Notes Payable

9 Months Ended

Sep. 30, 2020

Notes Payable

Notes Payable

7. Notes Payable

Notes payable consisted of the following (in thousands):

	September 30,		December 31,
	2020		2019
	(unaudited)
Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% to 5.95%; maturing at dates ranging from November 1, 2020 through January 6, 2025. The notes are collateralized by first deeds of trust on four hotel properties at both September 30, 2020 and December 31, 2019.	$	324,673	$	329,863
Note payable requiring payments of interest only, bearing a blended rate of one-month LIBOR plus 105 basis points; initial maturity on December 9, 2020 with notice provided to the lender of intent to exercise the first available one-year extension; two additional one-year options to extend remain, which the Company also intends to exercise. The note is collateralized by a first deed of trust on one hotel property.		220,000		220,000
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.591%, resulting in an effective interest rate of 3.791%. Matures on September 3, 2022. (1)		85,000		85,000
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 135 to 220 basis points, depending on the Company's leverage ratios, plus the greater of one-month LIBOR or 25 basis points. LIBOR has been swapped to a fixed rate of 1.853%, resulting in an effective interest rate of 4.053%. Matures on January 31, 2023. (1)		100,000		100,000
Unsecured Series A Senior Notes requiring semi-annual payments of interest only, bearing interest at 5.69%. Matures on January 10, 2026. (2)		90,000		120,000
Unsecured Series B Senior Notes requiring semi-annual payments of interest only, bearing interest at 5.79%. Matures on January 10, 2028. (2)		115,000		120,000
Total notes payable	$	934,673	$	974,863
Current portion of notes payable	$	189,189	$	83,975
Less: current portion of deferred financing costs		(1,093)		(1,866)
Carrying value of current portion of notes payable	$	188,096	$	82,109
Notes payable, less current portion	$	745,484	$	890,888
Less: long-term portion of deferred financing costs		(1,939)		(1,934)
Carrying value of notes payable, less current portion	$	743,545	$	888,954

(1) As described below, the Company entered into the Unsecured Debt Amendments (as defined below) in July 2020. As part of the amendments, a 25-basis point LIBOR floor was added for the remaining term of the term loan facilities and interest was increased to 220 basis points, the high point of the agreed upon range. After the Covenant Relief Period (as defined below), interest will revert back to the original terms of the pricing grid with a range of 135 to 220 basis points, depending on the Company’s leverage ratios. The effective interest rate of the $85.0 million term loan increased from 2.941% to 3.791%, and the effective interest rate of the $100.0 million term loan increased from 3.203% to 4.053%, in each case at December 31, 2019 and September 30, 2020, respectively.

(2) As described below, the Company entered into the Unsecured Debt Amendments (as defined below) in July 2020. As part of the amendments, the annual interest rate on both of the senior notes increased by 1.00%. As a result, the interest rate of the Series A Senior Notes increased from 4.69% to 5.69%, and the interest rate of the Series B Senior Notes increased from 4.79% to 5.79%, in each case at December 31, 2019 and September 30, 2020, respectively. After the Covenant Relief Period (as defined below), the interest rates on the senior notes will decrease by 0.25% until the Company’s leverage ratio is below 5.0x.

The Company has not made its debt payments for the $77.2 million loan secured by the Hilton Times Square since April 2020; although the Company continues to accrue interest expense on the debt, including $1.7 million in default interest and penalties accrued as of September 30, 2020. While the Company is required to record such default interest and penalties, recovery by the lender of these expenses is non-recourse to the Company, and the Company does not intend to pay the default interest and penalties as part of the ultimate resolution with the lender. The loan matures on November 1, 2020, and is included in current portion of notes payable on the Company’s consolidated balance sheets as of September 30, 2020 and December 31, 2019. In addition, the hotel’s ground leases require monthly payments be paid to the respective landlords, which the Company has not made since March 2020 (see Notes 8 and 9). As such, the Company has received default notices from its lender and landlords, and is working with the lender to explore various options in advance of the November 2020 debt maturity, which could include a negotiated transfer of the hotel to the lender or its landlords or a discounted payoff of the loan.

In March 2020, the Company drew $300.0 million under the revolving portion of its credit facility as a precautionary measure to increase the Company’s cash position and preserve financial flexibility. In June 2020 and August 2020, the Company repaid $250.0 million and $11.2 million, respectively, of the outstanding credit facility balance after determining that it had sufficient cash on hand in addition to access to its credit facility. Also in August 2020, the Company used a portion of the proceeds it received from the sale of the Renaissance Harborplace to repay $38.8 million of the outstanding credit facility balance as stipulated in the amended agreements to its unsecured debt described below. As of September 30, 2020, the Company has no amount outstanding under the credit facility.

In July 2020, the Company completed amendments to its unsecured debt, consisting of its revolving credit facility, term loans and senior notes (the “Unsecured Debt Amendments”). The Unsecured Debt Amendments were deemed to be debt modifications and accounted for accordingly. Key terms of the Unsecured Debt Amendments include:

● Waiver of required financial covenants through the end of the first quarter of 2021, with quarterly testing resuming for the period ending June 30, 2021 (the “Covenant Relief Period”). The Company can elect to terminate the Covenant Relief Period early, subject to the achievement of certain financial covenants;

● Following the end of the Covenant Relief Period, existing financial covenants will be phased-in over the following three quarters to ease compliance;

● Continued payment of existing preferred stock dividends and the ability to issue up to $200.0 million of additional preferred stock, subject to the satisfaction of certain conditions;

● Unlimited ability to fund future acquisitions with proceeds from the issuance of common equity or through the sale of unencumbered hotels;

● Flexibility to invest up to $250.0 million into acquisitions (in addition to acquisitions funded with equity or with hotel sale proceeds) subject to maintaining certain minimum liquidity thresholds;

● Ability to invest up to $110.0 million into capital improvements from May 1, 2020 through the end of the Covenant Relief Period;

● Ability to pay dividends on common stock to the extent required to maintain REIT status and comply with IRS regulations;

● Addition of a 25-basis point LIBOR floor for the remaining term of the revolving credit facility and term loan facilities. The applicable LIBOR spread for each of the facilities will be fixed during the Covenant Relief Period. In addition, there will be a 1.00% increase in the annual interest rate of the senior notes during the Covenant Relief Period which will decrease by 0.25% following the Covenant Relief Period until the Company’s leverage ratio is below 5.0x; and

● Addition of certain restrictions and covenants during the Covenant Relief Period including, but not limited to, restrictions on share repurchases, certain required mandatory debt prepayments on asset sales and equity issuances (if funds are not used to purchase assets), and restrictions on the incurrence of new indebtedness.

At September 30, 2020, the Company has $500.0 million of capacity available for additional borrowing under the revolving portion of its credit facility. The revolving portion of the amended credit facility matures in April 14, 2023, but may be extended for two six-month periods to April 14, 2024, upon the payment of applicable fees and satisfaction of certain customary conditions.

In September 2020, the Company repaid $35.0 million of its senior notes, comprising $30.0 million to the Series A note holders and $5.0 million to the Series B note holders, using a portion of the proceeds the Company received from the sale of the Renaissance Harborplace as stipulated in the Unsecured Debt Amendments. In conjunction with the repayments, the Company recorded a $0.2 million loss on extinguishment of debt related to the write-off of deferred financing fees.

The Company is subject to various financial covenants on its secured and unsecured debt. Due to COVID-19’s negative impact on the Company’s operations throughout 2020 and its expected impact into 2021, it is possible that the Company may not meet the terms of its unsecured debt financial covenants once such covenants are effective again in 2021. As of November 1, 2020, operations at three of the 19 Hotels remain suspended due to COVID-19, with the remainder operating at reduced capacities. The Company’s future liquidity will depend on the gradual return of guests, particularly group business, to its hotels and the stabilization of demand throughout its portfolio. The Company is currently working with its lenders to extend the Covenant Relief Period, however, there is no assurance that the Company will be able to obtain an extension in a timely manner, or on acceptable terms. If the Company is unable to obtain an extension of the Covenant Relief Period and is not able to satisfy the financial covenants following the end of the existing waiver period, the lenders of its unsecured debt may require the Company to repay the loans, which could raise doubt about the Company’s ability to continue as a going concern.

Interest Expense

Total interest incurred and expensed on the notes payable was as follows (unaudited and in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest expense on debt and finance lease obligations (1)	$	12,612	$	11,406	$	35,377	$	34,399
Noncash interest on derivatives and finance lease obligations, net		(762)		1,155		5,534		6,908
Amortization of deferred financing costs		892		698		2,288		2,094
Total interest expense	$	12,742	$	13,259	$	43,199	$	43,401

(1) Includes default interest and penalties of $0.9 million and $1.7 million for the three and nine months ended September 30, 2020, respectively, on the loan secured by the Hilton Times Square. As noted above, the Company does not intend to pay the default interest and penalties as part of the ultimate resolution with the lender.