Braemar Hotels & Resorts Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes thereto included in Item 8. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Forward-Looking Statements.” 87 This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 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 STR, LLC. Two times the U.S. national average was $187 for the year ended December 31, 2022. 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 December 31, 2022, we owned interests in 16 hotel properties in seven states, the District of Columbia, Puerto Rico and St. Thomas, U.S. Virgin Islands with 4,181 total rooms, or 3,946 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 14 of our hotel properties directly, and the remaining two hotel properties through an investment in a majority-owned consolidated entity. 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 December 31, 2022, Remington Hotels, a subsidiary of Ashford Inc., managed four of our 16 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 and brokerage services, insurance claims services, hypoallergenic premium rooms, watersport activities, travel/transportation services and mobile key technology. Recent Developments In September 2022, given the recent increases in interest rates on short-term U.S. Treasury securities, the independent members of our board of directors approved the engagement of our Advisor to actively manage and invest the Company’s excess cash in short-term U.S. Treasury securities (the “Cash Management Strategy”). As consideration for the Advisor’s services under this engagement, the Company will pay the Advisor an annual fee equal to the lesser of (i) 20 basis points (0.20%) of the average daily balance of the Company’s excess cash invested by the Advisor and (ii) the actual rate of return realized by the Cash Management Strategy (the “Cash Management Fee”); provided that in no event will the Cash Management Fee be less than zero. The Cash Management Fee will be calculated and payable monthly in arrears. Investment of the Company’s excess cash pursuant to the Cash Management Strategy commenced in October 2022. On December 1, 2022, the Company acquired a 100% interest in the 210-room Four Seasons Resort Scottsdale at Troon North for $267.8 million in cash. On December 7, 2022, our board of directors approved a new 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, having an aggregate value of up to $25 million. The board of director’s authorization replaced any previous repurchase authorizations. During the year ended December 31, 2022, we repurchased 1.5 million shares of our common stock for approximately $6.1 million. Subsequent to December 31, 2022, the Company repurchased approximately 3.9 million shares of its common stock for approximately $18.9 million. The Company repurchased approximately 5.4 million shares of its common stock for approximately $25.0 million and has completed the $25.0 million repurchase authorization. On December 23, 2022, we entered into a $100 million mortgage loan, secured by the Four Seasons Resort Scottsdale at Troon North. The mortgage loan has a three-year initial term and two one-year extension options, subject to satisfaction of certain conditions. The mortgage loan is interest only and bears interest at a rate of SOFR + 3.75% with a SOFR floor of 1.00%. 88 On January 18, 2023, the Company paid off its existing mortgage loan associated with the Ritz-Carlton Reserve Dorado Beach. Prior to the pay-off, the mortgage loan had an outstanding balance of $54 million. On February 24, 2023, at the option of Mr. Monty J. Bennett, Mr. Bennett’s 169,523 vested LTIP units that achieved economic parity with his common units were redeemed for common units on a one-for-one basis. On February 24, 2023, the Company received a Notice of Exercise of Redemption Right (the “Redemption Notice”), pursuant to which Mr. Bennett elected to redeem the common units and such redemption was settled in cash at the Company’s election based on the average of the closing price of the Company’s common stock for the ten consecutive trading days ending on February 23, 2023. Additionally, on February 24, 2023, Mr. Bennett elected to redeem an additional 1,254,254 common units and following receipt of the Redemption Notice, such redemption was settled in cash at the Company’s election at a price per common unit based on the average of the closing price of the Company’s common stock for the ten consecutive trading days ending on February 23, 2023. The cash redemption for the 1,423,777 common units totaled approximately $7.0 million. Additionally, based on information previously reported by Mr. Bennett in a Form 4 filed on March 1, 2023, Mr. Bennett subsequently sold 417,491 shares of common stock beneficially owned by him into the public markets. 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.” 89 Principal Factors Affecting Our Results of Operations The principal factors affecting our operating results include overall demand for hotel rooms compared to the supply of available hotel rooms, and the ability of our third-party management companies to increase or maintain revenues while controlling expenses. Demand. The demand for lodging, including business travel, is directly correlated to the overall economy; as GDP increases, lodging demand typically increases. Historically, periods of declining demand are followed by extended periods of relatively strong demand, which typically occurs during the growth phase of the lodging cycle. Supply. The development of new hotels is driven largely by construction costs, the availability of financing and expected performance of existing hotels. Short-term supply is also expected to be below long-term averages. While the industry is expected to have supply growth below historical averages, we may experience supply growth, in certain markets, in excess of national averages that may negatively impact performance. We expect that our ADR, occupancy and RevPAR performance will be impacted by macroeconomic factors such as national and local employment growth, personal income and corporate earnings, GDP, consumer confidence, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction, the pricing strategies of competitors and currency fluctuations. In addition, our ADR, occupancy and RevPAR performance are dependent on the continued success of the Marriott, Hilton, Four Seasons, Hyatt and Sofitel brands. Revenue. Substantially all of our revenue is derived from the operation of hotels. Specifically, our revenue is comprised of: • Rooms revenue: Occupancy and ADR are the major drivers of rooms revenue. Rooms revenue accounts for the substantial majority of our total revenue. • Food and beverage revenue: Occupancy and the type of customer staying at the hotel are the major drivers of food and beverage revenue (i.e., group business typically generates more food and beverage business through catering functions when compared to transient business, which may or may not utilize the hotel’s food and beverage outlets or meeting and banquet facilities). • Other hotel revenue: Occupancy and the nature of the property are the main drivers of other ancillary revenue, such as telecommunications, parking and leasing services. Hotel Operating Expenses. The following presents the components of our hotel operating expenses: • Rooms expense: These costs include housekeeping wages and payroll taxes, reservation systems, room supplies, laundry services and front desk costs. Like rooms revenue, occupancy is the major driver of rooms expense and, therefore, rooms expense has a significant correlation to rooms revenue. These costs can increase based on increases in salaries and wages, as well as the level of service and amenities that are provided. • Food and beverage expense: These expenses primarily include food, beverage and labor costs. Occupancy and the type of customer staying at the hotel (i.e., catered functions generally are more profitable than restaurant, bar or other on-property food and beverage outlets) are the major drivers of food and beverage expense, which correlates closely with food and beverage revenue. • Management fees: Base management fees are computed as a percentage of gross revenue. Incentive management fees generally are paid when operating profits exceed certain threshold levels. • Other hotel expenses: These expenses include labor and other costs associated with the other operating department revenues, as well as labor and other costs associated with administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs. Most categories of variable operating expenses, including labor costs such as housekeeping, fluctuate with changes in occupancy. Increases in occupancy are accompanied by increases in most categories of variable operating expenses, while increases in ADR typically only result in increases in limited categories of operating costs and expenses, such as franchise fees, management fees and credit card processing fee expenses which are based on hotel revenues. Thus, changes in ADR have a more significant impact on operating margins than changes in occupancy. 90 RESULTS OF OPERATIONS Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 The following table summarizes changes in key line items from our consolidated statements of operations for the years ended December 31, 2022 and 2021 (in thousands except percentages): Year Ended December 31, Favorable (Unfavorable) 2022 2021 $ Change % Change Revenue Rooms $ 431,515 $ 280,568 $ 150,947 53.8 % Food and beverage 159,241 90,299 68,942 76.3 Other 78,829 56,675 22,154 39.1 Total hotel revenue 669,585 427,542 242,043 56.6 Expenses Hotel operating expenses: Rooms 94,410 59,818 (34,592) (57.8) Food and beverage 125,555 75,177 (50,378) (67.0) Other expenses 205,373 138,914 (66,459) (47.8) Management fees 20,149 13,117 (7,032) (53.6) Total hotel operating expenses 445,487 287,026 (158,461) (55.2) Property taxes, insurance and other 30,766 34,997 4,231 12.1 Depreciation and amortization 78,122 73,762 (4,360) (5.9) Advisory services fee 28,847 22,641 (6,206) (27.4) (Gain) loss on legal settlements (114) (917) (803) (87.6) Transaction costs — 563 563 100.0 Corporate general and administrative 18,084 8,717 (9,367) (107.5) Total expenses 601,192 426,789 (174,403) (40.9) Gain (loss) on insurance settlement and disposition of assets — 696 (696) (100.0) Operating income (loss) 68,393 1,449 66,944 (4,620.0) Equity in earnings (loss) of unconsolidated entity (328) (252) (76) (30.2) Interest income 2,677 48 2,629 5,477.1 Interest expense and amortization of discounts and loan costs (52,166) (30,901) (21,265) (68.8) Write-off of loan costs and exit fees (146) (1,963) 1,817 92.6 Realized and unrealized gain (loss) on derivatives 4,961 32 4,929 15,403.1 Income (loss) before income taxes 23,391 (31,587) 54,978 174.1 Income tax (expense) benefit (4,043) (1,324) (2,719) (205.4) Net income (loss) 19,348 (32,911) 52,259 158.8 (Income) loss attributable to noncontrolling interest in consolidated entities (2,063) 2,650 (4,713) (177.8) Net (income) loss attributable to redeemable noncontrolling interests in operating partnership 476 3,597 (3,121) (86.8) Net income (loss) attributable to the Company $ 17,761 $ (26,664) $ 44,425 166.6 % 91 All hotel properties owned for the years ended December 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, the operating results for certain hotel properties are not comparable for the years ended December 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 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 Four Seasons Resort Scottsdale Scottsdale, Arizona Acquisition December 1, 2022 The following table illustrates the key performance indicators of all hotel properties for the periods indicated: Year Ended December 31, 2022 2021 Occupancy 65.62 % 52.47 % ADR (average daily rate) $ 451.56 $ 386.45 RevPAR (revenue per available room) $ 296.30 $ 202.76 Rooms revenue (in thousands) $ 431,515 $ 280,568 Total hotel revenue (in thousands) $ 669,585 $ 427,542 The following table illustrates the key performance indicators of the 13 hotel properties that were included for the full year ended December 31, 2022 and 2021: Year Ended December 31, 2022 2021 Occupancy 65.50 % 52.29 % ADR (average daily rate) $ 421.09 $ 387.47 RevPAR (revenue per available room) $ 275.83 $ 202.61 Rooms revenue (in thousands) $ 376,861 $ 276,038 Total hotel revenue (in thousands) $ 583,659 $ 420,949 Net Income (Loss) Attributable to the Company. Net income (loss) attributable to the Company changed $44.4 million, from a net loss of $26.7 million for the year ended December 31, 2021 (“2021”), to net income of $17.8 million for the year ended December 31, 2022 (“2022”), as a result of the factors discussed below. Rooms Revenue . Rooms revenue increased $150.9 million, or 53.8%, to $431.5 million during 2022 compared to 2021. During 2022, we experienced a 1,315 basis point increase in occupancy and a 16.8% increase in room rates compared to 2021. The increase in rooms revenue is due to the hotel properties recovering from the COVID-19 pandemic as well as increases in rooms revenue of $8.9 million from the acquisition of the Mr. C Beverly Hills Hotel on August 5, 2021, $38.1 million from the acquisition of The Ritz-Carlton Reserve Dorado Beach on March 11, 2022, and $3.1 million from the acquisition of the Four Seasons Resort Scottsdale. 92 Fluctuations in rooms revenue between 2022 and 2021 are a result of the changes in occupancy and ADR between 2022 and 2021 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 $ 20,104 3,470 42.9 % Marriott Seattle Waterfront (1) 6,340 465 30.4 % The Notary Hotel 10,348 1,898 23.6 % The Clancy 16,707 1,408 71.2 % Sofitel Chicago Magnificent Mile 10,407 1,843 23.6 % Pier House Resort & Spa 2,337 (701) 19.6 % The Ritz-Carlton St. Thomas 3,607 (571) 14.8 % Park Hyatt Beaver Creek Resort & Spa 7,950 565 32.3 % Hotel Yountville 1,429 (384) 19.0 % The Ritz-Carlton Sarasota 5,318 (253) 13.2 % Hilton La Jolla Torrey Pines 10,953 1,945 23.2 % Bardessono Hotel and Spa 691 (396) 10.2 % The Ritz-Carlton Lake Tahoe 4,631 73 16.5 % Total $ 100,822 1,321 8.7 % Non-comparable Mr. C Beverly Hills Hotel $ 8,941 1,038 4.4 % The Ritz-Carlton Reserve Dorado Beach 38,077 n/a n/a Four Seasons Resort Scottsdale 3,107 n/a n/a Total $ 50,125 ________ (1) This hotel was under renovation during the 2022 period. Food and Beverage Revenue . Food and beverage revenue increased $68.9 million, or 76.3%, to $159.2 million during 2022 compared to 2021. This increase is primarily driven by the recovery from the COVID-19 pandemic. We experienced an aggregate increase in food and beverage revenue of $50.2 million at 13 comparable hotel properties as well as increases of $3.0 million, $14.2 million and $1.4 million at the Mr. C Beverly Hills Hotel, The Ritz-Carlton Reserve Dorado Beach and the Four Seasons Resort Scottsdale, respectively. 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 $22.2 million, or 39.1%, to $78.8 million during 2022 compared to 2021. The increase is attributable to higher other hotel revenue of $11.9 million at 11 comparable hotel properties, and an increase of $917,000 at the Mr. C Beverly Hills Hotel, $8.9 million at The Ritz-Carlton Reserve Dorado Beach, as well as $657,000 at the Four Seasons Resort Scottsdale, partially offset by a decrease of $257,000 at Marriott Seattle Waterfront and $21,000 at the Pier House Resort & Spa. Rooms Expense . Rooms expense increased $34.6 million, or 57.8%, to $94.4 million in 2022 compared to 2021. The increase is attributable to an aggregate increase in rooms expense of $22.9 million at 13 comparable hotel properties due to the hotel properties recovering from the COVID-19 pandemic and increases of $2.7 million at the Mr. C Beverly Hills Hotel, $8.5 million at The Ritz-Carlton Reserve Dorado Beach as well as $538,000 at the Four Seasons Resort Scottsdale. Food and Beverage Expense . Food and beverage expense increased $50.4 million, or 67.0%, to $125.6 million during 2022 compared to 2021. The increase is attributable to an aggregate increase of $33.6 million at 13 comparable hotel properties and increases of $2.8 million at the Mr. C Beverly Hills Hotel, $12.7 million at The Ritz-Carlton Reserve Dorado Beach and $1.3 million at the Four Seasons Resort Scottsdale. Other Operating Expenses . Other operating expenses increased $66.5 million, or 47.8%, to $205.4 million in 2022 compared to 2021. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and 93 indirect expenses associated with support departments and incentive management fees. We experienced an increase of $8.0 million in direct expenses and $58.4 million in indirect expenses and incentive management fees in 2022 compared to 2021. Direct expenses were 4.3% of total hotel revenue in 2022 and 4.9% in 2021. The increase in direct expenses is associated with higher direct expenses of approximately $2.9 million at 11 comparable hotel properties as they are recovering from the COVID-19 pandemic, as well as an increase of $61,000 at the Mr. C Beverly Hills Hotel, $5.0 million at The Ritz-Carlton Reserve Dorado Beach as well as $193,000 at the Four Seasons Resort Scottsdale, the increases are partially offset by lower direct expenses of $58,000 at the Capital Hilton and Marriott Seattle Waterfront. The increase in indirect expenses is attributable to increases in (i) general and administrative costs of $24.6 million comprising an increase of $15.6 million at our 13 comparable hotel properties and $9.1 million at the three acquired hotel properties; (ii) marketing costs of $15.7 million comprising an increase of $11.5 million at our 13 comparable hotel properties and $4.2 million at the three acquired hotel properties; (iii) repairs and maintenance of $6.2 million comprising an increase of $2.5 million at our 13 comparable hotel properties and $3.7 million at the three acquired hotel properties; (iv) lease expense of $1.3 million comprising an increase of $1.1 million at our 13 comparable hotel properties and $250,000 at the three acquired hotel properties; (v) energy costs of $6.7 million comprised of an increase of $3.3 million at our 13 comparable hotel properties and $3.4 million at the three acquired hotel properties; and (vi) incentive management fees of $3.8 million comprising an increase of $2.9 million at our 13 comparable hotel properties and $888,000 at the three acquired hotel properties. Management Fees . Base management fees increased $7.0 million, or 53.6%, to $20.1 million in 2022 compared to 2021. Management fees increased approximately $4.9 million at 12 of our comparable hotel properties, $382,000 at the Mr. C Beverly Hills Hotel, $1.9 million at The Ritz-Carlton Reserve Dorado Beach and $157,000 at the Four Seasons Resort Scottsdale. These increases were partially offset by a decrease of $444,000 at the Sofitel Chicago Magnificent Mile primarily as a result of a legal settlement with Accor. See Item 3. “Legal Proceedings.” Property Taxes, Insurance and Other . Property taxes, insurance and other decreased $4.2 million, or 12.1%, to $30.8 million in 2022 compared to 2021. The decrease primarily resulted from an aggregate decrease of $8.5 million at five hotel properties, including a $5.5 million and $2.5 million decrease at the Sofitel Chicago Magnificent Mile and Marriott Seattle Waterfront, respectively, due to lower property tax assessments. The decrease is partially offset by increases of $768,000 at the Mr. C Beverly Hills Hotel, $2.1 million at The Ritz-Carlton Reserve Dorado Beach and $78,000 at the Four Seasons Resort Scottsdale as a result of their acquisitions, as well as an aggregate increase of approximately $1.3 million at eight hotel properties. Depreciation and Amortization . Depreciation and amortization increased $4.4 million, or 5.9%, to $78.1 million for 2022 compared to 2021. The increase comprised $1.5 million at the Mr. C Beverly Hills Hotel, $5.1 million at The Ritz-Carlton Reserve Dorado Beach and $781,000 at the Four Seasons Resort Scottsdale as a result of their acquisitions as well as an aggregate increase of $2.2 million at the Park Hyatt Beaver Creek Resort & Spa, Marriott Seattle Waterfront, The Ritz-Carlton St. Thomas and The Ritz-Carlton Lake Tahoe. These increases were partially offset by an aggregate decrease of $5.2 million at nine comparable hotel properties primarily due to fully depreciated assets. Advisory Services Fee. Advisory services fee increased $6.2 million, or 27.4%, to $28.8 million in 2022 compared to 2021 due to increases in the base advisory fee of $2.0 million, reimbursable expenses of $2.4 million, equity-based compensation of $1.1 million, and incentive fee of $803,000. In 2022, we recorded an advisory services fee of $28.8 million, which included a base advisory fee of $12.8 million, reimbursable expenses of $4.7 million, $10.6 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 $803,000. In 2021, we recorded an advisory services fee of $22.6 million, which included a base advisory fee of $10.8 million, reimbursable expenses of $2.3 million and $9.5 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. (Gain) loss on legal settlements . In 2021, we recognized a gain of $728,000 related to the settlement of a transfer tax matter with the City of San Francisco and $189,000 related to a billing dispute. During 2022, the Company received an additional payment of approximately $114,000 related to accrued interest on the initial settlement amount associated with the City of San Francisco transfer tax matter. Transaction costs . In 2021, we recognized $563,000 of transaction costs associated with the acquisition of the Mr. C Beverly Hills Hotel that closed on August 5, 2021. There were no transaction costs in 2022. 94 Corporate General and Administrative . Corporate general and administrative expense was $18.1 million in 2022 and $8.7 million in 2021. The increase in corporate general and administrative expenses is primarily due to higher professional fees of $1.2 million, higher public company costs of $108,000, higher reimbursed operating expenses of Ashford Securities of $7.5 million and higher miscellaneous expenses of $572,000. During 2022, the funding estimate to Ashford Securities was revised based on the latest capital raise estimates of the aggregate capital raised through Ashford Securities that resulted in additional expense of approximately $7.2 million. Gain (loss) on Insurance Settlement and Disposition of Assets . In 2021, we recognized a gain of $481,000 associated with proceeds received from an insurance claim, a gain of $18,000 upon disposition of certain fixed assets, as well as a gain of $197,000 associated with the sale of certain ERFP assets to Ashford Inc. There was no such gain (loss) in 2022. Equity in Earnings (Loss) of Unconsolidated Entity . In 2022 and 2021, we recorded equity in loss of unconsolidated entity of $328,000 and $252,000, respectively, related to our investment in OpenKey. Interest Income . Interest income was $2.7 million and $48,000 in 2022 and 2021, respectively. The increase in interest income was primarily related to higher cash balances and higher interest rates in 2022 compared to 2021. Interest Expense and Amortization of Discounts and Loan Costs . Interest expense and amortization of discounts and loan costs increased $21.3 million, or 68.8%, to $52.2 million for 2022 compared to 2021. The increase is 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 2022 and 2021 were 1.91% and 0.10%, respectively. Write-off of Loan Costs and Exit Fees. Write-off of loan costs and exit fees was $146,000 in 2022 primarily resulting from the refinance of the Park Hyatt Beaver Creek Resort & Spa in February 2022, the assumption of the mortgage loan from the acquisition of The Ritz-Carlton Reserve Dorado Beach, the extension of The Ritz-Carlton St. Thomas mortgage loan and the amendments associated with Bardessono Hotel and Spa and The Ritz-Carlton Lake Tahoe mortgage loans. Write-off of loan costs and exit fees was $2.0 million in 2021. This included a $1.2 million write-off of unamortized loan costs upon the payoff of our secured term loan payoff and $387,000 of third-party fees from 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. These third-party fees incurred in conjunction with these amendments were expensed in accordance with applicable accounting guidance. In addition, there was a write-off of loan costs of approximately $419,000 upon the $20 million pay-down of the mortgage loan assumed with the acquisition of the Mr. C Beverly Hills Hotel. Realized and Unrealized Gain (Loss) on Derivatives . Realized and Unrealized gain on derivatives of $5.0 million for 2022 consisted of unrealized gains of approximately $3.8 million on interest rate caps and approximately $1.2 million on warrants and realized gains of $497,000 associated with payments received from counterparties on interest rate caps. Realized and unrealized gain on derivatives of $32,000 for 2021 consisted of an unrealized gain of approximately $94,000 on warrants, partially offset by an unrealized loss of approximately $62,000 on interest rate caps. Income Tax (Expense) Benefit . Income tax expense increased $2.7 million, from $1.3 million in 2021 to $4.0 million in 2022. This increase was primarily due to an increase in the profitability of our TRS entities in 2022 compared to 2021. (Income) Loss Attributable to Noncontrolling Interest in Consolidated Entities . Our noncontrolling interest partner in consolidated entities was allocated income of $2.1 million and a loss of $2.7 million in 2022 and 2021, respectively. At both December 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 a net loss of $476,000 in 2022 and $3.6 million in 2021. Redeemable noncontrolling interests represented ownership interests in Braemar OP of approximately 7.69% and 8.83% as of December 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: • recurring maintenance necessary to maintain our hotel properties in accordance with brand standards; • interest expense and scheduled principal payments on outstanding indebtedness; 95 • distributions, if any, in the form of dividends on our common stock, necessary to qualify for taxation as a REIT; • dividends on our preferred stock; • capital expenditures to improve our hotel properties; and • advisory fees payable to Ashford LLC. 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, 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 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 December 31, 2022, our $435 million mortgage loan was in a cash trap and approximately $298,000 of our restricted cash was subject to this cash trap. Our estimated future obligations as of December 31, 2022 include both current and long-term obligations. With respect to our indebtedness, as discussed in note 6 to our consolidated financial statements, we have current obligations of $667.0 million and long-term obligations of $669.8 million. As of December 31, 2022, we held extension options to extend the principal for all of the debt due in the next twelve months except for $189.5 million. As discussed in note 17 to our consolidated financial statements, under our operating leases we have current obligations of approximately $3.4 million and long-term obligations of approximately $154.6 million. Additionally, as discussed in note 16 to our consolidated financial statements, we have short-term capital commitments of approximately $39.4 million. 96 Equity Transactions On December 7, 2022, our board of directors approved a new 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, having an aggregate value of up to $25 million. The board of director’s authorization replaced any previous repurchase authorizations. During the year ended December 31, 2022, we repurchased 1.5 million shares of our common stock for approximately $6.1 million. Subsequent to December 31, 2022, the Company repurchased approximately 3.9 million shares of its common stock for approximately $18.9 million. The Company repurchased approximately 5.4 million shares of its common stock for approximately $25.0 million and has completed the $25.0 million repurchase authorization. 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 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 March 8, 2023, the Company has issued approximately 16.4 million shares of Series E Preferred Stock and received net proceeds of approximately $369.5 million and issued approximately 2.0 million shares of Series M Preferred Stock and received net proceeds of approximately $47.6 million. The Company also issued approximately 68,000 shares of Series E Preferred Stock and approximately 4,000 shares of Series M Preferred Stock, respectively, pursuant to the dividend reinvestment plan. On February 21, 2023, the Company announced the closing of its offering of the Series E Preferred Stock and Series M Preferred Stock. 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 March 8, 2023, the Company has sold approximately 1.7 million shares of common stock and received proceeds of approximately $10.0 million under the SEDA. 97 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 March 8, 2023, 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 an 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 March 8, 2023, 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. 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%. 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 consolidated financial statements. On October 27, 2022, the Company amended its $40.0 million mortgage loan secured by the Bardessono Hotel and Spa. Terms of the agreement replaced the variable interest rate of LIBOR + 2.55% with SOFR + 2.65%. On October 27, 2022, the Company amended its $54.0 million mortgage loan secured by the Ritz-Carlton Lake Tahoe. Terms of the agreement replaced the variable interest rate of LIBOR + 2.10% with SOFR + 2.20%. On September 29, 2022, the Company amended its $80.0 million mortgage loan secured by the Pier House Resort & Spa. Terms of the agreement replaced the variable interest rate of LIBOR + 1.85% with SOFR + 1.95%. On December 23, 2022, we entered into a $100 million mortgage loan, secured by the Four Seasons Resort Scottsdale at Troon North. The mortgage loan has a three-year initial term and two one-year extension options, subject to satisfaction of certain conditions. The mortgage loan is interest only and bears interest at a rate of SOFR + 3.75% with a SOFR floor of 1.00%. On January 18, 2023, the Company repaid its $54.0 million mortgage loan secured by The Ritz-Carlton Reserve Dorado Beach. Sources and Uses of Cash We had approximately $261.5 million and $216.0 million of cash and cash equivalents at December 31, 2022 and December 31, 2021, respectively. We anticipate using funds to pay for capital expenditures for our 16 hotel properties, estimated to be approximately $80.0 million in fiscal year 2023 and debt interest payments, estimated to be approximately $80.8 million in 2023 based on future payments using the one month LIBOR/SOFR rate as of December 31, 2022. This estimate will fluctuate based on changes in the one-month LIBOR/SOFR rate and any future changes in outstanding indebtedness. Net Cash Flows Provided by (Used in) Operating Activities. Net cash flows provided by operating activities were $109.5 million and $64.0 million for the twelve months ended December 31, 2022 and 2021, respectively. Cash flows from operations were impacted by changes in hotel operations of our 13 comparable hotel properties as well as the acquisitions of the Mr. C Beverly Hills Hotel on August 5, 2021, The Ritz-Carlton Reserve Dorado Beach on March 11, 2022 and the Four Seasons Resort Scottsdale on December 1, 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 and settling with hotel managers. 98 Net Cash Flows Provided by (Used in) Investing Activities . For the year ended December 31, 2022, net cash flows used in investing activities were $402.2 million. These cash outflows were primarily attributable to $49.1 million of capital improvements made to various hotel properties, approximately $354.4 million associated with the acquisition of The Ritz-Carlton Reserve Dorado Beach and the Four Seasons Resort Scottsdale and additional investments in OpenKey of $328,000, partially offset by cash inflows of $1.7 million associated with an amendment to a hotel management agreement. Our capital improvements consisted of approximately $28.0 million of return on investment capital projects and approximately $21.2 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 sets. Renewal and replacement capital projects are designed to maintain the quality and competitiveness of our hotels. For the year ended December 31, 2021, net cash flows used in investing activities were $41.7 million. These cash outflows were primarily attributable to $25.6 million of capital improvements made to various hotel properties, approximately $17.6 million associated with the acquisition of the Mr. C Beverly Hills Hotel and earnest money associated with the acquisition of The Ritz-Carlton Reserve Dorado Beach, partially offset by proceeds of $1.8 million from the sale of certain ERFP assets to Ashford Inc. Our capital improvements consisted of approximately $12.8 million of return on investment capital projects and approximately $12.9 million of renewal and replacement capital projects. Net Cash Flows Provided by Financing Activities. For the year ended December 31, 2022, net cash flows provided by financing activities were $345.1 million. Cash inflows primarily consisted of debt borrowings of $170.5 million, $278.6 million from the issuance of preferred stock and $167,000 of proceeds from in-the-money interest rate caps. The cash inflows were partially offset by repayments of indebtedness of $68.5 million, $20.8 million of dividend and distribution payments, $7.4 million related to payments for stock repurchases, $4.1 million of payments for loan costs and fees, $3.0 million of payments for derivatives, and $499,000 for cash redemptions of Series E and Series M preferred stock. For the year ended December 31, 2021, net cash flows provided by financing activities were $128.0 million. Cash inflows primarily consisted of net proceeds of $83.2 million from the issuance of our Convertible Senior Notes, $102.5 million from the issuance of common stock, $36.9 million from the issuance of preferred stock and contributions of $1.2 million from a noncontrolling interest in consolidated entities. The cash inflows were partially offset by repayments of indebtedness of $84.2 million, $9.1 million of dividend and distribution payments and $1.9 million of payments for loan costs and fees. Inflation We rely entirely on the performance of our properties and the ability of the properties’ managers to increase revenues to keep pace with inflation. Hotel operators can generally increase room rates rather quickly, but competitive pressures may limit their ability to raise rates faster than inflation. Our general and administrative costs, real estate and personal property taxes, property and casualty insurance, and utilities are subject to inflation as well. Critical Accounting Policies and Estimates Our accounting policies are fully described in note 2 to our consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data.” We believe that the following discussion addresses our most critical accounting policies, representing those policies considered most vital to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, complex judgments and can include significant estimates. Impairment of Investments in Hotel Properties. Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property’s net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating the impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. Asset write-downs resulting from property damage are recorded up to the amount of the allocable property insurance deductible in the period that the property damage occurs. There was no impairment charge recorded for the years ended December 31, 2022, 2021 and 2020. Income Taxes. At December 31, 2022 and 2021, we had a valuation allowance of approximately $18.6 million and $17.3 million, respectively, to partially reserve our deferred tax assets of our TRSs. At each reporting date, we evaluate whether it is more likely than not that we will utilize all or a portion of our deferred tax assets. We consider all available positive and negative evidence, including historical results of operations, projected future taxable income, carryback potential and scheduled 99 reversals of deferred tax liabilities. In evaluating the objective evidence that historical results provide, we consider three years of consolidated cumulative operating income (loss). At December 31, 2022, we had TRS net operating loss carry forwards for U.S. federal income tax purposes of $68.5 million, of which $50.7 million is subject to expiration and will begin to expire in 2023. The remainder was generated after December 31, 2017 and is not subject to expiration under the Tax Cuts and Jobs Act. The loss carry forwards subject to expiration may be available to offset future taxable income, if any, for 2023 through 2034, with the remainder available to offset taxable income beyond 2034; however, there could be substantial limitations on their use imposed by the Code. At December 31, 2022, Braemar Hotels & Resorts Inc., our REIT, had net operating loss carryforwards for U.S. federal income tax purposes of $109.7 million based on the latest filed tax return. Of this amount, $2.2 million is subject to expiration in in 2033. The remainder is not subject to expiration under the Tax Cuts and Jobs Act. Management determined that it is more likely than not that $18.6 million of our net deferred tax assets will not be realized and a valuation allowance has been recorded accordingly. The “Income Taxes” Topic of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance requires us to determine whether tax positions we have taken or expect to take in a tax return are more likely than not to be sustained upon examination by the appropriate taxing authority based on the technical merits of the positions. Tax positions that do not meet the more likely than not threshold would be recorded as additional tax expense in the current period. We analyze all open tax years, as defined by the statute of limitations for each jurisdiction, which includes the federal jurisdiction and various states. We classify interest and penalties related to underpayment of income taxes as income tax expense. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and cities. Tax years 2018 through 2022 remain subject to potential examination by certain federal and state taxing authorities. Recently Adopted Accounting Standards In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, this ASU is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. We adopted ASU 2020-06 through the modified retrospective method on January 1, 2022. Upon adoption, our Convertible Senior Notes are recorded as a single debt instrument at amortized cost, instead of being recorded as both a liability and equity. The Company ceased recording non-cash interest expense associated with amortization of the debt discount associated with the conversion features. The adoption of ASU 2020-06 resulted in an adjustment to additional paid-in capital, accumulated deficit, and the carrying value of our Convertible Senior Notes. The impact of adopting ASU 2020-06 includes an increase to “indebtedness, net” and a decrease to stockholders’ equity of approximately $5.6 million. The adoption of this standard did not have a material impact on our consolidated financial statements, beyond the impact to our Convertible Senior Notes described above. The impact of adoption on our consolidated statement of operations for the year ended December 31, 2022 resulted in a decrease to net interest expense by approximately $1.1 million relating to the non-cash interest expense associated with amortization of the debt discount. The impact on basic and diluted net loss per share of common stock attributable to common stockholders for the year ended December 31, 2022 was $(0.02). 100 In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provides optional guidance through December 31, 2022 to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. In January 2021, the FASB issued 2021-01, Reference Rate Reform (Topic 848), Scope , which further clarified the scope of the reference rate reform optional practical expedients and exceptions outlined in Topic 848. The amendments in ASU Nos. 2020-04 and 2021-01 apply to contract modifications that replace a reference rate affected by reference rate reform, providing optional expedients regarding the measurement of hedge effectiveness in hedging relationships that have been modified to replace a reference rate. The Company applied the optional expedient in evaluating debt modifications converting from LIBOR to SOFR. There was no material impact as a result of this adoption. Non-GAAP Financial Measures The following non-GAAP presentations of EBITDA, EBITDAre, Adjusted EBITDAre, 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, gain/loss on insurance settlements, 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 are useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions. 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. 101 The following table reconciles net income (loss) to EBITDA, EBITDAre and Adjusted EBITDAre (in thousands) (unaudited): Year Ended December 31, 2022 2021 2020 Net income (loss) $ 19,348 $ (32,911) $ (124,677) Interest expense and amortization of loan costs 52,166 30,901 45,104 Depreciation and amortization 78,122 73,762 73,371 Income tax expense (benefit) 4,043 1,324 (4,406) Equity in (earnings) loss of unconsolidated entity 328 252 217 Company’s portion of EBITDA of OpenKey (334) (250) (214) EBITDA 153,673 73,078 (10,605) (Gain) loss on insurance settlement and disposition of assets — (696) (10,149) EBITDAre 153,673 72,382 (20,754) Amortization of favorable (unfavorable) contract assets (liabilities) 463 512 834 Transaction and conversion costs 9,679 2,637 1,370 Other (income) expense (497) — 5,126 Write-off of loan costs and exit fees 146 1,963 3,920 (Gain) loss on insurance settlements (55) — — Unrealized (gain) loss on derivatives (4,464) (32) (4,959) Stock/unit-based compensation 11,285 10,204 7,892 Legal, advisory and settlement costs 2,170 (208) 2,023 Company’s portion of adjustments to EBITDAre of OpenKey 8 7 13 Adjusted EBITDAre $ 172,408 $ 87,465 $ (4,535) 102 The following table reconciles net income (loss) to EBITDA attributable to the Company and OP unitholders on a property-by-property basis for each of our hotel properties owned and on a corporate basis during the year ended December 31, 2022. The results of The Ritz-Carlton Reserve Dorado Beach and Four Seasons Resort Scottsdale are included from its acquisition date through December 31, 2022 (in thousands) (unaudited): Year Ended December 31, 2022 Capital Hilton Hilton La Jolla Torrey Pines Sofitel Chicago Magnificent Mile Bardessono Hotel and Spa Pier House Resort & Spa Hotel Yountville Park Hyatt Beaver Creek Resort & Spa The Notary Hotel The Clancy The Ritz-Carlton Sarasota The Ritz-Carlton Lake Tahoe Marriott Seattle Waterfront The Ritz-Carlton St. Thomas Mr. C. Beverly Hills Hotel The Ritz-Carlton Dorado Beach Four seasons Resort Scottsdale Hotel Total Corporate / Allocated (1) Braemar Hotels & Resorts Inc. Net income (loss) $ 1,125 $ 13,162 $ 2,226 $ 4,488 $ 12,377 $ 2,547 $ 5,668 $ (505) $ (2,872) $ 17,641 $ 5,020 $ 3,790 $ 18,920 $ (1,390) $ 7,583 $ 933 $ 90,713 $ (71,365) $ 19,348 Non-property adjustments (2) — — — — — — 76 (16) — — — — (40) — — — 20 (20) — Interest income (55) (73) — — — — — (5) (24) (52) — (12) (8) — — (4) (233) 233 — Interest expense — — — 1,674 2,802 2,165 3,228 — — 4,919 2,017 26 2,557 1,822 1,747 — 22,957 26,753 49,710 Amortization of loan costs — — — 135 307 102 713 — — 370 150 — 43 167 — — 1,987 469 2,456 Depreciation and amortization 7,420 4,118 5,975 2,371 2,611 2,046 3,932 8,028 11,226 5,326 3,234 5,406 8,072 2,452 5,124 781 78,122 — 78,122 Income tax expense (benefit) — — — — — — — 19 — — — — 415 — 333 — 767 3,276 4,043 Non-hotel EBITDA ownership expense (income) 1,684 121 87 459 18 98 3 152 24 2,173 962 7 178 106 100 — 6,172 (6,172) — Hotel EBITDA including amounts attributable to noncontrolling interest 10,174 17,328 8,288 9,127 18,115 6,958 13,620 7,673 8,354 30,377 11,383 9,217 30,137 3,157 14,887 1,710 200,505 (46,826) 153,679 Less: EBITDA adjustments attributable to consolidated noncontrolling interest (2,543) (4,333) — — — — — — — — — — — — — — (6,876) 6,876 — Equity in earnings (loss) of unconsolidated entities — — — — — — — — — — — — — — — — — 328 328 Company’s portion of EBITDA of OpenKey — — — — — — — — — — — — — — — — — (334) (334) Hotel EBITDA attributable to the Company and OP unitholders $ 7,631 $ 12,995 $ 8,288 $ 9,127 $ 18,115 $ 6,958 $ 13,620 $ 7,673 $ 8,354 $ 30,377 $ 11,383 $ 9,217 $ 30,137 $ 3,157 $ 14,887 $ 1,710 $ 193,629 $ (39,956) $ 153,673 __________________ (1) Represents expenses not recorded at the individual hotel property level. (2) Includes allocated amounts which were not specific to hotel properties, such as gain on sale of hotel property, corporate taxes, insurance and legal expenses. 103 The following table reconciles net income (loss) to EBITDA attributable to the Company and OP unitholders on a property-by-property basis for each of our hotel properties owned and on a corporate basis during the year ended December 31, 2021. The results of The Mr. C Beverly Hills Hotel are included from its acquisition date through December 31, 2021 (in thousands) (unaudited): Year Ended December 31, 2021 Capital Hilton Hilton La Jolla Torrey Pines Sofitel Chicago Magnificent Mile Bardessono Hotel and Spa Pier House Resort & Spa Hotel Yountville Park Hyatt Beaver Creek Resort & Spa The Notary Hotel The Clancy The Ritz-Carlton Sarasota The Ritz-Carlton Lake Tahoe Marriott Seattle Waterfront The Ritz-Carlton St. Thomas Mr. C Beverly Hills Hotel Hotel Total Corporate / Allocated (1) Braemar Hotels & Resorts Inc. Net income (loss) $ (11,082) $ 1,915 $ (10,181) $ 5,053 $ 13,411 $ 2,310 $ 4,005 $ (6,261) $ (15,467) $ 15,342 $ 2,793 $ (293) $ 17,453 $ (1,630) $ 17,368 $ (50,279) $ (32,911) Non-property adjustments (2) — — — (117) (96) — — — — 1 1 — (671) 936 54 (54) — Interest income — — — — — — — — (3) (22) — (12) (2) — (39) 39 — Interest expense — — — 1,039 1,606 1,303 2,075 — — 3,518 1,205 54 2,134 644 13,578 15,117 28,695 Amortization of loan costs — — — 162 294 180 14 — — 352 144 — 68 66 1,280 926 2,206 Depreciation and amortization 7,448 4,293 6,582 2,581 2,883 2,572 3,526 8,333 13,258 6,347 2,931 3,965 8,071 972 73,762 — 73,762 Income tax expense (benefit) — (43) — — — — — (7) — — — — 101 — 51 1,273 1,324 Non-hotel EBITDA ownership expense (income) 292 70 39 490 (59) 68 (11) (141) (5) 125 761 (157) 396 64 1,932 (1,932) — Hotel EBITDA including amounts attributable to noncontrolling interest (3,342) 6,235 (3,560) 9,208 18,039 6,433 9,609 1,924 (2,217) 25,663 7,835 3,557 27,550 1,052 107,986 (34,910) 73,076 Less: EBITDA adjustments attributable to consolidated noncontrolling interest 839 (1,562) — — — — — — — — — — — — (723) 723 — Equity in earnings (loss) of unconsolidated entities — — — — — — — — — — — — — — — 252 252 Company’s portion of EBITDA of OpenKey — — — — — — — — — — — — — — — (250) (250) Hotel EBITDA attributable to the Company and OP unitholders $ (2,503) $ 4,673 $ (3,560) $ 9,208 $ 18,039 $ 6,433 $ 9,609 $ 1,924 $ (2,217) $ 25,663 $ 7,835 $ 3,557 $ 27,550 $ 1,052 $ 107,263 $ (34,185) $ 73,078 __________________ (1) Represents expenses not recorded at the individual hotel property level. (2) Includes allocated amounts which were not specific to hotel properties, such as gain on sale of hotel property, corporate taxes, insurance and legal expenses. 104 The following table reconciles net income (loss) to EBITDA attributable to the Company and OP unitholders on a property-by-property basis for each of our hotel properties owned and on a corporate basis during the year ended December 31, 2020 (in thousands) (unaudited): Year Ended December 31, 2020 Capital Hilton Hilton La Jolla Torrey Pines Sofitel Chicago Magnificent Mile Bardessono Hotel and Spa Pier House Resort & Spa Hotel Yountville Park Hyatt Beaver Creek Resort & Spa The Notary Hotel The Clancy The Ritz-Carlton Sarasota The Ritz-Carlton Lake Tahoe Marriott Seattle Waterfront The Ritz-Carlton St. Thomas Hotel Total Corporate / Allocated (1) Braemar Hotels & Resorts Inc. Net income (loss) $ (12,722) $ (4,013) $ (12,230) $ (4,360) $ 766 $ (4,772) $ (2,204) $ (10,642) $ (16,177) $ (294) $ (3,913) $ (6,001) $ 4,844 $ (71,718) $ (52,959) $ (124,677) Non-property adjustments (2) — — — 100 200 128 — — — 250 135 — (10,149) (9,336) 9,336 — Interest income (12) (16) — — — — — (6) (9) (29) — (27) (1) (100) 100 — Interest expense — — — 1,474 2,426 1,865 2,281 — — 4,634 1,769 — 2,283 16,732 24,963 41,695 Amortization of loan costs — — — 145 282 153 13 — — 334 136 — 104 1,167 2,242 3,409 Depreciation and amortization 7,648 5,032 6,667 3,126 3,006 2,441 4,562 8,768 12,028 5,992 2,772 3,949 7,380 73,371 — 73,371 Income tax expense (benefit) — (703) — — — — — (11) — — — — (83) (797) (3,609) (4,406) Non-hotel EBITDA ownership expense (income) 10 53 175 533 27 99 325 258 463 615 968 346 246 4,118 (4,118) — Hotel EBITDA including amounts attributable to noncontrolling interest (5,076) 353 (5,388) 1,018 6,707 (86) 4,977 (1,633) (3,695) 11,502 1,867 (1,733) 4,624 13,437 (24,045) (10,608) Less: EBITDA adjustments attributable to consolidated noncontrolling interest 1,269 (88) — — — — — — — — — — — 1,181 (1,181) — Equity in earnings (loss) of unconsolidated entities — — — — — — — — — — — — — — 217 217 Company's portion of EBITDA of OpenKey — — — — — — — — — — — — — — (214) (214) Hotel EBITDA attributable to the Company and OP unitholders $ (3,807) $ 265 $ (5,388) $ 1,018 $ 6,707 $ (86) $ 4,977 $ (1,633) $ (3,695) $ 11,502 $ 1,867 $ (1,733) $ 4,624 $ 14,618 $ (25,223) $ (10,605) _____________ (1) Represents expenses not recorded at the individual hotel property level. (2) Includes allocated amounts which were not specific to hotel properties, such as gain on sale of hotel property, corporate taxes, insurance and legal expenses. 105 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 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, gain/loss on insurance settlements and non-cash items such as deemed dividends on redeemable preferred stock, 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 present FFO and Adjusted FFO because we consider FFO and Adjusted FFO important supplemental measures of our operational performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO and Adjusted FFO when reporting their results. FFO and Adjusted FFO are intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and Adjusted FFO exclude depreciation and amortization related to real estate assets, gains and losses from real property dispositions and impairment losses on real estate assets, FFO and Adjusted FFO provide performance measures that, when compared year over year, reflect the effect to operations from trends in occupancy, guestroom rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. 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 consolidated financial statements. 106 The following table reconciles net income (loss) to FFO and Adjusted FFO (in thousands) (unaudited): Year Ended December 31, 2022 2021 2020 Net income (loss) $ 19,348 $ (32,911) $ (124,677) (Income) loss attributable to noncontrolling interest in consolidated entities (2,063) 2,650 6,436 Net (Income) loss attributable to redeemable noncontrolling interests in operating partnership 476 3,597 12,979 Preferred dividends (21,503) (8,745) (10,219) Deemed dividends on preferred stock (6,954) — — Gain (loss) on extinguishment of preferred stock — (4,595) — Net income (loss) attributable to common stockholders (10,696) (40,004) (115,481) Depreciation and amortization on real estate (1) 75,508 71,072 70,426 Net income (loss) attributable to redeemable noncontrolling interests in operating partnership (476) (3,597) (12,979) Equity in (earnings) loss of unconsolidated entity 328 252 217 (Gain) loss on insurance settlement and disposition of assets — (696) (10,149) Company’s portion of FFO of OpenKey (333) (251) (216) FFO available to common stockholders and OP unitholders 64,331 26,776 (68,182) Deemed dividends on preferred stock 6,954 — — (Gain) loss on extinguishment of preferred stock — 4,595 — Transaction and conversion costs 9,679 2,637 1,370 Other (income) expense — — 5,126 Interest expense accretion on refundable membership club benefits 723 772 818 Write-off of loan costs and exit fees 146 1,963 3,920 Amortization of loan costs (1) 2,365 2,121 3,332 (Gain) loss on insurance settlements (55) — — Unrealized (gain) loss on derivatives (4,464) (32) (4,959) Stock/unit-based compensation 11,285 10,204 7,892 Legal, advisory and settlement costs 2,170 (208) 2,023 Company’s portion of adjustments to FFO of OpenKey 8 7 13 Adjusted FFO available to common stockholders and OP unitholders 93,142 48,835 $ (48,647) ____________________ (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: Year Ended December 31, 2022 2021 2020 Depreciation and amortization on real estate $ (2,614) $ (2,690) $ (2,945) Amortization of loan costs (91) (87) (77) 107