INVESTMENTS IN LODGING PROPERTY, NET

3 Months Ended

Mar. 31, 2023

Investments in Lodging Property, net

Investments in lodging property, net is as follows (in thousands):


	March 31, 2023		December 31, 2022
Lodging buildings and improvements	$	2,776,110	$	2,764,355
Land	365,770		365,770
Furniture, fixtures and equipment	256,681		250,575
Construction in progress	65,252		62,471
Intangible assets	39,954		39,954
Real estate development loan, net	519		—
	3,504,286		3,483,125
Less accumulated depreciation	(727,339)		(690,573)
	$	2,776,947	$	2,792,552

Depreciation and amortization expense related to our lodging properties was $36.8 million and $36.1 million for the three months ended March 31, 2023 and 2022, respectively.

Real Estate Development Loans

Onera Mezzanine Loan

In January 2023, we entered into an agreement with affiliates of Onera Opportunity Fund I, LP ("Onera") to provide a mezzanine loan to fund up to $4.6 million for the development of a glamping property (the "Onera Mezzanine Loan"). The Onera Mezzanine Loan is secured by a second mortgage on the property that 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 March 31, 2023, we funded $1.3 million of our total $4.6 million commitment under the mezzanine 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 $0.8 million at March 31, 2023, and is classified as Investments in lodging property, net in our Condensed Consolidated Balance Sheets at March 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 three months ended March 31, 2023, we amortized $0.1 million of the carrying amount of the Onera Purchase Option as non-cash interest income.

Brickell Mezzanine Loan

During the year ended December 31, 2019, we executed a mezzanine loan, as amended, to a developer (the "Brickell Mezzanine Loan") to fund up to $29.9 million for a mixed-use development project that included the AC Hotel by Marriott and Element Miami Brickell Hotel in Miami, FL (together the "AC/Element Hotel"), retail space, and parking. As of March 31, 2022, we had funded $29.6 million of our total $29.9 million commitment, and we funded the full commitment thereafter. In connection with the Brickell Mezzanine Loan, we received an option to purchase a 90% interest in the AC/Element Hotel (the “Initial Purchase Option”). 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. We exercised the Initial Purchase Option in the second quarter of 2022, which resulted in the repayment in full of the Brickell Mezzanine Loan.

We recorded the Brickell Purchase Option at its estimated fair value of $2.8 million on the transaction date using the Black-Scholes model in Other assets and as a contra-asset to Investment in lodging property, net. The contra-asset was amortized as a component of non-cash interest income over the term of the Brickell Mezzanine Loan, using the straight-line method, which approximates the interest method. For the three months ended March 31, 2022, we amortized $0.1 million of the carrying amount of the Brickell Purchase Option as non-cash interest income.

Our estimate of the fair values of the Onera Purchase Option and the Brickell Purchase Option under the Black-Scholes model requires significant judgment and estimates primarily related to the volatility of our stock price and expected levels of future dividends on our common stock. Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations.

Lodging Property Acquisitions

NCI Transaction

During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on a transaction (the "NCI Transaction") with NewcrestImage Holdings, LLC and NewcrestImage Holdings II, LLC (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, paid in the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 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 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.

The 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 in Note 5 - Debt). We recorded debt assumed in connection with the NCI Transaction at its face amount, which approximated fair market value on the closing date.

The GIC 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 judgments 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 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.

A summary of the lodging properties acquired during the three months ended March 31, 2022 is as follows (in thousands):


Date Acquired	Franchise/Brand	Location	Guestrooms	Purchase Price
January 13, 2022	Portfolio of properties - twenty-six lodging properties and two parking garages (1)	Various	3,533	$	766,000
March 23, 2022	Canopy Hotels by Hilton (1)	New Orleans, LA	176	56,000

			3,709	$	822,000

(1) On January 13, 2022, we acquired a portfolio of twenty-six lodging properties and two parking garages for an aggregate purchase price of $766.0 million. The lodging properties 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). On March 23, 2022, we acquired the Canopy New Orleans upon completion of its construction for a purchase price of $56.0 million.

The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands):


Land	$	52,797
Lodging buildings and improvements	676,607
Furniture, fixtures and equipment	76,729
Incentives and other intangibles	23,670
Other assets	5,318
Total assets acquired (1)	835,121
Less debt assumed	(335,205)
Less lease liabilities assumed	(5,441)
Less other liabilities	(3,920)
Net assets acquired	$	490,555

(1) Total assets acquired is based on an aggregate purchase price of $822.0 million plus the following items related to the 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.

Acquisition costs related to the NCI Transaction have been capitalized as part of the recorded amounts of the acquired assets.

There were no acquisitions during the three months ended March 31, 2023.

Intangible Assets

Intangible assets, net is as follows (in thousands):


	March 31, 2023		December 31, 2022
Indefinite-lived intangible assets:
Air rights	$	10,754	$	10,754
Other	80		80
	10,834		10,834
Finite-lived intangible assets:

Tax incentives	19,750		19,750
Key money	9,370		9,370


	29,120		29,120
Intangible assets	39,954		39,954
Less accumulated amortization	(6,149)		(5,110)
Intangible assets, net	$	33,805	$	34,844

We recorded amortization expense related to intangible assets of approximately $1.0 million and $0.9 million for the three months ended March 31, 2023 and 2022, respectively.

Future amortization expense related to intangible assets is as follows (in thousands):


For the Year Ending December 31,	Amount
2023	$	4,331
2024	3,620
2025	1,625
2026	1,625
2027	1,506
Thereafter	10,264
	$	22,971

Assets Held for Sale

Assets held for sale, net at March 31, 2023 and December 31, 2022 include certain properties that are under contract for sale and expected to close during the second or third quarters of 2023 or are being marketed for sale as follows (in thousands):


	Net Carrying Amount
Under Contract For Sale:
Portfolio of four lodging properties	$	27,669
Portfolio of two lodging properties	49,853
Parcel of undeveloped land - San Antonio, TX	1,225
	78,747
Marketed For Sale:
Parcel of undeveloped land - Flagstaff, AZ	425
	$	79,172

We continue to incur limited renovation costs for certain properties recorded as Assets held for sale, net. During the three months ended March 31, 2023, we incurred approximately $0.6 million of such renovation costs that have been capitalized during the period as part of the carrying amounts of the related properties recorded as Assets held for sale, net.