10-Q 1 hit20200930_10q.htm FORM 10-Q arct20190331_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2020

OR

 

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

 

Commission file number: 000-55394

HOSPITALITY INVESTORS TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Maryland

80-0943668

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

Park Avenue Tower, 65 East 55th Street, Suite 801, New York, NY

10022

(Address of Principal Executive Office)

(Zip Code)

 

(571) 529-6390

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to section 12(b) of the Act: None.

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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, 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 7(a)(2)(B) of the Securities Act. Yes ☐   No ☐

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

The number of shares of the registrant's common stock, $0.01 par value, outstanding as of November 1, 2020 was 39,082,625.

 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I

Item 1.

Financial Statements

1

 

Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019

1

 

Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three Months Ended September 30, 2020 and the Three Months Ended September 30, 2019 and for the Nine Months Ended September 30, 2020 and the Nine Months Ended September 30, 2019

2

 

Consolidated Statement of Changes in Equity (Unaudited) for the Three Months Ended September 30, 2020 and the Three Months Ended September 30, 2019 and for the Nine Months Ended September 30, 2020 and the Nine Months Ended September 30, 2019

3

 

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2020 and the Nine Months Ended September 30, 2019

4

 

Notes to Consolidated Financial Statements (Unaudited)

6

Item 2.

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

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

39

PART II

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

Signatures

44

 

 

 
 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

HOSPITALITY INVESTORS TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share data)

 

   

September 30, 2020

   

December 31, 2019

 
   

(unaudited)

         

ASSETS

               

Real estate investments:

               

Land

  $ 259,864     $ 285,520  

Buildings and improvements

    1,567,929       1,587,079  

Furniture, fixtures and equipment

    164,971       218,669  

Total real estate investments

    1,992,764       2,091,268  

Less: accumulated depreciation and amortization

    (363,706 )     (365,893 )

Total real estate investments, net

    1,629,058       1,725,375  

Cash and cash equivalents

    60,832       103,207  
Assets held for sale           159,309  

Restricted cash

    40,093       41,413  

Investments in unconsolidated entities

    2,981       3,357  
Right of use assets     54,893       57,799  

Prepaid expenses and other assets

    19,843       36,346  

Goodwill

    6,786       9,889  

Total Assets

  $ 1,814,486     $ 2,136,695  
                 

LIABILITIES, NON-CONTROLLING INTEREST AND EQUITY

               

Mortgage notes payable, net

  $ 1,308,583     $ 1,461,441  

Accounts payable and accrued expenses

    38,460       54,279  
Lease liabilities     49,283       51,756  

Total Liabilities

  $ 1,396,326     $ 1,567,476  
                 

Commitments and Contingencies

               

Contingently Redeemable Class C Units in operating partnership; 28,997,036 and 27,920,954 units issued and outstanding, respectively ($427,706 and $411,834 liquidation preference, respectively)

    418,514       398,449  
                 

Stockholders' Equity (Deficit)

               

Preferred stock, $0.01 par value, 50,000,000 shares authorized, one share issued and outstanding

           

Common stock, $0.01 par value, 300,000,000 shares authorized, 39,082,625 and 39,151,201 shares issued and outstanding, respectively

    391       392  

Additional paid-in capital

    873,214       871,714  

Deficit

    (876,426 )     (703,611 )

Total equity (deficit) of Hospitality Investors Trust, Inc. stockholders

    (2,821 )     168,495  

Non-controlling interests

    2,467       2,275  

Total Equity (Deficit)

  $ (354 )   $ 170,770  

Total Liabilities, Contingently Redeemable Class C Units, and Stockholders' Equity (Deficit)

  $ 1,814,486     $ 2,136,695  

 

The accompanying notes are an integral part of these statements.

 

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except for share and per share data)

(Unaudited)

 

   

Three Months Ended September 30, 2020

   

Three Months Ended September 30, 2019

   

Nine Months Ended September 30, 2020

   

Nine Months Ended September 30, 2019

 

Revenues

                               

Rooms

  $ 51,798     $ 150,133     $ 175,590     $ 439,402  

Food and beverage

    272       4,622       3,914       14,953  

Other

    2,158       3,931       6,757       11,597  

Total revenue

    54,228       158,686       186,261       465,952  

Operating expenses

                               

Rooms

    13,255       38,960       48,306       113,301  

Food and beverage

    227       4,025       3,688       12,566  

Management fees

    1,528       4,410       5,119       12,867  

Other property-level operating expenses

    31,646       64,199       107,632       188,043  

Transaction related costs

    496       234       1,102       780  

General and administrative

    6,337       5,105       16,901       15,163  

Depreciation and amortization

    20,140       26,934       63,031       83,702  

Impairment of goodwill and long-lived assets

          11,677       30,675       55,168  

Rent

    679       1,674       2,707       4,989  

Total operating expenses

    74,308       157,218       279,161       486,579  

Gain on sale of assets, net

    276       1,232       4,476       1,272  

Operating (loss) income

  $ (19,804 )   $ 2,700     $ (88,424 )   $ (19,355 )

Interest expense

    (13,351 )     (22,123 )     (45,465 )     (72,648 )

Other income, net

    12,721       983       13,019       1,315  

Equity in (loss) earnings of unconsolidated entities

    (37 )     49       (421 )     276  

Total other expenses, net

    (667 )     (21,091 )     (32,867 )     (71,057 )

Loss before taxes

  $ (20,471 )   $ (18,391 )   $ (121,291 )   $ (90,412 )

Income tax expense (benefit)

    89       (897 )     8,116       (2,041 )

Net loss and comprehensive loss

  $ (20,560 )   $ (17,494 )   $ (129,407 )   $ (88,371 )

Less: Net (loss) income attributable to non-controlling interests

    (84 )     102       (465 )     (9 )

Net loss before dividends and accretion

  $ (20,476 )   $ (17,596 )   $ (128,942 )   $ (88,362 )

Dividends on Class C Units (cash and PIK)

    (13,491 )     (12,825 )     (39,681 )     (33,295 )

Accretion of Class C Units

    (1,441 )     (1,309 )     (4,192 )     (3,456 )

Net loss attributable to common stockholders

  $ (35,408 )   $ (31,730 )   $ (172,815 )   $ (125,113 )
                                 

Basic and Diluted net loss attributable to common stockholders per common share

  $ (0.90 )   $ (0.81 )   $ (4.41 )   $ (3.20 )
                                 

Basic and Diluted weighted average shares of common stock outstanding

    39,154,307       39,140,267       39,145,688       39,131,368  

 

The accompanying notes are an integral part of these statements.

 

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In thousands, except for share data)

(Unaudited)

 

   

Nine-Month Period Ended September 30, 2020

 
   

Common Stock

                                         
   

Number of Shares

   

Par Value

   

Additional Paid-in Capital

   

Deficit

   

Total Equity (Deficit) of Hospitality Investors Trust, Inc. Stockholders

   

Non-controlling Interests

   

Total Non-Controlling Interests and Equity (Deficit)

 

December 31, 2019

    39,151,201     $ 392     $ 871,714     $ (703,611 )   $ 168,495     $ 2,275     $ 170,770  

Net loss before dividends and accretion

                      (52,458 )     (52,458 )           (52,458 )

Net loss attributable to non-controlling interests

                                  (115 )     (115 )

Cash distributions on Class C Units

                      (7,807 )     (7,807 )           (7,807 )

Accretion on Class C Units

                      (1,359 )     (1,359 )           (1,359 )

PIK distributions on Class C Units

                      (5,205 )     (5,205 )           (5,205 )

Share-based payments

                348             348             348  

March 31, 2020

    39,151,201     $ 392     $ 872,062     $ (770,440 )   $ 102,014     $ 2,160     $ 104,174  

Net loss before dividends and accretion

                      (56,008 )     (56,008 )           (56,008 )

Net loss attributable to non-controlling interests

                                  (266 )     (266 )

Dividends paid or declared

                                  457       457  

Cash distributions on Class C Units

                      (7,907 )     (7,907 )           (7,907 )

Accretion on Class C Units

                      (1,392 )     (1,392 )           (1,392 )

PIK distributions on Class C Units

                      (5,271 )     (5,271 )           (5,271 )

Share-based payments

    2,393             583             583             583  

June 30, 2020

    39,153,594     $ 392     $ 872,645     $ (841,018 )   $ 32,019     $ 2,351     $ 34,370  

Net loss before dividends and accretion

                      (20,476 )     (20,476 )           (20,476 )
Repurchase and retirement of common stock     (83,504 )     (1 )                 (1 )           (1 )
Cash contributions from non-controlling interest                                   200       200  

Net loss attributable to non-controlling interests

                                  (84 )     (84 )

Cash distributions on Class C Units

                      (8,095 )     (8,095 )           (8,095 )

Accretion on Class C Units

                      (1,441 )     (1,441 )           (1,441 )

PIK distributions on Class C Units

                      (5,396 )     (5,396 )           (5,396 )

Share-based payments

    12,535             569             569             569  

September 30, 2020

    39,082,625     $ 391     $ 873,214     $ (876,426 )   $ (2,821 )   $ 2,467     $ (354 )

 

   

Nine-Month Period Ended September 30, 2019

 
   

Common Stock

                                         
   

Number of Shares

   

Par Value

   

Additional Paid-in Capital

   

Deficit

   

Total Equity (Deficit) of Hospitality Investors Trust, Inc. Stockholders

   

Non-controlling Interests

   

Total Non-Controlling Interests and Equity (Deficit)

 

December 31, 2018

    39,134,628     $ 391     $ 870,251     $ (489,108 )   $ 381,534     $ 2,535     $ 384,069  

Repurchase and retirement of common stock

    (2,177 )           (20 )           (20 )           (20 )

Net loss before dividends and accretion

                      (32,328 )     (32,328 )           (32,328 )

Net loss attributable to non-controlling interests

                                  (92 )     (92 )

Cash distributions on Class C Units

                      (4,765 )     (4,765 )           (4,765 )

Accretion on Class C Units

                      (883 )     (883 )           (883 )

PIK distributions on Class C Units

                      (3,177 )     (3,177 )           (3,177 )

Share-based payments

                448             448             448  

March 31, 2019

    39,132,451     $ 391     $ 870,679     $ (530,261 )   $ 340,809     $ 2,443     $ 343,252  

Net loss before dividends and accretion

                      (38,438 )     (38,438 )           (38,438 )

Net loss attributable to non-controlling interests

                                  (19 )     (19 )

Dividends paid or declared

                                  (87 )     (87 )

Cash distributions on Class C Units

                      (7,517 )     (7,517 )           (7,517 )

Accretion on Class C Units

                      (1,264 )     (1,264 )           (1,264 )

PIK distributions on Class C Units

                      (5,011 )     (5,011 )           (5,011 )

Share-based payments

    7,892             274             274             274  

June 30, 2019

    39,140,343     $ 391     $ 870,953     $ (582,491 )   $ 288,853     $ 2,337     $ 291,190  

Net loss before dividends and accretion

                      (17,596 )     (17,596 )           (17,596 )

Net income attributable to non-controlling interests

                                  102       102  

Cash distributions on Class C Units

                      (7,695 )     (7,695 )           (7,695 )

Accretion on Class C Units

                      (1,309 )     (1,309 )           (1,309 )

PIK distributions on Class C Units

                      (5,130 )     (5,130 )           (5,130 )

Share-based payments

    10,858       1       375             376             376  

September 30, 2019

    39,151,201     $ 392     $ 871,328     $ (614,221 )   $ 257,499     $ 2,439     $ 259,938  

 

The accompanying notes are an integral part of these statements.

 

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30, 2020

   

Nine Months Ended September 30, 2019

 

Cash flows from operating activities:

               

Net loss

  $ (129,407 )   $ (88,371 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                

Depreciation and amortization

    63,031       83,702  

Impairment of goodwill and long-lived assets

    30,675       55,168  

Amortization and write-off of deferred financing costs

    6,694       7,578  

Other adjustments, net

    (2,324 )     487  
Changes in assets and liabilities:                

Prepaid expenses and other assets

    15,960       (2,842 )

Accounts payable and accrued expenses

    (15,665 )     16,806  

Net cash (used in) provided by operating activities

  $ (31,036 )   $ 72,528  
                 

Cash flows from investing activities:

               

Real estate investment improvements and purchases of property and equipment

    (7,523 )     (44,167 )

Proceeds from sales of hotels, net

    177,006       35,452  

Other adjustments, net

    18       67  

Net cash provided by (used in) investing activities

  $ 169,501     $ (8,648 )
                 

Cash flows from financing activities:

               

Proceeds from Class C Units

          219,746  
Proceeds from non-controlling interest     200        

Payment of Class C Units issuance costs

          (7,756 )

Dividends/Distributions paid

    (23,352 )     (20,064 )

Payments of mortgage notes payable

    (156,323 )     (1,060,665 )
Proceeds from mortgage notes payable           1,086,100  
Deferred financing fees     (2,685 )     (17,644 )

Mandatorily redeemable preferred securities redemptions

          (219,746 )

Repurchase of shares of common stock

          (20 )

Net cash used in financing activities

  $ (182,160 )   $ (20,049 )

Net change in cash and cash equivalents and restricted cash

    (43,695 )     43,831  

Cash and cash equivalents and restricted cash, beginning of period

    144,620       82,845  

Cash and cash equivalents and restricted cash, end of period

  $ 100,925     $ 126,676  

 

 

HOSPITALITY INVESTORS TRUST, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30, 2020

   

Nine Months Ended September 30, 2019

 

Supplemental disclosure of cash flow information:

               

Interest paid

  $ 41,146     $ 60,363  

Income taxes paid, net

  $ (2,055 )   $ (592 )

Non-cash investing and financing activities:

               

Accretion of Class C Units

  $ (4,192 )   $ (3,456 )

PIK accrual on Class C Units

  $ (15,872 )   $ (13,318 )

Real estate investment improvements and purchases of property and equipment in accounts payable and accrued expenses

  $ 807     $ 1,118  

 

The accompanying notes are an integral part of these statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

 

Note 1 - Organization

 

Hospitality Investors Trust, Inc. (the "Company"), incorporated on July 25, 2013, is a self-managed real estate investment trust ("REIT") that invests primarily in premium-branded select-service lodging properties in the United States. As of September 30, 2020, the Company owns or has an interest in a total of 101 hotels with a total of 12,673 guest rooms located in 29 states. As of September 30, 2020, all but one of these hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., and Hyatt Hotels Corporation or one of their respective subsidiaries or affiliates. The Company's one unbranded hotel has a direct affiliation with a leading university in Atlanta.

 

In early March 2020, the Company started to experience the effects of the coronavirus pandemic on its business through softening of demand and revenue weakness across its portfolio triggered by direct guest cancellations at its hotels as well as cancellations of business and industry conventions and meetings in certain of its markets. These conditions significantly worsened over the course of the month and continued through the second and third quarters and into the fourth quarter as the level of overall travel has declined significantly due to concerns about the coronavirus pandemic and actions taken by governments, businesses and other organizations to contain the coronavirus that have included restrictions on travel and the operation of many businesses as well as event cancellations and social distancing measures. During the months of May through October, the Company has seen some return of demand primarily from leisure travelers with occupancy numbers improving each month from May through October, although the overall level of guests at its hotels remains substantially lower due to the continuing impact of the coronavirus pandemic. The Company anticipates that demand from business travelers will remain muted at least until the development and widespread distribution of a coronavirus vaccine.   

 

The Company anticipates this trend of substantially lower guest demand and revenue across its hotel portfolio will continue and the extent to which the coronavirus pandemic will impact the Company’s financial results will depend on future developments, which are unknown and cannot be predicted, including how long the pandemic continues and its severity, new information which may emerge concerning the coronavirus, the efficacy and acceptance of any vaccines or other remedies developed and actions taken to contain the coronavirus pandemic or its impact, consumer preferences and the duration of governmental and business restrictions on travel, among others. Additional waves of the coronavirus pandemic could lead to new travel restrictions and reductions in economic activity resulting in further disruptions to the Company’s operations and cash flows.

 

The Company has implemented various property-level cost reduction and other liquidity preservation measures in response to the coronavirus pandemic. These measures have included determining to delay most of the property improvement plans (“PIPs”) required by the Company’s franchisors that had been scheduled for 2020 as well as certain projects scheduled for future years, and determining not to make $4.2 million of capital reserve payments due to certain of the Company’s lenders during April and May 2020.  The Company discussed its decision not to make capital reserve payments in advance with the lenders and the decisions to delay PIPs and not to make capital reserve payments were made in conjunction with actions taken by the Company’s franchisors temporarily suspending obligations of hotel owners to perform capital improvements and fund capital reserves for at least the remainder of 2020.  The failure to make the capital reserve payments resulted in events of default under the 92-Pack Loans (as defined in Note 5 below) and the Additional Grace Mortgage Loan (as defined in Note 5 below). The Company reached definitive agreements with the lenders under the 92-Pack Loans during June 2020 and with the lender under the Additional Grace Mortgage Loan in August 2020 with respect to forbearance and waiver and deferral of the unpaid capital reserve obligations and certain future capital reserve obligations, as well as certain other relief. With respect to the Additional Grace Mortgage Loan, the Company’s agreement with the lender also includes an extension of the October 2020 maturity date of such loan. During June 2020, the Company also reached an agreement with the lender to extend the June 2020 maturity date of the Hilton Garden Inn Blacksburg Joint Venture Loan (as defined in Note 5 below). Deferrals the Company has agreed to with its lenders generally extend capital reserve obligations until 2021 and 2022, which could result in greater pressure on the Company’s future cash flows. 

 

As a result of the forbearance and loan modification agreements the Company has entered into with respect to its indebtedness, as well as the periodic debt yield and debt service coverage tests the Company remains subject to under its indebtedness, the Company does not expect that excess cash flows, if any, generated by its properties will be available to the Company for any other purpose for the foreseeable future. Accordingly, the Company will require additional liquidity from a source other than property operations, which may not be available on favorable terms or at all.  Because of the liquidity constraints the Company is facing as a result of the coronavirus pandemic, it has been engaged in ongoing discussions with one of its investors, Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the "Brookfield Investor"), regarding strategic and liquidity alternatives.  There can be no assurance these discussions will be successful. The failure of these discussions, as well as the potential consequences of the exercise of related rights or other resulting actions that could be taken by the Brookfield Investor, or the failure to obtain additional capital from another source, could materially and adversely affect the Company. Moreover, any transaction with the Brookfield Investor or any other transaction pursuant to which the Company could obtain additional capital could be on terms that would not be favorable to the Company or its other stockholders. 

 

Under United States Generally Accepted Accounting Principles (“GAAP”), when preparing financial statements for each annual and interim reporting period, the Company has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to meet its obligations arising within one year after the date that the financial statements are issued. Due to the impact of the coronavirus pandemic, the Company is unable to conclude with certainty that it is probable that it will be able to meet its obligations arising within twelve months of the date of issuance of these financial statements under the parameters set forth in the accounting guidance and the Company has determined in accordance with the accounting guidance that there is substantial doubt about its ability to continue as a going concern for one year after the date the financial statements are issued. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.  

 

As part of its investment strategy to continue to pursue the sale of non-core hotels and reallocate capital into other corporate purposes, including debt reduction, the Company commenced marketing for sale a total of 45 hotels during the year ended December 31, 2019. As of September 30, 2020, 43 of these hotels have been sold and the remaining two hotels were subject to definitive sale agreements where the buyer had made a non-refundable deposit.  However, due to the impact of the coronavirus pandemic, the Company was not able to conclude as of September 30, 2020, that the sales are probable to occur and to close within one year, so the Company has not classified the hotels as held for sale as of September 30, 2020. During October 2020, the pending sale of one hotel was terminated due to the buyer’s default and the Company was entitled to retain the non-refundable deposit as liquidated damages.  See Note 13 - Sale of Hotels and Assets Held for Sale for additional information.

 

The Company conducted its initial public offering ("IPO"), from January 2014 until November 2015 without listing shares of its common stock on a national securities exchange, and it has not subsequently listed its shares. There currently is no established trading market for the Company’s shares and there may never be one.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

 

The Company is required to annually publish an estimated net asset value per share of common stock ("Estimated Per-Share NAV") pursuant to the rules and regulations of the Financial Industry Regulatory Authority (“FINRA”). On April 21, 2020, the Company's board of directors unanimously approved and the Company published an updated Estimated Per-Share NAV equal to $8.35 based on an estimated fair value of the Company's assets less the estimated fair value of the Company's liabilities, divided by 39,151,201 shares of common stock outstanding on a fully diluted basis as of December 31, 2019 (the "2020 NAV"). The 2020 NAV and the underlying estimates and assumptions are as of December 31, 2019, and have not been revised to reflect any potential negative impact on the Company of the coronavirus pandemic or any other transactions or events occurring subsequent to December 31, 2019. While the Company’s board of directors has approved the 2020 NAV, it has only done so for the sole purpose of allowing the Company to comply with applicable rules of FINRA for use on customer account statements. As a result of the existing and anticipated impact of the coronavirus pandemic and taking into consideration the declines in publicly traded hospitality company stock prices during 2020, the Company’s board of directors believes the 2020 NAV is significantly above the current value of a share of common stock. Accordingly, stockholders should not rely on the 2020 NAV in respect of any investment decisions relating to the Company, including in making any decision to buy or sell shares of the Company’s common stock.  The Company intends to publish an updated Estimated Per-Share NAV on at least an annual basis. 

 

Substantially all of the Company’s business is conducted through its operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (the "OP"). On January 12, 2017, the Company, along with the OP, entered into the Securities Purchase, Voting and Standstill Agreement ("SPA") with the Brookfield Investor, to secure a commitment of up to $400 million by the Brookfield Investor to make capital investments in the Company necessary for the Company to meet its short-term and long-term liquidity requirements and obligations by purchasing units of limited partner interest in the OP entitled “Class C Units” (“Class C Units”) through February 2019. Following the final closing pursuant to the SPA on February 27, 2019 (the "Final Closing"), the Brookfield Investor no longer has any obligations or rights to purchase Class C Units pursuant to the SPA or otherwise.

 

The Brookfield Investor holds all the issued and outstanding Class C Units and the sole issued and outstanding Redeemable Preferred Share (as defined herein), and, as a result, has significant governance and other rights that could be used to control or influence the Company's decisions or actions. As of September 30, 2020, the total liquidation preference of the issued and outstanding Class C Units was $427.7 million. The Class C Units are convertible into units of limited partner interest in the OP entitled “OP Units” (“OP Units”), which may be redeemed for shares of the Company’s common stock or, at the Company’s option, the cash equivalent. As of the date of this Quarterly Report on Form 10-Q, the Brookfield Investor owns or controls 42.6% of the voting power of the Company’s common stock on an as-converted basis (See Note 3 - Brookfield Investment for additional information).

 

 

Note 2 - Summary of Significant Accounting Policies

 

The accompanying consolidated financial statements of the Company included herein were prepared in accordance with GAAP. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. These adjustments are considered to be of a normal, recurring nature.

 

The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2019, which are included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020.

 

Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as percentage ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

 

Certain amounts in prior periods have been reclassified in order to conform to current period presentation, specifically, the Company changed the presentation of its Consolidated Statements of Operations and Comprehensive Income (Loss) with respect to "Gain on sale of assets, net." The change in presentation was to reclassify this line item so that it is included as a component of Operating income (loss) and represented as a separate line item, rather than as a component of "Other (loss) income." The Company made this change in presentation for all periods presented.

 

Use of Estimates

 

The preparation of the accompanying 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Real Estate Investments

 

The Company allocates the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and furniture, fixtures and equipment. The Company utilizes various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which are recorded at fair value. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

The Company's acquisitions of hotel properties are accounted for as acquisitions of groups of assets rather than business combinations, although the determination will be made on a transaction-by-transaction basis. If the Company concludes that an acquisition will be accounted for as a group of assets, the transaction costs associated with the acquisition will be capitalized as part of the assets acquired.

 

The Company's investments in real estate, including transaction costs, that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of the Company's long-lived assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.

 

The Company is required to make assessments as to the useful lives of the Company’s assets for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company’s investments in real estate. These assessments have a direct impact on the Company’s net income because if the Company were to shorten the expected useful lives of the Company’s investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

 

Impairment of Long-Lived Assets

 

Upon the occurrence of certain “triggering events” under the provisions of the Accounting Standards Codification ("ASC") section 360-Property, Plant and Equipment, the Company reviews its hotel investments which are considered to be long-lived assets under GAAP for impairment.  These triggering events may include various conditions prescribed by GAAP such as the initiation of marketing an asset for sale, significant declines in market value of the asset, significant declines in operating performance, significant adverse changes in economic conditions and potential sales of hotel properties which result in shorter holding periods. If a triggering event occurs and circumstances indicate the carrying amount of the property may not be recoverable, the Company performs a recoverability test which compares the carrying amount to an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If the Company determines it is unable to recover the carrying amount of the asset over the useful life, impairment is deemed to exist, and an impairment loss will be recorded to the extent that the carrying amount exceeds the estimated fair value of the property. See Note 14 - Impairments for impairment disclosures.

 

Assets Held for Sale (Long Lived-Assets)

 

When the Company initiates the sale of long-lived assets, it assesses whether the assets meet the criteria to be considered assets held for sale. The review is based on whether the following criteria are met:

 

 

Management and the Company's board of directors have committed to a plan to sell the asset group;

 

 

The subject assets are available for immediate sale in their present condition;

 

 

The Company is actively locating buyers as well as other initiatives required to complete the sale;

 

 

The sale is probable and the transfer is expected to qualify for recognition as a complete sale in one year;

 

 

The long-lived asset is being actively marketed for sale at a price that is reasonable in relation to fair value; and

 

 

Actions necessary to complete the plan indicate it is unlikely significant changes will be made to the plan or the plan will be withdrawn.

 

If all the criteria are met, a long-lived asset held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and the Company will cease recording depreciation. Any adjustment to the carrying amount is recorded as an impairment loss. See Note 13 - Sale of Hotels and Assets Held for Sale for assets held for sale disclosures.

 

If at any point the criteria for assets held for sale are no longer met, the Company reclassifies the long-lived asset from held for sale to held and used, and the Company measures the asset value at the lower of: 


      •    its carrying amount before the asset (disposal group) was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the asset (disposal group) been continuously classified as held and used; or 


      •    its fair value at the date of the subsequent decision not to sell.

 

Goodwill

 

The Company allocates goodwill to each reporting unit. For the Company’s purposes, each of its majority-owned hotels is considered a reporting unit. The Company tests goodwill for impairment at least annually, as of March 31, or upon the occurrence of any "triggering events" under ASC section 360, if sooner. Upon the occurrence of any "triggering events," the Company is required to compare the fair value of each reporting unit to which goodwill has been allocated, to the carrying amount of such reporting unit including the allocation of goodwill. If the carrying amount of a reporting unit exceeds its fair value, the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of the reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to such reporting unit.

 

During 2019, the Company recorded impairments to goodwill of $0.9 million resulting in a goodwill balance of $9.9 million as of December 31, 2019. The Company recognized goodwill impairment of $3.1 million during the nine months ended September 30, 2020, resulting in a goodwill balance of $6.8 million as of September 30, 2020. There was no goodwill impairment recognized during the three months ended September 30, 2020. See Note 14 - Impairments for impairment disclosures.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less at purchase.

 

Restricted Cash

 

Restricted cash consists of amounts required under mortgage agreements for future capital improvements to owned assets, future interest and property tax payments and cash flow deposits while subject to mortgage agreement restrictions.

 

Deferred Financing Fees

 

Deferred financing fees represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized as a component of interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing fees are expensed in full when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful. Deferred financing fees are deducted from their related liabilities on the Company's Consolidated Balance Sheets.

 

Revenue Recognition

 

The Company's revenue is primarily from rooms, food and beverage, and other, and is disaggregated on the Company's Consolidated Statement of Operations and Comprehensive Loss.

 

Room sales are driven by a fixed fee charged to a hotel guest to stay at the hotel property for an agreed-upon period. A majority of the Company's room reservations are cancellable and the Company transfers promised goods and services to the hotel guest as of the date upon which the hotel guest occupies a room and at the same time earns and recognizes revenue. The Company offers advance purchase reservations that are paid for by the hotel guest in advance and the Company recognizes deferred revenue as a result of such reservations. The Company's obligation to the hotel guest is satisfied as of the date upon which the hotel guest occupies a room. The Company's room revenue accounted for 95.5% and 94.6% of the Company's total revenue for the three months ended September 30, 2020 and 2019, respectively. The Company's room revenue accounted for 94.3% and 94.3% of the Company's total revenue for the nine months ended September 30, 2020 and 2019, respectively. Food, beverage, and other revenue are recognized at the point of sale on the date of the transaction as the hotel guest simultaneously obtains control of the good or service.

 

Income Taxes

 

The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") commencing with its tax year ended December 31, 2014. In order to continue to qualify as a REIT, the Company must annually distribute to its stockholders 90% of its REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. The Company generally will not be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. The Company may be subject to certain state and local taxes on its income, property taxes and federal income and excise taxes on its undistributed income. The Company's hotels are leased to taxable REIT subsidiaries, which are owned by the OP. The taxable REIT subsidiaries are subject to federal, state and local income taxes.

 

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, capital loss, and tax credit carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.

 

As of September 30, 2020, the Company determined it is more likely than not that certain deferred tax assets will not be realized due to cumulative historical and current tax losses, which are negative evidence about the Company’s ability to generate future taxable income. As of September 30, 2020, the Company has recorded a full deferred tax valuation allowance of $7.2 million. The deferred tax assets (net of the valuation allowance) are included as part of “Prepaid expenses and other assets” on the Consolidated Balance Sheets and the impact of the valuation allowance in the current period is included as part of the “Income tax expense (benefit)” line item on the Consolidated Statements of Operations and Comprehensive Loss.

 

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement in order to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes. As of September 30, 2020, the Company's tax years that remain subject to examination by major tax jurisdictions are 2015, 2016, 2017, 2018 and 2019.

 

Earnings/Loss per Share

 

The Company calculates basic income or loss per share by dividing net income or loss attributable to common stockholders for the period by the weighted-average shares of its common stock outstanding for such period. Diluted income per share takes into account the effect of dilutive instruments, such as unvested restricted shares of common stock ("restricted shares") and unvested restricted share units in respect of shares of common stock ("RSUs"), except when doing so would be anti-dilutive.

 

The Company currently has outstanding restricted shares whose holders are entitled to participate in dividends when and if paid on shares of common stock. The Company also currently has outstanding RSUs whose holders generally are credited with dividend or other distribution equivalents when and if paid on shares of common stock. These dividends or other distribution equivalents will be regarded as having been reinvested in RSUs and will only be paid to the extent the corresponding RSUs vest. To the extent the Company were to have distributions in the future, it would be required to calculate earnings per share using the two-class method with regard to restricted shares, whereby earnings or losses are reduced by distributed earnings as well as any available undistributed earnings allocable to holders of restricted shares.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

Fair Value Measurements

 

In accordance with Accounting Standards Codification section 820 - Fair Value Measurement, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.

 

Financial instruments recorded or required to be disclosed at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:

 

 

Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets.

 

 

Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment.

 

 

Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

See Note 10 - Fair Value Measurements for fair value disclosures.

 

Class C Units

 

The Company initially measured the Class C Units which were issued to the Brookfield Investor at fair value net of issuance costs. The Company is required to accrete the carrying value of the Class C Units to the liquidation preference using the effective interest method over the five year period prior to the holder's redemption option becoming exercisable (See "Accretion of Class C Units" on the Company's Consolidated Statements of Operations and Comprehensive Loss). However, if it becomes probable that the Class C Units will become redeemable prior to such date, the Company will adjust the carrying value of the Class C Units to the maximum liquidation preference.

 

Until the Final Closing, the Company could have become obligated pursuant to the SPA with the Brookfield Investor to issue additional Class C Units. This obligation was considered a contingent forward contract under ASC section 480 - Distinguishing Liabilities from Equity, and the Company accounted for it as a liability. The Final Closing with the Brookfield Investor occurred on February 27, 2019, and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units. The contingent forward liability was extinguished upon the Final Closing, and, accordingly, the Company will not have any such obligations in the future. The Company had no contingent forward liability as of either December 31, 2019 or September 30, 2020 (See Note 11 - Commitments and Contingencies).

 

Leases

 

Effective January 1, 2019, the Company adopted ASU 2016-02 Leases, which requires companies to recognize operating leases under GAAP as “right of use assets” (“ROU assets”) and lease liabilities on the balance sheet. The Company has $54.9 million of ROU assets and $49.3 million of lease liabilities as of September 30, 2020 for its operating leases. The Company's below-market lease intangible, net, of $7.1 million is also included in the ROU assets on the Company's Consolidated Balance Sheets as of September 30, 2020. Prior to January 1, 2019, these amounts were recorded in "Below-market lease, net" on the Company's Consolidated Balance Sheet. 

 

The Company's leases are primarily comprised of: ground or operating leases of certain of its hotel properties; one corporate office lease; and leases of vans, copiers and other miscellaneous equipment. All of the foregoing are classified as operating leases under GAAP. The Company determines if an agreement is considered a lease under GAAP at commencement of the agreement. The Company determines the lease term by assuming the exercise of all renewal options that are reasonably certain.

 

The Company includes leases of its hotel properties, and its corporate office space lease, in ROU assets and lease liabilities on the Company’s Consolidated Balance Sheet.  The Company's below-market lease intangible, net, which is attributed to its ground leases is also included in the ROU assets on the Company's Consolidated Balance Sheet. The Company determined that its vans, copiers, and other miscellaneous equipment were immaterial to the Company’s financial statements and therefore they have been excluded from the Company's ROU assets and lease liabilities. 

 

Operating lease ROU assets and lease liabilities are recognized at the commencement date and are calculated using the present value of future lease payments over the lease term. The discount rate used in the present value calculation is the Company's estimate of its incremental borrowing rate based on the information available at the lease commencement date. ASU 2016-02 did not result in any changes to how operating lease payments are expensed under GAAP, and therefore, the Company's total operating lease payments continue to be expensed on a straight-line basis over the life of the lease commencing upon possession of the property. The below-market lease intangible is based on the difference between the market rent and the contractual rent for the Company’s ground lease obligations and is discounted to a present value using an interest rate reflecting the Company’s assessment of the risk associated with the leases acquired. Acquired lease intangible assets are amortized over the remaining lease term. See Note 4 - Leases for lease disclosures.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

Advertising Costs

 

The Company expenses advertising costs for hotel operations as incurred. These costs were $2.1 million for the three months ended September 30, 2020, and $5.7 million for the three months ended September 30, 2019. Advertising costs were $7.0 million for the nine months ended September 30, 2020, and $16.5 million for the nine months ended September 30, 2019. 

 

Allowance for Doubtful Accounts

 

Receivables consist principally of trade receivables from customers and are generally unsecured and are due within 30 to 90 days. The Company records a provision for uncollectible accounts using the allowance method. Expected credit losses associated with trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon a forward-looking assessment of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accounts have been exhausted, the accounts are written off and the associated allowance for doubtful accounts is reduced. Trade receivable balances, net of the allowance for doubtful accounts, are included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets, and are as follows (in thousands):

 

    September 30, 2020     December 31, 2019  

Trade receivables

  $ 4,561     $ 7,759  

Allowance for doubtful accounts

    (586 )     (447 )

Trade receivables, net of allowance

  $ 3,975     $ 7,312  

 

Reportable Segments

 

The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total consolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level, and therefore each property is considered a reporting unit. Each of the Company's reporting units are also considered to be operating segments, but none of these individual operating segments represents a reportable segment and they meet the criteria in GAAP to aggregate all properties into one reportable segment.

 

Derivative Transactions

 

The Company at certain times enters into derivative instruments to hedge exposure to changes in interest rates. The Company’s derivatives as of September 30, 2020, consist of interest rate cap agreements which it believes will help to mitigate its exposure to increasing borrowing costs under floating rate indebtedness, and a variable interest-only bond which it has acquired in connection with the securitization of one of its mortgage loans to effectively reduce its borrowing costs. The Company has elected not to designate its interest rate cap agreements and the variable interest-only bond as cash flow hedges. The impact of the interest rate caps for the three and nine months ended September 30, 2020 and September 30, 2019, was immaterial to the consolidated financial statements. See Note 5 - Mortgage Notes Payable and Note 10 - Fair Value Measurements for variable interest-only bond disclosures.

 

Recently Issued Accounting Pronouncements 

 

Effective January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13 replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company is required to use a forward-looking expected credit loss model for accounts receivable and financial assets carried on the Company's Consolidated Balance Sheet at amortized cost. The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements.

 

Effective January 1, 2020, the Company adopted ASU 2018-13 Fair Value Measurements (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). Among other changes, ASU 2018-13 addresses changes in disclosures related to unrealized gains and losses and transfers between levels in the fair value hierarchy. The adoption of ASU 2018-13 did not have any impact on the Company's consolidated financial statements.

 

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform if certain criteria are met. The Company can apply the ASU as of the beginning of the interim period that includes March 12, 2020 or any date thereafter, which is January 1, 2020 for the Company. The Company may elect to apply the amendments to contract modifications prospectively from January 1, 2020 through December 31, 2022. The hedging relationship provisions of ASU 2020-04 are currently not applicable as no hedge accounting elections have been made by the Company. The Company is still assessing the impact of ASU 2020-04 but at this point does not anticipate it will have a material impact on the Company's consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

 

 

 

Note 3 - Brookfield Investment

 

 

On March 31, 2017, the initial closing under the SPA (the “Initial Closing”) occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:

 

 

the sale by the Company and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share (the “Redeemable Preferred Share”), for a nominal purchase price; and

 

 

the sale by the Company and purchase by the Brookfield Investor of 9,152,542.37 Class C Units for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.

 

On February 27, 2018, the second closing under the SPA (the “Second Closing”) occurred, pursuant to which the Company sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate.

 

On February 27, 2019, the Final Closing occurred, pursuant to which the Company sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.

 

Without obtaining the prior approval of the majority of the then outstanding Class C Units and/or at least one of the two directors (each, a "Redeemable Preferred Director") elected to the Company’s board of directors by the Brookfield Investor pursuant to its rights as the holder of the Redeemable Preferred Share, the Company is restricted from taking certain operational and governance actions. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions. See “Brookfield Approval Rights” below.

 

The Redeemable Preferred Share

 

The Redeemable Preferred Share held by the Brookfield Investor has been classified as permanent equity on the Consolidated Balance Sheets.

 

The Redeemable Preferred Share ranks on parity with the Company’s common stock, with the same rights with respect to preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, terms and conditions of redemption and other terms and conditions as the Company’s common stock, with certain exceptions.

 

For so long as the Brookfield Investor holds the Redeemable Preferred Share, the Brookfield Investor has certain rights with respect to the election of members of the Company's board of directors and its committees, including the right to elect two Redeemable Preferred Directors to the Company’s board of directors and to approve two additional independent directors (each, an "Approved Independent Director") to be recommended and nominated by the Company's board of directors for election by the stockholders at each annual meeting. In addition, each committee of the Company's board of directors, subject to limited exceptions, must include at least one of the Redeemable Preferred Directors.

 

The holder of the Redeemable Preferred Share has certain rights in the event the OP fails to redeem Class C Units when required to do so, including the right to increase the size of the Company's board of directors by a number of directors that would result in the holder of the Redeemable Preferred Share being entitled to nominate and elect a majority of the Company's board of directors, subject to compliance with the provisions of the Company's charter requiring at least a majority of the Company's directors to be Independent Directors (as defined in the Company's charter).

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

Class C Units

 

As of September 30, 2020, the Class C Units reflected on the Consolidated Balance Sheets are reconciled in the following table (in millions):

 

   

As of September 30, 2020

 

Gross Proceeds

  $ 379.7  

Less:

       

Class C Unit issuance costs(1)

  $ (22.5 )

Plus:

       

PIK Distributions Paid to holders of Class C Units

  $ 48.0  

Accretion of carrying value to liquidation preference of Class C Units

  $ 13.2  

Change in contingent forward liability

  $ 0.1  

Contingently Redeemable Class C Units in operating partnership

  $ 418.5  

                                            

(1) Class C Unit issuance costs include $6.0 million paid directly to the Brookfield Investor at the Initial Closing in the form of expense reimbursements and a commitment fee.

 

The Class C Units have been classified as temporary equity due to the contingent redemption features described in more detail below. At the Initial Closing, the Class C Units were deemed to have a “beneficial conversion feature” as the effective conversion price of the Class C Units under GAAP as of March 31, 2017 was less than the fair value of the Company's common stock on such date. As a result, the Company recognized the beneficial conversion feature as a deemed dividend of $4.5 million during the three months ended March 31, 2017, thereby reducing income available to common stockholders for purposes of calculating earnings per share.

 

Rank

 

The Class C Units rank senior to the OP Units and all other equity interests in the OP with respect to priority in payment of distributions and in the distribution of assets in the event of the liquidation, dissolution or winding-up of the OP, whether voluntary or involuntary, or any other distribution of the assets of the OP among its equity holders for the purpose of winding up its affairs.

 

Distributions

 

Commencing on June 30, 2017, holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If the Company fails to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero, and such failure may result in a material breach of the terms of the Class C Units which would trigger the right of the Class C Unit holder to redeem the Class C Units. See "Holder Redemptions" below. 

 

Commencing on June 30, 2017, holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative PIK Distribution at a rate of 5% per annum ("PIK Distributions"). If the Company fails to redeem the Brookfield Investor when required to do so pursuant to the amendment and restatement of the OP's existing agreement of limited partnership (the "A&R LPA"), the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%.

 

The number of Class C Units delivered in respect of the PIK Distributions on any distribution payment date will be equal to the number obtained by dividing the amount of PIK Distribution by $14.75.

 

The Brookfield Investor is also entitled to receive tax distributions under certain limited circumstances. As of September 30, 2020, no tax distributions have been paid.

 

For the three months ended September 30, 2020 and September 30, 2019, the Company paid or accrued cash distributions of $8.1 million and $7.7 million and PIK Distributions of 365,843.03 and 347,822.16 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units.  For the nine months ended September 30, 2020 and September 30, 2019, the Company paid or accrued cash distributions of $23.8 million and $20.0 million and PIK Distributions of 1,076,082.82 and 902,948.37 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units. 

 

Conversion Rights

 

The Class C Units are generally convertible into OP Units at any time at the option of the holder thereof at an initial conversion price of $14.75 (the "Conversion Price"). The Conversion Price is subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions.

 

Liquidation Preference

 

The liquidation preference with respect to each Class C Unit as of a particular date is the original purchase price paid under the SPA or the value upon issuance of any Class C Unit received as a PIK Distribution, plus, with respect to such Class C Unit up to but not including such date, (i) any accrued and unpaid cash distributions and (ii) any accrued and unpaid PIK Distributions.

 

Mandatory Redemption

 

The Class C Units are generally subject to mandatory redemption at a premium to liquidation preference if the OP consummates any liquidation, sale of all or substantially all of the assets, dissolution or winding-up, whether voluntary or involuntary, sale, merger, reorganization, reclassification or recapitalization or other similar event (a “Fundamental Sale Transaction”) prior to March 31, 2022. The amount of the premium, which may be substantial, varies based on the timing of consummation of the Fundamental Sale Transaction.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

Holder Redemptions

 

The holders of the Class C Units may redeem such Class C Units at any time on or after March 31, 2022 for a redemption price in cash equal to the liquidation preference and also have certain other redemption rights in connection with the Company’s failure to maintain REIT status or material breaches of the A&R LPA. 

 

Remedies Upon Failure to Redeem

 

If the OP fails to redeem Class C Units when required to do so pursuant to the terms of the A&R LPA, beginning three months after such failure BSREP II Hospitality II Special GP OP LLC (the "Special General Partner"), an affiliate of the Brookfield Investor, has the exclusive right, power and authority to sell the assets or properties of the OP for cash at such time or times as the Special General Partner may determine, upon engaging a reputable, national third party sales broker or investment bank reasonably acceptable to holders of a majority of the then outstanding Class C Units to conduct an auction or similar process designed to maximize the sales price. The proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on the Company or the OP.

 

The foregoing rights of the Special General Partner are in addition to the other rights described herein if the OP fails to redeem Class C Units when required to do so pursuant to the terms of the A&R LPA.

 

Company Redemption After Five Years

 

At any time and from time to time on or after March 31, 2022, the Company has the right to elect to redeem all or any part of the issued and outstanding Class C Units for an amount in cash equal to the liquidation preference.

 

Transfer Restrictions

 

The Brookfield Investor is generally permitted to make transfers of Class C Units without the prior consent of the Company, provided that any transferee must customarily invest in these types of securities or real estate investments of any type or have in excess of $100.0 million of assets.

 

Preemptive Rights

 

If the Company or the OP proposes to issue additional equity securities, subject to certain exceptions and in accordance with the procedures in the A&R LPA, any holder of Class C Units that owns Class C Units representing more than 5% of the outstanding shares of the Company’s common stock on an as-converted basis has certain preemptive rights.

 

Brookfield Approval Rights

 

The articles supplementary with respect to the Redeemable Preferred Share restrict the Company from taking certain actions without the prior approval of at least one of the Redeemable Preferred Directors, and the A&R LPA restricts the OP from taking certain actions without the prior approval of the majority of the then outstanding Class C Units.

 

In general, subject to certain exceptions, prior approval is required before the Company or its subsidiaries (including the OP) are permitted to take any of the following actions: equity issuances; organizational document amendments; debt incurrences; affiliate transactions; sale of all or substantially all assets; bankruptcy or insolvency declarations; declarations or payments of dividends or other distributions; redemptions or repurchases of securities; adoption of, and amendments to, the annual business plan (including the annual operating and capital budget) required under the terms of the Redeemable Preferred Share; hiring and compensation decisions related to certain key personnel (including executive officers); property acquisitions and property sales and dispositions that do not meet transaction-size limits and other defined criteria and would be outside of the OP’s normal course of business; entry into new lines of business; settlement of material litigation; changes to material agreements; increasing or decreasing the number of directors on the Company’s board of directors; nominating or appointing a director (other than a Redeemable Preferred Director) who is not independent; nominating or appointing the chairperson of the Company’s board of directors; and certain other matters.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

 

 

 

Note 4 - Leases

 

As of September 30, 2020, the Company recorded leases of its hotel properties and its corporate office space lease in ROU assets and lease liabilities on the Company’s Consolidated Balance Sheet. The Company's below-market lease intangible, net, which is attributed to its ground leases is also included in the Company's ROU assets. The Company’s leases have remaining lease terms of three to 45 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from five to 50 years. One Company lease includes a purchase option. Lease extension and termination options require written notice by the Company in accordance with specific parameters addressed in each individual lease. Certain of the leases require variable lease payments typically based on a percentage of hotel revenue but no less than a minimum base rent. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

During the nine months ended September 30, 2020, the Company entered into agreements with three of its ground lease lessors to provide certain rent deferrals because of the coronavirus pandemic. Rent deferrals under these agreements continue until December 2020 at the latest. All three rent deferrals were immaterial to the financial statements and the total payments do not result in a substantially different obligation for the Company.  

 

For the nine months ended September 30, 2020 and September 30, 2019, the Company paid rental obligations of $2.2 million and $4.1 million, respectively, which was included in the measurement of lease liabilities and ROU assets. The cash paid is included in operating cash flows on the Company's Statement of Cash Flows.

 

Supplemental balance sheet information related to the Company's leases was as follows:

 

 

Weighted Average Remaining Lease Term

 

Weighted Average Discount Rate

 

September 30, 2020

16.5 years

  6.33%  

December 31, 2019

17.5 years

  6.33%  

 

Supplemental income statement information related to the Company's leases was as follows:

 

   

Variable Lease Expense (in thousands)

   

Rent Expense (in thousands)

   

Amortization of Below-Market Lease Intangible, net (in thousands)

 

For the three months ended September 30, 2020

  $ 19     $ 630     $ 92  

For the nine months ended September 30, 2020

  $ 240     $ 2,376     $ 277  

For the three months ended September 30, 2019

  $ 201     $ 1,440     $ 96  

For the nine months ended September 30, 2019

  $ 597     $ 4,281     $ 295  

 

Rent expense for the Company’s leases of its hotel properties which includes variable lease payments is recorded in Rent expense on the Consolidated Statement of Operations and Comprehensive Loss. Rent expense for the Company's corporate office space is included in General and administrative expense on the Consolidated Statement of Operations and Comprehensive Loss.
 

Maturity of Lease Liabilities Analysis as of September 30, 2020 for the Company's operating leases of hotel properties and corporate office space were as follows (in thousands):

 

   

Minimum Rental Commitments

    Amortization of Above Market Lease Intangible to Rent Expense     Amortization of Below Market Lease Intangible to Rent Expense     Amortization of Below Market Lease Intangible, net, to Rent Expense  

For the three months ending December 31, 2020

  $ 1,793     $ (38 )   $ 130     $ 92  

Year ending December 31, 2021

    6,584       (153 )     522       369  

Year ending December 31, 2022

    5,913       (153 )     522       369  

Year ending December 31, 2023

    5,489       (153 )     522       369  

Year ending December 31, 2024

    5,256       (153 )     522       369  

Thereafter

    63,074       (1,569 )     7,117       5,548  

Total lease payments

  $ 88,109     $ (2,219 )   $ 9,335     $ 7,116  

Less: Imputed Interest

    38,826                          

Present value of lease liability

  $ 49,283                          

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

 

Note 5 - Mortgage Notes Payable

 

The Company’s mortgage notes payable as of September 30, 2020 and December 31, 2019 consist of the following, respectively (in thousands):

 

   

Outstanding Mortgage Notes Payable

Encumbered Properties

 

September 30, 2020

   

December 31, 2019

   

Interest Rate

 

Payment

 

Maturity

Hilton Garden Inn Blacksburg Joint Venture

  $ 9,918     $ 10,500     4.31 %  

Interest Only, Principal paid at Maturity(1)

 

December 2021

92 - Pack Mortgage Loan(2)

    707,775       810,370    

One-month LIBOR plus 2.14%

 

Interest Only, Principal paid at Maturity

 

Nov 2021, subject to three, one year extension rights

92 - Pack Senior Mezzanine Loan

    81,352       93,146    

One-month LIBOR plus 5.60%

 

Interest Only, Principal paid at Maturity

 

Nov 2021, subject to three, one year extension rights

92 - Pack Junior Mezzanine Loan

    56,948       65,202    

One-month LIBOR plus 8.50%

 

Interest Only, Principal paid at Maturity

 

Nov 2021, subject to three, one year extension rights

Additional Grace Mortgage Loan -20 properties in Grace Portfolio and one additional property

    232,000       232,000     4.96 %  

Interest Only, Principal paid at Maturity

 

October 2022

Term Loan -16 properties

    228,850       261,948    

One-month LIBOR plus 3.00%

 

Interest Only, Principal paid at Maturity

 

May 2021, subject to two, one year extension rights

Total Mortgage Notes Payable

  $ 1,316,843     $ 1,473,166              

Less: Deferred Financing, Net

  $ 9,105     $ 13,113              

Plus: Premium on Variable Interest-Only Bond

  $ 845     $ 1,388              

Total Mortgage Notes Payable, Net

  $ 1,308,583     $ 1,461,441              

                                            

(1) Until maturity, any monthly excess cash flows from the property after payment of interest and property operating expenses and certain other amounts will be utilized to prepay the principal balance of the loan. 

(2) As a result of asset sale activity, the number of hotel properties serving as collateral for this loan has been reduced to 62 as of September 30, 2020.

 

Interest expense related to the Company's mortgage notes payable for the three months ended September 30, 2020 and for the three months ended September 30, 2019, was $11.6 million and $20.4 million, respectively. Interest expense related to the Company's mortgage notes payable for the nine months ended September 30, 2020 and for the nine months ended September 30, 2019, was $40.5 million and $62.7 million, respectively.

 

Hilton Garden Inn Blacksburg Joint Venture    

 

During June 2020, the Company and the lender agreed to extend the maturity date of the Hilton Garden Inn Blacksburg Joint Venture Loan, which had been June 6, 2020, for 18 months until December 6, 2021.  In connection with the extension, the Company and the lender also agreed to certain other modifications to the loan terms, including a requirement to prepay $0.525 million of the outstanding principal balance of the loan at closing, and a requirement that, until maturity, the lender will utilize any monthly excess cash flows from the property after payment of interest and property operating expenses and certain other amounts to prepay the principal balance of the loan. The Company is required to make monthly interest payments based on the outstanding principal and a fixed annual interest rate of 4.31%.  

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

92-Pack Loans

 

On May 1, 2019, the Company refinanced existing mortgage and mezzanine indebtedness with new mortgage and mezzanine indebtedness of $1,040 million secured by 92 of the Company’s hotel properties (the “92-Pack Loans”). 

 

At closing, the Company used the net proceeds from the 92-Pack Loans after accrued interest and closing costs to repay $961.1 million outstanding under existing indebtedness.  The Company also used $10.0 million of proceeds to fund a reserve with the lenders that the Company can utilize to fund expenditures for work required to be performed under property improvement plans (“PIPs”) required by franchisors of the 92 hotel properties. During the term of the 92-Pack Loans, the Company will be required to periodically deposit additional reserves with the lenders that the Company can utilize to fund a portion of future PIP work and other capital improvements.  During April and May 2020, as part of ongoing liquidity preservation measures being taken by the Company in response to the coronavirus pandemic and in conjunction with actions taken by the Company’s franchisors temporarily suspending obligations of hotel owners to perform capital improvements and fund capital reserves, the Company did not make required capital reserve payments to the mortgage lender of approximately $3.9 million, which resulted in an event of default under the 92-Pack Loans. 

 

During June 2020, the Company entered into forbearance agreements with the lenders under the 92-Pack Loans. Pursuant to the terms of the forbearance agreements:

 

 

the Company’s capital reserve obligations with respect to its brand mandated property improvement plans (“PIP Reserves”), starting with the payment that was not made in April 2020, have been deferred for nine months and re-scheduled, such that no further PIP Reserve payments are required during 2020, and the total of $8.3 million in PIP Reserve payments that had been scheduled to be made between April 2020 and May 2021 (the “Deferred PIP Amount”) is now scheduled to be made between January 2021 and February 2022 (including $5.8 million of PIP Reserves that had been scheduled to be made during 2020);

 

 

the Company’s monthly capital reserve obligations with respect to repair and replacement of furniture, fixtures and equipment and routine capital expenditures will not be required for April through December 2020; and

 

 

the Company has agreed to pay all excess cash flows from the 62 hotel properties that serve as loan collateral (after payment of interest on the 92-Pack Loans, property operating expenses and certain other amounts) to the account for PIP Reserves with the mortgage lender, with such funds to be applied to future PIP Reserve obligations, until the entire Deferred PIP Amount has been deposited.

 

The existing events of default under the 92-Pack Loans will continue to exist in full force and effect until the entire Deferred PIP Amount has been deposited and certain other conditions are satisfied, but the lenders have agreed to forbear from collecting default interest and enforcing their rights and remedies under the loan documents as a result of the events of default during that period.

 

The 92-Pack Loans were fully prepayable with certain prepayment fees applicable on or prior to May 7, 2020, provided, however, that the first 25% of each of the 92-Pack Loans is prepayable at par. Following May 7, 2020, each of the 92-Pack Loans may be prepaid without payment of any prepayment fee or any other fee or penalty.  Prepayments under the mortgage loan are generally conditioned on a pro-rata prepayment being made under the mezzanine loans.

 

The 92-Pack Mortgage Loan requires monthly interest payments at a variable rate equal to one-month LIBOR plus 2.14%, the 92-Pack Senior Mezzanine Loan required monthly interest payments at a variable rate equal to one-month LIBOR plus 5.60%, and the 92-Pack Junior Mezzanine Loan requires monthly interest payments at a variable rate equal to one-month LIBOR plus 8.50% for a combined weighted average interest rate of LIBOR plus 2.90%. Pursuant to an interest rate cap agreement, the LIBOR portions of the interest rates due under the 92-Pack Loans were effectively capped at 4.0%.

 

In connection with a sale or disposition to a third party of any of the 92 hotel properties serving as collateral, such property may be released from the 92-Pack Loans, subject to certain conditions and limitations, by prepayment of a portion of the 92-Pack Loans at a release price calculated in accordance with the terms of the 92-Pack Loans.

 

 As of September 30, 2020, the Company has sold 30 hotel properties pursuant to these provisions and prepaid approximately $162.2 million of principal under the mortgage loan and approximately $31.7 million of principal under the mezzanine loans, thereby reducing the number of hotel properties serving as collateral under the 92-Pack Loans to 62 hotels. 

 

For the term of the 92-Pack Loans, the Company and the OP are required to maintain, on a consolidated basis, a net worth of (i) $250.0 million (excluding their interest in the hotel properties serving as collateral and excluding accumulated depreciation and amortization) and (ii) $500.0 million (including their interest in the hotel properties serving as collateral but excluding accumulated depreciation and amortization). As of September 30, 2020, the Company was in compliance with this financial covenant.

 

Variable Interest-Only Bond

 

During the year ended December 31, 2019, the Company recorded a derivative asset and premium associated with a variable interest-only bond issued as part of the lenders' securitization of the 92-Pack Mortgage Loan and acquired by the Company in connection with such securitization. The interest-only bond was acquired to effectively reduce the Company’s borrowing cost on the 92-Pack Loans. The premium on the interest-only bond is amortized on a straight-line basis over the life of the bond and is included in the Mortgage notes payable on the Company's Consolidated Balance Sheet as of September 30, 2020 and December 31, 2019. The Company values the derivative asset portion of the variable interest-only bond at fair value (See Note 10 - Fair Value Measurements).

 

Additional Grace Mortgage Loan

 

A portion of the purchase price of the Grace Portfolio was financed through additional mortgage financing which loan was refinanced during October 2015 (the “Additional Grace Mortgage Loan”). The Additional Grace Mortgage Loan carries a fixed annual interest rate of 4.96% per annum.  The maturity date of the Additional Grace Mortgage Loan was extended until October 6, 2022 pursuant to the August 2020 loan modification agreement described below. Pursuant to the Additional Grace Mortgage Loan, the Company agreed to make periodic payments into an escrow account for the PIPs required by the franchisors, and the Company made the final PIP reserve payment during June 2018. The Company continues to have obligations to make periodic payments into other capital reserves. The Additional Grace Mortgage Loan includes the following financial covenants: minimum consolidated net worth and minimum consolidated liquidity. As of September 30, 2020, the Company was in compliance with these financial covenants. 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

During May 2020, as part of ongoing liquidity preservation measures being taken by the Company in response to the coronavirus pandemic and in conjunction with actions taken by the Company’s franchisors temporarily suspending obligations of hotel owners to perform capital improvements and fund capital reserves, the Company did not make required capital reserve payments to the mortgage lender of approximately $0.3 million, which resulted in an event of default under the Additional Grace Mortgage Loan.

 

During August 2020, the Company entered into a loan modification agreement with the lender under the Additional Grace Mortgage Loan.  Pursuant to the terms of the loan modification agreement:

 

 

the maturity date of the Additional Grace Mortgage Loan was extended for two years until October 6, 2022, subject to the Company’s right to further extend the maturity date for an additional six months until April 6, 2023, upon satisfaction of certain conditions, including prepayment by the Company of principal to the lender of five percent of the outstanding principal balance of the loan;   

 

 

commencing on the loan’s monthly payment date in October 2021, and continuing through and including the monthly payment date in September 2022, the Company has agreed to prepay principal under the Additional Grace Mortgage Loan in an amount equal to $250,000 per month, or $3.0 million in the aggregate; 

 

 

the Company’s monthly capital reserve obligations with respect to repair and replacement of furniture, fixtures and equipment and routine capital expenditures will not be required for May through December 2020; and

 

 

the Company has agreed that until maturity, the lender will utilize any monthly excess cash flows from the 21 hotel properties that serve as loan collateral, after payment of interest and property operating expenses and certain other amounts, to prepay amounts outstanding under the Additional Grace Mortgage Loan.

 

Term Loan

 

On April 27, 2017, the Company and the OP, as guarantors, and certain majority-owned subsidiaries of the OP, as borrowers, entered into a Second Amended and Restated Term Loan Agreement (as amended, the “Term Loan”) in an aggregate principal amount of $310.0 million, initially collateralized by 28 of the Company’s hotel properties (each, a “Term Loan Collateral Property”).

 

Prior to the closing of the 92-Pack Loans, the Term Loan was scheduled to mature on May 1, 2019, subject to three one-year extension rights at the Company's option which, if all three extension rights were exercised, would have resulted in an outside maturity date of May 1, 2022. In May 2019, the Company used $25.0 million of the net proceeds from the 92-Pack Loans to prepay principal under the Term Loan, entered into an amendment to the Term Loan which reduced the commitment under the Term Loan from $310.0 million to $285.0 million and added one additional extension term of one-year to the term of the Term Loan, such that if the Company exercises all extension rights, at the Company's option, the maturity date of the Term Loan would be May 1, 2023.  In May 2020, the Company extended the maturity of the Term Loan in accordance with its existing terms to May 1, 2021.   

 

The Term Loan is prepayable in whole or in part at any time, subject to LIBOR breakage, if any. 

 

The Term Loan requires monthly interest payments at a variable rate of one-month LIBOR plus 3.00%. Pursuant to an interest rate cap agreement, the LIBOR portions of the interest rates due under the Term Loan were effectively capped at 4.0%.

 

In connection with a sale or disposition to a third party of an individual Term Loan Collateral Property, such Term Loan Collateral Property may be released from the Term Loan, subject to certain conditions and limitations, by prepayment of a portion of the Term Loan at a release price calculated in accordance with the terms of the Term Loan. As of September 30, 2020, the Company has sold 12 hotel properties pursuant to these provisions and prepaid approximately $56.2 million of principal under the Term Loan, thereby reducing the number of hotel properties serving as collateral under the Term Loan to 16 hotels.

 

The Term Loan also provides for certain amounts to be deposited into reserve accounts, including with respect to all costs associated with the PIPs required pursuant to the franchise agreements related to the Term Loan Collateral Properties.

 

For the term of the Term Loan, the Company and the OP are required to maintain, on a consolidated basis, a net worth of $250.0 million (excluding accumulated depreciation and amortization). As of September 30, 2020, the Company was in compliance with this financial covenant.

 

 

Note 6 - Mandatorily Redeemable Preferred Securities

 

In February 2015, a portion of the contract purchase price for the Grace Portfolio was satisfied by the issuance to the sellers of the Grace Portfolio of approximately $447.1 million of liquidation value of preferred equity interests (the "Grace Preferred Equity Interests") in two newly-formed Delaware limited liability companies, HIT Portfolio I Holdco, LLC and HIT Portfolio II Holdco, LLC (together, the "Holdco entities"). Each of the Holdco entities is an indirect subsidiary of the Company and an indirect owner of the hotels comprising the Grace Portfolio.

 

The holders of the Grace Preferred Equity Interests were entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing, through August 2016, and entitled to 8.00% per annum thereafter. The Company was required to reduce the liquidation value of the Grace Preferred Equity Interests to 50.0% of the $447.1 million originally issued by February 27, 2018, and to redeem the Grace Preferred Equity Interests in full by February 27, 2019.

 

On February 27, 2019, the Company used proceeds from the concurrent sale of Class C Units to the Brookfield Investor at the Final Closing to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests.

 

Interest expense related to the Grace Preferred Equity Interests for the three and nine months ended September 30, 2019 was zero and $2.7 million, respectively.

 

Due to the fact that the Grace Preferred Equity Interests were mandatorily redeemable and certain of their other characteristics, the Grace Preferred Equity Interests were treated as debt in accordance with GAAP.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

 

Note 7 - Accounts Payable and Accrued Expenses

 

The following is a summary of the components of accounts payable and accrued expenses (in thousands):

 

    September 30, 2020     December 31, 2019  

Trade accounts payable

  $ 7,517     $ 9,679  

Accrued expenses

    30,943       44,600  
Total   $ 38,460     $ 54,279  

 

 

Note 8 - Common Stock

 

The Company had 39,082,625 and 39,151,201 shares of common stock outstanding as of each of September 30, 2020 and December 31, 2019, respectively. During the three months ended September 30, 2020, an aggregate 83,504 shares of common stock were tendered to the Company pursuant to the settlement of certain litigation.  See Note 11 – Commitments and Contingencies – Litigation below. 

 

Share Repurchase Program

 

On September 24, 2018, the Company announced that its board of directors had adopted a new share repurchase program (the "SRP"), effective as of October 1, 2018, pursuant to which the Company was offering, subject to certain terms and conditions, liquidity to stockholders by offering to make quarterly repurchases of common stock at a price to be established by the board of directors. In February 2019, the board of directors suspended the SRP. The suspension will remain in effect unless and until the board takes further action to reactivate the SRP. There can be no assurance the SRP will be reactivated on its current terms, different terms or at all. Prior to such suspension, the Company repurchased a total of 211,154 shares of common stock pursuant to the SRP for a total purchase price of $1.9 million, including 208,977 shares for a total purchase price of $1.9 million during the quarter and year ended December 31, 2018. 

 

 

Note 9 - Share-Based Payments

 

The Company has an employee and director incentive restricted share plan (as amended and/or restated, the “RSP”), which provides it with the ability to grant awards of restricted shares and RSUs to the Company’s directors, officers and employees, as well as the directors and employees of entities that provide services to the Company. The total number of shares of common stock that may be granted under the RSP may not exceed 5% of the outstanding shares of common stock on a fully diluted basis at any time and in any event may not exceed 4,000,000 shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).

 

Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient’s employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash or stock distributions when and if paid prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock are generally subject to the same restrictions as the underlying restricted shares. The restricted shares are measured at fair value and expensed over the applicable vesting period. The Company recognizes the impact of forfeited restricted share awards as they occur.

 

RSUs represent a contingent right to receive shares of common stock at a future settlement date, subject to satisfaction of applicable vesting conditions and/or other restrictions, as set forth in the RSP and an award agreement evidencing the grant of RSUs. RSUs may not, in general, be sold or otherwise transferred until restrictions are removed and the rights to the shares of common stock have vested. Holders of RSUs do not have or receive any voting rights with respect to the RSUs or any shares underlying any award of RSUs, but such holders generally are credited with dividend or other distribution equivalents that are regarded as having been reinvested in RSUs which are subject to the same vesting conditions and/or other restrictions as the underlying RSUs. The fair value of the RSUs is expensed over the applicable vesting period. The Company recognizes the impact of forfeited RSUs as they occur.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

 

 

Restricted Share Awards

 

A summary of the Company's restricted share awards for the nine months ended September 30, 2020 is presented below.

 

    Number of Shares     Weighted Average Grant Date Fair Value (per share)     Aggregate Intrinsic Value (in thousands)  

Non-vested December 31, 2019

    10,858     $ 6.91     $ 75  

Granted

    11,976     $ 5.76     $ 69  

Vested

    10,858     $ 6.91     $ 75  

Forfeitures

        $     $  

Non-vested September 30, 2020

    11,976     $ 5.76     $ 69  

 

 Following the Initial Closing and pursuant to a compensation payment agreement, restricted share awards are made to an affiliate of the Brookfield Investor in respect of the Redeemable Preferred Directors’ service on the board of directors and vest on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable Redeemable Preferred Director.

 

The compensation expense related to restricted shares for the three months ended September 30, 2020 and September 30, 2019 was less than $0.1 million. The compensation expense related to restricted shares for the nine months ended September 30, 2020 and the nine months ended September 30, 2019 was less than $0.1 million. As of September 30, 2020, there was less than $0.1 million of unrecognized compensation expense remaining.

 

RSU Awards

 

A summary of the Company's RSU awards for the nine months ended September 30, 2020 is presented below:

 

    Number of Shares     Weighted Average Grant Date Fair Value (per share)     Aggregate Intrinsic Value (in thousands)  

Non-vested December 31, 2019

    383,430     $ 10.74     $ 4,118  

Granted

    411,232     $ 5.76     $ 2,369  

Vested

    135,620     $ 10.93     $ 1,482  

Forfeited

    446     $ 10.17     $ 5  

Non-vested September 30, 2020

    658,596     $ 7.59     $ 5,000  

 

Outstanding RSU awards made to the Company’s executive officers and other employees during years prior to 2020 generally will vest annually over a four-year vesting period following the date of grant, subject to continued employment through the vesting date.

 

RSU awards made to the Company’s executive officers during 2020 and thereafter will include a time vesting and performance vesting component.  Fifty percent (50%) of these RSU awards will vest over a three-year period following the date of grant, subject to continued employment through the vesting date, and the remaining fifty percent (50%) of these RSU awards will vest and become payable based on Company performance over a three-year performance period, with the actual number of RSUs payable determined by the Company’s board of directors or compensation committee in its sole discretion based on the achievement of Company performance goals established by the board of directors or compensation committee after consultation with the Company’s chief executive officer, and subject to the executive officer’s continued employment through the vesting date.  RSU awards made to the Company’s other employees during 2020 and thereafter will vest annually over a three-year vesting period following the date of grant, subject to continued employment through the vesting date. RSU awards to directors vest on the earlier of the first anniversary of the date of grant or the date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable director. Vested RSUs may only be settled in shares of common stock and such settlement generally will be on the earliest of (i) in the calendar year in which the third anniversary of each applicable vesting date occurs, (ii) termination of the recipient’s services to the Company and (iii) a change in control event. As of September 30, 2020, the Company anticipates that all unvested RSUs will vest in accordance with their terms. 

 

The compensation expense related to RSUs for the three months ended September 30, 2020 and the three months ended September 30, 2019 was approximately $0.6 million and $0.4 million, respectively. The compensation expense related to RSUs for the nine months ended September 30, 2020 and the nine months ended September 30, 2019 was approximately $1.5 million and $1.1 million, respectively. As of September 30, 2020, there was $3.8 million of unrecognized compensation expense remaining.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

 

 

 

Note 10 - Fair Value Measurements

 

The Company is required to disclose the fair value of financial instruments which it is practicable to estimate. The fair value of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these items. The following table shows the carrying amounts and the fair values of material liabilities, excluding deferred financing fees, that qualify as financial instruments (in thousands):

 

   

September 30, 2020

 
    Carrying Amount     Fair Value  

Mortgage notes payable

  $ 1,316,843     $ 1,315,068  

Total

  $ 1,316,843     $ 1,315,068  

 

The fair value of the mortgage notes payable was determined using the discounted cash flow method and applying current market rates and is classified as level 3 under the fair value hierarchy. Market rates take into consideration general market conditions and maturity.

 

During the nine months ended September 30, 2020 and September 30, 2019, respectively, the Company recorded impairment losses on its hotel properties (See Note 14 - Impairments). The fair value of these hotel properties other than those subject to definitive sales agreements was based on the observable market data which are considered level 2 inputs under the fair value hierarchy, and unobservable inputs that reflect the Company's internal assumptions, which are considered level 3 inputs under the fair value hierarchy. For the Company's hotels subject to a definitive sales agreement, fair value was equal to the purchase price in the applicable agreement. 

 

During the year ended December 31, 2019, the Company recorded a derivative asset associated with a variable interest-only bond that the Company acquired in connection with the lenders' securitization of the 92-Pack Mortgage Loan (See Note 5 - Mortgage Notes Payable). As of September 30, 2020, the fair value of the derivative asset was $1.0 million which was based on observable market data which are considered level 2 inputs under the fair value hierarchy.

 

 

Note 11 - Commitments and Contingencies

 

Litigation

 

In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. As described in more detail below, the previously disclosed Milliken Court Action (as defined below) and Wollman Court Action (as defined below) were fully resolved and settled during the quarter ended September 30, 2020.  There are no material legal or regulatory proceedings pending or known to be contemplated against the Company at the date of this filing.

 

On September 4, 2020, the Company and certain other parties entered into a settlement agreement with the plaintiff in the Wollman Court Action that fully resolves and obtains a release of the claims set forth in the Wollman Court Action.  Pursuant to this settlement agreement, the appeals described in more detail below were withdrawn with prejudice.  The separate settlement of the Milliken Court Action (the “Milliken Settlement”) thereby became effective and the settlement funds described below were received. 

 

Pursuant to the Milliken Settlement, the Company received an aggregate cash payment of $15,181,108.47, and from which the Company paid attorneys’ fees, reimbursement of expenses, and a case contribution to plaintiff’s counsel of $2,250,000. The net cash amount received from settlement is recorded in Other income, net, on the Company's Consolidated Statements of Operations and Comprehensive Loss. Settlement and legal fees associated with the legal actions are recorded in General and Administrative expenses on the Company's Consolidated Statements of Operations and Comprehensive Loss. Certain defendants also tendered an aggregate of 83,504 shares of common stock to the Company pursuant to the Milliken Settlement. These tendered shares, which were immediately retired, were treated like a share repurchase and solely impacted stockholders' equity on the Company's Consolidated Balance Sheets. 

 

Also pursuant to the Milliken Settlement, the claims of the Company’s stockholders asserted in the Milliken Court Action were fully and completely released. 

 

As previously disclosed, in May 2018, a special litigation committee (the “SLC”) of the Company’s board of directors (the “Board”) was empowered to investigate claims asserted in shareholder demand letters sent to the Board by counsel for two of the Company’s stockholders, Tom Milliken and Stuart Wollman, as well as the allegations contained in a complaint filed by Mr. Milliken on behalf of the Company and against the Company, as well as the Company's former external advisor, American Realty Capital Hospitality Advisors, LLC (the "Former Advisor"), and various affiliates of the Former Advisor, including the Company’s former property managers (together, the “Former Advisor Defendants”), and certain current and former directors and officers of the Company (the “Director and Officer Defendants”). The complaint was filed in the United States District Court for the Southern District of New York on February 26, 2018 and amended on May 25, 2018 (the “Milliken Court Action”). The amended complaint alleged, among other things, that the Former Advisor and the Director and Officer Defendants breached their fiduciary duties to the Company by putting their own interests above the Company’s interests, which breach was aided and abetted by certain of the Former Advisor Defendants. The amended complaint also asserted a claim for corporate waste against the Former Advisor and Director and Officer Defendants, which was aided and abetted by certain of the Former Advisor Defendants, breach of contract against the Director and Officer Defendants, and unjust enrichment against certain of the Director and Officer Defendants and Former Advisor Defendants.

 

On October 11, 2019, the SLC submitted to the District Court its report (the “Report”), describing the SLC’s completion, with the assistance of independent counsel, of its investigation of the claims contained in the demand letters and the Milliken Court Action.

 

The SLC also was empowered to determine whether it is in the Company’s best interest for the claims against the defendants in the Milliken Court Action to proceed.  The Report included the SLC’s initial determination that some but not all of the claims should proceed. The Report also indicated that the SLC had previously reached an agreement-in-principle with one of the Director and Officer Defendants, the Company’s current Chief Executive Officer, to resolve the claims against him with prejudice whereby he would pay back to the Company a portion of certain fees and Company common stock he received.  In the Report, the SLC concluded that: (1) the claims against the Company’s current directors who served on the Board prior to the Initial Closing, the Company’s former director, Robert Burns, and the Company’s former Chief Financial Officer, Edward Hoganson should be dismissed with prejudice, and it is not, therefore, in the best interest of the Company for any claims to proceed against them; and (2) it is in the best interest of the Company for certain claims to proceed against the remaining defendants. 

 

  On December 27, 2019, following extensive settlement discussions, the Company, the Former Advisor Defendants and the Director and Officer Defendants reached an agreement-in-principle concerning the proposed settlement of the Milliken Court Action.

 

The proposed settlement also contemplated the full and complete release of the claims of the Company’s stockholders asserted in the stockholder derivation action, and under the terms of the proposed settlement, the cash payment to the Company would be reduced by the District Court-approved attorneys’ fees and expenses to plaintiff’s counsel and contribution award to plaintiff in recognition of the substantial benefit the plaintiff conferred on the Company in achieving the settlement. 

 

On January 29, 2020, two days before the District Court deadline for the filing of a stipulation comprising the settlement agreement among the Company and the various defendants in the Milliken Court Action reflecting the agreements-in-principle described above (the “Stipulation of Settlement”), Stuart Wollman filed a separate complaint with the District Court against the Company and all of the defendants in the Milliken Court Action except for certain of the Former Advisor Defendants and Mr. Hoganson (the “Wollman Court Action”), alleging common law fraud on behalf of himself and a putative class of the Company’s  stockholders related to their purchases of Company’s common stock, and seeking rescission or compensatory damages, punitive damages, and attorneys’ fees and costs.  The Wollman Court Action was based on facts that comprise part of the factual basis for and that gave rise to the Milliken Court Action, focusing in particular on disclosures related to the Company’s property management agreements with certain of the Former Advisor Defendants.   

 

On February 3, 2020, the Company and the defendants in the Milliken Court Action filed the Stipulation of Settlement with the District Court.  Dismissal with prejudice of the Wollman Court Action and the exhaustion of all appeals of both the Milliken Court Action and the Wollman Court Action were conditions precedent to the effectiveness of the settlement of the Milliken Court Action.  On February 5, 2020, the District Court issued an order preliminarily approving the proposed settlement of the Milliken Court Action contemplated by the Stipulation of Settlement. On March 25, 2020, Stuart Wollman filed a motion to intervene in the Milliken Court Action and vacate the District Court’s preliminary approval of the proposed settlement on the alleged basis that the settlement was impermissibly broad.  On March 31, 2020, the District Court denied Dr. Wollman’s motion to intervene and vacate and resolved to construe such motion as an objection to the preliminary approval of the proposed settlement of the Milliken Court Action. 

 

On June 9, 2020, the District Court held a settlement hearing to determine whether the proposed settlement and plaintiff’s counsel’s proposed fee application for an award of attorneys’ fees, reimbursement of expenses, and payment of a case contribution award in the aggregate of $2,250,000, are fair, reasonable and adequate, and should therefore be granted final approval.  On June 12, 2020, the District Court held a hearing on the pending motions to dismiss the Wollman Court Action, and on June 18, 2020, the District Court dismissed the Wollman Court Action with prejudice. On June 19, 2020, the District Court issued a final order and judgment approving the proposed settlement of the Milliken Court Action and plaintiff’s counsel’s proposed fee application.

 

On July 17, 2020, Stuart Wollman filed notices of appeal to the United States Court of Appeals for the Second Circuit, of the District Court’s dismissal with prejudice of the Wollman Court Action and the District Court’s final approval of the proposed settlement of the Milliken Court Action.  As described above, on September 4, 2020, the Company and certain other parties entered into a settlement agreement with Stuart Wollman that fully resolves and obtains a release of the claims set forth in the Wollman Court Action.  Pursuant to the foregoing settlement agreement, the appeals filed by Dr. Wollman were withdrawn with prejudice.  Because the appeals of the Milliken Court Action and the Wollman Court Action were thereby exhausted, the Milliken Settlement became effective.

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

Environmental Matters

 

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.

 

Contingent Forward Liability

 

Until the Final Closing, the Company could have become obligated pursuant to the SPA with the Brookfield Investor to issue additional Class C Units. This obligation was considered a contingent forward contract under ASC section 480 - Distinguishing Liabilities from Equity, and the Company accounted for it as a liability.  On February 27, 2019, the Company used the proceeds from the concurrent sale of Class C Units to the Brookfield Investor at the Final Closing to redeem the remaining $219.7 million in liquidation value of Grace Preferred Equity Interests, and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units. The contingent forward liability was extinguished upon the Final Closing, and, accordingly, the Company will not have any such obligations in the future. The Company had no contingent forward liability as of either December 31, 2019 or September 30, 2020.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

 

 

 

Note 12 - Related Party Transactions and Arrangements

 

Relationships with the Brookfield Investor and its Affiliates

 

As described in Note 3 - Brookfield Investment, on January 12, 2017, the Company and the OP entered into the SPA and the Framework Agreement. On March 31, 2017, the Initial Closing occurred and a variety of transactions contemplated by the SPA and the Framework Agreement were consummated, including the issuance and sale of the Redeemable Preferred Share and 9,152,542.37 Class C Units and the execution or taking of various agreements and actions required to effectuate the Company's transition to self-management. On February 27, 2018, the Second Closing occurred, pursuant to which the Company sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate. On February 27, 2019, the Final Closing occurred, pursuant to which the Company sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.

 

Holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, fixed, quarterly, cumulative PIK Distributions payable in Class C Units at a rate of 5% per annum. For the three months ended September 30, 2020 and September 30, 2019, the Company paid or accrued cash distributions of $8.1 million and $7.7 million and PIK Distributions of 365,843.03 and 347,822.16 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units.  For the nine months ended September 30, 2020 and September 30, 2019, the Company paid or accrued cash distributions of $23.8 million and $20.0 million and PIK Distributions of 1,076,082.82 and 902,948.37 Class C Units, respectively, to the Brookfield Investor, as the sole holder of the Class C Units. 

 

Two of the Company’s directors, Bruce G. Wiles, who also serves as Chairman of the Board, and Lowell G. Baron, have been elected to the Company’s board of directors as the Redeemable Preferred Directors pursuant to the Brookfield Investor’s rights as the holder of the Redeemable Preferred Share and pursuant to the SPA. Mr. Wiles serves as a Senior Advisor for Brookfield Property Group's lodging investment platform, a subsidiary of Brookfield Asset Management Inc., an affiliate of the Brookfield Investor, and Mr. Baron serves as a Managing Partner of Brookfield Asset Management Inc. and Chief Investment Officer of its global real estate business.

 

 

Note 13 - Sale of Hotels and Assets Held for Sale

 

Sale of Hotels

 

During the three months ended September 30, 2020, the Company completed the sale of three hotels for an aggregate sales price of $11.7 million, resulting in a net gain of approximately $0.3 million, which is included in gain on sale of assets on the Company’s Consolidated Statement of Operations and Comprehensive Loss. The Company had previously recognized impairment losses on these hotels in anticipation of their expected sale. The Company used the net proceeds after closing costs to repay $11.1 million of related mortgage debt obligations.

 

During the nine months ended September 30, 2020, the Company completed the sale of 23 hotels for a sales price of $186.0 million, resulting in a net gain of approximately $4.5 million, which is included in gain on sale of assets on the Company’s Consolidated Statement of Operations and Comprehensive Loss. The Company had previously recognized impairment losses on 19 of these hotels in anticipation of their expected sale. These sales generated net proceeds to the Company of approximately $21.3 million, after prepayment of approximately $164.7 million of related mortgage debt obligations and closing costs. 

 

During the three and nine months ended September 30, 2019, the Company completed the sale of six hotels for a sales price of $37.3 million, resulting in a net gain of approximately $1.2 million, which was included in gain on sale of assets on the Company’s Consolidated Statement of Operations and Comprehensive Loss. The Company had previously recognized impairment losses on five of these hotels in anticipation of their expected sale. These sales generated net proceeds to the Company of approximately $6.4 million, after prepayment of approximately $31.0 million of related mortgage debt obligations and closing costs. 

 

Assets Held for Sale

   

As of September 30, 2020, there were two hotels subject to definitive sale agreements where the buyer had made a non-refundable deposit. However, due to the impact of the coronavirus pandemic, the Company was not able to conclude as of September 30, 2020, that the sales are probable to occur and to close within one year, so the Company has not classified the hotels as held for sale as of September 30, 2020.  During October 2020, the pending sale of one hotel was terminated due to the buyer’s default and the Company was entitled to retain the non-refundable deposit as liquidated damages.

 

 

Note 14 - Impairments

 

Impairments of Long-Lived Assets

 

During the three months ended September 30, 2020, the Company did not record any impairment losses. During the nine months ended September 30, 2020 the Company recorded cumulative impairment losses of $27.6 million on four hotels. The goodwill previously allocated to these properties by the Company had been fully written off as part of impairment of goodwill in prior periods and therefore no further impairment of goodwill was recorded. These hotels were identified for impairment review based on their potential sale, resulting in shorter holding periods. The fair value of these four hotels was equal to the purchase price in their applicable sales agreements. A triggering event occurred as of March 31, 2020 due to the coronavirus pandemic which impacted hotel operations. A recoverability test was performed for each hotel, and no impairment was identified.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(Unaudited)

 

 

During the three months ended September 30, 2019, the Company identified a total of four hotel properties where the carrying value of the properties exceeded their fair value and management determined the excess carrying value was unrecoverable. These hotels were among the 16 hotels as of September 30, 2019, that were subject to definitive sale agreements where the buyer had made, or was obligated to make, a non-refundable deposit and had been classified as held for sale. The Company recorded cumulative impairment losses of $11.7 million during the three months ended September 30, 2019. The goodwill previously allocated to these properties by the Company had been fully written off as part of impairment of goodwill in prior periods and therefore no further impairment of goodwill was recorded. These hotels were identified for impairment review based on their potential sale, resulting in shorter holding periods. The Company determined the fair value of each hotel was equal to the purchase price in the applicable definitive sales agreement. During the nine months ended September 30, 2019, the Company recorded cumulative impairment losses on 17 hotel properties of $55.2 million. All but one of these 17 hotel properties were either sold or subject to definitive sale agreements as of September 30, 2019.

 

Impairment of Goodwill

 

The Company recognized $31.6 million of goodwill as a result of the transactions and consideration paid in connection with its transition to self-management on March 31, 2017. The Company allocated this goodwill to each of its majority-owned hotels based on its determination that each hotel is a reporting unit as defined in US GAAP.  As of December 31, 2019, due to goodwill impairments in prior periods, the carrying amount of goodwill was $9.9 million. 

 

For any reporting unit for which the Company has performed a recoverability test (as described above in Impairments of Long-Lived Assets), Accounting Standards Codification section 805 - Business Combinations requires that the Company also evaluate the goodwill allocated to such reporting unit for impairment. In performing this evaluation, the Company compares the fair value of the reporting unit to the carrying amount of such reporting unit including the allocation of goodwill. As required by ASC 350, as amended by ASU 2017-04, if the carrying amount of the reporting unit exceeds its fair value, the Company will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to such reporting unit.

 

The Company determines the fair values of each reporting unit using market and income based methods. The market approach estimates value based on what other purchasers and sellers in the market have agreed to as price for comparable properties. The income approach utilizes assumptions such as discount rates, future cash flow, and capitalization rates. 

 

During the nine months ended September 30, 2020, the Company determined that approximately $3.1 million of goodwill allocated to 12 reporting units for which the fair value using the income based method was less than the carrying amount was impaired. The range of goodwill impairment recorded by each reporting unit was from less than $0.1 million to $0.5 million, with an average impairment of $0.3 million. No additional goodwill impairment was recognized during the three months ended September 30, 2020.

 

The Company had no goodwill impairment during the nine months ended September 30, 2019. 

 

 

Note 15 - Subsequent Events

 

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the accompanying consolidated financial statements.

 

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Hospitality Investors Trust, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our," "our company" or "us" refer to Hospitality Investors Trust, Inc., a Maryland corporation, including, as required by context, to Hospitality Investors Trust Operating Partnership, L.P. (the "OP"), the Company’s operating partnership and a Delaware limited partnership, and to its subsidiaries.

 

Forward-Looking Statements

 

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of our company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

 

The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

 

  The novel coronavirus pandemic has caused a significant decline in travel and demand for hotels and guestrooms which is adversely impacting our business and we anticipate these conditions will continue and may worsen, and the pandemic has also adversely impacted credit and capital market conditions, such that we have been unable to access these markets and this may continue until conditions normalize.
 

Due to the impact of the coronavirus pandemic on our business, we expect we will no longer have sufficient cash on hand to continue to pay our current obligations during the first half of 2021 and the additional liquidity from a source other than property operations we require may not be available on favorable terms or at all.
 

The interests of the Brookfield Investor may conflict with our interests and the interests of our stockholders, and the Brookfield Investor owns all $427.7 million in liquidation preference units of limited partner interests in our operating partnership entitled “Class C Units” (the “Class C Units”) issued and outstanding as of the date hereof and has significant governance and other rights that could be used to control or influence our decisions or actions.

 

The prior approval rights of the Brookfield Investor will restrict our operational and financial flexibility and could prevent us from taking actions that we believe would be in the best interest of our business.

 

We no longer pay distributions and there can be no assurance we will resume paying distributions in the future.

  The loss of a brand license for any reason, including due to our failure to make required capital expenditures or to comply with other brand requirements, could adversely affect our financial condition and results of operations.
  Unless the value of our assets grows in excess of the fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum ("PIK Distributions") we pay to the holders of the Class C Units, continued accrual of PIK Distributions will have a negative impact on the value of shares of our common stock. The impact of the coronavirus pandemic on the value of our assets is highly uncertain.
 

We have a history of operating losses and there can be no assurance that we will ever achieve profitability.

 

No public market currently exists, or may ever exist, for shares of our common stock which are, and may continue to be, illiquid and difficult for our stockholders to sell.
 

All of the properties we own are hotels, and we are subject to risks inherent in the hospitality industry.

 

We primarily own older hotels, which makes us more susceptible to declines in consumer demand, the impact of increases in hotel supply and downturns in economic conditions.

  New hotel supply has contributed to declines in occupancy at our hotels in prior periods and may continue to have this effect.
 

Increases in interest rates could increase the amount of our debt payments.

 

We have incurred substantial indebtedness, which may limit our future operational and financial flexibility.

 

We depend on our operating partnership and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to their obligations, which include distribution and redemption obligations to holders of Class C Units.

 

The amount we would be required to pay holders of Class C Units in a fundamental sale transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.

 

We are subject to a variety of risks related to our brand-mandated property improvement plans ("PIPs"), such as we may spend more than budgeted amounts to make necessary renovations and the renovations we make may not have the desired effect of improving the competitive position and enhancing the performance of the hotels renovated.

 

Increases in labor costs have adversely affected the profitability of our hotels and may continue to do so.

 

Our operating results and the value of our properties are affected by economic, regulatory and environmental changes that have an adverse impact on the real estate market in general and other risks generally incident to the ownership of real estate.
 

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.

 

Our real estate investments are relatively illiquid and subject to some restrictions on sale, and therefore we may not be able to dispose of properties at the time of our choosing or on favorable terms.

  Our hotels have been and may continue to be subject to impairment charges, including as a result of significant declines in market value or operating performance caused by the coronavirus pandemic.
 

Our failure to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT") could have a material adverse effect on us.

 

All forward-looking statements should also be read in light of the risks identified in Item 1A of our Annual Report on Form 10-K.

 

 

Background

 

Hospitality Investors Trust, Inc. is a self-managed real estate investment trust ("REIT") that invests primarily in premium-branded select-service lodging properties in the United States. As of September 30, 2020, we own or have an ownership interest in a total of 101 hotels, with a total of 12,673 guestrooms in 29 states.

 

We believe in affiliating our hotels with premium brands owned by leading international franchisors such as Hilton, Marriott and Hyatt. As of September 30, 2020, all but one of our hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., and Hyatt Hotels Corporation or one of their respective subsidiaries or affiliates. Our one unbranded hotel has a direct affiliation with a leading university in Atlanta.

 

We have primarily acquired lodging properties in the upscale select-service, upscale extended stay and upper midscale select-service chain scale segments located in secondary markets with strong demand generators, such as state capitals, major universities and hospitals, as well as corporate, leisure and retail attractions. We believe properties in these chain scale segments can be operated with fewer employees and provide more stable cash flows than full service hotels, and with less market volatility than similar hotels in primary market locations.

 

Overview - Coronavirus Pandemic  

 

In early March 2020, we started to experience the effects of the coronavirus pandemic on our business through softening of demand and revenue weakness across our portfolio triggered by direct guest cancellations at our hotels as well as cancellations of business and industry conventions and meetings in certain of our markets. These conditions significantly worsened over the course of the month and have continued through the second and third quarters and into the fourth quarter as the level of overall travel has declined significantly due to concerns about the coronavirus pandemic and actions taken by governments, businesses and other organizations to contain the coronavirus that have included restrictions on travel and the operations of many businesses as well as event cancellations and social distancing measures. During the months of May through October, we have seen some return of demand primarily from leisure travelers with occupancy numbers improving each month from May through October, although the overall level of guests at our hotels remains substantially lower due to the continuing impact of the coronavirus pandemic. We anticipate that demand from business travelers will remain muted at least until the development and widespread distribution of a coronavirus vaccine. The table below compares pro-forma monthly Occupancy and Average Daily Rate ("ADR") of only the hotels in our portfolio that we owned as of September 30, 2020, for the months of March through October of 2020 and compared to the same months in 2019.  This information may not be indicative of any future period, although we currently expect occupancy percentages for our portfolio for the rest of the fourth quarter of 2020 to be below October 2020 due to the seasonal nature of our business. Our October 2020 Occupancy and ADR figures are preliminary estimates and are therefore subject to change.

 

   

Proforma Monthly Occupancy

   

Proforma Monthly ADR

 
   

2020

   

2019

   

2020

   

2019

 

March

    40.8 %     80.4 %     125.49       135.54  

April

    15.8 %     81.2 %     93.10       131.82  

May

    25.9 %     79.5 %     87.90       133.70  

June

    36.2 %     83.3 %     97.34       136.05  
July     42.8 %     82.3 %     100.97       131.97  
August     46.6 %     79.7 %     100.13       130.03  
September     48.8 %     76.4 %     96.31       131.07  
October     52.3 %     81.6 %     96.59       134.84  

 

Despite the improving monthly occupancy results since April, our financial results remain significantly below normal historical levels and as a result for the last eight months we have not generated sufficient cash from our operations to cover all of our obligations. During this period, we have utilized cash on hand to fund non-hotel expenses, such as interest on our debt obligations, payment of distributions on the Class C Units and general and administrative expenses, as well as in certain months a portion of our hotel operating expenses, and we anticipate continuing to use cash on hand for these purposes. Moreover, as a result of the forbearance and loan modification agreements we have entered into with respect to our indebtedness, as well as the periodic debt yield and debt service coverage tests we remain subject to under our indebtedness, we do not expect that excess cash flows, if any, generated by our properties will be available to us for any other purpose for the foreseeable future. Due to the effects of the coronavirus pandemic on our business, and as described in greater detail under “Liquidity and Capital Resources” and “Item 1A. Risk Factors” below, we estimate that without additional liquidity from a source other than property operations or additional modifications to the terms of our debt obligations, we will no longer have sufficient cash on hand to continue to pay our current obligations during the first half of 2021. 

 

We anticipate this trend of substantially lower guest demand and revenue across our hotel portfolio will continue and the extent to which the coronavirus pandemic will impact our financial results will depend on future developments, which are unknown and cannot be predicted, including how long the pandemic continues and its severity, new information which may emerge concerning the coronavirus, the efficacy and acceptance of any vaccines or other remedies developed and actions taken to contain the coronavirus pandemic or its impact, consumer preferences and the duration of governmental and business restrictions on travel, among others. Additional waves of the coronavirus pandemic could lead to new travel restrictions and reductions in economic activity resulting in further disruptions to our operations and cash flows. The coronavirus pandemic has also triggered a decrease in global economic activity that has resulted in a global recession, and the sustained downturn in the U.S. economy has caused an economic recession in the U.S. The continuation of the economic downturn and relative weakness in any recovery could have further adverse impacts on our business.

 

At the onset of the coronavirus pandemic, we worked closely with our third-party property managers to respond to these developments and to implement various property-level cost reduction and other liquidity preservation measures which have included temporary hotel staff reductions and temporary suspension of certain services. As occupancy has improved, we have adjusted hotel staffing and hotel services to be consistent with guest volume and consumer preferences. To date, largely as a result of the generally lower cost structure of our primarily select-service portfolio and the cost reduction steps we have taken, we have kept substantially all of our hotels open and operating. We have also enhanced our sales efforts by focusing on pandemic specific opportunities and maximizing performance based on available demand. We have not obtained and are no longer pursuing loans pursuant to the Small Business Administration Payroll Protection Program for our properties. We have implemented a corporate overhead savings plan, which has included permanent and temporary reduction in employee headcount, reduction in the 2020 incentive compensation pool and temporary elimination of certain employee benefit programs. We cannot predict how the coronavirus pandemic may impact the prospects for our company and our business generally when conditions normalize. For example, some of the current reduction in travel and consequently guest demand at our hotels may persist due to potentially permanent changes in hotel use patterns and willingness to travel of our guests.  We may also experience higher cost structures due to factors such as new brand standards and increasing guest and staff concerns about cleanliness. 

 

During March 2020, we determined to delay most of the PIP projects that had been scheduled for 2020 as well as certain projects scheduled for future years, and during April and May 2020, we determined not to make $4.2 million of capital reserve payments due under our mortgage and mezzanine indebtedness which had $846.1 million principal outstanding as of September 30, 2020 and is secured by 62 of our hotel properties (the “92-Pack Loans”) and the mortgage indebtedness which had $232.0 million principal outstanding as of September 30, 2020 and is secured by 21 properties (the “Additional Grace Mortgage Loan”), which resulted in events of default under the loans. We discussed our plans not to make the required capital reserve payments in advance with the lenders and the decisions to delay PIPs and not to make the capital reserve payments were made in conjunction with actions taken by our franchisors temporarily suspending obligations of hotel owners to perform capital improvements and fund capital reserves for at least the remainder of 2020. 

 

During June 2020, we entered into forbearance agreements with the lenders under the 92-Pack Loans, pursuant to which our monthly capital reserve obligations with respect to brand mandated property improvement plans, starting with the payment that was not made in April 2020, have been deferred until January 2021. In connection with the extension of the Additional Grace Mortgage Loan discussed below, the obligation to make the capital reserve payments for May through December 2020 was waived, and the event of default under the Additional Grace Mortgage Loan was thereby cured. Deferrals we have agreed to with our lenders generally extend capital reserve obligations until 2021 and 2022, which could result in greater pressure on our future cash flows. 

 

The coronavirus pandemic has also adversely impacted credit and capital market conditions and we may be unable to access these markets until conditions normalize.  During 2020, we had two debt obligations scheduled to mature: $10.5 million principal amount of mortgage debt secured by the Hilton Garden Inn Blacksburg, VA hotel (a joint venture in which we own a 56.5% interest) (the “Blacksburg JV Loan”) which was scheduled to mature in June and $232.0 million principal amount under the Additional Grace Mortgage Loan which was scheduled to mature in October. During June, we agreed with the lender to extend the maturity date of the Blacksburg JV Loan for 18 months until December 2021. During August 2020, we agreed with the lender to extend the maturity date of the Additional Grace Mortgage Loan for two years until October 2022, with a borrower option for an additional six month extension until April 2023, subject to a five percent principal prepayment and satisfaction of certain other conditions.    

 

Notwithstanding the steps we have taken, our hotel revenues were not sufficient to pay hotel operating expenses during the months of April and May 2020. Our hotels were approximately breakeven during June, and we generated $6.9 million of Hotel EBITDA during the third quarter. We expect fourth quarter Hotel EBITDA to be weaker than the third quarter due to normal seasonality of our business and we anticipate leisure travel will slow and business travel will continue to be very limited because of the impact of the coronavirus pandemic. Despite the positive Hotel EBITDA our hotel portfolio generated during the third quarter, we continued to use cash on hand to fund non-hotel expenses, such as interest on our debt obligations, payment of distributions on the Class C Units and general and administrative expenses, and we anticipate continuing to use cash on hand to fund these expenses, as well as any shortfall in hotel revenues over hotel operating expenses, until economic activity and demand for hotel rooms normalize. Moreover, as a result of the forbearance and loan modification agreements we have entered into with respect to our indebtedness, as well as the periodic debt yield and debt service coverage tests we remain subject to under our indebtedness, we do not expect that excess cash flows, if any, generated by our properties will be available to us for any other purpose for the foreseeable future.  Accordingly, we will require additional liquidity from a source other than property operations, which may not be available on favorable terms or at all. For further details, see “Item 1A. Risk Factors — Due to the impact of the coronavirus pandemic on our business, we expect we will no longer have sufficient cash on hand to continue to pay our current obligations during the first half of 2021 and the additional liquidity from a source other than property operations we require may not be available on favorable terms or at all.”

 

 

Overview - Other

 

During 2019, as part of our investment strategy to continue to pursue the sale of non-core hotels and reallocate capital into other corporate purposes, including debt reduction, we commenced marketing for sale a total of 45 hotels. As of September 30, 2020, 43 of these hotels have been sold and the remaining two hotels were subject to definitive sale agreements where the buyer had made a non-refundable deposit. However, due to the impact of the coronavirus pandemic, we were not able to conclude as of September 30, 2020, that the sales are probable to occur and to close within one year, so we have not classified the hotels as held for sale in accordance with GAAP as of September 30, 2020. During October 2020, the pending sale of one hotel was terminated due to the buyer’s default and we were entitled to retain the non-refundable deposit as liquidated damages. See “Results of Operations” below for more detail.

 

We conducted our initial public offering ("IPO") from January 2014 until November 2015 without listing shares of our common stock on a national securities exchange, and we have not subsequently listed our shares. There currently is no established trading market for our shares and there may never be one.

 

We are required to annually publish an estimated net asset value per share of common stock ("Estimated Per-Share NAV") pursuant to the rules and regulations of the Financial Industry Regulatory Authority (“FINRA”). On April 21, 2020, our board of directors unanimously approved and we published an updated 2020 Estimated Per-Share NAV equal to $8.35 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 39,151,201 shares of our common stock outstanding on a fully diluted basis as of December 31, 2019 (the "2020 NAV"). The 2020 NAV and the underlying estimates and assumptions are as of December 31, 2019, and have not been revised to reflect any potential negative impact on our company of the coronavirus pandemic or any other transactions or events occurring subsequent to December 31, 2019. While our board of directors has approved the 2020 NAV, it has only done so for the sole purpose of allowing us to comply with applicable rules of FINRA for use on customer account statements. As a result of the existing and anticipated impact of the coronavirus pandemic and taking into consideration the declines in publicly traded hospitality company stock prices during 2020, our board of directors believes the 2020 NAV is significantly above the current value of a share of common stock. Accordingly, stockholders should not rely on the 2020 NAV in respect of any investment decisions relating to our company, including in making any decision to buy or sell shares of our common stock.  We intend to publish an updated Estimated Per-Share NAV on at least an annual basis. 

 

On January 12, 2017, we, along with our operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (the "OP"), entered into the Securities Purchase, Voting and Standstill Agreement ("SPA") with the Brookfield Investor to secure a commitment by the Brookfield Investor to make capital investments in us necessary for us to meet our short-term and long-term liquidity requirements and obligations.

 

On March 31, 2017, the initial closing under the SPA (the "Initial Closing") occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:

 

 

the sale by us and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share ("the "Redeemable Preferred Share"), for a nominal purchase price; and

 

the sale by us and purchase by the Brookfield Investor of 9,152,542.37 Class C Units, for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.

 

On February 27, 2018, the Second Closing occurred, pursuant to which we sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate.

 

On February 27, 2019, the Final Closing occurred, pursuant to which we sold 14,898,060.78 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $219.7 million in the aggregate. Following the Final Closing, the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units pursuant to the SPA or otherwise.

 

Holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum and are also entitled to receive, with respect to each Class C Unit, fixed, quarterly, cumulative PIK Distributions payable in Class C Units at a rate of 5% per annum. As of September 30, 2020, the Brookfield Investor has made $379.7 million of capital investments in us by purchasing Class C Units in the OP, and the total liquidation preference of the Class C Units was $427.7 million. The Class C Units are convertible into units of limited partner interest in the OP entitled “OP Units” (“OP Units”), which may be redeemed for shares of our common stock or, at our option, the cash equivalent. As of September 30, 2020, the Brookfield Investor owns or controls 42.6% of the voting power of our common stock on an as-converted basis. With respect to share ownership limitations contained in our charter intended to ensure our ongoing compliance with REIT requirements, we have granted the Brookfield Investor and its affiliates a waiver of the applicable limitations which permits the Brookfield Investor and its affiliates to own up to 49.9% in value of the aggregate of the outstanding shares of our common stock, subject to terms and conditions set forth in an ownership limit waiver agreement. The SPA also contains certain standstill and voting restrictions applicable to the Brookfield Investor and certain of its affiliates.

 

 

Without obtaining the prior approval of the majority of the then outstanding Class C Units, and/or at least one of the two directors elected to our board of directors by the Brookfield Investor pursuant to its rights as the holder of the Redeemable Preferred Share, we are restricted from taking certain operational and governance actions. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions.

 

An affiliate of the Brookfield Investor, the Special General Partner, is the special general partner of the OP, with certain non-economic rights that apply if we fail to redeem the Class C Units when required to do so, including the ability to commence selling the OP’s assets until the Class C Units have been fully redeemed.

 

We conduct substantially all of our business through the OP. We are a general partner and hold substantially all of the OP Units. The Brookfield Investor holds all the issued and outstanding Class C Units, which rank senior in payment of distributions and in the distribution of assets to the OP Units held by us.

 

We do not currently pay distributions to our stockholders, and have not paid cash distributions since April 2016, when they were suspended to preserve liquidity, or stock distributions since January 2017, when we entered into the SPA. Currently, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.

 

Prior to the Initial Closing, we had no employees, and we depended on our former external advisor, American Realty Capital Hospitality Advisors, LLC (the "Former Advisor") to manage certain aspects of our affairs on a day-to-day basis pursuant to our advisory agreement. In connection with, and as a condition to, the Brookfield Investor’s investment in us at the Initial Closing, the advisory agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at that time, Crestline Hotels & Resorts, LLC ("Crestline")) who had been involved in the management of our day-to-day operations, including all of our executive officers, became our employees.

 

We contract directly or indirectly, through our taxable REIT subsidiaries, with third-party property management companies to manage our hotel properties.  As of September 30, 2020, 72 of the hotel assets we have acquired were managed by Crestline and 29 of the hotel assets we have acquired were managed by the following other property managers: Hampton Inns Management LLC and Homewood Suites Management LLC, affiliates of Hilton Worldwide Holdings Inc. ("Hilton") (16 hotels), InnVentures IVI, LP (one hotel), and McKibbon Hotel Management, Inc. ("McKibbon") (12 hotels). During 2019 and 2020, we transitioned management of a total of 14 hotels managed by other property managers to Crestline pursuant to Crestline’s right to manage a comparable replacement hotel (i.e., equal or greater historic annual revenue) if we sell a hotel Crestline is currently managing. We expect to similarly transition management of additional hotels to Crestline to the extent we continue to sell Crestline-managed hotels under our hotel sale program. During October 2020, we transitioned management of five hotels to McKibbon, from Hilton.

 

Our customers have historically fallen into three broad groups: transient business, group business and contract business. Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our hotels. Group business represents significant blocks of rooms for event-driven business and is primarily corporate users but can also include social events such as wedding parties. Contract business is also primarily comprised of corporate users for fixed rate longer term in nature business such as airline crews.

 

Our revenues are comprised of rooms revenue, food and beverage revenue and other revenue which accounted for approximately 95.5%, 0.5%, and 4.0%, respectively, of our total revenues for the three months ended September 30, 2020. Hotel operating expenses (which exclude acquisition and transaction costs, general and administrative, depreciation and amortization and impairment of goodwill and long-lived assets) represent approximately 63.7% of our total operating expenses for the three months ended September 30, 2020.

 

Critical Accounting Policies and Estimates

 

Real Estate Investments

 

We allocate the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and furniture, fixtures and equipment. We utilize various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent third parties or our analysis of comparable properties in our portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

 

Our acquisitions of hotel properties are accounted for as acquisitions of groups of assets rather than business combinations, although the determination will be made on a transaction-by-transaction basis. If we conclude that an acquisition will be accounted for as a group of assets, the costs associated with the acquisition will be capitalized as part of the assets acquired.

 

Our investments in real estate, including transaction costs, that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of our assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.

 

We are required to make assessments as to the useful lives of our assets for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

 

 

Impairment of Long-Lived Assets

 

Upon the occurrence of certain “triggering events” under the provisions of the Accounting Standards Codification ("ASC") section 360-Property, Plant and Equipment, we review our hotel investments which are considered to be long-lived assets under GAAP for impairment.  These triggering events may include various conditions prescribed by GAAP such as the initiation of marketing an asset for sale, significant declines in market value of the asset, significant declines in operating performance, significant adverse changes in economic conditions, and potential sales of hotel properties which result in shorter holding periods. If a triggering event occurs and circumstances indicate the carrying amount of the property may not be recoverable, we perform a recoverability test which compares the carrying amount to an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If we determine we are unable to recover the carrying amount of the asset over the useful life, impairment is deemed to exist and an impairment loss will be recorded to the extent that the carrying amount exceeds the estimated fair value of the property which results in an immediate charge to net income.

 

Class C Units

 

We initially measured the Class C Units at fair value net of issuance costs. We are required to accrete the carrying value of the Class C Units to the liquidation preference using the effective interest method over the five - year period prior to the holder's redemption option becoming exercisable. However, if it becomes probable that the Class C Units will become redeemable prior to such date, we will adjust the carrying value of the Class C Units to the maximum liquidation preference.

 

Until the Final Closing, we could have become obligated pursuant to the SPA with the Brookfield Investor to issue additional Class C Units. This obligation was considered a contingent forward contract under ASC section 480 - Distinguishing Liabilities from Equity, and we accounted for it as a liability. The Final Closing with the Brookfield Investor occurred on February 27, 2019, and the Brookfield Investor no longer has any obligations or rights to purchase additional Class C Units. The contingent forward liability was extinguished upon the Final Closing, and, accordingly, we will not have any such obligations in the future. The Company had no contingent forward liability as of either December 31, 2019 or September 30, 2020.

 

Revenue Performance Metrics

 

We measure hotel revenue performance by evaluating revenue metrics such as:

 

 

Occupancy percentage (“Occ”) - Occ represents the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occ measures the utilization of our hotels' available capacity.

 

 

ADR - ADR represents room revenues divided by the total number of rooms sold in a given period.

 

 

Revenue per Available room (“RevPAR”) - RevPAR is the product of ADR and Occ.

 

ADR and RevPAR do not include food and beverage or other revenues generated by the hotels.

 

Occ, ADR, and RevPAR are commonly used measures within the hotel industry to evaluate hotel operating performance. RevPAR is an important metric for monitoring operating performance at the individual hotel property level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget, to prior periods and to the hotel competitive set in the market, as well as on a company-wide and regional basis. Our hotel competitive sets generally include branded hotels of similar size, location, age and chain scale (as designated by STR, Inc.).

 

Our Occ, ADR and RevPAR performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel property construction, and the pricing strategies of competitors. In addition, our Occ, ADR and RevPAR performance are dependent on the continued success of our franchisors and brands.

 

We generally expect that room revenues will make up a significant majority of our total revenues, and our revenue results will therefore be highly dependent on maintaining and improving Occ and ADR, which drive RevPAR.

 

 

Results of Operations

 

Our results of operations have in the past, and may continue to be, impacted by our acquisition and disposition activities. Our hotel portfolio has been acquired through a series of seven portfolio purchases during the period from March 2014 to April 2017, which ranged in size from 116 hotels with a purchase price of $1.8 billion to two hotels with a purchase price of $48.6 million.

 

We commenced marketing for sale a total of 45 non-core hotels during the year ended December 31, 2019. During the year ended December 31, 2019, we sold 20 non-core hotels and during the nine months ended September 30, 2020, we sold an additional 23 non-core hotels set forth in the table below.

 

Property

Location

Number of Rooms

     

Courtyard Gainesville

Gainesville, FL

81

Courtyard Jackson Ridgeland Jackson, MS 117

Courtyard Memphis Germantown

Germantown, TN

93

Hampton Inn Dallas Addison

Addison, TX

158

Hampton Inn Detroit Northville

Northville, MI

124

Hampton Inn Fort Collins

Fort Collins, CO

75

Hampton Inn Kansas City Airport

Kansas City, MO

120

Hampton Inn Kansas City Overland Park

Overland Park, KS

133

Hampton Inn Columbia I 26 Airport

Columbia West, SC

120

Homewood Suites Jackson Ridgeland

Ridgeland, MS

91

Hyatt Place Baltimore Washington Airport

Linthicum Heights, MD

127

Hyatt Place Birmingham Hoover

Birmingham, AL

126

Hyatt Place Chicago Schaumburg

Schaumburg, IL

127

Hyatt Place Cincinnati Blue Ash

Blue Ash, OH

125

Hyatt Place Columbus Worthington

Columbus, OH

124

Hyatt Place Indianapolis Keystone

Indianapolis North Loop, IN

124

Hyatt Place Kansas City Overland Park Metcalf

Overland Park, KS

124

Hyatt Place Richmond Innsbrook

Glen Allen, VA

124

Residence Inn Jackson Ridgeland

Ridgeland, MS

100

Residence Inn Mobile

Mobile, AL

66

Residence Inn Portland

Portland, OR

168

Springhill Suites San Antonio Medical Center Northwest San Antonio, TX 112
Staybridge Suites Jackson Ridgeland, MS 92

 

The aggregate sales price of these hotels was $186.0 million, resulting in a gain of approximately $4.5 million, which is included in gain on sale of assets on our Consolidated Statement of Operations and Comprehensive Loss. We had previously recognized impairment losses on 19 of these hotels in anticipation of their expected sale and with respect to the 19 previously impaired hotels this gain represents the amount by which the realized sale proceeds exceeded the estimated sales proceeds at the time the impairments were recorded. These sales generated net proceeds to us of approximately $21.3 million, after prepayment of approximately $164.7 million of related mortgage debt obligations and closing costs. 

 

We anticipate that substantially all of these proceeds will be utilized for working capital and liquidity purposes in light of the downturn in financial performance we are experiencing due to the coronavirus pandemic. As of September 30, 2020, two of our hotels were subject to definitive sale agreements with an aggregate sales price of $26.1 million where the buyer had made a non-refundable deposit. However, due to the impact of the coronavirus pandemic, these hotels are no longer classified as held for sale because we were not able to conclude, that, as of September 30, 2020, the sales were probable to occur and to close within one year. During October 2020, the pending sale of one hotel was terminated due to the buyer’s default and we were entitled to retain the non-refundable deposit as liquidated damages.  We do not anticipate being able to generate any material amounts of liquidity from hotel sales for the foreseeable future.

 

The hotel business is capital-intensive and renovations are a regular part of the business. We have been undertaking a large-scale PIP program across a significant portion of the hotels in our portfolio for some time. As of September 30, 2020, we had substantially completed work on 80 of the 98 hotels that are part of our PIP program. We completed PIP work on 11 hotels in 2017, 30 hotels in 2018, 11 hotels in 2019 and one hotel in 2020.  All of the 43 hotels we sold during 2019 and the nine months ended 2020 had been part of our PIP program prior to sale, and we had completed PIP work on 19 of those hotels prior to sale. As part of the liquidity preservation measures we have implemented in response to the coronavirus pandemic, we have determined to delay most of the PIP projects that had been scheduled for 2020 as well as certain projects scheduled for future years.  We believe these steps are advisable in light of current market conditions and our liquidity position, and these steps are being taken in conjunction with actions taken by our franchisors temporarily suspending obligations of hotel owners to perform capital improvements and fund capital reserves.  We do not expect to perform further PIP work during 2020, and we are unable at this time to estimate when our PIP program will be resumed and, ultimately, completed. We intend to fund this PIP work exclusively from amounts in existing capital reserves held by our lenders.

 

Hotel renovations have adversely impacted, and, when our PIP program resumes, are expected to continue to adversely impact, our operating results due to the disruption to the operations of the hotels while work is ongoing. We anticipate that as we complete PIP and other renovations, our performance at the renovated hotels will increase for a period of time (generally one to two years) and then moderate as the hotel stabilizes. However, performance at renovated hotels remains subject to competition and other conditions in the markets in which they operate, as well as other factors that may impact the hotel industry generally or the renovated hotel in particular and, in some cases, offset the effects on performance of completed PIPs and other renovations. We cannot provide any assurance that the PIP and other renovations at our hotels will have the desired effect of improving the competitive position and enhancing the performance of the hotels renovated. 

 

We continue to take steps we believe are prudent and in the best interest of our stockholders with the goal of maximizing long-term value for our stockholders. While it is our intention to achieve a liquidity event, because of the developments in our business as a result of the coronavirus pandemic and other uncertainties, there can be no assurance as to when or if we will ultimately be able to do so and as to the terms of any such liquidity event.

 

 

Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

 

Room revenues for the portfolio were $51.8 million for the three months ended September 30, 2020, compared to room revenues of $150.1 million for the three months ended September 30, 2019. The decrease in room revenues was driven by lower occupancy as a result of less guest demand due to the coronavirus pandemic as well as the sale of hotels. Room revenues, including the results of only the hotels in our portfolio that we owned during each of the three months ended September 30, 2020, and the three months ended September 30, 2019, decreased 56.6% over the prior year period.  

 

The following table presents actual operating information of the hotels in our portfolio for the periods in which we have owned them.

 

   

Three Months Ended

 

Total Portfolio

  September 30, 2020     September 30, 2019  

Number of rooms

    12,673       16,765  

Occ

    46.0 %     77.8 %

ADR

  $ 98.72     $ 125.29  

RevPAR

  $ 45.38     $ 97.45  

 

The next table below presents pro-forma operating information only of the hotels in our portfolio that we owned as of September 30, 2020, for the full periods presented. Therefore, this table excludes operating information for a total of 43 hotels, including 23 hotels sold during the first and third quarters of 2020 and 20 hotels during the third and fourth quarters of 2019. 

 

   

Three Months Ended

 

Pro-forma (101 hotels)

  September 30, 2020     September 30, 2019  

Number of rooms

    12,673       12,673  

Occ

    46.0 %     79.5 %

ADR

  $ 99.08     $ 131.03  

RevPAR

  $ 45.60     $ 104.20  

RevPAR change

    (56.2 )%        

 

 

Other non-room operating revenues for the portfolio include food and beverage, and other ancillary revenues such as conference center, market, parking, telephone and cancellation fees. Total non-room operating revenues, including the results of only the hotels in our portfolio that we owned during each of the three months ended September 30, 2020, and the three months ended September 30, 2019, decreased 67.8% over the prior year period driven primarily by reduced demand and services due to the impact of the coronavirus pandemic.

 

 

Our hotel operating expenses include labor expenses incurred in the day-to-day operation of our hotels. Our hotels have a variety of fixed expenses, such as essential hotel staff, real estate taxes and insurance, and these expenses do not change materially even if the revenues at the hotels fluctuate. Our primary hotel operating expenses are described below:

 

 

Rooms expense: These costs include labor (housekeeping and rooms operation), reservation systems, room supplies, linen and laundry services. Occupancy is the major driver of rooms expense, due to the cost of cleaning the rooms, with additional expenses that vary with the level of service and amenities provided.

 

 

Food and beverage expense: These expenses primarily include labor and the cost of food and beverage. Occupancy and the type of customer staying at the hotel (for example, catered functions generally are more profitable than outlet sales) are the major drivers of food and beverage expense, which correlates closely with food and beverage revenue.

 

 

Management fees: Management fees include base management fees paid to third party property managers and are computed as a percentage of gross revenue. Incentive management fees may be paid to third party property managers when operating profit or other performance metrics exceed certain threshold levels.

 

 

Other property-level operating costs: These expenses include labor and other costs associated with other ancillary revenue, such as conference center, parking, market and other guest services, as well as labor and other costs associated with administrative and general, sales and marketing, brand related fees, repairs, maintenance and utility costs. In addition, these expenses include real and personal property taxes and insurance, which are relatively inflexible and do not necessarily change based on changes in revenue or performance at the hotels.

 

Total hotel operating expenses (which exclude transaction related costs, general and administrative, depreciation and amortization, and impairment of goodwill and long-lived assets), including the results of only the hotels in our portfolio that we owned during each of the three months ended September 30, 2020, and the three months ended September 30, 2019, decreased approximately 46.1% over the prior year period primarily due to the impact of various cost reduction measures taken in conjunction with our third party management companies in response to reduced demand at our hotels because of the coronavirus pandemic. These costs reduction measures have included temporary hotel staff reductions and temporary suspension of certain services, adjusted, accordingly, as occupancy improves.

 

Transaction related costs increased by $0.3 million for the three months ended September 30, 2020, compared to the prior year period.

 

General and administrative increased by $1.2 million for the three months ended September 30, 2020, compared to the prior year period, primarily due to legal fees incurred for stockholder litigation and related legal settlements.

 

Depreciation and amortization decreased approximately $6.8 million for the three months ended September 30, 2020, compared to the prior year period, primarily due to the sale of 43 hotels in 2019 and 2020.

 

Impairment of goodwill and long-lived assets decreased by $11.7 million for the three months ended September 30, 2020, compared to prior year period. For the three months ended September 30, 2020, there was no impairment on long-lived assets.  For the three months ended September 30, 2019, a $11.7 million impairment on long-lived assets was recorded on four hotels classified as assets held for sale. See Note 14 - Impairments to our accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q for further details. 

 

Interest expense decreased $8.8 million for the three months ended September 30, 2020, compared to the prior year period, primarily driven by lower average mortgage debt and lower interest rates. The average interest rate on our mortgage debt was 3.42% for the three months ended September 30, 2020, compared to 5.12% for the three months ended September 30, 2019. Average mortgage debt was $1,322.7 million for the three months ended September 30, 2020, compared to $1,553.0 million for the three months ended September 30, 2019.

 

Other income increased by $11.7 million for the three months ended September 30, 2020, compared to the prior year period, primarily due to the proceeds received from legal settlements. See Note 11 - Commitments and Contingencies to our accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q for further details. 

 

Income tax expense (benefit) changed by $1.0 million for the three months ended September 30, 2020, compared to the prior year period. The income tax expense for the 2020 period includes a $3.1 million reduction of a $9.5 million deferred tax valuation allowance recorded during the three months ended June 30, 2020. 

 

 

Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019

 

Room revenues for the portfolio were $175.6 million for the nine months ended September 30, 2020, compared to room revenues of $439.4 million for the nine months ended September 30, 2019. The decrease in room revenues was driven by lower occupancy as a result of less guest demand due to the coronavirus pandemic as well as the sale of hotels. Room revenues, including the results of only the hotels in our portfolio that we owned during each of the nine months ended September 30, 2020, and the nine months ended September 30, 2019, decreased 52.3% over the prior year period.  

 

The following table presents actual operating information of the hotels in our portfolio for the periods in which we have owned them.

 

   

Nine Months Ended

 

Total Portfolio

 

September 30, 2020

   

September 30, 2019

 

Number of rooms

    12,673       16,765  

Occ

    44.5 %     75.6 %

ADR

  $ 110.18     $ 125.76  

RevPAR

  $ 49.00     $ 95.09  

 

The next table below presents pro-forma operating information only of the hotels in our portfolio that we owned as of September 30, 2020, for the full periods presented. Therefore, this table excludes operating information for a total of 43 hotels, including 23 hotels sold during the first and third quarters of 2020 and 20 hotels during the third and fourth quarters of 2019. 

 

   

Nine Months Ended

 

Pro-forma (101 hotels)

 

September 30, 2020

   

September 30, 2019

 

Number of rooms

    12,673       12,673  

Occ

    44.4 %     78.3 %

ADR

  $ 111.11     $ 132.18  

RevPAR

  $ 49.29     $ 103.44  

RevPAR change

    (52.4 )%        

 

Other non-room operating revenues for the portfolio include food and beverage, and other ancillary revenues such as conference center, market, parking, telephone and cancellation fees. Total non-room operating revenues, including the results of only the hotels in our portfolio that we owned during each of the nine months ended September 30, 2020, and the nine months ended September 30, 2019, decreased 55.9% over the prior year period driven primarily by reduced demand and services due to the impact of the coronavirus pandemic.

 

Total hotel operating expenses (which exclude transaction related costs, general and administrative, depreciation and amortization, and impairment of goodwill and long-lived assets), including the results of only the hotels in our portfolio that we owned during each of the nine months ended September 30, 2020, and the nine months ended September 30, 2019, decreased approximately 39.1% over the prior year period primarily due to the impact of various cost reduction measures taken in conjunction with our third party management companies in response to reduced demand at our hotels because of the coronavirus pandemic. These costs reduction measures have included temporary hotel staff reductions and temporary suspension of certain services, adjusted, accordingly, as occupancy improves.

 

Transaction related costs increased by $0.3 million for the nine months ended September 30, 2020, compared to the prior year period.

 

General and administrative increased approximately $1.7 million for the nine months ended September 30, 2020, compared to the prior year period, primarily due to legal fees incurred for stockholder litigation and related legal settlements.

 

Depreciation and amortization decreased approximately $20.7 million for the nine months ended September 30, 2020, compared to the prior year period, primarily due to the sale of 43 hotels in 2019 and 2020.

 

Impairment of goodwill and long-lived assets decreased by $24.5 million for the nine months ended September 30, 2020, compared to prior year period. For the nine months ended September 30, 2020, a $27.6 million impairment on long-lived assets was recorded on four hotels and a goodwill impairment of $3.1 million was recorded on 12 reporting units. For the nine months ended September 30, 2019, a $55.2 million impairment on long-lived assets was recorded on 17 hotels. See Note 14 - Impairments to our accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q for further details. 

 

Interest expense decreased $27.2 million for the nine months ended September 30, 2020, compared to the prior year period, primarily driven by lower average mortgage debt and lower interest rates. The average interest rate on our mortgage debt was 3.85% for the nine months ended September 30, 2020, compared to 5.12% for the nine months ended September 30, 2019. Average mortgage debt was $1,358.9 million for the nine months ended September 30, 2020, compared to $1,527.3 million for the nine months ended September 30, 2019.

 

Other income increased by $11.7 million for the nine months ended September 30, 2020, compared to the prior year period, primarily due to the proceeds received from legal settlements. See Note 11 - Commitments and Contingencies to our accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q for further details. 

 

Income tax expense (benefit) changed by $10.2 million for the nine months ended September 30, 2020, compared to the prior year period, primarily due to the recording of an additional net valuation allowance of $6.4 million against our deferred tax assets since it was determined it is more likely than not that certain deferred tax assets will not be realized due to cumulative historical and current tax losses. 

 

 

Hotel EBITDA

 

This section includes disclosures with respect to hotel earnings before interest, taxes and depreciation and amortization ("Hotel EBITDA"), which is a non-GAAP financial measure. A description of Hotel EBITDA and a reconciliation to the most directly comparable GAAP measure, which is net income (loss) attributable to common stockholders, is provided below.

 

Hotel EBITDA is used by management as a performance measure and we believe it is useful to investors as a supplemental measure in evaluating our financial performance because it is a measure of hotel profitability that excludes expenses that we believe may not be indicative of the operating performance of our hotels. We believe that using Hotel EBITDA, which excludes the effect of expenses not related to operating hotels and non-cash charges, all of which are based on historical cost and may be of limited significance in evaluating current performance, facilitates comparison of hotel operating profitability between periods. For example, interest expense and general and administrative expenses are not linked to the operating performance of a hotel and Hotel EBITDA is not affected by whether the financing is at the hotel level or corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the hotel level. We believe that investors should consider our Hotel EBITDA in conjunction with net income (loss) and other required GAAP measures of our performance to improve their understanding of our operating results.

 

Hotel EBITDA, or similar measures, are commonly used as performance measures by other public hotel REITs. However, not all public hotel REITs calculate Hotel EBITDA, or similar measures, the same way. Hotel EBITDA should be reviewed in conjunction with other GAAP measurements as an indication of our performance. Hotel EBITDA should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance.

 

The following table reconciles our net loss attributable to common stockholders in accordance with GAAP to Hotel EBITDA for the three and nine months ended September 30, 2020, and for the three and nine months ended September 30, 2019 (unaudited in thousands):

 

   

For the Three Months Ended September 30, 2020

   

For the Three Months Ended September 30, 2019

   

For the Nine Months Ended September 30, 2020

   

For the Nine Months Ended September 30, 2019

 

Net loss attributable to common stockholders

  $ (35,408 )   $ (31,730 )   $ (172,815 )   $ (125,113 )

Dividends on Class C Units

    13,491       12,825       39,681       33,295  

Accretion of Class C Units

    1,441       1,309       4,192       3,456  

Net loss before dividends and accretion (in accordance with GAAP)

    (20,476 )     (17,596 )     (128,942 )     (88,362 )

Less: Net (loss) income attributable to non-controlling interests

    (84 )     102       (465 )     (9 )

Net loss and comprehensive loss (in accordance with GAAP)

  $ (20,560 )   $ (17,494 )   $ (129,407 )   $ (88,371 )

Depreciation and amortization