Braemar Hotels & Resorts Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As used in this Quarterly Report on Form 10-Q, unless the context otherwise indicates, the references to “we,” “us,” “our,” the “Company” or “Braemar” refer to Braemar Hotels & Resorts Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Braemar Hospitality Limited Partnership, a Delaware limited partnership, which we refer to as “our operating partnership” or “Braemar OP.” “Our TRSs” refers to our taxable REIT subsidiaries, including Braemar TRS Corporation, a Delaware corporation, which we refer to as “Braemar TRS,” and its subsidiaries, together with the two taxable REIT subsidiaries that lease our two hotels held in a consolidated joint venture and are wholly-owned by the joint venture and the U.S. Virgin Islands’ (“USVI”) taxable REIT subsidiary that owns The Ritz-Carlton St. Thomas hotel. “Ashford Trust” refers to Ashford Hospitality Trust, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Limited Partnership, a Delaware limited partnership and Ashford Trust’s operating partnership, which we refer to as “Ashford Trust OP.” “Ashford Inc.” refers to Ashford Inc., a Nevada corporation and, as the context may require, its consolidated subsidiaries. “Ashford LLC” or our “advisor” refers to Ashford Hospitality Advisors LLC, a Delaware limited liability company and a subsidiary of Ashford Inc. “Premier” refers to Premier Project Management LLC, a Maryland limited liability company and a subsidiary of Ashford LLC. “Remington Hotels” refers to the same entity after the acquisition was completed resulting in Remington Lodging & Hospitality, LLC becoming a subsidiary of Ashford Inc. This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International®, Hilton Worldwide®, Sofitel®, Hyatt® and Accor®. FORWARD-LOOKING STATEMENTS Throughout this Form 10-Q, we make forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature: • the factors discussed in our Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2022 (the “2021 10-K”), including those set forth under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties;” and other filings under the Exchange Act; • the impact of the ongoing COVID-19 pandemic, including the resurgence of cases relating to the spread of the Delta, Omicron or other potential variants, on our business, financial condition, liquidity and results of operations; • the impact of numerous governmental travel restrictions and other orders related to COVID-19 on our business including one or more possible recurrences of COVID-19 case surges causing state and local governments to reinstate travel restrictions; • our business and investment strategy; • anticipated or expected purchases or sales of assets; • our projected operating results; • completion of any pending transactions; • our ability to secure additional financing to enable us to operate our business during the pendency of COVID-related business weakness, which has materially impacted our operating cash flows and cash balances; • our understanding of our competition; • market trends; • projected capital expenditures; and • the impact of technology on our operations and business. Such forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently known to us. These beliefs, assumptions, and expectations can change as a result of many potential events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations, plans, and other objectives may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our securities. Additionally, the following factors could cause actual results to vary from our forward-looking statements: 33 Table of Contents • adverse effects of the COVID-19 pandemic, including a significant reduction in business and personal travel and travel restrictions in regions where our hotels are located, and one or more possible recurrences of COVID-19 case surges causing a further reduction in business and personal travel and potential reinstatement of travel restrictions by state or local governments; • extreme weather conditions may cause property damage or interrupt business; • our ability to raise sufficient capital and/or take other actions to improve our liquidity position or otherwise meet our liquidity requirements; • actions by our lenders to accelerate loan balances and foreclose on the hotel properties that are security for our loans if we are unable to make debt service payments or satisfy our other obligations under the forbearance agreements; • general volatility of the capital markets and the market price of our common and preferred stock; • general business and economic conditions affecting the lodging and travel industry; • changes in our business or investment strategy; • availability, terms and deployment of capital; • unanticipated increases in financing and other costs, including a rise in interest rates; • changes in our industry and the markets in which we operate, interest rates, or local economic conditions; • the degree and nature of our competition; • actual and potential conflicts of interest with Ashford Trust, Ashford Inc. and its subsidiaries (including Ashford LLC, Remington Hotels and Premier) and our executive officers and our non-independent director; • changes in personnel of Ashford LLC or the lack of availability of qualified personnel; • changes in governmental regulations, accounting rules, tax rates and similar matters; • legislative and regulatory changes, including changes to the Internal Revenue Code of 1986, as amended (the “Code”) and related rules, regulations and interpretations governing the taxation of REITs; • limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes; and • future sales and issuances of our common stock or other securities might result in dilution and could cause the price of our common stock to decline. When considering forward-looking statements, you should keep in mind the matters summarized under “Item 1A. Risk Factors” in Part I of our 2021 10-K and this Form 10-Q, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak and the numerous government travel restrictions imposed in response thereto. The extent to which COVID-19 impacts us will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Form 10-Q. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Form 10-Q to conform these statements to actual results and performance, except as may be required by applicable law. Overview We are a Maryland corporation formed in April 2013 that invests primarily in high revenue per available room (“RevPAR”), luxury hotels and resorts. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then-current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Two times the U.S. national average was $144 for the year ended December 31, 2021. We have elected to be taxed as a REIT under the Code. We conduct our business and own substantially all of our assets through our operating partnership, Braemar OP. We operate in the direct hotel investment segment of the hotel lodging industry. As of March 31, 2022, we owned interests in 15 hotel properties in six states, the District of Columbia, Puerto Rico and St. Thomas, U.S. Virgin Islands with 3,971 total rooms, or 3,736 net rooms, excluding those attributable to our joint venture partner. The hotel properties in our current portfolio are predominantly located in U.S. urban markets and resort locations with favorable growth characteristics resulting from multiple demand generators. We own 13 of our hotel properties directly, and the remaining two hotel properties through an investment in a majority-owned consolidated entity. 34 Table of Contents We are advised by Ashford LLC, a subsidiary of Ashford Inc., through an advisory agreement. All of the hotel properties in our portfolio are currently asset-managed by Ashford LLC. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC. We do not operate any of our hotel properties directly; instead we employ hotel management companies to operate them for us under management contracts. As of March 31, 2022, Remington Hotels, a subsidiary of Ashford Inc., managed four of our 15 hotel properties. Third-party management companies managed the remaining hotel properties. Ashford Inc. also provides other products and services to us or our hotel properties through certain entities in which Ashford Inc. has an ownership interest. These products and services include, but are not limited to design and construction services, debt placement and related services, broker-dealer and distribution services, audio visual services, real estate advisory services, insurance claims services, hypoallergenic premium rooms, watersport activities, travel/transportation services and mobile key technology. Mr. Monty J. Bennett is chairman and chief executive officer of Ashford Inc. and, together with Mr. Archie Bennett, Jr., as of March 31, 2022, owned approximately 610,246 shares of Ashford Inc. common stock, which represented an approximate 19.6% ownership interest in Ashford Inc., and owned 18,758,600 shares of Ashford Inc. Series D Convertible Preferred Stock, which was exercisable (at an exercise price of $117.50 per share) into an additional approximate 3,991,191 shares of Ashford Inc. common stock, which if exercised as of March 31, 2022 would have increased the Bennetts’ ownership interest in Ashford Inc. to 64.8% subject to applicable voting limitations; provided that prior to August 8, 2023, the voting power of the holders of the Ashford Inc. Series D Convertible Preferred Stock is limited to 40% of the combined voting power of all of the outstanding voting securities of the Ashford Inc. entitled to vote on any given matter. The 18,758,600 shares of Ashford Inc. Series D Convertible Preferred Stock owned by Mr. Monty J. Bennett and Mr. Archie Bennett, Jr. include 360,000 shares owned by trusts. As of March 31, 2022, Mr. Monty J. Bennett, chairman of our board of directors and his father, Mr. Archie Bennett, Jr., together owned approximately 4,557,361 shares of our common stock (including common units, long-term incentive plan (“LTIP”) units and performance LTIP units), which represented an approximate 5.7% ownership in the Company. Recent Developments On February 2, 2022, the Company refinanced its mortgage loan secured by the Park Hyatt Beaver Creek Resort & Spa, which had a final maturity date in April 2022. The new, non-recourse mortgage loan totals $70.5 million and has a two-year initial term with three one-year extension options, subject to the satisfaction of certain conditions. The mortgage loan is interest only and provides for a floating interest rate of SOFR + 2.86%. In connection with the refinancing, the Company paid Lismore a fee of approximately $637,000. On March 10, 2022, the Company entered into a Limited Waiver Under Advisory Agreement (the “Limited Waiver”) with Braemar OP, Braemar TRS and its advisor. As previously disclosed, the advisory agreement (i) allocates responsibility for certain employee costs between the Company and its advisor and (ii) permits the Company’s board of directors to issue annual equity awards in the Company or Braemar OP to employees and other representatives of its advisor based on achievement by the Company of certain financial or other objectives or otherwise as the Company’s board of directors sees fit. Pursuant to the Limited Waiver, the Company, Braemar OP, Braemar TRS and the Company’s advisor waived the operation of any provision in the advisory agreement that would otherwise limit its ability, in its discretion and at the Company’s cost and expense, to award during the first and second fiscal quarters of calendar year 2022 cash incentive compensation to employees and other representatives of its advisor. On March 11, 2022, the Company acquired a 100% interest in the 96-room Dorado Beach, a Ritz-Carlton Reserve in Dorado, Puerto Rico. The total consideration consisted of $104 million of cash, 6.0 million shares of common stock with a fair value of approximately $35.0 million. Additionally, the Company assumed a $54.0 million mortgage loan with a fair value of approximately $58.6 million. The Company also participates in a rental management program attributable to residences in the program. At acquisition, there were ten residences in the regular rental program and four in the flexible rental program. On March 14, 2022, the Company filed a resale registration statement on Form S-3, which was declared effective by the SEC on April 1, 2022, to register for resale the 6.0 million shares of common stock. On April 15, 2022, Ashford Inc. and Ashford Services, agreed with Jeremy Welter, the Chief Operating Officer of Ashford Inc., that, effective on the Resignation Date, Mr. Welter would terminate employment with and service to Ashford Inc., Ashford Services and their affiliates. Mr. Welter is also the Chief Operating Officer of the Company and Braemar and accordingly his service as Chief Operating Officer of each of the Company and Braemar will also end effective as of the Resignation Date. 35 Table of Contents Key Indicators of Operating Performance We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel’s contribution to cash flow and its potential to provide attractive long-term total returns. These key indicators include: • Occupancy . Occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to measure demand at a specific hotel or group of hotels in a given period. • ADR . ADR means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. We use ADR to assess the pricing levels that we are able to generate. • RevPAR. RevPAR means revenue per available room and is calculated by multiplying ADR by the average daily occupancy. RevPAR is one of the commonly used measures within the hotel industry to evaluate hotel operations. RevPAR does not include revenues from food and beverage sales or parking, telephone or other non-rooms revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire period). RevPAR improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. RevPAR improvements attributable to increases in ADR are generally accompanied by increases in limited categories of operating costs, such as management fees and franchise fees. RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (including housekeeping services, utilities and room supplies) and could also result in increased other operating department revenue and expense. Changes in ADR typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs. Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only rooms revenue. Rooms revenue is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms. We also use funds from operations (“FFO”), Adjusted FFO, earnings before interest, taxes, depreciation and amortization for real estate (“EBITDAre”) and Adjusted EBITDAre as measures of the operating performance of our business. See “Non-GAAP Financial Measures.” 36 Table of Contents RESULTS OF OPERATIONS Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The following table summarizes changes in key line items from our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021 (in thousands except percentages): Three Months Ended March 31, Favorable (Unfavorable) 2022 2021 $ Change % Change Revenue Rooms $ 105,192 $ 54,323 $ 50,869 93.6 % Food and beverage 36,707 16,629 20,078 120.7 Other 19,981 12,896 7,085 54.9 Total hotel revenue 161,880 83,848 78,032 93.1 Expenses Hotel operating expenses: Rooms 20,184 11,015 (9,169) (83.2) Food and beverage 28,028 13,952 (14,076) (100.9) Other expenses 46,207 28,543 (17,664) (61.9) Management fees 4,148 2,532 (1,616) (63.8) Total hotel operating expenses 98,567 56,042 (42,525) (75.9) Property taxes, insurance and other 8,603 7,264 (1,339) (18.4) Depreciation and amortization 18,441 18,353 (88) (0.5) Advisory services fee 7,322 4,795 (2,527) (52.7) Corporate general and administrative 2,495 1,600 (895) (55.9) Total expenses 135,428 88,054 (47,374) (53.8) Gain (loss) on insurance settlement and disposition of assets — 499 (499) (100.0) Operating income (loss) 26,452 (3,707) 30,159 813.6 Equity in earnings (loss) of unconsolidated entity (72) (64) (8) (12.5) Interest income 25 9 16 177.8 Interest expense and amortization of discounts and loan costs (8,522) (6,756) (1,766) (26.1) Write-off of loan costs and exit fees (76) (351) 275 78.3 Unrealized gain (loss) on derivatives 408 (20) 428 2,140.0 Income (loss) before income taxes 18,215 (10,889) 29,104 267.3 Income tax (expense) benefit (2,611) (145) (2,466) (1,700.7) Net income (loss) 15,604 (11,034) 26,638 241.4 (Income) loss attributable to noncontrolling interest in consolidated entities 26 1,247 (1,221) (97.9) Net (income) loss attributable to redeemable noncontrolling interests in operating partnership (967) 1,079 (2,046) (189.6) Net income (loss) attributable to the Company $ 14,663 $ (8,708) $ 23,371 268.4 % 37 Table of Contents All hotel properties owned for the three months ended March 31, 2022 and 2021 have been included in our results of operations during the respective periods in which they were owned. Based on when a hotel property was acquired or disposed of, operating results for certain hotel properties are not comparable for the three months ended March 31, 2022 and 2021. The hotel properties listed below are not comparable hotel properties for the periods indicated and all other hotel properties are considered comparable hotel properties. The following acquisitions affect reporting comparability related to our condensed consolidated financial statements: Hotel Properties Location Type Date Mr. C Beverly Hills Hotel Los Angeles, California Acquisition August 5, 2021 The Ritz-Carlton Reserve Dorado Beach Dorado, Puerto Rico Acquisition March 11, 2022 The following table illustrates the key performance indicators of all hotel properties for the periods indicated: Three Months Ended March 31, 2022 2021 Occupancy 54.95 % 37.01 % ADR (average daily rate) $ 543.79 $ 436.98 RevPAR (revenue per available room) $ 298.79 $ 161.73 Rooms revenue (in thousands) $ 105,192 $ 54,323 Total hotel revenue (in thousands) $ 161,880 $ 83,848 The following table illustrates the key performance indicators of the 13 hotel properties that were included for the full three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Occupancy 54.39 % 37.01 % ADR (average daily rate) $ 526.18 $ 436.98 RevPAR (revenue per available room) $ 286.18 $ 161.73 Rooms revenue (in thousands) $ 96,432 $ 54,323 Total hotel revenue (in thousands) $ 149,766 $ 83,848 Net Income (Loss) Attributable to the Company. Net income (loss) attributable to the Company changed by $23.4 million, from a net loss of $8.7 million for the three months ended March 31, 2021 (the “2021 quarter”), to net income of $14.7 million for the three months ended March 31, 2022 (the “2022 quarter”), as a result of the factors discussed below. Rooms Revenue . Rooms revenue increased $50.9 million, or 93.6%, to $105.2 million during the 2022 quarter compared to the 2021 quarter. During the 2022 quarter, we experienced a 1,794 basis point increase in occupancy and a 24.4% increase in room rates compared to the 2021 quarter. The increase in rooms revenue is due to the hotel properties recovering from the COVID-19 pandemic as well as an increase of $3.3 million associated with the acquisition of the Mr. C Beverly Hills Hotel on August 5, 2021 and $5.5 million with the acquisition of The Ritz-Carlton Reserve Dorado Beach on March 11, 2022. 38 Table of Contents Fluctuations in rooms revenue between the 2022 quarter and the 2021 quarter is a result of the changes in occupancy and ADR between 2022 quarter and 2021 quarter as reflected in the table below (dollars in thousands): Hotel Property Favorable (Unfavorable) Rooms Revenue Occupancy (change in bps) ADR (change in %) Comparable Capital Hilton $ 1,849 1,060 38.3 % Marriott Seattle Waterfront 1,690 2,508 16.0 % The Notary Hotel 1,834 1,894 26.2 % The Clancy 3,591 2,998 78.8 % Sofitel Chicago Magnificent Mile 1,340 2,041 4.2 % Pier House Resort & Spa 3,783 302 61.9 % The Ritz-Carlton St. Thomas 5,925 335 38.8 % Park Hyatt Beaver Creek Resort & Spa 5,797 1,305 58.7 % Hotel Yountville 1,113 633 75.2 % The Ritz-Carlton Sarasota 4,948 281 35.6 % Hilton La Jolla Torrey Pines 3,648 3,393 59.3 % Bardessono Hotel and Spa 1,747 1,414 50.0 % The Ritz-Carlton Lake Tahoe 4,844 246 59.1 % Total $ 42,109 1,738 20.4 % Non-comparable Mr. C Beverly Hills Hotel $ 3,285 n/a n/a The Ritz-Carlton Reserve Dorado Beach $ 5,475 n/a n/a Total $ 8,760 Food and Beverage Revenue . Food and beverage revenue increased $20.1 million, or 120.7%, to $36.7 million during the 2022 quarter compared to the 2021 quarter. This increase is primarily driven by the recovery from the COVID-19 pandemic. We experienced an aggregate increase in food and beverage revenue of $17.9 million at 13 comparable hotel properties as well as increases of $1.1 million at the Mr. C Beverly Hills Hotel and $1.1 million at The Ritz-Carlton Reserve Dorado Beach. Other Hotel Revenue . Other hotel revenue, which consists mainly of condo management fees, health center fees, resort fees, golf, telecommunications, parking, rentals and business interruption revenue, increased $7.1 million, or 54.9%, to $20.0 million during the 2022 quarter compared to the 2021 quarter. The increase is attributable to higher other hotel revenue of $5.9 million at 13 comparable hotel properties and an increase of $279,000 at the Mr. C Beverly Hills Hotel and $888,000 at The Ritz-Carlton Reserve Dorado Beach. Rooms Expense . Rooms expense increased $9.2 million, or 83.2%, to $20.2 million in the 2022 quarter compared to the 2021 quarter. The increase is attributable to an aggregate increase in rooms expense of $7.5 million at 13 comparable hotel properties due to the hotel properties recovering from the COVID-19 pandemic and increases of $889,000 at the Mr. C Beverly Hills Hotel and $797,000 at The Ritz-Carlton Reserve Dorado Beach. Food and Beverage Expense . Food and beverage expense increased $14.1 million, or 100.9%, to $28.0 million during the 2022 quarter compared to the 2021 quarter. The increase is attributable to an aggregate increase of $12.4 million at 13 comparable hotel properties and increases of $1.0 million at the Mr. C Beverly Hills Hotel and $689,000 at The Ritz-Carlton Reserve Dorado Beach. Other Operating Expenses . Other operating expenses increased $17.7 million, or 61.9%, to $46.2 million in the 2022 quarter compared to the 2021 quarter. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced an increase of $1.9 million in direct expenses and $15.8 million in indirect expenses and incentive management fees in the 2022 quarter compared to the 2021 quarter. Direct expenses were 4.2% of total hotel revenue in the 2022 quarter and 5.9% in the 2021 quarter. The increase in direct expenses is associated with higher direct expenses at our comparable hotel properties as they are recovering from the COVID-19 pandemic, as well as an increase of $36,000 at the Mr. C Beverly Hills Hotel and $419,000 at The Ritz-Carlton Reserve Dorado Beach. 39 Table of Contents The increase in indirect expenses is attributable to increases in (i) general and administrative costs of $5.1 million comprising an increase of $4.0 million at our 13 comparable hotel properties and $1.1 million at the two acquired hotel properties; (ii) marketing costs of $3.8 million comprising an increase of $3.3 million at our 13 comparable hotel properties and $551,000 at the two acquired hotel properties; (iii) repairs and maintenance of $1.6 million comprising an increase of $1.2 million at our 13 comparable hotel properties and $405,000 at the two acquired hotel properties; (iv) lease expense of $251,000 comprising an increase of $237,000 at our 13 comparable hotel properties and $14,000 at the two acquired hotel properties; (v) energy costs of $1.2 million comprised of an increase of $896,000 at our 13 comparable hotel properties and $329,000 at the two acquired hotel properties; and (vi) incentive management fees of $3.8 million comprising an increase of $3.6 million at our 13 comparable hotel properties and $121,000 at the two acquired hotel properties. Management Fees . Base management fees increased $1.6 million, or 63.8%, to $4.1 million in the 2022 quarter compared to the 2021 quarter. Management fees increased approximately $2.0 million at 12 of our comparable hotel properties, $136,000 at the Mr. C Beverly Hills Hotel and $243,000 at The Ritz-Carlton Reserve Dorado Beach. These increases were partially offset by a decrease of $807,000 at the Sofitel Chicago Magnificent Mile primarily as a result of a legal settlement with Accor. See Item 1. “Legal Proceedings.” Property Taxes, Insurance and Other . Property taxes, insurance and other increased $1.3 million, or 18.4%, to $8.6 million in the 2022 quarter compared to the 2021 quarter. The increase is comprised of an aggregate increase of approximately $1.5 million at six hotel properties as well as increases of $329,000 at the Mr. C Beverly Hills Hotel and $240,000 at The Ritz-Carlton Reserve Dorado Beach as a result of their acquisitions. These increases were partially offset by an aggregate decrease of approximately $941,000 at seven hotel properties. Depreciation and Amortization . Depreciation and amortization increased $88,000, or 0.5%, to $18.4 million for the 2022 quarter compared to the 2021 quarter. The increase is comprised of an increase of $609,000 at the Mr. C Beverly Hills Hotel and $351,000 at Ritz-Carlton Reserve Dorado Beach as a result of their acquisitions as well as an aggregate increase of $442,000 at the Park Hyatt Beaver Creek Resort & Spa, Marriott Seattle Waterfront, Hotel Yountville, The Ritz-Carlton St. Thomas and The Ritz-Carlton Lake Tahoe. These increases were partially offset by an aggregate decrease of $1.3 million at eight comparable hotel properties primarily due to fully depreciated assets. Advisory Services Fee. Advisory services fee increased $2.5 million, or 52.7%, to $7.3 million in the 2022 quarter compared to the 2021 quarter due to increases in the base advisory fee of $394,000, reimbursable expenses of $604,000, an incentive fee of $606,000 and an increase in equity-based compensation of $923,000. In the 2022 quarter, we recorded an advisory services fee of $7.3 million, which included a base advisory fee of $2.9 million, reimbursable expenses of $1.1 million, $2.3 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. and an incentive fee of $977,000. In the 2021 quarter, we recorded an advisory services fee of $4.8 million, which included a base advisory fee of $2.5 million, reimbursable expenses of $492,000, $1.4 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. and an incentive fee of $371,000. Corporate General and Administrative . Corporate general and administrative expense was $2.5 million in the 2022 quarter and $1.6 million in the 2021 quarter. The increase in corporate general and administrative expenses is primarily due to higher professional fees of $399,000, higher public company costs of $208,000, higher miscellaneous expenses of $101,000 and higher reimbursed operating expenses of Ashford Securities of $187,000. Gain (loss) on Insurance Settlement and Disposition of Assets . In the 2021 quarter, we recognized a gain of $481,000 associated with proceeds received from an insurance claim and a gain of $18,000 upon disposition of certain fixed assets. There was no such gain (loss) in the 2022 quarter. Equity in Earnings (Loss) of Unconsolidated Entity . In the 2022 quarter and the 2021 quarter, we recorded equity in loss of unconsolidated entity of $72,000 and $64,000, respectively, related to our investment in OpenKey. Interest Income . Interest income was $25,000 and $9,000 in the 2022 quarter and the 2021 quarter, respectively. Interest Expense and Amortization of Discounts and Loan Costs . Interest expense and amortization of discounts and loan costs increased $1.8 million, or 26.1%, to $8.5 million for the 2022 quarter compared to the 2021 quarter. The inc rease i s primarily due to higher interest expense from a higher average LIBOR rate, as well as higher interest expense from our Convertible Senior Notes and the mortgage loans associated with the Mr. C Beverly Hills Hotel and The Ritz-Carlton Reserve Dorado Beach acquisitions. The average LIBOR rates for the 2022 quarter and the 2021 quarter were 0.23% and 0.12%, respectively. 40 Table of Contents Write-off of Loan Costs and Exit Fees. Write-off of loan costs and exit fees was $76,000 in the 2022 quarter resulting from the refinance of the Park Hyatt Beaver Creek Resort & Spa in February 2022. Write-off of loan costs and exit fees was $351,000 in the 2021 quarter, resulting from several amendments executed with various lenders, which included deferral of debt service payments and allowed the use of reserves for property-level operating shortfalls and/or to cover debt service payments. Third-party fees incurred in conjunction with these amendments, totaling $351,000, were expensed in accordance with applicable accounting guidance. Unrealized Gain (Loss) on Derivatives . Unrealized gain on derivatives of $408,000 for the 2022 quarter consisted of an unrealized gain of approximately $843,000 on interest rate caps, partially offset by an unrealized loss of approximately $435,000 on warrants. Unrealized loss on derivatives of $20,000 in the 2021 quarter consisted of an unrealized loss on interest rate caps. Income Tax (Expense) Benefit . Income tax expense changed $2.5 million, from an income tax expense of $145,000 in the 2021 quarter to income tax expense of $2.6 million in the 2022 quarter. This change was primarily due to an increase in the profitability of our TRS entities in the 2022 quarter compared to the 2021 quarter. (Income) Loss Attributable to Noncontrolling Interest in Consolidated Entities . Our noncontrolling interest partner in consolidated entities was allocated a loss of $26,000 and $1.2 million for the 2022 quarter and the 2021 quarter, respectively. At both March 31, 2022 and 2021, noncontrolling interest in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity. Net (Income) Loss Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net income of $967,000 in the 2022 quarter and a net loss of $1.1 million in the 2021 quarter. Redeemable noncontrolling interests represented ownership interests in Braemar OP of approximately 7.84% and 8.87% as of March 31, 2022 and 2021, respectively. LIQUIDITY AND CAPITAL RESOURCES Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our hotel properties, including: • advisory fees payable to Ashford LLC; • recurring maintenance necessary to maintain our hotel properties in accordance with brand standards; • interest expense and scheduled principal payments on outstanding indebtedness; • dividends on our common stock; • dividends on our preferred stock; and • capital expenditures to improve our hotel properties. We expect to meet our short-term liquidity requirements generally through net cash provided by operations, capital market activities and existing cash balances. Pursuant to the advisory agreement between us and our advisor, we must pay our advisor on a monthly basis a base advisory fee, subject to a minimum base advisory fee. The minimum base advisory fee is equal to the greater of: (i) 90% of the base fee paid for the same month in the prior fiscal year; and (ii) 1/12 th of the “G&A Ratio” for the most recently completed fiscal quarter multiplied by our total market capitalization on the last balance sheet date included in the most recent quarterly report on Form 10-Q or annual report on Form 10-K that we file with the SEC. Thus, even if our total market capitalization and performance decline, we will still be required to make payments to our advisor equal to the minimum base advisory fee, which could adversely impact our liquidity and financial condition. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotel properties and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our hotel properties and scheduled debt payments. We expect to meet our long-term liquidity requirements through various sources of capital, including future common and preferred equity issuances, existing working capital, net cash provided by operations, hotel mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the current and ongoing effects of COVID-19 on our business and the hotel industry, the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating 41 Table of Contents performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources. While management cannot provide any assurances, management believes that our cash flow from operations and our existing cash balances will be adequate to meet upcoming anticipated requirements for interest and principal payments on debt (excluding any potential final maturity principal payments), working capital, and capital expenditures for the next 12 months and dividends required to maintain our status as a REIT for U.S. federal income tax purposes. Our hotel properties will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of hotel properties may require significant capital outlays. We may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or hotel redevelopment through retained earnings is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected. Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of our hotel properties decline. When these provisions are triggered, substantially all of the profit generated by the hotel properties securing such loan is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. This could affect our liquidity and our ability to make distributions to our stockholders until such time that a cash trap is no longer in effect for such loan. These cash trap provisions have been triggered on some of our mortgage loans, as discussed above. Our loans may remain subject to cash trap provisions for a substantial period of time which could limit our flexibility and adversely affect our financial condition or our qualification as a REIT. As of March 31, 2022, our $54 million mortgage loan was in a cash trap. Approximately $60,000 of our restricted cash was subject to this cash trap. Equity Transactions On December 5, 2017, our board of directors approved the stock repurchase program pursuant to which the board of directors granted a repurchase authorization to acquire shares of the Company’s common stock, par value $0.01 per share and preferred stock having an aggregate value of up to $50 million. The board of directors’ authorization replaced any previous repurchase authorizations. No shares were repurchased during the three months ended March 31, 2022, pursuant to this authorization. On December 11, 2017, we entered into equity distribution agreements with certain sales agents to sell from time to time shares of our common stock having an aggregate offering price of up to $50.0 million. Sales of shares of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at-the-market” offerings as defined in Rule 415 of the Securities Act, including sales made directly on the NYSE, the existing trading market for our common stock, or sales made to or through a market maker other than on an exchange or through an electronic communications network. We will pay each of the sales agents a commission, which in each case shall not be more than 2.0% of the gross sales price of the shares of our common stock sold through such sales agent. On July 7, 2020, we entered into a side letter (the “Side Letter”) with the sales agents pursuant to which we agreed to pay all reasonable documented out-of-pocket expenses, including the reasonable fees and disbursements of counsel incurred by the sales agents, in connection with the ongoing services contemplated by the equity distribution agreements (subject to a $75,000 cap on certain expenses incurred in June 2020). Pursuant to the Side Letter, the sales agents have agreed to reimburse us for up to $50,000 of such expenses, if the sales agents offer and sell an amount of our common stock with an aggregate offering price of $15,000,000, and have agreed to reimburse us for up to an additional $50,000 of such expenses, provided the sales agents offer and sell an amount of our common stock with an aggregate offering price of $30,000,000. As of May 4, 2022, the Company has sold approximately 7.4 million shares of common stock and received gross proceeds of approximately $30.8 million under this program. On November 13, 2019, we filed an initial registration statement with the SEC, as amended on January 24, 2020, for shares of our non-traded Series E Redeemable Preferred Stock (the “Series E Preferred Stock”) and our non-traded Series M Redeemable Preferred Stock (the “Series M Preferred Stock”). The registration statement became effective on February 21, 2020, and contemplates the issuance and sale of up to 20,000,000 shares of Series E Preferred Stock or Series M Preferred Stock in a primary offering and up to 8,000,000 shares of Series E Preferred Stock or Series M Preferred Stock pursuant to a dividend reinvestment plan. On February 25, 2020, we filed our prospectus with the SEC. Ashford Securities, a subsidiary of Ashford Inc., serves as the dealer manager and wholesaler of the Series E Preferred Stock and Series M Preferred Stock. On April 2, 2021, the Company filed with the State Department of Assessments and Taxation of the State of Maryland (the “SDAT”) articles supplementary to the Company’s Articles of Amendment and Restatement that provided for: (i) reclassifying the existing 28,000,000 shares of Series E Preferred Stock and 28,000,000 shares of Series M Preferred Stock as unissued 42 Table of Contents shares of preferred stock; (ii) reclassifying and designating 28,000,000 shares of the Company’s authorized capital stock as shares of the Series E Preferred Stock (the “Series E Articles Supplementary”); and (iii) reclassifying and designating 28,000,000 shares of the Company’s authorized capital stock as shares of the Series M Preferred Stock (the “Series M Articles Supplementary”). The Series E Articles Supplementary and Series M Articles Supplementary were filed to revise the preferred stock terms related to the dividend rate, our optional redemption right and certain other voting rights. The Company also caused its operating partnership to execute Amendment No. 5 to the Third Amended and Restated Agreement of Limited Partnership to amend the terms of its operating partnership agreement to conform to the terms of the Series E Articles Supplementary and Series M Articles Supplementary. As of May 4, 2022, the Company has issued approximately 3.7 million shares of Series E Preferred Stock and received net proceeds of approximately $83.9 million and issued approximately 114,000 shares of Series M Preferred Stock and received net proceeds of approximately $2.8 million. The Company also issued approximately 7,000 shares of Series E Preferred Stock pursuant to the dividend reinvestment plan. On February 4, 2021, the Company entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA II PN, Ltd. (“YA”), pursuant to which the Company will be able to sell up to 7,780,786 shares of its common stock (the “Commitment Amount”) at the Company’s request any time during the commitment period commencing on February 4, 2021, and terminating on the earliest of (i) the first day of the month next following the 36-month anniversary of the SEDA or (ii) the date on which YA shall have made payment of Advances (as defined in the SEDA) pursuant to the SEDA for shares of the Company’s common stock equal to the Commitment Amount (the “Commitment Period”). Other than with respect to the Initial Advance (as defined below) the shares sold to YA pursuant to the SEDA would be purchased at 95% of the Market Price (as defined below) and would be subject to certain limitations, including that YA could not purchase any shares that would result in it owning more than 4.99% of the Company’s common stock. “Market Price” means the lowest daily VWAP of the Company’s common stock during the five consecutive trading days commencing on the trading day following the date the Company submits an advance notice to YA. “VWAP” means, for any trading day, the daily volume weighted average price of the Company’s common stock for such date on the principal market as reported by Bloomberg L.P. during regular trading hours. At any time during the Commitment Period the Company may require YA to purchase shares of the Company’s common stock by delivering a written notice to YA setting forth the Advance Shares (as defined in the SEDA) that the Company desires to issue and sell to YA (the “Advance Notice”). The Company may deliver an Advance Notice for an initial Advance for up to 1,200,000 Advance Shares (the “Initial Advance”). The preliminary purchase price per share for such shares shall be 100% of the average daily VWAP for the five consecutive trading days immediately prior to the date of the Advance Notice. Pursuant to the SEDA, we currently intend to use the net proceeds from any sale of the shares for working capital purposes, including the repayment of outstanding debt. There are no other restrictions on future financing transactions. The SEDA does not contain any right of first refusal, participation rights, penalties or liquidated damages. We are not required to pay any additional amounts to reimburse or otherwise compensate YA in connection with the transaction except for a $10,000 structuring fee. As of May 4, 2022, the Company has sold approximately 1.7 million shares of common stock and received proceeds of approximately $10.0 million under the SEDA. On April 21, 2021, the Company entered into a purchase agreement (the “Lincoln Park Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company may issue or sell to Lincoln Park up to 8,893,565 shares of the Company’s common stock from time to time during the term of the Lincoln Park Purchase Agreement. The issuance of the shares of common stock pursuant to the Lincoln Park Purchase Agreement has been registered pursuant to the Company’s shelf registration statement on Form S-3 (the “Registration Statement”), and the related base prospectus included in the Registration Statement, as supplemented by a prospectus supplement filed with the SEC on April 21, 2021. The Company and Lincoln Park also entered into a registration rights agreement, pursuant to which the Company agreed to maintain the effectiveness of the Registration Statement. Upon entering into the Lincoln Park Purchase Agreement, the Company issued 15,000 shares of the Company’s common stock as consideration for Lincoln Park’s execution and delivery of the Lincoln Park Purchase Agreement. As of May 4, 2022, the Company has issued approximately 766,000 shares of common stock for gross proceeds of approximately $4.2 million under the Lincoln Park Purchase Agreement . On July 12, 2021, the Company entered into a second equity distribution agreement (the “Virtu July 2021 EDA”) with Virtu to sell from time to time shares of our common stock having an aggregate offering price of up to $100 million. We will pay Virtu a commission of approximately 1.0% of the gross sales price of the shares of our common stock sold. The Company may also sell some or all of the shares of our common stock to Virtu as principal for its own account at a price agreed upon at the time of sale. As of May 4, 2022, the Company has sold approximately 4.7 million shares of common stock under the Virtu July 2021 EDA and received gross proceeds of approximately $24.0 million. 43 Table of Contents Debt Transactions On February 2, 2022, the Company refinanced its mortgage loan secured by the Park Hyatt Beaver Creek Resort & Spa, which had a final maturity date in April 2022. The new, non-recourse mortgage loan totals $70.5 million and has a two-year initial term with three one-year extension options, subject to the satisfaction of certain conditions. The mortgage loan is interest only and provides for a floating interest rate of SOFR + 2.86%. In connection with the refinancing, the Company paid Lismore a fee of approximately $637,000. On March 11, 2022, in connection with the acquisition of The Ritz-Carlton Reserve Dorado Beach the Company assumed a $54.0 million mortgage loan. See note 6 to our condensed consolidated financial statements. Sources and Uses of Cash We had approximately $185.2 million and $216.0 million of cash and cash equivalents at March 31, 2022 and December 31, 2021, respectively. We anticipate that our principal sources of funds to meet our cash requirements will include cash on hand, positive cash flow from operations and capital market activities. Net Cash Flows Provided by (Used in) Operating Activities. Net cash flows provided by (used in) operating activities were $28.8 million and $12.0 million for the three months ended March 31, 2022 and 2021, respectively. Cash flows from operations were impacted by the COVID-19 pandemic and changes in hotel operations of our 13 comparable hotel properties as well the acquisitions of the Mr. C Beverly Hills Hotel on August 5, 2021 and The Ritz-Carlton Reserve Dorado Beach on March 11, 2022. Cash flows from operations are also impacted by the timing of working capital cash flows such as collecting receivables from hotel guests, paying vendors, settling with derivative counterparties, settling with related parties, settling with hotel managers and timing differences between the receipt of proceeds from business interruption insurance claims and the recognition of the related revenue. Net Cash Flows Provided by (Used in) Investing Activities . For the three months ended March 31, 2022, net cash flows used in investing activities were $97.7 million. These cash outflows were primarily attributable to $10.8 million of capital improvements made to various hotel properties, approximately $87.0 million associated with the acquisition of The Ritz-Carlton Reserve Dorado Beach. Our capital improvements consisted of $8.0 million of return on investment capital projects and $2.8 million of renewal and replacement capital projects. Return on investment capital projects are designed to improve the positioning of our hotel properties within their markets and competitive set. Renewal and replacement capital projects are designed to maintain the quality and competitiveness of our hotels. For the three months ended March 31, 2021, net cash flows used in investing activities were $4.5 million. These cash outflows were primarily attributable to $4.7 million of capital improvements made to various hotel properties, partially offset by proceeds of $200,000 from the disposition of assets. Our capital improvements consisted of $2.3 million of return on investment capital projects and $2.4 million of renewal and replacement capital projects. Net Cash Flows Provided by (Used in) Financing Activities. For the three months ended March 31, 2022, net cash flows provided by financing activities were $31.9 million. Cash inflows primarily consisted of debt borrowings of $70.5 million, $33.7 million from the issuance of preferred stock and contributions of $164,000 from a noncontrolling interest in consolidated entities. The cash inflows were partially offset by repayments of indebtedness of $67.8 million, $3.0 million of dividend and distribution payments and $1.7 million of payments for loan costs and fees. For the three months ended March 31, 2021, net cash flows provided by financing activities were $4.4 million. Cash inflows primarily consisted of net proceeds of $18.2 million from the issuance of common stock, partially offset by repayments of indebtedness of $10.8 million, $2.6 million of dividend and distribution payments and $365,000 of payments for loan costs and fees associated with loan forbearance. Dividend Policy. On March 4, 2022, our board of directors declared a quarterly cash dividend of $0.01 per diluted share for the Company’s common stock for the first quarter of 2022. Additionally, in March 2022, the board of directors approved an update to our previously announced dividend policy for 2022 to revise our then-expectation to pay a quarterly dividend of $0.01 per share of common stock during 2022. The approval of our dividend policy does not commit our board of directors to declare future dividends with respect to any quantity or the amount thereof. The board of directors will continue to review our dividend policy and make announcements with respect thereto. For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. 44 Table of Contents Seasonality Our properties’ operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months and some during the winter months. This seasonality pattern can cause fluctuations in our quarterly lease revenue under our percentage leases. Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as the COVID-19 pandemic and government-issued travel restrictions in response, extreme weather conditions, natural disasters, terrorist attacks or alerts, civil unrest, government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. To the extent that cash flows from operations and cash on hand are insufficient during any quarter due to temporary or seasonal fluctuations in lease revenue, we expect to utilize borrowings to fund distributions required to maintain our REIT status. However, we cannot make any assurances that we will make distributions in the future. Critical Accounting Policies The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2021 Form 10-K. There have been no material changes in these critical accounting policies. Non-GAAP Financial Measures The following non-GAAP presentations of EBITDA, EBITDAre, Adjusted EBITDAre, Funds From Operations (“FFO”) and Adjusted FFO are presented to help our investors evaluate our operating performance. EBITDA is defined as net income (loss) before interest expense and amortization of loan costs, depreciation and amortization, income taxes, equity in (earnings) loss of unconsolidated entity and after the Company’s portion of EBITDA of OpenKey. In addition, we excluded impairment on real estate, (gain) loss on insurance settlement and disposition of assets and Company’s portion of EBITDAre of OpenKey from EBITDA to calculate EBITDA for real estate, or EBITDAre, as defined by NAREIT. We then further adjust EBITDAre to exclude certain additional items such as amortization of favorable (unfavorable) contract assets (liabilities), transaction and conversion costs, write-off of loan costs and exit fees, legal, advisory and settlement costs, advisory services incentive fee, other/income expense, stock/unit-based compensation and the Company’s portion of adjustments to EBITDAre of OpenKey and non-cash items such as unrealized gain/ loss on derivatives. We present EBITDA, EBITDAre and Adjusted EBITDAre because we believe they reflect more accurately the ongoing performance of our hotel assets and other investments and provide more useful information to investors as they are indicators of our ability to meet our future debt payment requirements, working capital requirements and they provide an overall evaluation of our financial condition. EBITDA, EBITDAre and Adjusted EBITDAre as calculated by us may not be comparable to EBITDA, EBITDAre and Adjusted EBITDAre reported by other companies that do not define EBITDA, EBITDAre and Adjusted EBITDAre exactly as we define the terms. EBITDA, EBITDAre and Adjusted EBITDAre do not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as determined by GAAP as an indicator of liquidity. 45 Table of Contents The following table reconciles net income (loss) to EBITDA, EBITDAre and Adjusted EBITDAre (in thousands) (unaudited): Three Months Ended March 31, 2022 2021 Net income (loss) $ 15,604 $ (11,034) Interest expense and amortization of loan costs 8,522 6,756 Depreciation and amortization 18,441 18,353 Income tax expense (benefit) 2,611 145 Equity in (earnings) loss of unconsolidated entity 72 64 Company’s portion of EBITDA of OpenKey (71) (63) EBITDA 45,179 14,221 (Gain) loss on insurance settlement and disposition of assets — (499) EBITDAre 45,179 13,722 Amortization of favorable (unfavorable) contract assets (liabilities) 108 138 Transaction and conversion costs 555 340 Write-off of loan costs and exit fees 76 351 Unrealized (gain) loss on derivatives (408) 20 Stock/unit-based compensation 2,365 1,416 Legal, advisory and settlement costs 317 205 Advisory services incentive fee 977 371 Company’s portion of adjustments to EBITDAre of OpenKey 6 5 Adjusted EBITDAre $ 49,175 $ 16,568 46 Table of Contents FFO is calculated on the basis defined by NAREIT, which is net income (loss) attributable to common stockholders, computed in accordance with GAAP, excluding gains or losses on insurance settlement and disposition of assets, plus impairment charges on real estate, depreciation and amortization of real estate assets, and after redeemable noncontrolling interests in the operating partnership and adjustments for unconsolidated entities. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. Our calculation of Adjusted FFO excludes dividends on Series B Convertible Preferred Stock, gain/loss on extinguishment of preferred stock, transaction and conversion costs, write-off of loan costs and exit fees, legal, advisory and settlement costs, advisory services incentive fee, other income/expense, stock/unit-based compensation and non-cash items such as interest expense on Convertible Senior Notes, interest expense accretion on refundable membership club deposits, amortization of loan costs, unrealized gain/loss on derivatives and the Company’s portion of adjustments to FFO of OpenKey. FFO and Adjusted FFO exclude amounts attributable to the portion of a partnership owned by the third-party. We consider FFO and Adjusted FFO to be appropriate measures of our ongoing normalized operating performance as a REIT. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that either do not define the term in accordance with the current NAREIT definition or interpret the NAREIT definition differently than us. FFO and Adjusted FFO do not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income or loss as an indication of our financial performance or GAAP cash flows from operating activities as a measure of our liquidity. FFO and Adjusted FFO are also not indicative of funds available to satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO and Adjusted FFO should be considered along with our net income or loss and cash flows reported in our condensed consolidated financial statements. The following table reconciles net income (loss) to FFO and Adjusted FFO (in thousands) (unaudited): Three Months Ended March 31, 2022 2021 Net income (loss) $ 15,604 $ (11,034) (Income) loss attributable to noncontrolling interest in consolidated entities 26 1,247 Net (Income) loss attributable to redeemable noncontrolling interests in operating partnership (967) 1,079 Preferred dividends (3,303) (2,388) Gain (loss) on extinguishment of preferred stock — (73) Net income (loss) attributable to common stockholders 11,360 (11,169) Depreciation and amortization on real estate (1) 17,795 17,659 Net income (loss) attributable to redeemable noncontrolling interests in operating partnership 967 (1,079) Equity in (earnings) loss of unconsolidated entity 72 64 (Gain) loss on insurance settlement and disposition of assets — (499) Company’s portion of FFO of OpenKey (72) (64) FFO available to common stockholders and OP unitholders 30,122 4,912 Series B Convertible Preferred Stock dividends 1,058 1,563 (Gain) loss on extinguishment of preferred stock — 73 Transaction and conversion costs 555 340 Interest expense on Convertible Senior Notes 1,103 — Interest expense accretion on refundable membership club benefits 190 202 Write-off of loan costs and exit fees 76 351 Amortization of loan costs (1) 642 706 Unrealized (gain) loss on derivatives (408) 20 Stock/unit-based compensation 2,365 1,416 Legal, advisory and settlement costs 317 205 Advisory services incentive fee 977 371 Company’s portion of adjustments to FFO of OpenKey 6 5 Adjusted FFO available to common stockholders, OP unitholders, Series B Cumulative Convertible preferred stockholders and convertible note holders on an “as converted” basis $ 37,003 $ 10,164 ____________________ (1) Net of adjustment for noncontrolling interest in consolidated entities. The following table presents the amounts of the adjustments for noncontrolling interests for each line item: Three Months Ended March 31, 2022 2021 Depreciation and amortization on real estate $ (646) $ (694) Amortization of loan costs (22) (21) 47 Table of Contents Hotel Properties The following table presents certain information related to our hotel properties: Hotel Property Location Total Rooms % Owned Owned Rooms Fee Simple Properties Capital Hilton Washington, D.C. 550 75 % 413 Marriott Seattle Waterfront Seattle, WA 361 100 % 361 The Notary Hotel Philadelphia, PA 499 100 % 499 The Clancy San Francisco, CA 410 100 % 410 Sofitel Chicago Magnificent Mile Chicago, IL 415 100 % 415 Pier House Resort & Spa Key West, FL 142 100 % 142 The Ritz-Carlton St. Thomas St. Thomas, USVI 180 100 % 180 Park Hyatt Beaver Creek Resort & Spa Beaver Creek, CO 190 100 % 190 Hotel Yountville Yountville, CA 80 100 % 80 The Ritz-Carlton Sarasota Sarasota, FL 276 100 % 276 The Ritz-Carlton Lake Tahoe (1) Truckee, CA 170 100 % 170 Mr. C Beverly Hills Hotel (2) Los Angeles, CA 143 100 % 143 The Ritz-Carlton Reserve Dorado Beach (3) Dorado, Puerto Rico 96 100 % 96 Ground Lease Properties (4) Hilton La Jolla Torrey Pines (5) La Jolla, CA 394 75 % 296 Bardessono Hotel and Spa (6) Yountville, CA 65 100 % 65 Total 3,971 3,736 ________ (1) The above information does not include the operations of condominium units not owned by The Ritz-Carlton Lake Tahoe. (2) Includes 138 hotel rooms and five residences adjacent to the hotel. The results of the Mr. C Beverly Hills Hotel and the five adjacent luxury residences are included from August 5, 2021 through December 31, 2021. (3) The above information does not include the operations of residential units not owned by The Ritz-Carlton Reserve Dorado Beach. The results of the Hotel are included from March 11, 2022 through March 31, 2022. (4) Some of our hotel properties are on land subject to ground leases, two of which cover the entire property. (5) The ground lease expires in 2067. The ground lease contains one extension option of either 10 or 20 years dependent upon capital investment spend during the lease term. (6) The initial ground lease expires in 2065. The ground lease contains two 25-year extension options, at our election.