Management agreements with the Company’s third-party hotel managers currently require the Company to pay between 2.0% and 3.0% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. In addition to basic management fees, provided that certain operating thresholds are met, the Company may also be required to pay incentive management fees to certain of its third-party managers.

Total basic and incentive management fees were included in other property-level expenses on the Company’s consolidated statements of operations as follows (unaudited and in thousands):

The Company has entered into license and franchise agreements related to certain of its hotels. The license and franchise agreements require the Company to, among other things, pay monthly fees that are calculated based on specified percentages of certain revenues. The license and franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage and protection of trademarks. Compliance with such standards may from time to time require the Company to make significant expenditures for capital improvements.

Total license and franchise fees were included in franchise costs on the Company’s consolidated statements of operations as follows (unaudited and in thousands):

(1)

Includes advertising, reservation and frequent guest program assessments.

(2)

Prior to the sale of the Hyatt Centric Chicago Magnificent Mile in February 2022 (see Note 4), franchise royalties included key money received from the hotel’s franchisor, which the Company was amortizing over the term of the hotel’s franchise agreement.

Renovation and Construction Commitments

At September 30, 2022, the Company had various contracts outstanding with third parties in connection with the ongoing renovations of certain of its hotel properties. The remaining commitments under these contracts at September 30, 2022 totaled $66.7 million.

Concentration of Risk

The concentration of the Company’s hotels in California, Florida, Hawaii and Massachusetts exposes the Company’s business to economic and severe weather conditions, competition and real and personal property tax rates unique to these locales.

As of September 30, 2022, 11 of the 15 Hotels were geographically concentrated as follows (unaudited):


				Trailing 12-Month
		Percentage of		Total Consolidated
	Number of Hotels	Total Rooms		Revenue
California	5	34	%	39	%
Florida	3	17	%	14	%
Hawaii	1	7	%	19	%
Massachusetts	2	19	%	16	%

Hurricanes Ida and Ian

During the third quarter of 2021, the Company’s two New Orleans hotels were impacted to varying degrees by Hurricane Ida. While both hotels remained open during the storm, they sustained wind-driven damage, rain infiltration and water damage. The Company maintains customary property, casualty, environmental, flood and business interruption insurance at all of its hotels, the coverage of which is subject to certain limitations including higher deductibles in the event of a named storm. The Company is working with its insurers to identify and settle a property damage claim and a business interruption claim at the Hilton New Orleans St. Charles for portions of the costs related to Hurricane Ida. The Company has concluded that the cost to restore damages at the JW Marriott New Orleans will not exceed the hotel’s deductible.

During the first nine months of 2022, the Company incurred Hurricane Ida-related restoration expenses of $1.5 million and $0.1 million at the Hilton New Orleans St. Charles and the JW Marriott New Orleans, respectively, with only a nominal amount incurred at the Hilton New Orleans St. Charles during the third quarter of 2022. During the three and nine months ended September 30, 2021, the Company incurred Hurricane Ida-related restoration expenses of $1.2 million and $0.4 million at the Hilton New Orleans St. Charles

and the JW Marriott New Orleans, respectively. All restoration expenses are included in repairs and maintenance expense in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021. Through September 30, 2022, the Company has incurred total Hurricane Ida-related restoration expenses of $4.5 million at the Hilton New Orleans St. Charles and $1.4 million at the JW Marriott New Orleans. In addition, in the third quarter of 2021, the Company wrote-off $1.0 million in assets at the Hilton New Orleans St. Charles due to Hurricane Ida-related damage, which is included in impairment losses in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2021. Though the property damage claim has not been finalized, the Company recognized an advance payment of $4.4 million from its insurers in the first nine months of 2022 for Hurricane Ida-related property damage expenses previously incurred, which is included in interest and other income (loss) on the accompanying consolidated statement of operations for the nine months ended September 30, 2022. During the first nine months of 2022, the Company also recognized an advance payment of $1.0 million from its insurers related to its ongoing business interruption claim at the Hilton New Orleans St. Charles, which is included in other operating revenue on the accompanying consolidated statement of operations for the nine months ended September 30, 2022.

In late September 2022, two of the Company’s Florida hotels, the Oceans Edge Resort & Marina and the Renaissance Orlando at SeaWorld® were immaterially impacted by Hurricane Ian. The Company expects to incur approximately $0.6 million in Hurricane Ian-related restoration expenses at the two Florida hotels in the fourth quarter of 2022, and anticipates that the costs to restore the damages will not exceed either of the hotel’s property insurance deductible.

The Company may incur additional expenses related to Hurricane Ida and Hurricane Ian at the New Orleans and Florida hotels in the future. Any additional expenses will be recognized as incurred, and any additional property damage or business interruption recoveries will not be recognized until final settlements have been reached with the Company’s insurers.

Other

In accordance with the assignment-in-lieu agreement executed in December 2020 between the Company and the mortgage holder of the Hilton Times Square, the Company was required to retain approximately $11.6 million related to certain current and potential employee-related obligations (the “potential obligation”). As of September 30, 2022, $0.9 million of the potential obligation has been paid to the hotel’s employees, including $0.1 million paid during the first nine months of 2022. In addition, the potential obligation is reassessed at the end of every quarter, resulting in nominal gains on extinguishment of debt included on the accompanying consolidated statements of operations for the three and nine months ended September 30, 2022, and gains on extinguishment of debt of $0.1 million and $0.4 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022 and December 31, 2021, restricted cash on the accompanying consolidated balance sheets included $10.3 million and $10.4 million, respectively, which will continue to be held in escrow until the potential obligation is resolved. Other current liabilities on the accompanying consolidated balance sheets as of September 30, 2022 and December 31, 2021, included the potential obligation balances of $10.3 million and $10.5 million, respectively.

Coterminous with the Company’s acquisition of the Four Seasons Resort Napa Valley in 2021, the Company was required to deposit $3.1 million into a restricted bank account owned by the Company, but to which the hotel’s management company, Four Seasons, has sole and unrestricted access to withdraw funds for the purpose of satisfying any potential employee-related obligations that arise in connection with the termination of hotel personnel and any employment claim by hotel personnel (“severance obligations”). Prior to Four Seasons withdrawing funds from the restricted account, the Company has the option to pay the severance obligations using its cash on hand. Should amounts in the restricted bank account be used to fund the severance obligations, the Company will be required to deposit additional funds into the restricted bank account so that the amount in the account totals any estimated future severance obligations. Currently, the estimated future severance obligations total $3.1 million, which is included in restricted cash on the accompanying consolidated balance sheets as of September 30, 2022 and December 31, 2021; however, the estimated future severance obligations may increase up to a maximum of $5.0 million.

The Company has provided customary unsecured indemnities to certain lenders, including in particular, environmental indemnities. The Company has performed due diligence on the potential environmental risks, including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate the Company to reimburse the indemnified parties for damages related to certain environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, the Company could have recourse against other previous owners or a claim against its environmental insurance policies.

At September 30, 2022, the Company had $0.2 million of outstanding irrevocable letters of credit to guarantee the Company’s financial obligations related to workers’ compensation insurance programs from prior policy years. The beneficiaries of these letters of credit may draw upon the letters of credit in the event of a contractual default by the Company relating to each respective obligation. No draws have been made through September 30, 2022. The letters of credit are collateralized with $0.2 million held in a restricted bank account owned by the Company, which is included in restricted cash on the accompanying consolidated balance sheets as of September 30, 2022 and December 31, 2021.

The Company is subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of its hotels, its managers and other Company matters. While it is not possible to ascertain the ultimate outcome of such matters, the Company believes that the aggregate identifiable amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on its financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings, including any potential COVID-19-related litigation, brought against the Company, however, is subject to significant uncertainties.