Service Properties Trust 10-Q

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 September 30, 2021, we owned 1,098 properties in 47 states, the District of Columbia, Canada and Puerto Rico. Business Environment and Outlook. Since March 2020, 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 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 improved during the three and nine months ended September 30, 2021 when compared to 2020 levels, we cannot predict with certainty when business levels may return to historical pre-pandemic levels. We currently expect that the recovery with respect to business transient and group business will be gradual and likely inconsistent. We also currently expect the recovery of the U.S. hospitality industry to be a multi-year process and to remain uneven. In addition, consumer confidence and lodging demand will continue to be affected by unemployment, perceptions of the safety of returning to normal activities, the continued use of video conferencing technologies rather than in person meetings and broader macroeconomic trends. We are closely monitoring the impacts of the COVID-19 pandemic on all aspects of our business, specifically, but not limited to, labor availability and cost pressures from supply chain disruptions and commodity price inflation in our hotel portfolio. For more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1, “Business—Impact of COVID-19” 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 September 30, 2021, we owned 304 hotels operated under six agreements. We leased these hotels to our wholly owned TRSs that are managed by hotel operating companies. We own 794 service-oriented properties with 175 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 comprehensive 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. In February and March 2021, we transitioned the branding and management of 88 hotels to Sonesta from Marriott, in June 2021, we transitioned the branding and management of five hotels to Sonesta from Hyatt and on November 1, 2021, we transitioned the branding and management of one hotel to Sonesta from Radisson. For further information regarding these transitions, see Note 5 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. On June 7, 2021, we and Hyatt amended our Hyatt agreement. Under our amended Hyatt agreement, Hyatt will continue to manage 17 of the 22 hotels we own for a 10-year term effective April 1, 2021. For further information regarding our amended Hyatt agreement, see Note 5 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. On November 1, 2021, we and Radisson amended 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. For further information regarding our amended Radisson agreement, see Note 5 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Hotel Portfolio. As of September 30, 2021, we owned 304 hotels. In the three and nine months ended September 30, 2021, the U.S. hotel industry generally realized increases in average daily rate, or ADR, revenue per available room, or RevPAR, and occupancy compared to the corresponding 2020 periods. During the quarter ended September 30, 2021, our hotel portfolio produced aggregate quarter over quarter increases in ADR, RevPAR and occupancy. The following table provides a summary for all our hotels of these revenue metrics for the periods presented which we believe are key indicators of performance at our hotels. 22 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Change 2021 2020 Change All Hotels No. of hotels 304 329 (25) 304 329 (25) No. of rooms or suites 48,439 51,404 (2,965) 48,439 51,404 (2,965) Occupancy 60.1 % 43.6 % 16.5 pts 52.2 % 42.7 % 9.5 pts ADR $ 114.55 $ 89.88 27.4 % $ 102.84 $ 103.30 (0.4) % RevPAR $ 68.84 $ 39.19 75.7 % $ 53.68 $ 44.11 21.7 % 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 three months ended September 30, 2021 and 2020, our comparable results exclude 12 hotels that had suspended operations during part of the periods presented. For the nine months ended September 30, 2021 and 2020, SVC’s comparable results exclude 22 hotels that had suspended operations during part of the periods presented. The following table provides a summary of these revenue metrics for the periods presented. Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Change 2021 2020 Change Comparable Hotels No. of hotels 292 292 — 282 282 — No. of rooms or suites 45,020 45,020 — 42,292 42,292 — Occupancy 60.9 % 45.5 % 15.4 pts 53.5 % 44.9 % 8.6 pts ADR $ 111.18 $ 90.87 22.4 % $ 95.50 $ 100.17 (4.7) % RevPAR $ 67.71 $ 41.35 63.7 % $ 51.09 $ 44.98 13.6 % We believe these results are primarily due to the improved lodging fundamentals in the current year periods and disruption and displacement at certain of our hotels as a result of the COVID-19 pandemic that negatively affected results in the prior year periods. Net Lease Portfolio . As of September 30, 2021, we owned 794 service-focused retail net lease properties with 13,574,656 square feet leased to 175 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rent of $370,945. Our net lease portfolio was 98.2% occupied as of September 30, 2021 with a weighted (by annual minimum rent) lease term of 10.3 years, operating under 134 brands in 21 distinct industries. TA is our largest tenant. As of September 30, 2021, we leased 179 travel centers to TA under five master leases that expire between 2029 and 2035 and require annual minimum rents of $246,111. 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. In March 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. During the nine months ended September 30, 2021, we sold six hotels with 576 rooms for $32,016, excluding closing costs, and five net lease properties with 44,680 square feet for $2,705, excluding closing costs. In October 2021, we sold one net lease property with 7,070 rentable square feet for a sales price of $915, excluding closing costs. 23 Table of Contents Results of Operations (dollar amounts in thousands, except share amounts) Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020 For the Three Months Ended September 30, Increase % Increase 2021 2020 (Decrease) (Decrease) Revenues: Hotel operating revenues $ 338,375 $ 199,719 $ 138,656 69.4 % Rental income - hotels — 674 (674) (100.0) % Rental income - net lease 98,724 96,102 2,622 2.7 % Total revenues 437,099 296,495 140,604 47.4 % Expenses: Hotel operating expenses 285,233 174,801 110,432 63.2 % Other operating expenses 4,437 3,705 732 19.8 % Depreciation and amortization - hotels 66,065 64,517 1,548 2.4 % Depreciation and amortization - net lease 58,098 57,687 411 0.7 % Total depreciation and amortization 124,163 122,204 1,959 1.6 % General and administrative 14,231 12,295 1,936 15.7 % Transaction related costs 3,149 — 3,149 n/m Loss on asset impairment — 10,248 (10,248) (100.0) % Total expenses 431,213 323,253 107,960 33.4 % Other operating income: Gain on sale of real estate, net 94 109 (15) (13.8) % Unrealized gain on equity securities, net 24,348 5,606 18,742 334.3 % Interest income 203 6 197 3,283.3 % Interest expense (92,458) (80,532) (11,926) 14.8 % Loss before income taxes and equity in earnings (losses) of an investee (61,927) (101,569) 39,642 (39.0) % Income tax benefit 55 296 (241) (81.4) % Equity in earnings (losses) of an investee 2,158 (1,369) 3,527 (257.6) % Net loss $ (59,714) $ (102,642) $ 42,928 41.8 % Weighted average shares outstanding (basic and diluted) 164,590 164,435 155 0.1 % Net loss per common share (basic and diluted) $ (0.36) $ (0.62) $ 0.26 (41.9) % References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Hotel operating revenues. The increase in hotel operating revenues is primarily as a result of higher occupancies and average rates at certain of our hotels in the 2021 period and the negative impact the COVID-19 pandemic had on our hotels in the 2020 period ($146,353), partially offset by the sale of certain hotels since July 1, 2020 ($7,697). Additional operating statistics of our hotels are included in the table on page 23. Rental income - hotels. The decrease in rental income – hotels is primarily the result of the conversion of one hotel from a leased to managed property during 2020. Rental income - net lease. The increase in rental income - net lease is primarily the result of the reduction of reserves for uncollectible amounts in the 2021 period as compared to an increase in reserves for uncollectible amounts in the 2020 period ($7,743), partially offset by certain vacancies and lease restructurings ($3,610). 24 Table of Contents Hotel operating expenses. The increase in hotel operating expenses is primarily a result of an increase in occupancy at certain managed hotels ($36,343), an increase in wages and benefits ($31,901), an increase in utilities and management fees ($14,957) and a decrease in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($30,474), partially offset by the sale of certain hotels since July 1, 2020 ($3,243). Other operating expenses. The increase in other operating expenses is primarily the result of higher carrying costs at vacant properties. Depreciation and amortization - hotels. The increase in depreciation and amortization - hotels is a result an increase in depreciation expense from capital improvements made since July 1, 2020 ($2,429), partially offset by the sale of certain hotels and certain of our depreciable assets becoming fully depreciated since July 1, 2020 ($881). Depreciation and amortization - net lease. The increase in depreciation and amortization - net lease is primarily the result of an increase in depreciation expense from capital improvements made since July 1, 2020 ($717), partially offset by the sale of certain net lease properties since July 1, 2020 and certain of our depreciable assets becoming fully depreciated since July 1, 2020 ($306). General and administrative. The increase in general and administrative costs is primarily due to an increase in business management fees as a result of an increase in our market capitalization ($2,152), partially offset by a decrease in professional service expenses ($134) in the 2021 period. Transaction related cos ts. Transaction related costs for the three months ended September 30, 2021 are primarily related to our arbitration proceedings with Marriott. Loss on asset impairment. We recorded a $10,248 loss on asset impairment during the three months ended September 30, 2020 to reduce the carrying value of one hotel and two net lease properties to their estimated fair value less costs to sell. Gain on sale of real estate, net. We recorded a $94 net gain on sale of real estate during the three months ended September 30, 2021 in connection with the sale of two net lease properties and a $109 net gain on sale of real estate during the three months ended September 30, 2020 in connection with the sales of five net lease properties. Unrealized gain on equity securities, net. Unrealized gain 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 September 30, 2021 and 2020. Interest income. The increase in interest income is due to higher average cash balances 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 benefit. The decrease in income tax benefit is primarily due to a decrease in our net state tax benefit during the 2021 period, partially offset by foreign sourced income tax expense. Equity in earnings (losses) of an investee. Equity in earnings (losses) of an investee represents our proportionate share of the earnings and losses of Sonesta. Net loss. Our net loss and net loss per common share (basic and diluted) each decreased in the 2021 period compared to the 2020 period primarily due to the revenue and expense changes discussed above. 25 Table of Contents Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020 For the Nine Months Ended September 30, Increase % Increase 2021 2020 (Decrease) (Decrease) Revenues: Hotel operating revenues $ 787,463 $ 700,578 $ 86,885 12.4 % Rental income - hotels 700 3,246 (2,546) (78.4) % Rental income - net lease portfolio 286,042 291,387 (5,345) (1.8) % Total revenues 1,074,205 995,211 78,994 7.9 % Expenses: Hotel operating expenses 723,769 492,906 230,863 46.8 % Other operating expenses 11,758 11,029 729 6.6 % Depreciation and amortization - hotels 200,772 199,955 817 0.4 % Depreciation and amortization - net lease portfolio 169,436 177,602 (8,166) (4.6) % Total depreciation and amortization 370,208 377,557 (7,349) (1.9) % General and administrative 40,840 37,621 3,219 8.6 % Transaction related costs 28,934 — 28,934 n/m Loss on asset impairment 2,110 55,502 (53,392) 96.2 % Total expenses 1,177,619 974,615 203,004 20.8 % Other operating income: Gain (loss) on sale of real estate, net 10,934 (9,655) 20,589 213.2 % Gain on insurance settlement — 62,386 (62,386) (100.0) % Unrealized gain on equity securities, net 20,367 4,409 15,958 (361.9) % Interest income 485 283 202 71.4 % Interest expense (273,227) (223,679) (49,548) (22.2) % Loss on early extinguishment of debt — (6,970) 6,970 100.0 % Income before income taxes and equity in losses of an investee (344,855) (152,630) (192,225) n/m Income tax expense (1,009) (16,706) 15,697 n/m Equity in earnings (losses) of an investee 50 (4,305) 4,355 n/m Net loss $ (345,814) $ (173,641) $ (172,173) n/m Weighted average shares outstanding (basic and diluted) 164,532 164,397 135 0.1 % Net loss per common share (basic and diluted) $ (2.10) $ (1.06) $ (1.04) n/m References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Hotel operating revenues. The increase in hotel operating revenues is a result of higher occupancies and higher average rates at certain of our hotels in the 2021 period and the negative impact the COVID-19 pandemic had on our hotels in the 2020 period ($108,635), partially offset by the sale of certain of our hotels since January 1, 2020 ($21,751). Additional operating statistics of our hotels are included in the table on page 23. Rental income - hotels. The decrease in rental income - hotels is primarily a result of the conversion of one hotel from a leased to managed property during 2020. Rental income - net lease portfolio. The decrease in rental income - net lease is primarily the result of the sale of certain net lease properties since January 1, 2020 ($5,408) and the result of certain vacancies and lease restructurings ($4,996), partially offset by the net reduction of reserves for uncollectible amounts in the 2021 period ($5,019). 26 Table of Contents Hotel operating expenses. The increase in hotel operating expenses is primarily the result of an increase in occupancy at certain managed hotels ($23,038), an increase in management fees ($22,994) and a decrease in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($206,436), partially offset by the sale of certain hotels since January 1, 2020 ($10,287) and a decrease in wages and benefits ($10,490). Other operating expenses. The increase in other operating expenses is primarily the result of higher carrying costs at vacant properties. Depreciation and amortization - hotels. The increase in depreciation and amortization - hotels is the result of an increase in depreciation expense from capital improvements made since January 1, 2020 ($4,640), partially offset by the sale of certain hotels and certain of our depreciable assets becoming fully depreciated since January 1, 2020 ($3,911). Depreciation and amortization - net lease portfolio. The decrease in depreciation and amortization - net lease portfolio is a result of the depreciation and amortization of properties that were sold since January 1, 2020 ($3,220) and by certain of our depreciable assets becoming fully depreciated since January 1, 2020 ($4,946). General and administrative. The increase in general and administrative costs is primarily due to higher business management fees as a result of an increase in our market capitalization ($2,070), partially offset by lower professional fees ($787) in the 2021 period. Transaction related cos ts. Transaction related costs for the nine months ended September 30, 2021 included $19,971 of hotel manager transition related costs related to rebranding certain hotels, $5,263 of legal costs related to the arbitration proceedings with Marriott and $3,700 of working capital we previously funded under our Hyatt agreement as a result of the amount no longer being expected to be recoverable. Loss on asset impairment. We recorded a $2,110 loss on asset impairment during the nine months ended September 30, 2021 to reduce the carrying value of five net lease properties to their estimated fair value less costs to sell. We recorded a $55,502 loss on asset impairment during the nine months ended September 30, 2020 to reduce the carrying value of 18 hotels and eight net lease properties to their estimated fair value. Gain (loss) on sale of real estate, net. We recorded a $10,934 net gain on sale of real estate in the 2021 period in connection with the sales of six hotels and five net lease properties and a $9,655 net loss on sale of real estate in connection with the sales of 15 net lease properties during the nine months ended September 30, 2020. Gain on insurance settlement. In the 2020 period we recorded a $62,386 gain on insurance settlement as a result of insurance proceeds received for our then leased hotel in San Juan, PR related to Hurricane Maria. Unrealized gain on equity securities, net. Unrealized gain 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 September 30, 2021 and 2020. Interest income. The increase in interest income is due to higher average cash balances during the 2021 period. Interest expense. The increase in interest expense is due to higher average outstanding borrowings and weighted average interest rates in the 2021 period. Loss on early extinguishment of debt . Loss on early extinguishment of debt represents losses incurred in the 2020 period for our repurchase of certain unsecured senior notes. Income tax expense. We recorded a $15,650 deferred tax liability as a result of the book value to tax basis difference related to the accounting of an insurance settlement in the 2020 period. Equity in earnings (losses) of an investee. Equity in earnings (losses) of an investee represents our proportionate share of the earnings (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. 27 Table of Contents Liquidity and Capital Resources (dollar amounts in thousands, except share amounts) Our Managers and Tenants As of September 30, 2021, all 304 of our hotels were managed by five hotel operating companies pursuant to six combination portfolio agreements. Our 794 net lease properties were leased to 175 tenants as of September 30, 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 September 30, 2021, our hotel managers included Sonesta (261 hotels), Hyatt (17 hotels), Radisson (nine hotels), Marriott (16 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 on 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 effects 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 transitioned the branding and management of 88 Marriott hotels to Sonesta in February 2021 and March 2021. We sold one Marriott hotel in April 2021. As of September 30, 2021 , Marriott managed 16 of our hotels. 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. On June 7, 2021, we and Hyatt amended our Hyatt agreement. Under our amended Hyatt agreement, Hyatt will continue to manage 17 of the 22 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 agreed to fund approximately $50,000 of renovations that are expected to be completed by the end of 2022. We transitioned the branding and management of the remaining five hotels that Hyatt previously managed to Sonesta in June 2021. On November 1, 2021, we and Radisson amended 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 has provided us with a new $22,000 limited guarantee for 75% of the aggregate annual minimum returns 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. We transitioned the branding and management of the ninth hotel that Radisson previously managed to Sonesta on November 1, 2021. 28 Table of Contents 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. We had $10,827 of deferred rents outstanding related to 15 tenants who represent approximately 2.9% of our annualized rental income of our net lease retail portfolio as of September 30, 2021. Generally, the rent deferrals we have entered into 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 COVID-19 pandemic and its impact on 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 conditions, 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 September 30, 2021 and 2020, 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. 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 current operating trends. As a result, we believe using this industry benchmark data provides a more reasonable estimated representation of recent operating results and coverage for those tenants. Our net lease properties generated coverage of 2.37x and 2.12x as of September 30, 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 challenging operating environment posed by the COVID-19 pandemic and the slowdown in U.S. economic activity and lodging demand beginning in March 2020, 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 any operating losses at our hotels, to pay corporate expenses, including debt service, fund capital expenditures, and to pay distributions to our shareholders. 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 satisfy that covenant. 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. 29 Table of Contents The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands): Nine Months Ended September 30, 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 1,002 65,524 Investing activities (87,352) (99,520) Financing activities 909,083 38,714 Cash and cash equivalents and restricted cash at the end of the period $ 914,189 $ 85,977 The change from cash flows provided by operating activities in the 2020 period to cash flows used in operating activities in the 2021 period 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 hotel managers’ purchases with restricted cash and a decrease in real estate dispositions in the 2021 period, partially offset by an investment in Sonesta we made 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 2021 period 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, a decrease in net senior notes issuances and lower common share distributions compared to the 2020 period. We maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 304 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 nine months ended September 30, 2021, our hotel managers and tenants deposited $2,861 to these accounts and spent $23,692 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of September 30, 2021, there was $1,657 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 nine months ended September 30, 2021, we funded $72,432 for capital improvements in excess of FF&E reserves available to our hotels. We currently expect to fund $30,000 for capital improvements to certain hotels during the last three 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 $786 of capital improvements to properties under these lease provisions during the nine months ended September 30, 2021. Tenants are not obligated to request and we are not obligated to purchase any such improvements. As of September 30, 2021, we had $4,610 of unspent leasing-related obligations related to certain net lease tenants. In March 2021, we funded a $25,443 capital contribution to Sonesta related to its acquisition of Red Lion Hotels Corporation using cash on hand. 30 Table of Contents In March 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 nine months ended September 30, 2021, we sold six hotels with an aggregate of 576 rooms for net proceeds of $31,214 in two separate transactions and we also sold five net lease properties with 44,680 square feet for net proceeds of $2,705. We used the net proceeds from these sales to repay amounts outstanding under our revolving credit facility and for general business purposes. 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 expect these sales to be completed by the end of the first quarter of 2022. We 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. We expect to use the net sales proceeds from these sales for general business purposes or to repay debt. During the nine months ended September 30, 2021, we declared and paid regular quarterly distributions to common shareholders using cash on hand 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 on October 25, 2021 of $0.01 per share, or $1,651. We expect to pay this amount on or about November 18, 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 as noted below, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2021, we were fully drawn under our $1,000,000 revolving credit facility and remain fully drawn as of November 3, 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 provided first mortgage liens on 74 properties owned by certain of 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); 31 Table of Contents • 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 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 term debt maturities (other than our revolving credit facility) as of September 30, 2021 were as follows: 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. 32 Table of Contents 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 duration and severity of the COVID-19 pandemic and its impact on economic conditions 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. Debt Covenants Our debt obligations at September 30, 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 September 30, 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 September 30, 2021: Actual Results Covenant Requirement Total debt / adjusted total assets 55.5% Maximum of 60% Secured debt / adjusted total assets 7.7% Maximum of 40% Consolidated income available for debt service / debt service 1.06x Minimum of 1.50x Total unencumbered assets / unsecured debt 179.5% Minimum 150% The above consolidated income available for debt service to debt service ratio as of September 30, 2021 is based on results for the nine months ended September 30, 2021 and the fourth quarter of 2020. This ratio was 1.06x as of September 30, 2021, which was below the required level and was 1.00x as of June 30, 2021, 1.12x as of March 31, 2021 and 1.56x as of December 31, 2020. 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. 33 Table of Contents Supplemental Guarantor Information Our $800,000 of 7.50% unsecured senior notes due 2025, or the 2025 Notes, and our $450,000 of 5.50% 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 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 September 30, 2021 As of December 31, 2020 Real estate properties, net (1) $ 6,249,242 $ 5,871,790 Intercompany balances (2) 687,319 800,198 Other assets, net 1,675,530 677,408 Indebtedness, net $ 7,139,787 $ 6,208,590 Other liabilities 398,649 341,907 Nine Months Ended September 30, 2021 Revenues $ 536,755 Expenses 617,225 Net income (loss) (80,470) (1) Real estate properties, net as of September 30, 2021 includes $303,962 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 September 30, 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 146 brands across 22 industries. 34 Table of Contents 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. Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR Service Level No. of Hotels Three months ended September 30, Three months ended September 30, Three months ended September 30, Brand 2021 2020 Change 2021 2020 Change 2021 2020 Change Sonesta (1) Full Service 21 6,880 54.2 % 35.6 % 18.6 pts $ 143.06 $ 117.20 22.1 % $ 77.54 $ 41.72 85.8 % Royal Sonesta (1) Full Service 10 3,370 41.4 % 20.4 % 21.0 pts 196.83 138.21 42.4 % 81.49 28.19 189.0 % Radisson Hotel Full Service 4 969 60.1 % 31.2 % 28.9 pts 114.25 91.24 25.2 % 68.66 28.47 141.2 % Crowne Plaza Full Service 1 495 51.1 % 29.9 % 21.2 pts 123.47 92.88 32.9 % 63.09 27.77 127.2 % Country Inn and Suites Full Service 3 430 62.4 % 29.1 % 33.3 pts 130.77 90.88 43.9 % 81.60 26.45 208.6 % Radisson Blu Full Service 1 360 34.9 % 14.1 % 20.8 pts 124.30 92.30 34.7 % 43.38 13.01 233.3 % Full Service Total/Average 40 12,504 50.8 % 30.1 % 20.7 pts 150.64 116.78 29.0 % 76.53 35.15 117.7 % Sonesta Select (1) Select Service 63 8,888 42.2 % 28.7 % 13.5 pts 112.78 94.11 19.8 % 47.59 27.01 76.2 % Hyatt Place Select Service 17 2,107 66.7 % 47.1 % 19.6 pts 111.53 88.21 26.4 % 74.39 41.55 79.1 % Courtyard Select Service 13 1,813 61.1 % 32.1 % 29.0 pts 114.08 87.58 30.3 % 69.70 28.11 147.9 % Select Service Total/Average 93 12,808 48.9 % 32.2 % 16.7 pts 112.73 91.77 22.8 % 55.12 29.55 86.5 % Sonesta ES Suites (1) Extended Stay 91 11,326 73.5 % 60.0 % 13.5 pts 107.09 96.96 10.4 % 78.71 58.18 35.3 % Sonesta Simply Suites (1) Extended Stay 65 8,040 78.6 % 70.3 % 8.3 pts 73.84 65.38 12.9 % 58.04 45.96 26.3 % Residence Inn Extended Stay 3 342 69.9 % 46.8 % 23.1 pts 118.37 102.45 15.5 % 82.74 47.95 72.6 % Extended Stay Total/Average 159 19,708 75.4 % 64.0 % 11.4 pts 93.40 82.82 12.8 % 70.42 53.00 32.9 % Comparable Hotels Total/Average 292 45,020 60.9 % 45.5 % 15.4 pts $ 111.18 $ 90.87 22.4 % $ 67.71 $ 41.35 63.7 % Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR Service Level No. of Hotels Nine months ended September 30, Nine months ended September 30, Nine months ended September 30, Brand 2021 2020 Change 2021 2020 Change 2021 2020 Change Sonesta (1) Full Service 18 6,110 45.2 % 38.0 % 7.2 pts $ 112.69 $ 120.44 (6.4) % $ 50.94 $ 45.77 11.3 % Royal Sonesta (1) Full Service 7 2,002 31.7 % 28.7 % 3.0 pts 159.52 152.79 4.4 % 50.57 43.85 15.3 % Radisson Hotel Full Service 4 969 50.9 % 36.5 % 14.4 pts 104.19 106.76 (2.4) % 53.03 38.97 36.1 % Crowne Plaza Full Service 1 495 46.6 % 28.9 % 17.7 pts 110.77 120.55 (8.1) % 51.62 34.84 48.2 % Country Inn and Suites Full Service 1 84 51.7 % 44.1 % 7.6 pts 88.16 83.54 5.5 % 45.58 36.84 23.7 % Radisson Blu Full Service 1 360 23.7 % 26.2 % (2.5)pts 110.09 112.06 (1.8) % 26.09 29.36 (11.1) % Full Service Total/Average 32 10,020 42.4 % 35.2 % 7.2 pts 118.31 123.73 (4.4) % 50.16 43.55 15.2 % Sonesta Select (1) Select Service 63 8,888 35.7 % 31.2 % 4.5 pts 99.91 114.77 (12.9) % 35.67 35.81 (0.4) % Hyatt Place Select Service 17 2,107 59.9 % 45.1 % 14.8 pts 99.56 96.61 3.1 % 59.64 43.57 36.9 % Courtyard Select Service 13 1,813 50.6 % 29.4 % 21.2 pts 101.10 96.05 5.3 % 51.16 28.24 81.2 % Select Service Total/Average 93 12,808 41.8 % 33.2 % 8.6 pts 100.03 108.38 (7.7) % 41.81 35.98 16.2 % Sonesta ES Suites (1) Extended Stay 91 11,326 66.1 % 53.2 % 12.9 pts 97.64 104.83 (6.9) % 64.54 55.77 15.7 % Sonesta Simply Suites (1) Extended Stay 63 7,796 69.0 % 64.5 % 4.5 pts 69.19 70.95 (2.5) % 47.74 45.76 4.3 % Residence Inn Extended Stay 3 342 56.8 % 43.7 % 13.1 pts 109.29 105.99 3.1 % 62.08 46.32 34.0 % Extended Stay Total/Average 157 19,464 67.1 % 57.5 % 9.6 pts 86.17 89.61 (3.8) % 57.82 51.53 12.2 % Comparable Hotels Total/Average 282 42,292 53.5 % 44.9 % 8.6 pts $ 95.50 $ 100.17 (4.7) % $ 51.09 $ 44.98 13.6 % * 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 three months ended September 30, 2021 and 2020, our comparable results excluded 12 hotels that had suspended operations during part of the periods presented and for the nine months ended September 30, 2021 and 2020, our comparable results excluded 22 hotels that had suspended operations during part of the periods presented. 35 Table of Contents All Hotels* No. of Rooms or Suites Occupancy ADR RevPAR Service Level No. of Hotels Three months ended September 30, Three months ended September 30, Three months ended September 30, Brand 2021 2020 Change 2021 2020 Change 2021 2020 Change Sonesta (1) Full Service 25 8,040 52.8 % 30.8 % 22.0 Pts $ 142.31 $ 117.19 21.4 % $ 75.14 $ 36.09 108.2 % Royal Sonesta (1) Full Service 16 5,303 44.2 % 18.0 % 26.2 Pts 206.29 133.20 54.9 % 91.18 23.98 280.3 % Radisson Hotel Full Service 5 1,149 58.1 % 27.2 % 30.9 Pts 113.20 91.11 24.2 % 65.77 24.78 165.4 % Crowne Plaza Full Service 1 495 51.1 % 29.9 % 21.2 Pts 123.47 92.88 32.9 % 63.09 27.77 127.2 % Country Inn and Suites Full Service 3 430 62.4 % 29.1 % 33.3 Pts 130.77 90.88 43.9 % 81.60 26.45 208.6 % Radisson Blu Full Service 1 360 34.9 % 14.1 % 20.8 Pts 124.30 92.30 34.7 % 43.38 13.01 233.3 % Full Service Total/Average 51 15,777 50.2 % 26.2 % 24.0 Pts 156.66 116.37 34.6 % 78.64 30.49 157.9 % Sonesta Select (1) Select Service 63 8,888 42.2 % 28.7 % 13.5 Pts 112.78 94.11 19.8 % 47.59 27.01 76.2 % Hyatt Place Select Service 17 2,107 66.7 % 47.1 % 19.6 Pts 111.53 88.21 26.4 % 74.39 41.55 79.1 % Courtyard Select Service 13 1,813 61.1 % 32.1 % 29.0 Pts 114.08 87.58 30.3 % 69.70 28.11 147.9 % Select Service Total/Average 93 12,808 48.9 % 32.2 % 16.7 Pts 112.73 91.77 22.8 % 55.12 29.55 86.5 % Simply ES Suites (1) Extended Stay 92 11,472 73.2 % 59.4 % 13.8 Pts 107.26 96.89 10.7 % 78.51 57.55 36.4 % Sonesta Simply Suites (1) Extended Stay 65 8,040 78.6 % 70.3 % 8.3 Pts 73.84 65.38 12.9 % 58.04 45.96 26.3 % Residence Inn Extended Stay 3 342 69.9 % 46.8 % 23.1 Pts 118.37 102.45 15.5 % 82.74 47.95 72.6 % Extended Stay Total/Average 160 19,854 75.3 % 63.6 % 11.7 Pts 93.58 82.80 13.0 % 70.47 52.66 33.8 % All Hotels Total/Average 304 48,439 60.1 % 43.4 % 16.7 Pts $ 114.55 $ 90.99 25.9 % $ 68.84 $ 39.49 74.3 % All Hotels* No. of Rooms or Suites Occupancy ADR RevPAR Service Level No. of Hotels Nine months ended September 30, Nine months ended September 30, Nine months ended September 30, Brand 2021 2020 Change 2021 2020 Change 2021 2020 Change Sonesta (1) Full Service 25 8,040 45.2 % 35.3 % 9.9 Pts $ 127.71 $ 126.15 1.2 % $ 57.72 $ 44.53 29.6 % Royal Sonesta (1) Full Service 16 5,303 35.1 % 26.0 % 9.1 Pts 186.68 183.16 1.9 % 65.52 47.62 37.6 % Radisson Hotel Full Service 5 1,149 48.4 % 33.3 % 15.1 Pts 103.06 114.62 (10.1) % 49.88 38.17 30.7 % Crowne Plaza Full Service 1 495 46.6 % 28.9 % 17.7 Pts 110.77 120.55 (8.1) % 51.62 34.84 48.2 % Country Inn and Suites Full Service 3 430 48.8 % 26.7 % 22.1 Pts 110.59 103.60 6.7 % 53.97 27.66 95.1 % Radisson Blu Full Service 1 360 23.7 % 26.2 % (2.5)Pts 110.09 112.06 (1.8) % 26.09 29.36 (11.1) % Full Service Total/Average 51 15,777 41.8 % 31.6 % 10.2 Pts 140.33 138.91 1.0 % 58.66 43.90 33.6 % Sonesta Select (1) Select Service 63 8,888 42.2 % 31.2 % 11.0 Pts 99.91 114.77 (12.9) % 42.16 35.81 17.7 % Hyatt Place Select Service 17 2,107 66.7 % 45.1 % 21.6 Pts 99.56 96.61 3.1 % 66.41 43.57 52.4 % Courtyard Select Service 13 1,813 61.1 % 29.4 % 31.7 Pts 101.10 96.05 5.3 % 61.77 28.24 118.7 % Select Service Total/Average 93 12,808 41.8 % 33.2 % 8.6 Pts 100.03 108.38 (7.7) % 41.81 35.98 16.2 % Simply ES Suites (1) Extended Stay 92 11,472 73.2 % 52.8 % 20.4 Pts 97.78 105.05 (6.9) % 71.57 55.47 29.0 % Sonesta Simply Suites (1) Extended Stay 65 8,040 78.6 % 63.6 % 15.0 Pts 68.81 70.69 (2.7) % 54.08 44.96 20.3 % Residence Inn Extended Stay 3 342 69.9 % 43.7 % 26.2 Pts 109.29 105.99 3.1 % 76.39 46.32 64.9 % Extended Stay Total/Average 160 19,854 67.1 % 57.0 % 10.1 Pts 85.95 89.53 (4.0) % 57.67 51.03 13.0 % All Hotels Total/Average 304 48,439 52.2 % 42.6 % 9.6 Pts $ 102.84 $ 105.14 (2.2) % $ 53.68 $ 44.79 19.8 % * Results of all hotels owned as of September 31, 2021. Excludes the results of hotels sold during the periods presented. (1) Includes operator data for periods prior to when certain hotels were managed by Sonesta. Net Lease Portfolio As of September 30, 2021, our net lease properties were 98.2% occupied and we had 30 properties available for lease. During the nine months ended September 30, 2021, we entered into lease renewals for 607,614 rentable square feet at weighted (by rentable square feet) average rents that were 11.6% below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 14.1 years. Also during the nine months ended September 30, 2021, we entered into new leases for an aggregate of 159,633 rentable square feet at weighted (by rentable square feet) average rents that were 36.9% below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 14.1 years. 36 Table of Contents As of September 30, 2021, our net lease tenants operated across more than 134 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 44.4 % $ 168,012 45.3 % 2.19 x 2. Petro Stopping Centers 45 1,021,226 19.8 % 78,099 21.1 % 1.90 x 3. AMC Theatres 11 102,580 2.0 % 8,237 2.2 % (0.16) x 4. The Great Escape 14 98,242 1.9 % 7,140 1.9 % 1.70 x 5. Life Time Fitness 3 92,617 1.8 % 5,770 1.6 % 0.62 x 6. Buehler's Fresh Foods 5 76,536 1.5 % 5,657 1.5 % 5.90 x 7. Heartland Dental 59 61,120 1.2 % 4,561 1.2 % 5.04 x 8. Norms 10 53,673 1.0 % 1,584 0.4 % 0.47 x 9. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 3.57 x 10. Pizza Hut 42 47,641 0.9 % 3,341 0.9 % 1.59 x 11. Other (5) 448 1,265,303 24.5 % 84,827 22.9 % 3.19 x Total 794 $ 5,157,851 100.0 % $ 370,945 100.0 % 2.37 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 September 30, 2021, we have six net lease properties with annual minimum rent of $214 classified as held for sale. (4) See page 29 for our definition of coverage. (5) Other includes 124 distinct brands with an average investment of $10,204 and average annual minimum rent of $684. As of September 30, 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 65.0 % $ 246,110 66.4 % 2.10x (5) 2. American Multi-Cinema, Inc. AMC Theatres 11 102,580 2.0 % 8,237 2.2 % -0.16x 3. Universal Pool Co., Inc. The Great Escape 14 98,242 1.9 % 7,140 1.9 % 1.70x 4. Healthy Way of Life II, LLC Life Time Fitness 3 92,617 1.8 % 5,770 1.6 % 0.62x 5. Styx Acquisition, LLC Buehler's Fresh Foods 5 76,536 1.5 % 5,657 1.5 % 5.90x 6. Professional Resource Development, Inc. Heartland Dental 59 61,120 1.2 % 4,561 1.2 % 5.04x 7. Norms Restaurants, LLC Norms 10 53,673 1.1 % 1,584 0.4 % 0.47x 8. Express Oil Change, L.L.C. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 3.57x 9. Regal Cinemas, Inc. Regal Cinemas 6 44,476 0.9 % 3,658 1.0 % -0.08x 10. Pilot Travel Centers LLC Flying J Travel Plaza 3 41,681 0.8 % 3,183 0.9 % 4.03x Subtotal, top 10 313 3,931,064 77.2 % 289,617 78.1 % 2.12x 11. Other (6) Various 481 1,226,787 22.8 % 81,328 21.9 % 3.26x Total 794 $ 5,157,851 100.0 % $ 370,945 100.0 % 2.37x (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 September 30, 2021, we have six net lease properties with an annual minimum rent of $214 classified as held for sale. (4) See page 29 for our definition of coverage. 37 Table of Contents (5) 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 $26,420 is being paid in quarterly installments of $4,404 through January 31, 2023. (6) Other includes 165 tenants with an average investment of $7,435 and average annual minimum rent of $493. As of September 30, 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 65.0% $ 249,293 67.2 % 2.12x Restaurants-Quick Service 229 304,704 5.9% 20,418 5.5 % 2.71x Restaurants-Casual Dining 56 203,339 3.9% 10,390 2.8 % 1.69x Movie Theaters 22 190,725 3.7% 14,495 3.9 % -0.03x Health and Fitness 13 185,458 3.6% 10,747 2.9 % 1.04x Grocery Stores 19 129,219 2.5% 9,123 2.5 % 5.23x Home Goods and Leisure 20 118,899 2.3% 9,041 2.4 % 1.99x Medical, Dental Office 71 118,098 2.3% 9,351 2.5 % 4.63x Automotive Equipment & Services 64 98,473 1.9% 7,125 1.9 % 2.74x Automotive Dealers 9 64,756 1.3% 5,358 1.4 % 7.08x Entertainment 4 61,436 1.2% 4,334 1.2 % 1.76x General Merchandise Stores 5 56,321 1.1% 3,892 1.0 % 3.14x Educational Services 9 55,647 1.1% 4,376 1.2 % 1.53x Building Materials 27 31,317 0.6% 2,608 0.7 % 4.20x Car Washes 5 28,658 0.6% 2,128 0.6 % 1.76x Miscellaneous Manufacturing 7 32,873 0.6% 2,445 0.7 % 15.56x Drug Stores and Pharmacies 7 19,251 0.4% 1,258 0.3 % 1.61x Sporting Goods 3 17,595 0.3% 1,070 0.3 % 3.73x Legal Services 5 11,362 0.2% 1,097 0.3 % -2.50x Other 4 10,419 0.2% 2,210 0.6 % 5.47x Dollar Stores 3 2,971 0.1% 186 0.1 % 3.59x Vacant 30 64,234 1.2% — — % n/a Total 794 $ 5,157,851 100.0% $ 370,945 100.0 % 2.37x (1) Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any. (2) As of September 30, 2021, we have six net lease properties with an annual minimum rent of $214 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 29 for our definition of coverage. 38 Table of Contents As of September 30, 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 257,155 1,564 0.4% 0.4% 2022 346,255 3,191 0.9% 1.3% 2023 317,732 3,375 0.9% 2.2% 2024 788,158 11,787 3.2% 5.4% 2025 457,960 8,991 2.4% 7.8% 2026 952,723 11,260 3.0% 10.8% 2027 974,398 13,300 3.6% 14.4% 2028 553,330 9,649 2.6% 17.0% 2029 1,324,129 47,794 13.0% 30.0% 2030 144,290 4,203 1.1% 31.1% 2031 1,313,222 48,684 13.1% 44.2% 2032 1,266,322 53,229 14.4% 58.6% 2033 1,105,956 52,410 14.1% 72.7% 2034 104,508 3,719 1.0% 73.7% 2035 2,577,853 84,573 22.8% 96.5% 2036 291,408 4,878 1.3% 97.8% 2037 — — 0.0% 97.8% 2038 44,484 1,048 0.3% 98.1% 2039 134,901 3,209 0.9% 99.0% 2040 33,233 153 0.0% 99.0% 2041 223,043 2,189 0.6% 99.6% 2042 57,499 155 0.0% 99.6% 2043 — — 0.0% 99.6% 2044 — — 0.0% 99.6% 2045 63,490 1,584 0.4% 100.0% Total 13,332,049 $ 370,945 100% (1) The year of lease expiration is pursuant to contract terms. (2) As of September 30, 2021, we have six net lease properties with an annual minimum rent of $214 classified as held for sale. As of September 30, 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 $ 32,291 8.7% Ohio 1,302,273 26,439 7.1% Illinois 1,016,187 26,103 7.0% California 399,045 21,837 5.9% Georgia 597,248 20,178 5.4% Florida 538,130 16,114 4.3% Arizona 476,651 16,847 4.5% Indiana 606,839 16,994 4.6% Pennsylvania 580,091 15,633 4.2% Nevada 190,262 9,618 2.6% Other 6,662,537 168,891 45.7% 13,574,656 $ 370,945 100.0% 39 Table of Contents 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. 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 comprehensive 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. 40 Table of Contents Our calculations of FFO and Normalized FFO for the three and nine months ended September 30, 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 September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 Net loss $ (59,714) $ (102,642) $ (345,814) $ (173,641) Add (Less): Depreciation and amortization expense 124,163 122,204 370,208 377,557 Loss on asset impairment (1) — 10,248 2,110 55,502 (Gain) loss on sale of real estate, net (2) (94) (109) (10,934) 9,655 Unrealized gains on equity securities, net (3) (24,348) (5,606) (20,367) (4,409) Adjustments to reflect our share of FFO attributable to an investee (4) 369 (900) 1,868 (461) FFO 40,376 23,195 (2,929) 264,203 Add (less): Loss on early extinguishment of debt (5) — — — 6,970 Gain on insurance settlement, net of tax (6) — — — (46,736) Adjustments to reflect our share of Normalized FFO attributable to an investee (4) 256 — 1,619 — Transaction related costs (7) 3,149 — 28,934 — Normalized FFO $ 43,781 $ 23,195 $ 27,624 $ 224,437 Weighted average shares outstanding (basic and diluted) (8) 164,590 164,435 164,532 164,397 Basic and diluted per common share amounts: Net loss $ (0.36) $ (0.62) $ (2.10) $ (1.06) FFO $ 0.25 $ 0.14 $ (0.02) $ 1.61 Normalized FFO $ 0.27 $ 0.14 $ 0.17 $ 1.37 Distributions declared per share $ 0.01 $ 0.01 $ 0.03 $ 0.56 (1) We recorded a $10,248 loss on asset impairment during the three months ended September 30, 2020 to reduce the carrying value of one hotel and two net lease properties to their estimated fair value less costs to sell. We recorded a $2,110 loss on asset impairment during the nine months ended September 30, 2021 to reduce the carrying value of five net lease properties to their estimated fair value less costs to sell and a $55,502 loss on asset impairment during the nine months ended September 30, 2020 to reduce the carrying value of 18 hotel properties and eight net lease properties to their estimated fair value less costs to sell. (2) We recorded a $94 net gain on sale of real estate during the three months ended September 30, 2021 in connection with the sale of two net lease properties. We recorded a $109 net gain on sale of real estate during the three months ended September 30, 2020 in connection with the sale of five net lease properties. We recorded a $10,934 net gain on sale of real estate during the nine months ended September 30, 2021 in connection with the sale of six hotels and five net lease properties and recorded a net loss on sale of real estate of $9,655 during the nine months ended September 30, 2020 in connection with the sale of 15 net lease properties. (3) Unrealized gains 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) We recorded a $6,970 loss on early extinguishment of debt, during the nine months ended September 30, 2020, related to the repurchase of certain of our senior notes. (6) We recorded a $62,386 gain on insurance settlement, during the nine months ended September 30, 2020, for insurance proceeds received for our then leased hotel in San Juan, PR related to Hurricane Maria. Under GAAP, we were required to increase the building basis of this hotel for the amount of the insurance proceeds. We also recorded a $15,650 deferred tax liability as a result of the book value to tax basis difference related to this accounting during the nine months ended September 30, 2020. (7) Transaction related costs for the three months ended September 30, 2021 of $3,149 are primarily related to legal costs related to our arbitration proceeding with Marriott. Transaction related costs for the nine months ended September 30, 2021 included $19,971 of hotel manager transition related costs resulting from the rebranding of 88 hotels during the period, $5,263 of legal costs related to our arbitration proceeding with Marriott and $3,700 of working capital we previously funded under our agreement with Hyatt as a result of the amount no longer expected to be recoverable. (8) Represents weighted average common shares adjusted to reflect the potential dilution of unvested share awards, if any. 41 Table of Contents