What changed in this filing

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Item 4. Controls and Procedures

2021-05-10 compared with 2020-11-09 · 56 added, 58 removed, 60 unchanged (66% of the section changed)

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Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Warning Concerning Forward-Looking Statements

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Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:

• The duration and severity of the economic downturn resulting from the COVID-19 pandemic and its impact on us and our operators and tenants,

• The implications of our termination of our IHG and Marriott agreements and our expectations about the ability of Sonesta to operate the hotels that may be transferred and rebranded to it from Wyndham, IHG and Marriott,

• Our expectations about our ability and the ability of our operators and tenants to operate throughout the COVID-19 pandemic and withstand the resulting economic downturn,

• The likelihood and extent to which our operators and tenants will be negatively impacted by the COVID-19 pandemic and its aftermath and their abilities and willingness to pay the contractual amounts of returns, rents or other obligations due to us,

• The duration and severity of the economic downturn resulting from the COVID-19 pandemic and its impact on us and our managers and tenants, and our and their ability to operate throughout the pandemic and its aftermath,

• Our expectation about the ability of Sonesta to operate the hotels that have been or may be transferred and rebranded to it,

• The likelihood and extent to which our managers and tenants will pay the contractual amounts of returns, rents or other obligations due to us,

• Our ability to maintain sufficient liquidity during the duration of the COVID-19 pandemic and resulting economic downturn,

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• Our ability to raise or appropriately balance the use of debt or equity capital,

• Our intent to make improvements to certain of our properties and the success of our hotel renovations,

• Our intent to make improvements to certain of our properties,

• Our ability to engage and retain qualified managers and tenants for our hotels and net lease properties on satisfactory terms,

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• Our credit ratings,

• Our expectation that we benefit from our relationships with RMR LLC and Sonesta,

• Our expectation that we benefit from our relationships with RMR LLC, Sonesta and TA,

• Our qualification for taxation as a REIT,

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Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, FFO, Normalized FFO, cash flows, liquidity and prospects include, but are not limited to:

• The impact of conditions in the economy, including the COVID-19 pandemic and the resulting economic downturn, and the capital markets on us and our operators and tenants,

• Competition within the real estate, hotel, transportation and travel center and other industries in which our tenants operate, particularly in those markets in which our properties are located,

• The impact of conditions in the economy, including the COVID-19 pandemic and the resulting economic downturn, and the capital markets on us and our managers and tenants,

• Competition within the real estate, hotel, transportation and travel center and other industries in which our managers and tenants operate, particularly in those markets in which our properties are located,

• Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,

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federal income tax purposes,

• Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control, and

• Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other man-made or natural disasters beyond our control, and

• Actual and potential conflicts of interest with our related parties, including our Managing Trustees, TA, Sonesta, RMR LLC and others affiliated with them.

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We may be unable to pay our debt obligations or to increase or maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated,

• We fully utilized the security deposit we held from IHG and IHG has defaulted on its payments to us.

We fully utilized the security deposit we held and exhausted the $30.0 million limited guarantee to cover shortfalls in hotel cash flows available to pay the minimum returns due to us under the Marriott agreement.

Under the Marriott agreement, if the security deposit and guaranty have been depleted, Marriott is required to fund shortfalls up to 80% of the minimum returns due to us to avoid termination.

Marriott has not funded any of the required shortfalls in our minimum returns and we have terminated our Marriott agreement effective January 31, 2021.

We expect to rebrand to Sonesta 102 of the 103 hotels under the IHG agreement and the 98 hotels, to the extent not sold, under the Marriott agreement.

Transitioning hotels to another operator is disruptive to their operations and requires significant capital investments,

• We expect Sonesta to operate 257 of our 329 hotels, which constituted approximately 47.8% of our total historical real estate investments as of September 30, 2020, after we rebrand certain of our Wyndham, Marriott and IHG hotels to Sonesta in the fourth quarter of 2020 and the first quarter of 2021.

Sonesta is a small privately held company with less resources and scale compared to Wyndham, IHG and Marriott.

• Sonesta operated 256 of our 310 hotels as of March 31, 2021.

We are currently negotiating with Hyatt its possible continued management of 22 of our hotels.

If we do not reach an agreement with Hyatt, we expect that some or all of these hotels may transition to Sonesta management in June 2021.

Transitioning hotels to another operator is disruptive to the hotels’ operations and requires significant capital investments.

If Sonesta were to fail to provide quality services and amenities or to maintain a quality brand, our income from these properties may be adversely affected.

There can be no assurance that Sonesta can operate the hotels rebranded from Wyndham, IHG and Marriott as effectively or for returns at levels that could otherwise be achieved by Wyndham, IHG or Marriott.

There can be no assurance that Sonesta can operate the hotels as effectively or for returns at levels that could otherwise be achieved by other large well known hotel companies.

Further, if we were required to replace Sonesta, we could experience significant disruptions in operations at the applicable properties, which could reduce our income and cash flows from, and the value of, those properties.

We have no guarantee or security deposit under our Sonesta agreements.

Accordingly, we may receive amounts from Sonesta that are less than the contractual minimum returns stated in our agreements with Sonesta or we may be requested to fund losses for our Sonesta hotels.

Further, we own a 34% interest in Sonesta.

We have no guarantee or security deposit under our Sonesta agreement.

Accordingly, the returns we receive from our hotels managed under our Sonesta agreement are dependent upon the financial results of those hotel operations and we may continue to receive amounts from Sonesta that are less than the contractual minimum returns stated in our Sonesta agreement or we may be requested to fund operating losses for our Sonesta hotels.

Further, we own an approximately 34% ownership interest in Sonesta.

If Sonesta experiences losses, or requires additional capital, Sonesta may request we fund our share through the contribution of additional capital,

• We cannot be sure of the future financial performance of our properties and whether such performance will cover our minimum returns and rents, or regarding our managers’, tenants’ or guarantors’ future actions or their abilities or willingness to pay minimum returns and rents owed to us.

If other operators do not honor their obligations, we may seek to terminate our arrangements with them or other actions to enforce our rights,

• Statements about improving trends experienced during the course of the 2020 third quarter in the level of requests for rent deferments or other relief and improving hotel occupancies may imply that the positive trend may continue.

However, COVID-19 infections have recently increased in large parts of the United States and the U.S.

economy is experiencing continued challenges.

These positive trends could reverse and further deteriorate as a result,

• We have recently renovated certain hotels and are currently renovating additional hotels.

Operating results at our hotels may decline as a result of having rooms out of service or other disruptions during renovations.

Also, while our funding of these capital projects will cause our contractual minimum returns to increase, the hotels’ operating results may not increase or may not increase to the extent that the minimum returns increase.

Accordingly, coverage of our minimum returns at these hotels may remain depressed for an extended period,

• We cannot be sure of the future financial performance of our properties, or regarding our managers’, tenants’ or guarantors’ future actions or their abilities or willingness to pay contracted amounts owed to us.

If other operators or guarantors do not honor their obligations, we may seek to terminate our arrangements with them or other actions to enforce our rights,

• Recent improvements in leisure travel may not be sustained, may stall or could decline,

• If general economic activity in the country declines, the operating results of certain of our properties may decline, the financial results of our managers and our tenants may suffer and these managers and tenants may be unable to pay our returns or rents.

Also, depressed operating results from our properties for extended periods may result in the operators of some or all of our properties becoming unable or unwilling to meet their obligations or their guarantees and security deposits we hold may be exhausted,

• Hotel and other competitive forms of temporary lodging supply (for example, Airbnb) have been increasing and may affect our hotel operators’ ability to grow ADR and occupancy, and ADR and occupancy could decline due to increased competition which may cause our hotel operators to become unable to pay our returns or rents,

• If the current level of commercial activity in the country declines including as a result of the current economic downturn in response to the COVID-19 pandemic, if the price of diesel fuel increases significantly, if fuel conservation measures are increased, if freight business is directed away from trucking, if TA is unable to effectively compete or operate its business, if fuel efficiencies, the use of alternative fuels or transportation technologies reduce the demand for products and services TA sells or for various other reasons, TA may become unable to pay current and deferred rents due to us,

• Cash flows generated by certain tenant businesses may not be sufficient for a tenant to meet its obligations to us.

Our tenants’ failures to successfully operate their businesses could materially and adversely affect us,

Also, depressed operating results from our properties for extended periods may result in the operators of some or all of our properties becoming unable or unwilling to meet their obligations,

• Hotel and other competitive forms of temporary lodging supply have been increasing and may affect our hotel operators’ ability to grow ADR and occupancy, and ADR and occupancy could decline due to increased competition which may cause our hotel operators to become unable to pay our returns or rents,

• If the current level of commercial activity in the country declines, including as a result of the current economic downturn, if the price of diesel fuel increases significantly, if fuel conservation measures are increased, if freight business is directed away from trucking, if TA is unable to effectively compete or operate its business, if fuel efficiencies, the use of alternative fuels or transportation technologies reduce the demand for products and services TA sells or for various other reasons, TA may become unable to pay current and deferred rents due to us,

• Our ability to grow our business and increase our distributions depends in large part upon our ability to buy properties that generate returns or can be leased for rents which exceed our operating and capital costs.

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In addition, any properties we may acquire may not generate returns or rents which exceed our operating and capital costs,

• We believe that our portfolio agreements include diverse groups of properties.

Our portfolio agreements may not increase the security of our cash flows or increase the likelihood our agreements will be renewed as we expect,

• We were in the process of marketing certain hotels for sale in order to reduce our leverage.

Current market conditions have forced us to suspend efforts to sell certain of these properties.

We may not complete the sales of any additional hotels we plan to sell, and we may determine to sell fewer, additional or other assets than those we may target for sale.

Also, we may sell assets at prices that are less than we expect and less than their carrying values and we may incur losses on these sales or with respect to these assets, or may not ultimately use any proceeds we may receive to reduce debt leverage,

• At September 30, 2020, we had $47,847 of cash and cash equivalents, $919,914 available under our $1,000,000 revolving credit facility, guarantees covering some of our minimum returns and rents and executed on $74,735 of property sales and are under agreement to sell additional properties for an aggregate of $218,800.

These statements may imply that we have sufficient working capital and liquidity to meet our obligations for the next twelve months.

We used $400,000 of the availability under our revolving credit facility to repay our outstanding term loan on November 5, 2020.

• We believe that our portfolio agreements include diverse groups of properties and that this diversity may improve operating results that might be realized from a more concentrated group of properties.

However, our operator concentration with respect to our hotel operations has recently increased as a result of our transitioning of a majority of our hotels to Sonesta management, and our travel center properties continue to be concentrated with TA.

As a result, our operating results may not improve,

• Current market conditions may cause the process of selling properties to continue to take longer than previously expected.

We may not complete the sales of any properties we currently plan to sell, and we may determine to sell fewer properties.

Also, we may sell assets at prices that are less than we expect and less than their carrying values and we may incur losses on these sales or with respect to these assets,

• Contingencies in our pending sale agreements may not be satisfied and any expected sales and any related management or lease arrangements we expect to enter may not occur, may be delayed or the terms of such transactions or arrangements may change,

• As of May 6, 2021, we had approximately $897.6 million of cash or cash equivalents.

This statement may imply that we have sufficient working capital and liquidity to meet our obligations for the next twelve months.

The amounts we receive from our operators may be insufficient to operate our business profitably.

Certain tenants have requested and we have granted certain rent relief and these requests could increase.

In addition, our managers and tenants may not be able to fund minimum returns and rents due to us from operating our properties or from other resources.

In the past and currently, certain of our tenants and managers have in fact not paid the minimum amounts due to us from their operations of our leased or managed properties.

Also, certain of the security deposits and guarantees we have to cover any such shortfalls are limited in amount and duration, and any security deposits we apply for such shortfalls do not result in additional cash flows to us.

Our properties require, and we have agreed to provide, significant funding for capital improvements, renovations and other matters.

In the past and currently, certain of our tenants and managers have in fact not paid the minimum amounts due to us from their operations of our leased or managed properties and we may be required to fund hotel operating losses and working capital for our hotels.

Further, our properties require significant funding for capital improvements and other matters.

Accordingly, we may not have sufficient working capital or liquidity,

• Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions.

The ratio of income available for debt service to debt service is below the 1.5x requirement under our public debt covenants as of March 31, 2021.

We are not permitted under our debt agreements to incur additional debt while this ratio is below 1.5x.

As a precautionary measure, we have fully drawn our $1.0 billion credit facility to maintain our financial flexibility.

Our ability to incur debt may be limited for an extended period of time.

We cannot be certain how long our ratio of income available for debt service to debt service may remain below 1.5x.

We may not have any immediately available borrowing capacity to meet any funding needs beyond our cash on hand if our operating results and financial condition are significantly and adversely impacted by current economic conditions or otherwise.

If we cannot incur additional debt, we may be forced to raise additional sources of capital or take other measures to maintain adequate liquidity and we may not succeed in raising any capital we may need,

• We expect the borrowings under our revolving credit facility to strengthen our financial position;

however, we may not obtain the financial flexibility we expect due to the ongoing COVID-19 pandemic or for other reasons.

We can provide no assurance regarding the duration and severity of the economic downturn resulting from the COVID-19 pandemic and its impact on us and our operators,

• We may be unable to repay our debt obligations when they become due,

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However, we may not succeed in this regard and we may not have reasonable access to capital, including due to the COVID-19 pandemic and the resulting economic downturn.

If challenging market conditions, including due to the COVID-19 pandemic and the resulting economic downturn, last for a long period or worsen, our operators and tenants may experience liquidity constraints and as a result may be unable or unwilling to pay returns or rents to us and our ability to operate our business effectively may be challenged,

• Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions.

If our operating results and financial condition are significantly negatively impacted by the current economic conditions or otherwise, we may fail to satisfy covenants and conditions under our credit agreement or fail to satisfy our public debt covenants.

We expect the ratio of income available from debt service to debt service coverage could fall below the 1.5x requirement under our public debt covenants in the first quarter of 2021.

We will not be allowed to incur additional debt while this ratio is below 1.5x.

If challenging market conditions last for a long period or worsen, our managers and tenants may experience liquidity constraints and as a result may be unable or unwilling to pay returns or rents to us and our ability to operate our business effectively may be challenged,

• We currently expect to fund $140 million of capital expenditures in 2021.

The cost of capital projects may be greater than we anticipate and operating results at our hotels may decline as a result of having rooms out of service to complete such improvements,

• Actual costs under our revolving credit facility or other floating rate debt will be higher than LIBOR plus a premium because of fees and expenses associated with such debt,

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However, those agreements permit early termination in certain circumstances.

Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms, and

Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms,

• We believe that our relationships with our related parties, including RMR LLC, RMR Inc., TA, Sonesta and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business.

However, the advantages we believe we may realize from these relationships may not materialize.

Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as pandemics, acts of terrorism, natural disasters, changes in our managers’ or tenants’ revenues or expenses, changes in our managers’ or tenants’ financial conditions, the market demand for hotel rooms or the goods and services provided at our properties or changes in capital markets or the economy generally.

The information contained elsewhere in this Quarterly Report on Form 10-Q and in our 2019 Annual Report or in our other filings with the SEC, including under the caption “Risk Factors,” or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements.

However, the advantages we believe we may realize from these relationships may not materialize, and

• Two of our subsidiaries have initiated arbitration proceedings against Marriott and several of its subsidiaries after Marriott challenged the efficacy of the termination of our agreement with them.

The results of arbitration proceedings are difficult to predict and we can provide no assurances regarding such results.

Even if we are successful in such proceedings, the pendency and conduct of such proceedings may be expensive and distracting to our management, and could be disruptive to our operations.

Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as pandemics, including the COVID-19 pandemic, acts of terrorism, natural disasters, changes in our managers’ or tenants’ revenues or expenses, changes in our managers’ or tenants’ financial conditions, the market demand for hotel rooms or the goods and services provided at our properties or changes in capital markets or the economy generally.

The information contained elsewhere in this Quarterly Report on Form 10-Q, our 2020 Annual Report or in our other filings with the SEC, including under the caption “Risk Factors,” or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements.

Our filings with the SEC are available on the SEC’s website at www.sec.gov.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 4. Controls and Procedures