managers: Hampton Inns Management LLC and Homewood Suites Management LLC, affiliates of Hilton Worldwide Holdings Inc. (37 hotels), InnVentures IVI, LP (2 hotels), McKibbon Hotel Management, Inc. (20 hotels) and LBA Hospitality (4 hotels). During October 2019, we transitioned management of three hotels managed by Hilton Worldwide Holdings Inc. to Crestline pursuant to Crestline’s right to manage a comparable replacement hotel (i.e., equal or greater historic annual revenue) if we sell a hotel Crestline is currently managing. We expect to similarly transition management of additional hotels to Crestline to the extent we continue to sell Crestline-managed hotels under our hotel sale program.  

 

Our customers fall into three broad groups: transient business, group business and contract business. Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our hotels. Group business represents significant blocks of rooms for event-driven business and is primarily corporate users but can also include social events such as wedding parties. Contract business is also primarily comprised of corporate users for fixed rate longer term in nature business such as airline crews.

 

Our revenues are comprised of rooms revenue, food and beverage revenue and other revenue which accounted for approximately 94.6%, 2.9%, and 2.5%, respectively, of our total revenues for the three months ended September 30, 2019. Hotel operating expenses (which exclude transaction costs, general and administrative, depreciation and amortization and impairment of goodwill and long-lived assets) represent approximately 72.0% of our total operating expenses for the three months ended September 30, 2019.

 

Critical Accounting Policies and Estimates

 

Real Estate Investments

 

We allocate the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and furniture, fixtures and equipment. We utilize various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent third parties or our analysis of comparable properties in our portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

 

Our acquisitions of hotel properties are accounted for as acquisitions of groups of assets rather than business combinations, although the determination will be made on a transaction-by-transaction basis. If we conclude that an acquisition will be accounted for as a group of assets, the costs associated with the acquisition will be capitalized as part of the assets acquired.

 

Our investments in real estate, including transaction costs, that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of our assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.

 

We are required to make subjective assessments as to the useful lives of our assets for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

 

 

Impairment of Long-Lived Assets

 

Upon the occurrence of certain “triggering events” under the provisions of the Accounting Standards Codification ("ASC") section 360-Property, Plant and Equipment, we review our hotel investments which are considered to be long-lived assets under GAAP for impairment.  These triggering events include significant declines in market value of the asset, significant declines in operating performance, significant adverse changes in economic conditions, and potential sales of hotel properties which result in shorter holding periods. If a triggering event occurs and circumstances indicate the carrying amount of the property may not be recoverable, we perform a recoverability test which compares the carrying amount to an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If we determine we are unable to recover the carrying amount of the asset over the useful life, impairment is deemed to exist and an impairment loss will be recorded to the extent that the carrying amount exceeds the estimated fair value of the property which results in an immediate charge to net income.

 

Class C Units

 

We initially measured the Class C Units at fair value net of issuance costs. We are required to accrete the carrying value of the Class C Units to the liquidation preference using the effective interest method over the five - year period prior to the holder's redemption option becoming exercisable. However, if it becomes probable that the Class C Units will become redeemable prior to such date, we will adjust the carrying value of the Class C Units to the maximum liquidation preference.

 

Until the Final Closing, we could have become obligated pursuant to the SPA with the Brookfield Investor to issue additional Class C Units. This obligation was considered a contingent forward contract under ASC section 480 - Distinguishing Liabilities from Equity, and we accounted for it as a liability. On February 27, 2019, we used the proceeds from the sale of Class C Units to the Brookfield Investor at the Final Closing to redeem the remaining $219.7 million in liquidation value of preferred equity interests issued by two of our subsidiaries that indirectly own the hotels comprising the Grace Portfolio (the "Grace Preferred Equity Interests") (which was treated as indebtedness for accounting purposes), and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units. Accordingly, at December 31, 2018, we recognized the fair value of the contingent forward liability as income through current earnings, and thereby extinguished the liability of $1.3 million. We had no contingent forward liability as of September 30, 2019 and will not have any such liability in the future. 

 

Revenue Performance Metrics

 

We measure hotel revenue performance by evaluating revenue metrics such as:

 

 

Occupancy percentage (“Occ”) - Occ represents the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occ measures the utilization of our hotels' available capacity.

 

 

Average Daily Rate (“ADR”) - ADR represents total hotel revenues divided by the total number of rooms sold in a given period.

 

 

Revenue per Available room (“RevPAR”) - RevPAR is the product of ADR and Occ.

 

Occ, ADR, and RevPAR are commonly used measures within the hotel industry to evaluate hotel operating performance. ADR and RevPAR do not include food and beverage or other revenues generated by the hotels. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget, to prior periods and to the hotel competitive set in the market, as well as on a company-wide and regional basis. Our hotel competitive sets generally include branded hotels of similar size, location, age and chain scale (as designated by STR, Inc.).

 

Our Occ, ADR 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, airport and other business and leisure travel, new hotel property construction, and the pricing strategies of competitors. In addition, our Occ, ADR and RevPAR performance is dependent on the continued success of our franchisors and brands.

 

We generally expect that room revenues will make up a significant majority of our total revenues, and our revenue results will therefore be highly dependent on maintaining and improving Occ and ADR, which drive RevPAR.

 

 

Results of Operations

 

Our results of operations have in the past, and may continue to be, impacted by our acquisition and disposition activities. Our hotel portfolio has been acquired through a series of portfolio purchases, as shown in the table below.

 

Acquisition Date

Portfolio

Number of Hotels

 

Purchase Price(1)

March 2014

Barceló Portfolio

  6  

$110.1 million

February 2015

Grace Portfolio

  116(2)  

$1,796.5 million

October 2015

First Summit Portfolio

  10(3)  

$150.1 million

November 2015

First Noble Portfolio

  2  

$48.6 million

December 2015

Second Noble Portfolio

  2  

$59.0 million

February 2016

Third Summit Portfolio

  6  

$108.3 million

April 2017

Second Summit Portfolio

  7(4)  

$66.5 million

 

(1) Exclusive of closing costs

(2) Since the acquisition date, eight hotels have been sold reducing the size of this portfolio to 108 properties.

(3) Since the acquisition date, two hotels have been sold reducing the size of this portfolio to eight properties.

(4) Since the acquisition date, one hotel has been sold reducing the size of this portfolio to six properties.

 

We sold four non-core hotels during the fourth quarter of 2017 and the first quarter of 2018 which generated net proceeds of $4.3 million after associated repayments of Grace Preferred Equity Interests and indebtedness. As part of our primary business objective to maximize stockholder value and position ourselves for a liquidity event, we intend to continue to pursue the sale of hotels we determine are non-core to our portfolio and reallocate that capital into attractive acquisition and capital investment opportunities, as well as debt reduction, we believe will produce more attractive stockholder returns. As part of this investment strategy, we commenced marketing for sale a total of 26 hotels during the quarter ended June 30, 2019, and an additional 19 hotels during the quarter ended September 30, 2019. Our non-core hotel sale activity is expected to continue in future periods through the completion of the sale of these hotels and the marketing and sale of additional hotels. Our hotel sale program is subject to market conditions and there can be no assurance we will be successful in selling hotels at our target prices or at all. Additionally, the proceeds from some of the hotels we have sold during 2019 as part of our hotel sale program were below, and we expect that the proceeds from certain of the additional hotels for which we have entered into definitive sale agreements or have commenced marketing for sale (if completed) will be below, the corresponding estimated value of such hotel included in our most recent Estimated Per-Share NAV, which could negatively impact Estimated Per-Share NAV as of December 31, 2019. Our pursuit of any acquisition and capital investment opportunities is also subject to market conditions, as well as capital availability and the Brookfield Approval Rights, and there can be no assurance we will be able to acquire additional assets or make additional investments.

 

During the three months ended September 30, 2019, we sold six hotels set forth in the table below.

 

Property

Location

Number of Rooms

     

Courtyard Bowling Green Convention Center

Bowling Green, KY

93

Fairfield Inn & Suites Germantown

Germantown, TN

80

Homewood Suites Memphis Germantown

Germantown, TN

92

Hyatt Place Baton Rouge I 10

Baton Rouge, LA

126

SpringHill Suites Baton Rouge South

Baton Rouge, LA

78

TownePlace Suites Baton Rouge South

Baton Rouge, LA

90

 

The aggregate sales price of these hotels was $37.3 million, resulting in a gain of approximately $1.2 million, which is included in gain on sale of assets on our Consolidated Statement of Operations and Comprehensive Loss. We had previously recognized impairment losses on five of these hotels in anticipation of their expected sale, and this gain represents the amount by which the realized sale proceeds exceeded the estimated sales proceeds at the time the impairments were recorded. These sales generated net proceeds to us of approximately $6.4 million, after prepayment of approximately $31.0 million of related mortgage debt obligations and closing costs. We have not yet determined what our use of the excess proceeds will be. 

 

 

As of September 30, 2019, with respect to the other hotels we have commenced marketing for sale, we had entered into definitive agreements to sell the 16 hotels set forth in the table below where the buyer has made, or was obligated to make, a non-refundable deposit. 

 

 

Property

Location

Number of Rooms

     

Courtyard Chicago Elmhurst Oakbrook Area

Elmhurst, IL

140

Courtyard Lexington

Lexington, KY

90

Courtyard Mobile

Mobile, AL

78

Fairfield Inn & Suites Baton Rouge South

Baton Rouge, LA

78

Fairfield Inn & Suites Spokane Downtown

Spokane, WA

84

Hampton Inn Chicago Gurnee

Gurnee, IL

134

Hampton Inn Cleveland Westlake

Westlake, OH

122

Hampton Inn Colorado Springs Central Airforce Academy

Colorado Springs, CO

125

Hampton Inn Columbus Dublin

Dublin, OH

123

Hampton Inn Dallas Addison

Addison, TX

158

Hampton Inn Morgantown

Morgantown, WV

107

Hampton Inn Pickwick Dam at Shiloh Falls

Pickwick, TN

50

Hampton Inn St Louis Westport

Maryland Heights, MO

122

Holiday Inn Express & Suites Kendall East Miami

Miami, FL

66

Residence Inn Jackson Ridgeland

Ridgeland, MS

100

SpringHill Suites Houston Hobby Airport

Houston, TX

122

 

We have closed or expect to close these sales during the fourth quarter of 2019 and the first quarter of 2020. The aggregate sales price of these hotels is $116.0 million. During the three months ended September 30, 2019, we recognized an impairment loss on four of these 16 hotels, and made certain adjustments to previous impairment estimates, totaling $11.7 million, which includes the estimated costs to sell the assets (See Note 14 – Impairments to our accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q for more details). These sales are expected to generate net proceeds to us of approximately $38.4 million, after prepayment of approximately $77.6 million of related mortgage debt obligations and estimated closing costs. We have not yet determined what our use of the anticipated excess proceeds will be. The sales that have not yet been completed are subject to customary closing conditions, and there can be no assurance they will be completed on their current terms, or at all.

 

See Note 15 – Subsequent Events to our accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q for discussion about 11 of the 16 hotels that were sold between October 1, 2019 and November 7, 2019. 

 

The hotel business is capital-intensive and renovations are a regular part of the business. We have been undertaking a large-scale PIP program across a significant portion of the hotels in our portfolio. As of September 30, 2019, we have substantially completed work on 95 of the 135 hotels that are part of our PIP program, including 18 hotels that are among the 39 hotels we have commenced marketing for sale during the nine months ended September 30, 2019, and have not yet sold. We completed PIP work on 13 hotels in 2017, 36 hotels in 2018 and 14 hotels to date in 2019.  All of the six hotels we sold during 2019 to date had been part of our PIP program prior to sale, and we had completed PIP work on three of those hotels prior to sale. Due to the progress we have made in our PIP program and the commencement of increased disposition activity, going forward, we expect the number of hotels that undergo PIP renovations to moderate to less than ten hotels annually as we target for sale many of the remaining unrenovated hotels in our PIP program and we continue to selectively defer capital expenditures. We expect to substantially complete our PIP program over the next two to three years.

 

Hotel renovations have adversely impacted, and are expected to continue to adversely impact, our operating results due to the disruption to the operations of the hotels while work is ongoing. We anticipate that as we complete PIP and other renovations, our performance at the renovated hotels will increase for a period of time (generally one to two years) and then moderate as the hotel stabilizes. However, performance at renovated hotels remains subject to competition and other conditions in the markets in which they operate, as well as other factors that may impact the hotel industry generally or the renovated hotel in particular and, in some cases, offset the effects on performance of completed PIPs and other renovations. We cannot provide any assurance that the PIP and other renovations at our hotels will have the desired effect of improving the competitive position and enhancing the performance of the hotels renovated. 

 

We believe that the continued execution of our investment strategies will maximize long-term value for our stockholders and position us for future success and a potential liquidity event for our investors. While it is our intention to achieve a liquidity event, there can be no assurance as to when or if we will ultimately be able to do so and as to the terms of any such liquidity event.

 

 

Comparison of the Three Months Ended September 30, 2019 to the Three Months Ended September 30, 2018

 

Room revenues for the portfolio were $150.1 million for the three months ended September 30, 2019, compared to room revenues of $152.1 million for the three months ended September 30, 2018. The decrease in room revenues was primarily driven by a lower number of total rooms in the portfolio due to the sale of six hotels during the third quarter of 2019. Room revenues were also impacted by a decrease in ADR, partially offset be an increase in occupancy. 

 

No hotels were under renovation pursuant to our PIP program during the three months ended September 30, 2019, compared to seven hotels under renovation during the three months ended September 30, 2018, which represented approximately 600 nights during the period when a room could not be used due to ongoing renovations. A large-scale capital project that would result in the Company considering a hotel under renovation is an extensive renovation of core aspects of the hotel, such as rooms, meeting space, lobby, bars, restaurants, and other public spaces. Both quantitative and qualitative factors are taken into consideration in determining if a particular renovation would cause a hotel to be considered to be under renovation for these purposes, including unusual or exceptional circumstances such as a reduction or increase in room count, a significant alteration of the business operations, or the closing of material portions of the hotel during the renovation. 
 

The following table presents actual operating information of the hotels in our portfolio for the periods in which we have owned them.