Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2021 Annual Report.
Overview (dollar amounts in thousands, except share amounts and per-room hotel data)
We are a REIT organized under the laws of the State of Maryland. As of March 31, 2022, we owned 1,084 properties in 47 states, the District of Columbia, Canada and Puerto Rico.
Business Environment and Outlook. As a result of the COVID-19 pandemic and the impact it has had on travel and the broader economy throughout the U.S. since March 2020, our hotels have experienced significant declines in occupancy, which have had and are expected to continue to have a significant negative effect on our operating results and cash flow. While occupancy has since recovered significantly, there remains uncertainty as to when and if operations at our hotels will return to 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. In addition, consumer confidence and lodging demand will continue to be affected by unemployment levels, 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. These trends, together with increasing labor costs and shortages and commodity and other price inflation and supply chain challenges, may continue to negatively impact our hotel operations and financial results.
Liquidity . As of March 31, 2022, our $1,000,000 revolving credit facility was scheduled to mature on July 15, 2022. In April 2022, we amended the agreement governing the credit facility to among other things, obtain additional covenant relief, we repaid $200,000 of the outstanding balance, and reduced the size of the facility from $1,000,000 to $800,000. Also in April 2022, we exercised a six month option to extend the maturity date to January 15, 2023. We have $500,000 of unsecured senior notes due on August 15, 2022, which we currently expect to repay with cash on hand on or prior to the maturity date. From April 1, 2022 through May 3, 2022, we sold 16 hotels with 2,021 rooms for an aggregate sales price of $169,469, excluding closing costs and four net lease properties with 38,578 square feet for an aggregate sales price of $3,469, excluding closing costs. As of May 3, 2022, we have entered into agreements to sell 42 Sonesta branded hotels located in 22 states for an aggregate sales price of $301,125 and five net lease properties with an aggregate of 64,617 square feet for an aggregate sales price of $3,815. We expect the majority of these sales to be completed by the end of the second quarter of 2022. We continue to market four additional hotels with 631 keys for sale. As of May 3, 2022, we have $916,106 of cash or cash equivalents. See Notes 4 and 7 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our asset sales and debt.
Management agreements and leases . At March 31, 2022, we owned 298 hotels operated under six agreements. We leased these hotels to our wholly owned TRSs that are managed by hotel operating companies. We also owned 786 service-oriented properties with 174 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 net lease properties.
On January 7, 2022, we amended and restated our management agreements with Sonesta effective January 1, 2022. As of March 31, 2022, we owned 256 hotels that are managed by Sonesta and 62 of these hotels are expected to be sold. For further discussion of our hotel agreements with Sonesta, see Notes 4, 5 and 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Hotel Portfolio. As of March 31, 2022, we owned 298 hotels. In the three months ended March 31, 2022, 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 2021 period. 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.
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Three Months Ended March 31,
2022 2021 Change
All Hotels
No. of hotels 298 310 (12)
No. of rooms or suites 47,285 49,015 (1,730)
Occupancy 53.3 % 40.1 % 13.2 pts
ADR $ 115.24 $ 88.02 30.9 %
RevPAR $ 61.42 $ 35.30 74.0 %
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 March 31, 2022 and 2021, our comparable results exclude three 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 March 31,
2022 2021 Change
Comparable Hotels
No. of hotels 295 295 —
No. of rooms or suites 46,596 46,596 —
Occupancy 53.6 % 39.8 % 13.8 pts
ADR $ 114.85 $ 88.59 29.6 %
RevPAR $ 61.56 $ 35.26 74.6 %
We believe these results are primarily due to the improved lodging fundamentals in the current year period 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 period.
Net Lease Portfolio . As of March 31, 2022, we owned 786 service-focused retail net lease properties with 13,515,100 square feet leased to 174 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rent of $372,023. Our net lease portfolio was 97.6% occupied as of March 31, 2022 with a weighted (by annual minimum rent) lease term of 10 years, operating under 144 brands in 22 distinct industries. TA is our largest tenant. As of March 31, 2022, we leased 179 travel centers to TA under five master leases that expire between 2029 and 2035 and require annual minimum rents of $246,110.
Additional details of our hotel operating agreements and our net lease agreements are set forth in Notes 5 and 10 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.
Disposition Activities. During the three months ended March 31, 2022, we sold five hotels with 1,060 rooms for an aggregate sales price of $60,174, excluding closing costs, and two net lease properties with 6,960 square feet for an aggregate sales price of $5,350, excluding closing costs. From April 1, 2022 through May 3, 2022, we sold 16 hotels with 2,021 rooms for an aggregate sales price of $169,469, excluding closing costs and four net lease properties with 38,578 square feet for an aggregate sales price of $3,469, excluding closing costs. As of May 3, 2022 we have entered into agreements to sell 42 Sonesta branded hotels located in 22 states for an aggregate sales price of $301,125 and five net lease properties with an aggregate of 64,617 square feet for an aggregate sales price of $3,815. We expect the majority of these sales to be completed by the end of the second quarter of 2022. We continue to market four additional hotels with 631 keys for sale. For further discussion of our property sales, see Note 4 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Results of Operations (dollar amounts in thousands, except share amounts)
Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021
For the Three Months Ended March 31,
Increase % Increase
2022 2021 (Decrease) (Decrease)
Revenues:
Hotel operating revenues $ 297,406 $ 168,953 $ 128,453 76.0 %
Rental income - hotels — 496 (496) (100.0) %
Rental income - net lease 96,358 91,721 4,637 5.1 %
Total revenues 393,764 261,170 132,594 50.8 %
Expenses:
Hotel operating expenses 290,343 195,352 94,991 48.6 %
Other operating expenses 2,269 3,417 (1,148) (33.6) %
Depreciation and amortization - hotels 56,162 68,124 (11,962) (17.6) %
Depreciation and amortization - net lease 47,951 56,244 (8,293) (14.7) %
Total depreciation and amortization 104,113 124,368 (20,255) (16.3) %
General and administrative 11,989 12,657 (668) (5.3) %
Transaction related costs 1,177 19,635 (18,458) (94.0) %
Loss on asset impairment 5,500 1,211 4,289 354.2 %
Total expenses 415,391 356,640 58,751 16.5 %
Other operating income:
Gain (loss) on sale of real estate, net 5,548 (9) 5,557 n/m
Unrealized loss on equity securities, net (10,260) (6,481) (3,779) 58.3 %
Interest income 273 57 216 378.9 %
Interest expense (92,344) (89,391) (2,953) 3.3 %
Loss before income taxes and equity in losses of an investee (118,410) (191,294) 72,884 (38.1) %
Income tax expense (695) (853) 158 (18.5) %
Equity in losses of an investee (717) (2,843) 2,126 (74.8) %
Net loss $ (119,822) $ (194,990) $ 75,168 38.5 %
Weighted average shares outstanding (basic and diluted) 164,667 164,498 169 0.1 %
Net loss per common share (basic and diluted) $ (0.73) $ (1.19) $ 0.46 (38.7) %
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.
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 2022 period and the greater negative impact of the COVID-19 pandemic on our hotels in the 2021 period ($129,220), partially offset by the sale of certain hotels since January 1, 2021 ($767). Additional operating statistics of our hotels are included in the table on page 22.
Rental income - hotels. The decrease in rental income – hotels is the result of the sale of five leased hotels in the 2021 period.
Rental income - net lease. The increase in rental income - net lease is primarily the result of lower reserves for uncollectible rents for certain tenants in the 2022 period as compared to the 2021 period.
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Hotel operating expenses. The increase in hotel operating expenses is primarily a result of an increase in occupancy at certain managed hotels resulting in an increase in controllable costs ($40,975), an increase in wages and benefits ($32,524), a decrease in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($10,391), an increase in property insurance costs ($6,310) and an increase in management fees ($6,093), partially offset by the sale of certain hotels since January 1, 2021 ($1,302).
Other operating expenses. The decrease in other operating expenses is primarily the result of lower operating expenses at certain net lease properties.
Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is primarily a result of a decrease in depreciation for hotels classified as held for sale ($11,343), the sale of certain hotels and certain of our depreciable assets becoming fully depreciated since January 1, 2021 ($655).
Depreciation and amortization - net lease. The decrease in depreciation and amortization - net lease is primarily a result of certain of our depreciable assets being fully depreciated since January 1, 2021 ($7,985) and the sale of certain net lease properties since January 1, 2021 ($308).
General and administrative. The decrease in general and administrative costs is primarily due to a decrease in business management fees as a result of a decrease in our market capitalization ($420) and a decrease in professional service expenses ($623), partially offset by an increase in franchise taxes ($375).
Transaction related cos ts. Transaction related costs are primarily expenses incurred related to our hotel rebranding activities.
Loss on asset impairment. We recorded a $5,500 loss on asset impairment during the three months ended March 31, 2022 to reduce the carrying value of 25 hotels to their estimated fair value less costs to sell. We recorded a $1,211 loss on asset impairment during the three months ended March 31, 2021 to reduce the carrying value of two net lease properties to their estimated fair value less costs to sell.
Gain (loss) on sale of real estate, net. We recorded a $5,548 net gain on sale of real estate during the three months ended March 31, 2022 in connection with the sale of five hotels and two net lease properties and a $9 net loss on sale of real estate during the three months ended March 31, 2021 in connection with the sale of one net lease property.
Unrealized loss on equity securities, net. Unrealized loss on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value as of March 31, 2022 and 2021.
Interest income. The increase in interest income is due to higher average cash balances during the 2022 period.
Interest expense. The increase in interest expense is due to higher average outstanding borrowings in the 2022 period.
Income tax expense. The decrease in income tax expense is primarily due to a decrease in our net state tax expense during the 2022 period, partially offset by higher foreign sourced income tax expense.
Equity in losses of an investee. Equity in losses of an investee represents our proportionate share of the losses of Sonesta.
Net loss. Our net loss and net loss per common share (basic and diluted) each decreased in the 2022 period compared to the 2021 period primarily due to the revenue and expense changes discussed above.
Liquidity and Capital Resources (dollar amounts in thousands, except share amounts)
Our Managers and Tenants
As of March 31, 2022, all 298 of our hotels were managed by five hotel operating companies. Our 786 net lease properties were leased to 174 tenants as of March 31, 2022. 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 owner’s priority returns and rents, from their separate resources. As of March 31, 2022, our hotel managers included Sonesta (256 hotels), Hyatt (17 hotels), Radisson (eight hotels), Marriott (16 hotels) and IHG (one hotel). TA is our largest tenant (179 travel centers).
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As of March 31, 2022, we owned 256 hotels that are managed by Sonesta and 62 of these hotels are Sale Hotels.
On January 7, 2022, we and Sonesta amended and restated our management agreements effective January 1, 2022. As of that date, we owned 261 hotels managed by Sonesta, including the 67 Sale Hotels. Among other terms, the changes to the agreements between us and Sonesta for 194 hotels, or the retained hotels, are as follows:
• The term for the Retained Hotels expires on January 31, 2037 and includes two 15-year renewal options.
• All Retained Hotels are subject to a pooling agreement that combines the management agreements for the Retained Hotels for purposes of calculating gross revenues, hotel operating expenses, fees and distributions and the owner’s priority return due to us.
• The owner’s priority return for the Retained Hotels was initially set at $325,200 annually. We have the right to terminate Sonesta’s management of specific hotels that we own if minimum performance thresholds are not met starting in 2023.
• We will renovate the Retained Hotels to comply with agreed upon brand standards. As we advance such funding or fund other capital expenditures, the aggregate annual owner’s priority return due to us will increase by 6% of the amounts funded.
• Trade area restrictions by hotel brand were added to define boundaries to protect our owned hotels in response to Sonesta increasing its franchising and third-party management activities.
For the Sale Hotels, the term was extended to the earlier of December 31, 2022 (or until the applicable hotel has been sold) and the FF&E reserve funding requirement was removed. Our owner’s priority return will be reduced by the current owner’s priority return for a Sale Hotel once sold. The total owner’s priority return for all the sale hotels is $84,653 as of March 31, 2022.
See Notes 5 and 10 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on these agreements.
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 owner’s priority 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 a result of 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. We reduced reserves for uncollectible amounts by $507 during the three months ended March 31, 2022 and recorded reserves for uncollectible amounts of $4,785 during the three months ended March 31, 2021. We had reserves for uncollectible rents of $11,420 and $15,519 as of March 31, 2022 and December 31, 2021, respectively, included in other assets in our condensed consolidated balance sheets. As of March 31, 2022, we had $6,355 of deferred rents outstanding related to six tenants who represented approximately 6.6% of our annualized rental income of our net lease retail portfolio as of March 31, 2022, to which we granted rent relief during the COVID-19 pandemic.
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 the most recent quarter 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 2.67x and 2.19x as of March 31, 2022 and 2021, respectively.
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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 owner’s priority returns from our hotels, rents from our net lease portfolio and borrowings under our revolving credit facility. We receive owner’s priority 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 decline in operating cash flow experienced since the start of the COVID-19 pandemic, 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 owner’s priority 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 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 investments and 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, repay maturing debt, fund capital expenditures, and to pay distributions to our shareholders. As of March 31, 2022, 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.
The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands):
Three Months Ended March 31,
2022 2021
Cash and cash equivalents and restricted cash at the beginning of the period $ 947,418 $ 91,456
Net cash provided by (used in):
Operating activities (11,983) (62,724)
Investing activities 38,870 (68,806)
Financing activities (1,733) 919,625
Cash and cash equivalents and restricted cash at the end of the period $ 972,572 $ 879,551
The change in cash flows used in operating activities in the 2022 period is primarily due to higher returns earned from our hotel and net lease portfolios, partially offset by higher interest expense in the 2022 period. The change from cash flows used in investing activities in the 2021 period to cash flows provided by investing activities in the 2022 period is primarily due to an increase in real estate dispositions in the 2022 period, a decrease in hotel managers’ purchases with restricted cash and an investment in Sonesta in 2021. The change from cash flows provided by financing activities in the 2021 period to cash flows used in financing activities for the 2022 period is primarily due to a drawdown of the remaining capacity on our revolving credit facility in the 2021 period.
We maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 298 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
Our hotel operating agreements generally provide that, if necessary, we may provide our managers and tenants with funding for capital improvements to our hotels in excess of amounts otherwise available in escrowed FF&E reserves or when no FF&E reserves are available. During the three months ended March 31, 2022, we funded $28,144 for capital improvements in excess of FF&E reserves available to our hotels. We currently expect to fund $180,000 for capital improvements to certain hotels during the last nine months of 2022 using cash on hand.
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Various percentages of total sales at some of our hotels are escrowed as FF&E reserves to fund future capital improvements. We own all the FF&E escrows for our hotels. During the three months ended March 31, 2022, our hotel managers and tenants deposited $1,408 to these accounts and spent $787 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of March 31, 2022, there was $2,963 on deposit in these escrow accounts, which was held directly by us and is reflected in our condensed consolidated balance sheets as restricted cash.
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 $740 of capital improvements to properties under these lease provisions during the three months ended March 31, 2022. Tenants are not obligated to request and we are not obligated to purchase any such improvements. As of March 31, 2022, we had $4,310 of unspent leasing-related obligations related to certain net lease tenants.
During the three months ended March 31, 2022, we sold five hotels with 1,060 rooms for an aggregate sales price of $60,174, excluding closing costs, and two net lease properties with 6,960 square feet for an aggregate sales price of $5,350, excluding closing costs. From April 1, 2022 through May 3, 2022, we sold 16 hotels with 2,021 rooms for an aggregate sales price of $169,469, excluding closing costs and four net lease properties with 38,578 square feet for an aggregate sales price of $3,469, excluding closing costs. As of May 3, 2022, we have entered into agreements to sell 42 Sonesta branded hotels located in 22 states for an aggregate sales price of $301,125 and five net lease properties with an aggregate of 64,617 square feet for an aggregate sales price of $3,815. We expect the majority of these sales to be completed by the end of the second quarter of 2022. We continue to market four additional hotels with 631 keys for sale. We expect to use the proceeds from the asset sales for general business purposes, which may include the repayment of debt.
In April 2022, we funded a $25,000 capital contribution to Sonesta related to Sonesta’s acquisition of a portfolio of four hotels located in New York, NY using cash on hand. We currently expect to fund an additional capital contribution to Sonesta of approximately $21,000 before December 31, 2022 in connection with Sonesta’s acquisition of these four hotels.
During the three months ended March 31, 2022, 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 13, 2022 January 24, 2022 February 17, 2022 $ 0.01 $ 1,651
On April 14, 2022, we declared a regular quarterly distribution to common shareholders of record as of April 25, 2022 of $0.01 per share, or $1,651. We expect to pay this amount on or about May 19, 2022 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 revolving credit facility which is governed by the credit agreement. As of March 31, 2022 the maturity date of our revolving credit facility was July 15, 2022, and, subject to the payment of an extension fee and meeting certain other conditions as noted below, we had an option to extend the maturity date of this facility by two additional six-month periods. We are required to pay interest at the rate of LIBOR plus a premium, which was 235 basis points per annum, subject to a LIBOR floor of 0.50% at March 31, 2022, on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 30 basis points per annum at March 31, 2022. Both the interest rate premium and the facility fee were subject to adjustment based upon changes to our credit ratings. We can borrow, subject to meeting certain financial covenants, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of March 31, 2022, the annual interest rate payable on borrowings under our revolving credit facility was 2.85%. On January 19, 2021, we borrowed $972,793 under our revolving credit facility as a precautionary measure to preserve financial flexibility. As of March 31, 2022, we were fully drawn under our revolving credit facility and remain fully drawn.
We and our lenders amended the credit agreement in 2020. Among other things, the amendments waived all of the then existing financial covenants through the end of the then existing agreement term, or July 15, 2022. 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;
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• we had 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 were 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 have needed 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 were not able to 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 until we demonstrate compliance with certain covenants.
On April 14, 2022, we further amended our credit agreement and exercised our option to extend the maturity date of our revolving credit facility by six months to January 15, 2023. Pursuant to the amendment:
• we repaid $200,000 of the outstanding balance and reduced the size of the revolving credit facility from $1,000,000 to $800,000;
• we are permitted to acquire up to an aggregate of $300,000 of real property through the waiver period, which was extended pursuant to the amendment to December 31, 2022;
• certain of the financial covenants in our credit agreement will be tested and in full force and effect beginning with the quarter ending September 30, 2022 and were modified to lower the required fixed charge coverage ratio from 1.5x to 1.0x through December 31, 2022, increase the required leverage ratio limit from 60% to 70% and increase the minimum liquidity requirement from $125,000 to $150,000 (which amount is subject to an additional increase as noted below);
• we can fund through the waiver period an aggregate of $100,000 of capital contributions requested by Sonesta for business activities and to acquire additional shares of common stock of TA to retain our pro rata ownership of TA, an increase from the previous aggregate limit of $50,000;
• the interest rate premium payable on borrowings under our revolving credit facility is increased from 235 basis points per annum to 250 basis points per annum, with the facility fee remaining unchanged at 30 basis points per annum on the total amount of lending commitments under the facility. The interest rate premiums and the facility fee continue to be subject to adjustment based upon changes to our credit ratings and, pursuant to the amendment, the interest rate premium will increase by an additional 25 basis points if we do not satisfy certain financial covenants; and
• we are required to maintain minimum liquidity of $650,000 until we repay our $500,000 of 5.0% senior notes due in August, 2022 and at least $150,000 of liquidity thereafter.
We continue to have the option to further extend the maturity date of our revolving credit facility by an additional six months, subject to the payment of an extension fee and meeting certain other conditions, including pursuant to the amendment, maintaining a $650,000 minimum liquidity requirement until we repay or refinance our $500,000 of 4.5% senior notes due June 2023. This requirement is reduced to $150,000 if we are in compliance with certain financial covenants, including the 1.5x ratio of consolidated income available for debt service to debt service required to incur additional debt under the agreements governing our public debt.
Our revolving credit facility continues to be secured by 73 properties with an undepreciated book value of $1,757,253 as of March 31, 2022 to secure our obligations under the credit agreement.
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Our term debt maturities (other than our revolving credit facility) as of March 31, 2022 were as follows:
Year Maturity
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, investments, 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, except as may otherwise be permitted as described above.
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, as well as the impact of the current and possibly future, inflationary 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.
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Debt Covenants
Our debt obligations at March 31, 2022 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 ceasing to act as our business manager. As of March 31, 2022, we believe we were in compliance with all of the covenants under our indentures and their supplements and our credit agreement, subject to the waivers and except as noted above and below.
Senior Notes Indenture Covenants
The following table summarizes the results of the financial tests required by the indentures and related supplements for our senior unsecured notes as of March 31, 2022:
Actual Results Covenant Requirement
Total debt / adjusted total assets 58.3% Maximum of 60%
Secured debt / adjusted total assets 8.1% Maximum of 40%
Consolidated income available for debt service / debt service 1.32x Minimum of 1.50x
Total unencumbered assets / unsecured debt 170.4% Minimum 150%
The above consolidated income available for debt service to debt service ratio was 1.32x on a proforma basis as of March 31, 2022, which was below the required level. We are not permitted under our debt agreements to incur additional debt while we remain below the required covenant level.
Acceleration and Cross-Default
Neither our indentures and their supplements nor our credit agreement contain provisions for acceleration which could be triggered by a change in our debt ratings. However, under our credit agreement, our highest senior debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded, our interest expense and related costs under our revolving credit facility would increase.
Our public debt indentures and their supplements contain cross default provisions to any other debt of $20,000 or more ($50,000 or more in the case of our indenture entered into in February 2016 and its supplements). Similarly, our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $75,000 or more.
Supplemental Guarantor Information
Our $800,000 of 7.50% unsecured senior notes due 2025, or the 2025 Notes, and our $450,000 of 5.50% 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
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distinct legal entities and will have no obligation, contingent or otherwise, to pay any amounts due on these notes or the guarantees, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of these notes to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and any preferred equity holders. As a result, these notes and the related guarantees will be structurally subordinated to all indebtedness, guarantees and other liabilities of our subsidiaries that do not guarantee these notes, including guarantees of or pledges under other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity.
The following table presents summarized financial information for us and the subsidiary guarantors, on a combined basis after elimination of (i) intercompany transactions and balances among us and the subsidiary guarantors and (ii) equity in earnings from, and any investments in, any of our non-guarantor subsidiaries:
As of March 31, 2022 As of December 31, 2021
Real estate properties, net (1)
$ 5,562,808 $ 5,607,883
Intercompany balances (2)
874,409 826,338
Other assets, net 1,969,120 2,074,353
Indebtedness, net $ 7,146,258 $ 7,143,022
Other liabilities 419,252 430,267
Three Months Ended
March 31, 2022
Revenues
$ 368,368
Expenses
491,593
Net income (loss)
(123,225)
(1) Real estate properties, net as of March 31, 2022 includes $197,504 of properties owned directly by us and not included in the assets of the subsidiary guarantors.
(2) Intercompany balances represent receivables from non-guarantor subsidiaries.
Management Agreements, Leases and Operating Statistics (dollar amounts in thousands, except hotel statistics)
As of March 31, 2022, we owned and managed a diverse portfolio of hotels and net lease properties across the United States and in Puerto Rico and Canada with 144 brands across 22 industries.
Hotel Portfolio
The following tables summarize the operating statistics, including ADR, occupancy and RevPAR reported to us by our hotel managers or tenants by hotel brand for the periods indicated. All operating data presented are based upon the operating results provided by our hotel managers and tenants for the indicated periods. We have not independently verified our managers’ or tenants’ operating data.
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Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Three Months Ended
March 31, Three Months Ended
March 31, Three Months Ended
March 31,
Brand 2022 2021 Change 2022 2021 Change 2022 2021 Change
Sonesta (1)
Full Service 22 7,145 51.9 % 31.2 % 20.7 Pts $ 144.09 $ 109.85 31.2 % $ 74.78 $ 34.27 118.2 %
Royal Sonesta (1)
Full Service 16 5,291 37.3 % 22.2 % 15.1 Pts 211.22 150.05 40.8 % 78.79 33.31 136.5 %
Radisson Hotel Full Service 5 1,149 57.5 % 38.0 % 19.5 Pts 126.88 90.60 40.0 % 72.96 34.43 111.9 %
Crowne Plaza Full Service 1 495 43.4 % 36.0 % 7.4 Pts 121.33 93.92 29.2 % 52.66 33.81 55.8 %
Country Inn and Suites Full Service 3 430 52.2 % 30.2 % 22.0 Pts 107.10 79.75 34.3 % 55.91 24.08 132.2 %
Full Service Total/Average 47 14,510 46.7 % 28.6 % 18.1 Pts 160.03 117.57 36.1 % 74.73 33.63 122.2 %
Sonesta Select (1)
Select Service 62 8,750 40.4 % 25.1 % 15.3 Pts 104.22 85.57 21.8 % 42.10 21.48 96.0 %
Hyatt Place Select Service 17 2,107 58.6 % 47.5 % 11.1 Pts 113.09 84.19 34.3 % 66.27 39.99 65.7 %
Courtyard Select Service 13 1,813 43.9 % 37.0 % 6.9 Pts 106.02 82.55 28.4 % 46.54 30.54 52.4 %
Select Service Total/Average 92 12,670 44.0 % 30.5 % 13.5 Pts 106.45 84.69 25.7 % 46.84 25.83 81.3 %
Sonesta ES Suites (1)
Extended Stay 90 11,243 63.7 % 54.0 % 9.7 Pts 107.74 88.89 21.2 % 68.63 48.00 43.0 %
Sonesta Simply Suites Extended Stay 63 7,831 66.9 % 55.0 % 11.9 Pts 76.86 63.49 21.1 % 51.42 34.92 47.3 %
Residence Inn Extended Stay 3 342 56.3 % 43.7 % 12.6 Pts 106.53 96.74 10.1 % 59.98 42.28 41.9 %
Extended Stay Total/Average 156 19,416 64.9 % 54.2 % 10.7 Pts 94.96 78.60 20.8 % 61.63 42.60 44.7 %
Comparable Hotels Total/Average 295 46,596 53.6 % 39.8 % 13.8 Pts $ 114.85 $ 88.59 29.6 % $ 61.56 $ 35.26 74.6 %
* 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 March 31, 2022 and 2021, our comparable results excluded three hotels that had suspended operations during part of the periods presented.
All Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Three Months Ended
March 31, Three Months Ended
March 31, Three Months Ended
March 31,
Brand 2022 2021 Change 2022 2021 Change 2022 2021 Change
Sonesta (1)
Full Service 23 7,364 51.9 % 30.9 % 21.0 Pts $ 144.09 $ 109.85 31.2 % $ 74.78 $ 33.94 120.3 %
Royal Sonesta (1)
Full Service 17 5,663 36.8 % 22.2 % 14.6 Pts 210.61 150.05 40.4 % 77.50 33.31 132.7 %
Radisson Hotel Full Service 5 1,149 57.5 % 38.0 % 19.5 Pts 126.88 90.60 40.0 % 72.96 34.43 111.9 %
Crowne Plaza Full Service 1 495 43.4 % 36.0 % 7.4 Pts 121.33 93.92 29.2 % 52.66 33.81 55.8 %
Country Inn and Suites Full Service 3 430 52.2 % 30.2 % 22.0 Pts 107.10 79.75 34.3 % 55.91 24.08 132.2 %
Full Service Total/Average 49 15,101 46.3 % 28.4 % 17.9 Pts 160.71 117.57 36.7 % 74.41 33.39 122.9 %
Sonesta Select (1)
Select Service 62 8,750 40.4 % 25.1 % 15.3 Pts 104.22 85.57 21.8 % 42.10 21.48 96.0 %
Hyatt Place Select Service 17 2,107 58.6 % 47.5 % 11.1 Pts 113.09 84.19 34.3 % 66.27 39.99 65.7 %
Courtyard Select Service 13 1,813 43.9 % 37.0 % 6.9 Pts 106.02 82.55 28.4 % 46.54 30.54 52.4 %
Select Service Total/Average 92 12,670 44.0 % 30.5 % 13.5 Pts 106.45 84.69 25.7 % 46.84 25.83 81.3 %
Simply ES Suites (1)
Extended Stay 90 11,243 63.7 % 54.0 % 9.7 Pts 107.74 88.89 21.2 % 68.63 48.00 43.0 %
Sonesta Simply Suites Extended Stay 64 7,929 66.2 % 55.1 % 11.1 Pts 76.86 63.40 21.2 % 50.88 34.93 45.7 %
Residence Inn Extended Stay 3 342 56.3 % 43.7 % 12.6 Pts 106.53 96.74 10.1 % 59.98 42.28 41.9 %
Extended Stay Total/Average 157 19,514 64.6 % 54.3 % 10.3 Pts 94.96 78.47 21.0 % 61.34 42.61 44.0 %
All Hotels Total/Average 298 47,285 53.3 % 39.8 % 13.5 Pts $ 115.24 $ 88.48 30.2 % $ 61.42 $ 35.22 74.4 %
* Results of all hotels owned as of March 31, 2022. 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 March 31, 2022, our net lease properties were 97.6% occupied and we had 29 properties available for lease. During the three months ended March 31, 2022, we entered into lease renewals for 95,793 rentable square feet at weighted (by rentable square feet) average rents that were the same as the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 5.6 years. We also entered into new leases for 31,818 rentable square feet at weighted (by rentable square feet) average rents that were 18.1% lower than the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 14.4 years.
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As of March 31, 2022, our net lease tenants operated across more than 144 brands. The following table identifies the top ten brands based on investment.
Brand No. of Buildings Investment (1)
Percent of Total Investment Annualized
Minimum Rent (2)
Percent of Total Annualized
Minimum Rent Coverage (3)
1. TravelCenters of America 134 $ 2,289,189 44.8 % $ 168,012 45.2 % 2.35 x
2. Petro Stopping Centers 45 1,021,226 20.0 % 78,099 21.0 % 2.10 x
3. AMC Theatres 11 102,580 2.0 % 7,751 2.1 % 0.52 x
4. The Great Escape 14 98,242 1.9 % 7,140 1.9 % 7.79 x
5. Life Time Fitness 3 92,617 1.8 % 5,770 1.6 % 1.81 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 % 4.60 x
8. Norms 10 53,673 1.0 % 3,232 0.9 % 0.47 x
9. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.34 x
10. Regal Cinemas 6 44,476 0.9 % 3,736 1.0 % 0.47 x
11. Other (4)
476 1,223,457 23.9 % 84,348 22.6 % 3.45 x
Total 786 $ 5,112,840 100.0 % $ 372,023 100.0 % 2.67 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) See page 25 for our definition of coverage.
(4) Other includes 123 distinct brands with an average investment of $9,947 and average annual minimum rent of $686.
As of March 31, 2022, our top 10 net lease tenants based on annualized minimum rent are listed below.
Tenant Brand Affiliation No. of Buildings Investment (1)
Percent of Total Investment Annualized
Minimum Rent (2)
Percent of Total Annualized
Minimum Rent Coverage (3)
1. TravelCenters of America TravelCenters of America / Petro Stopping Centers 179 $ 3,310,415 64.7 % $ 246,110 66.2 % 2.18x (4)
2. American Multi-Cinema, Inc. AMC Theatres 11 102,580 2.0 % 7,751 2.1 % 0.33x
3. Universal Pool Co., Inc. The Great Escape 14 98,242 1.9 % 7,140 1.9 % 7.79x
4. Healthy Way of Life II, LLC Life Time Fitness 3 92,617 1.8 % 5,770 1.6 % 1.24x
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 % 4.60x
7. Norms Restaurants, LLC Norms 10 53,673 1.0 % 3,232 0.9 % 0.47x
8. Express Oil Change, L.L.C. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.34x
9. Regal Cinemas, Inc. Regal Cinemas 6 44,476 0.9 % 3,736 1.0 % 0.37x
10. Pilot Travel Centers LLC Flying J Travel Plaza 3 41,681 0.8 % 3,215 0.9 % 3.99x
Subtotal, top 10 313 3,931,064 76.8 % 290,889 78.3 % 2.37x
11. Other (5)
Various 473 1,181,776 23.2 % 81,134 21.7 % 3.76x
Total 786 $ 5,112,840 100.0 % $ 372,023 100.0 % 2.67x
(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) See page 25 for our definition of coverage.
(4) 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 $17,614 is being paid in quarterly installments of $4,404 through January 31, 2023.
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(5) Other includes 164 tenants with an average investment of $7,206 and average annual minimum rent of $495.
As of March 31, 2022, our net lease tenants operated across 22 distinct industries within the service-oriented retail sector of the U.S. economy.
Industry No. of Buildings Investment (1)
Percent of Total Investment Annualized
Minimum Rent (2)
Percent of Total Annualized
Minimum Rent Coverage (3)
Travel Centers 182 $ 3,352,096 65.5% $ 249,325 67.1 % 2.29 x
Restaurants-Quick Service 226 301,088 5.9% 20,287 5.5 % 2.90 x
Restaurants-Casual Dining 53 192,170 3.9% 11,434 3.1 % 1.92 x
Movie Theaters 22 190,725 3.7% 14,712 4.0 % 0.47 x
Health and Fitness 13 185,458 3.6% 10,588 2.8 % 1.89 x
Grocery Stores 19 129,219 2.5% 9,191 2.5 % 5.51 x
Home Goods and Leisure 20 118,899 2.3% 9,065 2.4 % 7.79 x
Medical, Dental Office 71 118,098 2.3% 9,369 2.5 % 4.42 x
Automotive Equipment & Services 64 98,473 1.9% 7,132 1.9 % 3.19 x
Entertainment 4 61,436 1.2% 4,367 1.2 % 2.48 x
Automotive Dealers 8 60,119 1.2% 5,087 1.4 % 6.95 x
General Merchandise Stores 5 56,321 1.1% 3,892 1.0 % 3.28 x
Educational Services 9 55,647 1.1% 4,376 1.2 % 1.42 x
Miscellaneous Manufacturing 6 29,837 0.6% 2,228 0.6 % 17.27 x
Building Materials 27 31,317 0.6% 2,644 0.7 % 4.20 x
Car Washes 5 28,658 0.6% 2,128 0.6 % 1.74 x
Drug Stores and Pharmacies 7 19,251 0.4% 1,258 0.3 % 1.61 x
Sporting Goods 3 17,596 0.3% 1,081 0.2 % 5.21 x
Legal Services 5 11,362 0.2% 1,119 0.2 % (2.75) x
Dollar Stores 3 2,971 0.1% 189 0.1 % 2.64 x
Other 5 16,538 0.3% 2,551 0.7 % 2.10 x
Vacant 29 35,561 0.7% — — % n/a
Total 786 $ 5,112,840 100.0% $ 372,023 100.0 % 2.67 x
(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, 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.
(3) See page 25 for our definition of coverage.
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As of March 31, 2022, lease expirations at our net lease properties by year are as follows:
Year (1)
Square Feet Annualized Minimum Rent Expiring Percent of Total Annualized Minimum Rent Expiring Cumulative % of Total Minimum Rent Expiring
2022 210,412 2,390 0.6% 0.6%
2023 315,142 2,799 0.8% 1.4%
2024 779,371 11,656 3.1% 4.5%
2025 436,043 8,906 2.4% 6.9%
2026 1,077,985 12,030 3.2% 10.1%
2027 1,050,075 13,674 3.7% 13.8%
2028 546,300 9,178 2.5% 16.3%
2029 1,343,309 48,441 13.0% 29.3%
2030 138,590 4,158 1.1% 30.4%
2031 1,313,222 48,778 13.1% 43.5%
2032 1,275,277 53,485 14.4% 57.9%
2033 1,146,326 51,938 14.0% 71.9%
2034 122,877 4,057 1.1% 73.0%
2035 2,234,644 80,285 21.6% 94.6%
2036 552,708 7,529 2.0% 96.6%
2037 4,970 421 0.1% 96.7%
2038 44,484 1,108 0.3% 97.0%
2039 134,901 3,209 0.9% 97.9%
2040 115,142 2,406 0.6% 98.5%
2041 223,043 2,189 0.6% 99.1%
2042 57,499 155 0.0% 99.1%
2045 63,489 3,232 0.9% 100.0%
Total 13,185,809 $ 372,024 100%
(1) The year of lease expiration is pursuant to contract terms.
As of March 31, 2022, 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 $ 32,409 8.7%
Ohio 1,302,273 26,276 7.1%
Illinois 1,016,187 26,125 7.0%
California 399,045 23,463 6.3%
Georgia 597,248 20,224 5.4%
Florida 538,130 16,153 4.3%
Arizona 476,651 17,226 4.6%
Indiana 637,239 17,035 4.6%
Pennsylvania 543,959 15,158 4.1%
Nevada 190,262 9,625 2.6%
Other 6,608,713 168,329 45.3%
Total 13,515,100 $ 372,023 100.0%
Related Person Transactions
We have relationships and historical and continuing transactions with RMR, 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 4, 5, 9 and 10 t o our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2021 Annual Report, our definitive Proxy Statement for our 2022 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 2021 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 or its subsidiaries provide management services.
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Non-GAAP Financial Measures
We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, including funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of 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.
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Our calculations of FFO and Normalized FFO for the three months ended March 31, 2022 and 2021 and reconciliations of net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to those amounts appear in the following table (amounts in thousands, except per share amounts).
For the Three Months Ended March 31,
2022 2021
Net loss $ (119,822) $ (194,990)
Add (Less): Depreciation and amortization expense 104,113 124,368
Loss on asset impairment (1)
5,500 1,211
(Gain) loss on sale of real estate, net (2)
(5,548) 9
Unrealized gains on equity securities, net (3)
10,260 6,481
Adjustments to reflect our share of FFO attributable to an investee (4)
666 465
FFO (4,831) (62,456)
Add (less): Adjustments to reflect our share of Normalized FFO attributable to an investee (4)
245 825
Transaction related costs (5)
1,177 19,635
Normalized FFO $ (3,409) $ (41,996)
Weighted average shares outstanding (basic and diluted) (6)
164,667 164,498
Basic and diluted per common share amounts:
Net loss $ (0.73) $ (1.19)
FFO $ (0.03) $ (0.38)
Normalized FFO
$ (0.02) $ (0.26)
Distributions declared per share $ 0.01 $ 0.01
(1) We recorded a $5,500 loss on asset impairment during the three months ended March 31, 2022 and a $1,211 loss on asset impairment during the three months ended March 31, 2021 to reduce the carrying value of two net lease properties to their estimated fair value less costs to sell.
(2) We recorded a $5,548 net loss on sale of real estate during the three months ended March 31, 2022 in connection with the sale of five hotels and two net lease properties and recorded a $9 net loss on sale of real estate during the three months ended March 31, 2021 in connection with the sale of one net lease property.
(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) Transaction related costs for the three months ended March 31, 2022 of $1,177 primarily consist of legal and other professional services costs related to our hotel rebrandings. Transaction related costs for the three months ended March 31, 2021 consists of $19,635 of hotel manager transition related costs resulting from the rebranding of 88 hotels during the period.
(6) Represents weighted average common shares adjusted to reflect the potential dilution of unvested share awards, if any.
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