UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended December 31 , 2023
OR
For the transition period from to
Commission File Number: 001-35074
(Exact name of registrant as specified in its charter)
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(Address of principal executive offices, including zip code)
(512 ) 538-2300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
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| 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 13(a) of the Exchange Act. | ☐ | ||||||||||
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant’s as of June 30, 2023 was $682,825,287 based on the closing sale price of the registrant’s common stock on the New York Stock Exchange as of June 30, 2023.
As of February 9, 2024 the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 107,593,373 .
DOCUMENTS INCORPORATED BY REFERENCE
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2023
SUMMIT HOTEL PROPERTIES, INC.
TABLE OF CONTENTS
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “forecast,” “project,” “potential,” “continue,” “likely,” “will,” “would” or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
•global, national, regional and local economic and geopolitical conditions and events, including wars or potential hostilities, such as future terrorist attacks, that may negatively affect business transient, group and other travel or consumer behavior;
•macroeconomic conditions related to, and our ability to manage, inflationary pressures for commodities, labor and other costs of our business;
•consumer purchasing power and overall behavior, or a potential recessionary environment, which could adversely affect our costs, liquidity, consumer confidence, and demand for travel and lodging;
•levels of spending for business and leisure travel;
•adverse changes in occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) and other lodging property operating metrics;
• potential changes in operations as a result of new regulations or changes in brand standards;
•financing risks, including the risk of leverage and the corresponding risk of default on our existing indebtedness and potential inability to refinance or extend the maturities of our existing indebtedness;
•effects of infectious disease outbreaks or pandemics;
•default by borrowers to which we lend or provide seller financing;
•supply and demand factors in our markets or sub-markets;
•the effect of alternative accommodations on our business;
•financial condition of, and our relationships with, third-party property managers and franchisors;
•the degree and nature of our competition;
•increased interest rates or continued high rates of interest;
•increased renovation costs, which may cause actual renovation costs to exceed our current estimates;
•supply-chain disruption, which may reduce access to operating supplies or construction materials and increase related costs;
•changes in zoning laws;
•Significant increases in the cost of real property taxes and/or insurance;
•risks associated with lodging property acquisitions, including the ability to ramp up and stabilize newly acquired lodging properties with limited or no operating history or that require substantial amounts of capital improvements for us to earn economic returns consistent with our expectations at the time of acquisition;
•risks associated with dispositions of lodging properties, including our ability to successfully complete the sale of lodging properties under contract to be sold, including the risk that the purchaser may not have access to the capital needed to complete the purchase;
•the nature of our structure and transactions such that our federal and state taxes are complex and there is risk of successful challenges to our tax positions by the Internal Revenue Service (“IRS”) or other federal and state taxing authorities;
•availability of and the abilities of our property managers and us to retain qualified personnel at our lodging property and corporate offices;
•our failure to maintain our qualification as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “IRC”);
•changes in our business or investment strategy;
•availability, terms and deployment of capital;
•general volatility of the capital markets and the market price of our common stock;
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•environmental uncertainties and risks related to natural disasters;
•our ability to recover fully under third-party indemnities or our existing insurance policies for insurable losses and our ability to maintain adequate or full replacement cost "all-risk" property insurance policies on our properties on commercially reasonable terms;
•the effect of a data breach or significant disruption of property operator information technology networks as a result of cyber-attacks that are greater than insurance coverages or indemnities from service providers;
•our ability to effectively manage our joint ventures with our joint venture partners;
•current and future changes to the IRC;
•our ability to continue to effectively enhance our Environmental, Social and Governance ("ESG") program to achieve expected social, environment and governance objectives and goals; and
•the other factors discussed in “Part I – Item 1A. – Risk Factors” in this report.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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PART I
Item 1. Business.
Unless the context otherwise requires, all references to “we,” “us,” “our,” or the “Company” refer to Summit Hotel Properties, Inc. and its consolidated subsidiaries.
Overview
Summit Hotel Properties, Inc. is a self-managed lodging property investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. We focus on owning lodging properties with efficient operating models that generate strong margins and investment returns. At December 31, 2023, our portfolio consisted of 100 lodging properties with a total of 14,912 guestrooms located in 24 states. We own our properties fee simple, except for six hotel properties which are subject to ground leases. As of December 31, 2023, we own 100% of the outstanding equity interests in 56 of our lodging properties. We own a 51% controlling interest in 41 lodging properties through a joint venture with USFI G-Peak Pte. Ltd. ("GIC"), a private limited company incorporated in the Republic of Singapore (the "GIC Joint Venture"), and two 90% equity interests in separate joint ventures (the "Brickell Joint Venture" and the "Onera Joint Venture"). The Brickell Joint Venture owns two lodging properties, and the Onera Joint Venture owns one lodging property.
The GIC Joint Venture was formed in July 2019 with GIC to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the GIC Joint Venture and intends to invest 51% of the equity capitalization of the limited partnership, with GIC investing the remaining 49%. The GIC Joint Venture intends to finance assets with an anticipated 50% overall leverage target. The Company earns fees for providing services to the GIC Joint Venture and will have the potential to earn incentive fees based on the GIC Joint Venture achieving certain return thresholds.
As of December 31, 2023, 86% of our guestrooms were located in the top 50 metropolitan statistical areas (“MSAs”), 90% were located within the top 100 MSAs, and over 99% of our guestrooms operated under premium franchise brands owned by Marriott® International, Inc. (“Marriott”), Hilton® Worldwide (“Hilton”), Hyatt® Hotels Corporation (“Hyatt”), and InterContinental® Hotels Group (“IHG”). Our properties are typically located in markets with multiple demand generators such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, universities, and leisure attractions.
See "Part II - Item 8. – Financial Statements and Supplementary Data – Note 3 - Investments in Lodging Property, net" for further information.
Substantially all of our assets are held by, and all of our operations are conducted through, the Operating Partnership. Through a wholly-owned subsidiary, we are the sole general partner of the Operating Partnership. At December 31, 2023, we owned, directly and indirectly, approximately 87% of the Operating Partnership’s issued and outstanding common units of limited partnership interest (“Common Units”), and all of the Operating Partnership’s issued and outstanding Series E and Series F preferred units of limited partnership interests. NewcrestImage Holdings, LLC owns all of the issued and outstanding 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation preference $25 per unit) of the Operating Partnership ("Series Z Preferred Units"), which was issued as part of the NCI Transaction (as defined under Part 1 - Item 1. "Our Financing Strategy" below). We collectively refer to preferred units of limited partnership interests of our Operating Partnership as "Preferred Units."
Pursuant to the Operating Partnership’s partnership agreement, we have full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions and refinancings, to make distributions to partners and to cause changes in the Operating Partnership’s business activities.
We have elected to be taxed as a REIT for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our lodging properties. Accordingly, all of our lodging properties are leased to our taxable REIT subsidiaries ("TRS Lessees" or "TRSs") and managed by professional third-party property management companies. We have one reportable segment as defined by generally accepted accounting principles (“GAAP”). See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 2 – Basis of Presentation and Significant Accounting Policies" to our Consolidated Financial Statements.
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Our corporate offices are located at 13215 Bee Cave Parkway, Suite B-300, Austin, TX 78738. Our telephone number is (512) 538-2300. Our website is www.shpreit.com. The information contained on, or accessible through, our website is not incorporated by reference into this report and should not be considered a part of this report.
Effects of COVID-19 Pandemic
Beginning in March 2020, we experienced the adverse effects of the COVID-19 pandemic (the "Pandemic"), which had a significant negative effect on the U.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in lodging demand. As such, we experienced a substantial decline in our revenues, profitability and cash flows from operations from the onset of the Pandemic and into the first quarter of 2022. We began to experience a recovery in our business in the first quarter of 2022, which accelerated in the second quarter of 2022 and thereafter. As a result, we experienced significant improvement in lodging demand during the years ended December 31, 2023 and 2022 led by strong leisure travel and more recently, growth in business transient and group travel.
Business Strategy
Our portfolio consists of lodging properties in desirable locations with efficient operating models. Our approach to creating value includes the following:
•Strategically allocate capital which includes, among other things, capital investment, growth initiatives and other strategic transactions;
•Evolving our portfolio by selling assets with lower operating margins, RevPAR growth opportunities or risk-adjusted return profiles and purchasing assets with higher operating margins, RevPAR growth opportunities or risk-adjusted return profiles; and
•Intensive asset and revenue management.
The key elements of our strategy that we believe will allow us to create long-term value include the following:
Focus on Lodging Properties with Efficient Operating Models. We focus on lodging properties with efficient operating models that are predominantly in the Upscale segment of the lodging industry, as defined by Smith Travel Research ("STR"). We believe that our focus on this segment provides us the opportunity to achieve strong, risk-adjusted returns across multiple lodging cycles for several reasons, including:
•RevPAR Growth. We believe that our lodging properties are positioned for long-term demand growth supported by the characteristics of our portfolio and its ability to appeal to evolving guests preferences.
•Stable Cash Flow. Our lodging properties are generally operated with fewer employees than full-service lodging properties, which enables our assets to generate higher operating margins and cash flows with less volatility.
•Broad Customer Base. Our target brands deliver consistently high-quality guest accommodations with value-oriented pricing that we believe appeals to a wide range of customers, including business transient, group, leisure and government travelers. We believe that our lodging properties are particularly popular with frequent travelers who seek to stay in properties operating under Marriott, Hilton, Hyatt, or IHG brands, which offer strong loyalty rewards programs.
•Lower Capital Requirements and Enhanced Diversification. Lodging properties with efficient operating models generally require less capital to acquire, build, and maintain on an absolute and a per-key basis, than lodging properties in the full-service segment of the industry. As a result, we can diversify our investment capital into ownership of a larger number of lodging properties than we could in the full-service segment.
Capitalize on Investments in Our Lodging Properties. We believe in the benefits of strategically investing capital in our properties to ensure they are in good physical condition and facilitate market leading financial performance. We believe these investments produce attractive returns, and we intend to continue to invest capital to upgrade our lodging properties with strategic renovations, property improvement plans, and return on discretionary investments.
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External Growth Through Acquisitions. We intend to continue to opportunistically grow through acquisitions of existing lodging properties either through wholly owned or joint venture structures using a disciplined approach, while maintaining a prudent capital structure. We generally target lodging facilities with efficient operating models that meet one or more of the following acquisition criteria:
•potential for strong risk-adjusted returns and are located in the top 50 MSAs and other select destination markets;
•operate under leading franchise brands, which may include but are not limited to brands owned by Marriott, Hilton, Hyatt, and IHG, as well as select independent lodging properties that meet our investment criteria;
•located in close proximity to multiple demand generators, such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, universities, and leisure attractions, with a diverse source of potential guests, including business transient, group, leisure, and government travelers;
•located in markets with barriers to entry due to lengthy or challenging real estate entitlement processes or other factors;
•can be acquired at a discount to replacement cost; and
•provide an opportunity to add value through operating efficiencies, revenue management and asset management expertise, repositioning, renovating or rebranding.
Strategic Lodging Property Sales. We strive to maximize our return on invested capital, and we periodically review our lodging properties to determine if any significant changes to markets or our properties have occurred or are anticipated to occur that would warrant the sale of one or more lodging properties. We intend to continue to pursue a disciplined capital allocation strategy designed to maximize the value of our investments by selectively selling lodging properties that we believe are no longer consistent with our investment strategy or whose returns on invested capital appear to have been maximized. To the extent that we sell lodging properties, we may redeploy the capital into acquisition and capital investment opportunities that we believe have the potential to generate better risk-adjusted returns, or we may repay outstanding indebtedness. We also expect to generate these improvements in returns with our proactive asset management approach and by investing in our lodging properties to enhance their quality and attractiveness, increase their long-term value and generate more favorable returns on our invested capital.
Selectively Develop Lodging Properties. We endeavor to identify attractive opportunities to selectively partner with experienced developers to acquire, upon completion, newly constructed lodging properties that meet our acquisition criteria. We will consider unique opportunities to develop lodging properties utilizing our own capital if and when circumstances warrant.
Selective Mezzanine Lending. We seek to identify select opportunities to provide mezzanine lending to developers, where we also have the opportunity to acquire the lodging property at or after the completion of the development project.
Our Financing Strategy
We rely on cash generated through operations, working capital, borrowings under our senior revolving and term loan facility (the "2023 Senior Credit Facility"), term debt, repayment of notes receivable, proceeds from the issuance of convertible securities, proceeds from the issuance of common and preferred securities, the strategic sale of lodging properties, contributions from our joint venture partners, and the release of restricted cash upon satisfaction of the usage requirements to finance our business. We may also issue Common Units or Preferred Units of the Operating Partnership in connection with acquisitions.
The 2023 Senior Credit Facility is comprised of a $400.0 million revolver (the "$400 Million Revolver") and a $200.0 million term loan facility (the $200 Million Term Loan"). We entered into the 2023 Senior Credit Facility during the year ended December 31, 2023, which amended and restated in its entirety our prior senior credit facility and included fully extended maturities for the $400 Million Revolver and $200 Million Term Loan to June 2028. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 – Debt” for further information.
In February 2024, the Company successfully completed a new $200 million senior unsecured term loan financing (the “2024 Term Loan”). The 2024 Term Loan provides for a fully extended maturity date of February 2029 and interest rate pricing ranging from 135 basis points to 235 basis points over the applicable adjusted term Secured Overnight Financing Rate (“SOFR”). Proceeds from the 2024 Term Loan financing along with advances on our $400 Million Revolver were used to repay in full the Company’s $225 million 2018 Term Loan (as defined under "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 – Debt”) that was scheduled to mature in February 2025. As a result of the 2024 Term Loan financing, the Company has significantly reduced its debt maturities until 2026 and has an average length to maturity of approximately 3.6 years. Other terms of the agreement are similar to the Company’s previous 2018 Term Loan. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 – Debt” for further information.
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Our GIC Joint Venture also operates with borrowings under a $200.0 million credit facility (the "GIC Joint Venture Credit Facility"). The GIC Joint Venture Credit Facility is comprised of a $125.0 million revolving credit facility (the “$125 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). In September 2023, we recast the GIC Joint Venture Facility to extend the maturities of the $125 Million Revolver and the $75 Million Term Loan to September 2028. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 – Debt” for further information.
In January and March 2022, the Operating Partnership and the GIC Joint Venture closed on a transaction with NewcrestImage Holdings, LLC, a Delaware limited liability company, and NewcrestImage Holdings II, LLC, a Delaware limited liability company (together, “NewcrestImage”), to purchase from NewcrestImage a portfolio of 27 lodging properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces and various financial incentives for an aggregate purchase price of $822.0 million (the "NCI Transaction"). In connection with the NCI Transaction, on January 13, 2022, our GIC Joint Venture entered into a $410.0 million senior secured term loan facility (the “GIC Joint Venture Term Loan”) secured by the 27 lodging properties and two parking garages acquired in the NCI Transaction and assumed a Property Assessed Clean Energy (" PACE") loan totaling $6.5 million. The GIC Joint Venture Term Loan has an accordion feature which will permit an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan has an initial maturity date of January 2026 and can be extended for a single 12-month period at the GIC Joint Venture's option, subject to certain contains. As such, the GIC Joint Venture Term Loan has a fully extended maturity date of January 2027. See "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 – Debt” for further information.
Our long-term leverage approach is to maintain conservative debt levels with high coverage ratios to allow us the flexibility to withstand various economic cycles and to position us for growth when opportunities arise that meet our investment criteria.
Our debt includes, and may include in the future, debt secured by stock pledges, mortgage debt secured by lodging properties and unsecured debt. As of December 31, 2023, we had $1.4 billion in outstanding indebtedness, including $675.9 million related to our joint ventures. Our pro rata debt taking into consideration only our portion of our joint venture debt was $1.1 billion at December 31, 2023.
When purchasing lodging properties, the Operating Partnership may issue Common Units or Preferred Units as full or partial consideration to sellers who may be interested in taking advantage of the opportunity to defer taxable gains on the sale of a property or participate in the potential appreciation in the value of our common stock.
Competition
We face competition for investments in lodging properties from institutional pension funds, private equity investors, REITs, lodging companies and others who are engaged in acquisitions of and investments in lodging properties. Some of these entities have substantially greater financial and operational resources than we have. This competition may increase the bargaining power of property owners seeking to sell, reduce the number of suitable investment opportunities available to us, and increase the cost of acquiring targeted lodging properties.
The lodging industry is highly competitive. Our lodging properties compete with other hotel properties and alternative accommodations for guests in their respective markets based on a number of factors, including location, convenience, brand affiliation, quality of the physical condition of the lodging property, guestroom rates, range of services and guest amenities or accommodations offered and quality of customer service. Competition is often specific to the individual markets in which our lodging properties are located and includes competition from existing and new hotel properties and alternative accommodations. Competition could adversely affect our occupancy rates, our ADR and our RevPAR, and may require us to provide additional amenities or make capital improvements that we otherwise would not make, which may reduce our profitability.
Seasonality
Certain segments of the lodging industry are seasonal in nature. The current trend in our business is for corporate, group and leisure travelers to occupy lodging properties relatively consistently throughout the year, but decreases in business travel occur during summer and the winter holidays. The lodging industry is also seasonal based upon geography. Lodging properties in the southern U.S. tend to have higher occupancy rates during the winter months. Lodging properties in the northern U.S. tend to have higher occupancy rates during the summer months.
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Regulation
Our lodging properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to accessibility, fire and safety requirements. We believe each of our lodging properties has the necessary permits and approvals to operate its business.
Americans with Disabilities Act of 1990 (“ADA”)
Our properties must comply with Title III of the ADA to the extent that they are “public accommodations” as defined by the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where removal is readily achievable. Although we believe the properties in our portfolio substantially comply with present requirements of the ADA, a determination to the contrary could require removal of access barriers and non-compliance could result in litigation costs, costs to remediate deficiencies, U.S. government fines or in damages to private litigants. The obligation to make readily achievable accommodations is ongoing, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Environmental, Health and Safety Matters
Our lodging properties and undeveloped land parcels are subject to various federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require us, as the current owner of the property, to perform or pay for the cleanup of contamination (including hazardous substances, waste, or petroleum products) at, on, under or emanating from the property and to pay for natural resource damages arising from contamination. These laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused the contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned a property at the time it became contaminated, we could incur cleanup costs or other environmental liabilities even after we sell properties. Contamination at, on, under or emanating from our properties also may expose us to liability to private parties for costs of remediation, personal injury, death or property damage. In addition, environmental liens may be created on contaminated sites in favor of the government for damages and costs it incurs to address contamination. If contamination is discovered on our properties, environmental laws also may impose restrictions on the manner in which our property may be used or our businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of a property and therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.
Some of our properties may have contained historical uses which involved the use or storage of hazardous chemicals and petroleum products (for example, storage tanks, gas stations and dry-cleaning operations) which if released, could have affected our properties. In addition, some of our properties may be near or adjacent to other properties that have contained or currently contain storage tanks containing petroleum products or conducted or currently conduct operations which use other hazardous or toxic substances. Releases from these adjacent or surrounding properties could affect our properties and we may be liable for any associated cleanup.
Independent environmental consultants conducted Phase I environmental site assessments on all of our properties prior to acquisition and we intend to conduct Phase I environmental site assessments on properties we acquire in the future. Phase I site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed properties and surrounding properties. These assessments do not generally include soil sampling, subsurface investigations or comprehensive asbestos surveys. In some cases, the Phase I environmental site assessments were conducted by another entity such as a lender, and we may not have the authorization to rely on such reports. None of the Phase I environmental site assessments of the lodging properties in our portfolio revealed any past or present environmental condition that we believe could have a material adverse effect on our business, consolidated financial position, or results of operations. In addition, the Phase I environmental site assessments may also have failed to reveal all environmental conditions, liabilities or compliance concerns. The Phase I environmental site assessments were completed at various times and material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future; and future laws, ordinances or regulations may impose material additional environmental liability.
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In addition, our lodging properties (including our real property, operations and equipment) are subject to various federal, state and local environmental, health and safety regulatory requirements that address a wide variety of issues, including, but not limited to, the potential transmission of infectious diseases, the existence of mold and other airborne contaminants above regulatory thresholds, the registration, maintenance and operation of our boilers and storage tanks, the supply of potable water to our guests, air emissions from emergency generators, storm water and wastewater discharges, protection of natural resources, asbestos, lead-based paint, and waste management. Some of our lodging properties also routinely handle and use hazardous or regulated substances and wastes as part of their operations (for example, swimming pool chemicals or biological waste). Our lodging properties incur costs, and in certain situations, may be required to limit operations, to comply with these environmental, health and safety laws and regulations and if these regulatory requirements are not met or unforeseen events result in the discharge of dangerous or toxic substances at our lodging properties, we could be subject to fines and penalties for non-compliance with applicable laws and material liability from third parties for harm to the environment, damage to real property, personal injury, or death. We are aware of no past or present environmental liability for non-compliance with environmental, health and safety laws and regulations that we believe would have a material adverse effect on our business, consolidated financial position, or results of operations.
Environmental, Social and Governance ("ESG") Matters
Our ongoing commitment to our environment, our communities and our stakeholders is an important part of our core responsibility to be more sustainable, inclusive and equitable. Since establishing our Corporate Responsibility program in 2017, we have built upon our sustainability objectives, including tracking metrics related to our energy and water consumption and greenhouse gas emissions. We have also established science-aligned reduction targets for emissions and water usage. We continue to improve the efficiency of our buildings and promote sustainable operations through our resource management program, and we have sourced renewable energy for several lodging properties. Additionally, we have expanded charitable engagement with our community through the Summit Foundation, our 501(c)(3) nonprofit organization, and have broadened our social programs to enhance connectivity among our employees, business partners, and other stakeholders to better enable us to champion an environment of diversity and inclusion.
Over the past few years, we have expanded the number of our lodging properties with smart building technologies, electric vehicle charging stations, and green certifications. We reduced our greenhouse gas emissions by 15% from our 2019 baseline year by reducing our energy consumption by 7% and increasing the percentage of our electricity sourced from renewable energy by 6%. For more information on these and our other sustainability practices, including environmental and social metrics and results, please see our current sustainability report available on our website at https://www.shpreit.com/responsibility/about.
Forward-looking and other statements in this report or other locations, such as our corporate website, is informed by various ESG standards and frameworks (including standards for the measurement of underlying data) and the interests of various stakeholders. Such information may not and should not be interpreted as necessarily being “material” under the federal securities laws for reporting purposes with the Securities and Exchange Commission ("SEC"), even if we use the word “material” or “materiality” in such documents. ESG information is also often reliant on third-party information or methodologies that are subject to evolving expectations and best practices, and our approach to and discussion of these matters may continue to evolve as well. For example, our disclosures may change due to revisions in framework requirements, availability of information, changes in our business or applicable governmental policies, or other factors, some of which may be beyond our control. Finally, website and document references in this report are provided for convenience; absent express language to the contrary, such materials are not incorporated by reference to this report.
Tax Status
REIT Election
We have elected to be taxed as a REIT under Sections 856 through 859 of the IRC, commencing with our short taxable year ended December 31, 2011. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the IRC relating to, among other things, the sources of our gross income, the composition and values of our assets, the timing and amount of our dividend distributions and the diversity of ownership of our stock. We believe that we have been organized and have operated in conformity with the requirements for qualification as a REIT under the IRC and that our current and intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for federal income tax purposes.
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For the income from our lodging operations to constitute “rents from real property” for purposes of the gross income tests required for REIT qualification, we cannot directly operate any of our lodging properties. We may, however, generate "rents from real property" through leasing our lodging properties to our TRSs, subject to certain conditions. A TRS is a fully taxable corporate subsidiary of a REIT that jointly elects with the REIT to be treated as a TRS of that REIT. Accordingly, all of our lodging properties are leased to our TRS Lessees. We have separate TRSs that lease the lodging properties owned in our joint ventures. We will lease newly acquired lodging properties to our existing TRSs or additional TRSs in the future. Our TRS Lessees pay rent to us that will qualify as “rents from real property,” provided that the TRS Lessees engage “eligible independent contractors” to manage our lodging properties. All of our lodging properties are operated pursuant to lodging property management agreements with professional third-party property management companies. We believe each of the third-party managers qualifies as an “eligible independent contractor” under the IRC.
As a REIT, we generally will not be subject to federal income tax on our REIT taxable income that we distribute as dividends to our stockholders. Under the IRC, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their taxable income, subject to certain adjustments and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by our TRSs will be fully subject to federal, state and local corporate income tax.
Human Capital Resources
As of February 9, 2024, we had 78 full-time corporate employees. None of our corporate employees is represented by a labor union or covered by a collective bargaining agreement. All persons employed in the day-to-day operations of our lodging properties are employees of our third-party independent property management companies engaged by our TRS Lessees or their subsidiaries to operate such lodging properties.
Our employees are vital to the success of our Company. We are committed to cultivating a culture of connectedness based on our primary values of passion, integrity, and excellence and strive to create an inspiring and inclusive work environment where our employees feel motivated and empowered to produce exceptional results for the Company. We strive to always be guided by our fundamental values and ethical standards to provide our team members with a fair and equitable work environment. We annually distribute and require acknowledgement of an employee handbook to all employees that provides direction on relevant policies related to conducting our business in accordance with our core values.
Our human capital resource objectives include, as applicable, identifying, recruiting, retaining and incentivizing our employees. To attract and retain top talent, we have designed our compensation and benefits programs to provide a balanced and effective reward structure, including:
•Subsidized medical, dental and vision insurance;
•Life and disability insurance;
•Stock grant program;
•401(k) savings and retirement plan with Company Safe Harbor contribution;
•Paid family leave; and
•Employee education programs.
We believe that our compensation and employee benefits are competitive and allow us to attract and retain skilled employees throughout our Company. We frequently benchmark our compensation and benefits package against those in both our industry and in similar disciplines.
We have established social programs with the goal of promoting a culture of unity and collaboration among our various departments through career and personal development opportunities designed to inspire all of those involved. Our career and personal development focus on four main principles: (1) communication and teamwork; (2) networking and mentorship; (3) leadership development; and (4) work-life balance. In addition, we have a formal annual goal setting and performance review process for our employees.
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We believe that equal employment opportunity is a fundamental principle and do not tolerate discrimination against any person on the basis of race, color, religious creed, sex, age, gender, gender identity, national origin, ancestry, present or past history of mental disability, learning disability, physical disability, marital status, pregnancy, genetic information, sexual orientation or any other protected characteristic as established by law, in recruiting, hiring, compensation, benefits, termination or any other terms or conditions of employment. Our employees have multiple avenues available through which concerns or inappropriate behavior can be reported, including a confidential hotline. Any concerns or reports of inappropriate behavior would be promptly investigated with appropriate action taken to address such concerns or behavior.
We are committed to maintaining a work culture that treats all employees fairly and with respect, promotes inclusivity and provides equal opportunities for advancement based on merit. Our workforce diversity has increased during the year ended December 31, 2023. Of the 78 full-time corporate employees employed by us at February 9, 2024, women constituted approximately 45% of our workforce. Individuals who identify as traditionally underrepresented races or ethnicities constituted approximately 22% of our workforce. We intend to continue using a combination of targeted recruiting, talent development and internal promotion strategies to expand the diversity of our employee base across all roles and functions.
Available Information
Our Internet website is located at www.shpreit.com. Copies of the charters of the committees of our board of directors, our code of business conduct and ethics and our corporate governance guidelines are available on our website. We will provide timely disclosures of amendments and waivers to the aforementioned documents, if any, via website posting. All reports that we have filed with the SEC including this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, can be obtained free of charge from the SEC’s website at www.sec.gov or through our website. The information contained on, or accessible through the SEC’s website or our website, is not incorporated by reference into this report and should not be considered a part of this report.
Item 1A. Risk Factors.
Summary of Risk Factors
Risks Related to Our Business
•Risks related to achieving revenue and net income growth
•Risks related to financing, including the risk of leverage and the corresponding risk of default on our existing indebtedness and potential inability to refinance or extend the maturities of our existing indebtedness;
•Risks related to acquisitions
•Risks of taxable gains as a result of lodging property dispositions
•Risks related to our third-party property management companies
•Risks related to lodging property management and franchise agreements
•Risks related to increased interest rates or continued high rates of interest, and our ability to hedge our interest rate exposure
•Risks related to retaining key personnel
•Risks related to organized labor
•Risks related to the effect on our business or guest confidence from a data breach or significant disruption of property operator information technology networks as a result of cyber-attacks that are greater than insurance coverages or indemnities from service providers
•Risks related to uninsured and underinsured losses
•Risks related to the management of our joint ventures
•Risks related to inflation
•Risks related to credit financing that we may provide to borrowers
•Risks related to global, national, regional and local economic and geopolitical conditions and events, including wars or potential hostilities, such as terrorist attacks that may affect travel
Risks Related to the Lodging Industry
•Risks related to infectious disease outbreaks or pandemics
•Risks related to adverse changes in economic conditions
•Risks related to competition from other lodging properties and alternative accommodations
•Risks inherent to the ownership of lodging properties and the markets in which we operate
•Risks related to lodging property development and other capital expenditures
•Risks related to changes in consumer trends and preferences
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Risks Related to the Real Estate Industry and Real Estate-Related Investments
•Risks related to the illiquidity of real estate investments
•Risks related to compliance with the laws, regulations and covenants that apply to our lodging properties
•Risks related to right-of-use assets on which certain of our lodging properties are located
•Risks related to adverse changes in income and property tax rates or amendments to tax regimes that increase our state and local tax liabilities
Risks Related to Our Organization and Structure
•Risks related to our fiduciary duties as the general partner of our Operating Partnership
•Risks related to the provisions of our charter
•Risks related to the provisions of Maryland law
•Risks related to the limited rights of our stockholders
•Risks related to actions taken by our board of directors
•Risks related to being a holding company with no direct operations
•Risks related to maintaining an effective system of internal controls
Risks Related to Ownership of Our Securities
•Risks related to the continued listing of our securities on a nationally-recognized exchange
•Risks related to expected distributions
•Risks related to stock price volatility
•Risks related to the issuance of debt or equity securities
Risks Related to Our Status as a REIT
•Risks related to compliance with REIT regulations
•Risks related to our TRS structure, including increased tax liabilities and operating costs
•Risks that transactions with our TRSs are not conducted on arm's-length terms
•Risks that the management companies of our lodging properties may not qualify as “eligible independent contractors,” or our lodging properties may not be considered “qualified lodging facilities”
•Risks that the 100% prohibited transactions tax may limit our ability to dispose of our properties
•Risks related to adverse legislative or regulatory tax changes
•Risks related to our REIT distribution requirements
•Risks that our Operating Partnership could be treated as a publicly traded partnership taxable as a corporation for federal income tax purposes
•Risks that stockholders may be restricted from acquiring or transferring certain amounts of our stock
•Risks that the IRS could determine that certain payments we have received in the nature of liquidated damages may not be ignored for purposes of the gross income tests applicable to REITs
Risks Related to Environmental, Social and Governance Factors
•Risks related to environmental uncertainties and natural disasters
•Risks related to our ability to continue to manage our ESG program to achieve expected social, environment and governance objectives and goals
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The following risk factors address the material risks concerning our business. If any of the risks discussed in this report were to occur, our business, prospects, financial condition, results of operation and our ability to service our debt and make distributions to our stockholders could be materially and adversely affected and the market price per share of our stock could decline significantly. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Statement About Forward-Looking Statements.” The discussion of the potential effect of the following risk factors on our financial results relates to our consolidated financial position, consolidated results of operations and cash flows.
Risks Related to Our Business
Our business strategy, future results of operations and growth prospects are dependent on achieving revenue and net income growth from anticipated increases in demand for lodging guestrooms and general economic conditions.
Our business strategy includes achieving continued revenue and cash flow growth from anticipated improvement in demand for lodging guestrooms driven by long-term economic growth. We, however, cannot provide any assurances that demand for lodging guestrooms will increase from current levels or continue to exceed the growth of new supply, or the time or extent of any demand growth that we do experience. If demand does not continue to increase as the economy grows, or if there is a slowdown in the general economy or a recession resulting in weakening demand, our operating results and growth prospects could be adversely affected. As a result, any slowdown in economic growth or an economic downturn could adversely affect our future results of operations and our growth prospects.
Our expenses may not decrease if our revenue decreases.
Many of the expenses associated with owning and operating lodging properties, such as debt service payments, property taxes, insurance, utilities, and certain employee compensation costs are relatively fixed. They do not necessarily decrease directly with a reduction in revenue at the lodging properties and may be subject to increases that are not related to the performance of our lodging properties or the increase in the rate of inflation. Also, as of December 31, 2023, six of our lodging properties are subject to third-party ground leases which generally require periodic increases in rent payments. Our ability to pay these rents could be adversely affected if our revenues for these lodging properties do not increase at the same or a greater rate than the increases in rental payments under the ground leases.
Additionally, certain costs, such as wages, benefits and insurance, may exceed the rate of inflation in any given period. In the event of a significant decrease in demand, the managers of our lodging properties may not be able to reduce the size of the property work forces in order to decrease compensation costs. Our managers also may be unable to offset any fixed or increased expenses with higher room rates. Any of our efforts to reduce operating costs also could adversely affect the future growth of our business and the value of our lodging properties.
Actions by organized labor could have a material adverse effect on our business.
We believe that unions are generally becoming increasingly active about organizing workers at lodging properties in certain locations and in some cases are demanding changes to work rules or conditions that are potentially more costly to owners. Union activity in markets in which we own lodging properties can increase our operating costs even if our hotels are not unionized. If the workers at our lodging properties unionize in the future or if there is unionization activity in a market in which we own a lodging property, we could incur a significant increase in administrative, labor and legal expenses, which could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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We may be unable to complete acquisitions that would grow our business.
Our growth strategy includes the disciplined acquisition of lodging properties as opportunities arise, which may be subject to restrictions related to our debt covenants. Our ability to acquire lodging properties on satisfactory terms or at all is subject to the following significant risks:
•we may be unable to acquire desired lodging properties because of competition from other real estate investors, including other real estate operating companies, REITs and investment funds;
•we may be unable to obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be on satisfactory terms; and
•agreements for the acquisition of lodging properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations and the receipt of franchisor and lender consents, and we may spend significant time and incur significant transaction costs on potential acquisitions that we do not consummate.
Additionally, if the United States experiences a significant economic downturn, we would have to manage our costs and capital investments accordingly, which could adversely affect our near-term growth. Our inability to complete lodging property acquisitions on favorable terms or at all, could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
The sale of certain lodging properties could result in significant tax liabilities unless we are able to defer the taxable gain through like-kind exchanges under Section 1031 of the IRC ("1031 Exchanges").
From time to time, we structure asset sales for possible inclusion in like-kind exchanges within the meaning of Section 1031 of the IRC. The ability to complete a like-kind exchange depends on many factors, including, among others, identifying and acquiring suitable replacement property within limited time periods, and the ownership structure of the properties being sold and acquired. Therefore, we are not always able to sell an asset as part of a like-kind exchange. When successful, a like-kind exchange enables us to defer the taxable gain on the asset sold. Our inability to defer the taxable gain resulting from the sales of certain lodging properties, could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock. Moreover, Section 1031 Exchanges now only apply to real property and do not apply to any related personal property transferred with the real property. As a result, any appreciated personal property that is transferred in connection with a Section 1031 Exchange of real property will cause gain to be recognized, and such gain is generally treated as non-qualifying income for the REIT 95% and 75% gross income tests. Any such non-qualifying income could have an adverse effect on our REIT status.
We may fail to successfully integrate acquired lodging properties or achieve expected operating performance.
Our ability to successfully integrate newly acquired lodging properties or achieve expected operating performance is subject to the following risks:
•we may not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could result in us paying too much for lodging properties in new markets or not have the lodging properties achieve their maximum potential;
•market conditions may result in lower-than-expected occupancy and guestroom rates;
•we may acquire lodging properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as cleanup of environmental contamination, claims by tenants, vendors or other persons against the former owners of the lodging properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the lodging properties;
•we may need to spend more than anticipated amounts to make necessary improvements or renovations to our newly acquired lodging properties;
•we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of lodging properties, into our existing operations; and
•the inability of our acquired lodging properties to meet our operating performance expectations could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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We may assume liabilities in connection with the acquisition of lodging properties, including unknown liabilities.
We may assume existing liabilities in connection with the acquisition of lodging properties, some of which may be unknown or unquantifiable on the acquisition date. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of lodging guests, vendors or other persons dealing with the seller of a particular lodging property, tax liabilities, employment-related issues and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, they could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
We may not be able to cause our management companies to operate any of our lodging properties in a manner that is satisfactory to us, and termination of our management agreements may be costly and disruptive.
To qualify as a REIT, we cannot operate or manage our lodging properties. Accordingly, all of our lodging properties are leased to TRS Lessees of our TRSs. All of our lodging properties are operated pursuant to management agreements with independent management companies, each of which must qualify as an “eligible independent contractor” to operate our lodging properties. As a result, our consolidated financial position, results of operations and our ability to service debt and make distributions to stockholders are dependent on the ability of our management companies to operate our lodging properties successfully. Any failure of our management companies to provide quality services and amenities or maintain a quality brand name and reputation could have a negative effect on their ability to operate our lodging properties and could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Even if we believe a lodging property is being operated inefficiently or in a manner that does not result in satisfactory operating results, we will have limited ability to require the management company to change its method of operation. We generally attempt to resolve issues with our management companies through discussions and negotiations, but otherwise will only be able to seek redress if a management company violates the terms of the applicable management agreement, and then only to the extent of the remedies provided for under the terms of the management agreement. If we replace the management company of any of our lodging properties, we may be required to pay a substantial termination fee and we may experience significant disruptions at the affected lodging property.
Furthermore, we have certain indemnifications from our property managers that generally protect us from financial losses due to the gross negligence or willful misconduct of our property managers. However, the indemnifications may be insufficient, or the property manager may not have the financial wherewithal to support their indemnification obligation to us. As such, the indemnification may not provide us with sufficient protection against third-party claims resulting from the gross negligence or willful misconduct of our property managers in the operation of our lodging properties.
Our property managers or their affiliates manage, and in some cases own, have invested in, or provided credit support or operating guarantees to lodging properties that compete with our lodging properties, all of which may result in conflicts of interest. As a result, our managers may in the future make decisions regarding competing lodging facilities that are not or would not be in our best interest.
Certain of our lodging properties are managed by affiliates of the franchisors for such lodging properties. In these situations, the management agreement and the franchise agreement are typically combined into one document. Thus, the termination of the management agreement due to poor performance or breach of the management agreement by the management company could also terminate our franchise license. Thus, we may have very limited options to remedy poor management performance if we desire to retain the franchise license.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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The management of a large number of lodging properties in our portfolio is currently concentrated with one property management company.
As of December 31, 2023, Aimbridge Hospitality or its affiliates (“Aimbridge”) managed 61 of our 100 lodging properties. Thus, a substantial portion of our revenues is generated by lodging properties managed by Aimbridge. This significant concentration of operational risk in one management company makes us more vulnerable economically than if our management was more evenly diversified among several management companies. Any adverse developments in Aimbridge's business, financial strength or ability to operate our lodging properties efficiently and effectively could have a material adverse effect on our results of operations. We cannot provide assurance that Aimbridge will satisfy its obligations to us or effectively and efficiently operate our lodging properties. The failure or inability of Aimbridge to satisfy its obligations to us or effectively and efficiently operate our lodging properties could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Our lodging properties may be clustered geographically increasing business risks based on adverse market conditions.
Our lodging properties are primarily located in the top 50 MSAs and 90% are located within the top 100 MSAs. In certain regions, we have lodging properties that are concentrated geographically, which may increase business risks based on adverse market conditions. Adverse market developments in a particular region, which themselves may become more frequent and severe due to climate change, could adversely affect lodging demand and rates. Also, adverse market developments caused by increased capacity in a region in which we are located could adversely affect rates or demand for our lodging properties due to increased competition. These conditions could have a material adverse effect on our profitability and cash generation.
Restrictive covenants and other provisions in management and franchise agreements could preclude us from taking actions with respect to the sale, refinancing or rebranding of a lodging property that would otherwise be in our best interest.
Our management agreements and franchise agreements generally contain restrictive covenants and other provisions that do not provide us with flexibility to sell, refinance or rebrand a lodging property without the consent of the manager or franchisor. For example, the terms of some of these agreements may restrict our ability to sell a lodging property unless the purchaser is not a competitor of the management company or franchisor, assumes the related agreement and meets specified other conditions. In addition, our franchise agreements restrict our ability to rebrand particular lodging properties without the consent of the franchisor, which could result in significant operational disruptions and litigation if we do not obtain the consent. We could be forced to pay consent or termination fees to property managers or franchisors under these agreements as a condition to changing management or franchise brands of our lodging properties, and these fees could deter us from taking actions that would otherwise be in our best interest or could cause us to incur substantial expense.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
We are required to expend funds to maintain franchisor operating standards and we may experience a loss of a franchise license or a decline in the value of a franchise brand.
Our lodging properties operate under franchise agreements, and the maintenance of franchise licenses for our lodging properties is subject to our franchisors’ operating standards and other terms and conditions. We expect that franchisors will periodically inspect our lodging properties to ensure that we, our TRS Lessees and our property management companies maintain our franchisors’ standards. Failure by us, our TRS Lessees or our management companies to maintain these standards or other terms and conditions could result in a franchise license being terminated. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we could also be liable to the franchisor for a termination payment, which varies by franchisor and by lodging property. As a condition of our continued holding of a franchise license, a franchisor could also require us to make capital improvements to our lodging properties, even if we do not believe the improvements are necessary or desirable or would result in an acceptable return on our investment.
The loss of a franchise license could materially and adversely affect the operations or the underlying value of the lodging property because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. Because our lodging properties are concentrated with a limited number of franchise brands, a loss of all of the licenses for a particular franchise could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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Negative publicity related to one of the franchise brands or the general decline of a brand also may adversely affect the underlying value of our lodging properties or result in a reduction in business.
We rely on external sources of capital to fund future capital needs, and if we encounter difficulty in obtaining such capital, we may not be able to make future acquisitions necessary to grow our business or meet maturing obligations.
To qualify as a REIT under the IRC, we are required, among other things, to distribute each year to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. Because of this distribution requirement, we may not be able to fund, from cash retained from operations, all of our future capital needs, including capital needed to make investments and to satisfy or refinance maturing obligations.
We expect to continue to rely on external sources of capital, including debt and equity financing, and contributions from joint venture partners related to joint venture activities, to fund future capital needs. Part of our strategy involves the use of additional debt financing to supplement our equity capital which may include our revolving credit and term loan facilities, mortgage financing and other unsecured financing. Our ability to effectively implement and accomplish our business strategy will be affected by our ability to obtain and use additional leverage in sufficient amounts and on favorable terms. However, the capital environment is often characterized by extended periods of limited availability of both debt and equity financing, increasing financing costs, stringent credit terms and significant volatility. We may not be able to secure first mortgage financing or increase the availability under, extend the maturity of or refinance our revolving credit and term loan facilities. If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to make the investments needed to expand our business, or to meet our obligations and commitments as they mature. Our access to capital will depend upon a number of factors over which we have little or no control, including general market conditions, the market’s perception of our current and potential future earnings and cash distributions and the market price of the shares of our common stock.
Additionally, certain factors may have an adverse effect on our ability to access certain capital sources, including our financial performance, degree of leverage, the value of our unencumbered lodging properties, borrowing restrictions imposed by lenders, volatility in the equity and debt capital markets and other market conditions. We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable to access the capital markets on a timely basis or on favorable terms.
We have a significant amount of debt, and our organizational documents have no limitation on the amount of additional indebtedness that we may incur in the future.
We have a significant amount of debt. In the future, we may incur additional indebtedness to finance future lodging property acquisitions, capital improvements and development activities and other general corporate purposes. In addition, there are no restrictions in our charter or bylaws that limit the amount or percentage of indebtedness that we may incur or restrict the form in which our indebtedness will be incurred (including recourse or non-recourse debt or cross-collateralized debt).
A substantial level of indebtedness could have adverse consequences for our business, consolidated financial position and results of operations because it could, among other things:
•require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, thereby reducing our cash flow available to fund working capital, capital expenditures and other general corporate purposes, including to pay dividends on our common stock and our preferred stock as currently contemplated or necessary to satisfy the requirements for qualification as a REIT;
•increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and our industry;
•limit our ability to borrow additional funds or refinance indebtedness on favorable terms or at all to expand our business or ease liquidity constraints; and
•place us at a competitive disadvantage relative to competitors that have less indebtedness.
Generally, our mortgage debt carries maturity dates or call dates such that the loans become due prior to their full amortization. It may be difficult to refinance or extend the maturity of such loans on terms acceptable to us, or at all, and we may not have sufficient borrowing capacity on our 2023 Senior Credit Facility to repay any amounts that we are unable to refinance. Although we believe that we will be able to refinance or extend the maturity of these loans, or will have the capacity to repay them, if necessary, using draws under our 2023 Senior Credit Facility, there can be no assurance that our 2023 Senior Credit Facility will be available to repay such maturing debt, as draws under our 2023 Senior Credit Facility are subject to certain use restrictions and limitations based upon our unencumbered assets and certain financial covenants.
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These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.
The agreements governing our indebtedness contain covenants that place restrictions on us and our subsidiaries. These covenants may restrict, among other activities, our and our subsidiaries’ ability to:
•merge, consolidate or transfer all or substantially all of our or our subsidiaries’ assets;
•sell, transfer, pledge or encumber our stock or the ownership interests of our subsidiaries;
•incur additional debt or place mortgages on our unencumbered hotels;
•make certain investments in lodging properties or other assets;
•enter into, terminate or modify leases for our lodging properties and property management and franchise agreements;
•make certain expenditures, including capital expenditures;
•undertake construction of certain development assets if aggregate budgeted costs for such assets exceeds a specified percentage of total asset value;
•pay dividends on or repurchase our capital stock; and
•enter into certain transactions with affiliates.
These covenants could impair our ability to grow our business, take advantage of attractive business opportunities or successfully compete. Our ability to comply with financial and other covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders could exercise their remedies available under the terms of the loan agreements, which could include accelerating outstanding debt to be immediately due and payable. If we were unable to repay or refinance the accelerated debt, the lenders could proceed against any assets pledged to secure that debt, including foreclosing on equity pledges or foreclosing on or requiring the sale of our lodging properties, and the proceeds from the sale of these assets may not be sufficient to repay such debt in full.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Secured debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in any lodging property subject to mortgage debt or equity pledges.
A portion of our long-term debt existing as of December 31, 2023 is secured by mortgages on our lodging properties. Incurring mortgages, equity pledges and other secured debt obligations increases our risk of property losses because defaults on secured indebtedness may result in foreclosure actions initiated by lenders and ultimately our loss of the lodging property securing such loans or the entities whose equity is pledged to secure such loans, which would include a loss of all of such entity's assets. For tax purposes, a foreclosure of any of our lodging properties would be treated as a sale of the lodging property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the lodging property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the IRC. We may assume or incur new mortgage or other secured indebtedness on the lodging properties and entities in our portfolio or lodging properties and entities that we acquire in the future. Any default under any one of our secured debt obligations may increase the risk of our default on our other indebtedness.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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An increase in interest rates would increase our interest costs on our variable rate debt and continued high rates of interest on our variable rate debt could have broader effects on the cost of capital for real estate companies and real estate asset values.
With respect to our existing and future variable-rate debt, an increase in interest rates would increase our interest payments and reduce our cash flow available for other general corporate purposes, including funding of working capital, capital improvements to our lodging properties, acquisitions of additional lodging properties, or dividends, among other things. In addition, rising interest rates could limit our ability to refinance existing debt when it matures and increase interest costs on any debt that is refinanced. Further, an increase in interest rates could increase the cost of capital for real estate assets which, in turn, could have a negative effect on real estate asset values generally, and our lodging properties specifically. Continued high rates of interest on our variable debt could also result in an elevated cost of capital for an extended period which, in turn, could have a negative effect on real estate asset values generally, and our lodging properties specifically.
See “Part II — Item 7A. — Quantitative and Qualitative Disclosures about Market Risk.”
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
We hedge our interest rate exposure to manage our exposure to interest rate volatility, however, such arrangements may adversely affect us.
We have entered into six interest rate swaps having an aggregate notional amount of $600.0 million at December 31, 2023, to hedge against interest rate increases on certain of our outstanding variable-rate indebtedness. In the future, we may manage our exposure to interest rate volatility by using hedging arrangements, such as interest rate swaps, caps, and collars. Hedging arrangements involve the risk that the arrangement may fail to protect or adversely affect us because, among other things:
•interest rate hedging can be expensive, particularly during periods of volatile interest rates;
•available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
•the duration of the hedge may not match the duration of the related liability;
•the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to collect, sell, or assign our side of the hedging transaction; and
•the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
As a result of any of the foregoing, our hedging transactions, which are intended to limit losses and exposure to interest rate volatility, could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock. At December 31, 2023, our interest rate swaps were in an asset position totaling $14.0 million (see "Part II – Item 8. – Financial Statements and Supplementary Data – Note 8 – Derivative Financial Instruments and Hedging").
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our management team to manage our day-to-day operations and strategic business activities. The loss of services from any of the members of our management team, and our inability to find suitable replacements on a timely basis, could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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We could incur uninsured and underinsured losses.
We intend to maintain comprehensive insurance on our lodging properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by owners of properties similar to our lodging properties. Various types of catastrophic losses, such as hurricanes, floods and droughts, which can be exacerbated by climate change, or other losses caused by earthquakes, acts of terrorism, data breaches, losses related to business disruption from disputes with franchisors, losses related to business disruption caused by the Pandemic, or losses from customer litigation, may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not be sufficient to cover the operating loss or the full market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a lodging property, as well as the anticipated future revenue from the lodging property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the asset. Loan covenants, inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate an asset after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed lodging properties.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to guests at our lodging properties, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
We and our third-party managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic customer information. These systems require the collection and retention of large volumes of the personally identifiable information of the guests of our lodging properties, including credit card numbers. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as personally identifiable information, including information relating to financial accounts. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Cyber-attacks are expected to accelerate on a global basis in both frequency and magnitude as threat actors are becoming increasingly sophisticated in using techniques that circumvent controls, evade detection, and remove or obfuscate forensic evidence, which means that we and our third-party providers may be unable to detect, investigate, contain or recover from future attacks or incidents in a timely or effective manner.
Cyber criminals may be able to penetrate our network security, or the network security of our property managers and franchisors, and misappropriate or compromise our confidential information or that of the guests of our lodging properties, create system disruptions or cause the shutdown of our lodging properties. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our computer systems, or the computer systems operated by our third-party property managers and franchisors, or otherwise exploit any security vulnerabilities of our respective networks. In addition, sophisticated hardware and operating system software and applications that we and our third-party property managers or franchisors may procure from outside companies may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with our internal operations or the operations at our lodging properties.
The costs to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential business at our lodging properties. Many of the information systems and networks used to operate our lodging properties are managed by our third-party property managers or franchisors and are not under our control. Any compromise of the function, security and availability of the information networks managed by our third-party property managers or franchisors could result in disruptions to operations, delayed sales or bookings, lost guest reservations, increased costs and lower margins. In addition, the Pandemic caused a shift to remote work and has increased cybersecurity risk as a result of global remote working dynamics for our customers, employees and third-party providers that present additional opportunities for threat actors to engage in social engineering and to exploit vulnerabilities in non-corporate networks. Any of these events could adversely affect our financial results, stock price and reputation, result in misstated financial reports and subject us to potential litigation and liability.
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Portions of our information technology infrastructure or the information technology infrastructure of our third-party property managers and franchisors also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We or our third-party property managers and franchisors may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely affect the ability of our third-party property managers and franchisors to fulfill reservations for guestrooms and other services offered at our lodging properties.
Although we work with our third-party property managers and franchisors to protect the security of our information systems, and the data maintained in these systems, there can be no assurance that the security measures we have taken will prevent failures, inadequacies or interruptions in system services, or that system security will not be breached through physical or electronic break-ins, computer viruses or attacks by hackers. The increased level of sophistication and volume of attacks in recent years make it more difficult to predict the effect of a future breach. In addition, we rely on the security systems of our third-party property managers and franchisors to protect proprietary and guest information from these threats.
All of our third-party property managers carry cyber insurance policies to protect and offset a portion of potential costs that may be incurred from a security breach. Additionally, we currently have cyber insurance policies to provide supplemental coverage above the coverage carried by our third-party property managers. Despite various precautionary steps to protect our lodging properties from losses resulting from cyber-attacks, any occurrence of a cyber-attack could still result in losses at our properties, which could affect our results of operations. We have not experienced any cyber incidents that we believe to be material or that could have a material adverse effect on the business, consolidated financial position and results of operations of the Company.
Any of these items could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Joint venture investments could be adversely affected by a lack of sole decision-making authority with respect to such investments, disputes with joint venture partners, and the financial condition of joint venture partners.
We have in the past and may in the future enter into strategic joint ventures with unaffiliated investors to acquire, develop, improve or dispose of lodging properties, thereby reducing the amount of capital required by us to make investments and diversifying our capital sources for growth. We may not have sole decision-making authority with respect to these investments, and as a result we may not be able to take actions which are in the best interest of our stockholders. Further, disputes between us and our joint venture partners may result in litigation or arbitration which could increase our expenses and prevent our officers and directors from focusing their time and effort on our business and could result in subjecting the lodging properties owned by the applicable joint venture to additional risks.
If a joint venture partner becomes bankrupt or otherwise defaults on its obligations under a joint venture agreement, we and any other remaining joint venture partners of that joint venture would generally remain liable for the joint venture liabilities. Furthermore, if a joint venture partner becomes bankrupt or otherwise defaults on its obligations under a joint venture agreement, we may be unable to continue the joint venture other than by purchasing such joint venture partner’s interests or the underlying assets at a premium to the market price. If any of the above risks are realized, it could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Inflation may affect consumer confidence which could reduce consumer demand for lodging, and may increase our operating costs, resulting in a material adverse effect on our business, consolidated financial position, results of operations and cash flows.
Our business is generally correlated to certain macroeconomic trends. During the year ended December 31, 2022 and thereafter, the U.S. economy has experienced a high rate of inflation, which has moderated during the year ended December 31, 2023 but still remains above historical levels. The effects of high inflation or a potential recessionary environment could adversely affect our costs, liquidity, consumer confidence, and demand for travel and lodging and could disrupt our supply chain, which would adversely affect the operation of our lodging properties. A high rate of inflation or disruption of our supply chain will cause our operating and renovation costs to increase. These conditions could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.
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We may provide mezzanine financing to developers or seller financing in connection with the disposition of a lodging property which exposes us to credit financing risk in the case of a borrower default, resulting in a material adverse effect on our business, consolidated financial position, results of operations and cash flows.
We selectively provide mezzanine financing to developers, where we also have the opportunity to acquire the lodging property at or after the completion of the development project, and we also provide seller financing in connection with the disposition of a lodging property under limited circumstances. As such, we are subject to credit financing risk in the case of a borrower default. These conditions could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.
Risks Related to the Lodging Industry
The outbreak of any highly infectious or contagious diseases, could adversely affect the number of guests visiting our lodging properties and disrupt our operations, resulting in a material adverse effect on our business, consolidated financial position, results of operations and cash flows.
Our business is sensitive to the willingness and ability of our customers to travel. The outbreak of any highly infectious or contagious diseases or a pandemic may result in decreases in travel to and from, and economic activity in, areas in which we operate, and may adversely affect the number of guests that visit our lodging properties. The spread of highly infectious or contagious diseases could cause severe disruptions in air and other forms of travel that reduce the number of guests visiting our lodging properties. This could disrupt our operations and we could experience a material adverse effect on our business, consolidated financial position, results of operations and cash flows. Management cannot predict the extent to which disruptions in travel as a result of infectious disease outbreaks will have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.
Economic conditions may adversely affect the lodging industry.
The performance of the lodging industry has historically been directly correlated to the performance of the general economy and, specifically, growth in U.S. gross domestic product (“GDP”). The lodging industry is also sensitive to business and personal discretionary spending levels. Declines in corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the revenue and profitability of our assets and therefore the net operating profits of our investments. Economic weakness could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
We experience a high level of competition from other hotels and alternative accommodations in the markets in which we operate.
The lodging industry is highly competitive. Our lodging properties compete with other properties for guests in each market in which our lodging properties operate based on a number of factors, including location, convenience, brand affiliation, guestroom rates, range of services and guest amenities or accommodations offered and quality of customer service. We also compete with numerous owners and operators of vacation ownership resorts, as well as companies that offer alternative accommodations, such as Airbnb and similar organizations, which operate websites that market available furnished, privately-owned residential properties, including homes and condominiums, that can be rented on a nightly, weekly or monthly basis. Competition will often be specific to the individual markets in which our lodging properties are located and includes competition from existing and new lodging properties, including alternative accommodations. The price transparency of the lodging industry could lead to difficulty in increasing ADR as our competitors may offer guestrooms at lower rates than we can, which could result in our competitors increasing their occupancy at our expense. Competition could adversely affect our occupancy, ADR and RevPAR, and may require us to provide additional amenities or make capital improvements that we otherwise would not have to make.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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Our operating results and ability to make distributions to our stockholders may be adversely affected by the risks inherent to the ownership of lodging properties and the markets in which we operate.
Lodging properties have different economic characteristics than many other real estate assets. A typical office property owner, for example, has long-term leases with third-party tenants, which provide a relatively stable long-term stream of revenue. By contrast, our lodging properties are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:
•relatively short-duration occupancies;
•dependence on business and commercial travelers and tourism;
•over-building of lodging properties in our markets, which could adversely affect occupancy and revenue at the lodging properties we acquire;
•increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;
•increases in operating costs, including increased real estate and personal property taxes and insurance costs due to inflation and other factors that may not be offset by increased guestroom rates;
•potential increases in labor costs at our lodging properties, including as a result of unionization of the labor force, and increasing health care insurance expense;
•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
•adverse effects of international, national, regional and local economic and market conditions; and
•unforeseen events beyond our control, such as instability in the national, European or global economy, terrorist attacks, travel-related health concerns including pandemics and epidemics, travel-related environmental concerns including water contamination and air pollution, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities and travel-related accidents and unusual weather patterns, including natural disasters such as hurricanes.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
We have significant ongoing needs to make capital expenditures at our lodging properties, which require us to devote funds to these purposes.
Our lodging properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. Our franchisors also require periodic capital improvements as a condition of keeping the franchise licenses. In addition, our lenders and property management companies may require that we set aside annual amounts for capital improvements to our assets. These capital improvements and replacements may give rise to the following risks:
•possible environmental problems;
•construction cost overruns and delays, including the effect of supply-chain disruptions;
•defects in design or construction;
•a possible shortage of available cash to fund capital improvements and replacements and, the related possibility that financing for these capital improvements may not be available to us on affordable terms; and
•uncertainties as to market demand or a loss of market demand after capital improvements and replacements have begun.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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Development of lodging properties is subject to timing, budgeting and other risks.
We have in the past and may in the future develop lodging properties or acquire lodging properties that are under development as suitable opportunities arise, taking into consideration general economic conditions. The development of lodging properties involves a number of risks, including the following:
•possible environmental problems;
•construction cost overruns and delays;
•receipt of and expense related to zoning, occupancy and other required governmental permits and authorizations;
•development costs incurred for projects that are not pursued to completion;
•acts of God such as earthquakes, hurricanes, floods or fires that could adversely affect a project;
•inability to raise capital; and
•governmental restrictions on the nature or size of a project.
To the extent we develop lodging properties or acquire lodging properties under development, we cannot provide assurance that any development project will be completed on time or within budget. Our inability to complete a project on time or within budget could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Customers may increasingly use Internet travel intermediaries.
Guestrooms for our lodging properties can be booked through Internet travel intermediaries, including, but not limited to Expedia.com and Booking.com, and their portfolio of companies (commonly referred to as "online travel agents" or "OTA's"). As these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced guestroom rates or other significant contract concessions from our property management companies. Moreover, some of these Internet travel intermediaries are attempting to offer lodging property guestrooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown property”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their reservations system rather than to the brands under which our lodging properties are franchised. If the amount of sales made through Internet intermediaries increases significantly, guestroom revenue may flatten or decrease, which could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Consumer trends and preferences, particularly with respect to younger generations, could change away from select-service lodging properties.
Consumer trends and preferences continuously change, especially within younger generations. Many new lodging property brands have been introduced over recent years to specifically address the perceived unique needs and preferences of younger travelers. As our portfolio is concentrated in select-service hotels, significant consumer shifts in preferences away from select-service hotels could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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Risks Related to the Real Estate Industry and Real Estate-Related Investments
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our lodging properties or to adjust our portfolio in response to changes in economic and other conditions.
Our ability to promptly sell one or more lodging properties in our portfolio in response to changing economic, financial and investment conditions may be limited. We cannot predict whether we will be able to sell any lodging properties for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of an asset. As such, the composition of our portfolio may be difficult to vary in response to changing economic, financial and investment conditions. The real estate market is also affected by many factors that are beyond our control, including:
•adverse changes in international, national, regional and local economic and market conditions;
•changes in interest rates and in the availability, cost and terms of debt financing;
•governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances and any changes thereto;
•the ongoing need for capital improvements, particularly in older structures, that may require us to periodically close or partially close our assets for renovation and expend funds to correct defects or to make improvements before an asset can be sold;
•changes in operating expenses; and
•civil unrest, acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses, and acts of war or terrorism, environmental uncertainties, or outbreaks of highly infectious diseases or pandemics.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
We could incur significant costs related to government regulation and litigation over environmental, health and safety matters.
Our lodging properties and development land parcels are subject to various federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require us, as the current or former owner of the property, to perform or pay for the cleanup of contamination (including hazardous substances, waste or petroleum products) at or emanating from the property and to pay for natural resource damage arising from contamination. These laws often impose liability without regard to whether the owner or operator knew of or caused the contamination. We can also be liable to private parties for costs of remediation, personal injury and death or property damage resulting from contamination at or emanating from our properties. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.
In addition, our lodging properties (including our real property, operations and equipment) are subject to various federal, state and local environmental, health and safety regulatory requirements that address a wide variety of issues, including, but not limited to the registration, maintenance and operation of our boilers and storage tanks, air emissions from emergency generators, storm water and wastewater discharges, asbestos, lead-based paint, mold and mildew, and waste management. Some of our lodging properties also routinely handle or use hazardous or regulated substances and waste in their operations (for example, swimming pool chemicals or biological waste). Our lodging properties incur costs to comply with these environmental, health and safety laws and regulations and if these regulatory requirements are not met or unforeseen events result in the discharge of dangerous or toxic substances at our lodging properties, we could be subject to fines and penalties for non-compliance with applicable laws and material liability from third parties for harm to the environment, damage to real property or personal injury and death. We are aware of no past or present environmental liability for non-compliance with environmental, health and safety laws and regulations that we believe would have a material adverse effect on our business, consolidated financial position, or results of operations.
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Certain lodging properties we currently own or those we acquire in the future contain, may contain, or may have contained, asbestos-containing material (“ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to undertake special precautions, such as removal or abatement, if ACM would be disturbed during maintenance, renovation, or demolition of a building. These laws regarding ACM may impose fines and penalties on building owners, employers and operators for failure to comply with these requirements or expose us to third-party liability.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Compliance with the laws, regulations and covenants that apply to our lodging properties, including permit, license and zoning requirements, may adversely affect our ability to make future acquisitions or renovations, result in significant costs or delays and adversely affect our growth strategy.
Our lodging properties are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements which can restrict the use of our properties and increase the cost of acquisition, development and operation of our lodging properties. Our lodging properties are also subject to regulations intended to address the risk of highly infectious diseases which can restrict certain activities of our lodging properties and result in increased costs. In addition, federal and state laws and regulations, including laws such as the ADA, impose further restrictions on our operations. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance. As such, some of our lodging properties currently may be in noncompliance with the ADA. If one or more of the lodging properties in our portfolio is not in compliance with the ADA or any other regulatory requirements, we may be required to incur additional costs to bring the property into compliance and we might incur damages or governmental fines. In addition, existing requirements may change and future requirements may require us to make significant unanticipated expenditures.
These conditions could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
We have fixed obligations related to right-of-use assets on which certain of our lodging properties are located.
If we default on the terms of any of our right-of-use assets, such as ground leases, air rights or other intangible assets, and are unable to cure the default in a timely manner, we may be liable for damages and could lose our leasehold interest in the applicable property and interest in the lodging property on the ground lease property. An event of default that is not timely cured could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
The states and localities in which we own material amounts of property or conduct material business operations could raise their income and property tax rates or amend their tax regimes in a manner that increases our state and local tax liabilities.
We and our subsidiaries are subject to income tax and other taxes by states and localities in which we conduct business. Additionally, we are and will continue to be subject to property taxes in states and localities in which we own property, and our TRS Lessees are and will continue to be subject to state and local corporate income tax. As these states and localities seek additional sources of revenue, they may, among other steps, raise income and property tax rates or amend their tax regimes to eliminate for state income tax purposes the favorable tax treatment REITs enjoy for federal income tax purposes. We cannot predict when or if any states or localities would make any such changes, or what form those changes would take. If states and localities in which we own material amounts of property or conduct material amounts of business make changes to their tax rates or tax regimes that increase our state and local tax liabilities, such increases could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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Risks Related to Our Organization and Structure
Our fiduciary duties as the general partner of our Operating Partnership could create conflicts of interest.
We, through our wholly-owned subsidiary that serves as the sole general partner of our Operating Partnership, have fiduciary duties to our Operating Partnership’s limited partners, the discharge of which may conflict with the interests of our stockholders. The limited partners of our Operating Partnership have agreed for so long as we own a controlling interest in our Operating Partnership that, in the event of a conflict between the duties owed by our directors to our Company and the duties that we owe, in our capacity as the sole general partner of our Operating Partnership, to the limited partners, our directors must give priority to the interests of our stockholders. In addition, those persons holding Common Units have the right to vote on certain amendments to the limited partnership agreement (which require approval by a majority interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights, as well as the right to vote on mergers and consolidations of the general partner or us in certain limited circumstances. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. For example, we cannot adversely affect the limited partners’ rights to receive distributions, as set forth in the limited partnership agreement, without their consent, even though modifying such rights might be in the best interest of our stockholders generally.
Provisions of our charter may limit the ability of a third-party to acquire control of us by authorizing our board of directors to issue additional securities.
Our board of directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued shares of common stock or preferred stock, and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may authorize the issuance of additional shares or establish a series of common or preferred stock that may have the effect of delaying or preventing a change in control of our Company, including transactions at a premium over the market price of our shares, even if stockholders believe that a change in control is in their interest. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third-party to gain control of us, which could adversely affect the market price of our securities.
Provisions of Maryland law may limit the ability of a third-party to acquire control of us by requiring our board of directors or stockholders to approve proposals to acquire our Company or effect a change in control.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to Maryland corporations may have the effect of inhibiting a third-party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including “business combination” and “control share” provisions.
By resolution of our board of directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board of directors may by resolution elect to opt into the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt into the control share provisions of the MGCL in the future.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Under Maryland law, generally, a director will not be liable if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
•actual receipt of an improper benefit or profit in money, property or services; or
•active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.
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Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director and officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other companies.
Our stockholders have limited voting rights and our charter contains provisions that make removal of our directors difficult.
Our shares of common stock are the only class of our securities that carry full voting rights. Voting rights for holders of our preferred stock exist primarily with respect to the ability to elect two additional directors to our board of directors in the event that six quarterly dividends (whether or not consecutive) payable on the preferred stock are in arrears, and with respect to voting on amendments to our charter or articles supplementary relating to the preferred stock that materially and adversely affect the rights of the holders of preferred stock or create additional classes or series of senior equity securities. However, NewcrestImage has the right to designate one person for election to our board of directors in connection with the Director Nomination Agreement entered into as part of the NCI Transaction, subject to certain conditions.
Our charter provides that a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of holders of shares entitled to cast at least two-thirds of the votes entitled to be cast generally in the election of directors. Our charter also provides that vacancies on our board of directors may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors with their own nominees and may prevent a change in control of our Company or effect other management changes that are in the best interests of our stockholders.
The ability of our board of directors to change our major policies without the consent of stockholders may not be in our stockholders’ interest.
Our board of directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to stockholders. Our board of directors may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and those changes could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
Our board of directors has the ability to revoke our REIT qualification without stockholder approval.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.
We are a holding company with no direct operations. As a result, we rely on funds received from our Operating Partnership to pay liabilities and dividends, our stockholders’ claims will be structurally subordinated to all liabilities of our Operating Partnership and our stockholders will not have any voting rights with respect to our Operating Partnership activities, including the issuance of additional Common Units or Preferred Units.
We are a holding company and conduct all of our operations through our Operating Partnership. We do not have, apart from our ownership of our Operating Partnership, any independent operations. As a result, we rely on distributions from our Operating Partnership to pay any dividends we might declare on shares of our common or preferred stock. We also rely on distributions from our Operating Partnership to meet any of our obligations, including tax liabilities on taxable income allocated to us from our Operating Partnership (which might make distributions to us that do not equal the tax on such allocated taxable income).
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In addition, because we are a holding company, stockholders’ claims will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our Operating Partnership and its subsidiaries, including the Convertible Notes (defined below under "Part II. - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources"). Therefore, in the event of our bankruptcy, liquidation or reorganization, claims of our stockholders will be satisfied only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
We own approximately 87% of the Common Units in the Operating Partnership, all of the issued and outstanding 6.25% Series E Cumulative Redeemable Preferred Units of the Operating Partnership (“Series E Preferred Units”), and all of the issued and outstanding 5.875% Series F Cumulative Redeemable Preferred Units of the Operating Partnership ("Series F Preferred Units"). An unrelated third-party owns all of the issued and outstanding Series Z Preferred Units that were issued in January 2022 as part of the NCI Transaction. Any future issuances by our Operating Partnership of additional Common Units or Preferred Units could reduce our ownership percentage in our Operating Partnership. Because our common stockholders do not directly own any Common Units or Preferred Units, they will not have any voting rights with respect to any such issuances or other partnership-level activities of the Operating Partnership.
If we are unable to maintain an effective system of internal controls, we may not be able to produce and report accurate financial information on a timely basis or prevent fraud.
A system of internal controls that is well designed and properly functioning is critical for us to produce and report accurate and reliable financial information and effectively prevent fraud. We must also rely on the quality of the internal control environments of our third-party property managers who provide us with financial information related to our lodging properties. At times, we may identify areas of internal controls that are not properly functioning as designed, that need improvement or that must be developed to ensure that we have an adequate system of internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. We cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and processes. Additionally, as we grow our business, our internal controls will become more complex and we will require significantly more resources to ensure that our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if promptly remedied, could cause our stockholders to lose confidence in our financial results, which could reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency could require management to devote substantial time and incur significant expense to remediate any such conditions. There can be no assurance that management will be able to remediate any material weaknesses in a timely manner.
Risks Related to Ownership of Our Securities
The New York Stock Exchange (“NYSE”) or another nationally-recognized exchange may not continue to list our securities.
Our common stock trades on the NYSE under the symbol “INN,” our 6.25% Series E Cumulative Redeemable Preferred Stock trades on the NYSE under the symbol “INN-PE,” and our 5.875% Series F Cumulative Redeemable Preferred Stock trades on the NYSE under the symbol "INN-PF." In order for our securities to remain listed, we are required to meet the continued listing requirements of the NYSE or, in the alternative, any other nationally-recognized exchange to which we apply. We may be unable to satisfy those listing requirements, and there is no guarantee our securities will remain listed on a nationally-recognized exchange. If our securities are delisted from the NYSE or another nationally-recognized exchange, we could face significant material adverse consequences, including:
•a limited availability of market quotations for our securities;
•a limited ability of our stockholders to make transactions in our securities;
•additional trading restrictions being placed on us;
•reduced liquidity with respect to our securities;
•a determination that our common stock is “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock;
•a limited amount of news and analyst coverage; and
•a decreased ability to issue additional securities or obtain additional financing in the future.
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The cash available for distribution may not be sufficient to make distributions at expected levels and we may use borrowed funds or funds from other sources to make distributions.
Distributions declared by us will be authorized by our board of directors in its sole discretion out of funds legally available for distribution and will depend upon a number of factors, including limitations imposed by our credit facilities, restrictions under applicable law and the capital requirements of our Company. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, the requirements for qualification as a REIT, restrictions under applicable law and other factors as our board of directors may deem relevant from time to time. We may be required to fund distributions from working capital, borrowings under our 2023 Senior Credit Facility, proceeds of future stock offerings or a sale of assets to the extent distributions exceed earnings or cash flows from operations. Funding distributions from working capital would restrict our operations. If we borrow from our 2023 Senior Credit Facility to pay distributions, we would be more limited in our ability to execute our strategy of using our 2023 Senior Credit Facility to fund acquisitions or capital expenditures. Finally, selling assets may require us to dispose of assets at a time or in a manner that is not consistent with our disposition strategy. If we borrow to fund distributions, our leverage ratios and future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. We may not be able to make distributions in the future. In addition, some of our distributions may be considered a return of capital for income tax purposes. If we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. If distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock.
The market price of our stock may be volatile due to numerous circumstances beyond our control.
The trading prices of equity securities issued by REITs and other real estate companies historically have been affected by changes in market interest rates. One of the factors that may influence the market price of our common or preferred stock is the annual yield from distributions on our common or preferred stock, respectively, as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our common or preferred stock to demand a higher annual yield, which could reduce the market price of our common or preferred stock, respectively.
Other factors that could affect the market price of our stock include the following:
•actual or anticipated variations in our quarterly results of operations;
•increases in interest rates;
•changes in market valuations of companies in the lodging industry;
•changes in expectations of future financial performance or changes in estimates of securities analysts;
•fluctuations in stock market prices and volumes;
•our issuances of common stock, preferred stock, convertible notes or other securities in the future;
•the inclusion of our common stock and preferred stock in equity indices, which could induce additional purchases;
•the exclusion of our common stock and preferred stock from equity indices;
•the addition or departure of key personnel;
•announcements by us or our competitors of acquisitions, investments or strategic alliances;
•unforeseen events beyond our control, such as instability in the national, European or global economy, terrorist attacks, travel-related health concerns including pandemics and epidemics, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities and travel-related accidents and unusual weather patterns, including natural disasters; and
•changes in the tax laws or regulations to which we are subject.
The market’s perception of our growth potential and our current and potential future cash distributions, whether from operations, sales or refinancings, as well as the real estate market value of the underlying assets, may cause our common and preferred stock to trade at prices that differ from our net asset value per share. If we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common and preferred stock. Our failure to meet the market’s expectations with regard to future earnings and distributions likely would adversely affect the market price of our common and preferred stock.
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The trading market for our stock may rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock or our industry, or the stock of any of our competitors, the price of our stock could decline. If one or more of these analysts ceases coverage of our Company, we could lose attention in the market, which in turn could cause the price of our stock to decline.
The number of shares of our common stock and preferred stock available for future sale could adversely affect the market price per share of our common stock and preferred stock, respectively, and future sales by us of shares of our common stock, preferred stock, or issuances by our Operating Partnership of Common Units may be dilutive to existing stockholders.
Sales of substantial amounts of shares of our common stock or preferred stock in the public market, or upon exchange of Common Units or exercise of any equity awards, or the perception that such sales might occur, could adversely affect the market price of our common stock and preferred stock. As of February 9, 2024, all 15,948,628 of the Common Units are redeemable and may in the future be converted into shares of our common stock on a one-for-one basis and sold into the public market. The exchange of Common Units for common stock, the vesting of any equity-based awards granted to certain directors, executive officers and other employees under the 2011 Equity Incentive Plan, which was amended and restated effective May 13, 2021 (as amended and restated, the “Equity Plan”), the issuance of our common stock or Common Units in connection with lodging property, portfolio or business acquisitions and other issuances of our common stock or Common Units could have an adverse effect on the market price of the shares of our common stock.
We may execute future offerings of debt securities, which would be senior to our common and preferred stock upon liquidation, and issuances of equity securities (including Common Units).
In the future we may offer debt securities and issue equity securities, including convertible notes, Common Units, preferred stock or other preferred shares that may be senior to our common stock for purposes of dividend distributions or upon liquidation. Upon liquidation, holders of our debt securities and our preferred shares will receive distributions of our available assets prior to the holders of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against us offering senior debt or equity securities. Therefore, additional common share issuances, directly or through convertible or exchangeable securities (including Common Units), warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of our common stock. In addition, new issues of preferred stock could have a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay a dividend or make another distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of future issuances. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interest in us.
Risks Related to Our Status as a REIT
Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation.
The REIT rules and regulations are highly technical and complex. We believe that our organization and method of operation has enabled us to meet the requirements for qualification and taxation as a REIT commencing with our short taxable year ended December 31, 2011. However, we cannot provide assurance that we will remain qualified as a REIT.
Failure to qualify as a REIT could result from a number of situations, including, without limitation:
•if the leases of our lodging properties to our TRS Lessees are not respected as true leases for federal income tax purposes;
•if our Operating Partnership is treated as a publicly traded partnership taxable as a corporation for federal income tax purposes;
•if our existing or future property management companies do not qualify as “eligible independent contractors” or if our lodging properties are not “qualified lodging facilities,” as required by federal income tax law; or
•if we fail to meet any of the required REIT qualifications.
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If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
•we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;
•we could be subject to increased state and local taxes; and
•unless we are entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our stock.
Even if we continue to qualify as a REIT, we may face other tax liabilities.
Even if we continue to qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets including, but not limited to taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our TRSs are subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.
Failure to make required distributions would subject us to federal corporate income tax.
We intend to operate in a manner so as to qualify as a REIT for federal income tax purposes. To qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% non-deductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the IRC.
The REIT distribution requirements may adversely affect our operations.
To satisfy the requirements for qualification as a REIT and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, limits on our ability or the ability of certain of our subsidiaries to deduct interest expense from borrowings under Section 163(j) of the IRC, the effect of non-deductible capital expenditures, the creation of reserves, required debt service or amortization payments. Our REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions or pay taxable stock dividends. The insufficiency of our cash flows to cover our distribution requirements could have an adverse effect on our ability to raise short- and long-term debt or sell equity securities to fund distributions required to maintain our qualification as a REIT.
The formation of our TRSs increases our overall tax liability.
Our TRSs are subject to federal, state and local income tax on their taxable income, which typically consists of the revenue from the lodging properties leased by our TRS Lessees, net of the operating expenses for such lodging properties and rent payments to us. In certain circumstances, the ability of our TRSs to deduct interest expense or utilize net operating loss carryforwards for federal income tax purposes may be limited. Accordingly, although our ownership of our TRSs allows us to participate in the operating income from our lodging properties in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of our TRSs is available for distribution to us.
Our TRS Lessee structure subjects us to the risk of increased lodging property operating expenses.
Our leases with our TRS Lessees require our TRS Lessees to pay us rent based in part on revenue from our lodging properties. Our operating risks include decreases in lodging revenues and increases in lodging operating expenses, including but not limited to increases in wage and benefit costs, repair and maintenance expenses, energy costs and other operating expenses, which would adversely affect our TRSs’ ability to pay us rent due under the leases. Increases in these operating expenses could adversely affect our consolidated financial position, results of operations, and cash flows or the market price of our stock.
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Our Operating Partnership could be treated as a publicly traded partnership taxable as a corporation for federal income tax purposes.
Although we believe that our Operating Partnership will be treated as a partnership for federal income tax purposes, no assurance can be given that the IRS will not successfully challenge that position. If the IRS were to successfully contend that our Operating Partnership should be treated as a publicly traded partnership that is taxable as a corporation, we would fail to meet the 75% gross income test and certain of the asset tests applicable to REITs and, unless we qualified for certain statutory relief provisions, we would cease to qualify as a REIT. Also, our Operating Partnership would become subject to federal, state and local income tax, which would reduce significantly the amount of cash available for debt service and for distribution to us.
Our current property management companies, or any other property management companies that we may engage in the future may not qualify as “eligible independent contractors,” or our lodging properties may not be considered “qualified lodging facilities.”
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the lodging properties are managed by an “eligible independent contractor” and certain other requirements are satisfied. We lease all of our lodging properties to our TRS Lessees. All of our lodging properties are operated pursuant to property management agreements with property management companies that we believe qualify as an “eligible independent contractor.” Among other requirements, to qualify as an eligible independent contractor, the property manager must not own, directly or through its stockholders, more than 35% of our outstanding shares, and no person or group of persons can own more than 35% of our outstanding shares and the shares (or ownership interest) of the lodging property manager, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of our shares by our lodging property managers and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be exceeded.
In addition, for a property management company to qualify as an eligible independent contractor, such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one or more persons not related to the REIT or its TRS at each time that such company enters into a property management contract with a TRS or its TRS Lessee. As of the date hereof, we believe each of our property management companies operates qualified lodging facilities for certain persons who are not related to us or our TRSs. However, no assurances can be provided that our property management companies or any other property managers that we may engage in the future will in fact comply with this requirement. Failure to comply with this requirement would require us to find other managers for future contracts and if we hired a management company without knowledge of the failure, it could jeopardize our status as a REIT.
Finally, each property with respect to which our TRS Lessees pay rent must be a “qualified lodging facility.” A “qualified lodging facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. As of the date hereof, we believe that the properties that are leased to our TRS Lessees are qualified lodging facilities. Although we intend to monitor future acquisitions and improvements of properties, REIT provisions of the IRC provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no assurance that these requirements will be satisfied. If any of our properties are not deemed to be a "qualified lodging facility," we may fail to qualify as a REIT.
Our ownership of our TRSs is subject to limitations and our transactions with our TRSs could cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the IRC limits the deductibility of interest paid or accrued by a TRS to its parent REIT to provide assurance that the TRS is subject to an appropriate level of corporate taxation. The IRC also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We monitor the value of our investment in our TRSs for the purpose of ensuring compliance with TRS ownership limitations and structure our transactions with our TRSs on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 20% TRS limitations or to avoid application of the 100% excise tax.
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If any subsidiary REIT failed to qualify as a REIT, we could be subject to higher taxes and could fail to remain qualified as a REIT.
We own and may in the future own interests in entities that have elected to be taxed as a REIT under the U.S. federal income tax laws (each, a “subsidiary REIT”). A subsidiary REIT is subject to the various REIT qualification requirements and other limitations described herein that are applicable to us. If any of our subsidiary REITs were to fail to qualify as a REIT, then (i) such subsidiary REIT would become subject to U.S. federal income tax and (ii) our ownership of shares in such subsidiary REIT would cease to be a qualifying asset for purposes of the asset tests applicable to REITs. If any subsidiary REIT were to fail to qualify as a REIT, it is possible that we would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions. We may make “protective” TRS elections with respect to our subsidiary REITs and may implement other protective arrangements intended to avoid such an outcome if a subsidiary REIT were not to qualify as a REIT, but there can be no assurance that such “protective” election and other arrangements will be effective to avoid the resulting adverse consequences to us. Moreover, even if the “protective” TRS election was to be effective in the event of the failure of our subsidiary REIT to maintain its qualification as a REIT, such subsidiary REIT would be subject to federal income tax and we cannot assure you that we would not fail to satisfy the requirement that not more than 20 percent of the value of our total assets may be represented by the securities of one or more TRSs. In this event, we would fail to qualify as a REIT unless we or such subsidiary REIT could avail ourselves or itself of certain relief provisions.
We may be subject to adverse legislative or regulatory tax changes.
At any time, the federal income tax laws governing REITs, or the administrative interpretations of those laws, may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation and we could experience a reduction in the price of our stock. We cannot predict the long-term effect of any recent changes or any future law changes on REITs and their stockholders. In addition, several proposals have been made that would make substantial changes to the federal income tax laws generally. We cannot predict whether any of these proposed changes will become law.
Stockholders may be restricted from acquiring or transferring certain amounts of our stock.
The stock ownership restrictions of the IRC for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.
To qualify as a REIT for each taxable year, five or fewer individuals, as defined in the IRC, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the IRC determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year. To help ensure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT.
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We may pay taxable dividends in our common stock and cash, in which case stockholders may sell shares of our common stock to pay taxes on such dividends.
We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. Under IRS Revenue Procedure 2017-45, as a publicly offered REIT, as long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the stock distribution as a dividend (to the extent applicable rules treat such distribution as being made out of our earnings and profits). If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend to pay these taxes, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including with respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders decide to sell shares of our common stock to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to pay a taxable dividend of our common stock and cash.
The 100% prohibited transactions tax may limit our ability to dispose of our properties, and we could incur a material tax liability if the IRS successfully asserts that the 100% prohibited transaction tax applies to some or all of our past or future dispositions.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We have selectively disposed of certain of our properties in the past and intend to make additional dispositions in the future. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, some of our past dispositions may not have qualified for that safe harbor and some or all of our future dispositions may not qualify for that safe harbor. We believe that our past dispositions will not be treated as prohibited transactions, and we may avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through our TRSs, which would be subject to federal and state income taxation as a corporation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our past or future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material.
The IRS could determine that certain payments we have received in the nature of liquidated damages may not be ignored for purposes of the gross income tests applicable to REITs.
In connection with our purchases and sales of properties, we have received payments in the nature of liquidated damages. The IRC does not specify the treatment of litigation settlements and liquidated damages for purposes of the gross income tests applicable to REITs. The IRS has issued private letter rulings to other taxpayers ruling that such payments will be ignored for purposes of the gross income tests. A private letter ruling can be relied upon only by the taxpayer to whom it was issued. Based on the IRS’s private letters rulings and the advice of our tax advisors, we believe these payments should be ignored for purposes of the gross income tests. No assurance can be provided that the IRS will not successfully challenge that position. In the event of a successful challenge, we believe that we would be able to maintain our REIT status if we qualified to use a REIT “savings clause” and paid the required penalty.
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Risks Related to Environmental, Social and Governance Factors
Increasing attention to and evolving expectations for environmental, social and governance ("ESG") matters may increase our costs, harm our reputation, or otherwise adversely affect our business.
We established our Corporate Responsibility program in 2017 to take positive actions to meet our responsibility to be more sustainable, inclusive and equitable and to address increasing investor and societal concern related to climate change, social justice and governance matters. Companies across industries are facing increasing scrutiny from a variety of stakeholders related to their ESG and sustainability practices. Expectations regarding voluntary ESG initiatives and disclosures may result in increased costs (including but not limited to increased costs related to compliance, stakeholder engagement, contracting and insurance), changes in demand for certain markets, enhanced compliance or disclosure obligations, or other adverse effects on our business, consolidated financial position, or results of operations.
In addition, from time to time we establish and publicly announce voluntary efforts (including but not limited to disclosures, certifications, goals and commitments) with respect to our sustainability programs and initiatives. However, such efforts may be costly and may not have the desired effect. For example, expectations around our management of ESG matters continues to evolve rapidly, in many instances due to factors that are out of our control. Moreover, certain of our efforts are based on hypothetical expectations and assumptions that are necessarily uncertain and may be prone to error or misinterpretation due to the long timelines involved and the lack of an established single approach to identifying, measuring, and reporting on many ESG matters. Our efforts may also be at least partially reliant on third-party information, which we do not necessarily, and in some cases cannot, independently verify. Any errors in such information, including estimates and assumptions, may materially and adversely affect our ability to achieve our ESG-related goals. If we and our brand and property management partners fail to properly establish, fail to achieve, or fail to adequately report on our progress toward achieving our sustainability goals and commitments, or are otherwise perceived as having not sufficiently addressed ESG matters, we may be subject to negative publicity that could adversely affect consumer preference for our lodging properties or subject us to enhanced investor or regulator engagement on our ESG initiatives and disclosures, even if such efforts are currently voluntary.
Certain market participants, including major institutional investors and capital providers, use third-party benchmarks and scores to assess companies’ ESG profiles in making investment or voting decisions. Unfavorable ESG ratings could lead to increased negative investor sentiment towards us or our industry, which could negatively affect our share price as well as our access to and cost of capital. To the extent ESG matters negatively affect our reputation, it may also impede our ability to compete as effectively to attract and retain employees or customers, which may adversely affect our operations. We also anticipate there to be increasing regulation, disclosure-related and otherwise, regarding ESG matters, which could result in increased costs and scrutiny that could increase the risk associated with all of the items identified in this risk factor. Certain of our customers, suppliers, and business partners may also be subject to similar risks, which could result in additional or augmented risks
Our business is subject to risks that may arise from climate change.
There are inherent climate-related risks wherever businesses operate. We are subject to risks associated with natural disasters, including but not limited to storms, flooding, droughts, wildfires, and extreme temperature events. Such disasters may become more frequent or intense as a result of climate change. Climate change may also result in negative physical effects, including rising sea levels and changes in temperature and precipitation patterns. As a result of the foregoing, we may experience increased costs or decreased availability of certain products which are important to our or our lessees’ operations, including but not limited to insurance, water, and energy. Separately, we have incurred, and in future may continue to incur, costs associated with structural enhancements to our lodging properties to mitigate climate-related effects. While such costs to-date have not been material, we cannot guarantee that we will not be subject to material costs in future. Even in situations where we have engaged in mitigation efforts, we may incur significant losses or repair costs or business interruptions that may not be fully covered by insurance.
Additionally, our business is exposed to risks associated with efforts to mitigate or respond to climate change, including but not limited to regulatory developments and changes in market demand. For example, some state and local governments have adopted, or considered adopting, restrictions on water use or GHG emissions. Separately, the SEC has proposed disclosure requirements that would require companies to disclose a range of climate-related information, which may require us to incur substantial monitoring and compliance costs. Changes in consumer preferences, whether due to physical climate conditions or environmentally-minded travel considerations, may also result in decreased demand for lodging in certain markets where we operate. These and other risks may reduce demand for our properties or otherwise result in adverse effects on our business, consolidated financial position, and results of operations.
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Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Cybersecurity Risk Management and Strategy
We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity risk management program includes a cybersecurity incident response plan.
Our cybersecurity risk management program is integrated with our overall enterprise risk management program, and shares common methodologies, reporting channels and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.
Our cybersecurity risk management program includes the following key elements:
•risk assessments designed to help identify material cybersecurity risks to our critical systems, information, services, and our broader enterprise information technology ("IT") environment;
•the use of external cybersecurity service providers, where appropriate, to assess, test or otherwise assist with aspects of our security processes and internal IT and risk management professionals principally responsible for directing (1) our cybersecurity risk assessment processes, (2) our security processes, and (3) our response to cybersecurity incidents;
•cybersecurity awareness training of employees with access to our IT systems;
•a cybersecurity incident response plan to respond to cybersecurity incidents; and
•a third-party risk management process for service providers.
We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, consolidated financial position, or results of operations. We face certain ongoing risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, consolidated financial position, or results of operations. See “Risk Factors – Risks Related to Our Business.”
Cybersecurity Governance
Our Board of Directors (the "Board") considers cybersecurity risk as critical to the enterprise and manages the cybersecurity risk oversight function through the Audit Committee. The Audit Committee oversees management’s design, implementation and enforcement of our cybersecurity risk management program.
Our Chief Risk Officer ("CRO") periodically reports to the Audit Committee and leads the Company’s overall cybersecurity function. The Audit Committee receives regular reports from our CRO on our cybersecurity risks, including briefings on our cyber risk management program. A potentially material cybersecurity incident would be immediately reported to the Audit Committee and management would continue to brief the Audit Committee on management's response to the cybersecurity incident. Audit Committee members also receive periodic presentations on cybersecurity topics from our CRO, supported by our information technology staff, or external experts as part of the Board’s continuing education on topics that may affect public companies.
Our CRO supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which include briefings from internal personnel; threat intelligence and other information obtained from governmental, public or private sources, including external cybersecurity service providers; and alerts and reports produced by security tools deployed in our IT environment.
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Item 2. Properties.
Our Portfolio
According to current chain scales as defined by STR, as of December 31, 2023, six of our lodging properties with a total of 953 guestrooms are categorized as Upper Upscale hotels, 78 of our lodging properties with a total of 11,903 guestrooms are categorized as Upscale hotels, and 14 of our lodging properties with a total of 1,998 guestrooms are categorized as Upper Midscale hotels. We have two independent lodging properties with a total of 58 guestrooms. Lodging property information for the year ended December 31, 2023 is as follows:
| Franchise/Brand | Location | STR Chain Scale | Number of Guestrooms | |||||||||||||||||
| Marriott | ||||||||||||||||||||
| AC Hotel by Marriott | Atlanta, GA | Upscale | 255 | |||||||||||||||||
| AC Hotel by Marriott (1) | Houston, TX | Upscale | 195 | |||||||||||||||||
| AC Hotel by Marriott (2) | Miami, FL | Upscale | 156 | |||||||||||||||||
| AC Hotel by Marriott (1) | Frisco, TX | Upscale | 150 | |||||||||||||||||
| AC Hotel by Marriott (1) | Oklahoma City, OK | Upscale | 142 | |||||||||||||||||
| AC Hotel by Marriott (1) | Dallas, TX | Upscale | 128 | |||||||||||||||||
| Courtyard by Marriott | Indianapolis, IN | Upscale | 297 | |||||||||||||||||
| Courtyard by Marriott | Fort Lauderdale, FL | Upscale | 261 | |||||||||||||||||
| Courtyard by Marriott | Nashville, TN | Upscale | 226 | |||||||||||||||||
| Courtyard by Marriott | New Haven, CT | Upscale | 207 | |||||||||||||||||
| Courtyard by Marriott | Fort Worth, TX | Upscale | 203 | |||||||||||||||||
| Courtyard by Marriott | New Orleans (Convention), LA | Upscale | 202 | |||||||||||||||||
| Courtyard by Marriott (1) | Pittsburgh, PA | Upscale | 183 | |||||||||||||||||
| Courtyard by Marriott | Charlotte, NC | Upscale | 181 | |||||||||||||||||
| Courtyard by Marriott (1) | Grapevine, TX | Upscale | 181 | |||||||||||||||||
| Courtyard by Marriott | Atlanta (Decatur), GA | Upscale | 179 | |||||||||||||||||
| Courtyard by Marriott (1) | Phoenix (Scottsdale), AZ | Upscale | 153 | |||||||||||||||||
| Courtyard by Marriott | New Orleans (Metairie), LA | Upscale | 153 | |||||||||||||||||
| Courtyard by Marriott | Atlanta (Downtown), GA | Upscale | 150 | |||||||||||||||||
| Courtyard by Marriott | New Orleans (French Quarter), LA | Upscale | 140 | |||||||||||||||||
| Courtyard by Marriott | Kansas City, MO | Upscale | 123 | |||||||||||||||||
| Courtyard by Marriott (1) | Amarillo, TX | Upscale | 107 | |||||||||||||||||
| Courtyard by Marriott | Dallas (Arlington), TX | Upscale | 103 | |||||||||||||||||
| Element (2) | Miami, FL | Upscale | 108 | |||||||||||||||||
| Fairfield Inn & Suites by Marriott | Louisville, KY | Upper Midscale | 140 | |||||||||||||||||
| Four Points by Sheraton | San Francisco, CA | Upscale | 101 | |||||||||||||||||
| Marriott | Boulder, CO | Upper Upscale | 165 | |||||||||||||||||
| Residence Inn by Marriott (1) | Portland (Downtown), OR | Upscale | 258 | |||||||||||||||||
| Residence Inn by Marriott | Baltimore (Downtown), MD | Upscale | 189 | |||||||||||||||||
| Residence Inn by Marriott | Cleveland, OH | Upscale | 175 | |||||||||||||||||
| Residence Inn by Marriott | Atlanta, GA | Upscale | 160 | |||||||||||||||||
| Residence Inn by Marriott | Boston (Watertown), MA | Upscale | 150 | |||||||||||||||||
| Residence Inn by Marriott (1) | Frisco, TX | Upscale | 150 | |||||||||||||||||
| Residence Inn by Marriott | Baltimore (Hunt Valley), MD | Upscale | 141 | |||||||||||||||||
| Residence Inn by Marriott | Portland (Portland Airport at Cascade Station), OR | Upscale | 124 | |||||||||||||||||
| Residence Inn by Marriott (1) | Portland (Hillsboro), OR | Upscale | 122 | |||||||||||||||||
| Residence Inn by Marriott (1) | Dallas, TX | Upscale | 121 | |||||||||||||||||
| Residence Inn by Marriott | New Orleans (Metairie), LA | Upscale | 120 | |||||||||||||||||
| Residence Inn by Marriott (1) | Scottsdale, AZ | Upscale | 120 | |||||||||||||||||
| Residence Inn by Marriott (1) | Tyler, TX | Upscale | 119 | |||||||||||||||||
| Residence Inn by Marriott (1) | Steamboat Springs, CO | Upscale | 110 | |||||||||||||||||
| Residence Inn by Marriott | Branchburg, NJ | Upscale | 101 | |||||||||||||||||
| Residence Inn by Marriott | Dallas (Arlington), TX | Upscale | 96 | |||||||||||||||||
| SpringHill Suites by Marriott | New Orleans, LA | Upscale | 208 | |||||||||||||||||
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| Franchise/Brand | Location | STR Chain Scale | Number of Guestrooms | |||||||||||||||||
| SpringHill Suites by Marriott | Louisville, KY | Upscale | 198 | |||||||||||||||||
| SpringHill Suites by Marriott | Indianapolis, IN | Upscale | 156 | |||||||||||||||||
| SpringHill Suites by Marriott (1) | Dallas, TX | Upscale | 148 | |||||||||||||||||
| SpringHill Suites by Marriott (1) | Phoenix (Scottsdale), AZ | Upscale | 121 | |||||||||||||||||
| SpringHill Suites by Marriott | Nashville, TN | Upscale | 78 | |||||||||||||||||
| SpringHill Suites by Marriott (1) | New Orleans, LA | Upscale | 74 | |||||||||||||||||
| TownePlace Suites by Marriott (1) | Grapevine, TX | Upper Midscale | 120 | |||||||||||||||||
| TownePlace Suites by Marriott (1) | New Orleans, LA | Upper Midscale | 105 | |||||||||||||||||
Total Marriott (52 hotel properties) | 8,053 | |||||||||||||||||||
| Hilton | ||||||||||||||||||||
| Canopy Hotel (1) | New Orleans, LA | Upper Upscale | 176 | |||||||||||||||||
| Canopy Hotel (1) | Frisco, TX | Upper Upscale | 150 | |||||||||||||||||
| DoubleTree | Brisbane, CA | Upscale | 210 | |||||||||||||||||
| Embassy Suites (1) | Amarillo, TX | Upper Upscale | 226 | |||||||||||||||||
| Embassy Suites (1) | Tucson, AZ | Upper Upscale | 120 | |||||||||||||||||
| Hampton Inn & Suites | Minneapolis, MN | Upper Midscale | 211 | |||||||||||||||||
| Hampton Inn & Suites | Austin, TX | Upper Midscale | 209 | |||||||||||||||||
| Hampton Inn & Suites (1) | Dallas, TX | Upper Midscale | 176 | |||||||||||||||||
| Hampton Inn & Suites (1) | Tampa (Ybor City), FL | Upper Midscale | 138 | |||||||||||||||||
| Hampton Inn & Suites | Ventura (Camarillo), CA | Upper Midscale | 116 | |||||||||||||||||
| Hampton Inn & Suites | Baltimore, MD | Upper Midscale | 116 | |||||||||||||||||
| Hampton Inn & Suites | San Diego (Poway), CA | Upper Midscale | 108 | |||||||||||||||||
| Hampton Inn & Suites (1) | Silverthorne, CO | Upper Midscale | 88 | |||||||||||||||||
| Hilton Garden Inn | Houston (Energy Corridor), TX | Upscale | 190 | |||||||||||||||||
| Hilton Garden Inn | Houston (Galleria), TX | Upscale | 182 | |||||||||||||||||
| Hilton Garden Inn (1) | San Jose (Milpitas), CA | Upscale | 161 | |||||||||||||||||
| Hilton Garden Inn (1) | Grapevine, TX | Upscale | 152 | |||||||||||||||||
| Hilton Garden Inn | Boston (Waltham), MA | Upscale | 148 | |||||||||||||||||
| Hilton Garden Inn (1) | Longview, TX | Upscale | 122 | |||||||||||||||||
| Hilton Garden Inn | Greenville, SC | Upscale | 120 | |||||||||||||||||
| Hilton Garden Inn (1) | Bryan, TX | Upscale | 119 | |||||||||||||||||
| Homewood Suites (1) | Aliso Viejo (Laguna Beach), CA | Upscale | 129 | |||||||||||||||||
| Homewood Suites (1) | Tucson, AZ | Upscale | 122 | |||||||||||||||||
| Homewood Suites (1) | Midland, TX | Upscale | 118 | |||||||||||||||||
Total Hilton (24 hotel properties) | 3,607 | |||||||||||||||||||
| Hyatt | ||||||||||||||||||||
| Hyatt House | Orlando, FL | Upscale | 168 | |||||||||||||||||
| Hyatt House | Miami, FL | Upscale | 163 | |||||||||||||||||
| Hyatt House | Denver (Englewood), CO | Upscale | 135 | |||||||||||||||||
| Hyatt Place | Minneapolis, MN | Upscale | 213 | |||||||||||||||||
| Hyatt Place | Chicago (Downtown), IL | Upscale | 206 | |||||||||||||||||
| Hyatt Place | Phoenix (Mesa), AZ | Upscale | 152 | |||||||||||||||||
| Hyatt Place | Orlando, FL | Upscale | 151 | |||||||||||||||||
| Hyatt Place | Orlando (Universal), FL | Upscale | 150 | |||||||||||||||||
| Hyatt Place | Portland (Portland Airport/Cascade Station), OR | Upscale | 136 | |||||||||||||||||
| Hyatt Place (1) | Oklahoma City, OK | Upscale | 134 | |||||||||||||||||
| Hyatt Place | Denver (Lone Tree), CO | Upscale | 127 | |||||||||||||||||
| Hyatt Place (1) | Plano, TX | Upscale | 127 | |||||||||||||||||
| Hyatt Place | Denver (Englewood), CO | Upscale | 126 | |||||||||||||||||
| Hyatt Place | Phoenix (Scottsdale), AZ | Upscale | 126 | |||||||||||||||||
| Hyatt Place (1) | Grapevine, TX | Upscale | 125 | |||||||||||||||||
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| Franchise/Brand | Location | STR Chain Scale | Number of Guestrooms | |||||||||||||||||
| Hyatt Place (1) | Lubbock, TX | Upscale | 125 | |||||||||||||||||
| Hyatt Place | Long Island (Garden City), NY | Upscale | 122 | |||||||||||||||||
Total Hyatt (17 hotel properties) | 2,486 | |||||||||||||||||||
| IHG | ||||||||||||||||||||
| Holiday Inn Express & Suites | San Francisco, CA | Upper Midscale | 252 | |||||||||||||||||
| Holiday Inn Express & Suites (1) | Oklahoma City, OK | Upper Midscale | 124 | |||||||||||||||||
| Holiday Inn Express & Suites (1) | Grapevine, TX | Upper Midscale | 95 | |||||||||||||||||
| Hotel Indigo | Asheville, NC | Upper Upscale | 116 | |||||||||||||||||
| Staybridge Suites | Denver (Glendale), CO | Upscale | 121 | |||||||||||||||||
Total IHG (5 hotel properties) | 708 | |||||||||||||||||||
| Other | ||||||||||||||||||||
| Nordic Lodge (1) | Steamboat Springs, CO | Independent | 47 | |||||||||||||||||
| Onera Escapes (3) | Fredericksburg, TX | N/A | 11 | |||||||||||||||||
Total Other (2 properties) | 58 | |||||||||||||||||||
Total Portfolio (100 lodging properties) | 14,912 | |||||||||||||||||||
(1) We own a 51% controlling interest in these lodging properties through our consolidated GIC Joint Venture.
(2) We own a 90% controlling interest in these lodging properties through our consolidated Brickell Joint Venture.
(3) We own a 90% controlling interest in this lodging property through our consolidated Onera Joint Venture.
In addition to our lodging property portfolio, we own two parcels of undeveloped land that are designated as held for sale. The land parcels are generally suitable for the development of new lodging properties or the development of restaurants. When unique opportunities to develop lodging properties utilizing our own resources arise, we may develop our own lodging properties on occasion. To reduce the risk of incurring a prohibited transaction tax on any sales of our undeveloped land, we may transfer some or all of these land parcels to our TRSs.
Our Lodging Property Operating Agreements
Ground Leases
At December 31, 2023, six of our lodging properties are subject to third-party ground lease agreements that cover all of the land underlying the respective lodging property.
•The Residence Inn by Marriott located in Portland (Portland Airport at Cascade Station), OR is subject to a ground lease with an initial lease termination date of June 30, 2084 with one option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the time we acquired the leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a formula established in the ground lease.
•The Hyatt Place located in Portland (Portland Airport/Cascade Station), OR is subject to a ground lease with a lease termination date of June 30, 2084 with one option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the time we acquired the leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a formula established in the ground lease.
•The Hampton Inn & Suites located in Austin, TX is subject to a ground lease with an initial lease termination date of May 31, 2050. Annual ground rent currently is estimated to be $0.5 million, including performance-based incentive rent. Annual rent is increased every five years with the next adjustment coming in 2025.
•The Hilton Garden Inn located in Houston (Galleria), TX is subject to a ground lease with an initial lease termination date of April 20, 2053 with one option to extend for an additional 10 years. Annual ground rent currently is estimated to be $0.5 million, including performance-based incentive rent. Annual rent is increased every five years with the next adjustment coming in 2028.
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•The Embassy Suites located in Amarillo, TX is subject to a ground lease with an initial lease termination date of October 1, 2095. The annual ground rent is nominal and increases every year.
•The Canopy Hotel located in New Orleans, LA is subject to a ground lease with an initial lease termination date of December 31, 2054. The annual ground rent is nominal and is fixed for the first 30 years.
These ground leases generally require us to make rental payments and payments for our share of charges, costs, expenses, assessments and liabilities, including real property taxes and utilities. Furthermore, these ground leases generally require us to obtain and maintain insurance covering the subject property.
Franchise Agreements
At December 31, 2023, all except for two of our lodging properties operate under franchise agreements, or similar agreements, that allow for access to reservation systems, with Marriott, Hilton, Hyatt, or IHG. We believe that the public’s perception of the quality associated with a branded lodging property is an important feature in its attractiveness to guests. Franchisors provide a variety of benefits to franchisees, including centralized reservation systems, national advertising, marketing programs and publicity designed to increase brand awareness, loyalty programs, training of personnel and maintenance of operational quality at lodging properties across the brand system.
The terms of our franchise agreements generally range from 10 to 30 years with various extension provisions. Each of our franchisors receive franchise fees ranging from 3% to 6% of each lodging property’s room revenue, and some agreements require that we pay marketing fees of up to 4% of room revenue. In addition, some of these franchise agreements require that we deposit into a reserve fund for capital expenditures up to 5% of the lodging property’s gross or room revenues, depending on the franchisor, to ensure that we comply with the franchisors’ standards and requirements. We also pay fees to our franchisors for services related to reservation and information systems.
Property Management Agreements
At December 31, 2023, all of our lodging properties are operated pursuant to property management agreements with professional third-party property management companies as follows:
| Management Company | Number of Properties | Number of Guestrooms | ||||||||||||
| Affiliates of Aimbridge Hospitality | 61 | 9,096 | ||||||||||||
| OTO Development, LLC | 12 | 1,765 | ||||||||||||
| Stonebridge Realty Advisors, Inc. and affiliates | 8 | 1,143 | ||||||||||||
| Affiliates of Marriott, including Courtyard Management Corporation, SpringHill SMC Corporation and Residence Inn by Marriott, Inc. | 6 | 973 | ||||||||||||
| Crestline Hotels & Resorts, LLC | 5 | 617 | ||||||||||||
| White Lodging Services Corporation | 2 | 453 | ||||||||||||
| Hersha Hospitality Management | 2 | 338 | ||||||||||||
| Concord Hospitality Enterprises | 2 | 264 | ||||||||||||
| InterContinental Hotel Group Resources, Inc., an affiliate of IHG | 1 | 252 | ||||||||||||
| Blink Data Services, LLC | 1 | 11 | ||||||||||||
| Total | 100 | 14,912 | ||||||||||||
Our typical property management agreement requires us to pay a base fee to our property manager calculated as a percentage of total property revenues. In addition, our property management agreements generally provide that the property manager can earn an incentive fee upon achieving earnings before interest, taxes, depreciation and amortization ("EBITDA") over certain thresholds. Our TRS Lessees may employ other property managers in the future. We do not, and will not, have any ownership or economic interest in any of the property management companies engaged by our TRS Lessees.
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Item 3. Legal Proceedings.
We are involved from time to time in litigation arising in the ordinary course of business; however, there are currently no pending legal actions that we believe would have a material adverse effect on our consolidated financial position or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the NYSE on February 9, 2011 under the symbol “INN.” Prior to that time, there was no public trading market for our common stock. The last reported sale price for our common stock as reported on the NYSE on February 9, 2024 was $6.64 per share.
Stockholder Information
As of February 9, 2024, our common stock was held of record by 263 holders and there were 107,593,373 shares of our common stock outstanding.
Stockholder Return Performance
The following graph compares the five-year cumulative total stockholder return on our common stock against the cumulative total returns of the Standard & Poor’s Corporation Composite 500 Index and the Dow Jones U.S. Hotels Index. The graph assumes an initial investment of $100 in our common stock and in each of the indexes, and also assumes the reinvestment of dividends.
For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||||||||||||||||||||
| Summit Hotel Properties, Inc. | $ | 100.00 | $ | 134.90 | $ | 100.03 | $ | 108.35 | $ | 80.91 | $ | 77.90 | ||||||||||||||||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 131.49 | $ | 155.68 | $ | 200.37 | $ | 164.08 | $ | 207.21 | ||||||||||||||||||||||||||
| Dow Jones U.S. Hotels Index | $ | 100.00 | $ | 115.88 | $ | 85.39 | $ | 97.80 | $ | 82.76 | $ | 94.91 | ||||||||||||||||||||||||||
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Summit Hotel Properties, Inc. (or any of our respective subsidiaries) under the Securities Act, except as shall be expressly set forth by specific reference in such filing.
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Distribution Information
As a REIT, we must distribute annually to our stockholders an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. Our cash available for distribution may be less than the amount required to meet the distribution requirements for REITs under the IRC, and we may be required to borrow money, sell assets or issue capital stock to satisfy the distribution requirements to maintain our REIT status.
The timing and frequency of distributions will be authorized by our Board, in its sole discretion, and declared by us based upon a variety of factors deemed relevant by our directors, including financial condition, restrictions under applicable law and loan agreements, capital requirements and the REIT requirements of the IRC. Our ability to make distributions will generally depend on receipt of distributions from the Operating Partnership, which depends primarily on lease payments from our TRS Lessees with respect to our lodging properties.
We are generally restricted from declaring or paying any distributions or setting aside any funds for the payment of distributions on our common stock unless all cumulative distributions on our preferred stock have been declared and either paid or set aside for payment in full for all past distribution periods.
As a result of the negative financial effects of the Pandemic on our business, we suspended the declaration and payment of dividends and distributions on our common stock and operating partnership units from the first quarter of 2020 until the second quarter of 2022. Commencing for the third quarter of 2022, a $0.04 per share quarterly common dividend and distribution was declared, and increased to $0.06 per share in the second and third quarters of 2023. A $0.06 per share quarterly common dividend and distribution was declared for the fourth quarter of 2023 and is payable on February 29, 2023 to stockholders and unit holders of record on February 15, 2024.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Industry Trends and Outlook
Room-night demand in the U.S. lodging industry is generally correlated to certain macroeconomic trends. Key drivers of lodging demand, and therefore hotel revenues, include changes in GDP, corporate profits, capital investments, and employment. From a cost perspective, elevated inflation has been pervasive since 2022, increasing the cost of salaries, wages, supplies, material, freight, insurance and energy. Higher costs from broad inflationary pressures have been partially offset by lodging price increases. While growth rates have decelerated, inflation is still increasing faster than historical norms, which may continue in 2024.
During the year ended December 31, 2023, we experienced a continued recovery from the Pandemic driven increasingly by strong group travel and improvements in business transient demand, in addition to continued strength in leisure travel. From an industry perspective, the year ended December 31, 2023 represented a new high in lodging demand, further evidence that businesses and individual consumers alike are increasingly traveling. Strong room night demand coupled with minimal forecasted growth in supply over the next several years positions the industry for continued growth. Based on the trends noted above, we expect positive comparable hotel RevPAR growth for our portfolio for the year ended December 31, 2024.
Operating Performance Metrics
We use a variety of performance indicators and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP, as well as other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual lodging properties, groups of lodging properties or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:
•Occupancy — Occupancy represents the total number of guestrooms occupied divided by the total number of guestrooms available.
•Average Daily Rate — ADR represents total room revenues divided by the total number of paid occupied guestrooms.
•Revenue Per Available Room — RevPAR is the product of ADR and Occupancy.
Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important metric for monitoring operating performance at the individual lodging property level and across our business as a whole. We evaluate individual lodging property RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and market-by-market basis. ADR and RevPAR are based only on room revenue. Room revenue depends on demand (as measured by occupancy), pricing (as measured by ADR), and our available supply of lodging property guestrooms. Our ADR, occupancy and RevPAR performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, air travel and other business and leisure travel, new lodging property construction, and the pricing strategies of competitors. In addition, our ADR, occupancy and RevPAR performance is dependent on the continued success of our partners, franchisors and brands.
Lodging Property Portfolio Activity
We continuously evaluate alternatives to refine our portfolio to drive growth and create value. In the normal course of business, we evaluate opportunities to acquire additional properties that meet our investment criteria and opportunities to recycle capital through the disposition of properties. As such, the composition and size of our portfolio of properties may change materially over time. Significant changes to our portfolio of properties could have a material effect on our Consolidated Financial Statements.
During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on the NCI Transaction for the acquisition of a portfolio of 27 lodging properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces, and various financial incentives for an aggregate purchase price of $822.0 million.
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In May 2022, the GIC Joint Venture completed the sale of the 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture.
In June 2022, we formed the Brickell Joint Venture (see "See Part II – Item 8. – Financial Statements and Supplementary Data - Note 10 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the exercise of our purchase option to acquire a 90% equity interest in the AC Hotel by Marriott and Element Miami Brickell Hotel in Miami, FL (together the "AC/Element Hotel"). The exercise price of the purchase option was $89.0 million and was primarily funded with the conversion of the mezzanine loan of $29.9 million to equity, $7.9 million in cash and the assumption of debt.
In October 2022, we completed the acquisition of a 90% equity interest in the Onera Joint Venture that owns an 11-unit glamping property for $5.2 million in cash, plus additional contingent consideration of $1.8 million paid in September 2023. The Onera Joint Venture has a 100% fee simple interest in a lodging property consisting of an 11-unit glamping property and a 6.4-acre parcel of land.
In May 2023, we completed the sale of four lodging properties for an aggregate gross selling price of $28.1 million. The sale included two Hyatt Place hotels in the Chicago area containing a total of 277 guestrooms, a Hilton Garden Inn in the Minneapolis area containing 97 guestrooms, and a Holiday Inn Express & Suites in the Minneapolis area containing 93 guestrooms. These lodging properties were classified as Assets Held for Sale at December 31, 2022 and their carrying values during the year then ended were reduced by $2.9 million to bring the carrying value of the properties to their net selling price less estimated costs to sell.
In June 2023, the GIC Joint Venture acquired the Residence Inn by Marriott located in Scottsdale, AZ containing 120 guestrooms for a purchase price of approximately $29.0 million and the Nordic Lodge located in Steamboat Springs, CO containing 47 guestrooms for a purchase price of approximately $13.7 million.
In December 2023, we completed the sale of the 123-guestroom Hyatt Place in Baltimore (Owings Mills), MD for a gross selling price of $8.3 million. The net selling price less costs to sell approximated the net book value of the hotel property on the sale date resulting in a nominal gain that was recorded in the fourth quarter of 2023.
During the fourth quarter of 2023, the GIC Joint Venture entered into a purchase and sale agreement with a third-party to sell the 127-guestroom Hyatt Place Dallas (Plano), TX for $10.3 million. We reclassified the property in Assets Held for sale, net at December 31, 2023 and recorded a write-down of $4.0 million in the fourth quarter of 2023 for the excess of the net carrying amount of the portfolio of properties over the net selling price less estimated costs to sell. We completed the sale of the property on February 15, 2024 under the terms described above.
During the first quarter of 2024, we entered into two separate purchase and sale agreements with two unrelated third-parties to sell one individual lodging property and a portfolio of two lodging properties with an aggregate 529-guestrooms for an aggregate selling price of $84.0 million. We reclassified all three of the properties to Assets Held for sale, net at December 31, 2023 and recorded a write-down of $1.4 million in the fourth quarter of 2023 for the excess of the net carrying amount of one of the lodging properties over its net selling price less estimated costs to sell. We expect to complete the transactions during the first half of 2024.
At December 31, 2023, we have a lodging property with 101-guestrooms being marketed for sale. We have reclassified the property to Assets Held for Sale, net at December 31, 2023 and recorded a write-down of $11.3 million in the fourth quarter of 2023 for the excess of the net carrying amount of the lodging property over its net selling price less estimated costs to sell.
During the first quarter of 2023, we entered into a purchase and sale agreement with a third-party to sell a 5.99-acre parcel of undeveloped land in San Antonio, TX for $1.3 million. We expect to complete the transaction during the first half of 2024.
See “Part II – Item 8. – Financial Statements and Supplementary Data –Note 3 - Investments in Lodging Property, net” to the Consolidated Financial Statements for additional information concerning our asset acquisitions, development, and dispositions.
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Revenues and Operating Expenses
Our revenues are derived from lodging operations and consist of room revenue, food and beverage revenue and other revenue. As a result of our focus on lodging properties with efficient operating models, substantially all of our revenues are related to the sales of guestrooms. Our other revenue consists of ancillary revenues related to meeting rooms, parking and other guest services provided at certain of our properties.
Our property operating expenses consist primarily of expenses incurred in the day-to-day operation of our lodging properties. Many of our expenses are fixed, such as essential lodging property staff, real estate taxes, insurance, and depreciation. These expenses generally do not decrease even if the revenues at our lodging properties decrease. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with administrative departments, sales and marketing, repair and maintenance, utility costs and franchise fees.
Results of Operations
The comparisons that follow should be reviewed in conjunction with the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Comparison of 2023 to 2022
The following table contains key operating metrics for our total portfolio and our same-store portfolio for the year ended December 31, 2023 compared with the year ended December 31, 2022 (dollars in thousands, except ADR and RevPAR). Our same-store portfolio consists of properties that we owned as of December 31, 2023 and that we have owned at all times since January 1, 2022, except as noted below.
| 2023 | 2022 | Year-over-Year Dollar Change | Year-over-Year Percentage Change | |||||||||||||||||||||||||||||||||||||||||||||||
Total Portfolio (100 Properties) | Same-Store Portfolio (94 properties) | Total Portfolio (103 properties) | Same-Store Portfolio (94 properties) | Total Portfolio (100/103 properties) | Same-Store Portfolio (94 properties) | Total Portfolio (100/103 properties) | Same-Store Portfolio (94 properties) | |||||||||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Room | $ | 656,063 | $ | 622,546 | $ | 609,370 | $ | 583,782 | $ | 46,693 | $ | 38,764 | 7.7 | % | 6.6 | % | ||||||||||||||||||||||||||||||||||
| Food and beverage | 41,513 | 32,177 | 32,117 | 27,489 | 9,396 | 4,688 | 29.3 | % | 17.1 | % | ||||||||||||||||||||||||||||||||||||||||
| Other | 38,551 | 35,567 | 34,208 | 32,880 | 4,343 | 2,687 | 12.7 | % | 8.2 | % | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 736,127 | $ | 690,290 | $ | 675,695 | $ | 644,151 | $ | 60,432 | $ | 46,139 | 8.9 | % | 7.2 | % | ||||||||||||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Room | $ | 148,005 | $ | 138,969 | $ | 136,999 | $ | 129,374 | $ | 11,006 | $ | 9,595 | 8.0 | % | 7.4 | % | ||||||||||||||||||||||||||||||||||
| Food and beverage | 31,580 | 25,162 | 24,897 | 21,754 | 6,683 | 3,408 | 26.8 | % | 15.7 | % | ||||||||||||||||||||||||||||||||||||||||
| Other hotel operating expenses | 224,901 | 210,612 | 207,975 | 196,522 | 16,926 | 14,090 | 8.1 | % | 7.2 | % | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | 404,486 | $ | 374,743 | $ | 369,871 | $ | 347,650 | $ | 34,615 | $ | 27,093 | 9.4 | % | 7.8 | % | ||||||||||||||||||||||||||||||||||
| Occupancy | 72.0 | % | 72.3 | % | 69.7 | % | 70.0 | % | n/a | n/a | 3.3 | % | 3.3 | % | ||||||||||||||||||||||||||||||||||||
| ADR | $ | 165.04 | $ | 165.09 | $ | 158.58 | $ | 159.94 | $ | 6.46 | $ | 5.15 | 4.1 | % | 3.2 | % | ||||||||||||||||||||||||||||||||||
| RevPAR | $ | 118.81 | $ | 119.33 | $ | 110.46 | $ | 111.90 | $ | 8.35 | $ | 7.43 | 7.6 | % | 6.6 | % | ||||||||||||||||||||||||||||||||||
The total portfolio information above includes revenues and expenses from the lodging properties that we acquired during the year ended December 31, 2023 (the “2023 Acquired Properties”) from the date of acquisition through December 31, 2023, and operating information (occupancy, ADR, and RevPAR) for the period each lodging property was owned. Accordingly, the information does not reflect a full 12 months of operations for the year ended December 31, 2023 for the 2023 Acquired Properties. The total portfolio information above includes revenues and expenses from the lodging properties that we acquired during the year ended December 31, 2022 (the “2022 Acquired Properties”) from the date of acquisition through December 31, 2022, and operating information (occupancy, ADR, and RevPAR) for the period each lodging property was owned. Accordingly, the information does not reflect a full 12 months of operations for the year ended December 31, 2022 for the 2022 Acquired Properties.
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Operating results for the same-store portfolio of 94 properties for the year ended December 31, 2022 include the 26 hotel properties and two parking garages acquired in the first closing of the NCI Transaction on January 13, 2022 (the "First Closing Hotels") and exclude the acquisition of the Canopy New Orleans (the "Canopy"), which was acquired upon completion of construction in the second closing of the NCI Transaction on March 23, 2022. As such, the same-store operating results for the First Closing Hotels for the year ended December 31, 2022 include the operating results related to the prior owner for the period from January 1, 2022 through the first closing date of the NCI Transaction of January 13, 2022 (the "Pre-Ownership Results"). Operating results for the total portfolio of 100 properties for the year ended December 31, 2022 include actual operating results for the First Closing Hotels and the Canopy only from the closing dates of the NCI Transaction through December 31, 2022.
Changes from the year ended December 31, 2023 compared with the year ended December 31, 2022 were due to the following:
•Revenues and RevPAR. The increase in total revenues and RevPAR for our total portfolio for the year ended December 31, 2023 compared with the year ended December 31, 2022 was due to improving corporate and group demand and continued strength in leisure travel. We generated additional revenues during the year ended December 31, 2023 as a result of the acquisition of the Canopy New Orleans hotel in the second closing of the NCI Transaction at the end of March 2022 and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio. These revenue increases were partially offset by the disposition of properties during the years ended December 31, 2023 and 2022. Additionally, revenues for the year ended December 31, 2022 were negatively affected by the effect of the Omicron variant of COVID-19 in the first quarter of 2022. On a same store basis, the improvements in our business resulted in an increase of approximately 3.3% in occupancy and a 3.2% in ADR during the year ended December 31, 2023, which resulted in an 6.6% increase in same-store RevPAR. For the total portfolio, we experienced an increase of approximately 3.3% in occupancy and an increase of 4.1% in ADR during the year ended December 31, 2023. This resulted in an increase in RevPAR of 7.6% over the same period in the prior year.
•Room Expenses. The increase in room expenses for both our total and the same-store portfolio is highly correlated to the increase in room revenues driven by increasing occupancy across our portfolio. Additional factors contributing to higher room expenses include higher wage rates, training, and contract labor needed to meet room demand. We also incurred additional operating expenses during the year ended December 31, 2023 as a result of the acquisition of the Canopy upon completion of the second closing of the NCI Transaction at the end of March 2022, and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio. These operating expense increases were partially offset by the disposition of properties during the years ended December 31, 2023 and 2022.
•Food and Beverage Revenues and Expenses. Total portfolio and same-store food and beverage revenues increased during the year ended December 31, 2023 as a result of an expanded food and beverage offering and an increase in occupancy across our portfolio during the period. During the year ended December 31, 2022, we were still providing a limited food and beverage offering due to the effects of the Omicron variant of the COVID-19 virus. Additionally, we acquired the AC/Element Hotel in June 2022, which resulted in additional food and beverage revenues and related expenses during the year ended December 31, 2023.
The increases in food and beverage expenses were generally consistent with the increases in food and beverage revenues as we have been able to increase food and beverage prices commensurate with the inflationary and other increases in food and beverage costs.
•Other Hotel Operating Revenues and Expenses. The increase in other lodging property operating revenues for the total portfolio and same-store resulted from miscellaneous revenues, such as cancellation fees and marketplace purchases, related to increased occupancy, an increase in parking and resort fees, and ancillary revenues driven by increased group demand. The increase in other lodging property operating expenses was attributable to increased marketing costs, labor costs, credit card commissions and other expenses resulting primarily from increased occupancy as compared with the same period of the prior year.
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The following table includes other consolidated income and expenses for 2023 compared with 2022 (dollars in thousands):
| For the Twelve Months Ended December 31, | ||||||||||||||||||||||||||
| 2023 | 2022 | Dollar Change | Percentage Change | |||||||||||||||||||||||
| Property taxes, insurance and other | $ | 55,167 | $ | 49,921 | $ | 5,246 | 10.5 | % | ||||||||||||||||||
| Management fees | 18,452 | 17,442 | 1,010 | 5.8 | % | |||||||||||||||||||||
| Depreciation and amortization | 150,924 | 150,160 | 764 | 0.5 | % | |||||||||||||||||||||
| Corporate general and administrative | 32,530 | 30,765 | 1,765 | 5.7 | % | |||||||||||||||||||||
| Transaction costs | 13 | 749 | (736) | nm(1) | ||||||||||||||||||||||
| Recoveries of credit losses | (1,230) | (1,100) | (130) | 11.8 | % | |||||||||||||||||||||
| Loss on write-down of assets | 16,661 | 10,420 | 6,241 | 59.9 | % | |||||||||||||||||||||
| Loss (gain) on disposal of assets, net | 337 | (20,315) | 20,652 | nm(1) | ||||||||||||||||||||||
| Interest expense | 86,798 | 65,581 | 21,217 | 32.4 | % | |||||||||||||||||||||
| Interest income | 1,688 | 1,544 | 144 | 9.3 | % | |||||||||||||||||||||
| Other (income) loss, net | (1,005) | (1,083) | 78 | (7.2) | % | |||||||||||||||||||||
| Income tax expense | 2,798 | 3,611 | (813) | (22.5) | % | |||||||||||||||||||||
(1) Not meaningful
Changes from the year ended December 31, 2023 compared with the year ended December 31, 2022 were due to the following:
•Property Taxes, Insurance and Other. The increase in Property taxes, insurance and other is primarily due to an increase in franchise taxes and property and casualty insurance and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio, partially offset by a reduction in property tax expense due to the disposition of properties during the years ended December 31, 2023 and 2022, and successful appeal efforts to reduce property tax assessments.
•Management Fees. The increase in Management fees during the current period is primarily due to an increase in revenues for the year ended December 31, 2023 compared with the same period of the prior year and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio, partially offset by the disposition of properties during the years ended December 31, 2023 and 2022 and a re-negotiation of property management agreements with two of our property managers that resulted in reduced property management fees.
•Depreciation and Amortization. Depreciation and amortization remained consistent between the year ended December 31, 2023 and 2022, which is the net result of additional depreciation expense related to the acquisition of the Canopy Hotel in March 2022 and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio offset by a reduction in depreciation related to the disposition of the properties during the years ended December 31, 2023 and 2022, and the reclassification of six hotel properties to Assets Held for Sale on December 31, 2022, which suspended depreciation expense from January 2023 to May 2023.
•Corporate General and Administrative. The increase in Corporate general and administrative expenses is primarily due to an increase in compensation expenses related to higher corporate headcount during the year ended December 31, 2023 to support our investment strategies and initiatives and an increase in professional fees for the year ended December 31, 2023 compared with the year ended December 31, 2022.
•Transaction Costs. Transactions costs for the years ended December 31, 2023 and 2022 relate to certain one-time costs and other expenses incurred in pursuit of potential lodging property acquisitions that ultimately were not consummated. Transaction costs will vary from year to year based on the level of acquisition activities that we undertake and the outcomes of such activities. Transaction costs were negligible for the year ended December 31, 2023.
•Recoveries of Credit Losses. Recoveries of credit losses for the year ended December 31, 2023 related to the payment in full of our seller-financing loan that was fully reserved. Recoveries of credit losses for the year ended December 31, 2022 related to principal payments received related to our seller-financing loans. See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 4 – Investment in Real Estate Loans" for further information.
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•Loss on Write-down of Assets. During the year ended December 31, 2023, the Company recorded a Loss on write-down of assets of $16.7 million to reduce the carrying amounts of the Hyatt Place - Dallas (Plano), TX, and two additional lodging properties that are under contract to sell or being marketed for sale to their expected net selling prices less estimated costs to sell. During the year ended December 31, 2022, the Company recorded a Loss on write-down of assets of $2.9 million to reduce the carrying amounts of the Hilton Garden Inn - Eden Prairie, MN, Holiday Inn Express & Suites - Minnetonka, MN, and the Hyatt Place - Hoffman Estates, IL and the Hyatt Place - Lombard, IL to their net selling prices less estimated costs to sell. Additionally, during the year ended December 31, 2022, the Company recorded a Loss on write-down of assets of $7.2 million to reduce the carrying amounts of two lodging properties to their expected net selling prices less estimated costs to sell. The proposed sale of these two lodging properties was terminated during the year ended December 31, 2023
•Loss (Gain) on Disposal of Assets. The loss on disposal of assets, net for the year ended December 31, 2023 relates to the write-off of the remaining undepreciated book values of disposed assets as a result of renovation activities. The gain on disposal of assets, net for the year ended December 31, 2022 is due to the sale of the Hilton Garden Inn San Francisco Airport North in San Francisco, CA in May 2022 for a gross selling price of $75.0 million.
•Interest Expense. Interest expense increased during the year ended December 31, 2023 due to higher base rates on our floating rate debt that is not hedged in comparison with the year ended December 31, 2022, and the additional debt related to the Brickell Transaction which closed in June 2022.
•Other Income, net. The decrease in Other income, net for the year ended December 31, 2023 is due primarily to reduced debt transaction costs incurred during the year ended December 31, 2023 offset by a reduction in net tenant income.
•Income Tax Expense. We recorded a $2.8 million income tax expense during the year ended December 31, 2023, a decrease of $0.8 million from the $3.6 million income tax expense recorded during the year ended December 31, 2022. Our income tax expense relates to federal and state income taxes on the earnings of our TRS Lessees. The decrease in income tax expense relates to a decrease in the taxable income of our TRS Lessees.
For information about our key operating metrics and results of operations for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management's Discussion and Analysis of Financial Conditions and Results of Operations - Results of Operations" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Non-GAAP Financial Measures
We disclose certain “non-GAAP financial measures,” which are measures of our historical financial performance. Non-GAAP financial measures are financial measures not prescribed by GAAP. These measures are as follows: (i) Funds From Operations (“FFO”) and Adjusted Funds from Operations ("AFFO"), (ii) EBITDA, Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate ("EBITDAre") and Adjusted EBITDAre (as described below). We caution investors that amounts presented in accordance with our definitions of non-GAAP financial measures may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP financial measures in the same manner. Our non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss) as a measure of our operating performance. Our non-GAAP financial measures may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, debt service obligations and other commitments and uncertainties. Although we believe that our non-GAAP financial measures can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures are not necessarily better indicators of any trend as compared to a comparable measure prescribed by GAAP such as net income (loss).
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FFO and AFFO
As defined by Nareit, FFO represents net income or loss (computed in accordance with GAAP), excluding preferred dividends, gains (or losses) from sales of real property, impairment losses on real estate assets, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization related to real estate assets, and adjustments for unconsolidated partnerships, and joint ventures. AFFO represents FFO excluding amortization of deferred financing costs, franchise fees, equity-based compensation expense, transaction costs, debt transaction costs, premiums on redemption of preferred shares, losses from net casualties, non-cash interest income and non-cash income tax related adjustments to our deferred tax asset. Unless otherwise indicated, we present FFO and AFFO applicable to our common shares and common units. We present FFO and AFFO because we consider FFO and AFFO an important supplemental measure of our operational performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO and AFFO when reporting their results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and AFFO exclude depreciation and amortization related to real estate assets, gains and losses from real property dispositions and impairment losses on real estate assets, and certain transaction costs related to lodging property acquisition activities and debt, FFO and AFFO provide performance measures that, when compared year over year, reflect the effect to operations from trends in occupancy, guestroom rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. Our computation of FFO differs slightly from the computation of Nareit-defined FFO related to the reporting of depreciation and amortization expense on assets at our corporate offices, which is de minimus. Our computation of FFO may also differ from the methodology for calculating FFO used by other equity REITs and, accordingly, may not be comparable to such other REITs. FFO and AFFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP), as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. Where indicated in this Annual Report on Form 10-K, FFO is based on our computation of FFO and not the computation of Nareit-defined FFO unless otherwise noted.
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The following is a reconciliation of our GAAP net income to FFO and AFFO for the years ended December 31, 2023, 2022 and 2021 (in thousands, except per common share/common unit amounts):
| 2023 | 2022 | 2021 | ||||||||||||||||||
Net (loss) income | $ | (28,116) | $ | 1,217 | $ | (68,584) | ||||||||||||||
| Preferred dividends | (15,875) | (15,875) | (15,431) | |||||||||||||||||
| Distributions to and accretion of redeemable non-controlling interests | (2,626) | (2,520) | — | |||||||||||||||||
| Premium on redemption of preferred stock | — | — | (2,710) | |||||||||||||||||
Loss (income) related to non-controlling interests in consolidated joint ventures | 14,824 | (2,321) | 2,896 | |||||||||||||||||
| Net loss applicable to common shares and common units | (31,793) | (19,499) | (83,829) | |||||||||||||||||
| Real estate-related depreciation | 146,187 | 145,492 | 105,462 | |||||||||||||||||
Loss on write-down of assets | 16,661 | 10,420 | 4,361 | |||||||||||||||||
Loss (gain) on disposal of assets and other dispositions, net | 385 | (20,315) | (240) | |||||||||||||||||
| Adjustments related to non-controlling interests in consolidated joint ventures | (34,662) | (20,845) | (8,454) | |||||||||||||||||
| FFO applicable to common shares and common units | 96,778 | 95,253 | 17,300 | |||||||||||||||||
Recoveries of credit losses | (1,230) | (1,100) | (2,632) | |||||||||||||||||
| Amortization of lease-related intangible assets | — | — | 87 | |||||||||||||||||
| Amortization of deferred financing costs | 5,910 | 5,708 | 4,353 | |||||||||||||||||
| Amortization of franchise fees | 595 | 663 | 493 | |||||||||||||||||
Amortization of intangible assets, net | 3,642 | 3,643 | — | |||||||||||||||||
Equity-based compensation (1) | 7,742 | 8,446 | 10,681 | |||||||||||||||||
Executive transition costs (2) | — | — | 1,065 | |||||||||||||||||
| Transaction costs | 13 | 749 | 3,849 | |||||||||||||||||
| Debt transaction costs | 395 | 1,528 | 220 | |||||||||||||||||
| Premium on redemption of preferred stock | — | — | 2,710 | |||||||||||||||||
| Non-cash interest income | (531) | (113) | (1,042) | |||||||||||||||||
| Non-cash lease expense, net | 481 | 505 | 521 | |||||||||||||||||
| Casualty losses, net | 2,112 | 2,505 | 468 | |||||||||||||||||
Decrease in deferred tax asset valuation allowance | 84 | — | — | |||||||||||||||||
| Adjustments related to non-controlling interests in consolidated joint ventures | (3,612) | (3,400) | (1,291) | |||||||||||||||||
Special allocation related to sale of joint venture asset(3) | — | (417) | — | |||||||||||||||||
Non-cash state taxes and other, net | 447 | — | — | |||||||||||||||||
| AFFO applicable to common shares and common units | $ | 112,826 | $ | 113,970 | $ | 36,782 | ||||||||||||||
| FFO per common share/common unit | $ | 0.79 | $ | 0.79 | $ | 0.16 | ||||||||||||||
AFFO per common share/common unit (4) | $ | 0.92 | $ | 0.94 | $ | 0.35 | ||||||||||||||
| Weighted average diluted common shares/common units: | ||||||||||||||||||||
FFO and AFFO (5)(6) | 122,355 | 121,163 | 105,455 | |||||||||||||||||
(1) The total equity-based compensation expense for the years ended December 31, 2022 and 2021 includes $1.3 million and $2.9 million, respectively, of incremental expense related to the modification of certain restricted stock awards as a result of the departure of our Chief Operating Officer and Executive Chairman.
(2) Executive transition costs are cash payments due to our former Executive Chairman as a result of the non-renewal of his employment contract in December 2021.
(3) During the year ended December 31, 2022, we earned a $0.4 million promote related to the sale by the GIC Joint Venture of the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture. Our promote is earned when the internal rate of return to GIC related to capital transactions exceeds a specified investment hurdle rate. We have adjusted this amount from our calculation of AFFO because it relates to the gain on the sale of the property and not on-going operations.
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(4) AFFO for the years ended December 31, 2023, 2022 and 2021 has not been adjusted for interest related to the Convertible Notes for purposes of calculating AFFO per common share/common unit because we intend to settle the principal portion of the Convertible Notes in cash and we did not include in the denominator of our calculation of AFFO per common share/common unit the potential dilutive effect of shares that would be issued if the principal portion of the Convertible Notes were converted into shares of our common stock.
(5) Includes Common Units in the Operating Partnership held by limited partners (other than us and our subsidiaries) because the Common Units are redeemable for cash or, at our election, shares of our common stock.
(6) The weighted average diluted common shares/common units used to calculate FFO and AFFO per common share/common unit for the years ended December 31, 2023, 2022 and 2021 includes the dilutive effect of our outstanding restricted stock awards. These shares were excluded from our weighted average shares outstanding used to calculate net loss per share because they would have been antidilutive. The weighted average common shares/common units used to calculate FFO and AFFO per common share/common unit for the year ended December 31, 2021 exclude the potential dilution related to our Convertible Notes as we intend to settle the principal value of the Convertible Notes in cash.
A reconciliation of weighted average diluted common shares to non-GAAP weighted average diluted common shares/common units for FFO and AFFO is as follows (in thousands):
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Weighted average dilutive common shares outstanding | 105,548 | 105,142 | 104,471 | |||||||||||||||||
| Dilutive effect of restricted stock awards | 226 | 221 | 402 | |||||||||||||||||
Dilutive effect of performance stock awards | — | 7 | — | |||||||||||||||||
| Dilutive effect of Common Units of Operating Partnership | 15,970 | — | — | |||||||||||||||||
| Dilutive effect of shares issuable upon conversion of convertible debt | 24,678 | 24,193 | 23,256 | |||||||||||||||||
| Adjusted weighted average dilutive common shares outstanding | 146,422 | 129,563 | 128,129 | |||||||||||||||||
| Non-GAAP adjustment for dilutive effects of common units | — | 15,360 | 144 | |||||||||||||||||
| Non-GAAP adjustment for dilutive effects of restricted stock awards | 611 | 433 | 438 | |||||||||||||||||
| Non-GAAP adjustment for dilutive effect of shares issuable upon conversion of convertible debt | (24,678) | (24,193) | (23,256) | |||||||||||||||||
| Non-GAAP weighted dilutive common shares/common units outstanding | 122,355 | 121,163 | 105,455 | |||||||||||||||||
During the year ended December 31, 2023, AFFO applicable to common stock and Common Units decreased $1.1 million due to an increase in interest expense as a result of rising interest rates and disposition activity, partially offset by an improvement in our business. The improvement in our business was primarily driven by improving demand for corporate transient and group travel and continued strength in leisure travel coupled with increases in our operating results due to acquisitions, partially offset by disposition activity.
For information about our AFFO for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
EBITDA, EBITDAre and Adjusted EBITDAre
EBITDA
EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions.
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EBITDAre and Adjusted EBITDAre
In September 2017, Nareit proposed a standardized performance measure, called EBITDAre, which is based on EBITDA and is expected to provide additional relevant information about REITs as real estate companies in support of growing interest among generalist investors. The conclusion was reached that, while dedicated REIT investors have long been accustomed to utilizing the industry’s supplemental measures such as FFO and net operating income to evaluate the investment quality of REITs as real estate companies, it would be helpful to generalist investors for REITs as real estate companies to also present EBITDAre as a more widely known and understood supplemental measure of performance. EBITDAre is intended to be a supplemental non-GAAP performance measure that is independent of a company’s capital structure and will provide a uniform basis for one measurement of the enterprise value of a company compared to other REITs.
EBITDAre, as defined by Nareit, is calculated as EBITDA, excluding: (i) loss and gains on disposition of property and (ii) asset impairments, if any. We believe EBITDAre is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.
We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional non-recurring or unusual items described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of Adjusted EBITDAre, when combined with the primary GAAP presentation of net income, is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.
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The following is a reconciliation of our GAAP net income to EBITDAre for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| 2023 | 2022 | 2021 | ||||||||||||||||||
Net (loss) income | $ | (28,116) | $ | 1,217 | $ | (68,584) | ||||||||||||||
| Depreciation and amortization | 150,924 | 150,160 | 105,955 | |||||||||||||||||
| Interest expense | 86,798 | 65,581 | 43,368 | |||||||||||||||||
| Interest income | (568) | (65) | (8) | |||||||||||||||||
| Income tax expense | 2,798 | 3,611 | 1,473 | |||||||||||||||||
| EBITDA | 211,836 | 220,504 | 82,204 | |||||||||||||||||
Loss on write-down of assets | 16,661 | 10,420 | 4,361 | |||||||||||||||||
Loss (gain) on disposal of assets and other dispositions, net | 385 | (20,315) | (240) | |||||||||||||||||
EBITDAre | 228,882 | 210,609 | 86,325 | |||||||||||||||||
Recoveries of credit losses | (1,230) | (1,100) | (2,632) | |||||||||||||||||
| Amortization of lease-related intangible assets | — | — | 87 | |||||||||||||||||
| Amortization of key money liabilities | (498) | (363) | — | |||||||||||||||||
Equity-based compensation(1) | 7,742 | 8,446 | 10,681 | |||||||||||||||||
Executive transition costs(2) | — | — | 1,065 | |||||||||||||||||
| Transaction costs | 13 | 749 | 3,849 | |||||||||||||||||
| Debt transaction costs | 395 | 1,528 | 220 | |||||||||||||||||
| Non-cash interest income | (531) | (113) | (1,042) | |||||||||||||||||
| Non-cash lease expense, net | 481 | 505 | 521 | |||||||||||||||||
| Casualty losses, net | 2,112 | 2,505 | 468 | |||||||||||||||||
Loss (income) related to non-controlling interests in consolidated joint ventures | 14,824 | (2,321) | 2,896 | |||||||||||||||||
| Adjustments related to non-controlling interests in consolidated joint ventures | (62,681) | (39,213) | (11,943) | |||||||||||||||||
Special allocation related to sale of joint venture asset(3) | — | (417) | — | |||||||||||||||||
Non-cash state taxes and other, net | 455 | — | — | |||||||||||||||||
Adjusted EBITDAre | $ | 189,964 | $ | 180,815 | $ | 90,495 | ||||||||||||||
(1) The total equity-based compensation expense for the years ended December 31, 2022 and 2021 includes $1.3 million and $2.9 million of incremental expense related to the modification of certain restricted stock awards as a result of the departure of our Chief Operating Officer and Executive Chairman, respectively.
(2) Executive transition costs are cash payments to our former Executive Chairman as a result of the non-renewal of his employment contract in December 2021.
(3) During the year ended December 31, 2022, we earned a $0.4 million promote related to the sale by the GIC Joint Venture of the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture. Our promote is earned when the internal rate of return to GIC related to capital transactions exceeds a specified investment hurdle rate. We have adjusted this amount from our calculation of AFFO because it relates to the gain on the sale of the property and not on-going operations.
During the year ended December 31, 2023, Adjusted EBITDAre increased $9.1 million from the prior year due to an improvement in our business that was primarily driven by improving demand for corporate transient and group travel and continued strength in leisure travel coupled with increases in our operating results due to acquisitions, partially offset by disposition activity.
For information about our Adjusted EBITDAre for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
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Liquidity and Capital Resources
Our short-term cash obligations consist primarily of operating expenses and other expenditures directly associated with our lodging properties, recurring maintenance and capital expenditures necessary to maintain our lodging properties in accordance with internal and brand standards, capital expenditures to improve our lodging properties, interest payments, settlement of any applicable interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, our joint venture acquisitions and capital requirements, contractual lease payments, corporate overhead, and distributions to our stockholders and holders of Common and Preferred Units in our Operating Partnership when declared. Our corporate overhead primarily consists of employee compensation expenses, professional fees, corporate insurance and rent expenses. Cash requirements for our corporate overhead expenses (excluding non-cash stock-based compensation), which are generally paid from operating cash flows, were $24.8 million, $22.3 million and $21.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. We generally expect our corporate overhead expenses to remain consistent with the level of our operating activities and market conditions for goods and services.
Our long-term cash obligations consist primarily of the costs of acquiring additional lodging properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our lodging properties, dividends and distributions to our stockholders and holders of Common and Preferred Units in our Operating Partnership when declared, and scheduled debt payments, including maturing loans.
In May 2023, the Company completed the disposition of four wholly-owned hotels containing an aggregate of 467 guestrooms for a gross sales price of $28.1 million.
In June 2023, the GIC Joint Venture acquired the Residence Inn by Marriott located in Scottsdale, AZ containing 120 guestrooms for a purchase price of approximately $29.0 million. GIC made a capital contribution of $13.7 million, or 49% of the purchase price, to the GIC Joint Venture, and the Operating Partnership made a capital contribution of $14.3 million, or 51% of the purchase price, to the GIC Joint Venture to fund the purchase price. The Operating Partnership made its capital contribution to the GIC Joint Venture with available cash on hand and borrowings on the $400 Million Revolver.
In June 2023, the GIC Joint Venture acquired the Nordic Lodge containing 47 guestrooms located in Steamboat Springs, CO for a purchase price of approximately $13.7 million. GIC made a capital contribution of $6.7 million, or 49% of the purchase price, to the GIC Joint Venture and the Operating Partnership made a capital contribution of $7.0 million, or 51% of the purchase price, to the GIC Joint Venture to fund the purchase price. The Operating Partnership made its capital contribution to the GIC Joint Venture with available cash on hand and borrowings on the $400 Million Revolver.
In December 2023, we completed the sale of the 123-guestroom Hyatt Place in Owings Mills (Baltimore), MD for a gross selling price of $8.3 million. The net selling price less costs to sell approximated the net book value of the lodging property on the sale date resulting in a nominal gain that was recorded in the fourth quarter of 2023.
During the first quarter of 2022, we completed the NCI Transaction for an aggregate purchase price of $822.0 million paid in the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 Preferred Units of limited partnership of the Operating Partnership newly designated as 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation Preference $25 Per Unit) (the “Series Z Preferred Units”), cash draws totaling $410.0 million from a term loan entered into by subsidiaries of the GIC Joint Venture, the assumption by a subsidiary of the GIC Joint Venture of approximately $6.5 million in PACE loan debt, $5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the GIC Joint Venture, and approximately $185.2 million cash contributed by GIC at closing. GIC also contributed to the GIC Joint Venture an additional $18.5 million in cash for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating Partnership as reimbursement for transaction costs paid by the Operating Partnership.
In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture.
Additionally, in June 2022, we exercised our purchase option to acquire a 90% equity interest in the AC/Element Hotel based on a gross hotel option exercise price of $89.0 million. The Brickell Joint Venture assumed $47.0 million of debt as part of the transaction.
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In October 2022, the Company entered into the Onera Joint Venture with the acquisition of a 90% equity interest in the Onera Joint Venture for $5.2 million in cash, plus additional contingent consideration of $1.8 million paid in September 2023. The Onera Joint Venture has a 100% fee simple interest in real property and improvements located in Fredericksburg, Texas consisting of an 11-unit glamping property and a 6.4-acre parcel of land.
In July 2023, we entered into the 2023 Senior Credit Facility to recast our prior senior credit facility, including certain key financial covenants, and renewal of our full access to our $400 Million Revolver. The 2023 Senior Credit Facility provides for fully extended maturities in June 2028. See “Part II - Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt,” for additional information concerning our prior senior credit facility and subsequent amendments thereto.
In September 2023, the GIC Joint Venture entered into a recast of the GIC Joint Venture Credit Facility (the "GIC Joint Venture Credit Recast"). The GIC Joint Venture Credit Recast extends the maturity of the $125 Million Revolver and the $75 Million Term Loan to an initial maturity date of September 2027, which may be extended for a single 12-month period at the option of the GIC Joint Venture, subject to certain conditions. As such, the GIC Joint Venture Credit Recast has a fully extended maturity date of September 2028.
To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to distribute a sufficient amount of our taxable income to maintain our status as a REIT and to avoid tax on undistributed income. Because we anticipate distributing a substantial amount of our available cash from operations, if sufficient funds are not available to us from lodging property dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business.
Outstanding Indebtedness
At December 31, 2023, we had no balance outstanding on our $400 Million Revolver, $200.0 million outstanding on our $200 Million Term Loan and $225.0 million outstanding on our 2018 Term Loan (as defined under "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 – Debt”). Each of the credit facilities is currently supported by the 52 lodging properties included in the credit facility borrowing base. We also had $287.5 million of Convertible Notes outstanding and $57.5 million of Secured Mortgage Indebtedness.
At December 31, 2023, the GIC Joint Venture had $200.0 million outstanding under our GIC Joint Venture Credit Facility, which included borrowings of a $75.0 million term loan and a $125.0 million revolving line of credit. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the equity interests in the subsidiaries that hold the 13 lodging property borrowing base assets, and the related TRS entities, which wholly own the TRS Lessees.
To complete the NCI Transaction, the GIC Joint Venture entered into the GIC Joint Venture Term Loan, which is secured by the 27 lodging properties and two parking garages acquired in the transaction and assumed a PACE loan totaling $6.5 million. The GIC Joint Venture Term Loan has an accordion feature which will permit an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan will mature in January 2026 and can be extended for a single 12-month period at the Company’s option, subject to certain conditions. As such, the GIC Joint Venture Term Loan has a fully extended maturity date of January 2027. The GIC Joint Venture Term Loan is interest-only and provides for a floating interest rate equal to SOFR plus 2.86%. In February 2023, we entered into an amendment to the GIC Joint Venture Term Loan to amend certain definitions, revise the minimum borrowing base interest coverage ratio thresholds and make certain other changes. The outstanding balance of the PACE loan is $6.1 million at December 31, 2023.
Additionally, the GIC Joint Venture has a mortgage loan outstanding totaling $12.8 million at December 31, 2023 related to the acquisition of the Embassy Suites in Tucson, AZ in December 2021.
In June 2022, the Brickell Joint Venture, as borrower, and the Operating Partnership, as the non-recourse guarantor, entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida to finance the dual-branded 264-guestroom AC/Element Hotel. The City National Bank Loan provides for an interest rate equal to one-month term SOFR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank Loan is prepayable at any time without penalty.
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In August 2022, we entered into agreements to fully defease three commercial mortgage-backed securities ("CMBS") mortgage loans totaling $54.9 million. In December 2022, we entered into an agreement to fully defease a fourth commercial mortgage-backed securities ("CMBS") mortgage loan totaling $32.3 million. To defease the CMBS mortgage loans, we were required to place into trust an amount sufficient to cover future principal and interest payments related to the loans. As a result, we are no longer obligated to make future interest payments of approximately $2.4 million between the defeasance dates and maturity dates. Finally, as part of the defeasances, $26.8 million of restricted cash reserves were returned to us.
At December 31, 2023, we have scheduled debt principal payments during the next 12 months totaling $16.9 million, when taking into consideration the refinancing of the Company's $225 Million Term Loan subsequent to year end.
Subsequent to year-end, the Company successfully completed a new $200 million senior unsecured term loan financing (the "2024 Term Loan") that refinanced and replaced the 2018 Term Loan. The 2024 Term Loan has an initial maturity date of February 2027 and can be extended for two 12-month periods at the Company’s option, subject to certain conditions, for a fully extended maturity date of February 2029.The 2024 Term Loan provides for interest rate pricing ranging from 135 basis points to 235 basis points over the applicable adjusted term SOFR or 35 basis points to 135 basis points over base rate, at the Company's option. Proceeds from the 2024 Term Loan financing and advances on our $400 Million Revolver were used to repay in full the Company’s $225 million 2018 Term Loan that was scheduled to mature in February 2025. In connection with the closing of the 2024 Term Loan, the collateral securing the Company’s 2023 Senior Credit Facility was released. As a result of the 2024 Term Loan financing, the Company has significantly reduced debt maturities until 2026 and has an average length to maturity of approximately 3.6 years. Other terms of the agreement are similar to the Company’s 2023 Senior Credit Facility.
Currently, we have the capacity to pay scheduled principal payments using cash on hand or draws under our $400 Million Revolver. We have obtained financing through debt instruments having staggered maturities and intend to continue to do so in the future. Our debt includes, and may include in the future, debt secured by first priority mortgage liens on certain lodging properties, debt secured by equity pledges, and unsecured debt. We believe that we will have adequate liquidity to meet the requirements for scheduled maturities and principal repayments. However, we can provide no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable terms.
At December 31, 2023, we and our GIC Joint Venture are in compliance with all of our loan agreements.
See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt" for additional information concerning our loans, loan amendments and our financing arrangements.
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A summary of our debt at December 31, 2023 is as follows (dollars in thousands):
| Lender | Interest Rate | Amortization Period (Years) | Initial Maturity Date | Fully Extended Maturity Date | Number of Properties Encumbered | |||||||||||||||||||||||||||||||||
| Principal Amount | ||||||||||||||||||||||||||||||||||||||
| 12/31/2023 | Outstanding | |||||||||||||||||||||||||||||||||||||
2023 Senior Credit Facility | ||||||||||||||||||||||||||||||||||||||
| Bank of America, NA | ||||||||||||||||||||||||||||||||||||||
$400 Million Revolver(1) | 7.41% Variable | n/a | 6/21/2027 | 6/21/2028 | n/a | $ | — | |||||||||||||||||||||||||||||||
$200 Million Term Loan(1) | 7.36% Variable | n/a | 6/21/2026 | 6/21/2028 | n/a | 200,000 | ||||||||||||||||||||||||||||||||
| Total Senior Credit and Term Loan Facility | 200,000 | |||||||||||||||||||||||||||||||||||||
| Term Loans | ||||||||||||||||||||||||||||||||||||||
KeyBank National Association Term Loan(1) (7) | 7.21% Variable | n/a | 2/14/2025 | 2/14/2025 | n/a | 225,000 | ||||||||||||||||||||||||||||||||
| Convertible Notes | 1.50% Fixed | n/a | 2/15/2026 | 2/15/2026 | n/a | 287,500 | ||||||||||||||||||||||||||||||||
| Secured Mortgage Indebtedness | ||||||||||||||||||||||||||||||||||||||
MetaBank(4) | 4.44% Fixed | 25 | 7/1/2027 | 7/1/2027 | 3 | 42,611 | ||||||||||||||||||||||||||||||||
Bank of the Cascades (First Interstate Bank)(4) | 7.33% Variable | 25 | 12/19/2024 | 12/19/2024 | 1 | 7,425 | ||||||||||||||||||||||||||||||||
Bank of the Cascades (First Interstate Bank)(4) | 4.30% Fixed | 25 | 12/19/2024 | 12/19/2024 | 7,425 | |||||||||||||||||||||||||||||||||
| Total Mortgage Loans | 4 | 57,461 | ||||||||||||||||||||||||||||||||||||
| 4 | 769,961 | |||||||||||||||||||||||||||||||||||||
| Brickell Joint Venture Mortgage Loan | ||||||||||||||||||||||||||||||||||||||
City National Bank of Florida(5) | 8.35% Variable | 25 | 6/9/2025 | 6/9/2025 | 2 | 47,000 | ||||||||||||||||||||||||||||||||
| GIC Joint Venture Credit Facility and Term Loans | ||||||||||||||||||||||||||||||||||||||
| Bank of America, N.A. | ||||||||||||||||||||||||||||||||||||||
$125 Million Revolver(2) | 7.61% Variable | n/a | 9/15/2027 | 9/15/2028 | n/a | 125,000 | ||||||||||||||||||||||||||||||||
$75 Million Term Loan(2) | 7.56% Variable | n/a | 9/15/2027 | 9/15/2028 | n/a | 75,000 | ||||||||||||||||||||||||||||||||
Bank of America, N.A.(3) | 8.22% Variable | n/a | 1/13/2026 | 1/13/2027 | n/a | 410,000 | ||||||||||||||||||||||||||||||||
Wells Fargo(5) | 4.99% Fixed | 30 | 6/6/2028 | 6/6/2028 | 1 | 12,785 | ||||||||||||||||||||||||||||||||
PACE loan(6) | 6.10% Fixed | 20 | 7/31/2040 | 7/31/2040 | 1 | 6,093 | ||||||||||||||||||||||||||||||||
| Total GIC Joint Venture Credit Facility and Term Loans | 2 | 628,878 | ||||||||||||||||||||||||||||||||||||
| Total Joint Venture Debt | 4 | 675,878 | ||||||||||||||||||||||||||||||||||||
| Total Debt | 8 | $ | 1,445,839 | |||||||||||||||||||||||||||||||||||
(1) The 2023 Senior Credit Facility and Term Loans are supported by a borrowing base of 52 unencumbered hotel properties.
(2) The $125 Million Revolver and the $75 Term Loan are secured by pledges of the equity in the entities (and affiliated entities) that own 13 lodging properties.
(3) The $410 million term loan with Bank of America, N.A. is secured by pledges of the equity in the entities (and affiliated entities) that own 27 lodging properties.
(4) The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.
(5) These loans are subject to mortgage debt and secured by the same collateral.
(6) As part of the NCI Transaction, a subsidiary of the GIC Joint Venture assumed a PACE loan of approximately $6.5 million. The loan bears fixed interest at 6.10%, has an amortization period of 20 years, and matures on July 31, 2040. The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender.
(7) In February 2024, we successfully closed the 2024 Term Loan. Proceeds from the 2024 Term Loan financing and advances on our $400 Million Revolver were used to repay in full this $225 million term loan that was scheduled to mature in February 2025. The 2024 Term Loan provides for a fully extended maturity date of February 2029. See "Part II - Item 8. - Financial Statement and Supplementary Information - Note 6 - Debt."
Capital Expenditures
During the year ended December 31, 2023, we funded $89.6 million of capital expenditures on a consolidated basis. When taking into consideration only our pro rata portion related to our joint ventures, capital expenditures for the year ended December 31, 2023 was $73.4 million.
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We anticipate spending an estimated $65.0 million to $85.0 million in capital expenditures across our portfolio (excluding the pro rata portion related to our joint venture partners) during the year ended December 31, 2024. We expect to fund these expenditures through a combination of cash on hand, working capital, cash flows from operations, restricted cash, borrowings under our $400 Million Revolver, or other potential sources of capital, to the extent available to us.
Cash Flow Analysis
The following table summarizes changes in cash flows for the years ended December 31, 2023 and December 31, 2022 (in thousands):
| For the Years Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | Change | ||||||||||||||||||
| Net cash provided by operating activities | $ | 153,641 | $ | 169,615 | $ | (15,974) | ||||||||||||||
| Net cash used in investing activities | (101,958) | (290,513) | 188,555 | |||||||||||||||||
| Net cash (used in) provided by financing activities | (65,723) | 85,762 | (151,485) | |||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (14,040) | $ | (35,136) | $ | 21,096 | ||||||||||||||
Changes from the year ended December 31, 2023 compared to the year ended December 31, 2022 were due to the following:
•Net cash provided by operating activities. Cash provided by operating activities for the year ended December 31, 2023 was the result of net income of $153.0 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a change in working capital of $0.7 million. Cash provided by operating activities for the year ended December 31, 2022 was the result of net income of $156.1 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a change in working capital of $13.5 million.
•Net cash used in investing activities. The decrease in cash used in investing activities for the year ended December 31, 2023 was primarily due to the net effect of property acquisitions and dispositions and capital expenditures related to lodging property renovations during each period. We closed the NCI Transaction in the first quarter of 2022 and the sale of the Hilton Garden Inn San Francisco Airport North in May 2022. Cash used in investing activities during the year ended December 31, 2023 primarily related to renovation capital during the period, the funding of the Onera Mezzanine Loan (see "Part II - Item 8. - Financial Statements and Supplementary Data - Note 3 - Investments in Lodging Property, net"), and the acquisitions during the year ended December 31, 2023 of the Residence Inn by Marriott in Scottsdale, AZ and the Nordic Lodge in Steamboat, CO, partially offset by the sale of a portfolio of four lodging properties in May 2023 and the sale of Hyatt Place in Baltimore (Owings Mills), MD in December 2023.
•Net cash (used in) provided by financing activities. Cash used in financing activities for the year ended December 31, 2023 was primarily related to the net decrease in debt principal payments of $17.3 million, the payment of dividends and distributions of approximately $45.8 million and financing costs of approximately $10.3 million related to the closing of our 2023 Senior Credit Facility and the recast of our $200 Million GIC Joint Venture Credit Facility, partially offset by contributions by our GIC Joint Venture partner of $20.4 million.
Cash provided by financing activities during the year ended December 31, 2022 was primarily the result of contributions from our joint venture partners of $204.1 million for the NCI Transaction and the Brickell Transaction, borrowings of $410.0 million under the GIC Joint Venture Term Loan for the NCI Transaction, offset by debt repayments, including the repayment of $328.7 million of debt assumed as part of the NCI Transaction, the repayment of a $62.0 million term loan in May 2022, debt defeasances of $87.3 million and distributions to our joint venture partner of $80.4 million during the year ended December 31, 2022.
For information about our consolidated cash flows for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management's Discussion and Analysis of Financial Conditions and Results of Operations – Cash Flow Analysis" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
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Critical Accounting Estimates
We consider the following policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and evaluating our reported consolidated financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements.
Asset Impairment
Each quarter, we evaluate the net carrying amounts of our long-term assets for impairment when impairment indicators are present. We evaluate for impairment triggers based on qualitative factors such as macroeconomic trends, trends related to demand for travel and lodging, and current and projected trends related to local market conditions. We also evaluate for impairment triggers based on quantitative factors such as historical and projected revenue and profitability performance trends. When an impairment indicator is identified, we perform a recoverability analysis based on estimated future undiscounted cash flows for the asset. Forecasted undiscounted cash flows require substantial management judgment related to estimates of future revenues, which is based on historical results, our expectations related to revenue trends and future performance of the asset, our assessment of current and future market conditions and competition, our expectations related to performance of the overall economy, and third-party industry published forecasts. If we determine that an asset impairment exists, we will estimate the fair value of the asset and record a loss on impairment to record the asset at the lower of cost or fair value.
Purchase Price Allocation
Our acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment, inventory, and assumed debt. We allocate the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. We estimate the fair values of the assets acquired and the liabilities assumed by using a combination of the market, cost and income approaches. We determine the fair value by using market data and independent appraisals available to us and by making numerous estimates and assumptions, such as estimates of future income growth, replacement cost per unit, value per acre or buildable square foot, capitalization rates, discount rates, borrowing rates, market rental rates, capital expenditures and cash flow projections at the respective hotel properties. The determination of fair value is subjective and is based in part on assumptions and estimates that could differ materially from actual results in future periods.
Critical Accounting Policies and New Accounting Standards
See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 2 – Basis of Presentation and Significant Accounting Policies."
Recent Developments
None
60
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business strategies, the primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is to SOFR. We primarily use derivative financial instruments to manage interest rate risk.
At December 31, 2023 and 2022, we were party to six interest rate derivative agreements pursuant to which we receive variable-rate payments in exchange for making fixed-rate payments (dollars in thousands):
| Average Annual Effective Fixed Rate | Notional Amount | |||||||||||||||||||||||||||||||
| Contract date | Effective Date | Expiration Date | December 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
| Operating Partnership | ||||||||||||||||||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | 1.96% | $ | — | $ | 100,000 | |||||||||||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | 1.98% | — | 100,000 | |||||||||||||||||||||||||||
| June 11, 2018 | September 28, 2018 | September 30, 2024 | 2.86% | 75,000 | 75,000 | |||||||||||||||||||||||||||
| June 11, 2018 | December 31, 2018 | December 31, 2025 | 2.92% | 125,000 | 125,000 | |||||||||||||||||||||||||||
| July 26, 2022 | January 31, 2023 | January 31, 2027 | 2.60% | 100,000 | 100,000 | |||||||||||||||||||||||||||
| July 26, 2022 | January 31, 2023 | January 31, 2029 | 2.56% | 100,000 | 100,000 | |||||||||||||||||||||||||||
| Total Operating Partnership | 400,000 | 600,000 | ||||||||||||||||||||||||||||||
| GIC Joint Venture | ||||||||||||||||||||||||||||||||
| March 24, 2023 | July 1, 2023 | January 13, 2026 | 3.35% | 100,000 | — | |||||||||||||||||||||||||||
| March 24, 2023 | July 1, 2023 | January 13, 2026 | 3.35% | 100,000 | — | |||||||||||||||||||||||||||
| Total GIC Joint Venture | 200,000 | — | ||||||||||||||||||||||||||||||
| $ | 600,000 | $ | 600,000 | |||||||||||||||||||||||||||||
At December 31, 2023, after giving effect to our interest rate derivative agreements in effect as of that date, $956.4 million, or 66%, of our debt had fixed interest rates and $489.4 million, or 34%, had variable interest rates. At December 31, 2023, debt related to our wholly-owned properties coupled with our pro rata share of joint venture debt results in a fixed-rate debt ratio of approximately 75% of our total pro rata indebtedness when including the effect of interest rate swaps effective as of that date.
At December 31, 2022, after giving effect to our interest rate derivative agreements, $758.4 million, or 51.8%, of our debt had fixed interest rates and $704.7 million, or 48.2%, had variable interest rates. At December 31, 2022, debt related to our wholly-owned properties coupled with our pro rata share of joint venture debt results in a fixed-rate debt ratio of approximately 65% of our total pro rata indebtedness when including the effect of interest rate swaps effective as of that date.
As our fixed-rate debts mature, they will become subject to interest rate risk. We currently have scheduled payments of principal on debt during the year ended December 31, 2024 totaling approximately $16.9 million.
In January 2024, subsidiaries of the GIC Joint Venture that are borrowers under the GIC Joint Venture Term Loan entered into a $100.0 million interest rate swap to fix one-month term SOFR until January 2026. The interest rate swap has an effective date of October 1, 2024 and a termination date of January 13, 2026. Pursuant to the interest rate swap, we will pay a fixed rate of 3.765% and receive the one-month term SOFR floating rate index.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data required by this item are included on pages F-1 through F-55 of this Annual Report on Form 10-K and are incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
61
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2023. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Management’s Report on the Effectiveness of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of our Chief Executive Officer and our Chief Financial Officer, and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP and that our receipts and our expenditures are being made only in accordance with authorizations of our management and our Board; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of this Annual Report on Form 10-K, our management, under the supervision of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework (2013) established by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, our management concluded that we had effective internal control over financial reporting as of December 31, 2023.
Ernst & Young LLP, our independent registered public accounting firm, has issued an auditor’s attestation report on our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2023. This report is included in "Part II – Item 8. – Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no material changes in our internal control over financial reporting during the year ended December 31, 2023.
Item 9B. Other Information.
During the year ended December 31, 2023, there were no adoptions terminations
62
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
63
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to our Definitive Proxy Statement on Schedule 14A (the “2024 Proxy Statement”) for the 2024 Annual Meeting of Stockholders.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to our 2024 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2023 with respect to our securities that may be issued under existing equity compensation plans:
| Plan Category | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |||||||
Equity Compensation Plans Approved by Summit Hotel Properties, Inc. Stockholders (1) | 2,002,788 | |||||||
| Total | 2,002,788 | |||||||
(1) As described in the Summit Hotel Properties, Inc. 2011 Equity Incentive Plan (See "Part II – Item 8. – Financial Statements and Supplementary Data –
Note 13 - Equity-based Compensation").
The following table represents common shares retained by the Company for employee taxes due upon vesting of equity awards during the year ended December 31, 2023:
| Period | Total Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
| March 1, 2023 - March 31, 2023 | 168,083 | $ | 7.63 | — | — | |||||||||||||||||||||
| May 1, 2023 - May 31, 2023 | 12,547 | $ | 6.84 | — | — | |||||||||||||||||||||
| June 1, 2023 - June 30, 2023 | 150 | $ | 6.96 | — | — | |||||||||||||||||||||
| August 1, 2023 - August 31, 2023 | 3,249 | $ | 5.80 | — | — | |||||||||||||||||||||
| Total | 184,029 | — | ||||||||||||||||||||||||
The other information required by this item is incorporated by reference to our 2024 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference to our 2024 Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item regarding our principal accountant, Ernst & Young LLP (PCAOB ID No. 42 ), is incorporated by reference to our 2024 Proxy Statement.
64
PART IV
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements:
Included herein at pages F-1 through F-50
2. Financial Statement Schedules:
Schedule III — Real Estate and Accumulated Depreciation
All schedules for which provision is made in Regulation S-X are either not required to be included herein pursuant to the related instructions or are inapplicable or the related information is included in the footnotes to the applicable consolidated financial statement.
3. Exhibits:
The following exhibits are filed as part of this report:
65
EXHIBITS
| Exhibit Number | Description of Exhibit | ||||||||||
66
67
68
69
101.INS(1) | XBRL Instance Document | ||||||||||
101.SCH(1) | XBRL Taxonomy Extension Schema Document | ||||||||||
101.CAL(1) | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
101.DEF(1) | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
101.LAB(1) | XBRL Taxonomy Extension Labels Linkbase Document | ||||||||||
101.PRE(1) | XBRL Taxonomy Presentation Linkbase Document | ||||||||||
104(1) | The cover page for Summit Hotel Properties, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2023 (formatted in Inline XBRL and contained in Exhibit 101). | ||||||||||
* Management contract or compensatory plan or arrangement.
† Filed herewith
(1) Submitted electronically herewith
Item 16. Form 10-K Summary.
None.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUMMIT HOTEL PROPERTIES, INC. (registrant) | ||||||||
| Date: February 28, 2024 | By: | /s/ Jonathan P. Stanner | ||||||
| Jonathan P. Stanner | ||||||||
| President, Chief Executive Officer and Director | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Jeffrey W. Jones | Chairman of the Board of Directors | February 28, 2024 | ||||||||||||
| Jeffrey W. Jones | ||||||||||||||
| /s/ Jonathan P. Stanner | President, Chief Executive Officer and Director | February 28, 2024 | ||||||||||||
| Jonathan P. Stanner | (principal executive officer) | |||||||||||||
| /s/ William H. Conkling | Executive Vice President and Chief Financial Officer | February 28, 2024 | ||||||||||||
| William H. Conkling | (principal financial officer) | |||||||||||||
| /s/ Paul Ruiz | Senior Vice President and Chief Accounting Officer | February 28, 2024 | ||||||||||||
| Paul Ruiz | (principal accounting officer) | |||||||||||||
| /s/ Bjorn R. L. Hanson | Director | February 28, 2024 | ||||||||||||
| Bjorn R. L. Hanson | ||||||||||||||
| /s/ Kenneth J. Kay | Director | February 28, 2024 | ||||||||||||
| Kenneth J. Kay | ||||||||||||||
| /s/ Mehulkumar B. Patel | Director | February 28, 2024 | ||||||||||||
| Mehulkumar B. Patel | ||||||||||||||
| /s/ Amina Belouizdad Porter | Director | February 28, 2024 | ||||||||||||
| Amina Belouizdad Porter | ||||||||||||||
| /s/ Thomas W. Storey | Director | February 28, 2024 | ||||||||||||
| Thomas W. Storey | ||||||||||||||
| /s/ Hope S. Taitz | Director | February 28, 2024 | ||||||||||||
| Hope S. Taitz | ||||||||||||||
71
SUMMIT HOTEL PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
| Page | |||||
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 42) | |||||
Consolidated Balance Sheets at December 31, 2023 and 2022 | |||||
Consolidated Statements of Operations for the years ended December 31, 2023, 2022 and 2021 | |||||
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2023, 2022 and 2021 | |||||
for the years ended December 31, 2023, 2022 and 2021 | |||||
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021 | |||||
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Summit Hotel Properties, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Summit Hotel Properties, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in equity and redeemable non-controlling interests, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
F-2
| Hotel Property Acquisitions | |||||
| Description of the Matter | Investments in lodging property, net totaled $2.8 billion at December 31, 2023. As explained in Note 2 of the consolidated financial statements, the Company monitors events and changes in circumstances for indicators that the carrying value of a lodging property or undeveloped land may be impaired. When such indicators are identified, the Company prepares an estimate of undiscounted future cash flows of the specific property and determine if the carrying amount of the asset is recoverable. If carrying amount of the asset is not recoverable, the Company estimates the fair value of the property, and an adjustment is made to reduce the carrying value of the property to its estimated fair value. Auditing the Company's impairment assessment for its investments in lodging property was challenging because it involved a high degree of subjectivity in applying audit procedures and evaluating the factors the Company considered in its identification of impairment indicators. | ||||
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s lodging property impairment evaluation process. For example, we tested controls over management’s evaluation of the factors used in identifying potential impairment indicators. To test the Company’s evaluation of the factors used in identifying potential impairment indicators, we performed procedures that included, among others, testing management’s assessment of the lodging properties’ performance relative to historical or anticipated operating results in addition to testing whether there were significant changes in the lodging properties’ estimated holding periods. For example, we compared and assessed the lodging properties’ historical operating results to the current market information using both internally and externally available information. We also made inquiries of management to confirm the lodging properties’ holding periods in addition to inspecting other information such as the minutes to the Company’s operational meetings and the meetings of the Board of Directors to either confirm or contradict management’s responses. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
February 28, 2024
F-3
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Summit Hotel Properties, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Summit Hotel Properties, Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Summit Hotel Properties, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in equity and redeemable non-controlling interests and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15 and our report dated February 28, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on the Effectiveness of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Austin, Texas
February 28, 2024
F-4
Summit Hotel Properties, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
| December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| ASSETS | ||||||||||||||
| Investments in lodging property, net | $ | $ | ||||||||||||
| Investment in hotel properties under development | ||||||||||||||
| Assets held for sale, net | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Restricted cash | ||||||||||||||
| Right-of-use assets, net | ||||||||||||||
| Trade receivables, net | ||||||||||||||
| Prepaid expenses and other | ||||||||||||||
| Deferred charges, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY | ||||||||||||||
| Liabilities: | ||||||||||||||
| Debt, net of debt issuance costs | $ | $ | ||||||||||||
| Lease liabilities, net | ||||||||||||||
| Accounts payable | ||||||||||||||
| Accrued expenses and other | ||||||||||||||
| Total liabilities | ||||||||||||||
Commitments and contingencies (Note 12) | ||||||||||||||
| Redeemable non-controlling interests | ||||||||||||||
| Equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
Accumulated other comprehensive income | ||||||||||||||
| Accumulated deficit and distributions in excess of retained earnings | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Non-controlling interests | ||||||||||||||
| Total equity | ||||||||||||||
| Total liabilities, redeemable non-controlling interests and equity | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements
F-5
Summit Hotel Properties, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Room | $ | $ | $ | |||||||||||||||||
| Food and beverage | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total revenues | ||||||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Room | ||||||||||||||||||||
| Food and beverage | ||||||||||||||||||||
| Other lodging property operating expenses | ||||||||||||||||||||
| Property taxes, insurance and other | ||||||||||||||||||||
| Management fees | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Corporate general and administrative | ||||||||||||||||||||
| Transaction costs | ||||||||||||||||||||
| Loss on write-down of assets | ||||||||||||||||||||
Recoveries of credit losses | ( | ( | ( | |||||||||||||||||
| Total expenses | ||||||||||||||||||||
(Loss) gain on disposal of assets, net | ( | |||||||||||||||||||
| Operating income (loss) | ( | |||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | ( | ( | ( | |||||||||||||||||
| Interest income | ||||||||||||||||||||
Other income, net | ||||||||||||||||||||
| Total other expense, net | ( | ( | ( | |||||||||||||||||
| (Loss) income from continuing operations before income taxes | ( | ( | ||||||||||||||||||
| Income tax expense (Note 15) | ( | ( | ( | |||||||||||||||||
Net (loss) income | ( | ( | ||||||||||||||||||
| Less - Loss attributable to non-controlling interests | ||||||||||||||||||||
| Net (loss) income attributable to Summit Hotel Properties, Inc. before preferred dividends and distributions | ( | ( | ||||||||||||||||||
| Less - Distributions to and accretion of redeemable non-controlling interests | ( | ( | ||||||||||||||||||
| Less - Preferred dividends | ( | ( | ( | |||||||||||||||||
| Premium on redemption of preferred stock | ( | |||||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Loss per share: | ||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||||||||||
| Dividends per common share | $ | $ | $ | |||||||||||||||||
See Notes to Consolidated Financial Statements
F-6
Summit Hotel Properties, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | |||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Changes in fair value of derivative financial instruments | ( | |||||||||||||||||||
Comprehensive (loss) income | ( | ( | ||||||||||||||||||
Comprehensive loss (income) attributable to non-controlling interests | ( | |||||||||||||||||||
Comprehensive (loss) income attributable to Summit Hotel Properties, Inc. | ( | ( | ||||||||||||||||||
| Distributions to and accretion on redeemable non-controlling interests | ( | ( | ||||||||||||||||||
Preferred dividends and distributions | ( | ( | ( | |||||||||||||||||
| Premium on redemption of preferred stock | ( | |||||||||||||||||||
Comprehensive (loss) income attributable to common stockholders | $ | ( | $ | $ | ( | |||||||||||||||
See Notes to Consolidated Financial Statements
F-7
Summit Hotel Properties, Inc.
Consolidated Statements of Changes in Equity and Redeemable Non-controlling Interests
For the Years Ended December 31, 2023, 2022 and 2021
(in thousands, except share amounts)
| Redeemable Non-controlling Interests | Shares of Preferred Stock | Preferred Stock | Shares of Common Stock | Common Stock | Additional Paid-In Capital | Accumulated Comprehensive Income /(Loss) | Accumulated Deficit and Distributions | Stockholders’ Equity | Non-Controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net proceeds from sale of preferred stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of preferred shares | — | ( | ( | — | — | ( | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases of capped call options | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions by non-controlling interest in joint venture | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock redemption of common units | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends and distributions | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividends and distributions | — | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock acquired for employee withholding requirements | — | — | — | ( | ( | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable non-controlling interests in operating partnership issued for the acquisition of a portfolio of lodging properties | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of redeemable non-controlling interests to redemption value | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interests in operating partnership issued for the acquisition of a portfolio of lodging properties | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of non-controlling interests in joint venture | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions by non-controlling interest in joint venture | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock redemption of common units | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends and distributions | — | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividends and distributions | ( | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Joint venture partner distributions | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock acquired for employee withholding requirements | — | — | — | ( | ( | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ( | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| See Notes to Consolidated Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
F-8
Summit Hotel Properties, Inc.
Consolidated Statements of Changes in Equity and Redeemable Non-controlling Interests
For the Years Ended December 31, 2023, 2022 and 2021
(in thousands, except share amounts)
| Redeemable Non-controlling Interests | Shares of Preferred Stock | Preferred Stock | Shares of Common Stock | Common Stock | Additional Paid-In Capital | Accumulated Comprehensive Income /(Loss) | Accumulated Deficit and Distributions | Stockholders’ Equity | Non-Controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of redeemable non-controlling interests to redemption value | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of non-controlling interests in joint venture | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of preferring non-controlling interests | — | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions by non-controlling interest in joint venture | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock redemption of common units | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common dividends and distributions | — | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred dividends and distributions | ( | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Joint venture partner distributions | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock acquired for employee withholding requirements | — | — | — | ( | ( | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ( | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements
F-9
Summit Hotel Properties, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | ( | |||||||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Amortization of debt issuance costs | ||||||||||||||||||||
Loss on write-down of assets | ||||||||||||||||||||
Recoveries of credit losses | ( | ( | ( | |||||||||||||||||
| Equity-based compensation | ||||||||||||||||||||
| Deferred tax asset, net | ( | ( | ||||||||||||||||||
| (Gain) loss on disposal of assets, net | ( | ( | ||||||||||||||||||
| Non-cash interest income | ( | ( | ( | |||||||||||||||||
| Debt transaction costs | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Trade receivables, net | ( | ( | ( | |||||||||||||||||
| Prepaid expenses and other | ( | ( | ||||||||||||||||||
| Accounts payable | ( | ( | ||||||||||||||||||
| Accrued expenses and other | ||||||||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||||||||||||||
| INVESTING ACTIVITIES: | ||||||||||||||||||||
| Acquisitions of real estate property | ( | ( | ( | |||||||||||||||||
| Improvements to lodging properties | ( | ( | ( | |||||||||||||||||
| Investment in hotel properties under development | ( | |||||||||||||||||||
| Proceeds from asset dispositions, net | ||||||||||||||||||||
| Funding of real estate loans and related expenses | ( | ( | ( | |||||||||||||||||
| Proceeds from principal payments on real estate loans | ||||||||||||||||||||
| Escrow deposits and deferred acquisition costs | ( | |||||||||||||||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ( | ( | |||||||||||||||||
| FINANCING ACTIVITIES: | ||||||||||||||||||||
Proceeds from borrowings on revolving line of credit | ||||||||||||||||||||
Repayments of line of credit borrowings | ( | ( | ( | |||||||||||||||||
| Principal payments on debt | ( | ( | ( | |||||||||||||||||
| Proceeds from the sale of non-controlling interests | ||||||||||||||||||||
| Proceeds from equity offerings, net of issuance costs | ||||||||||||||||||||
| Redemption of preferred stock | ( | ( | ||||||||||||||||||
| Purchases of capped call options | ( | |||||||||||||||||||
| Common dividends paid | ( | ( | ||||||||||||||||||
| Preferred dividends and distributions paid | ( | ( | ( | |||||||||||||||||
| Proceeds from contributions by non-controlling interests in joint venture | ||||||||||||||||||||
| Distributions to joint venture partner | ( | ( | ||||||||||||||||||
| Financing fees, debt transactions costs and other issuance costs | ( | ( | ( | |||||||||||||||||
| Repurchase of common stock for tax withholding requirements | ( | ( | ( | |||||||||||||||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | |||||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ( | ||||||||||||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ||||||||||||||||||||
| Beginning of period | ||||||||||||||||||||
| End of period | $ | $ | $ | |||||||||||||||||
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH WITHIN THE CONSOLIDATED BALANCE SHEET TO THE AMOUNTS SHOWN IN THE STATEMENT OF CASH FLOWS ABOVE: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Restricted cash | ||||||||||||||||||||
| TOTAL CASH, CASH EQUIVALENTS AND RESTRICTED CASH | $ | $ | $ | |||||||||||||||||
See Notes to Consolidated Financial Statements
F-10
SUMMIT HOTEL PROPERTIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 –– DESCRIPTION OF BUSINESS
General
Summit Hotel Properties, Inc. (the “Company”) is a self-managed lodging property investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
We focus on owning lodging properties with efficient operating models that generate strong margins and investment returns. At December 31, 2023, our portfolio consisted of 100 lodging properties with a total of 14,912 guestrooms located in 24 states. At December 31, 2023, we own 100 % of the outstanding equity interests in 56 of 100 of our lodging properties. We own a 51 % controlling interest in 41 hotels through a joint venture with USFI G-Peak Pte. Ltd. ("GIC"), a private limited company incorporated in the Republic of Singapore (the "GIC Joint Venture"), and two 90 % equity interests in separate joint ventures (the "Brickell Joint Venture" and the "Onera Joint Venture"). The Brickell Joint Venture owns two lodging properties, and the Onera Joint Venture owns one lodging property.
As of December 31, 2023, 86 % of our guestrooms were located in the top 50 metropolitan statistical areas (“MSAs”), 90 % were located within the top 100 MSAs and over 99% of our guestrooms operated under premium franchise brands owned by Marriott® International, Inc. (“Marriott”), Hilton® Worldwide (“Hilton”), Hyatt® Hotels Corporation (“Hyatt”), and InterContinental® Hotels Group (“IHG”).
NOTE 2 –– BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepare our Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenues and expenses in the reporting period. Actual results could differ from those estimates.
The accompanying Consolidated Financial Statements consolidate the accounts of all entities in which we have a controlling financial interest, as well as variable interest entities, if any, for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.
We evaluate joint venture partnerships to determine if they should be consolidated based on whether the partners exercise joint control. For a joint venture where we exercise primary control and we also own a majority of the equity interests, we consolidate the joint venture partnership. We have consolidated the accounts of all of our joint ventures in our Consolidated Financial Statements.
Segment Disclosure
Accounting Standards Codification (“ASC”) No. 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable operating segment for activities related to investing in real estate; thus, all required financial segment information is included in the Consolidated Financial Statements. An operating segment is defined as the component of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in order to allocate resources and assess performance. Our investments in real estate are geographically diversified and the chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the individual lodging property level. However, because each of our lodging properties have similar economic characteristics, facilities, and services, the lodging properties have been aggregated into a single operating segment.
F-11
Acquisitions of Lodging Property
Investments in Lodging Property, net
The Company allocates the purchase price of acquired lodging properties based on the relative fair values of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Intangible assets may include certain value associated with the on-going operations of the lodging business being acquired as part of the property acquisition. Acquired intangible assets that derive their values from real property, or an interest in real property, are inseparable from that real property or interest in real property, do not produce or contribute to the production of income other than consideration for the use or occupancy of space, and are recorded as a component of the related real estate asset in our Consolidated Financial Statements. We allocate the purchase price of acquired lodging properties to land, building and furniture, fixtures and equipment based on independent third-party appraisals.
Our lodging properties and related assets are recorded at cost, less accumulated depreciation. We capitalize development costs and the costs of significant additions and improvements that materially upgrade, increase the value or extend the useful life of the property. These costs may include development, refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. If an asset requires a period of time in which to carry out the activities necessary to bring it to the condition necessary for its intended use, the interest cost incurred during that period as a result of expenditures for the asset is capitalized as part of the cost of the asset. We expense the cost of repairs and maintenance as incurred.
We generally depreciate our lodging properties and related assets using the straight-line method over their estimated useful lives as follows:
| Classification | Estimated Useful Lives | |||||||
| Buildings and improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
We periodically re-evaluate asset lives based on current assessments of remaining utilization, which may result in changes in estimated useful lives. Such changes are accounted for prospectively and will increase or decrease future depreciation expense.
When depreciable property and equipment is retired or disposed, the related costs and accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in current operations.
On a limited basis, we provide financing to developers of lodging properties for development projects. We evaluate these arrangements to determine if we participate in residual profits of the lodging property through the loan provisions or other agreements. Where we conclude that these arrangements are more appropriately treated as an investment in the real property, we reflect the loan in Investments in lodging property, net in our Consolidated Balance Sheets.
F-12
Intangible Assets
Assets Held for Sale
We periodically review our lodging properties and our undeveloped land based on established criteria such as age, type of franchise, adverse economic and competitive conditions, and strategic fit to identify properties that we believe are either non-strategic or no longer complement our business. Based on our review, we periodically market properties for sale that no longer meet our investment criteria. We also periodically receive unsolicited external inquiries that result in the sale of lodging properties.
We classify assets as Assets held for sale in the period in which certain criteria are met, including when the sale of the asset within one year is probable. Assets classified as Assets held for sale are no longer depreciated and are carried at the lower of carrying amount or fair value less estimated selling costs. We record a write-down on our Consolidated Statement of Operations when the carrying amounts of assets held for sale exceed their fair values less estimated selling costs.
Variable Interest Entities
We consolidate variable interest entities (each a “VIE”) if we determine that we are the primary beneficiary of the entity. When evaluating the accounting for a VIE, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance relative to other economic interest holders. We determine our rights, if any, to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE by considering the economic interest in the entity, regardless of form, which may include debt, equity, management and servicing fees, or other contractual arrangements. We consider other relevant factors including each entity’s capital structure, contractual rights to earnings or obligations for losses, subordination of our interests relative to those of other investors, contingent payments, and other contractual arrangements that may be economically significant.
F-13
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may exceed the federally insured limit. We maintain our cash with high credit quality financial institutions.
Restricted Cash
Restricted cash generally consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
Trade Receivables and Credit Policies
Leases
In accordance with Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), we record the financial liability and right-of-use assets that are inherent to leasing an asset on our Consolidated Balance Sheets for all leases with a term of greater than 12 months regardless of their classification.
Several of our lodging properties lease retail or restaurant space to third-party tenants. The majority of our third-party tenants requested rent deferrals to ease the negative financial effects of the COVID-19 pandemic (the "Pandemic") on their businesses. We have primarily negotiated rent deferrals with these tenants that defer rent for a specified number of months and require repayment of the deferred rent over a negotiated period of time. We have adopted a policy that the deferrals are not a change in the provisions of the lease. As such, we are accounting for the concessions using the rights and obligations of the existing leases and recognize short-term lease receivables in the period that the cash payment is owed.
Notes Receivables
We selectively provide mezzanine financing to developers, where we also have the opportunity to acquire the lodging property at or after the completion of the development project, and we also may provide seller financing in connection with a lodging property disposition under limited circumstances. We classify notes receivable as held-to-maturity and carry the notes receivable at cost less the unamortized discount, if any. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We routinely evaluate our notes receivable and interest receivables for collectability. Probable losses on notes receivable are recognized in a valuation account that is deducted from the amortized cost basis of the notes receivable and recorded as Provision for credit losses in our Consolidated Statements of Operations. When we place notes receivable on non-accrual status, we suspend the recognition of interest income until cash interest payments are received. Generally, we return notes receivable to accrual status when all delinquent interest becomes current and collectability of interest is reasonably assured. We do not measure an allowance for credit losses for accrued interest receivable. Accrued interest receivable is written-off to bad debt expense when collection is not reasonably assured.
Deferred Charges, net
Initial franchise fees are capitalized and amortized over the term of the franchise agreement using the straight-line method.
F-14
Deferred Financing Fees
Non-controlling Interests
Non-controlling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Non-controlling interests are reported in the Consolidated Balance Sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income attributable to both the Company and the non-controlling interests are reported in the Consolidated Statements of Operations.
Our Consolidated Financial Statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties and third-party ownership of our consolidated joint ventures.
Redeemable Non-controlling Interests
Redeemable non-controlling interests represent redeemable preferred units issued by our Operating Partnership ("Redeemable Preferred Units") in connection with the NCI Transaction (see "Note 3 - Investments in Lodging Property, net" for additional information). The Redeemable Preferred Units are presented as temporary equity related to our Operating Partnership on our Consolidated Balance Sheets under the caption of "Redeemable Non-controlling Interests ("see "Note 9 - Equity" for further information). We record Redeemable non-controlling interests at fair value on the issuance date of the securities. When the carrying value (the acquisition date fair value adjusted for the non-controlling interest’s share of net income (loss) and dividends) is less than the redemption value, we adjust the redeemable non-controlling interest to equal the redemption value with changes recognized as an adjustment to Accumulated deficit and distributions in excess of retained earnings. Any such adjustment, when necessary, is recorded as of the applicable Consolidated Balance Sheet date.
Revenue Recognition
Revenues from the operation of our lodging properties are recognized when guestrooms are occupied, services have been rendered or fees have been earned. Revenues are recorded net of any discounts and sales and other taxes collected from customers. Revenues consist of room sales, food and beverage sales, and other lodging property revenues and are presented on a disaggregated basis on our Consolidated Statements of Operations.
Room revenue is generated through short-term contracts with customers whereby customers agree to pay a daily rate for the right to occupy lodging rooms for one or more nights. Our performance obligations are fulfilled at the end of each night that the customers have the right to occupy the rooms. Room revenues are recognized daily at the contracted room rate in effect for each room night.
Food and beverage revenues are generated when customers purchase food and beverage at a lodging property's restaurant, bar or other facilities. Our performance obligations are fulfilled at the time that food and beverage is purchased and provided to our customers.
Other revenues such as for parking, cancellation fees, meeting space or telephone services are recognized at the point in time or over the time period that the associated good or service is provided. Ancillary services such as parking at certain lodging properties are provided by third parties and we assess whether we are the principal or agent in such arrangements. If we are determined to be the agent, revenue is recognized based upon the commission paid to us by the third-party for the services rendered to our customers. If we are determined to be the principal, revenues are recognized based upon the gross contract price of the service provided. Certain of our lodging properties have retail spaces, restaurants or other spaces that we lease to third parties. Lease revenues are recognized on a straight line basis over the respective lease terms and are included in Other income on our Consolidated Statements of Operations.
Cash received prior to customer arrival is recorded as an advance deposit from the customer and is recognized as revenue at the time of occupancy.
F-15
Sales and Other Taxes
We have operations in states and municipalities that impose sales or other taxes on certain sales. We collect these taxes from our customers and remit the entire amount to the various governmental units. The taxes collected and remitted are excluded from revenues and are included in accrued expenses until remitted.
Equity-Based Compensation
Our 2011 Equity Incentive Plan, which was amended and restated effective May 13, 2021 (as amended, the “Equity Plan”), provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other stock-based awards. We account for time-based and performance-based stock awards using the grant date fair value of those equity awards. We have elected to account for forfeitures as they occur. Restricted stock awards with performance-based vesting conditions are market-based awards tied to total stockholder return and are valued using a Monte Carlo simulation model in accordance with ASC No. 718, Compensation — Stock Compensation. We expense the fair value of awards under the Equity Plan ratably over the vesting period and market-based awards are not adjusted for performance. The amount of stock-based compensation expense may be subject to adjustment in future periods due to forfeitures or modification of previously granted awards.
Derivative Financial Instruments and Hedging
All derivative financial instruments are recorded at fair value in our Consolidated Balance Sheets. We use interest rate derivatives to hedge our risks on variable-rate debt. Interest rate derivatives could include interest rate swaps, caps and collars. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction. The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts in Other comprehensive income will be reclassified to Interest expense in our Consolidated Statements of Operations in the period in which the hedged item affects earnings.
We have adopted ASC No. 848, Rate Reference Reform, at December 31, 2022. Under ASC No. 848 we have elected to not reassess a previous accounting determination related to our derivative financial instruments. We have also made elections to not de-designate the hedging relationships with the change in critical terms. Finally, we made elections to not de-designate the hedging relationships due to changes in hedged instruments, hedged items or future forecasted hedged transactions.
Income Taxes
We have elected to be taxed as a REIT under sections 856 through 859 of the IRC. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRS Lessees at regular corporate income tax rates) to the extent we distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we qualify for certain relief provisions.
Substantially all of our assets are held by, and all of our operations are conducted through, our Operating Partnership or our subsidiary REITs. Partnerships are not subject to U.S. federal income taxes as revenues and expenses pass through to and are taxed on the owners. Generally, the states and cities where partnerships operate follow the U.S. federal income tax treatment. However, there are a limited number of local and state jurisdictions that tax the taxable income of the Operating Partnership. Accordingly, we provide for income taxes in these jurisdictions for the Operating Partnership.
Taxable income related to our TRSs are subject to federal, state and local income taxes at applicable tax rates. Our consolidated income tax provision includes the income tax provision related to the operations of the TRSs as well as state and local income taxes related to the Operating Partnership.
F-16
Where required, we account for federal and state income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for: i) the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and the respective carrying amounts for tax purposes, and ii) operating losses and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized based on consideration of available evidence. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. At December 31, 2023, the Company continues to be in a three-year cumulative loss. As such, the realizability of our deferred tax assets at December 31, 2023 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all of our deferred tax assets at December 31, 2023.
We perform a review of any uncertain tax positions and if necessary, will record expected future tax consequences of uncertain tax positions in the financial statements.
Fair Value Measurement
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| Level 1: | Observable inputs such as quoted prices in active markets. | |||||||
| Level 2: | Directly or indirectly observable inputs, other than quoted prices in active markets. | |||||||
| Level 3: | Unobservable inputs in which there is little or no market information, which require a reporting entity to develop its own assumptions. | |||||||
Assets and liabilities measured at fair value on a recurring basis are based on one or more of the following valuation techniques:
| Market approach: | Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. | |||||||
| Cost approach: | Amount required to replace the service capacity of an asset (replacement cost). | |||||||
| Income approach: | Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models). | |||||||
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
We have elected a measurement alternative for equity investments, such as our purchase option, that do not have readily determinable fair values. Under the alternative, our purchase option is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, if any.
Assets measured at fair value on a nonrecurring basis consist of lodging properties classified as Assets Held For Sale that are recorded at the lower of historical cost or fair value, which is the selling price less estimated costs to sell (Level 2).
F-17
Earnings Per Share
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. We apply the two-class method of computing earnings (loss) per share, which requires the calculation of separate earnings (loss) per share amounts for participating securities. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Any anti-dilutive securities are excluded from the basic per-share calculation. Diluted EPS is computed by dividing net income (loss) available to common stockholders, as adjusted for dilutive securities, by the weighted-average number of common shares outstanding plus dilutive securities. Any anti-dilutive securities are excluded from the diluted per-share calculation.
Basic and diluted loss per share for the years ended December 31, 2023, 2022 and 2021 are calculated as Net loss attributable to common stockholders for each respective period divided by weighted average common shares outstanding for each respective period as all other securities are antidilutive. Potentially dilutive shares include unvested restricted share grants, unvested performance share grants, common shares issuable upon conversion of convertible debt and common shares issuable upon conversion of Common Units of our Operating Partnership.
Use of Estimates
New Accounting Standards
In October 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-06, Disclosure Improvements, codification amendments in response to the U.S. Securities and Exchange Commission's ("SEC") Disclosure Update and Simplification Initiative that was issued in August 2018. ASU 2023-06 will modify the disclosure or presentation requirements related to various subtopics, with clarifications to or technical corrections of the current requirements. The new guidance is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. ASU 2023-06 applies to all reporting entities within the scope of the amended subtopics. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all entities, if by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entity. The adoption of ASU 2023-06 will not have a material effect on our Consolidated Financial Statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). ASU 2023-07 which will improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. Although we operate only a single segment, ASU 2023-07 will require us to adhere to all disclosure requirements of the pronouncement which includes among other things, disclosures related to our chief operating decision maker. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The adoption of ASU 2023-07 will not have a material effect on our Consolidated Financial Statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740). ASU 2023-09 provides for changes to the rate reconciliation and income taxes paid disclosures to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU 2023-09 also improves the effectiveness and comparability of disclosures by (1) adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with SEC Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and (2) removing disclosures that no longer are considered cost beneficial or relevant. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The adoption of ASU 2023-09 will not have a material effect on our Consolidated Financial Statements.
F-18
Reclassifications
A portfolio of two lodging properties with an aggregate carrying amount of approximately $49.9 million that were classified as Assets Held for Sale at December 31, 2022 have been reclassified to Investments in Lodging Property, net during the year ended December 31, 2023 as the proposed sale of the properties was terminated during the year then ended.
NOTE 3 –– INVESTMENTS IN LODGING PROPERTY, NET
Investments in Lodging Property, net
Investments in lodging property, net at December 31, 2023 and 2022 include (in thousands):
| 2023 | 2022 | |||||||||||||
| Land | $ | $ | ||||||||||||
| Lodging buildings and improvements | ||||||||||||||
| Intangible assets | ||||||||||||||
| Construction in progress | ||||||||||||||
| Furniture, fixtures and equipment | ||||||||||||||
Real estate development loan (1) | ||||||||||||||
| Less - accumulated depreciation and amortization | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
(1) In January 2023, we entered into an agreement with affiliates of Onera Opportunity Fund I, LP to provide a mezzanine financing loan to fund up to $4.6 million for the development of a property. The mezzanine loan was classified as Investments in Lodging Property, net in our Consolidated Balance Sheet at December 31, 2023. See "Note 4 - Investment in Real Estate Loans" for further information.
Depreciation expense was $150.3 million, $149.5 million, and $105.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Lodging Property Acquisitions
Residence Inn by Marriott - Scottsdale, AZ
In June 2023, the GIC Joint Venture acquired the Residence Inn by Marriott located in Scottsdale, AZ containing 120 guestrooms for a purchase price of approximately $29.0 million. GIC made a capital contribution of $13.7 million, or 49 % of the cash paid at closing, to the GIC Joint Venture, and the Operating Partnership made a capital contribution of $14.3 million, or 51 % of the cash paid at closing to the GIC Joint Venture, along with $1.0 million of earnest money that was paid from available cash of the GIC Joint Venture to fund the purchase price. The Operating Partnership made its capital contribution to the GIC Joint Venture with available cash on hand and borrowings on our revolving line of credit.
Nordic Lodge - Steamboat Springs, CO
In June 2023, the GIC Joint Venture acquired the Nordic Lodge located in Steamboat Springs, CO containing 47 guestrooms for a purchase price of approximately $13.7 million. GIC made a capital contribution of $6.7 million, or 49 % of the purchase price, to the GIC Joint Venture and the Operating Partnership made a capital contribution of $7.0 million, or 51 % of the purchase price, to the GIC Joint Venture to fund the purchase price. The Operating Partnership made its capital contribution to the GIC Joint Venture with available cash on hand and borrowings on our revolving line of credit.
F-19
NCI Transaction
In January and March 2022, the Operating Partnership and the GIC Joint Venture closed on a transaction with NewcrestImage Holdings, LLC, a Delaware limited liability company, and NewcrestImage Holdings II, LLC, a Delaware limited liability company (together, “NewcrestImage”), to purchase from NewcrestImage a portfolio of 27 lodging properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces and various financial incentives for an aggregate purchase price of $822.0 million (the "NCI Transaction"), paid in the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 preferred units of limited partnership of the Operating Partnership newly designated as 5.25 % Series Z Cumulative Perpetual Preferred Units (Liquidation Preference $25 Per Unit) (the “Series Z Preferred Units”), cash draws totaling $410.0 million from a term loan entered into by subsidiaries of the GIC Joint Venture, the assumption by a subsidiary of the GIC Joint Venture of approximately $6.5 million in Property Assessed Clean Energy ("PACE") loan debt, $5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the GIC Joint Venture, and approximately $185.2 million cash contributed by GIC at closing. GIC also contributed to the GIC Joint Venture an additional $18.5 million in cash for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating Partnership as reimbursement for transaction costs paid by the Operating Partnership.
We valued the Common Units and Series Z Preferred Units at fair market value on the closing dates of the NCI Transaction, which resulted in us recording the issued Common Units and Series Z Preferred Units at $157.5 million and $50.0 million, respectively. The Common Units were recorded at the closing prices of our Common Stock on the closing dates since the Common Units are redeemable for shares of our Common Stock on a 1 :1 basis. We estimated the fair value of the Series Z Preferred Units based on the features and stated dividend coupon of the Series Z Preferred Units relative to similar securities with more readily determinable market values. We recorded the Series Z Preferred Units at their redemption value of $50.0 million, which approximates fair value on the closing dates.
Our GIC Joint Venture assumed $335.2 million of debt in connection with the NCI Transaction and immediately repaid $328.7 million of the assumed debt on the closing date using proceeds from borrowings on the GIC Joint Venture Term Loan (as described below). We recorded debt assumed in connection with the NCI Transaction at its face amount, which approximated fair market value on the closing date.
Our Joint Venture recorded the NCI Transaction as an asset acquisition and allocated the aggregate purchase price paid for the NCI Transaction to the net assets acquired based on their relative fair values. In determining relative fair values, we made significant estimates regarding replacement costs for the buildings and furniture, fixtures and equipment, and judgements related to certain market assumptions. Incentives and other intangibles include tax incentives totaling approximately $19.8 million associated with certain of the acquired properties in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 9.1 years, which is the period in which we expect to meet the requirements to receive payment of the tax incentives. Other intangible assets totaling approximately $3.9 million are related to key money associated with certain of the lodging properties acquired in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 19.7 years, which is the remaining key money contract period with the franchisor.
Brickell Transaction
In June 2022, we formed the Brickell Joint Venture (see "Note 10 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the exercise of our initial purchase option to acquire a 90 % equity interest (the "Initial Purchase Option") in the AC Hotel by Marriott and Element Miami Brickell Hotel in Miami, FL (together the "AC/Element Hotel"). The exercise price of the Initial Purchase Option was $89.0 million and was primarily funded with the conversion of the mezzanine loan of $29.9 million to equity, $7.9 million in cash and the assumption of debt.
Onera Transaction
In October 2022, we formed the Onera Joint Venture (see "Note 10 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the acquisition of a 90 % equity interest in the Onera Opportunity Fund I LP ("Onera") for $5.2 million in cash, plus additional contingent consideration of $1.8 million paid in September 2023. The Onera Joint Venture has a 100 % fee simple interest in real property and improvements consisting of an 11 -unit glamping property and a 6.4 -acre parcel of land.
F-20
Lodging property acquisitions during the years ended December 31, 2023 and 2022 were as follows (dollar amounts in thousands):
| Date Acquired | Franchise/Brand | Location | Guestrooms | Purchase Price | ||||||||||||||||||||||
| 2023 Acquisitions: | ||||||||||||||||||||||||||
| June 1, 2023 | Residence Inn by Marriott | Scottsdale, AZ | $ | |||||||||||||||||||||||
| June 23, 2023 | Nordic Lodge | Steamboat Springs, CO | ||||||||||||||||||||||||
| Total acquisitions 2023 | $ | |||||||||||||||||||||||||
| 2022 Acquisitions: | ||||||||||||||||||||||||||
| January 13, 2022 | Portfolio of properties - twenty-six lodging properties and two parking garages (1) | Various | $ | |||||||||||||||||||||||
| March 23, 2022 | Canopy Hotel by Hilton (1) | New Orleans, LA | ||||||||||||||||||||||||
| June 10, 2022 | AC/Element Hotel (2) | Miami, FL | ||||||||||||||||||||||||
October 26, 2022 | Onera (3) | Fredericksburg, TX | ||||||||||||||||||||||||
| Total acquisitions 2022 | $ | |||||||||||||||||||||||||
(1) In January 2022, we acquired a portfolio of twenty-six hotels and two parking garages for an aggregate purchase price of 766.0 million. The hotels acquired included 21 hotels and two parking garages in Texas, two hotels in Louisiana, and three hotels in Oklahoma under the following brands: Marriott (13), Hilton (7), Hyatt (4), and IHG (2). In March 2022, we acquired the Canopy New Orleans upon completion of its construction for a purchase price of $56.0 million.
(2) We acquired a 90 % equity interest in the AC/Element Hotel for $80.1 million based on the exercise price of the Initial Purchase Option of $89.0 million. The transaction included the assumption of $47.0 million of debt resulting in a net consideration payment requirement of $42.0 million. We paid 90 % of the required net consideration with the conversion of our $29.9 million mezzanine loan into equity and a cash payment of $7.9 million. The carrying amount of our Initial Purchase Option of $2.8 million is also included in the total amount allocated to the assets acquired. The Brickell Joint Venture partner’s non-controlling interest of $6.9 million represents 10 % of the fair value of the net assets on the transaction date, determined by a third-party valuation expert based on discounted forecasted future cash flows of the net assets acquired. We also incurred $0.6 million of transaction costs. The result is a total amount allocated to the assets acquired of $95.1 million plus an intangible asset totaling $2.0 million related to the assumption of the franchises for the hotel properties and a related key money liability.
(3) In October 2022, we completed the acquisition of a 90 % equity interest in Onera Joint Venture which owns an 11 -unit glamping property for $5.2 million based on aggregate purchase price of $5.8 million. We paid for our 90 % in cash, plus $0.5 million of transaction costs. Additionally, the transaction includes additional contingent consideration (based on performance of the property for the 12-month period ending July 31, 2023) that was paid in September 2023 of $1.8 million. The Onera Joint Venture has a 100 % fee simple interest in real property and improvements consisting of 11 lodging units and a 6.4 -acre parcel of undeveloped land.
The allocation of the aggregate purchase prices and contingent consideration to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands):
| 2023 | 2022 | |||||||||||||
| Land | $ | $ | ||||||||||||
| Lodging buildings and improvements | ||||||||||||||
| Furniture, fixtures and equipment | ||||||||||||||
| Incentives and other intangibles | ||||||||||||||
| Other assets | ||||||||||||||
Total assets acquired (1) (2) | ||||||||||||||
| Less debt assumed | ( | |||||||||||||
| Less lease liabilities assumed | ( | |||||||||||||
| Less other liabilities | ( | |||||||||||||
| Net assets acquired | $ | $ | ||||||||||||
(1) Total assets acquired during the year ended December 31, 2023 is based on an aggregate purchase price of $42.7 million plus transaction costs of $0.1 million and $1.8 million related to contingent consideration paid to the seller in September 2023. See "Note 10 - Non-controlling Interests and Redeemable Non-controlling Interests" for details related to the Onera Joint Venture.
(2) Total assets acquired during the year ended December 31, 2022 is based on an aggregate purchase price of $909.1 million adjusted for the following items:
•NCI Transaction: interest swap breakage fees and debt defeasance costs of $3.5 million, a reduction to the value of the Common Units issued on the closing date of $2.5 million, plus transaction costs of $3.0 million, and intangible assets totaling $9.1 million acquired outside of escrow, and
•Brickell Transaction: Brickell Joint Venture partner’s non-controlling interest of $6.9 million; Brickell Joint Venture partner’s non-controlling interest share of the debt assumed as part of the transaction of $4.7 million, the assumption of intangible assets totaling $2.0 million, the carrying amount of our Initial Purchase Option of $2.9 million, and transactions costs of $0.6 million.
•Onera Transaction: Onera Joint Venture partner's non-controlling interest of $0.8 million and $0.5 million of transaction costs.
F-21
All lodging property purchases completed during the years ended December 31, 2023 and 2022 were deemed to be the acquisition of assets. Therefore, acquisition costs related to these transactions have been capitalized as part of the recorded amounts of the acquired net assets.
Lodging Property Sales
Portfolio of Four Lodging Properties
In May 2023, we completed the sale of four lodging properties (the "Sale Portfolio") for an aggregate gross selling price of $28.1 million as follows:
| Franchise/Brand | Location | Guestrooms | ||||||||||||
| Hilton Garden Inn | Minneapolis (Eden Prairie), MN | |||||||||||||
| Holiday Inn Express & Suites | Minneapolis (Minnetonka), MN | |||||||||||||
| Hyatt Place | Chicago (Hoffman Estates), IL | |||||||||||||
| Hyatt Place | Chicago (Lombard/Oak Brook), IL | |||||||||||||
At December 31, 2022, we classified the Sale Portfolio as Assets Held for Sale and recorded a write-down of $2.9 million to reduce the carrying amount of the net assets to the selling price less estimated costs to sell. As such, the net selling proceeds approximated the net carrying amount of the Sale Portfolio at closing.
Hyatt Place - Baltimore (Owings Mills), MD
In December 2023, we completed the sale of the 123 -guestroom Hyatt Place in Baltimore, MD for a gross selling price of $8.3 million. The net selling price less costs to sell approximated the net book value of the hotel property on the sale date resulting in a nominal gain that was recorded in the fourth quarter of 2023.
Hilton Garden Inn San Francisco Airport North - San Francisco, CA
In May 2022, the GIC Joint Venture completed the sale of a 169 -guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture during the year ended December 31, 2022.
Hyatt Place - Dallas (Plano), TX
During the fourth quarter of 2023, we entered into a purchase and sale agreement with a third-party to sell the 127 -guestroom Hyatt Place Dallas (Plano), TX for $10.3 million. We reclassified the property in Assets Held for sale, net at December 31, 2023 and recorded a write-down of $4.0 million in the fourth quarter of 2023 for the excess of the net carrying amount of the portfolio of properties over the net selling price less estimated costs to sell. We completed the sale of the property on February 15, 2024 under the terms described above.
F-22
Intangible Assets
Intangible assets included in Investments in Lodging Property, net in our Consolidated Balance Sheets include the following (in thousands):
December 31, | ||||||||||||||||||||
| Weighted Average Amortization Period (in Years) | 2023 | 2022 | ||||||||||||||||||
| Indefinite-lived Intangible assets: | ||||||||||||||||||||
| Air rights | N/A | $ | $ | |||||||||||||||||
| Other | N/A | |||||||||||||||||||
| Finite-lived intangible assets: | ||||||||||||||||||||
Tax incentives(1) | ||||||||||||||||||||
Key money(1) | ||||||||||||||||||||
| Total intangible assets | ||||||||||||||||||||
| Less - accumulated amortization | ( | ( | ||||||||||||||||||
| Intangible assets, net | $ | $ | ||||||||||||||||||
(1) Finite-lived intangible assets were primarily acquired in the NCI Transaction.
We recorded amortization expense related to intangible assets of approximately $4.1 million and $4.0 million for the years ended December 31, 2023 and 2022, respectively. There was no amortization expense related to intangible assets for the for the year ended December 31, 2021.
Future amortization expense related to intangible assets is as follows (in thousands):
| For the Year Ended December 31, | Amount | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| $ | ||||||||
F-23
Assets Held for Sale
Assets held for sale, net at December 31, 2023 include a parcel of undeveloped land in Flagstaff, AZ and certain properties that are under contract for sale and expected to close during the first half of 2024 as follows (in thousands):
December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
Under Contract for Sale: | |||||||||||
| Portfolio of four lodging properties | $ | $ | |||||||||
Hyatt Place - Dallas (Plano), TX | |||||||||||
One individual lodging property and a portfolio of two lodging properties | |||||||||||
| Parcel of undeveloped land - San Antonio, TX | |||||||||||
Marketed for Sale: | |||||||||||
One individual lodging property | |||||||||||
| Parcel of undeveloped land - Flagstaff, AZ | |||||||||||
| $ | $ | ||||||||||
During the first quarter of 2024, we entered into two separate purchase and sale agreements with two unrelated third-parties to sell one individual lodging property and a portfolio of two lodging properties with an aggregate 529 -guestrooms for an aggregate selling price of $84.0 million. We reclassified all three of the properties to Assets Held for sale, net at December 31, 2023 and recorded a write-down of $1.4 million in the fourth quarter of 2023 for the excess of the net carrying amount of one of the lodging properties over its net selling price less estimated costs to sell. We expect to complete the transactions during the first half of 2024.
At December 31, 2023, we have a lodging property with 101 -guestrooms being marketed for sale. We have reclassified the property to Assets Held for Sale, net at December 31, 2023 and recorded a write-down of $11.3 million in the fourth quarter of 2023 for the excess of the net carrying amount of the lodging property over its expected net selling price less estimated costs to sell.
During the first quarter of 2023, we entered into a purchase and sale agreement with a third-party to sell a 5.99 -acre parcel of undeveloped land in San Antonio, TX for $1.3 million. We expect to complete the transaction during the second quarter of 2024.
During the year ended December 31, 2022, the Company recorded a Loss on write-down of assets of $2.9 million to reduce the carrying amounts of the Hilton Garden Inn - Eden Prairie, MN, Holiday Inn Express & Suites - Minnetonka, MN, Hyatt Place - Chicago (Hoffman Estates), and Hyatt Place - Chicago (Lombard), IL to their net selling prices less estimated costs to sell. Additionally, during the year ended December 31, 2022, the Company recorded a loss on write-down of assets of $7.2 million to reduce the carrying amounts of two lodging properties to their expected selling prices less estimated costs to sell. The proposed sale of these two lodging properties was terminated during the year ended December 31, 2023.
During the year ended December 31, 2021, the Company recorded a loss on write-down of assets of $4.4 million on its unexercised purchase options related to real estate development loans. See "Note 11 – Fair Value Measurement" for further information.
F-24
NOTE 4 — INVESTMENT IN REAL ESTATE LOANS
Real Estate Development Loans
Onera Mezzanine Financing Loan
In January 2023, we entered into an agreement with affiliates of Onera Opportunity Fund I, LP ("Onera") to provide a mezzanine financing loan to fund up to $4.6 million (the "Onera Mezzanine Loan") for the development of a lodging property in Wimberley, TX. The Onera Mezzanine Loan is secured by a second mortgage on the property and is subordinate to the senior lender for the development project. The loan matures 24 months from the closing date of the transaction and may be extended for an additional 12 months at the borrower's option. Additionally, we issued a $3.0 million letter of credit to the senior lender of the project as additional support for Onera's construction loan. We also have an option to purchase 90 % of the equity of the entity that owns the development property upon completion of construction or upon the one-year anniversary of such completion at a pre-determined price (the "Onera Purchase Option"). The development is expected to be completed in the second half of 2024. As of December 31, 2023, we have funded our entire $4.6 million commitment under the mezzanine financing loan. The balance of the Onera Mezzanine Loan is recorded net of the unamortized discount related to the carrying amount of the Onera Purchase Option of $0.4 million at December 31, 2023, and is classified as Investments in lodging property, net in our Consolidated Balance Sheets at December 31, 2023.
We recorded the Onera Purchase Option related to the Onera Mezzanine Loan at its estimated fair value of $0.9 million on the transaction date using the Black-Scholes model in Other assets and as a contra-asset to Investments in lodging property, net. The recorded amount of the Onera Purchase Option is being amortized over the term of the Onera Mezzanine Loan using the straight-line method, which approximates the interest method, as non-cash interest income. For the year ended December 31, 2023, we amortized $0.5 million of the carrying amount of the Onera Purchase Option as non-cash interest income.
Our estimate of the fair value of the Onera Purchase Option under the Black-Scholes model requires judgment and estimates primarily related to the volatility of our stock price and expected levels of future dividends on our common stock. Although our estimate contemplates current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations.
Brickell Mezzanine Financing Loan
During the year ended December 31, 2019, we executed a mezzanine financing loan to a developer, as amended (the "Brickell Mezzanine Loan"), to fund up to $29.9 million for a mixed-use development project that included the AC/Element Hotel, retail space, and parking.
During the second quarter of 2022, we exercised our option (the “Initial Purchase Option”) to purchase a 90 % interest in the AC/Element Hotel, retail space, and parking that was granted in connection with the Brickell Mezzanine Loan, which resulted in payment in full of the Brickell Mezzanine Loan. We also have the right to purchase the remaining interest in the property five years after the completion of construction. The Brickell Mezzanine Loan was classified as Investments in lodging property, net in our Condensed Consolidated Balance Sheets.
F-25
Seller-Financing Loans
In June 2018, we sold two hotel properties for an aggregate selling price of $24.9 million. We provided seller financing in two notes totaling $3.6 million on the sale of these properties. During the year ended December 31, 2020, we recorded an allowance for credit losses in an amount equal to the outstanding principal balance of the loans due to a borrower default caused by the negative effects of the Pandemic. During the year ended December 31, 2022, we received $0.6 million from the borrower to repay one of the two loans in full and $0.5 million of principal payments on the remaining loan. As such, we recorded Recoveries of credit losses of $1.1 million during the year ended December 31, 2022. During the year ended December 31, 2023, we received $1.5 million from the borrower to repay approximately $0.3 million of accrued and unpaid interest and the remaining outstanding principal balance of the remaining loan. As a result, we recorded Recoveries of credit losses of $1.2 million during the year ended December 31, 2023 related to the repayment in full of the seller-financing loan.
The seller-financing loan, net was included in Prepaid expenses and other in our Consolidated Balance Sheets at December 31, 2022.
Investment in real estate loans, net at December 31, 2022 was as follows (in thousands):
December 31, | |||||||||||
| 2022 | |||||||||||
| Real estate loan | $ | ||||||||||
| Allowance for credit losses | ( | ||||||||||
| $ | |||||||||||
NOTE 5 — SUPPLEMENTAL BALANCE SHEET INFORMATION
Restricted Cash
Restricted cash was as follows (in thousands):
December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| FF&E reserves | $ | $ | ||||||||||||
| Property taxes | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
The Company maintains reserve funds for property taxes, insurance, capital expenditures and replacement or refurbishment of furniture, fixtures and equipment at some of our lodging properties in accordance with management, franchise or mortgage loan agreements. These agreements generally require us to reserve cash ranging from 2 % to 5 % of the revenues of the individual lodging property in restricted cash escrow accounts. Any unused restricted cash balances revert to us upon the termination of the underlying agreement or may be released to us from the restricted cash escrow accounts upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
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Prepaid Expenses and Other
Prepaid expenses and other included the following (in thousands):
December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Deferred acquisition costs | $ | $ | ||||||||||||
| Prepaid insurance | ||||||||||||||
| Prepaid taxes | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
Deferred Charges
Deferred charges were as follows (in thousands):
December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Franchise fees | $ | $ | ||||||||||||
| Less - accumulated amortization | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
Amortization expense for the years ended December 31, 2023, 2022, and 2021 was $0.6 million, $0.7 million and $0.5 million, respectively.
Other Assets
Other assets included the following (in thousands):
December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Derivative financial instrument | $ | $ | ||||||||||||
| Purchase options related to real estate loan | ||||||||||||||
| Deferred tax asset, net | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
Accrued Expenses and Other
Accrued expenses and other included the following (in thousands):
December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Accrued property, sales and income taxes | $ | $ | ||||||||||||
| Accrued salaries and benefits | ||||||||||||||
| Other accrued expenses at lodging properties | ||||||||||||||
| Accrued interest | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
F-27
NOTE 6 –– DEBT
At December 31, 2023, our indebtedness was comprised of borrowings under our 2023 Senior Credit Facility (as defined below), the 2018 Term Loan (as defined below), the GIC Joint Venture Credit Facility (as defined below), the GIC Joint Venture Term Loan (as defined below), the PACE Loan (as defined below), the Brickell Mortgage Loan (as defined below), the Convertible Notes (as defined below), and other indebtedness secured by first priority mortgage liens on various lodging properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 5.31 % and 5.04 % at December 31, 2023 and 2022, respectively.
$600 Million Senior Credit and Term Loan Facility
In June 2023, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into an amended and restated $600.0 million senior credit facility (the “2023 Senior Credit Facility”) with Bank of America, N.A., as successor administrative agent, and a syndicate of lenders. The 2023 Senior Credit Facility is comprised of a $400.0 million revolver (the "$400 Million Revolver") and a $200.0 million term loan facility (the “$200 Million Term Loan”). The 2023 Senior Credit Facility has an accordion feature which allows the Company to increase the total commitments by an aggregate of up to $300.0 million.
The $400 Million Revolver has a maturity date of June 2027, which may be extended by the Company for up to two consecutive six-month periods, subject to certain conditions and the $200 Term Loan has a maturity date of June 2026, which may be extended by the Company for up to two consecutive 12-month periods, subject to certain conditions. At December 31, 2023, the $200 Million Term Loan was fully funded, and we had no borrowings on our $400 Million Revolver. Borrowings under the 2023 Senior Credit Facility are limited by the value of the Unencumbered Assets.
The 2023 Senior Credit Facility bears interest at the Secured Overnight Financing Rate (“SOFR”). The interest rate on the $400 Million Revolver is based on the higher of (i) a pricing grid ranging from 140 basis points to 240 basis points plus Adjusted Daily SOFR or Adjusted Term SOFR, depending on the Company's leverage ratio (as defined in the loan documents); and (ii) a pricing grid ranging from 40 basis points to 140 basis points over the Base Rate, depending on the Company's leverage ratio (as defined in the credit agreements governing the 2023 Senior Credit Facility).
The interest rate on the $200 Million Term Loan pursuant to the 2023 Senior Credit Facility is based on the higher of (i) a pricing grid ranging from 135 basis points to 235 basis points plus Adjusted Daily SOFR or Adjusted Term SOFR, depending on the Company's leverage ratio (as defined in the loan documents); and (ii) a pricing grid ranging from 35 basis points to 135 basis points over the Base Rate, depending on the Company's leverage ratio (as defined in the loan documents).
Term SOFR will be available for one, three and six-month interest periods. The Base Rate is a fluctuating rate of interest per annum equal to the highest of (a) the Federal Funds Rate plus 0.50 %, (b) the rate of interest in effect for such day as publicly announced by Bank of America as its “prime rate,” (c) SOFR published on such day on the Federal Reserve Bank of New York’s website (or any successor source) plus 1.00 % and (d) 1.00 %. For purposes of the 2023 Senior Credit Facility, SOFR is subject to a floor of zero basis points.
We are also required to pay an unused fee (“Unused Fee”) on the undrawn portion of the $400 Million Revolver. The Unused Fee shall be calculated on a daily basis on the unused amount of the $400 Million Revolver multiplied by (i) 0.25 % per annum in the event that Revolver usage is greater than 50 %, and (ii) 0.20 % per annum in the event that Revolver usage is equal to or less than 50 %. The Unused Fee is payable quarterly in arrears and on the final maturity date of the $400 Million Revolver.
The 2023 Senior Credit Facility requires the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own all properties included in the unencumbered asset pool supporting the facility (“Unencumbered Properties”), as well as the equity interests in the TRS Lessees related to such Unencumbered Properties until the borrower meets certain conditions for their release, which conditions were satisfied subsequent to December 31, 2023 and the pledge of such equity interests were released in full. The 2023 Senior Credit Facility also permitted the Company to complete the Convertible Notes Offering (defined below), the Series F preferred shares offering (defined below), close on the NCI Transaction and enter into equity transactions and indebtedness related thereto.
F-28
Term Loans
2018 Term Loan
In February 2018, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a new $225.0 million term loan (the “2018 Term Loan”) with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation, which is fully drawn as of December 31, 2023. The 2018 Term Loan has an accordion feature that allows us to increase the total commitments by $150.0 million prior to the maturity date of February 14, 2025, subject to certain conditions.
Amendments to $225 Million 2018 Term Loan
Between May 2020 and July 2022, the Company entered into several amendments to the 2018 Term Loan (collectively, the "2018 Term Loan Amendments"). The amendments to the 2018 Term Loan are substantially the same as the 2023 Senior Credit Facility. There was no modification to the maturity date of the 2018 Term Loan.
We pay interest on advances at varying rates, based upon, at our option, either (i) daily, 1-, 3-, or 6-month SOFR (subject to a floor of 25 basis points), plus a SOFR adjustment equal to 10 basis points and an applicable margin between 135 and 215 basis points, depending upon our leverage ratio (as defined in the loan documents). We are required to pay other fees, including customary arrangement and administrative fees.
Financial and Other Covenants. We are required to comply with various financial and other covenants to draw and maintain borrowings under the 2018 Term Loan. The 2018 Term Loan Amendments provide that certain financial and other covenants under the 2018 Term Loan were waived or adjusted, which waivers and adjustments were the same as the Company's prior senior credit facility. At December 31, 2023, we were in compliance with all financial covenants.
Unencumbered Assets. Borrowings under the 2018 Term Loan are limited by the value of the Unencumbered Assets.
Subsequent to year-end, the Company successfully completed a new $200 million senior unsecured term loan financing (the “2024 Term Loan”) that refinanced and replaced the 2018 Term Loan. The 2024 Term Loan has an initial maturity date of February 2027 and can be extended for two 12-month periods at the Company’s option, subject to certain conditions, for a fully extended maturity date of February 2029.The 2024 Term Loan provides for interest rate pricing ranging from 135 basis points to 235 basis points over the applicable adjusted term SOFR or 35 basis points to 135 basis points over base rate, at the Company's option. Proceeds from the 2024 Term Loan financing and advances on our $400 Million Revolver were used to repay in full the Company’s $225 million 2018 Term Loan that was scheduled to mature in February 2025. In connection with the closing of the 2024 Term Loan, the collateral securing the Company’s 2023 Senior Credit Facility was released. As a result of the 2024 Term Loan financing, the Company has significantly reduced debt maturities until 2026 and has an average length to maturity of approximately 3.6 years. Other terms of the agreement are similar to the Company’s 2023 Senior Credit Facility.
Convertible Senior Notes and Capped Call Options
In January 2021, we entered into an underwriting agreement (the “Convertible Notes Offering”) pursuant to which the Company agreed to offer and sell $287.5 million aggregate principal amount of 1.50 % convertible senior notes due 2026 (the “Convertible Notes"). The net proceeds from the Convertible Notes Offering, after deducting underwriting discounts and commissions and offering expenses payable by the Company (including net proceeds from the full exercise by the underwriters of their over-allotment option to purchase additional Convertible Notes), were approximately $280.0 million before consideration of the Capped Call Transactions (as described below). These proceeds were used to pay the cost of the Capped Call Transactions and to partially repay outstanding obligations under the Company's prior senior credit facility and a $62.0 million term loan.
F-29
The Convertible Notes bear interest at a rate of 1.50 % per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. The Convertible Notes will mature on February 15, 2026 (the “Maturity Date”), unless earlier converted, purchased or redeemed. Prior to August 15, 2025, the Convertible Notes will be convertible only upon certain circumstances and during certain periods. On or after August 15, 2025 and through the Maturity Date, holders may convert any of their Convertible Notes into shares of the Company’s common stock, at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day prior to the Maturity Date, unless the Convertible Notes have been previously purchased or redeemed by the Company. During each of the years ended December 31, 2023, 2022 and 2021, the Company recorded coupon interest expense of $4.3 million, $4.3 million, and $4.2 million, respectively, and amortized $1.5 7.6 million debt issuance costs related to the Convertible Notes Offering. Including the amortization of the debt issuance costs, the current effective interest rate on the Convertible Notes is approximately 2.02 %. The unamortized discount related to the Convertible Notes was $3.2 million and $4.7 million at December 31, 2023 and 2022, respectively.
The initial conversion rate of the Convertible Notes is 83.4028 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of $11.99 per share of common stock based on the 37.5 % base conversion premium on the reference price of $8.72 per share. In no event will the conversion rate exceed 114.6788 shares of common stock per $1,000 principal amount of Convertible Notes, subject to certain adjustments defined in the Convertible Notes Offering. Commensurate with the declaration of dividends on our common stock and Common Units during the years ended December 31, 2023 and 2022, the conversion rate of the Convertible Notes was adjusted to 87.0869 shares of common stock per $1,000 principal amount of Convertible Notes at December 31, 2023.
In January 2021, in connection with the pricing of the Convertible Notes and the full exercise by the Underwriters of their option to purchase additional Convertible Notes pursuant to the Underwriting Agreement, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters or their respective affiliates and another financial institution (the “Capped Call Counterparties”). The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of shares of common stock underlying the Convertible Notes. The Capped Call Transactions are generally expected to reduce the potential dilution to holders of shares of common stock upon conversion of the Convertible Notes or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction or offset subject to a cap.
The effective strike price of the Capped Call Transactions is initially $15.26 , which represents a premium of 75.0 % over the last reported sale price of the common stock on the New York Stock Exchange on January 7, 2021, and is subject to certain adjustments under the terms of the Capped Call transactions. The strike price was $14.61 at December 31, 2023 due to the adjustments related to the dividends paid during the years ended December 31, 2023 and 2022.
MetaBank and Other Mortgage Loans
In June 2017, Summit Meta 2017, LLC (“SM-17”), a subsidiary of our Operating Partnership, entered into a $47.6 million secured, non-recourse loan with MetaBank (the "MetaBank Loan"). The MetaBank Loan provides for a fixed interest rate of 4.44 %, amortizes over 25 years, and matures on July 1, 2027. The MetaBank Loan is secured by three hotel properties and is subject to a prepayment penalty if prepaid prior to April 1, 2027. In or around December 2021, MetaBank sold the MetaBank Loan to Bayside MB CRE Loans, LLC (“Bayside”). In October 2022, and on several occasions thereafter, Bayside's legal counsel sent letters to SM-17 alleging various events of default under the MetaBank Loan, primarily related to certain non-monetary covenants. In all cases, SM-17's legal counsel sent written responses to Bayside disputing that any events of default have occurred.
At December 31, 2023 and 2022, we had mortgage loans totaling $123.3 million and $125.6 million, respectively, that are secured primarily by first mortgage liens on eight
F-30
During 2022, we entered into agreements to fully defease four commercial mortgage-backed securities ("CMBS") mortgage loans totaling $87.3 million, and by placing into trust an amount sufficient to cover future principal and interest payments. The defeasance resulted in the 11 lodging properties that collateralized the CMBS mortgage loans becoming unencumbered. The defeasance was recorded as an extinguishment of the debt since we have been fully released from liability. As part of the transaction, we incurred transaction costs of $0.8 million that were recorded as Transaction Costs in our Statement of Operations for the year ended December 31, 2022. We will no longer be obligated to make future interest payments of approximately $2.4 million between the defeasance dates and the original maturity dates, and $26.8 million of restricted cash reserves were returned to us. We also expensed $0.1 million of unamortized deferred financing costs related to the defeased CMBS mortgage loans as Transaction Costs during the year ended December 31, 2022.
GIC Joint Venture Credit Facility
In October 2019, Summit JV MR 1, LLC (the “Borrower”), as borrower, and Summit Hospitality JV, LP (the “Parent” or "GIC Joint Venture"), as parent of the Borrower, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $200.0 million credit facility (the “GIC Joint Venture Credit Facility”) with Bank of America, N.A., as administrative agent and sole initial lender, and BofA Securities, Inc., as sole lead arranger and sole bookrunner. The Operating Partnership and the Company are not borrowers or guarantors of the GIC Joint Venture Credit Facility. The GIC Joint Venture Credit Facility is guaranteed by all of the Borrower’s existing and future subsidiaries, subject to certain exceptions.
The GIC Joint Venture Credit Facility is comprised of a $125.0 million revolving credit facility (the “$125 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). The GIC Joint Venture Credit Facility has an accordion feature which allows the GIC Joint Venture to increase the total commitments by up to $300.0 million, for aggregate potential borrowings of up to $500.0 million on the GIC Joint Venture Credit Facility. At December 31, 2023, the GIC Joint Venture had $125.0 million outstanding under the $125 Million Revolver. The $125 Million Revolver and the $75 Million Term Loan have an initial maturity date of September 2027 and can be extended for a single 12-month period at the option of the GIC Joint Venture, subject to certain conditions. As such, the $125 Million Revolver and the $75 Million Term Loan have a fully extended maturity date of September 2028.
The interest rate on the $125 Million Revolver is based on the higher of (i) Daily SOFR or Term SOFR (1-month or 3-month), plus a SOFR adjustment of 0.10 %, plus a margin of 2.15 %, or, (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50 %, and 1-month Term SOFR plus 1.00 %, plus a base rate margin of 1.15 %.
The interest rate on the $75 Million Term Loan is five basis points less than the interest rate on the $125 Million Revolver referenced above.
In addition, on a quarterly basis, the GIC Joint Venture will be required to pay a fee on the unused portion of the GIC Joint Venture Credit Facility equal to the unused amount multiplied by an annual rate of 0.25 % of the average unused amount of the GIC Joint Venture Credit Facility. The GIC Joint Venture will also be required to pay other fees, including customary arrangement and administrative fees.
The GIC Joint Venture Credit Facility requires the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the 13 lodging properties included in the borrowing base assets, the related TRS entities that lease each of the borrowing base assets, and all other subsidiaries of the borrower and the subsidiary guarantors, subject to certain exceptions.
Amendments to $200 Million GIC Joint Venture Credit Facility
In June 2020, the Company entered into a Second Amendment to Credit Agreement related to the GIC Joint Venture Credit Facility (the “Second Amendment”). The Second Amendment resulted in waivers or adjustments to certain financial and other covenants under the GIC Joint Venture Credit Facility, which are described in the Current Report on Form 8-K filed by the Company on June 24, 2020.
In April 2021, the Borrower, Parent, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a Third Amendment to Credit Agreement concerning the GIC Joint Venture Credit Facility (the “Third Amendment”).
F-31
Under the Third Amendment, certain financial and other covenants under the GIC Joint Venture Credit Facility were waived or adjusted as follows:
• Increase of the Maximum Leverage Ratio through the initial maturity date (as defined in the loan agreements);
• Increase of the Borrowing Base Leverage through the initial maturity date (as defined in the loan agreements);
During the covenant waiver period (which ended during 2022), the applicable margin was increased to 230 basis points and 225 basis points for the $125 Million Revolver and $75 Million Term Loan, respectively.
In February 2023, the Borrower entered into the Fifth Amendment to Credit Agreement to, among other things, convert the reference rate used in interest rate calculations from the London InterBank Offered Rate ("LIBOR") to adjusted term or daily SOFR (using a 10 -basis point credit spread adjustment), with Borrower's option to borrow base rate advances, term SOFR advances or daily SOFR advances.
In September 2023, the Company recast the GIC Joint Venture Credit Facility in its entirety (the "GIC Joint Venture Credit Recast"). The GIC Joint Venture Credit Recast extends the maturity of the $125 Million Revolver and the $75 Million Term Loan to an initial maturity date of September 2027, which may be extended for a single 12-month period at the option of the GIC Joint Venture, subject to certain conditions. As such, the GIC Joint Venture Credit Recast has a fully extended maturity date of September 2028.
The GIC Joint Venture Credit Recast requires the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the 13 properties included in the borrowing base assets, the related TRS entities that lease each of the borrowing base assets, and all other subsidiaries of the borrower and the subsidiary guarantors, subject to certain exceptions.
Borrowing Base Assets. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that hold 13 lodging properties financed by the facility, and the related TRS entities, which wholly own the TRS Lessees that lease each of the borrowing base assets. There are currently 13 lodging properties deemed borrowing base assets.
GIC Joint Venture Term Loan
In connection with the NCI Transaction, in January 2022, Summit JV MR 2, LLC, Summit JV MR 3, LLC and Summit NCI NOLA BR 184, LLC (each of which is a subsidiary of the GIC Joint Venture, and are collectively, the “JV Borrowers”), the GIC Joint Venture, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $410.0 million senior secured term loan facility (the “GIC Joint Venture Term Loan”) with Bank of America, N.A., as administrative agent and initial lender, Wells Fargo Bank, National Association, as syndication agent and an initial lender, and BofA Securities, Inc. and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners.
Neither the Operating Partnership nor the Company are borrowers or guarantors of the GIC Joint Venture Term Loan. The GIC Joint Venture Term Loan is guaranteed by the GIC Joint Venture and all of the JV Borrowers’ existing and future subsidiaries, subject to certain exceptions.
The GIC Joint Venture Term Loan provides for a $410.0 million term loan and has an accordion feature which permits an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC
Joint Venture Term Loan will mature in January 2026 and can be extended for a single 12-month period at the option of the
GIC Joint Venture, subject to certain conditions. As such, the GIC Joint Venture Term Loan has a fully extended maturity date of January 2027. In February 2023, the GIC Joint Venture entered into an amendment to the GIC Joint Venture Term Loan to amend certain definitions, revise the minimum borrowing base interest coverage ratio and make certain other changes.
As of December 31, 2023, we had $410.0 million outstanding on the GIC Joint Venture Term Loan bearing interest at a floating rate of SOFR plus 2.75 %. The interest rate at December 31, 2023 was 8.22 %.
Borrowing Base Assets. The GIC Joint Venture Term Loan is secured primarily by a first priority pledge of the JV Borrowers’ equity interests in the subsidiaries that hold a direct or indirect interest in the 27 lodging properties and two parking facilities purchased in the NCI Transaction that constitute borrowing base assets. The GIC Joint Venture Term Loan contains terms, conditions and covenants for typical for similar credit facilities.
F-32
PACE Loan
As part of the NCI Transaction, a subsidiary of the GIC Joint Venture assumed a PACE loan of approximately $6.5 million. The outstanding balance of the PACE loan is $6.1 million at December 31, 2023. The loan bears fixed interest at 6.10 %, has an amortization period of 20 years, and matures on July 31, 2040. The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender.
Brickell Mortgage Loan
In June 2022, the Company entered into a joint venture (the "Brickell Joint Venture") with C-F Brickell, LLC, a Delaware limited liability company that was the developer of the AC/Element Hotel ("C-F Brickell"), to facilitate the exercise of the Initial Purchase Option to acquire a 90 % equity interest in the Brickell Joint Venture, which owned a 100 % interest in the AC/Element Hotel. In June 2022, the Brickell Joint Venture entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida to finance the dual-branded AC/Element Hotel. The City National Bank Loan provides for an interest rate equal to one-month term SOFR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize based on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank Loan is prepayable at any time without penalty.
Financial Guarantee
During the year ended December 31, 2023, we issued a $3.0 million letter of credit to the senior lender of a development project for which we provided the Onera Mezzanine Loan as additional support on behalf of the developer. We recorded the non-contingent portion of financial guarantee as a liability of $0.2 million on the transaction date, which is the premium receivable for the guarantee payable to us by the borrower. The liability is being amortized using the straight-line method into interest income over the term of the letter of credit and is recorded in Accrued expenses and other in our Consolidated Balance Sheet at December 31, 2023.
Currently, payment under the contingent portion of the guarantee is not probable nor reasonably estimable. Therefore, no liability for the contingent portion of the guarantee is recorded at December 31, 2023.
F-33
At December 31, 2023 and 2022 our outstanding indebtedness was as follows (dollar amounts in thousands):
| Lender | Reference | Interest Rate | Amortization Period (Years) | Initial Maturity Date | Fully Extended Maturity Date | Number of Properties Encumbered | ||||||||||||||||||||||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
| OPERATING PARTNERSHIP DEBT: | ||||||||||||||||||||||||||||||||||||||||||||||||||
2023 Senior Credit Facility | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America, NA | ||||||||||||||||||||||||||||||||||||||||||||||||||
$ | (1) | n/a | 6/21/2027 | 6/21/2028 | n/a | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
$ | (1) | n/a | 6/21/2026 | 6/21/2028 | n/a | |||||||||||||||||||||||||||||||||||||||||||||
| Total Senior Credit and Term Loan Facility | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Term Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||
| KeyBank National Association Term Loan | (1) (7) | n/a | 2/14/2025 | 2/14/2025 | n/a | |||||||||||||||||||||||||||||||||||||||||||||
| Convertible Notes | n/a | 2/15/2026 | 2/15/2026 | n/a | ||||||||||||||||||||||||||||||||||||||||||||||
| Secured Mortgage Indebtedness | ||||||||||||||||||||||||||||||||||||||||||||||||||
| MetaBank | (2) | 7/1/2027 | 7/1/2027 | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank of the Cascades (First Interstate Bank) | (3) | 12/19/2024 | 12/19/2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank of the Cascades (First Interstate Bank) | (3) | 12/19/2024 | 12/19/2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total Mortgage Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Operating Partnership Debt | ||||||||||||||||||||||||||||||||||||||||||||||||||
| JOINT VENTURE DEBT: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Brickell Joint Venture Mortgage Loan | ||||||||||||||||||||||||||||||||||||||||||||||||||
| City National Bank of Florida | 6/9/2025 | 6/9/2025 | ||||||||||||||||||||||||||||||||||||||||||||||||
| GIC Joint Venture Credit Facility and Term Loans | (4) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America, N.A. | ||||||||||||||||||||||||||||||||||||||||||||||||||
$ | n/a | 9/15/2027 | 9/15/2028 | n/a | ||||||||||||||||||||||||||||||||||||||||||||||
$ | n/a | 9/15/2027 | 9/15/2028 | n/a | ||||||||||||||||||||||||||||||||||||||||||||||
| Bank of America, N.A. | n/a | 1/13/2026 | 1/13/2027 | n/a | ||||||||||||||||||||||||||||||||||||||||||||||
| Wells Fargo | (5) | 6/6/2028 | 6/6/2028 | |||||||||||||||||||||||||||||||||||||||||||||||
| PACE loan | (6) | 7/31/2040 | 7/31/2040 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total GIC Joint Venture Credit Facility and Term Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Joint Venture Debt | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Debt | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Unamortized debt issuance costs | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debt, net of issuance costs | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
(1)The $600 million 2023 Senior Credit Facility is supported by a borrowing base of 52 unencumbered hotel properties.
(2) In June 2017, we entered into the MetaBank Loan. The MetaBank Loan is secured by the Hampton Inn & Suites in Minneapolis, MN, the Four Points by Sheraton Hotel & Suites in South San Francisco, CA, and the Hyatt Place in Mesa, AZ. The MetaBank Loan is subject to a prepayment penalty if prepaid prior to April 1, 2027. In or around December 2021, MetaBank sold the MetaBank Loan to Bayside MB CRE Loans, LLC (“Bayside”).
(3) In December 2014, we refinanced our loan with Bank of the Cascades and increased the amount financed by $7.9 million. As part of the refinance the loan was split into two notes. Note A carries a variable interest rate of 30-day LIBOR plus 200 basis points and Note B carries a fixed interest rate of 4.3 %. Both notes have amortization periods of 25 years and maturity dates of December 19, 2024. The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.
(4) The GIC Joint Venture Credit Facilities and Term Loans are secured by a pledge of the equity interests in the subsidiaries that own and operate the borrowing base assets financed by the facility.
(5) In December 2021, we assumed a $13.3 million loan with a fixed rate of 4.99 % and a maturity of June 6, 2028. This loan is secured by the Embassy Suites by Hilton in Tucson, AZ. This loan is subject to defeasance if prepaid.
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(6) As part of the NCI Transaction, a subsidiary of the GIC Joint Venture assumed a PACE loan of approximately $6.5 million. The loan bears fixed interest at 6.10 %, has an amortization period of 20 years, and matures on July 31, 2040. The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender.
There are currently no defaults under any of the Company's mortgage loan agreements.
Our total fixed-rate and variable-rate debt at December 31, 2023 and 2022, after giving effect to our interest rate derivatives, is as follows (dollar amounts in thousands):
| 2023 | Percentage | 2022 | Percentage | |||||||||||||||||||||||
Fixed-rate debt(1) | $ | % | $ | % | ||||||||||||||||||||||
| Variable-rate debt | % | % | ||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||
(1) At December 31, 2023, debt related to our wholly-owned properties coupled with our pro rata share of joint venture debt results in a fixed-rate debt ratio of approximately 75 % of our total pro rata indebtedness when including the effect of interest rate swaps. See "Note 8 - Derivative Financial Instruments and Hedging."
Contractual principal payments, without consideration of maturity date extension options, but including the refinancing of the 2018 Term Loan subsequent to December 31, 2023, for each of the next five years are as follows (in thousands):
| For the Year Ended December 31, | Amount | ||||||||||
| 2024 | $ | ||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| 2028 | (1) | ||||||||||
| Thereafter | |||||||||||
| $ | |||||||||||
(1) Debt maturities in 2028 include $25 million related to the refinancing of the 2018 Term Loan that was paid at closing of the 2024 Term Loan in February 2024. Advances on our $400 Million Revolver have a fully extended maturity of June 2028.
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
| 2023 | 2022 | |||||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | Valuation Technique | ||||||||||||||||||||||||||||
| Convertible notes | $ | $ | $ | $ | Level 1 - Market approach | |||||||||||||||||||||||||||
| Mortgage loans | Level 2 - Market approach | |||||||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||||||||
At December 31, 2023 and 2022, we had $600.0 million and $400.0 million of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date.
For additional information on our use of derivatives as interest rate hedges, see "Note 8 – Derivative Financial Instruments and Hedging.”
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NOTE 7 –– LEASES
The Company has operating leases related to the land under certain lodging properties, conference centers, parking spaces, automobiles, our corporate office and other miscellaneous office equipment. These leases have remaining terms of 1 year to 74.5 years, some of which include options to extend the leases for additional years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize rental expense for these leases on a straight-line basis over the lease term.
Certain of our lease agreements include rental payments based on a percentage of revenue over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or restrictive covenants that materially affect our business. In addition, we rent or sublease certain owned real estate to third parties. During the years ended December 31, 2023, 2022, and 2021, we recorded gross third-party tenant income of $2.6 million, $2.6 million, and $1.9 million, respectively, which were recorded in Other income, net in the Consolidated Statements of Operations.
Our right-of-use assets and related liabilities include renewal options reasonably certain to be exercised. We base our lease calculations on our estimated incremental borrowing rate. As of December 31, 2023 and 2022 our weighted average incremental borrowing rate was 4.8
During the years ended December 31, 2023, 2022, and 2021, the Company's total operating lease cost was $4.6 million, $4.1 million, and $3.3 million, respectively, and the operating cash outflows from operating leases was $4.0 million, $3.7 million, and $3.1 million, respectively. As of December 31, 2023 and 2022, the weighted average operating lease term was 32.2 and 34.0 years, respectively.
Operating lease maturities as of December 31, 2023 are as follows (in thousands):
| For the Year Ended December 31, | Amount | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
Total lease payments (1) | ||||||||
| Less interest | ( | |||||||
| Total | $ | |||||||
(1) Certain payments above include future increases to the minimum fixed rent based on the Consumer Price Index in effect at the initial measurement of the lease balances.
NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
We are exposed to interest rate risk through our variable-rate debt. We manage this risk primarily by managing the amount, sources, and duration of our debt funding and through the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage our exposure to known or expected cash payments related to our variable-rate debt. The maximum length of time over which we have hedged our exposure to variable interest rates with our existing derivative financial instruments is approximately seven years .
Our objectives in using derivative financial instruments are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Our interest rate swaps are designated as cash flow hedges and involve the receipt of variable-rate payments from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
Our agreements with our derivative counterparties contain provisions such that if we default, or can be declared in default, on any of our indebtedness, then we could also be declared in default on our derivative financial instruments.
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Information about our derivative financial instruments at December 31, 2023 and 2022 is as follows (dollar amounts in thousands):
Average | |||||||||||||||||||||||||||||||||||||||||||||||
Annual | Notional Amount | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||
Effective | December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||
| Contract date | Effective Date | Expiration Date | Fixed Rate | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||
| Operating Partnership: | |||||||||||||||||||||||||||||||||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | % | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| October 2, 2017 | January 29, 2018 | January 31, 2023 | % | ||||||||||||||||||||||||||||||||||||||||||||
| June 11, 2018 | September 28, 2018 | September 30, 2024 | % | ||||||||||||||||||||||||||||||||||||||||||||
| June 11, 2018 | December 31, 2018 | December 31, 2025 | % | ||||||||||||||||||||||||||||||||||||||||||||
| July 26, 2022 | January 31, 2023 | January 31, 2027 | % | ||||||||||||||||||||||||||||||||||||||||||||
| July 26, 2022 | January 31, 2023 | January 31, 2029 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total Operating Partnership | |||||||||||||||||||||||||||||||||||||||||||||||
| GIC Joint Venture: | |||||||||||||||||||||||||||||||||||||||||||||||
| March 24, 2023 | July 1, 2023 | January 13, 2026 | % | ||||||||||||||||||||||||||||||||||||||||||||
| March 24, 2023 | July 1, 2023 | January 13, 2026 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total GIC Joint Venture | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At December 31, 2023 and 2022, all our interest rate swaps were in an asset position. Derivative assets related to our interest rate swaps are recorded in Other assets, and other and derivative liabilities (when applicable) are included in Accrued expenses and other in our Consolidated Balance Sheets. We are not required to post any collateral related to these agreements and are not in breach of any financial provisions of the agreements.
Changes in the fair value of the hedging instruments are deferred in Other comprehensive income (loss) and are reclassified to Interest expense in our Consolidated Statements of Operations in the period in which the hedged item affects earnings. In 2024, we estimate that an additional $10.1 million will be reclassified from Other comprehensive income and recorded as a decrease to Interest expense.
The table below details the location in the financial statements of the gain or loss recognized on derivative financial instruments designated as cash flow hedges (in thousands):
For the Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
Gain recognized in Accumulated other comprehensive loss on derivative financial instruments | $ | $ | $ | |||||||||||||||||
Gain (loss) reclassified from Accumulated other comprehensive income to Interest expense | $ | $ | ( | $ | ( | |||||||||||||||
| Total interest expense and other finance expense presented in the Consolidated Statement of Operations in which the effects of cash flow hedges are recorded | $ | $ | $ | |||||||||||||||||
In January 2024, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into a $100.0 million interest rate swap to fix one-month term SOFR until January 2026. The interest rate swaps have an effective date of October 1, 2024 and a termination date of January 13, 2026. Pursuant to the interest rate swaps, we will pay a fixed rate of 3.765 % and receive the one-month term SOFR floating rate index.
NOTE 9 — EQUITY
Common Stock
The Company is authorized to issue up to 500,000,000 0.01 one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power.
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In May 2022, the Company and the Operating Partnership entered into an equity distribution agreement (the “Equity Distribution Agreement”) with a group of underwriters as sales agents for the Company, principals and/or, with certain exceptions, forward sellers (collectively the “Managers”) and certain banks as forward purchasers, providing for the offer and sale of shares of the Company’s Common Stock, having a maximum aggregate offering price of up to $200.0 million through or to the Managers, as the Company’s sales agents or, if applicable, as forward sellers, or directly to the Managers, as principals (the “2022 ATM Program”). To date, we have not sold any shares of our Common Stock under the 2022 ATM Program.
Changes in Common Stock during the years ended December 31, 2023 and 2022 were as follows:
| 2023 | 2022 | |||||||||||||
| Beginning shares of Common Stock outstanding | ||||||||||||||
| Common Unit redemptions | ||||||||||||||
| Grants under the Equity Plan | ||||||||||||||
| Annual grants to independent directors | ||||||||||||||
| Performance share and other forfeitures | ( | ( | ||||||||||||
| Shares retained for employee tax withholding requirements | ( | ( | ||||||||||||
| Ending shares of Common Stock outstanding | ||||||||||||||
At December 31, 2023 and 2022, the Company had reserved 50,774,173 and 51,650,000 shares of Common Stock, respectively, for the issuance of Common Stock (i) upon the exercise of stock options, issuance of time-based restricted stock awards, issuance of performance-based restricted stock awards, grants of director stock awards, or other awards issued pursuant to our Equity Plan, (ii) upon redemption of Common Units, or (iii) under the 2022 ATM Program.
Preferred Stock
The Company is authorized to issue up to 100,000,000 0.01 89,600,000 is currently undesignated, 6,400,000 shares have been designated as 6.25 4,000,000 shares have been designated as 5.875
The Company's preferred shares (collectively, “Preferred Shares”) rank senior to our Common Stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirements. The Company may not redeem the Series E Preferred Shares or Series F Preferred Shares prior to November 13, 2022 and August 12, 2026, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25 per share, plus any accumulated, accrued and unpaid distributions up to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each Series E preferred share is 3.1686 shares of Common Stock and each Series F preferred share is 5.8275 shares of common stock, all subject to certain adjustments.
The Company pays dividends at an annual rate of $1.5625 for each Series E Preferred Share and $1.46875 for each Series F Preferred Share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
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NOTE 10 - NON-CONTROLLING INTERESTS AND REDEEMABLE NON-CONTROLLING INTERESTS
Non-controlling Interests in Operating Partnership
Pursuant to the limited partnership agreement of our Operating Partnership, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of Common Stock at the time of redemption; however, the Company has the option to redeem with shares of our Common Stock on a one -for-one basis. The number of shares of our Common Stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations. In January 2022 and March 2022, in connection with the NCI Transaction, the Company issued an aggregate of 15,864,674 Common Units as partial consideration for the purchase.
At December 31, 2023 and 2022, unaffiliated third parties owned 15,948,628 and 15,976,807 , respectively, of Common Units of the Operating Partnership, representing approximately 13
We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s Consolidated Balance Sheets. The portion of net income allocated to these Common Units is reported on the Company’s Consolidated Statement of Operations as net income attributable to non-controlling interests of the Operating Partnership.
Non-controlling Interests in Joint Ventures
At December 31, 2023, the Company is a partner with a majority controlling equity interest in three consolidated joint ventures as described below.
GIC Joint Venture
In July 2019, the Company entered into the GIC Joint Venture to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the GIC Joint Venture and invests 51 % of the equity capitalization of the limited partnership, with GIC investing the remaining 49 %. The Company earns fees for providing services to the GIC Joint Venture and has the potential to earn incentive fees based on the GIC Joint Venture achieving certain return thresholds. During the year ended December 31, 2023 and 2022, Summit earned $0.1 million and $0.8 million, respectively under incentive fee agreements. There were no such incentive fees earned during the year ended December 31, 2021.
As of December 31, 2023, the GIC Joint Venture owns 41 hotel properties containing 5,581 guestrooms in nine states. The GIC Joint Venture owns the properties through master real estate investment trusts (“Master REIT”) and subsidiary REITs (“Subsidiary REIT”). All of the hotel properties owned by the GIC Joint Venture are leased to taxable REIT subsidiaries of the Subsidiary REITs (“Subsidiary REIT TRSs”). To qualify as a REIT, the Master REIT and each Subsidiary REIT must meet all REIT requirements provided in the IRC. Taxable income related to the Subsidiary REIT TRSs is subject to federal, state and local income taxes at applicable corporate tax rates.
Brickell Joint Venture
In June 2022, the Company entered into the Brickell Joint Venture to facilitate the exercise of the Initial Purchase Option to acquire a 90 % equity interest in the AC/Element Hotel. Our joint venture partner, C-F Brickell, owns the remaining 10 % equity interest in the Brickell Joint Venture. The Company has an option to purchase the remaining 10 % equity interest in the Brickell Joint Venture from C-F Brickell in December 2026 pursuant to the exercise of a second purchase option at its market value on the exercise date. The Company serves as the managing member of the Brickell Joint Venture.
Onera Joint Venture
In October 2022, the Company entered into the Onera Joint Venture, developers of alternative accommodation properties, with the acquisition of a 90 % equity interest in the Onera Joint Venture for $5.2 million in cash, plus additional contingent consideration of $1.8 million paid in September 2023. The $1.8 million contingent consideration paid represents our 90 % pro rata share of the maximum increase in value of the property of $2.0 million as a result of the property outperforming a pre-established threshold over a 12-month period after the closing of the transaction.
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The Onera Joint Venture owns a 100 % fee simple interest in real property and improvements located in Fredericksburg, Texas (the "Onera Property") consisting an 11 -unit glamping property and a 6.4 -acre parcel of land.
Redeemable Non-controlling Interests
In January 2022, in connection with the NCI Transaction, Summit Hotel GP, LLC, a wholly-owned subsidiary of the Company and the sole general partner of the Operating Partnership, on its own behalf as general partner of the Operating Partnership and on behalf of the limited partners of the Operating Partnership, entered into the Tenth Amendment (the “Tenth Amendment”) to the First Amended and Restated Agreement of Limited Partnership of the Operating Partnership, to provide for the issuance of up to 2,000,000 Series Z Preferred Units. The Series Z Preferred Units rank on a parity with the Operating Partnership’s Series E and Series F Preferred Units and holders will receive quarterly distributions at a rate of 5.25 % per year. From issuance until the tenth anniversary of their issuance, the Series Z Preferred Units will be redeemable at the holder’s request at any time, or in connection with a change of control of the Company, for, at the Company’s election, cash or shares of the Company’s 5.25 % Series Z Cumulative Perpetual Preferred Stock (which will be designated and authorized following notice of redemption by holder of the Series Z Preferred Units) on a one -for-one basis. After the fifth anniversary of their issuance, the Company may redeem the Series Z Preferred Units for cash at a redemption amount of $25 per unit. For a 90-day period immediately following both the tenth and the eleventh anniversaries of their issuance or in connection with a change of control of the Company, the Series Z Preferred Units will be redeemable at the holder’s request for cash at a redemption amount of $25 per unit. In January 2022 and March 2022, in connection with the NCI Transaction, the Operating Partnership issued an aggregate of 2,000,000 Series Z Preferred Units as partial consideration for the purchase. At December 31, 2023, the redeemable Series Z Preferred Units issued in connection with the NCI Transaction are recorded as temporary equity and reflected as Redeemable non-controlling interests on our Consolidated Balance Sheets.
NOTE 11 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The following table presents information about our financial instruments measured at fair value on a recurring basis as of December 31, 2023 and 2022. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
| Fair Value Measurement at December 31, 2023 using | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||||||||||||
| Purchase options related to real estate loans (Onera Purchase Option) | ||||||||||||||||||||||||||
| Fair Value Measurement at December 31, 2022 using | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | ||||||||||||||||||||||
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The Onera Purchase Option does not have a readily determinable fair value. The fair value was estimated using the Black-Scholes model and was based on unobservable inputs for which there is little or no market information available. As such, we were required to develop assumptions to determine the fair value of the Onera Purchase Option as follows (dollar amounts in thousands):
| Exercise price | $ | |||||||
First option exercise date (1) | 10/1/2024 | |||||||
| Expected volatility | % | |||||||
| Risk free rate | % | |||||||
| Expected annualized equity dividend yield | % | |||||||
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2023 or 2022.
Nonrecurring Fair Value Measurements
During the year ended December 31, 2023, the Company recorded a loss on write-down of lodging properties classified as Assets Held for Sale of $16.7 million to reduce the carrying amounts of the Hyatt Place - Dallas (Plano), TX and two additional lodging properties that are under contract to sell or being marketed for sale to their expected net selling prices less estimated costs to sell (Level 2 of the fair value hierarchy).
During the year ended December 31, 2022, the Company recorded a loss on write-down of lodging properties classified as Assets Held for Sale of $2.9 million to reduce the carrying amounts of the Hilton Garden Inn - Eden Prairie, MN, Holiday Inn Express & Suites - Minnetonka, MN, the Hyatt Place - Chicago (Hoffman Estates), IL and the Hyatt Place - Chicago (Lombard), IL to their net selling prices less estimated costs to sell (Level 2 of the fair value hierarchy).
During the year ended December 31, 2022, the Company recorded a loss on write-down of lodging properties classified as Assets Held for Sale of $7.2 million to reduce the carrying amounts of two lodging properties to their net selling prices less estimated costs to sell. The proposed sale of these two lodging properties was terminated during the year ended December 31, 2023 and the assets were reclassified out of Assets Held for Sale (Level 2 of the fair value hierarchy).
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Franchise Agreements
All of our lodging properties (with the exception of the Onera Property and the Nordic Lodge - Steamboat Springs, CO) operate under franchise agreements with major hotel franchisors. The terms of our franchise agreements generally range from 10 to 30 years with various extension provisions. Each franchisor receives franchise fees ranging from 3 % to 6 % of each hotel property’s room revenues, and some agreements require that we pay marketing fees of up to 4 % of room revenue. In addition, some of these franchise agreements require that we deposit into a reserve fund for capital expenditures up to 5 % of the lodging property's gross or room revenues, depending on the franchisor, to ensure that we comply with the franchisor's standards and requirements. We also pay fees to our franchisors for services related to reservation and information systems. In 2023, 2022, and 2021, we expensed fees related to our franchise agreements of $52.6 million, $47.9 million, and $25.0 million, respectively.
Management Agreements
Our lodging properties operate pursuant to management agreements with various professional third-party management companies. The remaining terms of our management agreements range from month-to-month to 14 years and have various extension provisions. Each management company receives a base management fee, generally a percentage of total lodging property revenues. In some cases, there are also monthly fees for certain services, such as accounting, based on the number of guestrooms. Generally, there are also incentive fees based on attaining certain financial thresholds. During the years ended December 31, 2023, 2022, and 2021, we expensed fees related to our lodging property management agreements of $18.5 million, $17.4 million, and $9.9 million, respectively.
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Litigation
We are involved from time to time in litigation arising in the ordinary course of business. We are not currently aware of any actions against us that would have a material effect on our consolidated financial position or results of operations.
NOTE 13 — EQUITY-BASED COMPENSATION
Our currently outstanding equity-based awards were issued under the Equity Plan which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive awards.
Stock options granted may be either incentive stock options or non-qualified stock options. Vesting terms may vary with each grant, and stock option terms are generally to ten years . We currently have no outstanding stock options. We have outstanding equity-based awards in the form of restricted stock awards. All of our outstanding equity-based awards are classified as equity.
Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes time-based restricted stock activity under our Equity Plan for 2023 and 2022:
| Number of Shares | Weighted Average Grant Date Fair Value per Share | Aggregate Current Value | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Non-vested December 31, 2021 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
| Vested | ( | |||||||||||||||||||
| Forfeited | ( | |||||||||||||||||||
| Non-vested December 31, 2022 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Vested | ( | |||||||||||||||||||
| Forfeited | ( | |||||||||||||||||||
| Non-vested December 31, 2023 | $ | $ | ||||||||||||||||||
The awards granted to our non-executive employees prior to 2022 vest over a four-year period based on continuous service (20 40 % on the fourth anniversary of the grant date). The awards granted to our non-executive employees in 2022 and thereafter vest over a three-year period based on continuous service (25 50 % on the third anniversary of the grant date).
The awards granted to our executive officers vest over a three-year period based on continuous service (25 50 % on the third anniversary of the grant date) or in certain circumstances upon a change in control.
The holders of these awards have the right to vote the related shares of Common Stock and receive all dividends declared and paid whether or not vested. The fair value of time-based restricted stock awards granted is calculated based on the market value of our Common Stock on the date of grant.
During the years ended December 31, 2023, 2022, and 2021, the total fair value of time-based restricted stock awards that vested was $3.6 million, $2.5 million and $5.3 million, respectively. The total fair value of time-based restricted stock awards that vested during the year ended December 31, 2022 includes $0.4 million of time-based restricted stock for which the vesting was accelerated related to the departure of our Executive Vice President and Chief Operating Officer. The total fair value of time-based restricted stock awards that vested during the year ended December 31, 2021 includes $1.5 million of time-based restricted stock for which the vesting was accelerated related to the non-renewal of the employment contract of our Executive Chairman.
F-42
Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes performance-based restricted stock activity under our Equity Plan:
| Number of Shares | Weighted Average Grant Date Fair Value per Share | Aggregate Current Value | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Non-vested December 31, 2021 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
| Vested | ( | |||||||||||||||||||
| Non-vested December 31, 2022 | ||||||||||||||||||||
| Granted | ||||||||||||||||||||
| Vested | ( | |||||||||||||||||||
| Forfeited | ( | |||||||||||||||||||
| Non-vested December 31, 2023 | $ | $ | ||||||||||||||||||
Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our Common Stock on the grant date. The fair value of the performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model. These awards generally vest over a three-year period based on our total shareholder return relative to the total shareholder return of companies within the Dow Jones U.S. Hotels Index (or in the event such index is discontinued, or its methodology significantly changed, a comparable index selected by the Compensation Committee of the Board) at the end of the period or upon a change in control. The awards require continued service during the measurement period and are subject to the other conditions described in the Equity Plan or award document.
The number of shares the executive officers may earn under these awards range from zero shares to twice the number of shares granted based on our percentile ranking within the index at the end of the measurement period. In addition, a portion of the performance-based shares may be earned based on the Company's absolute total shareholder return calculated during the performance period.
The holders of these grants have the right to vote the granted shares of Common Stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards. Further, if additional shares are earned based on our percentile ranking within the index, dividend payments will be issued as if the additional shares had been held throughout the measurement period.
The fair value of performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model and the following assumptions:
For the Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Expected dividend yield | % | % | % | |||||||||||||||||
| Expected stock price volatility | % | % | % | |||||||||||||||||
| Risk-free interest rate | % | % | % | |||||||||||||||||
| Monte Carlo iterations | ||||||||||||||||||||
| Weighted average estimated fair value of performance-based restricted stock awards | $ | $ | $ | |||||||||||||||||
The expected dividend yield was calculated based on our annual expected dividend payments at the time of grant. The expected volatility was based on historical price changes of our Common Stock for a period comparable to the performance period. The risk-free interest rates were interpolated from the Federal Reserve Bond Equivalent Yield rates for “on-the-run” U.S. Treasury securities.
F-43
Director Stock Awards Made Pursuant to Our Equity Plan
During the years ended December 31, 2023 and 2022 we granted 113,141 and 84,899 shares of Common Stock, respectively, to our non-employee directors as a part of our director compensation program. These grants were made pursuant to our Equity Plan and were vested upon grant.
Equity-Based Compensation Expense
Equity-based compensation expense included in Corporate General and Administrative expense in the Consolidated Statements of Operations was as follows (in thousands):
For the Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Time-based restricted stock | $ | $ | $ | |||||||||||||||||
| Performance-based restricted stock | ||||||||||||||||||||
| Director stock | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
We recognize equity-based compensation expense ratably over the vesting terms. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions.
Unrecognized equity-based compensation expense for all non-vested awards pursuant to our Equity Plan was $8.9 million at December 31, 2023 as follows (in thousands):
| Total | 2024 | 2025 | 2026 | |||||||||||||||||||||||
| Time-based restricted stock | $ | $ | $ | $ | ||||||||||||||||||||||
| Performance-based restricted stock | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
The Company's former Executive Vice President and Chief Operating Officer departed the Company in March 2022. The Company recorded $1.3 million of additional stock-based compensation expense during the period related to the modification of certain stock award agreements. This amount was comprised of $0.4 million related to time-based restricted stock awards and $0.9 million related to performance-based restricted stock awards.
In connection with the non-renewal of the employment contract of the former Executive Chairman in December 2021, the Company recorded $2.9 million of additional stock-based compensation expense during the year ended December 31, 2021 related to the modification of certain stock award agreements. This amount was comprised of $1.5 million related to time-based restricted stock awards and $1.4 million related to performance-based restricted stock awards.
NOTE 14 — BENEFIT PLANS
In August 2011, we initiated a qualified contributory retirement plan (the Summit Hotel Properties, Inc. 401(k) Profit Sharing Plan or the “Plan”) under Section 401(k) of the IRC, which covers all full-time employees who meet certain eligibility requirements. Voluntary contributions may be made to the Plan by employees. The Plan is a Safe Harbor Plan and requires a mandatory employer contribution. The employer contribution for the years ended December 31, 2023 and 2022 was $0.4 0.3 million for the year ended December 31, 2021.
NOTE 15 — INCOME TAXES
We have elected to be taxed as a REIT. As a REIT, we are generally not subject to corporate level income taxes on taxable income we distribute to our stockholders. We have met the annual REIT distribution requirement by distribution of at least 90% of our taxable income to our stockholders.
Income related to our TRSs is subject to federal, state and local taxes at applicable corporate tax rates. Our consolidated tax provision includes the income tax provision related to the operations of the TRSs as well as state and local income taxes related to the Operating Partnership.
F-44
The components of income tax expense (benefit) for the years ended December 31, 2023, 2022 and 2021 are as follows (in thousands):
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | $ | $ | |||||||||||||||||
| State and local | ||||||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | ( | ( | ||||||||||||||||||
| Income tax expense | $ | $ | $ | |||||||||||||||||
Below is a reconciliation between the provision for income taxes and the amounts computed by applying the federal statutory income tax rate to the income or loss before taxes (in thousands):
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Statutory federal income tax provision | $ | ( | $ | $ | ( | |||||||||||||||
| Nontaxable income of the REITs | ||||||||||||||||||||
| State income taxes, net of federal tax benefit | ||||||||||||||||||||
| Provision to return and deferred adjustment | ||||||||||||||||||||
| Effect of permanent differences and other | ||||||||||||||||||||
| Deferred assets transferred with REIT stock sale | ||||||||||||||||||||
| Change in valuation allowance | ( | ( | ||||||||||||||||||
| Income tax provision | $ | $ | $ | |||||||||||||||||
The Company evaluates its deferred tax assets each reporting period to determine if it is more-likely-than-not that those assets will be realized. In its evaluation, the Company assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the Company’s existing deferred tax assets. At December 31, 2023, the Company continues to be in a three-year cumulative loss. As such, realizability of the Company's deferred tax assets is not reasonably assured. Therefore, a valuation allowance was recorded against substantially all of our deferred tax assets at December 31, 2023.
At December 31, 2023 and 2022, we had valuation allowances of $13.9 million and $11.8 million, respectively. The $2.1 million increase in valuation allowance relates to increases in deferred tax assets primarily due to a $1.8 million increase related to
Deferred tax assets are included in Other assets and deferred tax liabilities are included in Accrued expenses and other in the accompanying Consolidated Balance Sheets.
Significant components of our TRSs deferred tax assets (liabilities) are as follows (in thousands):
December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Tax carryforwards | $ | $ | ||||||||||||
| Accrued expenses | ||||||||||||||
| Other | ||||||||||||||
| Total | ||||||||||||||
| Valuation allowance | ( | ( | ||||||||||||
| Net deferred tax assets | $ | ( | $ | |||||||||||
| Gross deferred tax assets | $ | $ | ||||||||||||
| Gross deferred tax liabilities | ( | ( | ||||||||||||
| Valuation allowance | ( | ( | ||||||||||||
Net deferred tax (liabilities) assets | $ | ( | $ | |||||||||||
F-45
At December 31, 2023, our TRSs had federal net operating losses of $46.2 million which are not subject to expiration and state net operating losses of $37.4 million, which expire beginning in 2025. At December 31, 2023, Summit Hotel Properties Inc. and our Subsidiary REITs had federal net operating loss carryforwards of $50.0 million and $6.3 million, respectively, which are not subject to expiration.
In the normal course of business, we are subject to examination by federal, state, and local jurisdictions where applicable. We had no unrecognized tax benefits at December 31, 2023 or in the three-year period then ended. We expect no significant increase or decrease in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2023. We have no material interest or penalties relating to unrecognized tax benefits in the Consolidated Statements of Operations for the years ended December 31, 2023, 2022 or 2021 or in the Consolidated Balance Sheets as of December 31, 2023 or 2022.
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. In general, we are not subject to tax examinations by tax authorities for years before 2018.
F-46
Characterization of Distributions (Unaudited)
For income tax purposes, distributions paid consist of ordinary income and capital gains or a combination thereof. For the years ended December 31, 2023, 2022 and 2021 distributions paid per share were characterized as follows:
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||
| Ordinary non-qualified dividend income | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Ordinary qualified dividend income | % | % | % | |||||||||||||||||||||||||||||||||||
| Capital gain distributions | % | % | % | |||||||||||||||||||||||||||||||||||
| Return of capital | % | % | % | |||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Preferred Stock - Series D | ||||||||||||||||||||||||||||||||||||||
| Ordinary non-qualified dividend income | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Capital gain distributions | % | % | % | |||||||||||||||||||||||||||||||||||
| Return of capital | % | % | % | |||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Preferred Stock - Series E | ||||||||||||||||||||||||||||||||||||||
| Ordinary non-qualified dividend income | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Ordinary qualified dividend income | % | % | % | |||||||||||||||||||||||||||||||||||
| Capital gain distributions | % | % | % | |||||||||||||||||||||||||||||||||||
| Return of capital | % | % | % | |||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Preferred Stock - Series F | ||||||||||||||||||||||||||||||||||||||
| Ordinary non-qualified dividend income | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Ordinary qualified dividend income | % | % | % | |||||||||||||||||||||||||||||||||||
| Capital gain distributions | % | % | % | |||||||||||||||||||||||||||||||||||
| Return of capital | % | % | % | |||||||||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
Ordinary non-qualified dividends are eligible for the 20% deduction provided by Section 199A of the IRC.
NOTE 16 — EARNINGS PER SHARE
We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested time-based restricted stock awards with non-forfeitable dividends and for our Common Stock. Our non-vested time-based restricted stock awards with non-forfeitable rights to dividends are considered securities which participate in undistributed earnings with Common Stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested time-based restricted stock awards with non-forfeitable dividends do not have such an obligation so they are not allocated losses.
F-47
The Common Units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income would also be added to derive net income attributable to common stockholders. For the years ended December 31, 2023, 2022 and 2021, we had unvested performance-based restricted stock awards of 1,056,272 shares, 1,006,974 shares and 1,002,866 shares, respectively, which were excluded from the denominator of the diluted earnings per share as the awards were antidilutive. Our outstanding convertible notes have been excluded from the denominator of the diluted earnings per share calculation as their inclusion would be antidilutive.
Below is a summary of the components used to calculate basic and diluted earnings per share (in thousands, except per share amounts):
For the Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Numerator: | ||||||||||||||||||||
Net (loss) income | $ | ( | $ | $ | ( | |||||||||||||||
| Adjusted for: | ||||||||||||||||||||
| Preferred dividends | ( | ( | ( | |||||||||||||||||
| Premium on redemption of preferred stock | ( | |||||||||||||||||||
| Distributions and accretion of redeemable non-controlling interests | ( | ( | ||||||||||||||||||
Loss attributable to non-controlling interest in Operating Partnership | ||||||||||||||||||||
Loss attributable to non-controlling interests in joint ventures | ( | |||||||||||||||||||
Loss from continuing operations attributable to common stockholders | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Denominator: | ||||||||||||||||||||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||||||||||
| Loss per share: | ||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | ||||||||||||||
F-48
NOTE 17 — SUPPLEMENTAL CASH FLOW INFORMATION
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
Supplemental cash flow information is as follows (in thousands):
For the Year Ended December 31, | ||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Cash payments for interest | $ | $ | $ | |||||||||||||||||
| Accrued acquisition costs and improvements to lodging properties | $ | $ | $ | |||||||||||||||||
| Cash payments for income taxes, net of refunds | $ | $ | $ | |||||||||||||||||
| Accrued and unpaid dividends | $ | $ | $ | |||||||||||||||||
| Mortgage debt assumed for acquisitions of lodging properties | $ | $ | $ | |||||||||||||||||
| Assumption of leases and other assets and liabilities in connection with the acquisition of a portfolio of properties | $ | $ | $ | |||||||||||||||||
| Conversion of a mezzanine loan to complete acquisition of lodging properties | $ | $ | $ | |||||||||||||||||
| Conversion of purchase option to complete acquisition of lodging properties | $ | $ | $ | |||||||||||||||||
| Non-cash contributions of assets by non-controlling interests related to acquisition of lodging properties | $ | $ | $ | |||||||||||||||||
| Issuance of non-controlling interests in Operating Partnership to complete acquisition of a portfolio of properties | $ | $ | $ | |||||||||||||||||
| Redeemable non-controlling interests in operating partnership issued to complete acquisition of a portfolio of properties | $ | $ | $ | |||||||||||||||||
NOTE 18 — SUBSEQUENT EVENTS
We have evaluated significant matters subsequent to our year end date of December 31, 2023 and through the filing date of our Annual Report on Form 10-K on February 28, 2024 as follows:
Equity Transactions
In January 2024, our Board declared cash dividends of $0.390625 per share of Series E Preferred Stock and $0.3671875 per share of Series F Preferred Stock. The Board also declared on behalf of the Operating Partnership, a cash dividend of $0.328125 per share of the Operating Partnership's Series Z Preferred Units. Our Board also declared a quarterly cash dividend of $0.06 per share on our Common Stock and per Common Unit of the Operating Partnership.
These dividends are payable February 29, 2024 to stockholders and unitholders of record on February 15, 2024.
Disposition of Lodging Property
During the fourth quarter of 2023, we entered into a purchase and sale agreement with a third-party to sell the 127 -guestroom Hyatt Place Dallas (Plano), TX for $10.3 million. We reclassified the property to Assets Held for sale, net at December 31, 2023 and recorded a write-down of $4.0 million in the fourth quarter of 2023 for the excess of the net carrying amount of the lodging property over the net selling price less estimated costs to sell. We completed the sale of the property on February 15, 2024 under the terms described above.
F-49
Debt Refinancing
Subsequent to year-end, the Company successfully completed a new $200 million senior unsecured term loan financing that refinanced and replaced the 2018 Term Loan. The 2024 Term Loan has an initial maturity date of February 2027 and can be extended for two 12-month periods at the Company’s option, subject to certain conditions, for a fully extended maturity date of February 2029. The 2024 Term Loan provides for interest rate pricing ranging from 135 basis points to 235 basis points over the applicable adjusted term SOFR or 35 basis points to 135 basis points over base rate, at the Company's option. Proceeds from the 2024 Term Loan financing and advances on our $400 Million Revolver were used to repay in full the Company’s $225 million 2018 Term Loan that was scheduled to mature in February 2025. In connection with the closing of the 2024 Term Loan, the collateral securing the Company’s 2023 Senior Credit Facility was released. As a result of the 2024 Term Loan financing, the Company has significantly reduced debt maturities until 2026 and has an average length to maturity of approximately 3.6 years. Other terms of the agreement are similar to the Company’s 2023 Senior Credit Facility.
Interest Rate Swaps
In January 2024, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into a $100.0 million interest rate swap to fix one-month term SOFR until January 2026. The interest rate swap has an effective date of October 1, 2024 and a termination date of January 13, 2026. Pursuant to the interest rate swap, we will pay a fixed rate of 3.765 % and receive the one-month term SOFR floating rate index.
F-50
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2023
(in thousands)
| Initial Cost | Costs Subsequent | Gross Amount at December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Mortgage Debt/ Encumbrances | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Buildings, Improvements and Furniture, Fixtures and Equipment | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Total | Accumulated Depreciation | Date Acquired | |||||||||||||||||||||||||||||||||||||||||||||||
| Aliso Viejo, CA - Homewood Suites | $ | $ | $ | $ | $ | $ | $ | $ | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amarillo, TX - Courtyard | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amarillo, TX - Embassy Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Arlington, TX - Courtyard | ( | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Arlington, TX - Residence Inn | ( | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asheville, NC - Hotel Indigo | (3) | ( | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta, GA - AC Hotel | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta, GA - Courtyard | (2) | ( | 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Atlanta, GA - Residence Inn | ( | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Austin, TX - Hampton Inn & Suites | ( | 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Baltimore, MD - Hampton Inn & Suites | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Baltimore, MD - Residence Inn | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Boulder, CO - Marriott | ( | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Branchburg, NJ - Residence Inn | ( | ( | 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Brisbane, CA - DoubleTree | ( | 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bryan, TX - Hilton Garden Inn | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Camarillo, CA - Hampton Inn & Suites | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charlotte, NC - Courtyard | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Chicago, IL - Hyatt Place | (3) | ( | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cleveland, OH - Residence Inn | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dallas, TX - AC Hotel | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dallas, TX - Hampton Inn & Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dallas, TX - Parking Garage | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dallas, TX - Residence Inn | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dallas, TX - SpringHill Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Decatur, GA - Courtyard | ( | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Eden Prairie, MN - Hilton Garden Inn | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Englewood, CO - Hyatt House | (3) | ( | 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Englewood, CO - Hyatt Place | (2) | ( | 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fort Lauderdale, FL - Courtyard | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fort Lauderdale, FL - New Builds | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fort Worth, TX - Courtyard | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fredericksburg, TX - Onera Escapes | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Frisco, TX - AC Hotel | (3) | ( | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Frisco, TX - Canopy Hotel | (3) | ( | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Frisco, TX - Parking Garage | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Frisco, TX - Residence Inn | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
F-51
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2023
(in thousands)
| Initial Cost | Costs Subsequent | Gross Amount at December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Mortgage Debt/ Encumbrances | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Buildings, Improvements and Furniture, Fixtures and Equipment | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Total | Accumulated Depreciation | Date Acquired | |||||||||||||||||||||||||||||||||||||||||||||||
| Garden City, NY - Hyatt Place | ( | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Glendale, CO - Staybridge Suites | (1) | ( | 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Grapevine, TX - Courtyard | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Grapevine, TX - Hilton Garden Inn | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Grapevine, TX - Holiday Inn Express & Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Grapevine, TX - Hyatt Place | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Grapevine, TX - TownePlace Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Greenville, SC - Hilton Garden Inn | (1) | ( | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hillsboro, OR - Residence Inn | (3) | ( | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hoffman Estates, IL - Hyatt Place | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Houston, TX - AC Hotel | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Houston, TX - Hilton Garden Inn | ( | 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Houston, TX - Hilton Garden Inn | ( | 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hunt Valley, MD - Residence Inn | ( | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indianapolis, IN - Courtyard | ( | ( | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indianapolis, IN - SpringHill Suites | ( | ( | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Kansas City, MO - Courtyard | ( | ( | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Land Parcels - Land Parcels | ( | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lombard, IL - Hyatt Place | ( | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lone Tree, CO - Hyatt Place | ( | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Longview, TX - Hilton Garden Inn | (2) | ( | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Louisville, KY - Fairfield Inn & Suites | (2) | ( | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Louisville, KY - SpringHill Suites | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lubbock, TX - Hyatt Place | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mesa, AZ - Hyatt Place | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Metairie, LA - Courtyard | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Metairie, LA - Residence Inn | (1) | ( | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Miami, FL - AC Hotel | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Miami, FL - Element | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Miami, FL - Hyatt House | ( | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Miami, FL - Sky Lounge | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Midland, TX - Homewood Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Milpitas, CA - Hilton Garden Inn | ( | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minneapolis, MN - Hampton Inn & Suites | ( | 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minneapolis, MN - Hyatt Place | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Minnetonka, MN - Holiday Inn Express & Suites | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nashville, TN - Courtyard | ( | 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
F-52
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2023
(in thousands)
| Initial Cost | Costs Subsequent | Gross Amount at December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Mortgage Debt/ Encumbrances | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Buildings, Improvements and Furniture, Fixtures and Equipment | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Total | Accumulated Depreciation | Date Acquired | |||||||||||||||||||||||||||||||||||||||||||||||
| Nashville, TN - SpringHill Suites | ( | 2004 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Haven, CT - Courtyard | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA - Canopy Hotel | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA - Courtyard | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA - Courtyard | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA - SpringHill Suites | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA - SpringHill Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| New Orleans, LA - TownePlace Suites | (2) | ( | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Oklahoma City, OK - AC Hotel | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Oklahoma City, OK - Holiday Inn Express & Suites | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Oklahoma City, OK - Hyatt Place | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Orlando, FL - Hyatt House | ( | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Orlando, FL - Hyatt Place | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Orlando, FL - Hyatt Place | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Owings Mills, MD - Hyatt Place | ( | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pittsburgh, PA - Courtyard | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Plano, TX - Hyatt Place | ( | ( | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portland, OR - Hyatt Place | ( | 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portland, OR - Residence Inn | ( | 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portland, OR - Residence Inn | ( | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Poway, CA - Hampton Inn & Suites | ( | 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Francisco, CA - Four Points | ( | 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Francisco, CA - Hilton Garden Inn | ( | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| San Francisco, CA - Holiday Inn Express & Suites | (2) | ( | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Scottsdale, AZ - Courtyard | ( | 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Scottsdale, AZ - Hyatt Place | ( | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Scottsdale, AZ - Residence Inn | ( | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Scottsdale, AZ - SpringHill Suites | ( | 2003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Silverthorne, CO - Hampton Inn & Suites | ( | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Silverthorne, CO - Parking Garage | (2) | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Steamboat Springs, CO - Nordic Lodge | (1) | $ | ( | 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Steamboat Springs, CO - Residence Inn | (1) | ( | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tampa, FL - Hampton Inn & Suites | (1) | ( | 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tucson, AZ - Embassy Suites | ( | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tucson, AZ - Homewood Suites | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tyler, TX - Residence Inn | ( | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Waltham, MA - Hilton Garden Inn | ( | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
F-53
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2023
(in thousands)
| Initial Cost | Costs Subsequent | Gross Amount at December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Description | Mortgage Debt/ Encumbrances | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Buildings, Improvements and Furniture, Fixtures and Equipment | Land | Buildings, Improvements and Furniture, Fixtures and Equipment | Total | Accumulated Depreciation | Date Acquired | |||||||||||||||||||||||||||||||||||||||||||||||
| Watertown, MA - Residence Inn | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
(1) Properties cross-collateralize the related loan, refer to "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt" in the Consolidated Financial Statements.
(2) Properties subject to ground lease, refer to "Part II – Item 8. – Financial Statements and Supplementary Data – Note 7 – Leases" in the Consolidated Financial Statements.
(3) Property value includes an impairment charge, based on the difference between the net realizable value and the carrying value at the time of measurement.
F-54
SUMMIT HOTEL PROPERTIES, INC
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2023
(in thousands)
(a) ASSET BASIS
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Reconciliation of land, buildings and improvements: | ||||||||||||||||||||
| Balance at beginning of period as adjusted | $ | $ | $ | |||||||||||||||||
| Additions to land, buildings and improvements | ||||||||||||||||||||
| Disposition of land, buildings and improvements | ( | ( | ( | |||||||||||||||||
| Write-down of assets | ( | ( | ||||||||||||||||||
| Balance at end of period | $ | $ | $ | |||||||||||||||||
(b)ACCUMULATED DEPRECIATION
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Reconciliation of accumulated depreciation: | ||||||||||||||||||||
| Balance at beginning of period | $ | $ | $ | |||||||||||||||||
| Depreciation | ||||||||||||||||||||
| Depreciation on assets sold or disposed | ( | ( | ( | |||||||||||||||||
| Balance at end of period | $ | $ | $ | |||||||||||||||||
(c)The aggregate cost of real estate for Federal income tax purposes was approximately $3,380 million (unaudited).
(d)Depreciation for buildings, improvements and furniture, fixtures and equipment is based on useful lives ranging from 2 to 40 years.
(e)We have mortgages payable on the properties as noted. Additional mortgage information can be found in "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt" to the Consolidated Financial Statements.
(f)Amounts under the column heading "Costs Subsequent" include (when applicable) parcels of undeveloped land that were sold, and impairment losses related to certain properties.
F-55