Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2020 Annual Report.
Overview (dollar amounts in thousands, except share amounts and per-room hotel data)
We are a REIT organized under the laws of the State of Maryland. As of March 31, 2021, we owned 1,108 properties in 47 states, the District of Columbia, Canada and Puerto Rico.
Business Environment and Outlook. The lodging industry and other industries in which our managers and tenants operate have been adversely impacted by the COVID-19 global pandemic, along with federal, state and local government mandates intended to contain and mitigate the spread of COVID-19, which continues to have a significant negative impact on our results of operations, financial position and cash flow. Our results of operations and cash flows from our hotels are heavily dependent on our operators’ ability to generate returns to us. Although leisure demand at our hotels has improved through the first quarter of 2021 when compared to 2020 levels, business transient and group demand have been limited and, consistent with trends throughout the U.S. lodging industry, continue to lag in recovery. Although overall lodging activity continues to improve over levels seen since the beginning of the pandemic, and our current expectation is that lodging demand may improve in the second half of 2021 at a more meaningful pace than experienced to date, we expect the recovery in the lodging industry to historical levels may take several years. We cannot predict with certainty when business levels will return to normalized historical levels after the effects of the pandemic subside. We currently expect that the recovery with respect to business transient and group business will be gradual and likely inconsistent. Factors such as public health, availability and effectiveness of COVID-19 vaccines, changes in business practices with regard to travel and the geopolitical environment may impact the timing, extent and pace of such recovery. In addition, consumer confidence and leisure demand will continue to be affected by unemployment, perceptions of the safety of returning to normal activities and broader macroeconomic trends. We believe that our current financial resources and our expectations as to the future performance of the lodging industry and the industries in which our net lease retail tenants operate will enable us to withstand the COVID-19 pandemic and its aftermath despite the operating losses we have realized during the pandemic. For more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1, “Business—COVID-19 Pandemic” and Part I, Item 1A, “Risk Factors”, of our 2020 Annual Report. Our manager, RMR LLC, has taken various actions in response to the COVID-19 pandemic to address its operating and financial impact on us. In addition, we are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. For more information regarding these actions and monitoring activities, see our 2020 Annual Report.
Management agreements and leases . At March 31, 2021, we owned 310 hotels operated under seven agreements. We leased 305 of these hotels to our wholly owned TRSs that are managed by hotel operating companies. We have entered an agreement to sell the other five hotels and have leased these properties to the buyer in anticipation of the sale. We own 798 service-oriented properties with 168 tenants subject to “triple net” leases, where the tenants are generally responsible for the payment of operating expenses and capital expenditures. Our condensed consolidated statements of income (loss) include hotel operating revenues and hotel operating expenses from our managed hotels and rental income and other operating expenses from our leased hotels and net lease properties.
During the quarter ended March 31, 2021, we transferred the branding and management of 88 hotels to Sonesta from Marriott. For further information regarding these transfers, see Note 5 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In January 2021, we received a notice of termination from Hyatt that terminated our Hyatt agreement, effective as of April 8, 2021, as a result of Hyatt’s guaranty being exhausted. On April 7, 2021, we and Hyatt agreed to a short term extension of the termination date to May 22, 2021. We and Hyatt are currently in discussions regarding possible changes to our Hyatt agreement that may result in some or all of the hotels remaining Hyatt managed. However, if such discussions do not result in a mutually acceptable agreement for Hyatt to continue to manage some or all of these hotels, we expect to transition management of those hotels to Sonesta on or about June 1, 2021. For further information on our Hyatt and Sonesta agreements, see Notes 5 and 9 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Hotel Portfolio. As of March 31, 2021, we owned 310 hotels. In the first quarter of 2021, the U.S. hotel industry generally realized decreases in average daily rate, or ADR, revenue per available room, or RevPAR, and occupancy compared to 2020. During the quarter ended March 31, 2021, our 304 comparable hotels that we owned continuously and were open and operating for the entire periods being compared produced aggregate quarter over quarter decreases in ADR and RevPAR and a decline in occupancy. We believe these results are primarily due to the disruption and displacement at certain of our hotels as a result of the COVID-19 pandemic, which began negatively affecting results in March 2020, including significant decreases in business and leisure activity in areas where some of our hotels are located, partially offset by increased demand from first responders, medical personnel and people seeking safe locations for quarantine or to remain socially distanced, particularly in our long-term or extended stay properties.
For the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 for all our 310 hotels, ADR decreased 29.6% to $88.02, occupancy decreased 16.5 percentage points to 40.1% and RevPAR decreased 50.1% to $35.30.
For the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 for our 304 comparable hotels that we owned continuously since January 1, 2020, ADR decreased 29.2% to $87.19, occupancy decreased 17.3 percentage points to 40.1% and RevPAR decreased 50.6% to $34.96.
Comparable hotels data . We present RevPAR, ADR and occupancy for the periods presented on a comparable basis to facilitate comparisons between periods. We generally define comparable hotels as those that were owned by us and were open and operating for the entire periods being compared. For the quarters ended March 31, 2021 and 2020, we excluded six hotels from our comparable results. Four were closed for major renovations and two suspended operations as a result of the COVID-19 pandemic during part of the periods presented.
Net Lease Portfolio . As of March 31, 2021, we owned 798 net lease service-oriented retail properties with 13,452,608 square feet leased to 168 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rent of $375,811. Our net lease portfolio was 98.5% occupied as of March 31, 2021 with a weighted (by annual minimum rent) lease term of 10.7 years, operating under 130 brands in 21 distinct industries. TA is our largest tenant. As of March 31, 2021, we leased 179 travel centers to TA under five master leases that expire between 2029 and 2035 and require annual minimum rents of $246,110.
Additional details of our hotel operating agreements and our net lease agreements are set forth in Notes 5 and 9 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the tables and notes thereto below.
Acquisitions and Dispositions. During the three months ended March 31, 2021, we acquired a land parcel adjacent to a property we own in Nashville, TN for a purchase price of $7,709, including acquisition related costs.
We sold one net lease property with 2,797 rentable square feet for $375, excluding closing costs, during the three months ended March 31, 2021. In April 2021, we sold one hotel with 146 rooms for $9,753, excluding closing costs, and one net lease property with 32,130 square feet for $1,206, excluding closing costs.
We have entered into an agreement to sell five hotels with an aggregate of 430 rooms in four states and an aggregate carrying value of $10,699 for an aggregate sales price of $22,263, excluding closing costs. We have also entered into agreements to sell two net lease properties with an aggregate of 35,330 square feet and an aggregate carrying value of $1,439 for an aggregate sales price of $1,581, excluding closing costs. We currently expect these sales to be completed by the end of the second quarter of 2021. However, these sales are subject to conditions and we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.
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Results of Operations (dollar amounts in thousands, except share amounts)
Three Months Ended March 31, 2021 compared to the Three Months Ended March 31, 2020
For the Three Months Ended March 31,
Increase % Increase
2021 2020 (Decrease) (Decrease)
Revenues:
Hotel operating revenues $ 168,953 $ 383,503 $ (214,550) (55.9) %
Rental income - hotels 496 1,008 (512) (50.8) %
Rental income - net lease 91,721 99,265 (7,544) (7.6) %
Total revenues 261,170 483,776 (222,606) (46.0) %
Expenses:
Hotel operating expenses 214,987 271,148 (56,161) (20.7) %
Other operating expenses 3,417 3,759 (342) (9.1) %
Depreciation and amortization - hotels 68,124 67,669 455 0.7 %
Depreciation and amortization - net lease 56,244 60,257 (4,013) (6.7) %
Total depreciation and amortization 124,368 127,926 (3,558) (2.8) %
General and administrative 12,657 14,024 (1,367) (9.7) %
Loss on asset impairment 1,211 16,740 (15,529) (92.8) %
Total expenses 356,640 433,597 (76,957) (17.7) %
Other operating income:
Loss on sale of real estate (9) (6,911) 6,902 (99.9) %
Unrealized losses on equity securities, net (6,481) (5,045) (1,436) 28.5 %
Interest income 57 262 (205) (78.2) %
Interest expense (89,391) (71,075) (18,316) 25.8 %
Loss before income taxes and equity in losses of an investee (191,294) (32,590) (158,704) 487.0 %
Income tax expense (853) (342) (511) 149.4 %
Equity in losses of an investee (2,843) (718) (2,125) 296.0 %
Net loss $ (194,990) $ (33,650) $ (161,340) 479.5 %
Weighted average shares outstanding (basic) 164,498 164,370 128 0.1 %
Weighted average shares outstanding (diluted) 164,498 164,370 128 0.1 %
Net loss per common share (basic and diluted) $ (1.19) $ (0.20) $ (0.99) 495.0 %
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.
Hotel operating revenues. The decrease in hotel operating revenues is a result of decreased revenues at certain of our managed hotels primarily as a result of lower occupancies principally as a result of the COVID-19 pandemic ($202,867), the sale of 18 hotels ($7,564) and renovations at certain of our hotels ($4,119). Additional operating statistics of our hotels are included in the table on page 29.
Rental income - hotels. The decrease in rental income – hotels is primarily the result of the conversion of one hotel from a leased to a managed property and the termination of the lease for 48 vacation units at one hotel during 2020 ($968), partially offset by the conversion of five hotels from managed properties to leased properties in anticipation of sale of the properties ($456).
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Rental income - net lease. The decrease in rental income - net lease is primarily the result of the sale of properties ($3,874) and an increase in reserves for uncollectible rents and higher vacancies due to the COVID-19 pandemic ($3,670). We reduced rental income by $1,883 and $1,646 for the 2021 and 2020 periods, respectively, to record scheduled rent changes under certain leases, the deferred rent obligations payable to us under our TA leases and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks on a straight-line basis.
Hotel operating expenses. The decrease in hotel operating expenses is a result of a decrease in occupancy at certain managed hotels primarily driven by the COVID-19 pandemic ($123,601), the sale of eighteen hotels ($6,572) and a decrease in real estate taxes, insurance and other fees ($5,737), partially offset by a decrease in the amount of guarantee and security deposit utilization under certain of our hotel management agreements ($60,114) and hotel manager transition related costs resulting from the rebranding of 88 hotels during the 2021 period ($19,635). Hotel operating expenses were decreased by $10,392 and $70,506 for the utilization of our security deposits and guarantees during the three months ended March 31, 2021 and March 31, 2020, respectively.
Other operating expenses. The decrease in other operating expenses is primarily the result of the sale of certain net lease properties.
Depreciation and amortization - hotels. The increase in depreciation and amortization - hotels is a result of the depreciation and amortization of improvements acquired with funds from our FF&E reserves or directly funded by us since January 1, 2020 ($5,891), partially offset by certain of our depreciable assets becoming fully depreciated since January 1, 2020 ($4,218) and our hotel dispositions since January 1, 2020 ($1,218).
Depreciation and amortization - net lease. The decrease in depreciation and amortization - net lease is a result of our net lease dispositions since January 1, 2020 ($3,292) and certain of our depreciable assets becoming fully depreciated since January 1, 2020 ($721).
General and administrative. The decrease in general and administrative costs is primarily due to a decrease in business management fees and professional service expenses in the 2021 period.
Loss on asset impairment. We recorded a $1,211 loss on asset impairment during the three months ended March 31, 2021 to reduce the carrying value of two net lease properties to their estimated fair values and a $16,740 loss on asset impairment during the three months ended March 31, 2020 to reduce the carrying value of two net lease properties to their estimated fair value.
Loss on sale of real estate. We recorded a $9 net loss on sale of real estate during the three months ended March 31, 2021 in connection with the sale of one net lease property and a $6,911 net loss on sale of real estate during the three months ended March 31, 2020 in connection with the sales of six net lease properties.
Unrealized losses on equity securities, net. Unrealized losses on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value as of March 31, 2021 and 2020.
Interest income. The decrease in interest income is due to lower interest rates during the 2021 period.
Interest expense. The increase in interest expense is due to higher average outstanding borrowings and a higher weighted average interest rate in the 2021 period.
Income tax expense. We recognized higher income taxes during the 2021 period primarily due to an increase in the amount of state and foreign sourced income subject to income taxes.
Equity in losses of an investee. Equity in losses of an investee represents our proportionate share of the losses of Sonesta.
Net loss. Our net loss and net loss per common share (basic and diluted) each increased in the 2021 period compared to the 2020 period primarily due to the revenue and expense changes discussed above.
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Liquidity and Capital Resources (dollar amounts in thousands, except share amounts)
Our Managers and Tenants
As of March 31, 2021, 305 of our hotels were managed by five hotel operating companies pursuant to six combination portfolio agreements. We have entered into an agreement to sell five of our 310 hotels and have entered into a short term lease of these properties with the buyer in anticipation of the sale. Our 798 net lease properties were leased to 168 tenants as of March 31, 2021. The costs of operating and maintaining our properties are generally paid by the hotel managers as agents for us or by our tenants for their own account. Our hotel managers and tenants derive their funding for property operating expenses and for returns and rents due to us generally from property operating revenues and, to the extent that these parties themselves fund our minimum returns and rents, from their separate resources. As of March 31, 2021, our hotel managers included Sonesta (256 hotels), Hyatt (22 hotels), Radisson (nine hotels), Marriott (17 hotels) and IHG (one hotel). TA is our largest tenant (179 travel centers).
The COVID-19 pandemic has had a material and adverse effect on the lodging and service industries and our hotel managers’ and tenants’ businesses, which may reduce their ability or willingness to pay us our minimum returns and rents, increase the likelihood they will default in paying us returns and rent and reduce the value of those properties. We continue to carefully monitor the developments of the COVID-19 pandemic and its impact on our operators and our other stakeholders.
As of January 1, 2021, Marriott managed 105 of our hotels under agreements we had terminated in 2020 for Marriott’s failure to pay the cumulative shortfall between the payments we had received and 80% of the cumulative priority returns due to us in accordance with the agreement. We transferred the branding and management of 88 Marriott hotels to Sonesta in February 2021 and March 2021. As of March 31, 2021 , Marriott managed 17 of our hotels. We sold one of these hotels in April 2021. For further information regarding this sale, see the Notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We are in arbitration proceedings with Marriott regarding, among other things, the timing and characterization of certain payments made to us, including Marriott’s assertion that we are required to refund $19,120 of minimum return advances made to us in 2020, and the validity of the timing of the termination of the Marriott agreements, including an exit hotel agreement which, if not terminated, would require us to sell the 16 hotels encumbered with a Marriott brand. We are also seeking repayment of certain working capital advances we made to Marriott during 2020. We have entered an agreement with Marriott regarding the 16 hotels noted above, pursuant to which we agreed to have these hotels remain Marriott branded hotels until the arbitration is resolved.
In January 2021, we received a notice of termination from Hyatt that terminated our Hyatt agreement, effective as of April 8, 2021, as a result of Hyatt’s guaranty being exhausted. On April 7, 2021, we and Hyatt agreed to a short term extension of the termination date to May 22, 2021. We and Hyatt are currently in discussions regarding possible changes to our Hyatt agreement that may result in some or all of the hotels remaining Hyatt managed. However, if such discussions do not result in a mutually acceptable agreement for Hyatt to continue to manage some or all of these hotels, we expect to transition management of those hotels to Sonesta on or about June 1, 2021.
TA, our largest tenant, is current on all its rent obligations to us as of May 6, 2021. During the three months ended March 31, 2021, we collected 93.1% of rents due to us from our net lease tenants. During April 2021, we collected 97.7% of rents due to us from our net lease tenants. During the three months ended March 31, 2021, we entered into rent deferral agreements for $1,228 of rent with five net lease tenants. As of March 31, 2021, we had $10,605 of deferred rents outstanding related to 45 tenants who represent approximately 2.8% of our annualized rental income of our net lease retail portfolio as of March 31, 2021. Generally, these rent deferrals are payable by the tenants over a 12 to 24 month period. We may receive additional similar requests in the future, and we may determine to grant additional relief in the future, which may vary from the type of relief we have granted to date, and could include more substantial relief, if we determine it prudent or appropriate to do so. In addition, if any of our tenants are unable to continue as going concerns as a result of the current economic conditions or otherwise, we will experience a reduction in rents received and we may be unable to find suitable replacement tenants for an extended period or at all and the terms of our leases with those replacement tenants may not be as favorable to us as the terms of our agreements with our existing tenants. As a result of these uncertainties surrounding the COVID-19 pandemic and the duration and extent of the resulting economic downturn, we are unable to determine what the ultimate impact will be on our tenants and their ability and willingness to pay us rent and any additional impact this pandemic will have on our future cash flows. During the three months ended March 31, 2021 and 2020, we recorded reserves for uncollectible rents of $4,785 and $1,115, respectively, based on our assessment of whether amounts due under certain tenants’ leases are probable of collection. We had reserves for uncollectible rents of $23,051 and $18,230 as of March 31, 2021 and December 31, 2020, respectively.
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We define net lease coverage as earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, divided by the annual minimum rent due to us weighted by the minimum rent of the property to total minimum rents of the net lease portfolio. EBITDAR amounts used to determine rent coverage are generally for the latest twelve month period reported based on the most recent operating information, if any, furnished by the tenant. Operating statements furnished by the tenant often are unaudited and, in certain cases, may not have been prepared in accordance with GAAP and are not independently verified by us. Tenants that do not report operating information are excluded from the coverage calculations. In instances where we do not have financial information for our portion of the measurement period from our tenants, we have calculated an implied EBITDAR for the period using industry benchmark data to more accurately reflect the impact of COVID-19 on our tenants’ operations. We believe using only financial information from the earlier periods could be misleading as it would not reflect the negative impact those tenants experienced as a result of the COVID-19 pandemic. As a result, we believe using this industry benchmark data provides a more accurate estimated representation of recent operating results and coverage for those tenants. Our net lease properties generated coverage of 2.19x and 2.28x as of March 31, 2021 and 2020, respectively.
Our Operating Liquidity and Capital Resources
Our principal sources of funds to meet operating and capital expenses, debt service obligations and distributions to our shareholders are minimum returns and rents from our hotels and net lease portfolio and borrowings under our revolving credit facility. We receive minimum returns and rents from our managers and tenants monthly. We may receive additional returns, percentage rents and our share of the operating profits of our managed hotels after payment of management fees and other deductions, if any, either monthly or quarterly, and these amounts are usually subject to annual reconciliations. We believe we have sufficient liquidity to withstand the current decline in operating cash flow, fund our capital expenditures, pay debt service obligations and make distributions to our shareholders for the next twelve months and for the foreseeable future thereafter. However, our managers and tenants may become further or increasingly unable or unwilling to pay minimum returns and rents to us when due as a result of current economic conditions and, as a result, our revenue, cash flow, and net income could decline. Under the current challenging operating environment posed by the COVID-19 pandemic and the slowdown in U.S. economic activity and lodging demand, we have taken steps to preserve liquidity by drawing down the remaining capacity on our $1,000,000 revolving credit facility, maintaining our quarterly distribution to our shareholders at $0.01 per share, which we expect to continue at that rate for the foreseeable future, subject to applicable REIT tax requirements, by selectively making capital expenditures, and by continuing to work with our hotel operators to reduce hotel operating expenses. We intend to use available cash in the near term predominantly to fund operating losses at our hotels, to pay corporate expenses, including debt service, fund capital expenditures, and to pay distributions to our shareholders. As of March 31, 2021, we were not in compliance with one of our debt covenants necessary to incur additional debt, and as a result, we will not be able to incur additional debt until we meet the required covenant level. We may access equity markets or seek other sources of capital if favorable conditions exist for us in order to enhance our liquidity, reduce debt and to fund cash needs.
The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands):
Three Months Ended March 31,
2021 2020
Cash and cash equivalents and restricted cash at the beginning of the period $ 91,456 81,259
Net cash provided by (used in):
Operating activities (62,724) $ 97,016
Investing activities (68,806) $ (69,614)
Financing activities 919,625 $ (8,906)
Cash and cash equivalents and restricted cash at the end of the period $ 879,551 $ 99,755
The change from cash flows provided by operating activities in the 2020 period to cash flows used in operating activities for the three months ended March 31, 2021 is primarily due to lower returns earned from our hotel portfolio and higher interest expense in the 2021 period. The decrease in cash flows used in investing activities in the 2021 period is primarily due to a decrease in real estate disposition activity and lower hotel managers’ purchases with restricted cash in the 2021 period, partially offset by our $25,443 capital contribution to Sonesta in the 2021 period and our receipt of a hotel manager’s deposit of insurance proceeds into restricted cash during the 2020 period. The increase in cash provided by financing activities for the three months ended March 31, 2021 as compared to the prior year period is primarily due to a draw down of the remaining capacity on our $1,000,000 revolving credit facility and lower common share distributions compared to the 2020 period.
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We maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 305 hotels to our wholly owned TRSs that are managed by hotel operating companies. As a REIT, we do not expect to pay federal income taxes on the majority of our income; however, the income realized by our TRSs in excess of the rent they pay to us is subject to U.S. federal income tax at corporate income tax rates. In addition, the income we receive from our hotels in Canada and Puerto Rico is subject to taxes in those jurisdictions and we are subject to taxes in certain states where we have properties despite our qualification for taxation as a REIT.
Our Investment and Financing Liquidity and Capital Resources
Various percentages of total sales at some of our hotels are escrowed as FF&E reserves to fund future capital improvements. We own all the FF&E escrows for our hotels. During the three months ended March 31, 2021, our hotel managers and tenants deposited $447 to these accounts and spent $14,198 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of March 31, 2021, there was $5,096 on deposit in these escrow accounts, which was held directly by us and is reflected in our condensed consolidated balance sheets as restricted cash. As a result of the COVID-19 pandemic and the adverse impact on the lodging industry and our properties, we and certain of our hotel operators agreed to temporarily suspend the required contribution to our FF&E reserves under certain of our agreements. As a result, less cash will be available to us to fund future capital improvements and we may be required to provide additional fundings that may have otherwise been available in escrowed FF&E reserves. Such fundings are unlikely to materially increase in the near term above what we currently expect, as reduced occupancies are resulting in less usage and less wear and tear of our properties.
Our hotel operating agreements generally provide that, if necessary, we may provide our managers and tenants with funding for capital improvements to our hotels in excess of amounts otherwise available in escrowed FF&E reserves or when no FF&E reserves are available. During the three months ended March 31, 2021, we funded $28,881 for capital improvements in excess of FF&E reserves available to our hotels. We currently expect to fund $140,000 for capital improvements to certain hotels during the last nine months of 2021 using cash on hand.
Our net lease portfolio leases do not require FF&E escrow deposits. However, tenants under these leases are required to maintain the leased properties, including structural and non-structural components. Tenants under certain of our net lease portfolio leases, including TA, may request that we purchase qualifying capital improvements to the leased facilities in return for minimum rent increases or we may agree to provide allowances for tenant improvements upon execution of new leases or when renewing our existing leases. We funded $156 of capital improvements to properties under these lease provisions during the three months ended March 31, 2021. Tenants are not obligated to request and we are not obligated to purchase any such improvements. As of March 31, 2021, we had $4,114 of unspent leasing-related obligations related to certain net lease tenants.
During the three months ended March 31, 2021, we funded a $25,443 capital contribution to Sonesta related to its acquisition of Red Lion Hotels Corporation using cash on hand.
During the three months ended March 31, 2021, we acquired a parcel of land adjacent to a property we own in Nashville, TN for a purchase price of $7,709 using cash on hand including acquisition related costs of $109.
During the three months ended March 31, 2021, we sold one net lease property with 2,797 square feet for net proceeds of $375, excluding closing costs. In April 2021, we sold one hotel with 146 rooms for $9,753 and one net lease property with 32,130 square feet for net proceeds of $1,206, excluding closing costs. We used the net proceeds from these sales to repay amounts outstanding under our revolving credit facility.
We have entered into an agreement to sell five hotels with an aggregate of 430 rooms in four states and an aggregate carrying value of $10,699 for an aggregate sales price of $22,263, excluding closing costs. We have also entered into agreements to sell two net lease properties with an aggregate of 35,330 square feet and an aggregate carrying value of $1,439 for an aggregate sales price of $1,581, excluding closing costs. We currently expect these sales to be completed by the end of the second quarter of 2021. However, these sales are subject to conditions and we cannot be sure that we will complete these sales or that these sales will not be delayed or that the terms will not change. We expect to use the net sales proceeds from these sales for general business purposes.
During the three months ended March 31, 2021, we declared and paid regular quarterly distributions to common shareholders using cash on hand as follows:
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Declaration Date Record Date Paid Date Dividend Per Common Share Total Distributions
January 14, 2021 January 25, 2021 February 18, 2021 $ 0.01 $1,648
$ 0.01 $1,648
On April 15, 2021, we declared a regular quarterly distribution to common shareholders of record on April 26, 2021 of $0.01 per share, or $1,648. We expect to pay this amount on or about May 20, 2021 using cash on hand.
In order to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $1,000,000 revolving credit facility which is governed by a credit agreement with a syndicate of institutional lenders. The maturity date of our revolving credit facility is July 15, 2022, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the maturity date of this facility by two additional six-month periods. We are required to pay interest at the rate of LIBOR plus a premium, which was 235 basis points per annum, subject to a LIBOR floor of 0.50% at March 31, 2021, on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 30 basis points per annum at March 31, 2021. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, subject to meeting certain financial covenants, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of March 31, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 2.85%. On January 19, 2021, we borrowed $972,793 under our revolving credit facility as a precautionary measure to preserve financial flexibility. As of March 31, 2021, we were fully drawn under our under our $1,000,000 revolving credit facility and remain fully drawn as of May 6, 2021.
We and our lenders amended our credit agreement governing our $1,000,000 revolving credit facility in 2020. Among other things, the amendments waived all of the then existing financial covenants through the Waiver Period. As a result of the amendments, among other things:
• we pledged certain equity interests of subsidiaries owning properties and will provide first mortgage liens on 74 properties owned by certain of the pledged subsidiaries with an undepreciated book value of $1,835,000 as of March 31, 2021 to secure our obligations under the credit agreement;
• we have the ability to fund up to $250,000 of capital expenditures per year and up to $50,000 of certain other investments per year as defined in the credit agreement;
• we agreed to certain covenants and restrictions on distributions to common shareholders, share repurchases, incurring indebtedness, and acquiring real property (in each case subject to various exceptions);
• we agreed to maintain minimum liquidity of $125,000;
• we are generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions and debt refinancings to repay outstanding amounts under the credit agreement, and then to other debt maturities; and
• we may not, during the Waiver Period and until we demonstrate compliance with certain covenants, utilize the feature in our credit agreement pursuant to which maximum aggregate borrowings may be increased to up to $2,300,000 on a combined basis in certain circumstances.
Our term debt maturities (other than our revolving credit facility) as of March 31, 2021 were as follows:
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Year Maturity
2021 $ —
2022 500,000
2023 500,000
2024 1,175,000
2025 1,150,000
2026 800,000
2027 850,000
2028 400,000
2029 425,000
2030 400,000
$ 6,200,000
None of our unsecured debt obligations require principal or sinking fund payments prior to their maturity dates.
We currently expect to use cash on hand, the cash flows from our operations, borrowings under our revolving credit facility (when available), net proceeds from any asset sales and net proceeds of offerings of equity or debt securities, as allowed by our existing credit agreement, to fund our operations, capital expenditures, future debt maturities, distributions to our shareholders and other general business purposes.
When significant amounts are outstanding for an extended period of time under our revolving credit facility, or the maturities of our indebtedness approach, we currently expect to explore refinancing alternatives. Such alternatives may include incurring additional debt when permitted under our debt agreements, issuing new equity securities and the sale of properties. We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. We may also seek to participate in joint ventures or other arrangements that may provide us additional sources of financing. Although we have not historically done so, we may also assume mortgage debt on properties we may acquire or obtain mortgage financing on our existing properties.
While we believe we will generally have access to various types of financings, including debt or equity, to fund our future acquisitions and to pay our debts and other obligations, we cannot be sure that we will be able to complete any debt or equity offerings or other types of financings or that our cost of any future public or private financings will not increase. Also, as noted above, we are limited in our ability to incur additional debt pursuant to our debt agreements and are not permitted under our debt agreements to incur any debt while below the 1.5x debt service coverage ratio requirement under our public debt covenants as described below.
Our ability to complete, and the costs associated with, future debt transactions depends primarily upon credit market conditions and our then perceived creditworthiness. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans, including our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investment and financing activities. However, as discussed elsewhere in this Quarterly Report on Form 10-Q, the continued duration and severity of the current economic downturn resulting from the COVID-19 pandemic are uncertain and may have various negative consequences on us and our operations including a decline in financing availability and increased costs for financing. Further, such conditions could also disrupt the capital markets generally and limit our access to financing from public sources or on favorable terms, particularly if the global financial markets experience significant disruptions.
Off Balance Sheet Arrangements
As of March 31, 2021, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Debt Covenants
Our debt obligations at March 31, 2021 consisted of outstanding borrowings under our $1,000,000 revolving credit facility and $6,200,000 of publicly issued term debt. Our publicly issued term debt is governed by our indentures and related supplements. These indentures and related supplements and our credit agreement contain covenants that generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, and require us to maintain various financial ratios and our credit agreement currently restricts our ability to make certain investments and limits our distributions under certain circumstances. Our credit agreement and our unsecured senior notes, indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business manager. As of March 31, 2021, we believe we were in compliance with all of the covenants under our indentures and their supplements and our credit agreement, subject to the waivers and except as noted above and below.
Senior Notes Indenture Covenants
The following table summarizes the results of the financial tests required by the indentures and related supplements for our senior unsecured notes as of March 31, 2021:
Actual Results Covenant Requirement
Total debt / adjusted total assets 55.4% Maximum of 60%
Secured debt / adjusted total assets 7.7% Maximum of 40%
Consolidated income available for debt service / debt service 1.12x Minimum of 1.50x
Total unencumbered assets / unsecured debt 179.6% Minimum 150%
The above consolidated income available for debt service to debt service ratio as of March 31, 2021 is based on results for the first quarter of 2021 and second, third and fourth quarters of 2020. This ratio was 2.85x as of June 30, 2020, 2.05x as of September 30, 2020, 1.56x as of December 31, 2020, and 1.12x as of March 31, 2021, which is below the required level. We are not permitted under our debt agreements to incur additional debt while we remain below the required covenant level.
Acceleration and Cross-Default
Neither our indentures and their supplements nor our credit agreement contain provisions for acceleration which could be triggered by a change in our debt ratings. However, under our credit agreement, our highest senior debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded, our interest expense and related costs under our revolving credit facility would increase.
Our public debt indentures and their supplements contain cross default provisions to any other debt of $20,000 or more ($50,000 or more in the case of our indenture entered into in February 2016 and its supplements). Similarly, our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $75,000 or more.
Supplemental Guarantor Information
Our $800,000 of 7.50% unsecured senior notes due 2025, or the 2025 Notes, and our $450,000 of 5.5% unsecured senior notes due 2027, or the 2027 Notes, are fully and unconditionally guaranteed, on a joint and several basis and on a senior unsecured basis, by all of our subsidiaries, except for certain excluded subsidiaries, including our foreign subsidiaries and our subsidiaries pledged under our credit agreement. The notes and the guarantees will be effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness, respectively, to the extent of the value of the collateral securing such secured indebtedness, and will be structurally subordinated to all indebtedness and other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes. Our remaining $4,950,000 of senior unsecured notes do not have the benefit of any guarantees.
A subsidiary guarantor's guarantee of the 2025 Notes and 2027 Notes and all other obligations of such subsidiary guarantor under the indentures governing the notes will automatically terminate and such subsidiary guarantor will automatically be released from all of its obligations under such subsidiary guarantee and such indenture under certain circumstances, including on or after the date on which (a) the notes have received a rating equal to or higher than Baa2 (or the equivalent) by Moody’s Investors Service, or Moody’s, or BBB (or the equivalent) by Standard & Poor’s, or S&P, or if Moody’s or S&P ceases to rate the notes for reasons outside of our control, the equivalent investment grade rating from any other rating agency and (b) no
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default or event of default has occurred and is continuing under the indenture. Our non-guarantor subsidiaries are separate and distinct legal entities and will have no obligation, contingent or otherwise, to pay any amounts due on these notes or the guarantees, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of these notes to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and any preferred equity holders. As a result, these notes and the related guarantees will be structurally subordinated to all indebtedness, guarantees and other liabilities of our subsidiaries that do not guarantee these notes, including guarantees of or pledges under other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity.
The following table presents summarized financial information for us and the subsidiary guarantors, on a combined basis after elimination of (i) intercompany transactions and balances among us and the subsidiary guarantors and (ii) equity in earnings from, and any investments in, any of our non-guarantor subsidiaries:
As of March 31, 2021
As of December 31, 2020
Real estate properties, net (1)
$ 5,827,892 $ 5,871,790
Intercompany balances (2)
196,267 800,198
Other assets, net 1,624,660 677,408
Indebtedness, net $ 7,133,376 $ 6,208,590
Other liabilities 372,857 341,907
Three Months Ended
March 31, 2021
Revenues
$ 210,722
Expenses
400,391
Net income (loss)
(189,670)
(1) Real estate properties, net as of March 31, 2021 includes $209,449 of properties owned directly by us and not included in the assets of the subsidiary guarantors.
(2) Intercompany balances represent receivables from non-guarantor subsidiaries.
Management Agreements, Leases and Operating Statistics (dollar amounts in thousands, except hotel statistics)
As of March 31, 2021, we owned and managed a diverse portfolio of hotels and net lease properties across the United States and in Puerto Rico and Canada with 142 brands across 22 industries.
Hotel Portfolio
The following tables summarize the operating statistics, including ADR, occupancy and RevPAR reported to us by our hotel managers or tenants by hotel brand for the periods indicated. All operating data presented are based upon the operating results provided by our hotel managers and tenants for the indicated periods. We have not independently verified our managers’ or tenants’ operating data.
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Comparable Hotels No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Three months ended March 31, Three months ended March 31, Three months ended March 31,
Brand 2021 2020 Change 2021 2020 Change 2021 2020 Change
Sonesta (1)
Full Service 24 7,821 31.5 % 58.3 % (26.8) pts $ 106.61 $ 136.32 (21.8) % $ 33.58 $ 79.47 (57.7) %
Royal Sonesta (1)
Full Service 14 4,529 20.8 % 54.5 % (33.7) pts 143.29 190.25 (24.7) % 29.80 103.69 (71.3) %
Radisson Hotel Full Service 5 1,149 38.0 % 57.7 % (19.7) pts 90.60 130.51 (30.6) % 34.43 75.30 (54.3) %
Crowne Plaza Full Service 1 495 36.0 % 46.8 % (10.8) pts 93.92 145.17 (35.3) % 33.81 67.94 (50.2) %
Radisson Blu Full Service 2 264 35.7 % 54.8 % (19.1) pts 80.34 120.92 (33.6) % 28.68 66.26 (56.7) %
Country Inn and Suites Full Service 1 360 14.6 % 54.8 % (40.2) pts 82.07 119.40 (31.3) % 11.98 65.43 (81.7) %
Full Service Total/Average 47 14,618 28.5 % 56.5 % (28.0) pts 111.78 151.39 (26.2) % 31.86 85.54 (62.8) %
Sonesta Select (1)
Select Service 58 8,271 23.8 % 51.0 % (27.2) pts 86.46 134.69 (35.8) % 20.58 68.69 (70.0) %
Hyatt Place Select Service 22 2,724 46.6 % 59.5 % (12.9) pts 82.41 106.95 (22.9) % 38.40 63.64 (39.7) %
Courtyard Select Service 14 1,959 40.9 % 45.1 % (4.2) pts 92.51 112.78 (18.0) % 37.84 50.86 (25.6) %
Select Service Total/Average 94 12,954 31.2 % 51.9 % (20.7) pts 86.39 125.12 (31.0) % 26.95 64.94 (58.5) %
Simply Suites (1)
Extended Stay 92 11,472 54.1 % 58.2 % (4.1) pts 88.52 121.63 (27.2) % 47.89 70.79 (32.3) %
Sonesta ES Suites (1)
Extended Stay 63 7,796 55.1 % 66.7 % (11.6) pts 63.79 81.46 (21.7) % 35.15 54.33 (35.3) %
Residence Inn Extended Stay 3 342 43.7 % 50.2 % (6.5) pts 96.74 111.15 (13.0) % 42.28 55.80 (24.2) %
Other (2)
Extended Stay 5 430 60.8 % 66.5 % (5.7) pts 55.85 71.75 (22.2) % 33.96 47.71 (28.8) %
Extended Stay Total/Average 163 20,040 54.4 % 61.6 % (7.2) pts 78.09 103.38 (24.5) % 42.48 63.68 (33.3) %
Comparable Hotels Total/Average 304 47,612 40.1 % 57.4 % (17.3) pts $ 87.19 $ 123.22 (29.2) % $ 34.96 $ 70.73 (50.6) %
All Hotels No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Three months ended March 31, Three months ended March 31, Three months ended March 31,
Brand 2021 2020 Change 2021 2020 Change 2021 2020 Change
Sonesta (1)
Full Service 25 8,040 31.2 % 58.2 % (27.0) pts $ 106.61 $ 136.43 (21.9) % $ 33.26 $ 79.40 (58.1) %
Royal Sonesta (1)
Full Service 16 5,303 22.7 % 51.1 % (28.4) pts 153.25 203.56 (24.7) % 34.79 104.02 (66.6) %
Radisson Hotel Full Service 5 1,149 38.0 % 57.7 % (19.7) pts 90.60 130.51 (30.6) % 34.43 75.30 (54.3) %
Crowne Plaza Full Service 1 495 36.0 % 46.8 % (10.8) pts 93.92 145.17 (35.3) % 33.81 67.94 (50.2) %
Country Inn and Suites Full Service 3 430 30.2 % 41.3 % (11.1) pts 79.75 114.89 (30.6) % 24.08 47.45 (49.2) %
Radisson Blu Full Service 1 360 14.6 % 54.8 % (40.2) pts 82.07 119.40 (31.3) % 11.98 65.43 (81.7) %
Full Service Total/Average 51 15,777 28.7 % 54.8 % (26.1) pts 115.34 156.09 (26.1) % 33.10 85.54 (61.3) %
Sonesta Select (1)
Select Service 58 8,271 23.8 % 51.0 % (27.2) pts 86.46 134.69 (35.8) % 20.58 68.69 (70.0) %
Hyatt Place Select Service 22 2,724 46.6 % 59.5 % (12.9) pts 82.41 106.95 (22.9) % 38.40 63.64 (39.7) %
Courtyard Select Service 14 1,959 40.9 % 45.1 % (4.2) pts 92.51 112.78 (18.0) % 37.84 50.86 (25.6) %
Select Service Total/Average 94 12,954 31.2 % 51.9 % (20.7) pts 86.39 125.12 (31.0) % 26.95 64.94 (58.5) %
Simply Suites (1)
Extended Stay 92 11,472 54.1 % 58.2 % (4.1) pts 88.52 121.63 (27.2) % 47.89 70.79 (32.3) %
Sonesta ES Suites (1)
Extended Stay 65 8,040 55.2 % 65.0 % (9.8) pts 63.42 81.40 (22.1) % 35.01 52.91 (33.8) %
Residence Inn Extended Stay 3 342 43.7 % 50.2 % (6.5) pts 96.74 111.15 (13.0) % 42.28 55.80 (24.2) %
Other (2)
Extended Stay 5 430 60.8 % 66.5 % (5.7) pts 55.85 71.75 (22.2) % 33.96 47.71 (28.8) %
Extended Stay Total/Average 165 20,284 54.5 % 61.0 % (6.5) pts 77.76 103.31 (24.7) % 42.38 63.02 (32.8) %
All Hotels Total/Average 310 49,015 40.1 % 56.6 % (16.5) pts $ 88.02 $ 125.06 (29.6) % $ 35.30 $ 70.78 (50.1) %
(1) Includes operator data for periods prior to when certain hotels were managed by Sonesta.
(2) We have entered into an agreement to sell five hotels and we have entered into a short term lease of these properties with the buyer in anticipation of the sale.
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Net Lease Portfolio
As of March 31, 2021, our net lease properties were 98.5% occupied and we had 30 properties available for lease. During the three months ended March 31, 2021, we entered into lease renewals for 170,327 rentable square feet at weighted (by rentable square feet) average rents that were 4.1% below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 5.8 years. Also during the three months ended March 31, 2021, we entered into new leases for an aggregate of 1,775 rentable square feet at weighted (by rentable square feet) average rents that were 5.2% below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 6.0 years.
As of March 31, 2021, our net lease tenants operated across more than 130 brands. The following table identifies the top ten brands based on investment.
Brand No. of Buildings Investment (1) (3)
Percent of Total Investment (3)
Annualized
Minimum Rent (2) (3)
Percent of Total Annualized
Minimum Rent (2) (3)
Coverage (4)
1. TravelCenters of America 134 $ 2,289,189 44.3 % $ 168,012 44.7 % 2.01 x
2. Petro Stopping Centers 45 1,021,226 19.8 % 78,099 20.8 % 1.65 x
3. AMC Theatres 11 102,580 2.0 % 8,637 2.3 % (0.03) x
4. The Great Escape 14 98,242 1.9 % 7,140 1.9 % 2.02 x
5. Lifetime Fitness 3 92,617 1.8 % 5,770 1.5 % 1.52 x
6. Buehler's Fresh Foods 5 76,536 1.5 % 5,657 1.5 % 4.79 x
7. Heartland Dental 59 61,120 1.2 % 4,493 1.2 % 3.38 x
8. Norms 10 53,673 1.0 % 3,169 0.8 % 0.47 x
9. Express Oil Change 23 49,724 1.0 % 3,379 0.9 % 4.14 x
10. Pizza Hut 44 49,525 1.0 % 3,522 0.9 % 1.61 x
11. Other (5)
450 1,269,597 24.5 % 87,933 23.5 % 3.07 x
Total 798 $ 5,164,029 100.0 % $ 375,811 100.0 % 2.19 x
(1) Represents historical cost of our properties plus capital improvements funded by us less impairment write-downs, if any.
(2) Each of our leases provides for payment to us of minimum rent. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight-line basis, or any reimbursement of expenses paid by us.
(3) As of March 31, 2021, we have six net lease properties with a carrying value of $3,106 and annual minimum rent of $240 classified as held for sale.
(4) See page 24 for our definition of coverage.
(5) Other includes 120 distinct brands with an average investment of $10,746 and average annual minimum rent of $733.
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As of March 31, 2021, our top 10 net lease tenants based on annualized minimum rent are listed below.
Tenant Brand Affiliation No. of Buildings Investment (1) (2)
Percent of Total Investment Annualized
Minimum Rent (2) (3)
Percent of Total Annualized
Minimum Rent (2) (3)
Coverage (4)
1. TravelCenters of America TravelCenters of America/ Petro Shopping Centers 179 $ 3,310,415 64.1 % $ 246,110 65.5 % 1.90x (5) (6)
2. American Multi-Cinema, Inc. AMC Theatres 11 102,580 2.0 % 8,637 2.3 % -0.03x
3. Universal Pool Co., Inc. The Great Escape 14 98,242 1.9 % 7,140 1.9 % 2.02x (5)
4. Healthy Way of Life II, LLC Life Time Fitness 3 92,617 1.8 % 5,770 1.5 % 1.52x (5)
5. Styx Acquisition, LLC Buehler's Fresh Foods 5 76,536 1.5 % 5,657 1.5 % 4.79x
6. Professional Resource Development, Inc. Heartland Dental 59 61,120 1.2 % 4,493 1.2 % 3.38x
7. Express Oil Change, L.L.C. Express Oil Change 23 49,724 1.0 % 3,379 0.9 % 4.14x
8. Regal Cinemas, Inc. Regal Cinemas 6 44,476 0.9 % 3,854 1.0 % 0.01x
9. Pilot Travel Centers LLC Flying J Travel Plaza 3 41,681 0.8 % 3,183 0.8 % 4.18x
10. Automotive Remarketing Group, Inc. Automotive Remarketing Group 6 34,314 0.7 % 3,216 0.9 % 8.08x
Subtotal, top 10 309 3,911,705 75.9 % 291,439 77.5 % 2.01x
11. Other (7)
Various 489 1,252,324 24.1 % 84,372 22.5 % 2.81x
Total 798 $ 5,164,029 100.0 % $ 375,811 100.0 % 2.19x
(1) Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.
(2) Each of our leases provides for payment to us of minimum rent. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight-line basis, or any reimbursement of expenses paid by us.
(3) As of March 31, 2021, we have six net lease properties with an aggregate carrying value of $3,106 and annual minimum rent of $240 classified as held for sale.
(4) See page 24 for our definition of coverage.
(5) Leases subject to full or partial corporate guarantee.
(6) TA is our largest tenant. We lease 179 travel centers (134 under the TravelCenters of America brand and 45 under the Petro Stopping Centers brand) to a subsidiary of TA under five master leases that expire in 2029, 2031, 2032, 2033 and 2035, respectively. TA has two renewal options for 15 years each for all of the travel centers. In addition to the payment of our minimum rent, the TA leases provide for payment to us of percentage rent based on increases in total non-fuel revenues over base levels (3.5% of non-fuel revenues above applicable base years). TA's remaining deferred rent obligation of $35,228 is being paid in quarterly installments of $4,404 through January 31, 2023.
(7) Other includes 158 tenants with an average investment of $7,926 and average annual minimum rent of $534.
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As of March 31, 2021, our net lease tenants operated across 21 distinct industries within the service-oriented retail sector of the U.S. economy.
Industry No. of Buildings Investment (1) (2)
Percent of Total Investment Annualized
Minimum Rent (2) (3)
Percent of Total Annualized
Minimum Rent Coverage (4)
Travel Centers 182 $ 3,352,096 64.9% $ 249,293 66.3 % 1.93x (5)
Restaurants-Quick Service 230 305,949 5.9% 20,662 5.5 % 2.67x
Restaurants-Casual Dining 59 213,689 4.1% 13,189 3.5 % 1.15x
Movie Theaters 22 190,725 3.7% 15,091 4.0 % 0.01x
Health and Fitness 14 189,215 3.7% 11,844 3.2 % 1.24x
Grocery Stores 19 129,219 2.5% 9,123 2.4 % 4.69x
Home Goods and Leisure 21 127,379 2.5% 10,107 2.7 % 2.02x
Medical, Dental Office 70 116,678 2.3% 9,014 2.4 % 3.54x
Automotive Equipment & Services 64 102,384 2.0% 7,114 1.9 % 3.28x
Automotive Dealers 9 64,756 1.3% 5,354 1.4 % 7.12x
Entertainment 4 61,436 1.2% 4,265 1.1 % 0.20x
General Merchandise Stores 5 56,321 1.1% 3,833 1.0 % 3.42x
Educational Services 9 55,647 1.0% 4,303 1.1 % 1.58x
Building Materials 26 28,987 0.5% 2,447 0.7 % 6.74x
Car Washes 5 28,658 0.6% 2,086 0.6 % 4.90x
Miscellaneous Manufacturing 6 26,984 0.5% 1,825 0.5 % 13.53x
Drug Stores and Pharmacies 8 23,970 0.5% 1,576 0.4 % 1.88x
Sporting Goods 2 14,220 0.3% 926 0.2 % 4.39x
Other 5 11,837 0.2% 2,549 0.8 % 2.68x
Legal Services 5 11,362 0.1% 1,024 0.3 % 2.06x
Dollar Stores 3 2,971 0.1% 186 — % 3.67x
Vacant 30 49,546 1.0% — — % n/a
Total 798 $ 5,164,029 100.0% $ 375,811 100.0 % 2.19x
(1) Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.
(2) As of March 31, 2021, we have six net lease properties with an aggregate carrying value of $3,106 and annual minimum rent of $240 classified as held for sale.
(3) Each of our leases provides for payment to us of minimum rent, respectively. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight-line basis, or any reimbursement of expenses paid by us.
(4) See page 24 for our definition of coverage.
(5) Leases subject to full or partial corporate guarantee.
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As of March 31, 2021, lease expirations at our net lease properties by year are as follows.
Year (1)
Square Feet Annualized Minimum Rent Expiring (2)
Percent of Total Annualized Minimum Rent Expiring Cumulative % of Total Minimum Rent Expiring
2021 319,951 3,305 0.9% 0.9%
2022 317,105 4,428 1.2% 2.1%
2023 320,423 3,978 1.1% 3.2%
2024 787,547 11,602 3.1% 6.3%
2025 434,424 8,986 2.4% 8.7%
2026 901,606 10,244 2.7% 11.4%
2027 1,042,655 14,423 3.8% 15.2%
2028 553,330 9,611 2.6% 17.8%
2029 1,321,924 47,705 12.7% 30.5%
2030 209,200 5,185 1.4% 31.9%
2031 1,472,458 50,121 13.3% 45.2%
2032 1,233,445 52,069 13.9% 59.1%
2033 1,107,227 53,382 14.2% 73.3%
2034 134,640 4,523 1.2% 74.5%
2035 2,577,853 84,235 22.4% 96.9%
2036 320,792 5,385 1.4% 98.3%
2037 — — 0.0% 98.3%
2038 10,183 416 0.1% 98.4%
2039 185,437 6,061 1.6% 100.0%
2040 1,739 152 0.0% 100.0%
Total 13,251,939 $ 375,811 100%
(1) The year of lease expiration is pursuant to contract terms.
(2) As of March 31, 2021, we have six net lease properties with an annual minimum rent of $240 classified as held for sale.
As of March 31, 2021, shown below is the list of our top ten states based on annualized minimum rent where our net lease properties were located. No other state represents more than 3% of our net lease annual minimum rents.
State Square Feet Annualized Minimum Rent Percent of Total Annualized Minimum Rent
Texas 1,205,393 $ 32,318 8.6%
Ohio 1,302,273 26,392 7.0%
Illinois 1,019,885 26,072 6.9%
California 399,045 23,393 6.2%
Georgia 597,248 20,440 5.4%
Arizona 476,651 17,565 4.7%
Indiana 637,239 16,976 4.5%
Pennsylvania 529,444 16,566 4.4%
Florida 538,130 16,085 4.3%
Nevada 190,262 9,618 2.6%
Other 6,557,038 170,386 45.4%
13,452,608 $ 375,811 100.0%
Related Person Transactions
We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., TA and Sonesta and others related to them. For further information about these and other such relationships and related person transactions, see Notes 5, 8 and 9 t o our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2020 Annual Report, our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, see the section captioned “Risk Factors” in our 2020 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
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Non-GAAP Financial Measures
We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, including funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs.
Funds From Operations and Normalized Funds From Operations
We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, excluding any gain or loss on sale of properties and loss on impairment of real estate assets, if any, plus real estate depreciation and amortization, less any unrealized gains and losses on equity securities, as well as adjustments to reflect our share of FFO attributable to an investee and certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the items shown below. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to satisfy our REIT distribution requirements, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and to the dividend yield of other REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.
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Our calculations of FFO and Normalized FFO for the three months ended March 31, 2021 and 2020 and reconciliations of net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to those amounts appear in the following table (amounts in thousands, except per share amounts).
For the Three Months Ended March 31,
2021 2020
Net loss $ (194,990) $ (33,650)
Add (Less): Depreciation and amortization expense 124,368 127,926
Loss on asset impairment (1)
1,211 16,740
Loss on sale of real estate (2)
9 6,911
Unrealized (gains) and losses on equity securities, net (3)
6,481 5,045
Adjustments to reflect our share of FFO attributable to an investee (4)
465 112
FFO (62,456) 123,084
Add (less): Adjustments to reflect our share of Normalized FFO attributable to an investee (4)
825
Hotel manager transition related costs (5)
19,635
Normalized FFO $ (41,996) $ 123,084
Weighted average shares outstanding (basic) 164,498 164,370
Weighted average shares outstanding (diluted) (6)
164,498 164,370
Basic and diluted per common share amounts:
Net loss $ (1.19) $ (0.20)
FFO $ (0.38) $ 0.75
Normalized FFO
$ (0.26) $ 0.75
Distributions declared per share $ 0.01 $ 0.54
(1) We recorded a $1,211 loss on asset impairment during the three months ended March 31, 2021 to reduce the carrying value of two net lease properties to their estimated fair value. We recorded a $16,740 loss on asset impairment during the three months ended March 31, 2020 to reduce the carrying value of two net lease properties to their estimated fair value less costs to sell and two hotels to their estimated fair value.
(2) We recorded a $9 net loss on sale of one net lease property during the three months ended March 31, 2021. We recorded a $6,911 loss on sale of real estate during the three months ended March 31, 2020 in connection with the sales of six net lease properties.
(3) Unrealized gains (losses) on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value.
(4) Represents adjustments to reflect our proportionate share of FFO and normalized FFO related to our equity investment in Sonesta.
(5) Hotel operating expenses for the three months ended March 31, 2021 and December 31, 2020 includes $19,635 of hotel manager transition related costs resulting from the rebranding of 88 hotels during the period.
(6) Represents weighted average common shares adjusted to reflect the potential dilution of unvested share awards.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.