Investment in Hotel Properties

9 Months Ended

Sep. 30, 2022

Investment in hotel properties as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Land	$	911,898	$	926,330
Buildings and improvements	5,197,437		5,197,816
Furniture, fixtures and equipment	535,997		535,607
Finance lease asset	91,181		91,181
Construction in progress	21,369		15,869
	$	6,757,882	$	6,766,803
Right-of-use asset, operating leases	372,791		378,939
Investment in hotel properties	$	7,130,673	$	7,145,742
Less: Accumulated depreciation	(1,165,850)		(1,066,409)
Investment in hotel properties, net	$	5,964,823	$	6,079,333

On September 27, 2022, LaPlaya Beach Resort and LaPlaya Beach Club ("LaPlaya") and Inn on Fifth, both located in Naples, Florida, and Southernmost Beach Resort located in Key West, Florida were impacted by the effects of Hurricane Ian. Inn on Fifth and Southernmost Beach Resort did not suffer significant damage and have been reopened. LaPlaya was closed in anticipation of the storm and remains closed as a result of the damage sustained from Hurricane Ian. The Company expects LaPlaya to re-open in stages beginning in the fourth quarter of 2022.

The Company’s insurance policies provide coverage for property damage, business interruption and reimbursement for other costs that were incurred relating to damages sustained during Hurricane Ian. Insurance proceeds are subject to deductibles. As of September 30, 2022, the Company recognized an impairment for the damage to LaPlaya and Southernmost Beach Resort, which resulted in an aggregate impairment loss of $12.9 million, which is included in impairment loss in the Company’s consolidated statement of operations and comprehensive income. The Company expects to incur additional costs related to the cleanup of the property and preparation of the property for reopening which are expected to be recovered through insurance proceeds. The Company is continuing to evaluate the financial impact of Hurricane Ian and its ability to recover, through insurance policies, any loss due to business interruption or damage to the hotel properties.

Impairment

The Company reviews its investment in hotel properties for impairment whenever events or circumstances indicate potential impairment. As a result of the ongoing effects of the COVID-19 pandemic on its expected future operating cash flows and estimated hold periods for certain properties, the Company determined certain impairment triggers had occurred and therefore, the Company assessed its investment in hotel properties for recoverability. Based on the analyses performed, for the nine months ended September 30, 2022, the Company recognized an impairment loss of $73.3 million related to two hotels as a result of their fair values being lower than their carrying values. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements using information from marketing efforts for these properties. For the nine months ended September 30, 2021, the Company recognized an impairment loss of $14.9 million related to one hotel as a result of its fair value being lower than its carrying value. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements using information from marketing efforts for this property.

Right-of-use Assets and Lease Liabilities

The Company recognized right-of-use assets and related liabilities related to its ground leases, all of which are operating leases. When the rate implicit in the lease could not be determined, the Company used incremental borrowing rates, which ranged from 4.7% to 7.6%. In addition, the term used includes any options to exercise extensions when it is reasonably certain the Company will exercise such options. See Note 11. Commitments and Contingencies for additional information about the ground leases.

The right-of-use assets and liabilities are amortized to ground rent expense over the term of the underlying lease agreements. As of September 30, 2022, the Company's lease liabilities consisted of operating lease liabilities of $320.3 million and financing lease liabilities of $42.5 million. As of December 31, 2021, the Company's lease liabilities consisted of operating lease liabilities of $319.4 million and financing lease liabilities of $42.0 million. The financing lease liabilities are included in accounts payable, accrued expenses and other liabilities on the Company's accompanying consolidated balance sheets.