Item 1. Financial Statements
Item 1. Financial Statements
SERVICE PROPERTIES TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except share data)
September 30,
2021 December 31,
2020
ASSETS
Real estate properties:
Land $ 2,036,297 $ 2,030,440
Buildings, improvements and equipment 9,109,518 9,131,832
Total real estate properties, gross 11,145,815 11,162,272
Accumulated depreciation ( 3,517,771 ) ( 3,280,110 )
Total real estate properties, net 7,628,044 7,882,162
Acquired real estate leases and other intangibles, net 288,852 325,845
Assets held for sale 3,707 13,543
Cash and cash equivalents 912,532 73,332
Restricted cash 1,657 18,124
Due from related persons 46,660 55,530
Other assets, net 453,379 318,783
Total assets $ 9,334,831 $ 8,687,319
LIABILITIES AND SHAREHOLDERS’ EQUITY
Revolving credit facility $ 1,000,000 $ 78,424
Senior unsecured notes, net 6,139,787 6,130,166
Accounts payable and other liabilities 430,694 345,373
Due to related persons 10,608 30,566
Total liabilities 7,581,089 6,584,529
Commitments and contingencies
Shareholders’ equity:
Common shares of beneficial interest, $ .01 par value; 200,000,000 shares authorized; 165,092,638 and 164,823,833 , shares issued and outstanding, respectively
1,651 1,648
Additional paid in capital
4,552,087 4,550,385
Cumulative other comprehensive loss
( 755 ) ( 760 )
Cumulative net income available for common shareholders
2,834,449 3,180,263
Cumulative common distributions
( 5,633,690 ) ( 5,628,746 )
Total shareholders’ equity 1,753,742 2,102,790
Total liabilities and shareholders’ equity
$ 9,334,831 $ 8,687,319
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SERVICE PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(amounts in thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenues:
Hotel operating revenues $ 338,375 $ 199,719 $ 787,463 $ 700,578
Rental income 98,724 96,776 286,742 294,633
Total revenues 437,099 296,495 1,074,205 995,211
Expenses:
Hotel operating expenses 285,233 174,801 723,769 492,906
Other operating expenses 4,437 3,705 11,758 11,029
Depreciation and amortization 124,163 122,204 370,208 377,557
General and administrative 14,231 12,295 40,840 37,621
Transaction related costs 3,149 — 28,934 —
Loss on asset impairment — 10,248 2,110 55,502
Total expenses 431,213 323,253 1,177,619 974,615
Other operating income:
Gain (loss) on sale of real estate, net 94 109 10,934 ( 9,655 )
Unrealized gain on equity securities, net 24,348 5,606 20,367 4,409
Gain on insurance settlement — — — 62,386
Interest income 203 6 485 283
Interest expense (including amortization of debt issuance costs and debt discounts and premiums of $ 5,877 , $ 3,877 , $ 15,123 and $ 10,651 , respectively)
( 92,458 ) ( 80,532 ) ( 273,227 ) ( 223,679 )
Loss on early extinguishment of debt — — — ( 6,970 )
Loss before income taxes and equity in earnings (losses) of an investee ( 61,927 ) ( 101,569 ) ( 344,855 ) ( 152,630 )
Income tax benefit (expense) 55 296 ( 1,009 ) ( 16,706 )
Equity in earnings (losses) of an investee 2,158 ( 1,369 ) 50 ( 4,305 )
Net loss ( 59,714 ) ( 102,642 ) ( 345,814 ) ( 173,641 )
Other comprehensive income:
Equity interest in investee’s unrealized gains 5 63 5 63
Other comprehensive income 5 63 5 63
Comprehensive loss $ ( 59,709 ) $ ( 102,579 ) $ ( 345,809 ) $ ( 173,578 )
Weighted average common shares outstanding (basic and diluted) 164,590 164,435 164,532 164,397
Net loss per common share (basic and diluted) $ ( 0.36 ) $ ( 0.62 ) $ ( 2.10 ) $ ( 1.06 )
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SERVICE PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited) (in thousands, except share data)
Common Shares Additional
Paid in
Capital Cumulative
Net Income
Available for
Common
Shareholders Cumulative
Other
Comprehensive
Income (Loss)
Number of
Shares Common
Shares Cumulative
Common
Distributions
Total
Balance at December 31, 2020 164,823,833 $ 1,648 $ ( 5,628,746 ) $ 4,550,385 $ 3,180,263 $ ( 760 ) $ 2,102,790
Net loss — — — — ( 194,990 ) — ( 194,990 )
Common share grants — — — 380 — — 380
Distributions to common shareholders — — ( 1,648 ) — — — ( 1,648 )
Balance at March 31, 2021 164,823,833 $ 1,648 $ ( 5,630,394 ) $ 4,550,765 $ 2,985,273 $ ( 760 ) $ 1,906,532
Net loss — — — — ( 91,110 ) — ( 91,110 )
Common share grants 49,000 1 — 1,066 — — 1,067
Common share repurchases and forfeitures ( 15,079 ) — — ( 190 ) — — ( 190 )
Distributions — — ( 1,648 ) — — — ( 1,648 )
Balance at June 30, 2021 164,857,754 $ 1,649 $ ( 5,632,042 ) $ 4,551,641 $ 2,894,163 $ ( 760 ) $ 1,814,651
Net loss — — — — ( 59,714 ) — ( 59,714 )
Equity in unrealized gains of investees — — — — — 5 5
Common share grants 291,700 2 — 1,046 — — 1,048
Common share repurchases and forfeitures ( 56,816 ) — — ( 600 ) — — ( 600 )
Distributions — — ( 1,648 ) — — — ( 1,648 )
Balance at September 30, 2021 165,092,638 $ 1,651 $ ( 5,633,690 ) $ 4,552,087 $ 2,834,449 $ ( 755 ) $ 1,753,742
Balance at December 31, 2019 164,563,034 $ 1,646 $ ( 5,534,942 ) $ 4,547,529 $ 3,491,645 $ — $ 2,505,878
Net loss — — — — ( 33,650 ) — ( 33,650 )
Common share grants 6,000 — — 590 — — 590
Common share repurchases and forfeitures ( 2,637 ) — — ( 43 ) — — ( 43 )
Distributions to common shareholders — — ( 90,509 ) — — — ( 90,509 )
Balance at March 31, 2020 164,566,397 $ 1,646 $ ( 5,625,451 ) $ 4,548,076 $ 3,457,995 $ — $ 2,382,266
Net loss — — — — ( 37,349 ) — ( 37,349 )
Common share grants 35,000 — — 831 — — 831
Common share repurchases and forfeitures ( 3,808 ) — — ( 27 ) — — ( 27 )
Balance at June 30, 2020 164,597,589 $ 1,646 $ ( 5,625,451 ) $ 4,548,880 $ 3,420,646 $ — $ 2,345,721
Net loss — — — — ( 102,642 ) — ( 102,642 )
Equity in unrealized gains of investees — — — — — 63 63
Common share grants 264,400 3 — 868 — — 871
Common share repurchases and forfeitures ( 38,156 ) ( 1 ) — ( 282 ) — — ( 283 )
Distributions — — ( 1,646 ) — — — ( 1,646 )
Balance at September 30, 2020 164,823,833 $ 1,648 $ ( 5,627,097 ) $ 4,549,466 $ 3,318,004 $ 63 $ 2,242,084
The accompanying notes are an integral part of these condensed consolidated financial statements.
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SERVICE PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
For the Nine Months Ended September 30,
2021 2020
Cash flows from operating activities:
Net loss $ ( 345,814 ) $ ( 173,641 )
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
Depreciation and amortization 370,208 377,557
Net amortization of debt issuance costs, discounts and premiums as interest 15,123 10,651
Straight-line rental income 3,087 298
Security deposits utilized — ( 109,162 )
Loss on early extinguishment of debt — 6,970
Loss on asset impairment 2,110 55,502
Unrealized gain on equity securities, net ( 20,367 ) ( 4,409 )
Equity in (earnings) losses of an investee ( 50 ) 4,305
(Gain) loss on sale of real estate ( 10,934 ) 9,655
Gain on insurance settlement — ( 62,386 )
Deferred income taxes — 15,650
Other non-cash income, net ( 1,720 ) ( 2,324 )
Changes in assets and liabilities:
Due from related persons ( 919 ) 171
Other assets 16,396 ( 45,844 )
Accounts payable and other liabilities ( 9,635 ) ( 15,585 )
Due to related persons ( 16,483 ) ( 1,884 )
Net cash provided by operating activities 1,002 65,524
Cash flows from investing activities:
Real estate acquisitions and deposits ( 7,649 ) ( 7,090 )
Real estate improvements ( 64,340 ) ( 54,603 )
Hotel managers’ purchases with restricted cash ( 23,692 ) ( 127,837 )
Hotel manager’s deposit of insurance proceeds into restricted cash — 34,238
Net proceeds from sale of real estate 33,772 67,811
Investment in Sonesta ( 25,443 ) ( 5,314 )
Investment in TravelCenters of America — ( 7,011 )
Distributions in excess of earnings from Affiliates Insurance Company — 286
Net cash used in investing activities ( 87,352 ) ( 99,520 )
Cash flows from financing activities:
Proceeds from issuance of senior unsecured notes, after discounts and premiums — 800,000
Repurchase of senior unsecured notes — ( 355,971 )
Borrowings under revolving credit facility 984,027 709,000
Repayments of revolving credit facility ( 62,451 ) ( 1,005,914 )
Deferred financing costs ( 6,762 ) ( 15,900 )
Repurchase of common shares ( 787 ) ( 346 )
Distributions to common shareholders ( 4,944 ) ( 92,155 )
Net cash provided by financing activities 909,083 38,714
Increase in cash and cash equivalents and restricted cash 822,733 4,718
Cash and cash equivalents and restricted cash at beginning of period 91,456 81,259
Cash and cash equivalents and restricted cash at end of period $ 914,189 $ 85,977
Supplemental disclosure of cash and cash equivalents and restricted cash:
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
Cash and cash equivalents $ 912,532 $ 47,847
Restricted cash 1,657 38,130
Total cash and cash equivalents and restricted cash $ 914,189 $ 85,977
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
(dollars in thousands)
For the Nine Months Ended September 30,
2021 2020
Supplemental cash flow information:
Cash paid for interest $ 273,221 $ 226,329
Cash paid for income taxes 2,577 2,117
Non-cash investing activities:
Real estate improvements accrued, not paid $ 7,341 $ 2,775
Investment in Sonesta — 42,000
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 1. Organization and Basis of Presentation
Service Properties Trust, or we, us or our, is a real estate investment trust, or REIT, organized on February 7, 1995 under the laws of the State of Maryland, which invests in hotels and service-focused retail net lease properties. At September 30, 2021, we owned, directly and through our subsidiaries, 304 hotels and 794 net lease properties.
At September 30, 2021, all 304 of our hotels were operated by subsidiaries of the following companies: Sonesta Holdco Corporation, or Sonesta ( 261 hotels), Hyatt Hotels Corporation, or Hyatt ( 17 hotels), Radisson Hospitality, Inc., or Radisson ( nine hotels), Marriott International, Inc., or Marriott ( 16 hotels), and InterContinental Hotels Group, plc, or IHG ( one hotel). At September 30, 2021, we owned 794 net lease properties with 175 tenants, including 179 travel centers leased to TravelCenters of America Inc., or TA, our largest tenant. Hereinafter, these companies are sometimes referred to as our managers and/or tenants, or collectively, operators.
Impact of COVID-19
Since March 2020, the lodging industry and other industries in which our managers and tenants operate have been adversely impacted by the novel coronavirus, or COVID-19, global pandemic along with the federal, state and local government mandates intended to contain and mitigate the spread of COVID-19 and market reactions to the pandemic. The effects of COVID-19 continue to have a significant negative impact on our results of operations, financial position and cash flow. Although lodging demand has improved through the third quarter of 2021 when compared to 2020 levels, we cannot predict with certainty when business levels may return to historical, pre-pandemic levels.
Basis of Presentation
The accompanying condensed consolidated financial statements of us are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020, or our 2020 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are 100 % owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for credit losses, purchase price allocations, useful lives of fixed assets, impairment of real estate and related intangibles.
We have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification ™ . We have concluded that we must consolidate each of our wholly owned TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were $ 151,506 and $ 118,862 as of September 30, 2021 and December 31, 2020, respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were $ 39,169 and $ 70,240 as of September 30, 2021 and December 31, 2020, respectively, and consist primarily of amounts payable to certain of our hotel managers. The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs.
Note 2. Revenue Recognition
We report hotel operating revenues for managed hotels in our condensed consolidated statements of comprehensive income (loss). We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
We report rental income for leased properties in our condensed consolidated statements of comprehensive income (loss). We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. We reduced rental income by $ 905 for the three months ended September 30, 2021, increased rental income by $ 2,370 for the three months ended September 30, 2020 and reduced rental income by $ 3,087 and $ 298 for the nine months ended September 30, 2021 and 2020, respectively, 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. See Notes 5 and 9 for further information regarding our TA leases. Due from related persons includes $ 24,113 and $ 33,902 and other assets, net, includes $ 25,172 and $ 16,264 of straight line rent receivables at September 30, 2021 and December 31, 2020, respectively.
Certain of our lease agreements require additional percentage rent if gross revenues of our properties exceed certain thresholds defined in our lease agreements. We may determine percentage rent due to us under our leases monthly, quarterly or annually, depending on the specific lease terms, and recognize it when all contingencies are met and the rent is earned. We had deferred estimated percentage rent of $ 1,849 and $ 893 for the three months ended September 30, 2021 and 2020, respectively, and $ 4,827 and $ 1,742 for the nine months ended September 30, 2021 and 2020, respectively.
Note 3. Weighted Average Common Shares
We calculate basic earnings per common share by dividing net loss by the weighted average number of our common shares outstanding during the period. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common shares, and the related impact on earnings, are considered when calculating diluted earnings per share. For the three and nine months ended September 30, 2021 and 2020, there were no dilutive common shares and certain unvested common shares were not included in the calculation of diluted earnings per share because to do so would have been antidilutive.
Note 4. Real Estate Properties
At September 30, 2021, we owned 304 hotels with an aggregate of 48,439 rooms or suites and 794 service-oriented retail properties with an aggregate of 13,574,656 square feet that are primarily subject to “triple net” leases, or net leases where the tenant is generally responsible for payment of operating expenses and capital expenditures of the property during the lease term. Our properties had an aggregate undepreciated carrying value of $ 11,145,815 , excluding six properties classified as held for sale as of September 30, 2021.
Capital expenditures made at certain of our properties were $ 73,218 and $ 108,392 during the nine months ended September 30, 2021 and 2020, respectively.
Acquisitions
On March 9, 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 accounted for this transaction as an acquisition of assets.
Dispositions
During the nine months ended September 30, 2021, we sold 11 properties for an aggregate sales price of $ 34,721 , excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions individually or in the aggregate nor do they represent a strategic shift. As a result, the results of the operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of comprehensive income (loss).
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Date of Sale Number of Properties Location Property Type Rooms/ Square Feet Gross Sales Price Gain/(Loss) on Sale
3/16/2021 1 Chattanooga, TN Net Lease 2,797 $ 375 $ ( 9 )
4/1/2021 1 Jacksonville, FL Hotel 146 9,753 49
4/6/2021 1 Colorado Springs, CO Net Lease 32,130 1,300 ( 10 )
5/20/2021 5 Various Hotel 430 22,263 10,763
6/11/2021 1 Emmitsburg, MD Net Lease 3,114 360 47
8/11/2021 1 Soddy Daisy, TN Net Lease 2,941 300 ( 33 )
9/30/2021 1 Lincoln, IL Net Lease 3,698 370 127
11 576 / 44,680
$ 34,721 $ 10,934
In October 2021, we sold one net lease property with 7,070 rentable square feet for a sales price of $ 915 , excluding closing costs.
We are currently marketing for sale 68 Sonesta branded hotels ( 46 extended stay hotels with 5,404 rooms or suites, 19 select service hotels with 2,461 rooms or suites and three full service hotels with 895 rooms or suites) located in 27 states with an aggregate net carrying value of $ 578,982 as of September 30, 2021 . We currently expect these sales to be completed by the end of the first quarter of 2022.
We have also entered into agreements to sell four net lease properties with an aggregate of 14,630 square feet and an aggregate carrying value of $ 1,788 for an aggregate sales price of $ 2,275 , excluding closing costs. We currently expect these sales to be completed by the end of the fourth quarter of 2021.
As of September 30, 2021, we had six net lease properties with an aggregate of 25,327 square feet classified as held for sale. See Note 12 for further information on these properties.
Note 5. Management Agreements and Leases
As of September 30, 2021, we owned 304 hotels which were included in six operating agreements and 794 service oriented retail properties net leased to 175 tenants. We do not operate any of our properties.
Hotel agreements
As of September 30, 2021, all 304 of our hotels were leased to our TRSs and managed by independent hotel operating companies. As of September 30, 2021, our hotel properties were managed by separate subsidiaries of Sonesta, Hyatt, Radisson, Marriott and IHG under six agreements. These hotel agreements had initial terms expiring between 2021 and 2037. Each of these agreements is for between one and 208 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between one to 60 years . Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns; (2) deposit a percentage of total hotel sales into FF&E reserves; and (3) make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, payment of certain management fees, payment of our minimum returns, reimbursement of certain advances, funding of our FF&E reserves and replenishment of guarantees. Some of our managers or their affiliates provided deposits or guarantees to secure their obligations to pay us.
Sonesta agreement. As of September 30, 2021, Sonesta managed 41 of our full-service hotels, 157 extended stay hotels and 63 select service hotels pursuant to management agreements for each of the hotels. We are also party to pooling agreements that combine certain of our management agreements with Sonesta for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us. Our agreements with Sonesta for 53 hotels expire in January 2037, which we refer to as our legacy management and pooling agreements. As of September 30, 2021, 208 of our hotels were managed by Sonesta under agreements that expire on December 31, 2021 and automatically renew for successive one-year terms unless terminated earlier, which we refer to as our conversion hotel management and pooling agreements or collectively with our legacy management and pooling agreements, our Sonesta agreement.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
As of September 30, 2021, Sonesta operated 261 of the 304 hotels we currently own, which comprised approximately 52.9 % of our total historical real estate investments. In February and March 2021, we transitioned the branding and management of 88 hotels to Sonesta from Marriott and, in June 2021, we transitioned the branding and management of five hotels to Sonesta from Hyatt. On November 1, 2021, we transitioned the branding and management of one additional hotel to Sonesta from Radisson. We added these hotels to our conversion hotel management and pooling agreements with Sonesta.
Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to 8 % of our invested capital, as defined therein, if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. Our fixed annual minimum return under our Sonesta agreement was $ 510,226 as of September 30, 2021. Our Sonesta agreement further provides that we are paid an additional return equal to 80 % of the operating profits, as defined therein, after reimbursement of owner or manager advances, FF&E reserve escrows and Sonesta’s incentive fee, if applicable. Our Sonesta hotels generated net operating cash flow of $ 40,728 and a net operating cash flow deficit of $ 6,155 for the three months ended September 30, 2021 and 2020, respectively, and net operating cash flow of $ 28,531 and net operating cash flow deficit of $ 31,969 for the nine months ended September 30, 2021 and 2020, respectively. The returns we receive from our Sonesta hotels are limited to the hotels’ available cash flows, if any, after payment of operating expenses, including management and related fees.
Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third-party reservation transmission fees of $ 26,640 and $ 3,831 for the three months ended September 30, 2021 and 2020, respectively, and $ 59,962 and $ 12,756 for the nine months ended September 30, 2021 and 2020, respectively. These fees and costs are included in hotel operating expenses in our condensed consolidated statements of comprehensive income (loss). In addition, we incurred procurement and construction supervision fees payable to Sonesta of $ 184 for each of the three months ended September 30, 2021 and 2020, and $ 1,571 and $ 1,087 for the nine months ended September 30, 2021 and 2020, respectively, which amounts have been capitalized in our condensed consolidated balance sheets and are depreciated over the estimated useful lives of the related capital assets.
Our Sonesta agreement requires us to fund capital expenditures that we approve at our Sonesta hotels. Each of our 14 full-service hotels operated under the legacy management agreements and all the hotels operated under the conversion hotel management agreements require that 5 % of the hotel gross revenues be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the annual minimum returns due to us. Our legacy management agreements do not require FF&E escrow deposits for 39 extended stay hotels. No FF&E escrow deposits were required during the three and nine months ended September 30, 2021. We incurred capital expenditures for certain hotels included in our Sonesta agreement of $ 76,035 and $ 48,119 during the nine months ended September 30, 2021 and 2020, respectively, which resulted in increases in our contractual annual minimum returns of $ 6,083 and $ 3,622 , respectively. We owed Sonesta $ 5,016 and $ 26,096 for capital expenditures, and other reimbursements at September 30, 2021 and December 31, 2020, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our condensed consolidated balance sheets.
We are required to maintain working capital for each of our hotels managed by Sonesta and have advanced a fixed amount based on the number of rooms in each hotel to meet the cash needs for hotel operations. We had advanced $ 55,977 and $ 41,514 of initial working capital to Sonesta as of September 30, 2021 and December 31, 2020, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. Any remaining working capital would be returned to us upon termination in accordance with the terms of our Sonesta agreement.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Accounting for Investment in Sonesta:
We account for our 34 % non-controlling interest in Sonesta under the equity method of accounting. In March 2021, we funded a $ 25,443 capital contribution to Sonesta related to its acquisition of Red Lion Hotels Corporation. We continue to maintain our 34 % ownership in Sonesta after giving effect to this funding. As of September 30, 2021, our investment in Sonesta had a carrying value of $ 62,143 . This amount is included in other assets, net in our condensed consolidated balance sheets. The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total shareholders’ equity book value on the date of acquisition of our initial equity interest in Sonesta, February 27, 2020, by an aggregate of $ 8,000 . As required under GAAP, we are amortizing this difference to equity in earnings of an investee over 31 years, the weighted average remaining useful life of the real estate assets and intangible assets and liabilities owned by Sonesta as of the date of our acquisition. We recorded amortization of the basis difference of $ 65 in each of the three months ended September 30, 2021 and 2020 and $ 195 and $ 151 for the nine months ended September 30, 2021 and 2020, respectively. We recognized income of $ 2,158 and a loss of $ 1,369 related to our investment in Sonesta for the three months ended September 30, 2021 and 2020, respectively, and income of $ 50 and a loss of $ 4,305 for the nine months ended September 30, 2021 and 2020, respectively. These amounts are included in equity in earnings (losses) of an investee in our condensed consolidated statements of comprehensive income (loss).
We recorded a liability for the fair value of our initial investment in Sonesta, as no cash consideration was exchanged related to the modification of our management agreement with, and investment in, Sonesta. This liability for our investment in Sonesta is included in accounts payable and other liabilities in our condensed consolidated balance sheet and is being amortized on a straight-line basis through January 31, 2037, as a reduction to hotel operating expenses in our condensed consolidated statements of comprehensive income (loss). We reduced hotel operating expenses by $ 621 for each of the three months ended September 30, 2021 and 2020, respectively, and $ 1,863 and $ 1,448 for the nine months ended September 30, 2021 and 2020, respectively, for amortization of this liability. As of September 30, 2021, the unamortized balance of this liability was $ 38,068 .
See Note 9 for further information regarding our relationship, agreements and transactions with Sonesta.
Hyatt agreement. On June 7, 2021, we and Hyatt amended our previous agreement for 22 hotels we own, or our Hyatt agreement. Under our amended Hyatt agreement, Hyatt will continue to manage 17 of the hotels we own for a 10 year term effective April 1, 2021. Our amended Hyatt agreement sets our annual minimum return at $ 12,000 and Hyatt provided us with a new $ 30,000 limited guarantee for 75 % of the aggregate annual minimum returns due to us beginning in 2023. Under our amended Hyatt agreement, a management fee of 5 % of gross room revenues payable to Hyatt will be an operating cost paid senior to our minimum return. Hyatt may also earn a 20 % incentive management fee after payment of our annual minimum return and reimbursement of certain advances, if any. We also agreed to fund approximately $ 50,000 of renovations that are expected to be completed by the end of 2022. As described above, we transitioned the branding and management of the remaining five hotels that Hyatt previously managed to Sonesta in June 2021.
We realized returns of $ 2,768 and $ 5,509 during the three months ended September 30, 2021 and 2020, respectively, and returns of $ 6,634 and $ 16,528 during the nine months ended September 30, 2021 and 2020, respectively, under our Hyatt agreement. Any returns we receive from Hyatt are currently limited to the hotels’ available cash flows, if any, after payment of operating expenses. During the nine months ended September 30, 2021, we expensed $ 3,700 of working capital we previously funded under our Hyatt agreement because the amount is no longer expected to be recoverable. This amount is included in transaction related costs in our condensed consolidated statement of income (loss).
Radisson agreement . On November 1, 2021, we and Radisson amended our previous agreement for nine hotels we own, or our Radisson agreement. Under our amended Radisson agreement, Radisson will continue to manage eight of the nine hotels we own for a 10 year term effective August 1, 2021. Our amended Radisson agreement sets our annual minimum return at $ 10,200 and Radisson provided us with a new $ 22,000 limited guarantee for 75 % of the aggregate annual minimum returns due to us beginning in 2023. Under our amended Radisson agreement, a management fee of 5 % of gross room revenues for each hotel operated under the Country Inn & Suites brand and a management fee of 3 % of gross room revenues for each hotel managed under the Radisson Hotel brand payable to Radisson will be an operating cost paid senior to our minimum return. Radisson may also earn a 20 % incentive management fee after payment of our annual minimum return and reimbursement of certain advances, if any. We also agreed to fund approximately $ 12,000 of renovations that are expected to be completed by the end of 2022. As described above, we transitioned the management and branding of the ninth hotel that Radisson previously managed to Sonesta on November 1, 2021.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
We realized minimum returns of $ 1,822 and $ 5,111 during the three months ended September 30, 2021 and 2020, respectively, and $ 11,878 and $ 15,332 during the nine months ended September 30, 2021 and 2020, respectively, under our Radisson agreement. Pursuant to our Radisson agreement, Radisson had provided us with a guaranty, which was limited to $ 47,523 . During the nine months ended September 30, 2021, the hotels under our Radisson agreement generated cash flows that were less than the minimum returns due to us for the periods and Radisson made $ 13,238 of guaranty payments to cover part of the shortfall and the Radisson guaranty was exhausted.
Marriott agreement . 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 transitioned the branding and management of 88 Marriott managed hotels to Sonesta in February and March 2021. We sold one hotel that Marriott managed in April 2021 (see Note 4 for further information regarding this sale). As of September 30, 2021, Marriott managed 16 of our hotels. 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.
Our Marriott hotels generated net operating cash flow of $ 4,685 and a net operating cash flow deficit of $ 7,895 during the three and nine months ended September 30, 2021, respectively. Any returns we receive from Marriott are limited to the hotels’ available cash flows, if any, after payment of operating expenses. Marriott managed 122 of our hotels during the three and nine months ended September 30, 2020. We realized returns of $ 14,369 and $ 91,076 from our Marriott branded hotels during the three and nine months ended September 30, 2020, respectively. We incurred capital expenditures for certain hotels included in our Marriott agreement of $ 7,319 and $ 50,415 during the nine months ended September 30, 2021 and 2020, respectively.
Other. Our management agreement with IHG for one hotel expires on January 31, 2026. Our IHG hotel generated net operating cash flow of $ 962 and a net operating cash flow deficit of $ 384 during the three and nine months ended September 30, 2021, respectively. Any returns we receive from IHG are limited to the hotels’ available cash flows, if any, after payment of operating expenses. IHG managed or leased 103 of our hotels during the three and nine months ended September 30, 2020. We realized returns of $ 9,654 and $ 117,874 under our IHG agreement during the three and nine months ended September 30, 2020, respectively.
Net lease portfolio
As of September 30, 2021, we owned 794 service-focused retail net lease properties with 13,574,656 square feet with leases requiring annual minimum rents of $ 370,945 with a weighted (by annual minimum rents) average remaining lease term of 10.3 years. The portfolio was 98.2 % leased by 175 tenants operating under 134 brands in 21 distinct industries.
As a result of the COVID-19 pandemic, some of our tenants requested rent assistance. During the three months ended September 30, 2021, we entered into a rent deferral agreement for $ 2,852 of rent with one net lease tenant. As of September 30, 2021, we had $ 10,827 of deferred rents outstanding related to 15 tenants we granted rent relief to pursuant to such requests who represented approximately 2.9 % of our annualized rental income of our net lease retail portfolio as of September 30, 2021. These deferred rents are included in other assets, net in our condensed consolidated balance sheets. These tenants are obligated to pay, in most cases, the deferred rent over a 12 to 24 month period. We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic and account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance as the resulting cash flows from the modified lease are substantially the same as or less than the original lease. The deferred amounts did not impact our operating results for the three or nine months ended September 30, 2021.
We continually review receivables related to rent, straight-line rent and property operating expense reimbursements and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes an assessment of whether substantially all of the amounts due under a tenant’s lease are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
For leases that are deemed not probable of collection, revenue is recorded as cash is received. We recognize all changes in the collectability assessment for an operating lease as an adjustment to rental income. We reduced our reserves for uncollectible amounts and increased rental income by $ 5,373 for the three months ended September 30, 2021 based on our assessment of collectibility and cash received from certain tenants. We recorded reserves for uncollectible amounts against rental income of $ 2,369 for the three months ended September 30, 2020, and $ 588 and $ 7,689 for the nine months ended September 30, 2021 and 2020, respectively. We had reserves for uncollectible rents of $ 16,434 and $ 18,230 as of September 30, 2021 and December 31, 2020, respectively, included in other assets in our condensed consolidated balance sheets.
TA leases. TA is our largest tenant, leasing 26.7 % of our gross carrying value of real estate properties as of September 30, 2021. We lease to TA a total of 179 travel centers under five leases that expire between 2029 and 2035, subject to TA’s right to extend those leases, and require annual minimum rents of $ 246,111 as of September 30, 2021. In addition, TA is required to pay us previously deferred rent obligations in quarterly installments of $ 4,404 through January 31, 2023. TA paid $ 4,404 and $ 13,212 of deferred rent to us for the three and nine months ended September 30, 2021 and 2020, respectively. The remaining balance of previously deferred rents was $ 26,420 and $ 39,632 as of September 30, 2021 and December 31, 2020, respectively.
We recognized rental income from TA of $ 62,116 and $ 61,528 for the three months ended September 30, 2021 and 2020, respectively, and $ 186,357 and $ 184,583 for the nine months ended September 30, 2021 and 2020, respectively. Rental income was reduced by $ 3,267 and $ 3,250 for the three months ended September 30, 2021 and 2020, respectively, and $ 9,789 and $ 9,834 for the nine months ended September 30, 2021 and 2020, respectively, to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight-line basis. As of September 30, 2021 and December 31, 2020, we had receivables for current rent amounts owed to us by TA and straight-line rent adjustments of $ 46,660 and $ 55,530 , respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.
In addition to the rental income that we recognized during the three months ended September 30, 2021 and 2020 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $ 1,849 and $ 893 for the three months ended September 30, 2021 and 2020, respectively, and $ 4,827 and $ 1,742 for the nine months ended September 30, 2021 and 2020, respectively.
Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to 8.5 % of the amounts funded. We did not fund any capital improvements to our properties that we leased to TA during each of the three and nine months ended September 30, 2021 or 2020.
See Note 9 for further information regarding our relationship with TA.
Our other net lease agreements generally provide for minimum rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight-line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We recognized rental income from our net lease properties (excluding TA) of $ 36,608 and $ 34,574 for the three months ended September 30, 2021 and 2020, respectively, which included $ 2,361 and $ 5,620 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis and $ 99,594 and $ 106,804 for the nine months ended September 30, 2021 and 2020, respectively, which included $ 6,702 and $ 11,433 , respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis.
Note 6. Indebtedness
Our principal debt obligations at September 30, 2021 were: (1) $ 1,000,000 of outstanding borrowings under our $ 1,000,000 revolving credit facility; and (2) $ 6,200,000 aggregate outstanding principal amount of senior unsecured notes. Our revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
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 noted below, we have an option to extend the maturity date of the facility for two additional six-month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium, which was 235 basis points per annum, subject to a LIBOR floor of 0.50 %, as of September 30, 2021. We also pay a facility fee, which was 30 basis points per annum at September 30, 2021, on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of September 30, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 2.85 %. The weighted average annual interest rate for borrowings under our revolving credit facility was 2.85 % and 2.55 % for the three months ended September 30, 2021 and 2020, respectively, and 2.85 % and 2.38 % for the nine months ended September 30, 2021 and 2020, respectively. As of each of September 30, 2021 and November 3, 2021, our $ 1,000,000 revolving credit facility was fully drawn.
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 end of the agreement term, or July 15, 2022, or the Waiver Period. As a result of the amendments, among other things:
• we pledged certain equity interests of subsidiaries owning properties and provided first mortgage liens on 74 properties owned by the pledged subsidiaries with an undepreciated book value of $ 1,834,420 as of September 30, 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;
• in order to exercise the first six month extension option under the credit agreement, we would need to be in compliance with the financial covenants under the agreement calculated using pro forma projections as defined in the agreement for the quarter ending June 30, 2022, annualized, and have repaid or refinanced our $ 500,000 of 5.00 % senior notes due in August 2022; 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 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 The RMR Group LLC, or RMR LLC, ceasing to act as our business manager. Our credit agreement and our unsecured senior notes indentures and their supplements also contain covenants, including those that restrict our ability to incur debts or to make distributions under certain circumstances and generally require us to maintain certain financial ratios. As of September 30, 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.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 7. Shareholders' Equity
Distributions
During the three months ended September 30, 2021, we declared and paid regular quarterly distributions to common shareholders as follows:
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
April 15, 2021 April 26, 2021 May 20, 2021 0.01 1,648
July 15, 2021 July 26, 2021 August 19, 2021 0.01 1,648
$ 0.03 $ 4,944
On October 14, 2021, we declared a regular quarterly distribution to common shareholders of record as of October 25, 2021 of $ 0.01 per share, or $ 1,651 . We expect to pay this amount on or about November 18, 2021.
Common Share Awards
On June 16, 2021, in accordance with our Trustee compensation arrangements, we awarded to each of our seven Trustees 7,000 of our common shares, valued at $ 13.94 per common share, the closing price of our common shares on The Nasdaq Stock Market, or Nasdaq, on that day.
On September 15, 2021, we awarded under our equity compensation plan an aggregate of 291,700 of our common shares, valued at $ 10.82 per common share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other current and former officers and employees of RMR LLC.
Common Share Purchases
During the nine months ended September 30, 2021, we purchased an aggregate of 70,795 of our common shares valued at a weighted average share price of $ 11.10 per share, from our officers and certain other current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Note 8. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations of our net lease portfolio, excluding properties leased to TA, the office building component of one of our hotels and to major renovation or repositioning activities at our hotels.
We recognized net business management fees payable to RMR LLC of $ 10,794 and $ 8,641 for the three months ended September 30, 2021 and 2020, respectively, and $ 31,836 and $ 27,613 for the nine months ended September 30, 2021 and 2020, respectively. Based on our common share total return, as defined in our business management agreement, as of each of September 30, 2021 and 2020, no incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 2021 or 2020. The actual amount of annual incentive fees for 2021, if any, will be based on our common share total return, as defined in our business management agreement, for the three-year period ending December 31, 2021, and will be payable in January 2022. We did not incur an incentive fee payable to RMR LLC for the year ended December 31, 2020. We include business management fee amounts in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).
We and RMR LLC amended our business management agreement effective August 1, 2021 to replace the benchmark index used in the calculation of incentive management fees. Pursuant to the amendment, for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Hotel & Resort REIT Index will replace the discontinued SNL U.S. REIT Hotel Index and be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR LLC. For periods prior to August 1, 2021, the SNL U.S. REIT Hotel Index will continue to be used. Accordingly, the
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
calculation of incentive management fees for the next three measurement periods will continue to use the SNL U.S. REIT Hotel Index in calculating the benchmark returns for periods through July 31, 2021. This change of index was due to S&P Global, Inc. ceasing to publish the SNL U.S. REIT Hotel Index.
We recognized property management and construction supervision fees payable to RMR LLC of $ 1,384 and $ 781 for the three months ended September 30, 2021 and 2020, respectively, and $ 3,267 and $ 2,722 for the nine months ended September 30, 2021 and 2020, respectively. Of those amounts, for the three months ended September 30, 2021 and 2020, $ 1,002 and $ 781 , respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 382 of construction and supervision fees were capitalized for the three months ended September 30, 2021. For the nine months ended September 30, 2021 and 2020, $ 2,683 and $ 2,710 , respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of comprehensive income (loss) and $ 584 and $ 12 , respectively, of construction and supervision fees were capitalized. The amounts capitalized are included in building, improvements and equipment in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets.
We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC employees assigned to work exclusively or partly at our net lease properties, our share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function, and as otherwise agreed. We reimbursed RMR LLC $ 679 and $ 258 for these expenses and costs for the three months ended September 30, 2021 and 2020, respectively, and $ 2,016 and $ 525 for the nine months ended September 30, 2021 and 2020, respectively. We included these amounts in other operating expenses and selling, general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss).
On June 22, 2021, we and RMR LLC amended our property management agreement to, among other things, provide for RMR LLC's oversight of any major capital projects and repositioning activities at our hotels, including our hotels that are managed by Sonesta, as we may request from time to time. RMR LLC will receive the same fee previously paid to Sonesta for these services, which is equal to 3 % of the cost of any such major capital project or repositioning activity.
Note 9. Related Person Transactions
We have relationships and historical and continuing transactions with TA, Sonesta, RMR LLC, The RMR Group, Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned operating subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. John G. Murray, our other Managing Trustee and our President and Chief Executive Officer also serves as an officer and employee of RMR LLC. In addition, each of our other officers serves as an officer of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors and as a managing trustee or managing director of those companies. Other officers of RMR LLC, including Mr. Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies.
See Note 7 for information relating to the annual share awards we made in September 2021 to our officers and certain other employees of RMR LLC and common shares we purchased from our officers and certain other current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares to them. We include amounts recognized as expense for share awards to RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
TA . We lease 179 of our travel centers to TA under our TA leases. As of September 30, 2021, we owned 1,184,797 shares of TA common stock, representing approximately 8.1 % of TA’s outstanding shares of common stock. RMR LLC provides management services to both us and TA, and Adam D. Portnoy, also serves as the chair of the board of directors and as a managing director of TA and, as of September 30, 2021, beneficially owned 658,506 shares of TA common stock (including through RMR LLC), representing approximately 4.5 % of TA’s outstanding shares of common stock. See Note 5 for further information regarding our relationships, agreements and transactions with TA and Note 12 for further information regarding our investment in TA.
Sonesta. Sonesta is a private company. One of our Managing Trustees, Mr. Portnoy, is the controlling shareholder and a director of Sonesta. One of Sonesta’s other directors is our other Managing Trustee, President and Chief Executive Officer and Sonesta’s other director serves as RMR LLC’s and RMR Inc.’s executive vice president, general counsel and secretary, as a managing director of RMR Inc. and as our Secretary. Sonesta’s chief executive officer and chief financial officer are officers of RMR LLC. Certain other officers and employees of Sonesta are former employees of RMR LLC. RMR LLC also provides certain services to Sonesta. As of September 30, 2021, we owned approximately 34 % of Sonesta which managed 261 of our hotels. See Note 5 for further information regarding our relationships, agreements and transactions with Sonesta.
Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 8 for further information regarding our management agreements with RMR LLC.
For further information about these and certain other such relationships and certain other related person transactions, refer to our 2020 Annual Report.
Note 10. Income Taxes
We have elected to be taxed as a REIT under the United States Internal Revenue Code of 1986, as amended, or the IRC, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We are subject to income tax in Canada, Puerto Rico and certain states despite our qualification for taxation as a REIT. Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by us despite our qualification for taxation as a REIT.
During the three months ended September 30, 2021, we recognized an income tax benefit of $ 55 , which includes $ 139 of foreign taxes and $ 194 of state tax benefit. During the three months ended September 30, 2020, we recognized an income tax benefit of $ 296 , which includes $ 123 of foreign tax benefit and $ 173 of state tax benefit. During the nine months ended September 30, 2021, we recognized income tax expense of $ 1,009 , which includes $ 309 of foreign taxes and $ 699 of state taxes. During the nine months ended September 30, 2020, we recognized income tax expense of $ 16,706 which includes $ 379 of foreign taxes, $ 677 of state taxes and a $ 15,650 deferred tax liability recorded as a result of the book value to tax basis difference related to the accounting of an insurance settlement at one of our hotels.
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Note 11. Segment Information
We aggregate our hotels and net lease portfolio into two reportable segments, hotel investments and net lease investments, based on their similar operating and economic characteristics.
For the Three Months Ended September 30, 2021
Hotels Net Lease Corporate Consolidated
Revenues:
Hotel operating revenues $ 338,375 $ — $ — $ 338,375
Rental income — 98,724 — 98,724
Total revenues 338,375 98,724 — 437,099
Expenses:
Hotel operating expenses 285,233 — — 285,233
Other operating expenses — 4,437 — 4,437
Depreciation and amortization 66,065 58,098 — 124,163
General and administrative — — 14,231 14,231
Transaction related costs — — 3,149 3,149
Loss on asset impairment — — — —
Total expenses 351,298 62,535 17,380 431,213
Gain on sale of real estate, net — 94 — 94
Unrealized gain on equity securities, net — — 24,348 24,348
Interest income — — 203 203
Interest expense — — ( 92,458 ) ( 92,458 )
Income (loss) before income taxes and equity in earnings of an investee
( 12,923 ) 36,283 ( 85,287 ) ( 61,927 )
Income tax benefit — — 55 55
Equity in earnings of an investee 2,158 — — 2,158
Net income (loss) $ ( 10,765 ) $ 36,283 $ ( 85,232 ) $ ( 59,714 )
For the Nine Months Ended September 30, 2021
Hotels Net Lease Corporate Consolidated
Revenues:
Hotel operating revenues $ 787,463 $ — $ — $ 787,463
Rental income 700 286,042 — 286,742
Total revenues 788,163 286,042 — 1,074,205
Expenses:
Hotel operating expenses 723,769 — — 723,769
Other operating expenses — 11,758 11,758
Depreciation and amortization 200,772 169,436 — 370,208
General and administrative ( 276 ) 1,008 40,108 40,840
Transaction related costs 23,159 — 5,775 28,934
Loss on asset impairment — 2,110 — 2,110
Total expenses 947,424 184,312 45,883 1,177,619
Gain on sale of real estate, net 10,813 121 — 10,934
Unrealized gain on equity securities, net — — 20,367 20,367
Interest income — — 485 485
Interest expense — — ( 273,227 ) ( 273,227 )
Income (loss) before income taxes and equity in losses of an investee ( 148,448 ) 101,851 ( 298,258 ) ( 344,855 )
Income tax expense — — ( 1,009 ) ( 1,009 )
Equity in earnings of an investee 50 — — 50
Net income (loss) $ ( 148,398 ) $ 101,851 $ ( 299,267 ) $ ( 345,814 )
As of September 30, 2021
Hotels Net Lease Corporate Consolidated
Total assets $ 4,609,248 $ 3,605,271 $ 1,120,312 $ 9,334,831
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Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
For the Three Months Ended September 30, 2020
Hotels Net Lease Corporate Consolidated
Revenues:
Hotel operating revenues $ 199,719 $ — $ — $ 199,719
Rental income 674 96,102 — 96,776
Total revenues 200,393 96,102 — 296,495
Expenses:
Hotel operating expenses 174,801 — — 174,801
Other operating expenses — 3,705 — 3,705
Depreciation and amortization 64,517 57,687 — 122,204
General and administrative — — 12,295 12,295
Loss on asset impairment 262 9,986 — 10,248
Total expenses 239,580 71,378 12,295 323,253
Loss on sale of real estate, net — 109 — 109
Unrealized gain on equity securities, net — — 5,606 5,606
Interest income 6 — — 6
Interest expense — — ( 80,532 ) ( 80,532 )
Income (loss) before income taxes and equity in losses of an investee ( 39,181 ) 24,833 ( 87,221 ) ( 101,569 )
Income tax benefit — — 296 296
Equity in losses of an investee — — ( 1,369 ) ( 1,369 )
Net income (loss) $ ( 39,181 ) $ 24,833 $ ( 88,294 ) $ ( 102,642 )
For the Nine Months Ended September 30, 2020
Hotels Net Lease Corporate Consolidated
Revenues:
Hotel operating revenues $ 700,578 $ — $ — $ 700,578
Rental income 3,246 291,387 — 294,633
Total revenues 703,824 291,387 — 995,211
Expenses:
Hotel operating expenses 492,906 — — 492,906
Other operating expenses — 11,029 — 11,029
Depreciation and amortization 199,955 177,602 — 377,557
General and administrative — — 37,621 37,621
Loss on asset impairment 22,622 32,880 — 55,502
Total expenses 715,483 221,511 37,621 974,615
Loss on sale of real estate, net — ( 9,655 ) — ( 9,655 )
Gain on insurance settlement 62,386 — — 62,386
Unrealized gain on equity securities, net — — 4,409 4,409
Interest income 168 — 115 283
Interest expense — — ( 223,679 ) ( 223,679 )
Loss on early extinguishment of debt
— — ( 6,970 ) ( 6,970 )
Income (loss) before income taxes and equity in losses of an investee 50,895 60,221 ( 263,746 ) ( 152,630 )
Income tax expense — — ( 16,706 ) ( 16,706 )
Equity in losses of an investee — — ( 4,305 ) ( 4,305 )
Net income (loss) $ 50,895 $ 60,221 $ ( 284,757 ) $ ( 173,641 )
As of December 31, 2020
Hotels Net Lease Corporate Consolidated
Total assets $ 4,846,410 $ 3,721,418 $ 119,491 ` $ 8,687,319
Note 12. Fair Value of Assets and Liabilities
The table below presents certain of our assets carried at fair value at September 30, 2021, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.
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SERVICE PROPERTIES TRUST
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
September 30, 2021 December 31, 2020
Carrying Value Fair Value Carrying Value Fair Value
Recurring Fair Value Measurement Assets:
Investment in TA (Level 1) (1)
$ 58,991 $ 58,991 $ 38,624 $ 38,624
Non-Recurring Fair Value Measurement Assets:
Assets of properties held for sale (Level 2) (2)
$ 3,690 $ 3,690 $ 13,543 $ 13,543
(1) As of September 30, 2021 and December 31, 2020, we owned 1,184,797 shares of TA common stock, which are included in other assets in our condensed consolidated balance sheets and reported at fair value based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares was $ 24,418 as of both September 30, 2021 and December 31, 2020. We recorded unrealized gains of $ 24,348 and $ 5,606 during the three months ended September 30, 2021 and 2020, respectively, and unrealized gains of $ 20,367 and $ 4,909 during the nine months ended September 30, 2021 and 2020, respectively, to adjust the carrying value of our investment in shares of TA common stock to its fair value.
(2) As of September 30, 2021, we owned six net lease properties located in five states with an aggregate carrying value of $ 3,690 classified as held for sale. These properties are recorded at their estimated fair value less costs to sell based on information derived from offers received from prospective buyers of the properties (Level 2 inputs as defined in the fair value hierarchy under GAAP). We recorded a $ 2,110 loss on asset impairment during the nine months ended September 30, 2021 to reduce the carrying value of five of these properties to their estimated fair value less costs to sell. As of December 31, 2020, we owned five hotels in four states with an aggregate carrying value of $ 10,699 and six net lease properties located in six states with an aggregate carrying value of $ 2,844 classified as held for sale.
In addition to the assets included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility and senior notes. At September 30, 2021 and December 31, 2020, the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their short-term nature or floating interest rates, except as follows:
September 30, 2021 December 31, 2020
Carrying Value (1)
Fair Value Carrying Value (1)
Fair Value
Senior Unsecured Notes, due 2022 at 5.00 %
$ 498,941 $ 504,458 $ 498,032 $ 510,285
Senior Unsecured Notes, due 2023 at 4.50 %
499,720 511,435 499,596 505,280
Senior Unsecured Notes, due 2024 at 4.65 %
349,004 355,541 348,700 347,893
Senior Unsecured Notes, due 2024 at 4.35 %
820,649 840,362 819,546 819,328
Senior Unsecured Notes, due 2025 at 4.50 %
347,634 350,656 347,118 346,462
Senior Unsecured Notes, due 2025 at 7.50 %
790,757 900,748 789,006 926,404
Senior Unsecured Notes, due 2026 at 5.25 %
345,059 353,668 344,212 354,996
Senior Unsecured Notes, due 2026 at 4.75 %
446,973 449,460 446,515 448,506
Senior Unsecured Notes, due 2027 at 4.95 %
395,971 399,028 395,405 404,328
Senior Unsecured Notes, due 2027 at 5.50 %
443,109 479,815 442,370 491,918
Senior Unsecured Notes, due 2028 at 3.95 %
392,770 379,540 391,908 388,146
Senior Unsecured Notes, due 2029 at 4.95 %
418,697 417,163 418,102 430,064
Senior Unsecured Notes, due 2030 at 4.375 %
390,503 382,550 389,656 388,292
Total financial liabilities $ 6,139,787 $ 6,324,424 $ 6,130,166 $ 6,361,902
(1) Carrying value includes unamortized discounts and premiums and issuance costs.
At September 30, 2021 and December 31, 2020, we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).
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