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 Hospitality” 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: • our business and investment strategy; • anticipated or expected purchases or sales of assets; • our projected operating results; • completion of any pending transactions; • our understanding of our competition; • 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: • the factors discussed in our Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2023 (the “2022 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; • rising interest rates and inflation; • macroeconomic conditions, such as a prolonged period of weak economic growth, and volatility in capital markets; • uncertainty in the business sector and market volatility due to the failures of Silicon Valley Bank, New York Signature Bank and First Republic Bank; • 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; • 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; 32 • 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 Hospitality 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 2022 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. 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 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 September 30, 2023, we owned interests in 16 hotel properties in seven states, the District of Columbia, Puerto Rico and St. Thomas, U.S. Virgin Islands with 4,192 total rooms, or 3,957 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 September 30, 2023, Remington Hospitality , 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. Mr. Monty J. Bennett is chairman and chief executive officer of Ashford Inc. and, together with Mr. Archie Bennett, Jr., as of September 30, 2023, hold a controlling interest in Ashford Inc. The Bennetts owned approximately 610,261 shares of Ashford Inc. common stock, which represented an approximate 19.0% ownership interest in Ashford Inc., and owned 18,758,600 shares of Ashford Inc. Series D Convertible Preferred Stock, which, along with all unpaid accrued and accumulated dividends thereon, was convertible (at a conversion price of $117.50 per share) into an additional approximate 4,154,013 shares 33 of Ashford Inc. common stock, which if converted as of September 30, 2023 would have increased the Bennetts’ ownership interest in Ashford Inc. to 64.7%. The 18,758,600 shares of 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 September 30, 2023, Mr. Monty J. Bennett, chairman of our board of directors and his father, Mr. Archie Bennett, Jr., together owned approximately 3,059,526 shares of our common stock (including common units, long-term incentive plan (“LTIP”) units and performance LTIP units), which represented an approximate 4.2% ownership in the Company. Recent Developments Effective June 30, 2023, LIBOR is no longer published. Accordingly all variable interest rate mortgage loans held by the Company that used the LIBOR index transitioned to SOFR beginning on July 1, 2023. Not all lenders will execute loan amendment documents and instead will defer to original loan documents that dictate changes in index rates. On July 31, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with Braemar OP (the “Borrower”), the lenders party thereto (the “Lenders”) and Bank of America, N.A., as administrative agent and L/C Issuer (as defined in the Credit Agreement). Bank of America, N.A. acted as administrative agent and lead arranger on the transaction. Syndicate bank participants include TBK Bank and MidFirst Bank. The Credit Agreement evidences a $200 million secured credit facility (the “Facility”) comprised of a secured term loan facility of $150 million (the “Term Loan Facility”) and a secured revolving credit facility of $50 million (the “Revolving Credit Facility”). Upon satisfaction of certain conditions, including the addition of new Borrowing Base Properties (as defined in the Credit Agreement), the Facility may be increased to a size of not more than $400 million in the aggregate. The maximum availability under the Facility is determined on a quarterly basis and limited to the lesser of (i) $200 million (subject to increase of up to $400 million in the aggregate); (ii) 55% of the appraised value of all Borrowing Base Properties; and (iii) the DSC Amount (as defined below). The initial Borrowing Base Properties include the Company’s Ritz-Carlton Sarasota, Bardessono Hotel and Spa and Hotel Yountville hotel properties (the “Initial Borrowing Base Properties”). The “DSC Amount” means the maximum principal amount that can be supported from the Adjusted NOI (as defined in the Credit Agreement) from the Borrowing Base Properties assuming (i) a 30-year amortization and an interest rate which is the greater of (a) the ten (10) year U.S. Treasury Rate plus 2.50% and (b) 7.50%; and (ii) a minimum debt service coverage of 1.75 to 1.00. The proceeds of the Term Loan Facility were used to repay the mortgage debt associated with The Ritz-Carlton Sarasota, Bardessono Hotel and Spa and Hotel Yountville, which will serve as the Initial Borrowing Base Properties for the financing. In addition, at closing, the Company drew down approximately $46 million under the Revolving Credit Facility. The Facility is a three-year, interest-only facility with all outstanding principal due at maturity, with a one-year extension option, subject to the satisfaction of certain conditions, including the payment of an Extension Fee (as defined in the Credit Agreement) equal to 20 basis points (0.20%) of the outstanding Facility amount. The Credit Agreement is guaranteed by the Company, the Borrower and certain other eligible subsidiaries of the Company and secured by: (i) perfected lien mortgages or deeds of trust and security interests in the Borrowing Base Properties (as defined in the Credit Agreement); (ii) assignments of leases and rents with respect to the Borrowing Base Properties; (iii) assignments of all management agreements, franchise agreements, licenses and other material agreements relating to the Borrowing Base Properties; (iv) perfected first priority liens on all reserve accounts and all operating accounts related to each Borrowing Base Property; and (v) perfected first priority liens on and security interests in each subsidiary guarantor owning a Borrowing Base Property. Borrowings under the Credit Agreement will bear interest at Daily SOFR or Term SOFR plus 10 basis points (with a 0% floor) plus the applicable margin. Depending on the Company’s Net Debt to EBITDA ratio, the applicable margin for SOFR ranges from 2.25% to 3.00%. Default interest would accrue at the applicable rate plus 2.0%. The Facility contains customary terms, covenants, negative covenants, events of default, limitations and other conditions for credit facilities of this type. Subject to certain exceptions, the Company and the Borrower are subject to restrictions on incurring additional indebtedness and liens, investments, mergers and fundamental changes, sales or other dispositions of property, dividends and stock redemptions, changes in the nature of the Borrower’s business, transactions with affiliates and burdensome agreements. Financial covenants are generally based on the financial condition and results of operations of the Company and its consolidated subsidiaries and include, among others, the following: (i) a Consolidated Leverage Ratio (i.e., Consolidated Net Debt to the Consolidated Total Asset Value) of not more than 55%; and 34 (ii) a Consolidated Fixed Charge Coverage Ratio (FCCR) (i.e., the ratio of Consolidated Adjusted EBITDA to Consolidated Fixed Charges) of not less than (i) prior to December 31, 2024, 1.1 to 1.0 and (ii) thereafter, 1.25 to 1.0. The Credit Agreement includes customary events of default, and the occurrence of an event of default will permit the Lenders to terminate commitments to lend under the Credit Agreement and accelerate payments of all amounts outstanding thereunder. On August 1, 2023, the Company announced the rebranding and planned conversion of its Mr. C Beverly Hills Hotel in Los Angeles, California to the Cameo Beverly Hills. Effective August 4, 2023, Cameo Beverly Hills became available for booking on Hilton’s website at hilton.com and joined Hilton Honors, Hilton’s award-winning guest loyalty program. Following an extensive renovation, which is expected to be completed by the end of 2025, the hotel will join LXR Hotels & Resorts (“LXR”). One of Hilton’s iconic luxury brands, LXR is a collection of unique, independent luxury properties around the world that focuses on individualized service and one-of-a-kind stays. The conversion of the hotel, which was built in 1965, will reflect its unique history and distinctive location in the heart of West Los Angeles near iconic amenities and high-end shopping on Rodeo Drive. The Company is planning an approximately $25 million renovation to further elevate this distinctive hotel that will enable a revitalized luxury guest experience when it is completed. Added amenities and enhanced design elements will include upgrades to the guestrooms, guest bathrooms, restaurant, lobby, pool, fitness area, and meeting spaces. Remington Hospitality will continue to manage the hotel after the conversion under a management agreement. On August 4, 2023, the board of directors of the Company approved amendments to the Company’s Fourth Amended and Restated Bylaws, as amended. On September 29, 2023, the Company amended the mortgage loan secured by the Four Seasons Resort Scottsdale. Terms of the amendment included increasing the outstanding principal from $100 million to $140 million, and extending the final maturity date by one year to December 2028. On October 31, 2023, the Company amended its $54.0 million mortgage loan secured by The Ritz-Carlton Lake Tahoe. Terms of the amendment included extending the maturity date by one year to January 2025, with a one-year extension option, amending the interest rate to SOFR + 3.60% and making a pay down of $587,000. 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. 35 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 RESULTS OF OPERATIONS Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 The following table summarizes changes in key line items from our condensed consolidated statements of operations for three months ended September 30, 2023 and 2022 (in thousands except percentages): Three Months Ended September 30, Favorable (Unfavorable) 2023 2022 $ Change % Change Revenue Rooms $ 100,738 $ 104,503 $ (3,765) (3.6) % Food and beverage 38,537 37,624 913 2.4 Other 20,526 19,062 1,464 7.7 Total revenue 159,801 161,189 (1,388) (0.9) Expenses Hotel operating expenses: Rooms 25,899 25,424 (475) (1.9) Food and beverage 32,750 31,320 (1,430) (4.6) Other expenses 52,725 50,836 (1,889) (3.7) Management fees 5,076 5,116 40 0.8 Total hotel operating expenses 116,450 112,696 (3,754) (3.3) Property taxes, insurance and other 10,471 8,851 (1,620) (18.3) Depreciation and amortization 22,703 19,604 (3,099) (15.8) Advisory services fee 7,020 8,854 1,834 20.7 Corporate general and administrative 2,506 8,075 5,569 69.0 Total expenses 159,150 158,080 (1,070) (0.7) Operating income (loss) 651 3,109 (2,458) (79.1) Equity in earnings (loss) of unconsolidated entity (60) (74) 14 18.9 Interest income 986 745 241 32.3 Other income (expense) 293 27 266 985.2 Interest expense and amortization of loan costs (23,306) (14,490) (8,816) (60.8) Write-off of loan costs and exit fees (2,588) (8) (2,580) (32,250.0) Realized and unrealized gain (loss) on derivatives 223 2,403 (2,180) (90.7) Income (loss) before income taxes (23,801) (8,288) (15,513) (187.2) Income tax (expense) benefit 1,190 (95) 1,285 1,352.6 Net income (loss) (22,611) (8,383) (14,228) 169.7 (Income) loss attributable to noncontrolling interest in consolidated entities (1,773) (823) (950) (115.4) Net (income) loss attributable to redeemable noncontrolling interests in operating partnership 2,354 1,166 1,188 101.9 Net income (loss) attributable to the Company $ (22,030) $ (8,040) $ (13,990) (174.0) % 37 All hotel properties owned for the three months ended September 30, 2023 and 2022 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 September 30, 2023 and 2022. The hotel property listed below is not a comparable hotel property for the periods indicated and all other hotel properties are considered comparable hotel properties. The following acquisition affects reporting comparability related to our condensed consolidated financial statements: Hotel Property Location Type Date Four Seasons Resort Scottsdale Scottsdale, Arizona Acquisition December 1, 2022 The following table illustrates the key performance indicators of all hotel properties owned for the periods indicated: Three Months Ended September 30, 2023 2022 Occupancy 68.37 % 71.50 % ADR (average daily rate) $ 379.97 $ 398.16 RevPAR (revenue per available room) $ 259.78 $ 284.69 Rooms revenue (in thousands) $ 100,738 $ 104,503 Total hotel revenue (in thousands) $ 159,801 $ 161,189 The following table illustrates the key performance indicators of the 15 hotel properties that were owned for the full three months ended September 30, 2023 and 2022: Three Months Ended September 30, 2023 2022 Occupancy 70.11 % 71.50 % ADR (average daily rate) $ 376.25 $ 398.16 RevPAR (revenue per available room) $ 263.79 $ 284.69 Rooms revenue (in thousands) $ 97,197 $ 104,503 Total hotel revenue (in thousands) $ 151,578 $ 161,189 Net Income (Loss) Attributable to the Company. Net loss attributable to the Company increased $14.0 million, from $8.0 million for the three months ended September 30, 2022 (the “2022 quarter”) to $22.0 million for the three months ended September 30, 2023 (the “2023 quarter”), as a result of the factors discussed below. Rooms Revenue . Rooms revenue decreased $3.8 million, or 3.6%, to $100.7 million during the 2023 quarter compared to the 2022 quarter. During the 2023 quarter, we experienced a 313 basis point decrease in occupancy and a 4.6% decrease in room rates. 38 Fluctuations in rooms revenue between the 2023 quarter and the 2022 quarter are a result of the changes in occupancy and ADR between the 2023 quarter and the 2022 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) $ 519 79 5.6 % Marriott Seattle Waterfront (2) 2,215 1,402 2.9 % The Notary Hotel 350 279 1.1 % The Clancy (1,005) (413) (5.7) % Sofitel Chicago Magnificent Mile (430) 170 (7.3) % Pier House Resort & Spa (810) (484) (9.4) % The Ritz-Carlton St. Thomas (2,333) (1,054) (8.4) % Park Hyatt Beaver Creek Resort & Spa (748) (1,218) (1.4) % Hotel Yountville (401) 1,602 (28.0) % The Ritz-Carlton Sarasota (1) (2,323) (1,574) (7.4) % Hilton La Jolla Torrey Pines (470) (262) (2.3) % Bardessono Hotel and Spa (210) 1,436 (21.1) % The Ritz-Carlton Lake Tahoe (1) (1,137) (1,194) 1.4 % Cameo Beverly Hills (792) (1,014) (10.9) % The Ritz-Carlton Reserve Dorado Beach 269 199 (0.3) % Total $ (7,306) (139) (5.5) % Non-comparable Four Seasons Resort Scottsdale $ 3,541 n/a n/a ________ (1) This hotel was under renovation during the 2023 quarter. (2) This hotel was under renovation during the 2022 quarter. Food and Beverage Revenue . Food and beverage revenue increased $913,000, or 2.4%, to $38.5 million during the 2023 quarter compared to the 2022 quarter. This increase is attributable to an aggregate increase of $1.3 million at six comparable hotel properties and an increase of $3.0 million from the acquisition of the Four Seasons Resort Scottsdale on December 1, 2022. These increases were partially offset by an aggregate decrease of $3.3 million at The Clancy, Sofitel Chicago Magnificent Mile, Pier House Resort & Spa, The Ritz-Carlton St. Thomas, Park Hyatt Beaver Creek Resort & Spa, The Ritz-Carlton Sarasota, Hilton La Jolla Torrey Pines, Cameo Beverly Hills and 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 and rentals, increased $1.5 million, or 7.7%, to $20.5 million during the 2023 quarter compared to the 2022 quarter. This increase is attributable to an aggregate increase in other hotel revenue of $1.2 million at nine comparable hotel properties and an increase of $1.7 million at the Four Seasons Resort Scottsdale, partially offset by an aggregate decrease of $1.4 million at the Capital Hilton, The Notary Hotel, Pier House Resort & Spa, The Ritz-Carlton St. Thomas, The Ritz-Carlton Sarasota and The Ritz-Carlton Lake Tahoe. Rooms Expense . Rooms expense increased $475,000, or 1.9%, to $25.9 million in the 2023 quarter compared to the 2022 quarter. This increase is primarily attributable to an aggregate increase of $723,000 at five comparable hotel properties and an increase of $1.5 million at the Four Seasons Resort Scottsdale, partially offset by an aggregate decrease of $1.7 million at The Clancy, Sofitel Chicago Magnificent Mile, Pier House Resort & Spa, The Ritz-Carlton St. Thomas, Park Hyatt Beaver Creek Resort & Spa, The Ritz-Carlton Sarasota, Hilton La Jolla Torrey Pines, The Ritz-Carlton Lake Tahoe, Cameo Beverly Hills and The Ritz-Carlton Reserve Dorado Beach. Food and Beverage Expense . Food and beverage expense increased $1.4 million, or 4.6%, to $32.8 million during the 2023 quarter compared to the 2022 quarter. This increase is attributable to an aggregate increase of $716,000 at seven comparable hotel properties and an increase of $3.1 million at the Four Seasons Resort Scottsdale, partially offset by an aggregate decrease of $2.4 million at the Sofitel Chicago Magnificent Mile, The Ritz-Carlton St. Thomas, Park Hyatt Beaver Creek Resort & Spa, The Ritz-Carlton Sarasota, Hilton La Jolla Torrey Pines, The Ritz-Carlton Lake Tahoe, Cameo Beverly Hills and The Ritz-Carlton Reserve Dorado Beach. 39 Other Operating Expenses . Other operating expenses increased $1.9 million, or 3.7%, to $52.7 million in the 2023 quarter compared to the 2022 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 $245,000 in direct expenses and $1.6 million in indirect expenses and incentive management fees in the 2023 quarter as compared to the 2022 quarter. Direct expenses were 4.4% of total hotel revenue in the 2023 quarter and 4.2% in the 2022 quarter. The increase in direct expenses includes an increase of approximately $548,000 at the Four Seasons Resort Scottsdale. The increase in indirect expenses comprises increases in: (i) general and administrative costs of $719,000 comprising an increase $1.3 million at the one acquired hotel property offset by a decrease of $620,000 at our 15 comparable hotel properties; (ii) marketing costs of $1.1 million comprising an increase of $218,000 at our 15 comparable hotel properties and $912,000 at the one acquired hotel property; (iii) repairs and maintenance of $773,000, comprising an increase of $53,000 at our 15 comparable hotel properties and $720,000 at one acquired hotel property; and (iv) energy costs of $196,000 comprising an increase of $89,000 at our 15 comparable hotel properties and $285,000 at the one acquired hotel property. The increases were partially offset by decreases in (i) incentive management fees of $1.2 million comprising an aggregate decrease of $1.1 million from our 15 comparable hotel properties and $59,000 at the one acquired hotel property, and (ii) lease expense of $66,000 at our 15 comparable hotel properties. Management Fees . Base management fees decreased $40,000, or 0.8%, to $5.1 million in the 2023 quarter compared to the 2022 quarter. Base management fees decreased by $473,000 at 12 comparable hotel properties, partially offset by an aggregate increase of $173,000 at the Capital Hilton, The Notary Hotel and Marriott Seattle Waterfront and an increase of $260,000 at the one acquired hotel property. Property Taxes, Insurance and Other . Property taxes, insurance and other increased $1.6 million, or 18.3%, to $10.5 million in the 2023 quarter compared to the 2022 quarter. The increase is primarily attributable to an aggregate increase of approximately $2.2 million at 13 comparable hotel properties and $211,000 at the one acquired hotel property. These increases were partially offset by an aggregate decrease of $830,000, including $813,000 at the Sofitel Chicago Magnificent Mile and $17,000 at The Notary Hotel. Depreciation and Amortization . Depreciation and amortization increased $3.1 million, or 15.8%, to $22.7 million in the 2023 quarter compared to the 2022 quarter. The increase comprised $2.4 million at Four Seasons Resort Scottsdale as a result of its acquisition and an aggregate increase of $1.6 million at eight comparable hotel properties. These increases were partially offset by an aggregate decrease of $961,000 at the Sofitel Chicago Magnificent Mile, The Notary Hotel, The Clancy, Pier House Resort & Spa, Hotel Yountville, Bardessono Hotel and Spa and Cameo Beverly Hills due to fully depreciated assets. Advisory Services Fee. Advisory services fee decreased $1.8 million, or 20.7%, to $7.0 million in the 2023 quarter compared to the 2022 quarter due to decreases of $1.0 million in the incentive fee and $1.7 million in equity-based compensation, partially offset by increases in the base advisory fee of $124,000 and reimbursable expenses of $837,000. In the 2023 quarter, we recorded an advisory services fee of $7.0 million, which included a base advisory fee of $3.4 million, reimbursable expenses of $2.0 million, $1.6 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. In the 2022 quarter, we recorded an advisory services fee of $8.9 million, which included a base advisory fee of $3.3 million, reimbursable expenses of $1.2 million, $3.3 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 $1.0 million. Corporate General and Administrative . Corporate general and administrative expense was $2.5 million in the 2023 quarter as compared to $8.1 million in the 2022 quarter. The decrease in corporate general and administrative expense is due to lower reimbursed operating expenses of Ashford Securities of $4.6 million, lower professional fees of $519,000, lower miscellaneous expenses of $372,000 and lower public company costs of $80,000. During the third quarter of 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 $5.2 million. Equity in Earnings (Loss) of Unconsolidated Entity . In the 2023 quarter and 2022 quarter, we recorded equity in loss of unconsolidated entity of $60,000 and $74,000, respectively, related to our investment in OpenKey. Interest Income . Interest income was $986,000 and $745,000 in the 2023 quarter and 2022 quarter, respectively. The increase in interest income in the 2023 quarter was primarily attributable to higher short-term interest rates on excess cash and the Company’s cash management agreement with Ashford LLC. 40 Other Income (Expense) . Other income was $293,000 in the 2023 quarter compared to $27,000 in the 2022 quarter. In the 2023 quarter we recorded $293,000 of miscellaneous income. Interest Expense and Amortization of Loan Costs . Interest expense and amortization of loan costs increased $8.8 million, or 60.8%, to $23.3 million in the 2023 quarter compared to the 2022 quarter. This increase is primarily due to higher interest expense from higher average interest rates and higher interest expense associated with the mortgage loan secured by the Four Seasons Resort Scottsdale as a result of its acquisition. The average LIBOR rate for the 2022 quarter was 2.47%. The average SOFR rates for the 2023 quarter and the 2022 quarter were 5.08% and 2.08%, respectively. Write-off of Loan Costs and Exit Fees. Write-off of loan costs and exit fees was $2.6 million in the 2023 quarter, primarily related to various loan modifications and costs associated with the $200 million secured credit facility. Write-off of loan costs and exit fees was $8,000 in the 2022 quarter, primarily related to the mortgage loan extension of The Ritz-Carlton St. Thomas. Realized and Unrealized Gain (Loss) on Derivatives . Realized and unrealized gain on derivatives of $223,000 for 2023 quarter consisted of an unrealized gain on warrants of approximately $154,000 and a realized gain of $2.0 million associated with payments received from counterparties on in-the-money interest rate caps. These gains were partially offset by an unrealized loss on interest rate caps of approximately $1.9 million. Unrealized gain on derivatives of $2.4 million in the 2022 quarter consisted of an unrealized gain of approximately $265,000 on warrants and approximately $2.1 million on interest rate caps. Income Tax (Expense) Benefit . Income tax (expense) benefit changed $1.3 million, from expense of $95,000 in the 2022 quarter to a benefit of $1.2 million in the 2023 quarter. This change was primarily due to a decrease in the taxable income of certain of our TRS entities in the 2023 quarter compared to the 2022 quarter. (Income) Loss Attributable to Noncontrolling Interest in Consolidated Entities. Our noncontrolling interest partner in consolidated entities was allocated income of $1.8 million and $823,000 in the 2023 quarter and the 2022 quarter, respectively. At both September 30, 2023 and 2022, 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 $2.4 million and $1.2 million in the 2023 quarter and the 2022 quarter, respectively. Redeemable noncontrolling interests in Braemar OP represented ownership interests of 6.63% and 7.66% as of September 30, 2023 and 2022, respectively. 41 Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 The following table summarizes changes in key line items from our condensed consolidated statements of operations for the nine months ended September 30, 2023 and 2022 (in thousands except percentages): Nine Months Ended September 30, Favorable (Unfavorable) 2023 2022 $ Change % Change Revenue Rooms $ 355,402 $ 322,222 $ 33,180 10.3 % Food and beverage 138,541 116,600 21,941 18.8 Other 67,866 59,141 8,725 14.8 Total hotel revenue 561,809 497,963 63,846 12.8 Expenses Hotel operating expenses: Rooms 79,962 69,742 (10,220) (14.7) Food and beverage 108,854 91,242 (17,612) (19.3) Other expenses 171,317 149,130 (22,187) (14.9) Management fees 17,661 14,802 (2,859) (19.3) Total hotel operating expenses 377,794 324,916 (52,878) (16.3) Property taxes, insurance and other 27,983 22,731 (5,252) (23.1) Depreciation and amortization 67,791 57,616 (10,175) (17.7) Advisory services fee 23,183 22,481 (702) (3.1) (Gain) loss on legal settlements — (114) (114) (100.0) Corporate general and administrative 9,222 14,008 4,786 34.2 Total expenses 505,973 441,638 (64,335) (14.6) Operating income (loss) 55,836 56,325 (489) (0.9) Equity in earnings (loss) of unconsolidated entity (208) (220) 12 5.5 Interest income 5,389 932 4,457 478.2 Other income (expense) 293 27 266 985.2 Interest expense and amortization of discounts and loan costs (69,779) (33,293) (36,486) (109.6) Write-off of loan costs and exit fees (2,848) (106) (2,742) (2,586.8) Gain (loss) on extinguishment of debt 2,318 — 2,318 Realized and unrealized gain (loss) on derivatives 918 4,019 (3,101) (77.2) Income (loss) before income taxes (8,081) 27,684 (35,765) (129.2) Income tax (expense) benefit (1,064) (3,783) 2,719 71.9 Net income (loss) (9,145) 23,901 (33,046) (138.3) (Income) loss attributable to noncontrolling interest in consolidated entities (1,715) (2,265) 550 24.3 Net (income) loss attributable to redeemable noncontrolling interests in operating partnership 3,018 (647) 3,665 566.5 Net income (loss) attributable to the Company $ (7,842) $ 20,989 $ (28,831) (137.4) % All hotel properties owned for the nine months ended September 30, 2023 and 2022 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 nine months ended September 30, 2023 and 2022. 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 Property Location Type Date The Ritz-Carlton Reserve Dorado Beach Dorado, Puerto Rico Acquisition March 11, 2022 Four Seasons Resort Scottsdale Scottsdale, Arizona Acquisition December 1, 2022 42 The following table illustrates the key performance indicators of all hotel properties owned for the periods indicated: Nine Months Ended September 30, 2023 2022 Occupancy 68.06 % 66.00 % ADR (average daily rate) $ 453.87 $ 451.01 RevPAR (revenue per available room) $ 308.88 $ 297.66 Rooms revenue (in thousands) $ 355,402 $ 322,222 Total hotel revenue (in thousands) $ 561,809 $ 497,963 The following table illustrates the key performance indicators of the 14 hotel properties that were owned for the full nine months ended September 30, 2023 and 2022: Nine Months Ended September 30, 2023 2022 Occupancy 69.50 % 63.49 % ADR (average daily rate) $ 396.14 $ 423.14 RevPAR (revenue per available room) $ 275.31 $ 279.61 Rooms revenue (in thousands) $ 293,020 $ 296,628 Total hotel revenue (in thousands) $ 456,078 $ 456,619 Net Income (Loss) Attributable to the Company. Net income (loss) attributable to the Company changed $28.8 million, from net income of $21.0 million for the nine months ended September 30, 2022 (the “2022 period”), to a net loss of $7.8 million for the nine months ended September 30, 2023 (the “2023 period”), as a result of the factors discussed below. Rooms Revenue . Rooms revenue increased $33.2 million, or 10.3%, to $355.4 million during the 2023 period compared to the 2022 period. During the 2023 period, we experienced a 206 basis point increase in occupancy and a 0.6% increase in room rates compared to the 2022 period. 43 Fluctuations in rooms revenue between the 2023 period and the 2022 period are a result of the changes in occupancy and ADR between the 2023 period and the 2022 period 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) $ 7,130 1,320 10.2 % Marriott Seattle Waterfront (2) 6,454 1,752 3.7 % The Notary Hotel 3,279 767 6.3 % The Clancy 971 81 2.9 % Sofitel Chicago Magnificent Mile 573 422 (3.2) % Pier House Resort & Spa (3,273) (443) (10.0) % The Ritz-Carlton St. Thomas (7,383) (841) (6.3) % Park Hyatt Beaver Creek Resort & Spa 976 (652) 15.7 % Hotel Yountville (1,535) 767 (24.9) % The Ritz-Carlton Sarasota (1) (7,634) (1,374) (4.1) % Hilton La Jolla Torrey Pines 539 92 1.3 % Bardessono Hotel and Spa (1,981) 250 (16.7) % The Ritz-Carlton Lake Tahoe (1) (730) (77) (2.6) % Cameo Beverly Hills (994) (13) (9.6) % Total $ (3,608) 601 (6.4) % Non-comparable The Ritz-Carlton Reserve Dorado Beach $ 11,166 n/a n/a Four Seasons Resort Scottsdale 25,622 n/a n/a Total $ 36,788 ________ (1) This hotel was under renovation during the 2023 period. (2) This hotel was under renovation during the 2022 period. Food and Beverage Revenue . Food and beverage revenue increased $21.9 million, or 18.8%, to $138.5 million during the 2023 period compared to the 2022 period. We experienced an aggregate increase in food and beverage revenue of $9.0 million at five comparable hotel properties and increases of $4.0 million and $14.8 million at The Ritz-Carlton Reserve Dorado Beach and the Four Seasons Resort Scottsdale, respectively. These increases were partially offset by an aggregate decrease of approximately $5.8 million at The Ritz-Carlton St. Thomas, The Ritz-Carlton Sarasota, Pier House Resort & Spa, Bardessono Hotel and Spa, Hotel Yountville, Sofitel Chicago Magnificent Mile, Park Hyatt Beaver Creek Resort & Spa, Hilton La Jolla Torrey Pines and Cameo Beverly Hills. Other Hotel Revenue . Other hotel revenue, which consists mainly of condo management fees, health center fees, resort fees, golf, telecommunications, parking and rentals, increased $8.7 million, or 14.8%, to $67.9 million during the 2023 period compared to the 2022 period. This increase is attributable to higher other hotel revenue of $2.7 million at nine comparable hotel properties, $2.5 million at The Ritz-Carlton Reserve Dorado Beach and $6.4 million at the Four Seasons Resort Scottsdale. These increases were partially offset by an aggregate decrease of approximately $2.9 million at The Ritz-Carlton St. Thomas, The Ritz-Carlton Sarasota, Pier House Resort & Spa, Park Hyatt Beaver Creek Resort & Spa and Capital Hilton. Rooms Expense . Rooms expense increased $10.2 million, or 14.7%, to $80.0 million in the 2023 period compared to the 2022 period. This increase is attributable to an aggregate increase in rooms expense of $4.9 million at eight comparable hotel properties, an increase of $1.5 million at The Ritz-Carlton Reserve Dorado Beach and an increase of $5.7 million at the Four Seasons Resort Scottsdale. These increases were partially offset by an aggregate decrease of approximately $1.8 million at The Ritz-Carlton St. Thomas, The Ritz-Carlton Sarasota, Pier House Resort & Spa, Bardessono Hotel and Spa, Hotel Yountville and Hilton La Jolla Torrey Pines. Food and Beverage Expense . Food and beverage expense increased $17.6 million, or 19.3%, to $108.9 million during the 2023 period compared to the 2022 period. This increase is attributable to higher food and beverage expense of $5.5 million at six comparable hotel properties, $3.6 million at The Ritz-Carlton Reserve Dorado Beach and $11.5 million at the Four Seasons Resort Scottsdale. These increases were partially offset by an aggregate decrease of approximately $2.9 million at The Ritz-Carlton St. Thomas, The Ritz-Carlton Sarasota, The Ritz-Carlton Lake Tahoe, Pier House Resort & Spa, Hotel Yountville, Sofitel Chicago Magnificent Mile, Park Hyatt Beaver Creek Resort & Spa and Cameo Beverly Hills. 44 Other Operating Expenses . Other operating expenses increased $22.2 million, or 14.9%, to $171.3 million in the 2023 period compared to the 2022 period. 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 $3.1 million in direct expenses and $19.0 million in indirect expenses and incentive management fees in the 2023 period compared to the 2022 period. Direct expenses were 4.3% of total hotel revenue in the 2023 period and 4.2% in the 2022 period. The increase in direct expenses is associated with higher direct expenses of approximately $1.2 million at nine comparable hotel properties, $1.3 million at The Ritz-Carlton Reserve Dorado Beach and $2.0 million at the Four Seasons Resort Scottsdale. These increases were partially offset by lower direct expenses of $1.4 million at the Sofitel Chicago Magnificent Mile, Pier House Resort & Spa, Cameo Beverly Hills, The Ritz-Carlton St. Thomas and The Ritz-Carlton Sarasota. The increase in indirect expenses is attributable to increases in: (i) general and administrative costs of $7.6 million comprising an increase of $1.5 million at our 14 comparable hotel properties and $6.1 million at the two acquired hotel properties; (ii) marketing costs of $7.7 million comprising an increase of $3.4 million at our 14 comparable hotel properties and $4.4 million at the two acquired hotel properties; (iii) repairs and maintenance of $3.4 million comprising an increase of $470,000 at our 14 comparable hotel properties and $2.9 million at the two acquired hotel properties; (iv) lease expense of $92,000 comprising an increase of $130,000 at our 14 comparable hotel properties, partially offset by an aggregate decrease of $38,000 at the two acquired hotel properties; and (v) energy costs of $2.5 million comprised of an increase of $1.1 million at our 14 comparable hotel properties and $1.4 million at our two acquired hotel properties. These increases in indirect expenses were partially offset by an aggregate decrease of $2.3 million in incentive management fees, comprising of an aggregate decrease of $3.8 million at our 14 comparable hotel properties, offset by an aggregate increase of $1.5 million at the two acquired hotel properties. Management Fees . Base management fees increased $2.9 million, or 19.3%, to $17.7 million in the 2023 period compared to the 2022 period. Management fees increased $2.0 million at six comparable hotel properties, $535,000 at The Ritz-Carlton Reserve Dorado Beach and $1.4 million at the Four Seasons Resort Scottsdale. These increases were partially offset by an aggregate decrease of $1.0 million at the Park Hyatt Beaver Creek Resort & Spa, Pier House Resort & Spa, Hotel Yountville, Bardessono Hotel and Spa, Cameo Beverly Hills, The Ritz-Carlton St. Thomas, The Ritz-Carlton Sarasota and The Ritz-Carlton Lake Tahoe. Property Taxes, Insurance and Other . Property taxes, insurance and other increased $5.3 million, or 23.1%, to $28.0 million in the 2023 period compared to the 2022 period. This increase is primarily attributable to an aggregate increase of $4.4 million at 12 comparable hotel properties, $929,000 at The Ritz-Carlton Reserve Dorado Beach and $718,000 at the Four Seasons Resort Scottsdale. These increases were partially offset by an aggregate decrease of approximately $835,000 including $777,000 at the Sofitel Chicago Magnificent Mile and $58,000 at The Notary Hotel. Depreciation and Amortization . Depreciation and amortization increased $10.2 million, or 17.7%, to $67.8 million for the 2023 period compared to the 2022 period. This increase is comprised of $1.4 million at The Ritz-Carlton Reserve Dorado Beach, $7.1 million at the Four Seasons Resort Scottsdale and an aggregate increase of $4.8 million at eight comparable hotel properties. These increases were partially offset by an aggregate decrease of $3.2 million at the Sofitel Chicago Magnificent Mile, The Clancy, Pier House Resort & Spa, Hotel Yountville, Bardessono Hotel and Spa and Cameo Beverly Hills, primarily due to fully depreciated assets. Advisory Services Fee. Advisory services fee increased $702,000, or 3.1%, to $23.2 million in the 2023 period compared to the 2022 period due to increases in reimbursable expenses of $2.6 million and base advisory fee of $1.3 million. These increases are partially offset by decreases in equity-based compensation of $1.9 million and an incentive fee of $1.3 million. In the 2023 period, we recorded an advisory services fee of $23.2 million, which included a base advisory fee of $10.7 million, reimbursable expenses of $6.1 million and $6.4 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. In the 2022 period, we recorded an advisory services fee of $22.5 million, which included a base advisory fee of $9.4 million, reimbursable expenses of $3.5 million, $8.3 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 $1.3 million. Gain on Legal Settlements. During the 2022 period, 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. There was no such gain during the 2023 period. 45 Corporate General and Administrative . Corporate general and administrative expense was $9.2 million in the 2023 period compared to $14.0 million in the 2022 period. The decrease in corporate general and administrative expenses is primarily due to lower reimbursed operating expenses of Ashford Securities of $3.6 million, lower miscellaneous expenses of $309,000, lower professional fees of $740,000 and lower public company costs of $166,000. During the third quarter of 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 $5.2 million. Equity in Earnings (Loss) of Unconsolidated Entity . In the 2023 period and the 2022 period, we recorded equity in loss of unconsolidated entity of $208,000 and $220,000, respectively, related to our investment in OpenKey. Other Income (Expense). Other income was $293,000 in the 2023 period compared to $27,000 in the 2022 period. In the 2023 period, we recorded $293,000 of miscellaneous income. Interest Income . Interest income was $5.4 million and $932,000 in the 2023 period and the 2022 period, respectively. The increase in interest income in the 2023 period was primarily attributable to higher short-term interest rates on excess cash and the Company’s cash management agreement with Ashford LLC. Interest Expense and Amortization of Discounts and Loan Costs . Interest expense and amortization of discounts and loan costs increased $36.5 million, or 109.6%, to $69.8 million for the 2023 period compared to the 2022 period. The increase is primarily due to higher interest expense from higher average interest rates and the mortgage loan secured by the Four Seasons Resort Scottsdale as a result of its acquisition. LIBOR ceased to be published after June 30, 2023. The average LIBOR rate for the 2022 period was 1.24%. The average SOFR rates for the 2023 period and the 2022 period were 4.78% and 0.97%, respectively. Write-off of Loan Costs and Exit Fees. Write-off of loan costs and exit fees was $2.8 million in the 2023 period related to various loan modifications and costs associated with the $200 million secured credit facility. Write-off of loan costs and exit fees was $106,000 in the 2022 period, primarily resulting from the refinance of the Park Hyatt Beaver Creek Resort & Spa in February 2022, the acquisition of The Ritz-Carlton Reserve Dorado Beach and the mortgage loan extension of The Ritz-Carlton St. Thomas. Gain (loss) on Extinguishment of Debt. Gain on extinguishment of debt was $2.3 million in the 2023 period due to the payoff of The Ritz-Carlton Reserve Dorado Beach mortgage loan. The gain was primarily attributable to the premium that was recorded upon the assumption of the mortgage loan when the hotel was acquired. There was no such gain or loss in the 2022 period. Realized and Unrealized Gain (Loss) on Derivatives . Realized and unrealized gain on derivatives of $918,000 for the 2023 period consisted of unrealized gain on warrants of $273,000 and a realized gain of $6.2 million associated with payments received from counterparties on in-the-money interest rate caps. These gains were partially offset by an unrealized loss on interest rate caps of approximately $5.5 million. Unrealized gain on derivatives of $4.0 million for the 2022 period consisted of an unrealized gain of approximately $3.0 million on interest rate caps and approximately $995,000 from warrants. Income Tax (Expense) Benefit . Income tax expense decreased $2.7 million, from $3.8 million in the 2022 period to $1.1 million in the 2023 period. This decrease was primarily due to a decrease in the taxable income of certain of our TRS entities in the 2023 period compared to the 2022 period. (Income) Loss Attributable to Noncontrolling Interest in Consolidated Entities . Our noncontrolling interest partner in consolidated entities was allocated income of $1.7 million and $2.3 million in the 2023 period and the 2022 period, respectively. At both September 30, 2023 and 2022, 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 $3.0 million in the 2023 period and net income of $647,000 in the 2022 period. Redeemable noncontrolling interests represented ownership interests in Braemar OP of approximately 6.63% and 7.66% as of September 30, 2023 and 2022, respectively. 46 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, our Revolving Credit Facility 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 and paydowns for extension tests), 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 declines. 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 one mortgage loan, as discussed below. Our loan that is in a cash trap may remain subject to the 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 September 30, 2023, none of our mortgage loans were subject to cash traps. 47 As of September 30, 2023, the Company held cash and cash equivalents of $149.5 million and restricted cash of $57.3 million, the vast majority of which is comprised of lender and manager-held reserves. As of September 30, 2023, $14.2 million was also due to the Company from third-party hotel managers, most of which is held by one of the Company’s managers and is available to fund hotel operating costs. At September 30, 2023, our net debt to gross assets was 38.6%. The Company’s cash and cash equivalents are primarily comprised of corporate cash invested in short-term U.S. Treasury securities with maturity dates of less than 90 days and corporate cash held at commercial banks in Insured Cash Sweep (“ICS”) accounts, which are fully insured by the FDIC. The Company’s cash and cash equivalents also includes property-level operating cash deposited with commercial banks that have been designated as a Global Systemically Important Bank (“G-SIB”) by the Financial Stability Board (“FSB”) and a small amount deposited with other commercial banks. 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 directors’ authorization replaced any previous repurchase authorizations. During the nine months ended September 30, 2023, we repurchased 3.9 million shares of our common stock for approximately $18.9 million. As of September 30, 2023, the Company 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. On February 21, 2023, the Company announced the closing of its offering of the Series E Preferred Stock and Series M Preferred Stock. The Company 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. 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. 48 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 November 6, 2023, the Company has sold approximately 1.7 million shares of common stock and received proceeds of approximately $10.0 million under the SEDA. 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 November 6, 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 January 18, 2023, the Company repaid its $54.0 million mortgage loan secured by The Ritz-Carlton Reserve Dorado Beach, which resulted in a gain on extinguishment of debt of $2.3 million for the nine months ended September 30, 2023. The gain was primarily attributable to the premium that was recorded upon the assumption of the mortgage loan when the hotel was acquired. On June 13, 2023, the Company finalized an extension of its $435 million mortgage loan secured by four properties: The Notary Hotel, The Clancy, Sofitel Chicago Magnificent Mile, and Marriott Seattle Waterfront. The loan is being extended beyond its original initial maturity in June 2023 for an additional 12 months. In conjunction with the extension, the Company paid down $142 million of the loan utilizing corporate cash on hand, which reduced the balance to approximately $293 million. As part of the extension, the Company also purchased an interest rate cap through June 2024 with a strike rate of 4.69%. Effective June 30, 2023, LIBOR is no longer published. Accordingly all variable interest rate mortgage loans held by the Company that used the LIBOR index transitioned to SOFR beginning on July 1, 2023. Not all lenders will execute loan amendment documents and instead will defer to original loan documents that dictate changes in index rates. On July 31, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with Braemar OP (the “Borrower”), the lenders party thereto (the “Lenders”) and Bank of America, N.A., as administrative agent and L/C Issuer (as defined in the Credit Agreement). Bank of America, N.A. acted as administrative agent and lead arranger on the transaction. Syndicate bank participants include TBK Bank and MidFirst Bank. The Credit Agreement evidences a $200 million secured credit facility (the “Facility”) comprised of a secured term loan facility of $150 million (the “Term Loan Facility”) and a secured revolving credit facility of $50 million (the “Revolving Credit Facility”). Upon satisfaction of certain conditions, including the addition of new Borrowing Base Properties (as defined in the Credit Agreement), the Facility may be increased to a size of not more than $400 million in the aggregate. The maximum availability under the Facility is determined on a quarterly basis and limited to the lesser of: (i) $200 million (subject to increase of up to $400 million in the aggregate); (ii) 55% of the appraised value of all Borrowing Base Properties; and (iii) the DSC Amount (as defined below). The initial Borrowing Base Properties include the Company’s Ritz-Carlton Sarasota, Bardessono Hotel and Spa and Hotel Yountville hotel properties (the “Initial Borrowing Base Properties”). The “DSC Amount” means the maximum principal amount that can be supported from the Adjusted NOI (as defined in the Credit Agreement) from the Borrowing Base Properties assuming (i) a 30-year amortization and an interest rate which is the greater of (a) the ten (10) year U.S. Treasury Rate plus 2.50% and (b) 7.50%; and (ii) a minimum debt service coverage of 1.75 to 1.00. The proceeds of the Term Loan Facility were used to repay the mortgage debt associated with The Ritz-Carlton Sarasota, Bardessono Hotel and Spa and Hotel Yountville, which will serve as the Initial Borrowing Base Properties for the financing. In addition, at closing, the Company drew down approximately $46 million under the Revolving Credit Facility. The Facility is a three-year, interest-only facility with all outstanding principal due at maturity, with a one-year extension option, subject to the satisfaction of certain conditions, including the payment of an Extension Fee (as defined in the Credit Agreement) equal to 20 basis points (0.20%) of the outstanding Facility amount. 49 The Credit Agreement is guaranteed by the Company, the Borrower and certain other eligible subsidiaries of the Company and secured by: (i) perfected lien mortgages or deeds of trust and security interests in the Borrowing Base Properties (as defined in the Credit Agreement); (ii) assignments of leases and rents with respect to the Borrowing Base Properties; (iii) assignments of all management agreements, franchise agreements, licenses and other material agreements relating to the Borrowing Base Properties; (iv) perfected first priority liens on all reserve accounts and all operating accounts related to each Borrowing Base Property; and (v) perfected first priority liens on and security interests in each subsidiary guarantor owning a Borrowing Base Property. Borrowings under the Credit Agreement will bear interest at Daily SOFR or Term SOFR plus 10 basis points (with a 0% floor) plus the applicable margin. Depending on the Company’s Net Debt to EBITDA ratio, the applicable margin for SOFR ranges from 2.25% to 3.00%. Default interest would accrue at the applicable rate plus 2.0%. The Facility contains customary terms, covenants, negative covenants, events of default, limitations and other conditions for credit facilities of this type. Subject to certain exceptions, the Company and the Borrower are subject to restrictions on incurring additional indebtedness and liens, investments, mergers and fundamental changes, sales or other dispositions of property, dividends and stock redemptions, changes in the nature of the Borrower’s business, transactions with affiliates and burdensome agreements. Financial covenants are generally based on the financial condition and results of operations of the Company and its consolidated subsidiaries and include, among others, the following: (i) a Consolidated Leverage Ratio (i.e., Consolidated Net Debt to the Consolidated Total Asset Value) of not more than 55%; and (ii) a Consolidated Fixed Charge Coverage Ratio (FCCR) (i.e., the ratio of Consolidated Adjusted EBITDA to Consolidated Fixed Charges) of not less than (i) prior to December 31, 2024, 1.1 to 1.0 and (ii) thereafter, 1.25 to 1.0. The Credit Agreement includes customary events of default, and the occurrence of an event of default will permit the Lenders to terminate commitments to lend under the Credit Agreement and accelerate payments of all amounts outstanding thereunder. On September 29, 2023, the Company amended its mortgage loan secured by the Four Seasons Resort Scottsdale. Terms of the amendment included increasing the outstanding principal from $100 million to $140 million, and extending the final maturity date by one year to December 2028. On October 31, 2023, the Company amended its $54.0 million mortgage loan secured by The Ritz-Carlton Lake Tahoe. Terms of the amendment included extending the maturity date by one year to January 2025, with a one-year extension option, amending the interest rate to SOFR + 3.60% and making a pay down of $587,000. Sources and Uses of Cash We had approximately $149.5 million and $261.5 million of cash and cash equivalents at September 30, 2023 and December 31, 2022, 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 operating activities were $73.0 million and $104.0 million for the nine months ended September 30, 2023 and 2022, respectively. Cash flows from operations were impacted by changes in hotel operations of our 14 comparable hotel properties, The Ritz-Carlton Reserve Dorado Beach, acquired on March 11, 2022, and the Four Seasons Resort Scottsdale, acquired 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. Net Cash Flows Provided by (Used in) Investing Activities . For the nine months ended September 30, 2023, net cash flows used in investing activities were $55.6 million. These cash outflows were primarily attributable to $55.6 million of capital improvements made to various hotel properties and a $237,000 loan to OpenKey partially offset by cash inflows of $327,000 related to proceeds from property insurance. Our capital improvements consisted of approximately $36.8 million of return on investment capital projects and approximately $18.8 million of renewal and replacement capital projects. For the nine months ended September 30, 2022, net cash flows used in investing activities were $123.6 million. These cash outflows were primarily attributable to $36.5 million of capital improvements made to various hotel properties, approximately $86.8 million associated with the acquisition of The Ritz-Carlton Reserve Dorado Beach and additional investments in 50 OpenKey of $328,000. Our capital improvements consisted of $22.1 million of return on investment capital projects and $14.4 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. 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. Net Cash Flows Provided by (Used in) Financing Activities. For the nine months ended September 30, 2023, net cash flows used in financing activities were $126.3 million. Cash outflows primarily consisted of repayments of indebtedness of $390.2 million, $39.4 million of dividend and distribution payments, $19.3 million of payments to repurchase common stock, payments of $7.2 million for the redemption of operating partnership units, $4.0 million to purchase interest rate caps, $2.0 million of distributions to a noncontrolling interest in consolidated entities, $3.3 million payments of loan costs and exit fees, and $4.8 million for cash redemptions of Series E and Series M preferred stock. These cash outflows were partially offset by cash inflows of $236.0 million from borrowings on indebtedness, $97.9 million from the issuance of preferred stock, $4.1 million of contributions from a noncontrolling interest in consolidated entities and $6.0 million of proceeds from in-the-money interest rate caps. For the nine months ended September 30, 2022, net cash flows provided by financing activities were $169.1 million. Cash inflows primarily consisted of debt borrowings of $70.5 million, $185.2 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 $68.3 million, $13.0 million of dividend and distribution payments, $1.8 million of payments for loan costs and fees, $2.1 million of payments for derivatives, $1.3 million for purchases of common stock and $193,000 for cash redemptions of Series E and Series M preferred stock. Dividend Policy. On December 8, 2022, our board of directors approved the Company’s dividend policy for 2023. The Company expects to pay a quarterly cash dividend of $0.05 per share for the Company’s common stock for 2023, or $0.20 per share on an annualized basis. On July 11, 2023, our board of directors declared a quarterly cash dividend of $0.05 per diluted share for the third quarter of 2023. 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 will continue to review our dividend policy on a quarter-to-quarter basis 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. 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 pandemics, 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 2022 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, FFO and Adjusted FFO are presented to help our investors evaluate our operating performance. 51 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 exclude impairment on real estate, (gain) loss on 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, other income/expense, write-off of loan costs and exit fees, advisory and settlement costs, advisory services incentive fee, gain/loss on extinguishment of debt, 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 they provide 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 they help 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. The following table reconciles net income (loss) to EBITDA, EBITDAre and Adjusted EBITDAre (in thousands) (unaudited): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income (loss) $ (22,611) $ (8,383) $ (9,145) $ 23,901 Interest expense and amortization of loan costs 23,306 14,490 69,779 33,293 Depreciation and amortization 22,703 19,604 67,791 57,616 Income tax expense (benefit) (1,190) 95 1,064 3,783 Equity in (earnings) loss of unconsolidated entity 60 74 208 220 Company’s portion of EBITDA of OpenKey (63) (74) (220) (220) EBITDA and EBITDAre 22,205 25,806 129,477 118,593 Amortization of favorable (unfavorable) contract assets (liabilities) 119 119 356 345 Transaction and conversion costs 978 5,562 3,229 6,888 Other (income) expense (293) (27) (293) (27) Write-off of premiums, loan costs and exit fees 2,588 8 2,848 106 Realized and unrealized (gain) loss on derivatives (223) (2,403) (918) (4,019) Stock/unit-based compensation 1,627 3,391 6,854 8,941 Legal, advisory and settlement costs — 544 81 1,176 Advisory services incentive fee — 1,048 — 1,294 (Gain) loss on extinguishment of debt — — (2,318) — Company’s portion of adjustments to EBITDAre of OpenKey — 1 — 6 Adjusted EBITDAre $ 27,001 $ 34,049 $ 139,316 $ 133,303 52 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 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 transaction and conversion costs, other income/expense, write-off of loan costs and exit fees, legal, advisory and settlement costs, advisory services incentive fee, stock/unit-based compensation, gain/loss on extinguishment of debt 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 condensed consolidated financial statements. 53 The following table reconciles net income (loss) to FFO and Adjusted FFO (in thousands) (unaudited): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income (loss) $ (22,611) $ (8,383) $ (9,145) $ 23,901 (Income) loss attributable to noncontrolling interest in consolidated entities (1,773) (823) (1,715) (2,265) Net (Income) loss attributable to redeemable noncontrolling interests in operating partnership 2,354 1,166 3,018 (647) Preferred dividends (10,582) (6,028) (31,809) (13,395) Deemed dividends on preferred stock (516) (2,649) (3,271) (4,802) Net income (loss) attributable to common stockholders (33,128) (16,717) (42,922) 2,792 Depreciation and amortization on real estate (1) 21,886 18,956 65,434 55,678 Net income (loss) attributable to redeemable noncontrolling interests in operating partnership (2,354) (1,166) (3,018) 647 Equity in (earnings) loss of unconsolidated entity 60 74 208 220 Company’s portion of FFO of OpenKey (71) (74) (234) (220) FFO available to common stockholders and OP unitholders (13,607) 1,073 19,468 59,117 Deemed dividends on preferred stock 516 2,649 3,271 4,802 Transaction and conversion costs 978 5,562 3,229 6,888 Other (income) expense (293) — (293) — Write-off of premiums, loan costs and exit fees 2,588 8 2,848 106 Unrealized (gain) loss on derivatives 1,790 (2,403) 5,244 (4,019) Stock/unit-based compensation 1,627 3,391 6,854 8,941 Legal, advisory and settlement costs — 544 81 1,176 Interest expense accretion on refundable membership club deposits 165 177 507 545 Amortization of loan costs 858 598 2,258 1,793 Advisory services incentive fee — 1,048 — 1,294 (Gain) loss on extinguishment of debt — — (2,318) — Company’s portion of adjustments to FFO of OpenKey — 1 — 6 Adjusted FFO available to common stockholders and OP unitholders $ (5,378) $ 12,648 $ 41,149 $ 80,649 ____________________ (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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Depreciation and amortization on real estate $ (817) $ (648) $ (2,357) $ (1,938) Amortization of loan costs (23) (23) (70) (68) 54 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 369 100 % 369 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 193 100 % 193 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 Cameo Beverly Hills (2) Los Angeles, CA 143 100 % 143 The Ritz-Carlton Reserve Dorado Beach (3) Dorado, Puerto Rico 96 100 % 96 Four Seasons Resort Scottsdale Scottsdale, AZ 210 100 % 210 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 4,192 3,957 ________ (1) The above information does not include the operations of the voluntary rental program with respect to condominium units not owned by the Company. (2) Includes 138 hotel rooms and five residences adjacent to the hotel. On August 1, 2023, the Company announced the rebranding and planned conversion of its Mr. C Beverly Hills in Los Angeles, California to the Cameo Beverly Hills. Following an extensive renovation, which is expected to be completed by the end of 2025, the hotel will join LXR Hotels & Resorts. (3) The above information does not include the operations of the voluntary rental program with respect to residential units not owned by the Company. (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 during the lease term. (6) The initial ground lease expires in 2065. The ground lease contains two 25-year extension options, at our election.