Summit Hotel Properties(INN) - 2020 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Summit Hotel Properties, Inc. for the periods ended June 30, 2020, and December 31, 2019 (for balance sheet) or June 30, 2019 (for income, comprehensive income, changes in equity, and cash flows) Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time | Metric (in thousands) | June 30, 2020 (Unaudited) | December 31, 2019 | | :----------------------------- | :------------------------ | :------------------ | | Total assets | $2,380,875 | $2,355,683 | | Total liabilities | $1,249,339 | $1,112,293 | | Total equity | $1,131,536 | $1,243,390 | | Cash and cash equivalents | $124,554 | $42,238 | | Debt, net of debt issuance costs | $1,159,399 | $1,016,163 | - Total assets increased by $25.2 million from December 31, 2019, to June 30, 2020, primarily driven by a significant increase in cash and cash equivalents[9] - Total liabilities increased by $137.0 million, mainly due to an increase in debt, net of debt issuance costs, from $1.016 billion to $1.159 billion[9] - Total equity decreased by $111.8 million, from $1.243 billion to $1.132 billion, over the six-month period[9] Condensed Consolidated Statements of Operations This section outlines the company's financial performance over specific periods, detailing revenues, expenses, and net income or loss | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenues | $25,436 | $142,930 | $133,821 | $281,882 | | Total expenses | $68,326 | $119,060 | $182,048 | $239,377 | | Operating (loss) income | $(42,922) | $59,390 | $(48,262) | $82,191 | | Net (loss) income | $(52,548) | $49,069 | $(68,762) | $61,969 | | Net (loss) income attributable to common stockholders | $(54,126) | $45,248 | $(73,157) | $54,416 | | Basic and diluted (Loss) earnings per share | $(0.52) | $0.43 | $(0.70) | $0.52 | - Total revenues for the three months ended June 30, 2020, significantly decreased by 82.2% YoY to $25.4 million, and for the six months ended June 30, 2020, decreased by 52.5% YoY to $133.8 million, primarily due to the COVID-19 pandemic[12] - The company reported a net loss of $(52.5 million) for the three months and $(68.8 million) for the six months ended June 30, 2020, a substantial decline from net income in the prior year periods[12] - Basic and diluted loss per share was $(0.52) for the three months and $(0.70) for the six months ended June 30, 2020, compared to earnings per share of $0.43 and $0.52, respectively, in the prior year[12] Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the company's comprehensive income or loss, including net income and other comprehensive income items not recognized in the income statement | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(52,548) | $49,069 | $(68,762) | $61,969 | | Other comprehensive loss, net of tax | $(1,023) | $(9,274) | $(20,067) | $(14,832) | | Comprehensive (loss) income | $(53,571) | $39,795 | $(88,829) | $47,137 | | Comprehensive (loss) income attributable to common stockholders | $(55,149) | $35,997 | $(93,187) | $39,621 | - Comprehensive loss attributable to common stockholders was $(55.1 million) for the three months and $(93.2 million) for the six months ended June 30, 2020, a significant decrease from comprehensive income in the prior year periods[14] - Changes in fair value of derivative financial instruments resulted in an other comprehensive loss of $(1.0 million) for the three months and $(20.1 million) for the six months ended June 30, 2020[14] Condensed Consolidated Statements of Changes in Equity (Three Months) This section details the changes in the company's equity over the three-month period, reflecting the impact of net income/loss, dividends, and other comprehensive income | Metric (in thousands) | March 31, 2020 | June 30, 2020 | | :------------------------------------ | :------------- | :------------ | | Total Stockholders' Equity (March 31) | $1,118,202 | $1,175,709 | | Net loss | $(50,417) | $48,957 | | Dividends | $(3,709) | $(22,537) | | Other comprehensive loss | $(1,023) | $(9,251) | | Total Stockholders' Equity (June 30) | $1,065,249 | $1,194,803 | - Total stockholders' equity decreased from $1.118 billion at March 31, 2020, to $1.065 billion at June 30, 2020, primarily due to a net loss of $(50.4 million) and dividends of $(3.7 million)[17] Condensed Consolidated Statements of Changes in Equity (Six Months) This section details the changes in the company's equity over the six-month period, reflecting the impact of net income/loss, dividends, and other comprehensive income | Metric (in thousands) | December 31, 2019 | June 30, 2020 | | :------------------------------------ | :---------------- | :------------ | | Total Stockholders' Equity (Dec 31) | $1,173,778 | $1,189,849 | | Net loss | $(65,739) | $61,834 | | Dividends | $(25,972) | $(44,493) | | Other comprehensive loss | $(20,030) | $(14,795) | | Total Stockholders' Equity (June 30) | $1,065,249 | $1,194,803 | - Total stockholders' equity decreased from $1.174 billion at December 31, 2019, to $1.065 billion at June 30, 2020, driven by a net loss of $(65.7 million) and dividends of $(26.0 million)[19] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities, providing insight into the company's liquidity and solvency | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(20,831) | $75,300 | | Net cash (used in) provided by investing activities | $(21,035) | $106,428 | | Net cash provided by (used in) financing activities | $115,245 | $(178,422) | | Net change in cash, cash equivalents and restricted cash | $73,379 | $3,306 | | Cash, cash equivalents and restricted cash - End of period | $143,212 | $75,862 | - Net cash used in operating activities was $(20.8 million) for the six months ended June 30, 2020, a significant decrease from $75.3 million provided in the prior year, primarily due to the COVID-19 pandemic[21][281] - Net cash provided by financing activities increased substantially to $115.2 million, driven by increased borrowings on revolving credit facilities and reduced dividend payments[21][281] - Cash, cash equivalents and restricted cash at the end of the period increased to $143.2 million, up from $75.9 million in the prior year[21] Notes to the Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1 - DESCRIPTION OF BUSINESS Summit Hotel Properties, Inc. is a self-managed hotel investment REIT focused on premium-branded hotels, primarily in the Upscale segment, significantly impacted by the COVID-19 pandemic - As of June 30, 2020, the company's portfolio consisted of 72 hotels with 11,288 guestrooms in 23 states, owning 100% of 67 hotels and a 51% controlling interest in five joint venture hotels[24] - The COVID-19 pandemic has caused a significant negative effect on the U.S. and global economies, leading to a rapid decline in travel and hotel demand, which has substantially reduced the company's revenues, profitability, and cash flows in the first half of 2020[26] - In response to COVID-19, the company temporarily suspended operations at six hotels and directed guests from nine others to 'Sister Properties,' with most re-opened by June 30, 2020[28] - The company has taken actions to mitigate COVID-19 effects, including borrowing $125.0 million on its revolving credit facility, amending loan agreements, suspending common stock dividends (conserving $19.0 million quarterly), postponing non-essential capital projects, and implementing cost reduction initiatives[31] NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the condensed consolidated financial statements, adhering to GAAP for interim reporting, and details significant accounting policies - The company prepares its financial statements in conformity with GAAP for interim financial information, consolidating entities where it has a controlling financial interest or is the primary beneficiary of variable interest entities[30][32] - Purchase prices for acquired hotel properties are allocated to land, building, furniture, fixtures, equipment, and identifiable intangible assets based on fair value, with acquisition costs capitalized if the acquisition is not considered a business[34][35] - The company adopted ASU No. 2016-02 (Leases) on January 1, 2019, recognizing right-of-use assets and lease liabilities, and ASU No. 2016-13 (Credit Losses) on January 1, 2020, requiring financial assets measured at amortized cost to be presented at the net amount expected to be collected[42][44] - Revenue from hotel operations is recognized when guestrooms are occupied, services are rendered, or fees are earned, disaggregated into room, food and beverage, and other hotel revenues[48] - The company uses interest rate derivatives to hedge variable-rate debt, recording them at fair value with changes deferred in Other comprehensive income and reclassified to Interest expense[54][55] - As a REIT, the company is generally not subject to federal income tax on distributed REIT taxable income, but its Taxable REIT Subsidiaries (TRS Lessees) are subject to federal, state, and local income taxes[57][59] - The company's accounting estimates and assumptions, particularly regarding asset carrying values and future cash flows, are significantly affected by the uncertain severity and duration of the COVID-19 pandemic[69][70][71] NOTE 3 - INVESTMENT IN HOTEL PROPERTIES, NET This note details the composition of the company's investment in hotel properties, net, including buildings, land, FF&E, construction in progress, and intangible assets, along with asset sales and acquisitions | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Hotel buildings and improvements | $2,056,244 | $2,049,384 | | Land | $319,603 | $319,603 | | Furniture, fixtures and equipment | $180,961 | $173,128 | | Construction in progress | $5,061 | $9,388 | | Intangible assets | $11,231 | $11,231 | | Real estate development loan | $9,275 | $5,485 | | Less - accumulated depreciation and amortization | $(436,463) | $(383,987) | | Investment in hotel properties, net | $2,145,912 | $2,184,232 | - Investment in hotel properties, net, decreased by $38.3 million from December 31, 2019, to June 30, 2020[75] - The company did not sell or acquire any hotel properties during the six months ended June 30, 2020[76][78] - A land parcel in Flagstaff, AZ, with a carrying amount of $0.4 million, is classified as an asset held for sale and is expected to close in 2021[82] NOTE 4 - INVESTMENT IN REAL ESTATE LOANS This note details the company's investment in real estate loans, primarily mezzanine financing for hotel development projects and seller-financing loans, and the impact of COVID-19 on these investments | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Real estate loans | $32,615 | $32,831 | | Unamortized discount | $(810) | $(1,895) | | Allowance for credit losses | $(2,632) | $— | | Investment in real estate loans, net | $29,173 | $30,936 | - The company provided mezzanine loans totaling $29.6 million for three hotel development projects, each with an 8% interest rate and an initial three-year term, all fully funded[85] - An additional mezzanine loan commitment of up to $28.9 million for a mixed-use development project has $11.1 million funded as of June 30, 2020, with a 9% interest rate and a 30-month initial term[87] - Due to COVID-19, interest payment deferrals were granted for 90 days on the three real estate development loans, and interest recognition was suspended until cash payments are received[86] - A $2.6 million allowance for credit losses was recorded at June 30, 2020, reflecting the estimated fair value of collateral supporting the notes receivable due to the effects of the COVID-19 pandemic[90] NOTE 5 - DEBT This note details the company's indebtedness, including revolving debt, term loans, and mortgage loans, and the amendments made to loan agreements in response to the COVID-19 pandemic | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Revolving debt | $286,500 | $140,000 | | Term loans | $725,000 | $725,000 | | Mortgage loans | $155,868 | $157,726 | | Unamortized debt issuance costs | $(7,969) | $(6,563) | | Debt, net of debt issuance costs | $1,159,399 | $1,016,163 | | Weighted average interest rate (after derivatives) | 3.39% | 3.95% | | Fixed-rate debt (after derivatives) | 47% ($547,511) | 54% ($549,236) | | Variable-rate debt (after derivatives) | 53% ($619,857) | 46% ($473,490) | - The company's total debt, net of debt issuance costs, increased by $143.2 million from December 31, 2019, to June 30, 2020[92] - Loan agreements for the 2018 Unsecured Credit Facility, 2017 Term Loan, and 2018 Term Loan were amended to provide financial covenant waivers through March 31, 2021, and modify covenants for the final three quarters of 2021[97][102][104][106][109][113] - The First Amendment to the 2018 Unsecured Credit Facility confirmed an additional $100 million advance on the $400 Million Revolver and permitted an additional $50 million upon filing mortgages on unencumbered properties[100] - The Joint Venture Credit Facility was also amended to waive financial covenants through March 31, 2021, and adjust the Borrowing Base Coverage Ratio through June 30, 2022[123] - At June 30, 2020, the company was in compliance with all financial covenants, although certain mortgage agreements had triggered cash trap events, which are not considered defaults[98][106][113][125][130] NOTE 6 - LEASES This note details the company's operating leases for various assets, the impact of adopting ASC No. 842, and rent deferrals due to the COVID-19 pandemic - The company has operating leases with remaining terms of 1 to 78 years, including options to extend or purchase[132] - Upon adopting ASC No. 842 on January 1, 2019, the company recognized incremental Right-of-use assets and related Lease liabilities of $23.6 million[42] - At June 30, 2020, the weighted average incremental borrowing rate for lease calculations was 4.9%, and the weighted average operating lease term was 28.3 years[135][136] | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Total operating lease cost | $1,600 | $1,800 | | Operating cash outflows from operating leases | $1,400 | $1,600 | - The company negotiated rent deferrals with most third-party tenants due to the COVID-19 pandemic, accounting for them as short-term lease receivables[43][134] NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING This note details the company's use of interest rate swaps to hedge variable-rate debt, their fair value measurement, and the impact on comprehensive income and interest expense | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Notional Amount of Interest Rate Swaps | $400,000 | $400,000 | | Fair Value of Interest Rate Swaps | $(36,244) | $(16,177) | | Loss recognized in Other comprehensive income (Six Months Ended June 30) | $(22,804) | $(14,744) | | (Loss) gain reclassified to Interest expense (Six Months Ended June 30) | $(2,737) | $88 | - All interest rate swaps were in a liability position at June 30, 2020, due to a decline in short-term interest rates and a flattening of the forward yield curve[140] - The company estimates that $9.3 million will be reclassified from Other comprehensive income to Interest expense in the next twelve months[141] NOTE 8 - EQUITY This note details the company's equity structure, including common stock, preferred stock, and non-controlling interests, and the formation of a joint venture | Metric | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Common shares outstanding | 105,696,833 | 105,169,515 | | 6.45% Series D Preferred Stock (shares) | 3,000,000 | 3,000,000 | | 6.25% Series E Preferred Stock (shares) | 6,400,000 | 6,400,000 | | Common Units in Operating Partnership held by unaffiliated third parties | 175,442 | 209,021 | - The company's preferred stock (Series D and E) ranks senior to common stock for dividends and liquidation, with annual dividend rates of $1.6125 and $1.5625 per share, respectively[146][147] - In July 2019, the company entered into a joint venture with GIC, investing 51% of the equity capitalization, with GIC investing the remaining 49%, and the joint venture owns five hotel properties[152] NOTE 9 - FAIR VALUE MEASUREMENT This note outlines the fair value measurements for financial instruments, categorized into a three-tiered hierarchy, and the impact of COVID-19 on purchase options | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Purchase Options related to real estate loans (Level 3) | $8,138 | $8,920 | | Interest rate swaps (Level 2) | $(36,244) | $(16,177) | - The fair value of Purchase Options related to real estate loans decreased from $8.9 million at December 31, 2019, to $8.1 million at June 30, 2020[157] - Due to the adverse effects of the COVID-19 pandemic, the company recorded a Loss on impairment of assets of $0.8 million related to one of its purchase options during the six months ended June 30, 2020[159] NOTE 10 - COMMITMENTS AND CONTINGENCIES This note outlines the company's commitments and contingencies, including restricted cash reserves, franchise and management fees, and the impact of COVID-19 on these obligations | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------------ | :------------ | :---------------- | | Restricted cash reserve funds | $18,700 | $27,600 | - Marriott International allowed the company to use $1.6 million from FF&E Reserve Accounts for working capital and released $8.9 million for general operational purposes due to the COVID-19 pandemic, with replenishment required later[161] | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Franchise fees | $2,400 | $12,500 | $11,900 | $24,000 | | Management fee expenses | $600 | $4,500 | $3,700 | $9,600 | - Franchise fees decreased by 80.8% and management fees decreased by 61.5% for the six months ended June 30, 2020, compared to the prior year, primarily due to reduced consolidated revenues from the COVID-19 pandemic[163][164] NOTE 11 - EQUITY-BASED COMPENSATION This note details the company's equity-based compensation under its Equity Plan, including stock options and restricted stock awards, and the associated expense - As of June 30, 2020, the company had 235,000 outstanding and exercisable stock options with a weighted average exercise price of $9.75 per share[169] | Metric | Non-vested at Dec 31, 2019 | Granted | Vested | Forfeited | Non-vested at June 30, 2020 | | :------------------------------------ | :------------------------- | :------ | :----- | :-------- | :-------------------------- | | Time-based restricted stock (shares) | 448,467 | 299,562 | (172,170) | (536) | 575,323 | | Performance-based restricted stock (shares) | 755,991 | 376,609 | — | (210,361) | 922,239 | | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Equity-based compensation expense | $1,966 | $1,964 | $3,441 | $3,316 | - Unrecognized equity-based compensation expense for all non-vested awards was $10.4 million at June 30, 2020, to be recognized through 2024[178] NOTE 12 - INCOME TAXES This note explains the company's income tax treatment as a REIT, the tax implications for its TRS Lessees, and the impact of COVID-19 and the CARES Act on tax expense - As a REIT, the company is generally not subject to U.S. federal income tax on ordinary income and capital gains income distributed to stockholders, but its TRS Lessees are subject to federal, state, and local income taxes[179] | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income tax benefit (expense) | $247 | $(701) | $(1,721) | $(1,051) | - The $1.7 million income tax expense for the six months ended June 30, 2020, includes a $2.1 million discrete non-cash deferred income tax from establishing valuation allowances against TRS Lessees' deferred tax assets due to expected operating losses from the COVID-19 pandemic[180] - The company anticipates a $1.0 million future tax benefit from the Net Operating Loss (NOL) carry-back provisions of the CARES Act[183] NOTE 13 - EARNINGS PER SHARE This note details the calculation of basic and diluted earnings per share using the two-class method, highlighting the impact of net loss and unvested awards | Metric (in thousands, except per share/unit) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income attributable to common stockholders, net of amount allocated to participating securities | $(54,126) | $45,053 | $(73,238) | $54,198 | | Weighted average common shares outstanding - basic | 104,154 | 103,896 | 104,075 | 103,823 | | Basic and diluted (Loss) earnings per share | $(0.52) | $0.43 | $(0.70) | $0.52 | - The company reported a basic and diluted loss per share of $(0.70) for the six months ended June 30, 2020, a significant decline from earnings per share of $0.52 in the prior year[185] - Unvested performance-based restricted stock awards (922,239 shares) were excluded from the diluted EPS denominator for the six months ended June 30, 2020, as the requisite performance conditions for vesting were not achieved[187] NOTE 14 - SUBSEQUENT EVENTS This note discloses subsequent events, specifically the declaration of cash dividends on Series D and Series E Cumulative Redeemable Preferred Stock - On July 29, 2020, the Board of Directors declared cash dividends of $0.403125 per share for 6.45% Series D Preferred Stock and $0.390625 per share for 6.25% Series E Preferred Stock, payable August 31, 2020[188] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, emphasizing the significant adverse impact of the COVID-19 pandemic and the actions taken to mitigate its effects Cautionary Statement about Forward-Looking Statements This section warns readers that the report contains forward-looking statements, which are subject to known and unknown risks, uncertainties, and other factors that could materially affect actual results - Forward-looking statements are identified by words like 'may,' 'could,' 'expect,' 'intend,' 'plan,' and similar expressions, covering business strategy, industry trends, estimated revenues, expenses, and liquidity[192] - Key factors that may cause actual results to differ materially include the effects of the COVID-19 pandemic, financing risks (leverage, default, refinancing), global economic conditions, and adverse changes in hotel operating metrics (occupancy, ADR, RevPAR)[193] Overview Summit Hotel Properties, Inc. is a self-managed hotel investment company, organized in 2010 and publicly offered in 2011, focusing on premium-branded, select-service hotels - The company's portfolio consists of 72 hotels with 11,288 guestrooms in 23 states, with 67 wholly-owned and five owned through a 51% controlling interest in a joint venture[195] - Hotels operate under premium brands such as Marriott, Hilton, Hyatt, and IHG, and are managed by third-party companies like Aimbridge Hospitality and OTO Development[196][197] - As a REIT, the company leases its hotels to TRS Lessees, which then engage third-party management companies, with revenues derived from room, food and beverage, and other hotel operations[197][199][200] Industry Trends and Outlook The U.S. lodging industry's demand is typically linked to macroeconomic trends, but the first half of 2020 saw a significant downturn due to the COVID-19 pandemic, leading to substantial negative effects on the company's financials - Room-night demand in the U.S. lodging industry is generally correlated with macroeconomic trends such as GDP, corporate profits, capital investments, and employment[201] - The COVID-19 pandemic caused a significant downturn in the global and U.S. economies and the travel/lodging industries during the first half of 2020[201][202] - These conditions led to a rapid and sharp decline in all forms of travel and hotel demand, resulting in a substantial decline in the company's revenues, profitability, and cash flows, with continued material adverse effects expected[203] Effects of COVID-19 Pandemic on Our Business The COVID-19 pandemic severely impacted the U.S. and global economies, leading to a rapid decline in travel and hotel demand, causing a 53.4% decrease in RevPAR and a significant drop in income from hotel operations for the six months ended June 30, 2020 - The COVID-19 pandemic caused a 53.4% decline in RevPAR and a drop in income from hotel operations from $105.4 million to $19.7 million for the six months ended June 30, 2020, compared to the prior year[204] - The pandemic has significantly increased economic uncertainty and led to disruption and volatility in global capital markets, potentially increasing the cost of and limiting access to capital[203] - The full extent and duration of the pandemic's adverse effects on the company's operations and financial performance, as well as the timing of an economic recovery, remain extremely difficult to predict[204] Management's Actions in Response to the Effects of COVID-19 on Our Operations In response to the COVID-19 pandemic, management implemented extensive measures to mitigate negative impacts on operations, financial position, and cash flows, including operational adjustments, liquidity enhancements, and debt covenant amendments Operational Adjustments This section details the operational adjustments made by management in response to the COVID-19 pandemic, including temporary hotel suspensions and reduced staffing - The company temporarily suspended operations at six hotels (934 guestrooms) and directed guests from nine 'Sister Properties' (1,278 guestrooms) to adjacent hotels in March 2020[205] - By June 30, 2020, five hotels (682 guestrooms) and four 'Sister Properties' (506 guestrooms) had re-opened, with only one hotel (252 guestrooms) still suspended and five (772 guestrooms) directing guests to 'Sister Properties'[207] - Staffing levels at open hotels were significantly reduced to maintain reasonable accommodations and implement enhanced cleaning and disinfecting protocols[208] Financial Measures and Liquidity This section outlines the financial measures and liquidity enhancements implemented by management in response to the COVID-19 pandemic, including increased borrowings, debt covenant waivers, and dividend suspensions - The company borrowed an additional net $125.0 million on its $400 Million Revolver during the six months ended June 30, 2020, as a precautionary measure[209] - As of July 31, 2020, the company had $117.3 million of consolidated unrestricted cash and $150.0 million of undrawn availability on its $400 Million Revolver[209] - Loan agreements for the 2018 Unsecured Credit Facility, 2017 Term Loan, and 2018 Term Loan were amended to provide financial covenant waivers through March 31, 2021, and modify covenants for the final three quarters of 2021[209] - The company suspended common stock and operating partnership unit dividends, conserving an additional $19.0 million quarterly ($75.0 million annualized)[209] - Non-essential capital improvement projects for 2020 were postponed, expected to reduce planned capital expenditures by at least $35.0 million (over 50%)[209] - Voluntary 25% temporary reduction of base salaries/fees for executive officers and independent directors, and furloughing of approximately 25% of corporate staff in April 2020[209] First Amendment to $600.0 Million Senior Unsecured Credit Facility This section details the First Amendment to the $600.0 Million Senior Unsecured Credit Facility, which waived financial covenants and adjusted certain terms in response to the COVID-19 pandemic - The First Amendment waived all financial and certain other covenants for the 2018 Unsecured Credit Facility from April 1, 2020, through March 31, 2021[211] - It adjusted certain financial covenants for April 1, 2021, through December 31, 2021, including increases in Maximum Leverage Ratio and Maximum Unsecured Leverage Ratio, and reductions in Minimum Consolidated Fixed Charge Coverage Ratio and Minimum Unsecured Interest Coverage Ratio[211] - The amendment confirmed an additional $100 million advance on the $400 Million Revolver and permitted an additional $50 million upon filing mortgages on unencumbered properties[213] Third Amendment to $225.0 Million 2018 Term Loan This section details the Third Amendment to the $225.0 Million 2018 Term Loan, which included changes substantially similar to those in the First Amendment to the 2018 Unsecured Credit Facility - The Third Amendment to the 2018 Term Loan included changes substantially similar to those in the First Amendment to the 2018 Unsecured Credit Facility, providing waivers and adjustments to financial covenants[215] Second Amendment to $225.0 Million 2017 Term Loan This section details the Second Amendment to the $225.0 Million 2017 Term Loan, which included changes substantially similar to those in the First Amendment to the 2018 Unsecured Credit Facility - The Second Amendment to the 2017 Term Loan also included changes substantially similar to those in the First Amendment to the 2018 Unsecured Credit Facility, providing waivers and adjustments to financial covenants[216] Second Amendment to $200 Million Joint Venture Credit Facility This section details the Second Amendment to the $200 Million Joint Venture Credit Facility, which provided temporary waivers of financial covenants and adjusted the Borrowing Base Coverage Ratio - The Second Amendment to the Joint Venture Credit Facility provided temporary waivers of the Consolidated Fixed Charge Coverage Ratio and other covenants from June 18, 2020, until the compliance certificate for June 30, 2021[219] - It also adjusted the Borrowing Base Coverage Ratio, beginning June 18, 2020, and adjusting up through June 30, 2022[219] - The amendment confirmed additional advances on the existing revolving facility, limited by aggregate facility amount and Borrowing Base Asset Value[219] Use of FF&E Reserve Funds This section details the company's use of FF&E Reserve Funds, including permission from Marriott International to use funds for working capital and operational purposes due to the COVID-19 pandemic - Marriott International allowed the company to use $1.6 million from FF&E Reserve Accounts for working capital and released $8.9 million for general operational purposes for seven Marriott-branded hotels[223] - The Borrowed Reserve must be replenished in ten equal monthly installments starting twelve months prior to the next scheduled renovation date or in a lump sum 60 days prior[223] - Marriott also suspended the obligation to fund monthly FF&E reserves for these hotels through August 31, 2020[223] Tax Relief This section outlines the tax relief provisions included in the CARES Act and their anticipated impact on the company's tax position - The CARES Act includes temporary changes to tax laws, such as eliminating the 80% taxable income limitation for NOL carryforwards, allowing NOLs from 2018-2020 to be carried back five years, and increasing the net interest expense deduction limit to 50% for 2019-2020[225] - The company anticipates a $1.0 million future tax benefit from the NOL carry-back provisions of the CARES Act due to expected net operating losses in 2020 for its TRS Lessees[225] Modification of TRS Leases This section discusses the modification of TRS leases due to economic challenges from COVID-19, including temporary suspension of rent payments and potential future lease adjustments - Economic challenges from COVID-19 have led to temporary suspension of rent payments by many TRS Lessees and potential future lease modifications[226] - The suspension or modification of TRS lease rents has no effect on the company's consolidated financial position or results of operations but will increase the income of TRS Lessees on a stand-alone basis[226] Health and Well-being This section details the health and safety protocols implemented by the company in collaboration with brand partners to protect employees and guests from pathogens and viruses, including COVID-19 - The company has collaborated with brand partners to develop and implement comprehensive health and safety protocols for employees and guests, addressing pathogens and viruses including COVID-19[228] - Procedures include frequent and thorough hand-washing, specific cleaning products, availability of disinfecting products, and increased cleaning frequency in high-touch areas[228] Forward-looking Information and Use of Estimates This section discusses the uncertainty surrounding the full effects of the COVID-19 pandemic on the company and its reliance on estimates for future financial performance and liquidity - The full effects of the COVID-19 pandemic on the company are uncertain and depend on future developments, such as the outbreak's duration, its impact on customers and partners, and the pace of economic recovery[229] - Despite uncertainty, the company expects a gradual recovery in business conditions to continue into the second half of 2020, with operating performance improving over a multi-year period to reach prior peak levels[229] - The company believes it has sufficient liquidity from positive operating cash flows, cash on hand, and credit facility availability to fund operations for at least the next twelve months, though there's no assurance forecasts will be realized[229] Our Hotel Property Portfolio As of June 30, 2020, the company's portfolio consisted of 72 hotels with 11,288 guestrooms, primarily Upscale properties operating under major brands like Marriott, Hilton, and Hyatt - As of June 30, 2020, the portfolio included 72 hotels with 11,288 guestrooms[231] - The portfolio primarily consists of Upscale hotels (60 properties, 9,537 guestrooms), with a smaller number of Upper-upscale (2 properties, 280 guestrooms) and Upper-midscale (10 properties, 1,471 guestrooms) hotels[231] | Franchise/Brand | Number of Hotel Properties | Number of Guestrooms | | :---------------------- | :------------------------- | :------------------- | | Marriott | 35 | 5,819 | | Hilton | 17 | 2,514 | | Hyatt | 16 | 2,374 | | IHG | 4 | 581 | | Total | 72 | 11,288 | Hotel Property Portfolio Activity The company continuously evaluates opportunities to acquire and dispose of properties to refine its portfolio and drive value, with no hotel property acquisitions or sales for the six months ended June 30, 2020 - The company continuously evaluates opportunities for property acquisitions and dispositions to refine its portfolio and drive growth[232] - No hotel properties were sold or acquired during the six months ended June 30, 2020[76][78] Results of Operations The company's results of operations for the three and six months ended June 30, 2020, show a severe decline compared to the prior year, primarily due to the COVID-19 pandemic, despite comprehensive cost reduction initiatives Comparison of the Three Months Ended June 30, 2020 with the Three Months Ended June 30, 2019 This section compares the company's financial performance for the three months ended June 30, 2020, against the same period in 2019, highlighting significant declines in revenues and RevPAR due to the COVID-19 pandemic | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Dollar Change | Percentage Change | | :----------------------------- | :------------------------------- | :------------------------------- | :------------ | :------------------ | | Total Revenues | $25,436 | $142,930 | $(117,494) | (82.2)% | | Total Hotel Operating Expenses | $23,336 | $72,523 | $(49,187) | (67.8)% | | Occupancy | 24.3% | 81.8% | n/a | (70.3)% | | ADR | $95.57 | $162.87 | $(67.30) | (41.3)% | | RevPAR | $23.20 | $133.25 | $(110.05) | (82.6)% | | Property taxes, insurance and other | $11,466 | $10,695 | $771 | 7.2% | | Management fees | $644 | $4,458 | $(3,814) | (85.6)% | | Depreciation and amortization | $27,565 | $23,779 | $3,786 | 15.9% | | Corporate general and administrative | $5,315 | $5,920 | $(605) | (10.2)% | | Loss on impairment of assets | $— | $1,685 | $(1,685) | (100.0)% | | (Loss) gain on disposal of assets, net | $(32) | $35,520 | $(35,552) | (100.1)% | | Interest expense | $10,749 | $9,766 | $983 | 10.1% | | Other income, net | $876 | $146 | $730 | 500.0% | | Income tax (benefit) expense | $(247) | $701 | $(948) | (135.2)% | - The significant decline in revenues and RevPAR was primarily due to a substantial decrease in occupancy caused by the COVID-19 pandemic[239] - Operating expenses decreased significantly due to comprehensive cost reduction initiatives, including labor reductions and temporary elimination of services[239] - Interest expense increased due to increased borrowings, partially offset by declines in base interest rates[240] - The company recorded a $0.2 million income tax benefit, primarily from a net operating loss carryback opportunity under the CARES Act[240] Comparison of the Six Months Ended June 30, 2020 with the Six Months Ended June 30, 2019 This section compares the company's financial performance for the six months ended June 30, 2020, against the same period in 2019, highlighting substantial declines in revenues and RevPAR due to the COVID-19 pandemic | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Dollar Change | Percentage Change | | :----------------------------- | :----------------------------- | :----------------------------- | :------------ | :------------------ | | Total Revenues | $133,821 | $281,882 | $(148,061) | (52.5)% | | Total Hotel Operating Expenses | $87,229 | $144,760 | $(57,531) | (39.7)% | | Occupancy | 42.8% | 79.0% | n/a | (45.8)% | | ADR | $139.19 | $161.84 | $(22.65) | (14.0)% | | RevPAR | $59.59 | $127.89 | $(68.30) | (53.4)% | | Property taxes, insurance and other | $23,164 | $22,103 | $1,061 | 4.8% | | Management fees | $3,716 | $9,604 | $(5,888) | (61.3)% | | Depreciation and amortization | $54,644 | $49,315 | $5,329 | 10.8% | | Corporate general and administrative | $9,983 | $11,910 | $(1,927) | (16.2)% | | Provision for credit losses | $2,530 | $— | $2,530 | 100.0% | | Loss on impairment of assets | $782 | $1,685 | $(903) | (53.6)% | | (Loss) gain on disposal of assets, net | $(35) | $39,686 | $(39,721) | (100.1)% | | Interest expense | $21,761 | $20,618 | $1,143 | 5.5% | | Other income, net | $2,982 | $1,447 | $1,535 | 106.1% | | Income tax expense | $1,721 | $1,051 | $670 | 63.7% | - The decline in total and same-store revenues and RevPAR was primarily due to a significant decrease in occupancy as a result of the COVID-19 pandemic[243] - A $2.5 million provision for credit losses was recorded due to the effects of the COVID-19 pandemic on notes receivable[246] - Income tax expense increased, including a $2.1 million non-cash deferred income tax related to valuation allowances against TRS Lessees' deferred tax assets, partially offset by a CARES Act NOL carryback benefit[246] Non-GAAP Financial Measures This section presents non-GAAP financial measures, including FFO, AFFO, EBITDA, EBITDAre, and Adjusted EBITDAre, used to supplement GAAP net income and provide insights into operational performance FFO and AFFO This section defines and presents Funds From Operations (FFO) and Adjusted Funds from Operations (AFFO), non-GAAP measures used to evaluate the company's operational performance - FFO and AFFO are non-GAAP measures used to evaluate operational performance, excluding GAAP depreciation, amortization, gains/losses from real property sales, and impairment losses on real estate assets[248] | Metric (in thousands, except per share/unit) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | FFO applicable to common shares and common units | $(28,273) | $35,202 | $(18,475) | $65,652 | | AFFO applicable to common shares and common units | $(25,922) | $38,648 | $(12,653) | $70,912 | | FFO per common share/common unit | $(0.27) | $0.34 | $(0.18) | $0.63 | | AFFO per common share/common unit | $(0.25) | $0.37 | $(0.12) | $0.68 | - AFFO applicable to common shares and common units decreased by $64.6 million (167.1%) for the three months and $83.6 million (117.8%) for the six months ended June 30, 2020, compared to the prior year, due to the COVID-19 pandemic[251] EBITDA, EBITDAre and Adjusted EBITDAre This section defines and presents EBITDA, EBITDAre, and Adjusted EBITDAre, non-GAAP measures used to evaluate operating performance by removing the effect of asset base and certain non-recurring/non-cash items - EBITDA, EBITDAre, and Adjusted EBITDAre are non-GAAP measures used to evaluate operating performance, providing insights into debt servicing ability, operating expenses, and capital expenditures by removing the effect of asset base and certain non-recurring/non-cash items[252][253][255] | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | EBITDA | $(14,535) | $83,244 | $9,254 | $132,813 | | EBITDAre | $(14,503) | $49,409 | $12,601 | $94,812 | | Adjusted EBITDAre | $(12,791) | $52,420 | $13,959 | $99,145 | - Adjusted EBITDAre decreased by $65.2 million (124.4%) for the three months and $85.2 million (85.9%) for the six months ended June 30, 2020, compared to the prior year, primarily due to the COVID-19 pandemic's impact on occupancy[257] Liquidity and Capital Resources The COVID-19 pandemic has adversely affected the company's liquidity and capital resources, leading to increased debt and limited access to capital markets, with the company expecting to meet its liquidity requirements using cash on hand and additional borrowing capacity Outstanding Indebtedness This section details the company's outstanding indebtedness, including revolving debt, term loans, and mortgage loans, and their interest rate characteristics - At July 31, 2020, the company had $420.0 million outstanding under its 2018 Unsecured Credit Facility, $225.0 million on its 2017 Term Loan, and $225.0 million on its 2018 Term Loan[266] - The subsidiary joint venture had $141.5 million outstanding under its Joint Venture Credit Facility at July 31, 2020[267] - Scheduled debt principal amortization payments for the next twelve months total $3.8 million, with no debt maturities[268][290] - At June 30, 2020, 46.9% of debt had fixed interest rates and 53.1% had variable interest rates after giving effect to interest rate derivatives, with a 1.0% increase in interest rates decreasing cash flows by approximately $6.2 million per year[289] | Lender | Interest Rate | Maturity Date | Principal Amount Outstanding (in thousands) | | :---------------------------------------------------- | :------------ | :------------ | :---------------------------------------- | | $400 Million Revolver (Deutsche Bank AG New York Branch) | 2.40% Variable | March 31, 2023 | $220,000 | | $200 Million Term Loan (Deutsche Bank AG New York Branch) | 2.35% Variable | April 1, 2024 | $200,000 | | $125 Million Revolver (Bank of America, N.A.) | 2.40% Variable | October 8, 2023 | $66,500 | | $75 Million Term Loan (Bank of America, N.A.) | 2.35% Variable | October 8, 2023 | $75,000 | | Term Loan (KeyBank National Association) | 2.50% Variable | November 25, 2022 | $225,000 | | Term Loan (KeyBank National Association) | 2.20% Variable | February 14, 2025 | $225,000 | | Mortgage Loans (various) | 2.16%-4.95% | 2023-2027 | $155,868 | | Total Debt | | | $1,167,368 | Capital Expenditures This section details the company's capital expenditures, including amounts funded during the six months ended June 30, 2020, and anticipated spending for fiscal year 2020 - During the six months ended June 30, 2020, the company funded $15.9 million in capital expenditures[279] - All non-essential capital improvement projects planned for 2020 were postponed, reducing previously planned total capital expenditures by at least $35.0 million[279] - The company anticipates spending an estimated $25.0 million on capital expenditures during fiscal year 2020[279] Cash Flows This section summarizes the company's cash flows from operating, investing, and financing activities for the six months ended June 30, 2020, compared to the prior year | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change | | :------------------------------------ | :----------------------------- | :----------------------------- | :------- | | Net cash (used in) provided by operating activities | $(20,831) | $75,300 | $(96,131) | | Net cash (used in) provided by investing activities | $(21,035) | $106,428 | $(127,463) | | Net cash provided by (used in) financing activities | $115,245 | $(178,422) | $293,667 | | Net change in cash, cash equivalents and restricted cash | $73,379 | $3,306 | $70,073 | - Net cash used in operating activities decreased by $96.1 million, primarily due to a decrease in net income from the COVID-19 pandemic[281] - Net cash used in investing activities increased by $127.5 million, mainly due to reduced proceeds from asset dispositions and increased net real estate loan funding[281] - Net cash provided by financing activities increased by $293.7 million, driven by increased borrowings on the $400 Million Revolver and a reduction in dividends paid[281] Contractual Obligations This section outlines the company's contractual obligations, including debt, interest, lease, and purchase obligations, categorized by their payment due dates | Obligation Type | Total (in thousands) | Less than One Year (in thousands) | One to Three Years (in thousands) | Four to Five Years (in thousands) | More than Five Years (in thousands) | | :---------------------- | :------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------------------- | | Debt obligations | $1,167,368 | $3,834 | $506,923 | $516,024 | $140,587 | | Currently projected interest | $142,278 | $40,628 | $75,644 | $22,755 | $3,251 | | Lease obligations | $35,776 | $2,131 | $3,350 | $1,840 | $28,455 | | Purchase obligations | $2,647 | $2,647 | $— | $— | $— | | Total | $1,348,069 | $49,240 | $585,917 | $540,619 | $172,293 | Critical Accounting Policies This section refers to Note 2 for a detailed discussion of the company's critical accounting policies - Critical accounting policies are detailed in Note 2 - Basis of Presentation and Significant Accounting Policies[284] Cybersecurity This section describes the company's approach to managing cybersecurity risks, including collaboration with franchisors and property management companies, and Board oversight - The company manages cybersecurity risks with franchisors and property management companies, including maintaining cybersecurity insurance and indemnifications in management agreements[285] - The Board of Directors provides ongoing oversight of management's approach to cybersecurity risks[285] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure is interest rate risk, specifically to 30-day LIBOR, which it manages using derivative financial instruments like interest rate swaps, and is monitoring the transition to alternative benchmarks - The primary market risk exposure is interest rate risk, specifically to 30-day LIBOR, managed through derivative financial instruments[286] - At June 30, 2020, after giving effect to interest rate derivatives, 46.9% ($547.5 million) of debt had fixed interest rates and 53.1% ($619.9 million) had variable interest rates[289] - A 1.0% increase in interest rates would decrease the company's cash flows by approximately $6.2 million per year[289] - The company is monitoring the planned cessation of LIBOR after 2021 and the transition to alternative benchmarks like SOFR, which will result in a different calculation of variable interest rates[287] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, concluding they were effective, despite temporary operational adjustments to internal controls at hotels due to the COVID-19 pandemic - Disclosure controls and procedures were evaluated as effective as of June 30, 2020, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[291] - Due to significantly reduced hotel staff from the COVID-19 pandemic, some internal controls, such as segregation of incompatible duties, could not fully operate as designed[292] - The company increased corporate oversight and review of hotel operations and financial information to mitigate the temporary inability of hotels to fully function within normal internal control structures[292] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is occasionally involved in litigation arising in the ordinary course of business, but currently, there are no pending legal actions believed to have a material adverse effect on its financial position or results of operations - The company is involved in litigation from time to time in the ordinary course of business[295] - There are currently no pending legal actions that are believed to have a material adverse effect on the company's financial position or results of operations[295] Item 1A. Risk Factors This section updates the risk factor concerning the COVID-19 pandemic, emphasizing its material adverse effects on the company's business, financial condition, and results of operations, including increased debt levels and potential limitations on accessing capital - The COVID-19 pandemic has materially adversely affected and may continue to materially adversely affect the company's financial position and results of operations[296] - Key factors influencing the pandemic's impact include its duration, effect on demand and consumer confidence, government restrictions, increased unemployment, and reductions in discretionary spending[296] - Precautionary borrowings of $125.0 million on the $400 Million Revolver and an additional $150.0 million borrowing capacity from amended loan agreements have increased the company's debt level, which may adversely affect or restrict financial and operating activities[297] - There is no guarantee that debt or equity financings will be available in the future to fund obligations, or will be available on favorable terms or at all[297] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company Item 5. Other Information This section indicates that there is no other information to report Item 6. Exhibits This section lists the exhibits filed as part of the report, including various amendments to credit agreements and certifications from the CEO and CFO - Exhibits include amendments to credit agreements: First Amendment to $600 Million Senior Unsecured Credit Facility, Second Amendment to Joint Venture Credit Facility, Third Amendment to 2018 Term Loan, and Second Amendment to 2017 Term Loan[298] - Certifications from the Chief Executive Officer and Chief Financial Officer are filed pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[298] SIGNATURES This section contains the required signatures for the Form 10-Q report, confirming its submission pursuant to the Securities Exchange Act of 1934 - The report was signed on August 5, 2020, by Jonathan P. Stanner, Executive Vice President, Chief Financial Officer and Treasurer[302]