10-Q 1 sho-20240331x10q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2024

OR

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

For the transition period from                to               

Commission file number 001-32319

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification Number)

15 Enterprise, Suite 200
Aliso Viejo, California

92656

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (949) 330-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

SHO

New York Stock Exchange

Series H Cumulative Redeemable Preferred Stock, $0.01 par value

SHO.PRH

New York Stock Exchange

Series I Cumulative Redeemable Preferred Stock, $0.01 par value

SHO.PRI

New York Stock Exchange

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 1, 2024, there were 203,674,398 shares of Sunstone Hotel Investors, Inc.’s common stock, $0.01 par value per share, outstanding.

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended March 31, 2024

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

2

Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023

2

Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023

3

Unaudited Consolidated Statements of Equity for the Three Months Ended March 31, 2024 and 2023

4

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023

6

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

Item 4.

Controls and Procedures

35

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

36

Item 6.

Exhibits

37

SIGNATURES

38

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

March 31,

December 31,

    

2024

    

2023

(unaudited)

ASSETS

Investment in hotel properties, net

$

2,588,849

$

2,585,279

Operating lease right-of-use assets, net

11,619

12,755

Cash and cash equivalents

400,678

426,403

Restricted cash

70,317

67,295

Accounts receivable, net

36,694

31,206

Prepaid expenses and other assets, net

33,943

26,383

Total assets

$

3,142,100

$

3,149,321

LIABILITIES AND STOCKHOLDERS' EQUITY

Debt, net of unamortized deferred financing costs

$

814,410

$

814,559

Operating lease obligations

15,588

16,735

Accounts payable and accrued expenses

48,078

48,410

Dividends and distributions payable

18,243

29,965

Other liabilities

84,485

73,014

Total liabilities

980,804

982,683

Commitments and contingencies (Note 11)

Stockholders’ equity:

Preferred stock, $0.01 par value, 100,000,000 shares authorized:

Series G Cumulative Redeemable Preferred Stock, 2,650,000 shares issued and outstanding at both March 31, 2024 and December 31, 2023, stated at liquidation preference of $25.00 per share

66,250

66,250

6.125% Series H Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at both March 31, 2024 and December 31, 2023, stated at liquidation preference of $25.00 per share

115,000

115,000

5.70% Series I Cumulative Redeemable Preferred Stock, 4,000,000 shares issued and outstanding at both March 31, 2024 and December 31, 2023, stated at liquidation preference of $25.00 per share

100,000

100,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 203,674,398 shares issued and outstanding at March 31, 2024 and 203,479,585 shares issued and outstanding at December 31, 2023

2,037

2,035

Additional paid in capital

2,416,085

2,416,417

Distributions in excess of retained earnings

(538,076)

(533,064)

Total stockholders’ equity

2,161,296

2,166,638

Total liabilities and stockholders' equity

$

3,142,100

$

3,149,321

See accompanying notes to unaudited consolidated financial statements.

2

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

Three Months Ended March 31,

    

2024

    

2023

REVENUES

Room

$

135,815

$

152,438

Food and beverage

61,339

70,812

Other operating

20,012

20,193

Total revenues

217,166

243,443

OPERATING EXPENSES

Room

35,551

39,064

Food and beverage

44,315

48,535

Other operating

5,944

5,757

Advertising and promotion

12,132

13,022

Repairs and maintenance

8,710

9,446

Utilities

5,944

7,092

Franchise costs

4,205

3,918

Property tax, ground lease and insurance

18,925

19,233

Other property-level expenses

27,623

31,777

Corporate overhead

7,518

8,468

Depreciation and amortization

29,040

32,342

Total operating expenses

199,907

218,654

Interest and other income

5,453

541

Interest expense

(11,010)

(13,794)

Gain on sale of assets, net

457

Gain on extinguishment of debt

21

9,909

Income before income taxes

12,180

21,445

Income tax benefit (provision), net

855

(358)

NET INCOME

13,035

21,087

Preferred stock dividends

(3,683)

(3,768)

INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

$

9,352

$

17,319

Basic and diluted per share amounts:

Basic income attributable to common stockholders per common share

$

0.05

$

0.08

Diluted income attributable to common stockholders per common share

$

0.05

$

0.08

Basic weighted average common shares outstanding

202,631

207,035

Diluted weighted average common shares outstanding

202,958

207,282

See accompanying notes to unaudited consolidated financial statements.

3

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except share and per share data)

Distributions

Preferred Stock

Common Stock

in Excess of

Number of

Number of

Additional

Retained

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid in Capital

    

 Earnings

    

Total

Balance at December 31, 2023 (audited)

11,250,000

$

281,250

203,479,585

$

2,035

$

2,416,417

$

(533,064)

$

2,166,638

Amortization of deferred stock compensation

2,887

2,887

Issuance of restricted common stock, net

194,813

2

(3,219)

(3,217)

Common stock distributions declared at $0.07 per share

(14,364)

(14,364)

Series G preferred stock dividends declared at $0.187500 per share

(497)

(497)

Series H preferred stock dividends declared at $0.382813 per share

(1,761)

(1,761)

Series I preferred stock dividends declared at $0.356250 per share

(1,425)

(1,425)

Net income

13,035

13,035

Balance at March 31, 2024

11,250,000

$

281,250

203,674,398

$

2,037

$

2,416,085

$

(538,076)

$

2,161,296

See accompanying notes to unaudited consolidated financial statements.

4

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except share and per share data)

Distributions

Preferred Stock

Common Stock

in Excess of

Number of

Number of

Additional

Retained

Shares

    

Amount

    

Shares

    

Amount

    

Paid in Capital

    

 Earnings

    

Total

Balance at December 31, 2022 (audited)

11,250,000

$

281,250

209,320,447

$

2,093

$

2,465,595

$

(663,977)

$

2,084,961

Amortization of deferred stock compensation

2,545

2,545

Issuance of restricted common stock, net

55,970

1

(3,349)

(3,348)

Forfeiture of restricted common stock

(1,435)

Common stock distributions declared at $0.05 per share

(10,449)

(10,449)

Series G preferred stock dividends declared at $0.219536 per share

(582)

(582)

Series H preferred stock dividends declared at $0.382813 per share

(1,761)

(1,761)

Series I preferred stock dividends declared at $0.356250 per share

(1,425)

(1,425)

Repurchase of outstanding common stock

(1,964,923)

(20)

(18,606)

(18,626)

Net income

21,087

21,087

Balance at March 31, 2023

11,250,000

$

281,250

207,410,059

$

2,074

$

2,446,185

$

(657,107)

$

2,072,402

See accompanying notes to unaudited consolidated financial statements.

5

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended March 31,

    

2024

    

2023

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

13,035

$

21,087

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

Bad debt expense (recovery)

80

(58)

Gain on sale of assets, net

(457)

Gain on extinguishment of debt

(21)

(9,909)

Noncash interest on derivatives, net

(2,042)

1,832

Depreciation

28,782

32,214

Amortization of franchise fees and other intangibles

258

110

Amortization of deferred financing costs

739

545

Amortization of deferred stock compensation

2,770

2,427

Changes in operating assets and liabilities:

Accounts receivable, net

(5,568)

264

Prepaid expenses and other assets

(6,400)

(5,604)

Accounts payable and other liabilities

7,319

4,392

Operating lease right-of-use assets and obligations

(11)

(52)

Net cash provided by operating activities

38,484

47,248

CASH FLOWS FROM INVESTING ACTIVITIES

Renovations and additions to hotel properties and other assets

(27,664)

(22,474)

Net cash used in investing activities

(27,664)

(22,474)

CASH FLOWS FROM FINANCING ACTIVITIES

Repurchases of outstanding common stock

(18,626)

Repurchases of common stock for employee tax obligations

(3,217)

(3,348)

Payments on notes payable

(537)

(524)

Dividends and distributions paid

(29,769)

(13,981)

Net cash used in financing activities

(33,523)

(36,479)

Net decrease in cash and cash equivalents and restricted cash

(22,703)

(11,705)

Cash and cash equivalents and restricted cash, beginning of period

493,698

157,206

Cash and cash equivalents and restricted cash, end of period

$

470,995

$

145,501

See accompanying notes to unaudited consolidated financial statements.

6

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Supplemental Disclosure of Cash Flow Information

March 31,

2024

2023

Cash and cash equivalents

$

400,678

$

96,386

Restricted cash

70,317

49,115

Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows

$

470,995

$

145,501

Three Months Ended March 31,

2024

2023

Cash paid for interest

$

15,306

$

14,127

Cash paid for income taxes, net

$

3,137

$

40

Operating cash flows used for operating leases

$

1,360

$

1,409

Changes in operating lease right-of-use assets

$

1,136

$

1,088

Changes in operating lease obligations

(1,147)

(1,140)

Changes in operating lease right-of-use assets and lease obligations, net

$

(11)

$

(52)

Supplemental Disclosure of Noncash Investing and Financing Activities

Three Months Ended March 31,

2024

2023

Accrued renovations and additions to hotel properties and other assets

$

14,512

$

15,382

Operating lease right-of-use asset obtained in exchange for operating lease obligation

$

$

2,163

Amortization of deferred stock compensation — construction activities

$

117

$

118

Dividends and distributions payable

$

18,243

$

14,231

See accompanying notes to unaudited consolidated financial statements.

7

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004. The Company elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with its taxable year ended on December 31, 2004. The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, invests in hotels where it can add value through capital investment, hotel repositioning and asset management. In addition, the Company seeks to capitalize on its portfolio’s embedded value and balance sheet strength to actively recycle past investments into new growth and value creation opportunities in order to deliver strong stockholder returns and superior per share net asset value growth.

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. The Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels, in transactions that are intended to generate qualifying income.

As of March 31, 2024 and 2023, the Company owned 14 and 15 hotels, respectively.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements as of March 31, 2024 and December 31, 2023, and for the three months ended March 31, 2024 and 2023, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity.

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 23, 2024. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

The Company does not have any comprehensive income other than what is included in net income. If the Company has any comprehensive income in the future such that a statement of comprehensive income would be necessary, the Company will include such statement in one continuous consolidated statement of operations.

The Company has evaluated subsequent events through the date of issuance of these financial statements.

Use of Estimates

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

Earnings Per Share

The Company applies the two-class method when computing its earnings per share. Net income per share for each class of stock is calculated assuming all of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights.

8

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid), which include the Company’s time-based restricted stock awards, are considered participating securities and are included in the computation of earnings per share.

Basic earnings attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, including shares of the Company’s performance-based restricted stock units for which all necessary conditions have been satisfied except for the passage of time. Diluted earnings attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of time-based unvested restricted stock awards and performance-based restricted stock units, using the more dilutive of either the two-class method or the treasury stock method. The Company’s performance-based restricted stock units are considered for computing diluted net income per common share as of the beginning of the period in which all necessary conditions have been satisfied and the only remaining vesting condition is a service vesting condition.

The following table sets forth the computation of basic and diluted earnings per common share (unaudited and in thousands, except per share data):

Three Months Ended March 31,

    

2024

    

2023

Numerator:

Net income

$

13,035

$

21,087

Preferred stock dividends

(3,683)

(3,768)

Distributions paid to participating securities

(65)

(52)

Undistributed income allocated to participating securities

(40)

Numerator for basic and diluted income attributable to common stockholders

$

9,287

$

17,227

Denominator:

Weighted average basic common shares outstanding

202,631

207,035

Unvested restricted stock units

327

247

Weighted average diluted common shares outstanding

202,958

207,282

Basic income attributable to common stockholders per common share

$

0.05

$

0.08

Diluted income attributable to common stockholders per common share

$

0.05

$

0.08

In its calculation of diluted earnings per share, the Company excluded 929,928 and 1,039,023 anti-dilutive unvested time-based restricted stock awards for the three months ended March 31, 2024 and 2023, respectively (see Note 10).

The Company also had unvested performance-based restricted stock units as of March 31, 2024 and 2023 that are not considered participating securities as the awards contain forfeitable rights to dividends or dividend equivalents. The performance-based restricted stock units were granted based on either target market condition thresholds or pre-determined stock price targets. Based on the Company’s common stock performance, the Company excluded 188,004 anti-dilutive performance-based restricted stock units from its calculations of diluted earnings per share for the three months ended March 31, 2024 and 2023 (see Note 10).

Restricted Cash

Restricted cash primarily includes reserves for operating expenses and capital expenditures required by certain of the Company’s management, franchise and debt agreements. At times, restricted cash also includes hotel acquisition or disposition-related earnest money held in escrow reserves pending completion of the associated transaction. In addition, restricted cash as of March 31, 2024 and December 31, 2023 included $0.1 million and $0.2 million, respectively, held in escrow related to certain current and potential employee-related obligations at one of the Company’s former hotels and $0.2 million held as collateral for certain letters of credit as of both March 31, 2024 and December 31, 2023 (see Note 11).

Investments in Hotel Properties

Investments in hotel properties, including land, buildings, furniture, fixtures and equipment (“FF&E”) and identifiable intangible assets are recorded at their respective relative fair values for an asset acquisition or at their estimated fair values for a business acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset,

9

the cost and related accumulated depreciation is removed from the Company’s accounts and any resulting gain or loss is included in the consolidated statements of operations.

Depreciation expense is based on the estimated life of the Company’s assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish the Company’s hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five years to forty years for buildings and improvements and three years to twelve years for FF&E. Intangible assets are amortized using the straight-line method over the shorter of their estimated useful life or over the length of the related agreement.

The Company’s investment in hotel properties, net also includes initial franchise fees which are recorded at cost and amortized using the straight-line method over the terms of the franchise agreements ranging from fifteen years to twenty years. All other franchise fees that are based on the Company’s results of operations are expensed as incurred.

While the Company believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of the Company’s hotels. The Company has not changed the useful lives of any of its assets during the periods discussed.

Impairment losses are recorded on investments in hotel properties to be held and used by the Company whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors the Company considers when assessing whether impairment indicators exist include, but are not limited to, hotel disposition strategy and hold period, a significant decline in operating results not related to renovations or repositionings, significant changes in the manner in which the Company uses the asset, physical damage to the property due to unforeseen events such as natural disasters, and other market and economic conditions.

Recoverability of assets that will continue to be used is measured by comparing the carrying amount of the asset to the related total future undiscounted net cash flows. If an asset’s carrying value is not recoverable through those cash flows, the asset is considered to be impaired. The impairment is measured by the difference between the asset’s carrying amount and its fair value. The Company performs a fair value assessment using valuation techniques such as discounted cash flows and comparable sale transactions in the market to estimate the fair value of the hotel and, if appropriate and available, current estimated net sales proceeds from pending offers. The Company’s judgment is required in determining the discount rate, terminal capitalization rate, the estimated growth of revenues and expenses, revenue per available room and margins, as well as specific market and economic conditions. Based on the Company’s review, no hotels were impaired during the three months ended March 31, 2024 and 2023.

Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing. The realization of the Company’s investment in hotel properties is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from their estimated fair values.

Leases

The Company determines if a contract is a lease at inception. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Expense for these short-term leases is recognized on a straight-line basis over the lease term. For leases with an initial term greater than twelve months, the Company records a right-of-use (“ROU”) asset and a corresponding lease obligation. ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease obligations represent the Company’s obligation to make fixed lease payments as stipulated by the lease. The Company has elected to not separate lease components from nonlease components, resulting in the Company accounting for lease and nonlease components as one single lease component.

Leases are accounted for using a dual approach, classifying leases as either operating or financing based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the Company. This classification determines whether the lease expense is recognized on a straight-line basis over the term of the lease for operating leases or based on an effective interest method for finance leases.

Lease ROU assets are recognized at the lease commencement date and include the amount of the initial operating lease obligation, any lease payments made at or before the commencement date, excluding any lease incentives received, and any initial direct costs incurred. For leases that have extension options that the Company can exercise at its discretion, management uses judgment to determine if it is reasonably certain that the Company will in fact exercise such option. If the extension option is

10

reasonably certain to occur, the Company includes the extended term’s lease payments in the calculation of the respective lease liability. None of the Company’s leases contain any material residual value guarantees or material restrictive covenants.

Lease obligations are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (“IBR”) based on information available at the commencement date in determining the present value of lease payments over the lease term. The IBR is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In order to estimate the Company’s IBR, the Company first looks to its own unsecured debt offerings, and adjusts the rate for both length of term and secured borrowing using available market data as well as consultations with leading national financial institutions that are active in the issuance of both secured and unsecured notes.

The Company reviews its right-of-use assets for indicators of impairment. If such assets are considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment loss is recognized. The impairment loss recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Based on the Company’s review, no ROU assets were impaired during the three months ended March 31, 2024 and 2023.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to hotel guests, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Room revenue and other occupancy based fees are recognized over a guest’s stay at the previously agreed upon daily rate. Some of the Company’s hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, revenue for the room is recognized by the Company at the price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays the Company directly, revenue for the room is recognized by the Company on a gross basis, with the related discount or commission recognized in room expense. A majority of the Company’s hotels participate in frequent guest programs sponsored by the hotel brand owners whereby the hotel allows guests to earn loyalty points during their hotel stay. The Company expenses charges associated with these programs as incurred, and recognizes revenue at the amount it will receive from the brand when a guest redeems their loyalty points by staying at one of the Company’s hotels. In addition, some contracts for rooms or food and beverage services require an advance deposit, which the Company records as deferred revenue (or a contract liability) and recognizes once the performance obligations are satisfied. Cancellation fees and attrition fees, which are charged to groups when they do not fulfill their contracted minimum number of room nights or minimum food and beverage spending requirements, are typically recognized as revenue in the period the Company determines it is probable that a significant reversal in the amount of revenue recognized will not occur, which is generally the period in which these fees are collected.

Food and beverage revenue and other ancillary services revenue are generated when a customer chooses to purchase goods or services. The revenue is recognized when the goods or services are provided to the customer at the amount the Company expects to be entitled to in exchange for those goods or services. For ancillary services provided by third parties, the Company assesses whether it is the principal or the agent. If the Company is the principal, revenue is recognized based upon the gross sales price. If the Company is the agent, revenue is recognized based upon the commission earned from the third party.

Additionally, the Company collects sales, use, occupancy and other similar taxes from customers at its hotels at the time of purchase, which are not included in revenue. The Company records a liability upon collection of such taxes from the customer, and relieves the liability when payments are remitted to the applicable governmental agency.

Trade receivables and contract liabilities consisted of the following (in thousands):

March 31,

December 31,

2024

2023

(unaudited)

Trade receivables, net (1)

$

17,016

$

14,431

Contract liabilities (2)

$

61,650

$

45,432

(1)Trade receivables, net are included in accounts receivable, net on the accompanying consolidated balance sheets.
(2)Contract liabilities consist of advance deposits and are included in other liabilities on the accompanying consolidated balance sheets.

During the three months ended March 31, 2024 and 2023, the Company recognized approximately $20.2 million and $27.5 million, respectively, in revenue related to its outstanding contract liabilities.

11

Segment Reporting

The Company considers each of its hotels to be an operating segment and allocates resources and assesses the operating performance for each hotel. Because all of the Company’s hotels have similar economic characteristics, facilities and services, the hotels have been aggregated into one single reportable segment, hotel ownership.

New Accounting Standards and Accounting Changes

In November 2023, the FASB issued Accounting Standards Update No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), which amended the guidance in Accounting Standards Codification (ASC) 280, Segment Reporting, to require a public entity to disclose significant segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. Public entities with a single reportable segment, such as the Company, are required to provide the new disclosures and all the disclosures required under ASC 280. ASU 2023-07 is applied retrospectively to all periods presented in the financial statements, unless it is impracticable. The guidance will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating ASU 2023-07’s additional disclosure requirements.

In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU-2023-09”), to enhance the transparency and decision-usefulness of income tax disclosures, particularly in the rate reconciliation table and disclosures about income taxes paid. All entities should apply the guidance prospectively but have the option to apply it retrospectively. ASU 2023-09 will be effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating ASU 2023-09’s additional disclosure requirements.

3. Investment in Hotel Properties

Investment in hotel properties, net consisted of the following (in thousands):

March 31,

December 31,

    

2024

    

2023

(unaudited)

Land

$

614,112

$

614,112

Buildings and improvements

2,602,467

2,587,278

Furniture, fixtures and equipment

410,696

407,861

Intangible assets

42,187

42,187

Construction in progress

75,672

61,247

Investment in hotel properties, gross

3,745,134

3,712,685

Accumulated depreciation and amortization

(1,156,285)

(1,127,406)

Investment in hotel properties, net

$

2,588,849

$

2,585,279

4. Fair Value Measurements and Interest Rate Derivatives

Fair Value Measurements

As of March 31, 2024 and December 31, 2023, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:

Level 1

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2

Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

12

Level 3

Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

As of both March 31, 2024 and December 31, 2023, the Company measured its interest rate derivatives at fair value on a recurring basis. The Company estimated the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements.

Fair Value of Debt

As of March 31, 2024 and December 31, 2023, 51.1% and 51.2%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap derivatives. The Company uses Level 3 measurements to estimate the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates.

The Company’s principal balances and fair market values of its consolidated debt as of March 31, 2024 (unaudited) and December 31, 2023 were as follows (in thousands):

March 31, 2024

December 31, 2023

Carrying Amount (1)

Fair Value (2)

Carrying Amount (1)

Fair Value (2)

Debt

$

818,512

$

806,482

$

819,050

$

805,212

(1)The principal balance of debt is presented before any unamortized deferred financing costs.
(2)Due to prevailing market conditions and the current uncertain economic environment, actual interest rates could vary materially from those estimated, which would result in variances in the Company’s calculations of the fair market value of its debt.

Interest Rate Derivatives

The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at March 31, 2024 (unaudited) and December 31, 2023 (in thousands):

Estimated Fair Value of Assets (Liabilities) (1)

Strike / Capped

Effective

Maturity

Notional

March 31,

December 31,

Hedged Debt

Type

Rate

Index

Date

Date

Amount

2024

2023

Term Loan 1

Swap

3.675

%

CME Term SOFR

March 17, 2023

March 17, 2026

$

75,000

$

1,150

$

417

Term Loan 1

Swap

3.931

%

CME Term SOFR

September 14, 2023

September 14, 2026

$

100,000

908

(401)

$

2,058

$

16

(1)The fair values of the swap derivative assets were included in prepaid expenses and other assets, net on the accompanying consolidated balance sheets as of March 31, 2024 and December 31, 2023. The fair value of the swap derivative liability was included in other liabilities on the accompanying consolidated balances sheet as of December 31, 2023.

Noncash changes in the fair values of the Company’s interest rate derivatives resulted in a (decrease) increase to interest expense for the three months ended March 31, 2024 and 2023 as follows (unaudited and in thousands):

Three Months Ended March 31,

2024

2023

Noncash interest on derivatives, net

$

(2,042)

$

1,832

13

5. Prepaid Expenses and Other Assets

Prepaid expenses and other assets, net consisted of the following (in thousands):

March 31,

December 31,

    

2024

    

2023

(unaudited)

Prepaid expenses

$

14,316

$

8,123

Inventory

9,381

9,185

Deferred financing costs

3,276

3,627

Property and equipment, net

2,937

3,120

Interest rate derivatives

2,058

417

Deferred rent on straight-lined third-party tenant leases

618

552

Liquor licenses

930

930

Other

427

429

Total prepaid expenses and other assets, net

$

33,943

$

26,383

6. Notes Payable

Notes payable consisted of the following (in thousands):

Balance Outstanding as of

March 31, 2024

March 31,

December 31,

Rate Type

Interest Rate

Maturity Date

2024

2023

(unaudited)

Mortgage Loans

JW Marriott New Orleans

Fixed

4.15

%

December 11, 2024

$

73,512

$

74,050

Unsecured Corporate Credit Facilities

Term Loan 1

Fixed

(1)

5.25

%

July 25, 2027

$

175,000

$

175,000

Term Loan 2

Variable

(2)

6.76

%

January 25, 2028

175,000

175,000

Term Loan 3

Variable

(3)

6.77

%

May 1, 2025

225,000

225,000

Total unsecured corporate credit facilities

$

575,000

$

575,000

Unsecured Senior Notes

Series A

Fixed

4.69

%

January 10, 2026

$

65,000

$

65,000

Series B

Fixed

4.79

%

January 10, 2028

105,000

105,000

Total unsecured senior notes

$

170,000

$

170,000

Total debt

$

818,512

$

819,050

Unamortized deferred financing costs

(4,102)

(4,491)

Debt, net of unamortized deferred financing costs

$

814,410

$

814,559

(1)Term Loan 1 is subject to two interest rate swap derivatives (see Note 4). The variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on the Company’s leverage ratios, plus SOFR and a 0.10% adjustment. In May 2023, the pricing grid was reduced by 0.02% to a range of 1.33% to 2.18% as the Company achieved the 2022 sustainability performance metric specified in the Second Amended Credit Agreement. The reduction in the pricing grid will be evaluated annually and is subject to the Company’s continued ability to satisfy its sustainability metric. The effective interest rate on the term loan was 5.25% at both March 31, 2024 and December 31, 2023.
(2)Term Loan 2’s variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on the Company’s leverage ratios, plus SOFR and a 0.10% adjustment. In May 2023, the pricing grid was reduced by 0.02% to a range of 1.33% to 2.18% as the Company achieved the 2022 sustainability performance metric specified in the Second Amended Credit Agreement. The reduction in the pricing grid will be evaluated annually and is subject to the Company’s continued ability to satisfy its sustainability metric. The effective interest rates on the term loan were 6.76% and 6.77% at March 31, 2024 and December 31, 2023, respectively.
(3)Term Loan 3’s variable interest rate is based on a pricing grid with a range of 1.35% to 2.20%, depending on the Company’s leverage ratios, plus SOFR and a 0.10% adjustment. The effective interest rates on the term loan were 6.77% and 6.81% at March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, the Company had no amount outstanding on its credit facility, with $500.0 million of capacity available for borrowing under the facility. The Company’s ability to draw on the credit facility is subject to the Company’s compliance with various financial covenants.

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