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 June 30, 2022, we owned 1,022 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 and conditions. 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.
The U.S. Federal Reserve has recently raised interest rates in an effort to combat high inflation, which could result in negative consequences in the U.S. economy, and concerns about a potential recession are becoming more pronounced. A recession could adversely affect our financial condition, operations at our hotels, our tenants, and their ability and willingness to renew our leases or pay rent to us, our ability to effectively deploy our capital or realize upon investments on favorable terms and the values of our properties and other investments. We could also be affected by any overall weakening of, or disruptions in, the financial markets, including our ability to obtain new or replacement financing and the costs of any such financings.
Liquidity and Financing Transactions . In April 2022, we amended the agreement governing our 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 and, subject to the payment of an extension fee and meeting certain other conditions, we have the option to extend the maturity date of the facility for an additional six-month period. On June 15, 2022, we redeemed at par all of our outstanding 5.00% senior notes due 2022 for a redemption price equal to the principal amount of $500,000, plus accrued and unpaid interest with cash on hand, including proceeds from the property dispositions discussed below. As of August 3, 2022, we have $790,011 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 June 30, 2022, we owned 247 hotels operated under six agreements. We leased these hotels to our wholly owned TRSs that are managed by hotel operating companies. We also owned 775 service-oriented properties with 176 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 June 30, 2022, we owned 205 hotels that are managed by Sonesta and 11 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 June 30, 2022, we owned 247 hotels. In the three and six months ended June 30, 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 periods. 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 June 30,
Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
All Hotels
No. of hotels 247 304 (57) 247 304 (57)
No. of rooms or suites 41,166 48,439 (7,273) 41,166 48,439 (7,273)
Occupancy 66.6 % 56.6 % 10.0 pts 59.8 % 48.3 % 11.5 pts
ADR $ 138.43 $ 100.72 37.4 % $ 130.50 $ 95.54 36.6 %
RevPAR $ 92.19 $ 57.01 61.7 % $ 78.04 $ 46.15 69.1 %
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 and six months ended June 30, 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 June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Comparable Hotels
No. of hotels 244 244 — 244 244 —
No. of rooms or suites 40,477 40,477 — 40,477 40,477 —
Occupancy 66.7 % 55.4 % 11.3 pts 60.0 % 47.1 % 12.9 pts
ADR $ 137.57 $ 105.54 30.3 % $ 129.82 $ 99.99 29.8 %
RevPAR $ 91.76 $ 58.47 56.9 % $ 77.89 $ 47.10 65.4 %
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 June 30, 2022, we owned 775 service-focused retail net lease properties with 13,406,568 square feet leased to 176 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rent of $372,120. Our net lease portfolio was 98.8% occupied as of June 30, 2022 with a weighted (by annual minimum rent) lease term of 10 years, operating under 145 brands in 21 distinct industries. TA is our largest tenant. As of June 30, 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 six months ended June 30, 2022, we sold 56 hotels with 7,272 rooms for an aggregate sales price of $487,868, excluding closing costs, and 13 net lease properties with 115,492 square feet for an aggregate sales price of $13,064, excluding closing costs. From July 1, 2022 through August 3, 2022, we sold three hotels with 383 rooms and an aggregate carrying value of $17,952 for an aggregate sales price of $21,500, excluding closing costs, and four net lease properties with 10,216 square feet and an aggregate carrying value of $678 for an aggregate sales price of $700 excluding closing costs. As of August 3, 2022, we have entered into agreements to sell four Sonesta branded hotels with an aggregate of 508 rooms for an aggregate sales price of $24,250 and two net lease properties with an aggregate of 3,840 square feet for an aggregate sales price of $325.We continue to market 20 additional hotels with 2,752 rooms for sale. We expect the majority of these sales to be completed by the end of 2022. 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.
23
Table of Contents
Results of Operations (dollar amounts in thousands, except share amounts)
Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021
For the Three Months Ended June 30,
Increase % Increase
2022 2021 (Decrease) (Decrease)
Revenues:
Hotel operating revenues $ 418,984 $ 280,135 $ 138,849 49.6 %
Rental income - hotels — 245 (245) (100.0) %
Rental income - net lease 96,793 95,556 1,237 1.3 %
Total revenues 515,777 375,936 139,841 37.2 %
Expenses:
Hotel operating expenses 325,194 243,183 82,011 33.7 %
Other operating expenses 3,179 4,376 (1,197) (27.4) %
Depreciation and amortization - hotels 55,878 66,582 (10,704) (16.1) %
Depreciation and amortization - net lease 44,642 55,095 (10,453) (19.0) %
Total depreciation and amortization 100,520 121,677 (21,157) (17.4) %
General and administrative 12,665 13,480 (815) (6.0) %
Transaction related costs 743 6,151 (5,408) (87.9) %
Loss on asset impairment, net 3,048 899 2,149 239.0 %
Total expenses 445,349 389,766 55,583 14.3 %
Other operating income:
Gain on sale of real estate, net 38,851 10,849 28,002 258.1 %
Unrealized gains (losses) on equity securities, net (10,059) 2,500 (12,559) (502.4) %
Interest income 1,021 225 796 353.8 %
Interest expense (89,820) (91,378) 1,558 (1.7) %
Loss on early extinguishment of debt (791) — (791) n/m
Income (loss) before income taxes and equity in losses of an investee 9,630 (91,634) 101,264 (110.5) %
Income tax expense (473) (211) (262) 124.2 %
Equity in earnings (losses) of an investee 2,193 735 1,458 198.4 %
Net income (loss) $ 11,350 $ (91,110) $ 102,460 112.5 %
Weighted average shares outstanding (basic and diluted) 164,677 164,506 171 0.1 %
Net income (loss) per common share (basic and diluted) $ 0.07 $ (0.55) $ 0.62 (112.7) %
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended June 30, 2022, compared to the three months ended June 30, 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 ($153,363), partially offset by the sale of certain hotels since April 1, 2021 ($14,514). Additional operating statistics of our hotels are included in the table on page 23.
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.
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 resulting in an increase in controllable costs ($44,323), an increase in wages and benefits ($38,396), a decrease in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($5,306), and an increase in management fees ($5,289), partially offset by the sale of certain hotels since April 1, 2021 ($9,918) and a decrease in real estate taxes ($1,385).
Other operating expenses. The decrease in other operating expenses is primarily the result of lower operating expenses at certain net lease properties and the sale of certain net lease properties since April 1, 2021.
Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is primarily a result of the sale of certain hotels ($7,728), a decrease in depreciation for hotels classified as held for sale ($1,377), and certain of our depreciable assets becoming fully depreciated since April 1, 2021($3,711), partially offset by depreciation and amortization related to capital additions since April 1, 2021 ($2,112).
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 April 1, 2021 ($9,994) and the sale of certain net lease properties since April 1, 2021 ($459).
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 ($1,438), partially offset by an increase in professional service expenses ($623).
Transaction related cos ts. Transaction related costs for the three months ended June 30, 2022 are primarily costs related to our exploration of possible financing transactions. Transaction related costs for the three months ended June 30, 2021 include $3,700 of working capital we previously funded under our Hyatt agreement that we expensed as a result of the amount no longer expected to be recoverable, $1,110 of legal costs related to the arbitration claim against Marriott and $1,341 of costs related to the rebranding of certain hotels.
Loss on asset impairment, net. We recorded a $3,048 loss on asset impairment, net during the three months ended June 30, 2022 to reduce the carrying value of two hotels and four net lease properties to their estimated fair value less costs to sell. We recorded a $899 loss on asset impairment during the three months ended June 30, 2021 to reduce the carrying value of three net lease properties to their estimated fair value less costs to sell.
Gain on sale of real estate, net. We recorded a $38,851 net gain on sale of real estate during the three months ended June 30, 2022 in connection with the sale of 51 hotels and 11 net lease properties and a $10,849 net loss on sale of real estate during the three months ended June 30, 2021 in connection with the sale of six hotels and two net lease properties.
Unrealized gains (losses) on equity securities, net. Unrealized gain (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 June 30, 2022 and 2021.
Interest income. The increase in interest income is primarily due to higher average cash balances and higher interest rates during the 2022 period.
Interest expense. The decrease in interest expense is primarily due to lower average outstanding borrowings in the 2022 period, partially offset by higher average interest rates on our revolving credit facility.
Loss on early extinguishment of debt. We recorded a $791 loss on early extinguishment of debt in the 2022 period related to the write off of deferred financing costs and unamortized discounts relating to our amendment to our revolving credit facility and the repayment of $500,000 of unsecured senior notes.
Income tax expense. The increase in income tax expense is primarily due to increases in state and foreign sourced income tax expenses during the 2022 period.
Equity in earnings (losses) of an investee. Equity in earnings (losses) of an investee represents our proportionate share of the earnings or losses of Sonesta.
Net income (loss). Our net income (loss) and net income (loss) per common share (basic and diluted) each changed in the 2022 period compared to the 2021 period primarily due to the revenue and expense changes discussed above.
25
Table of Contents
Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
For the Six Months Ended June 30,
Increase % Increase
2022 2021 (Decrease) (Decrease)
Revenues:
Hotel operating revenues $ 716,390 $ 449,088 $ 267,302 59.5 %
Rental income - hotels — 701 (701) (100.0) %
Rental income - net lease portfolio 193,151 187,317 5,834 3.1 %
Total revenues 909,541 637,106 272,435 42.8 %
Expenses:
Hotel operating expenses 615,537 438,536 177,001 40.4 %
Other operating expenses 5,650 8,109 (2,459) (30.3) %
Depreciation and amortization - hotels 112,040 134,707 (22,667) (16.8) %
Depreciation and amortization - net lease portfolio 92,593 111,338 (18,745) (16.8) %
Total depreciation and amortization 204,633 246,045 (41,412) (16.8) %
General and administrative 24,452 25,821 (1,369) (5.3) %
Transaction related costs 1,920 25,785 (23,865) (92.6) %
Loss on asset impairment, net 8,548 2,110 6,438 305.1 %
Total expenses 860,740 746,406 114,334 15.3 %
Other operating income:
Gain on sale of real estate, net 44,399 10,840 33,559 309.6 %
Unrealized losses on equity securities, net (20,319) (3,981) (16,338) 410.4 %
Interest income 1,294 282 1,012 358.9 %
Interest expense (182,164) (180,769) (1,395) 0.8 %
Loss on early extinguishment of debt (791) — (791) n/m
Loss before income taxes and equity in losses of an investee (108,780) (282,928) 174,148 (61.6) %
Income tax expense (1,168) (1,064) (104) 9.8 %
Equity in earnings (losses) of an investee 1,476 (2,108) 3,584 (170.0) %
Net loss $ (108,472) $ (286,100) $ 177,628 (62.1) %
Weighted average shares outstanding (basic and diluted) 164,672 164,502 170 0.1 %
Net loss per common share (basic and diluted) $ (0.66) $ (1.74) $ 1.08 n/m
References to changes in the income and expense categories below relate to the comparison of consolidated results for the six months ended June 30, 2022, compared to the six months ended June 30, 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 ($273,873), partially offset by the sale of certain hotels since January 1, 2021 ($6,571). Additional operating statistics of our hotels are included in the table on page 23.
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 portfolio. 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.
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 ($79,529), an increase in wages and benefits ($68,550), a decrease in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($15,698), an increase in management fees ($10,963) and an increase in property insurance costs ($9,362), partially offset by the sale of certain hotels since January 1, 2021 ($3,352) and a decrease in real estate tax expense ($3,749).
26
Table of Contents
Other operating expenses. The decrease in other operating expenses is primarily the result lower operating expenses at certain net lease properties and the sale of certain net lease properties since January 1, 2021.
Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is primarily a result of the sale of certain hotels ($15,078), certain of our depreciable assets becoming fully depreciated since January 1, 2021 ($7,998) and a decrease in depreciation for hotels classified as held for sale ($2,358), partially offset by depreciation and amortization related to capital additions since January 1, 2021 ($2,767).
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 ($17,655) and the sale of certain net lease properties since January 1, 2021 ($1,090).
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 ($1,859), partially offset by an increase in other professional service expenses and franchise taxes ($490).
Transaction related cos ts. Transaction related costs for the six months ended June 30, 2022 are primarily costs related to exploration of possible financing transactions. Transaction related costs for the six months ended June 30, 2021 include $3,700 of working capital we previously funded under our Hyatt agreement that we expensed as a result of the amount no longer expected to be recoverable, $2,257 of legal costs related to the arbitration claim against Marriott and $19,828 of costs related to rebranding certain hotels.
Loss on asset impairment, net. We recorded a $8,548 loss on asset impairment during the six months ended June 30, 2022 to reduce the carrying value of 25 hotels and four net lease properties to their estimated fair value less costs to sell. We recorded a $2,110 loss on asset impairment during the six months ended June 30, 2021 to reduce the carrying value of five net lease properties to their estimated fair value less costs to sell.
Gain on sale of real estate, net. We recorded a $44,399 net gain on sale of real estate in the 2022 period in connection with the sales of 56 hotels and 13 net lease properties and a $10,840 net gain on sale of real estate during the six months ended June 30, 2021 in connection with the sale of six hotels and three net lease properties.
Unrealized loss on equity securities, net. Unrealized losses on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value as of June 30, 2022 and 2021.
Interest income. The increase in interest income is primarily due to higher average cash balances and higher interest rates during the 2022 period.
Interest expense. The increase in interest expense is due to higher weighted average interest rates, partially offset by our repayment of certain debt in the 2022 period.
Loss on early extinguishment of debt. We recorded a $791 loss on early extinguishment of debt in the 2022 period related to the write off of deferred financing costs and unamortized discounts relating to our amendment to our revolving credit facility and the repayment of $500,000 of unsecured senior notes.
Income tax expense. The increase in income tax expense is primarily due to an increase in our foreign sourced income tax expense during the 2022 period, partially offset by lower net state income tax expense.
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 decreased in the 2022 period compared to the 2021 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
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 of June 30, 2022, all 247 of our hotels were managed by five hotel operating companies. Our 775 net lease properties were leased to 176 tenants as of June 30, 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 June 30, 2022, our hotel managers included Sonesta (205 hotels), Hyatt (17 hotels), Radisson (eight hotels), Marriott (16 hotels) and IHG (one hotel). TA is our largest tenant (179 travel centers).
As of June 30, 2022, we owned 205 hotels that are managed by Sonesta and 11 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 things, the amendments to the agreements between us and Sonesta for the 194 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 $17,519 as of June 30, 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.
We reduced reserves for uncollectible amounts by $160 and $667 during the three and six months ended June 30, 2022, respectively, and recorded reserves for uncollectible amounts of $1,176 and $5,960 during the three and six months ended June 30, 2021, respectively. We had reserves for uncollectible rents of $11,259 and $15,519 as of June 30, 2022 and December 31, 2021, respectively, included in other assets in our condensed consolidated balance sheets. As of June 30, 2022, we had $5,492 of deferred rents outstanding related to five tenants who represented approximately 3.7% of our annualized rental income of our net lease retail portfolio as of June 30, 2022, to which we granted rent relief during the COVID-19 pandemic.
28
Table of Contents
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 2.80x and 2.29x as of June 30, 2022 and 2021, 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 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 or future economic conditions, including if the U.S. enters an economic recession, 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, 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, repayment of debt, fund capital expenditures, and to pay distributions to our shareholders. 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):
Six Months Ended June 30,
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 59,297 (21,206)
Investing activities 399,338 (65,218)
Financing activities (705,948) 911,593
Cash and cash equivalents and restricted cash at the end of the period $ 700,105 $ 916,625
The change from cash flows used in operating activities in the 2021 period to cash flows provided by 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 real estate improvements and hotel managers’ purchases with restricted cash, partially offset by an increase in investments in Sonesta in 2022. 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 the repayment of debt in the 2022 period compared to a drawdown of the then 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 247 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.
29
Table of Contents
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 six months ended June 30, 2022, we funded $45,661 for capital improvements in excess of FF&E reserves available to our hotels. We currently expect to fund $100,000 for capital improvements to certain hotels during the last six months of 2022 using cash on hand.
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 six months ended June 30, 2022, our hotel managers and tenants deposited $3,834 to these accounts and spent $1,860 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of June 30, 2022, there was $4,316 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 $3,930 of capital improvements to properties under these lease provisions during the six months ended June 30, 2022. Tenants are not obligated to request and we are not obligated to purchase any such improvements. As of June 30, 2022, we had $2,792 of unspent leasing-related obligations related to certain net lease tenants.
During the six months ended June 30, 2022, we sold 56 hotels with 7,272 rooms for an aggregate sales price of $487,868, excluding closing costs, and 13 net lease properties with 115,492 square feet for an aggregate sales price of $13,064, excluding closing costs. From July 1, 2022 through August 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 August 3, 2022, we have entered into agreements to sell four Sonesta branded hotels with an aggregate of 508 rooms for an aggregate sales price of $24,250 and two net lease properties with an aggregate of 3,840 square feet for an aggregate sales price of $325.We continue to market 20 additional hotels with 2,752 rooms for sale. We expect the majority of these sales to be completed by the end of 2022. We expect to use the proceeds from the asset sales for general business purposes, which may include the repayment of debt.
In April 2022 and June 2022, we funded $25,000 and $20,470, respectively, of capital contributions to Sonesta related to Sonesta’s acquisition of a portfolio of four hotels located in New York, NY using cash on hand.
During the six months ended June 30, 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
April 14, 2022 April 25, 2022 May 19, 2022 0.01 1,651
$ 0.02 $ 3,302
On July 14, 2022, we declared a regular quarterly distribution to common shareholders of record as of July 25, 2022 of $0.01 per share, or $1,651. We expect to pay this amount on or about August 18, 2022 using cash on hand.
30
Table of Contents
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 June 30, 2022 the maturity date of our revolving credit facility was January 15, 2023, and, subject to the payment of an extension fee and meeting certain other conditions as noted below, we have the option to extend the maturity date of this facility by one additional six-month period. We are required to pay interest at the rate of LIBOR plus a premium, which was 250 basis points per annum, subject to a LIBOR floor of 0.50% at June 30, 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 June 30, 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 June 30, 2022, the annual interest rate payable on borrowings under our revolving credit facility was 3.69%. On January 19, 2021, we borrowed $972,793 under our revolving credit facility as a precautionary measure to preserve financial flexibility. As of June 30, 2022, we had $800,000 of borrowings outstanding and were fully drawn under our revolving credit facility.
We and our lenders amended the credit agreement in 2020. Among other things, the amendment 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 amendment, 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;
• 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 demonstrated 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 was 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 at least $150,000.
Our revolving credit facility continues to be secured by 73 properties with an undepreciated book value of $1,578,603 as of June 30, 2022 to secure our obligations under the credit agreement.
31
Table of Contents
Our term debt maturities (other than our revolving credit facility) as of June 30, 2022 were as follows:
Year Maturity
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
$ 5,700,000
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.
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 impacts of the current, and possibly future, inflationary conditions, increasing interest rates and a possible recession 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.
32
Table of Contents
Debt Covenants
Our debt obligations at June 30, 2022 consisted of outstanding borrowings under our $800,000 revolving credit facility and $5,700,000 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 June 30, 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 noted above.
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 June 30, 2022:
Actual Results Covenant Requirement
Total debt / adjusted total assets 57.9% Maximum of 60%
Secured debt / adjusted total assets 7.1% Maximum of 40%
Consolidated income available for debt service / debt service 1.59x Minimum of 1.50x
Total unencumbered assets / unsecured debt 169.2% Minimum 150%
As of June 30, 2022, we have met the minimum financial covenant levels under our senior notes indentures, which reinstates our ability to incur additional debt so long as we maintain these covenant levels and subject to the provisions of our credit facility and senior notes indentures. Because the margin by which we satisfied the minimum required consolidated income available for debt service to debt service ratio as of quarter end was relatively small, our current ability to incur additional debt remains limited.
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 $4,450,000 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
33
Table of Contents
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 June 30, 2022 As of December 31, 2021
Real estate properties, net (1)
$ 5,501,728 $ 5,607,883
Intercompany balances (2)
871,257 826,338
Other assets, net 1,313,020 2,074,353
Indebtedness, net $ 6,449,650 $ 7,143,022
Other liabilities 420,240 430,267
Six Months Ended
June 30, 2022
Revenues
$ 840,287
Expenses
1,014,491
Net loss
(174,204)
(1) Real estate properties, net as of June 30, 2022 includes $194,819 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 June 30, 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 145 brands across 21 industries.
Hotel Portfolio
The following tables summarize the operating statistics, including ADR, occupancy and RevPAR reported to us by our hotel managers by hotel brand for the periods indicated. All operating data presented are based upon the operating results provided by our hotel managers for the indicated periods. We have not independently verified our managers’ operating data.
34
Table of Contents
Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Three Months Ended
June 30, Three Months Ended
June 30, Three Months Ended
June 30,
Brand 2022 2021 Change 2022 2021 Change 2022 2021 Change
Sonesta Full Service 22 7,145 67.7 % 51.2 % 16.5 Pts $ 157.45 $ 129.76 21.3 % $ 106.59 $ 66.44 60.4 %
Royal Sonesta (1)
Full Service 16 5,291 59.3 % 37.4 % 21.9 Pts 246.52 181.35 35.9 % 146.19 67.82 115.6 %
Radisson Hotel Full Service 5 1,149 70.0 % 48.8 % 21.2 Pts 137.48 100.45 36.9 % 96.24 49.02 96.3 %
Crowne Plaza Full Service 1 495 61.2 % 52.5 % 8.7 Pts 132.72 109.70 21.0 % 81.22 57.59 41.0 %
Country Inn and Suites Full Service 3 430 69.8 % 53.6 % 16.2 Pts 138.36 104.07 32.9 % 96.58 55.78 73.1 %
Full Service Total/Average 47 14,510 64.6 % 46.1 % 18.5 Pts 184.51 140.91 30.9 % 119.19 64.96 83.5 %
Sonesta Select (1)
Select Service 52 7,476 53.6 % 40.1 % 13.5 Pts 119.11 97.75 21.9 % 63.84 39.20 62.9 %
Hyatt Place Select Service 17 2,107 74.6 % 65.2 % 9.4 Pts 121.34 98.24 23.5 % 90.52 64.05 41.3 %
Courtyard Select Service 13 1,813 61.7 % 53.4 % 8.3 Pts 123.05 98.80 24.5 % 75.92 52.76 43.9 %
Select Service Total/Average 82 11,396 58.8 % 46.9 % 11.9 Pts 120.30 98.07 22.7 % 70.74 45.99 53.8 %
Sonesta ES Suites Extended Stay 61 7,739 73.9 % 70.5 % 3.4 Pts 126.91 100.64 26.1 % 93.79 70.95 32.2 %
Sonesta Simply Suites Extended Stay 51 6,490 76.6 % 72.7 % 3.9 Pts 86.08 69.47 23.9 % 65.94 50.50 30.6 %
Residence Inn Extended Stay 3 342 70.7 % 56.4 % 14.3 Pts 123.28 107.52 14.7 % 87.16 60.64 43.7 %
Extended Stay Total/Average 115 14,571 75.0 % 71.2 % 3.8 Pts 108.43 86.58 25.2 % 81.32 61.64 31.9 %
Comparable Hotels Total/Average 244 40,477 66.7 % 55.4 % 11.3 Pts $ 137.57 $ 105.54 30.3 % $ 91.76 $ 58.47 56.9 %
Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Six Months Ended
June 30, Six Months Ended
June 30, Six Months Ended
June 30,
Brand 2022 2021 Change 2022 2021 Change 2022 2021 Change
Sonesta (1)
Full Service 22 7,145 59.9 % 41.3 % 18.6 Pts $ 151.74 $ 122.28 24.1 % $ 90.89 $ 50.50 80.0 %
Royal Sonesta (1)
Full Service 16 5,291 48.5 % 29.9 % 18.6 Pts 233.16 169.79 37.3 % 113.08 50.77 122.7 %
Radisson Hotel Full Service 5 1,149 63.8 % 43.4 % 20.4 Pts 132.73 96.16 38.0 % 84.68 41.73 102.9 %
Crowne Plaza Full Service 1 495 52.4 % 44.3 % 8.1 Pts 128.02 103.32 23.9 % 67.08 45.77 46.6 %
Country Inn and Suites Full Service 3 430 61.1 % 42.0 % 19.1 Pts 125.08 95.36 31.2 % 76.42 40.05 90.8 %
Full Service Total/Average 47 14,510 55.8 % 37.4 % 18.4 Pts 174.40 132.04 32.1 % 97.32 49.38 97.1 %
Sonesta Select (1)
Select Service 52 7,476 47.7 % 32.9 % 14.8 Pts 113.36 93.88 20.7 % 54.07 30.89 75.0 %
Hyatt Place Select Service 17 2,107 66.7 % 56.4 % 10.3 Pts 117.73 92.36 27.5 % 78.53 52.09 50.8 %
Courtyard Select Service 13 1,813 52.9 % 45.3 % 7.6 Pts 116.02 92.19 25.8 % 61.37 41.76 47.0 %
Select Service Total/Average 82 11,396 52.1 % 39.2 % 12.9 Pts 114.83 93.17 23.2 % 59.83 36.52 63.8 %
Sonesta ES Suites (1)
Extended Stay 61 7,739 70.0 % 62.3 % 7.7 Pts 121.07 98.12 23.4 % 84.75 61.13 38.6 %
Sonesta Simply Suites Extended Stay 51 6,490 71.2 % 64.1 % 7.1 Pts 83.16 67.56 23.1 % 59.21 43.31 36.7 %
Residence Inn Extended Stay 3 342 63.5 % 50.1 % 13.4 Pts 115.90 102.84 12.7 % 73.60 51.52 42.9 %
Extended Stay Total/Average 115 14,571 70.4 % 62.8 % 7.6 Pts 104.03 84.32 23.4 % 73.24 52.95 38.3 %
Comparable Hotels Total/Average 244 40,477 60.0 % 47.1 % 12.9 Pts $ 129.82 $ 99.99 29.8 % $ 77.89 $ 47.10 65.4 %
* 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 and six months ended June 30, 2022 and 2021, our comparable results excluded three 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
June 30, Three Months Ended
June 30, Three Months Ended
June 30,
Brand 2022 2021 Change 2022 2021 Change 2022 2021 Change
Sonesta Full Service 23 7,364 67.7 % 51.8 % 15.9 Pts $ 157.45 $ 129.76 21.3 % $ 106.59 $ 67.22 58.6 %
Royal Sonesta (1)
Full Service 17 5,663 59.6 % 37.1 % 22.5 Pts 245.75 180.86 35.9 % 146.47 67.10 118.3 %
Radisson Hotel Full Service 5 1,149 70.0 % 48.8 % 21.2 Pts 137.48 100.45 36.9 % 96.24 49.02 96.3 %
Crowne Plaza Full Service 1 495 61.2 % 52.5 % 8.7 Pts 132.72 109.70 21.0 % 81.22 57.59 41.0 %
Country Inn and Suites Full Service 3 430 69.8 % 53.6 % 16.2 Pts 138.36 104.07 32.9 % 96.58 55.78 73.1 %
Full Service Total/Average 49 15,101 64.6 % 46.1 % 18.5 Pts 185.80 141.02 31.8 % 120.03 65.01 84.6 %
Sonesta Select (1)
Select Service 52 7,476 53.6 % 40.1 % 13.5 Pts 119.11 97.75 21.9 % 63.84 39.20 62.9 %
Hyatt Place Select Service 17 2,107 74.6 % 65.2 % 9.4 Pts 121.34 98.24 23.5 % 90.52 64.05 41.3 %
Courtyard Select Service 13 1,813 61.7 % 53.4 % 8.3 Pts 123.05 98.80 24.5 % 75.92 52.76 43.9 %
Select Service Total/Average 82 11,396 58.8 % 46.9 % 11.9 Pts 120.30 98.07 22.7 % 70.74 45.99 53.8 %
Simply ES Suites Extended Stay 61 7,739 73.9 % 70.5 % 3.4 Pts 126.91 100.64 26.1 % 93.79 70.95 32.2 %
Sonesta Simply Suites Extended Stay 52 6,588 75.8 % 72.9 % 2.9 Pts 86.08 69.36 24.1 % 65.25 50.56 29.1 %
Residence Inn Extended Stay 3 342 70.7 % 56.4 % 14.3 Pts 123.28 107.52 14.7 % 87.16 60.64 43.7 %
Extended Stay Total/Average 116 14,669 74.7 % 71.3 % 3.4 Pts 108.43 86.40 25.5 % 81.00 61.60 31.5 %
All Hotels Total/Average 247 41,166 66.6 % 55.4 % 11.2 Pts $ 138.43 $ 105.49 31.2 % $ 92.19 $ 58.44 57.8 %
All Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Six Months Ended
June 30, Six Months Ended
June 30, Six Months Ended
June 30,
Brand 2022 2021 Change 2022 2021 Change 2022 2021 Change
Sonesta (1)
Full Service 23 7,364 59.9 % 41.3 % 18.6 Pts $ 151.74 $ 122.28 24.1 % $ 90.89 $ 50.50 80.0 %
Royal Sonesta (1)
Full Service 17 5,663 48.4 % 29.8 % 18.6 Pts 232.60 169.63 37.1 % 112.58 50.55 122.7 %
Radisson Hotel Full Service 5 1,149 63.8 % 43.4 % 20.4 Pts 132.73 96.16 38.0 % 84.68 41.73 102.9 %
Crowne Plaza Full Service 1 495 52.4 % 44.3 % 8.1 Pts 128.02 103.32 23.9 % 67.08 45.77 46.6 %
Country Inn and Suites Full Service 3 430 61.1 % 42.0 % 19.1 Pts 125.08 95.36 31.2 % 76.42 40.05 90.8 %
Full Service Total/Average 49 15,101 55.5 % 37.3 % 18.2 Pts 175.48 132.14 32.8 % 97.39 49.29 97.6 %
Sonesta Select (1)
Select Service 52 7,476 47.7 % 32.9 % 14.8 Pts 113.36 93.88 20.7 % 54.07 30.89 75.0 %
Hyatt Place Select Service 17 2,107 66.7 % 56.4 % 10.3 Pts 117.73 92.36 27.5 % 78.53 52.09 50.8 %
Courtyard Select Service 13 1,813 52.9 % 45.3 % 7.6 Pts 116.02 92.19 25.8 % 61.37 41.76 47.0 %
Select Service Total/Average 82 11,396 52.1 % 39.2 % 12.9 Pts 114.83 93.17 23.2 % 59.83 36.52 63.8 %
Simply ES Suites (1)
Extended Stay 61 7,739 70.0 % 62.3 % 7.7 Pts 121.07 98.12 23.4 % 84.75 61.13 38.6 %
Sonesta Simply Suites Extended Stay 52 6,588 70.4 % 64.3 % 6.1 Pts 83.16 67.44 23.3 % 58.54 43.36 35.0 %
Residence Inn Extended Stay 3 342 63.5 % 50.1 % 13.4 Pts 115.90 102.84 12.7 % 73.60 51.52 42.9 %
Extended Stay Total/Average 116 14,669 70.0 % 62.9 % 7.1 Pts 104.03 84.13 23.7 % 72.82 52.92 37.6 %
All Hotels Total/Average 247 41,166 59.8 % 47.1 % 12.7 Pts $ 130.50 $ 99.90 30.6 % $ 78.04 $ 47.05 65.9 %
* Results of all hotels owned as of June 30, 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 June 30, 2022, our net lease properties were 98.8% occupied and we had 17 properties available for lease. During the six months ended June 30, 2022, we entered into lease renewals for 103,815 rentable square feet at weighted (by rentable square feet) average rents that were 0.71% higher than the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 5.5 years. We also entered into new leases for 117,795 rentable square feet at weighted (by rentable square feet) average rents that were 14.5% lower than the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 9.2 years.
36
Table of Contents
As of June 30, 2022, our net lease tenants operated across more than 145 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 44.9 % $ 168,012 45.1 % 2.55 x
2. Petro Stopping Centers 45 1,021,226 20.0 % 78,099 21.0 % 2.29 x
3. AMC Theatres 11 102,580 2.0 % 7,305 2.0 % 1.01 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 % 4,629 1.2 % 4.42 x
8. Norms 10 53,673 1.1 % 3,232 0.9 % 0.70 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 % 0.70 x
11. Other (4)
465 1,211,723 23.7 % 84,823 22.8 % 3.45 x
Total 775 $ 5,101,106 100.0 % $ 372,120 100.0 % 2.80 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 June 30, 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 64.9 % $ 246,110 66.1 % 2.46x (4)
2. American Multi-Cinema, Inc. AMC Theatres 11 102,580 2.0 % 7,305 2.0 % 1.01x
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 % 1.81x
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 % 4,629 1.2 % 4.42x
7. Norms Restaurants, LLC Norms 10 53,673 1.1 % 3,232 0.9 % 2.34x
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 % 0.70x
10. Pilot Travel Centers LLC Flying J Travel Plaza 3 41,681 0.8 % 3,215 0.9 % 4.55x
Subtotal, top 10 313 3,931,064 77.1 % 290,511 78.1 % 2.75x
11. Other (5)
Various 462 1,170,043 22.9 % 81,609 21.9 % 2.60x
Total 775 $ 5,101,107 100.0 % $ 372,120 100.0 % 2.80x
(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 28 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 $13,211 is being paid in quarterly installments of $4,404 through January 31, 2023.
37
Table of Contents
(5) Other includes 166 tenants with an average investment of $7,048 and average annual minimum rent of $492.
As of June 30, 2022, 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)
Percent of Total Investment Annualized
Minimum Rent (2)
Percent of Total Annualized
Minimum Rent Coverage (3)
Travel Centers 182 $ 3,352,096 65.7% $ 249,303 67.0 % 2.49x
Restaurants-Quick Service 226 301,088 5.9% 20,354 5.5 % 2.72x
Restaurants-Casual Dining 53 192,170 3.8% 11,525 3.1 % 2.38x
Movie Theaters 22 190,725 3.7% 14,266 3.8 % 0.78x
Health and Fitness 13 185,458 3.6% 10,629 2.9 % 1.89x
Grocery Stores 19 129,219 2.5% 9,191 2.5 % 5.46x
Home Goods and Leisure 20 120,552 2.4% 9,103 2.4 % 6.56x
Medical, Dental Office 71 109,014 2.1% 8,737 2.3 % 3.41x
Automotive Equipment & Services 64 98,473 1.9% 7,144 1.9 % 3.18x
Entertainment 4 61,436 1.2% 4,292 1.2 % 2.56x
Automotive Dealers 8 58,166 1.1% 4,716 1.3 % 6.17x
General Merchandise Stores 5 56,321 1.1% 3,892 1.0 % 3.12x
Educational Services 9 55,647 1.1% 4,451 1.2 % 1.41x
Miscellaneous Manufacturing 6 29,837 0.6% 2,228 0.6 % 17.27x
Building Materials 28 31,906 0.6% 2,685 0.7 % 6.68x
Car Washes 5 28,658 0.6% 2,170 0.6 % 1.83x
Drug Stores and Pharmacies 7 19,251 0.4% 1,258 0.3 % 1.45x
Sporting Goods 3 17,595 0.3% 967 0.3 % 5.70x
Legal Services 5 11,362 0.2% 1,033 0.3 % 1.89x
Dollar Stores 3 2,971 0.1% 189 0.1 % 2.62x
Other 5 27,245 0.5% 3,987 1.0 % 4.49x
Vacant 17 21,916 0.4% — — % — x
Total 775 $ 5,101,106 100.0% $ 372,120 100.0 % 2.80x
(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 28 for our definition of coverage.
38
Table of Contents
As of June 30, 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 168,131 $ 1,903 0.5% 0.5%
2023 309,471 2,669 0.7% 1.2%
2024 769,082 11,152 3.0% 4.2%
2025 436,043 8,911 2.4% 6.6%
2026 1,080,336 12,171 3.3% 9.9%
2027 1,104,615 13,733 3.7% 13.6%
2028 551,971 9,398 2.5% 16.1%
2029 1,343,309 48,453 13.0% 29.1%
2030 138,590 4,159 1.1% 30.2%
2031 1,313,222 48,857 13.1% 43.4%
2032 1,276,610 53,442 14.4% 57.7%
2033 1,176,430 52,612 14.1% 71.9%
2034 122,877 3,995 1.1% 72.9%
2035 2,234,644 80,285 21.6% 94.5%
2036 552,708 7,529 2.0% 96.5%
2037 35,103 464 0.1% 96.7%
2038 44,484 1,116 0.3% 97.0%
2039 134,901 3,214 0.9% 97.8%
2040 115,142 2,406 0.6% 98.5%
2041 223,043 2,264 0.6% 99.1%
2042 57,499 155 0.0% 99.1%
2045 63,490 3,232 0.9% 100.0%
Total 13,251,701 $ 372,120 100%
(1) The year of lease expiration is pursuant to contract terms.
As of June 30, 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%
Other 6,798,975 177,954 47.9%
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 to 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.
39
Table of Contents
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include consolidation of VIE’s, purchase price allocations, the determination of useful lives of fixed assets, classification of leases, and the assessment of the carrying values and impairment of real estate intangible assets and equity investments.
A discussion of our critical accounting estimates is included in our 2021 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2021.
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 six months ended June 30, 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 June 30, For the Six Months Ended June 30,
2022 2021 2022 2021
Net income (loss) $ 11,350 $ (91,110) $ (108,472) $ (286,100)
Add (Less): Depreciation and amortization expense 100,520 121,677 204,633 246,045
Loss on asset impairment (1)
3,048 899 8,548 2,110
Gain on sale of real estate, net (2)
(38,851) (10,849) (44,399) (10,840)
Unrealized (gains) losses on equity securities, net (3)
10,059 (2,500) 20,319 3,981
Adjustments to reflect our share of FFO attributable to an investee (4)
905 1,034 1,571 1,499
FFO 87,031 19,151 82,200 (43,305)
Add (less): Transaction related costs (5)
743 6,151 1,920 25,785
Loss on early extinguishment of debt (6)
791 — 791 —
Adjustments to reflect our share of Normalized FFO attributable to an investee (4)
593 538 838 1,363
Normalized FFO $ 89,158 $ 25,840 $ 85,749 $ (16,157)
Weighted average shares outstanding (basic and diluted) (7)
164,677 164,506 164,672 164,502
Basic and diluted per common share amounts:
Net income (loss) $ 0.07 $ (0.55) $ (0.66) $ (1.74)
FFO $ 0.53 $ 0.12 $ 0.50 $ (0.26)
Normalized FFO
$ 0.54 $ 0.16 $ 0.52 $ (0.10)
Distributions declared per share $ 0.01 $ 0.01 $ 0.02 $ 0.02
(1) We recorded a loss on asset impairment of $3,048 to reduce the carrying value of two hotels and four net lease properties to their estimated fair value less costs to sell during the three months ended June 30, 2022, a loss on asset impairment of $899 to reduce the fair value of three net lease properties to their estimated fair value less costs to sell during the three months ended June 30, 2021, a loss on asset impairment of $8,548 to reduce the carrying value of 25 hotels and four net lease properties to their estimated fair value less costs to sell during the six months ended June 30, 2022 and a loss on asset impairment of $2,110 during the six months ended June 30, 2021 to reduce the carrying value of five net lease properties to their estimated fair value less costs to sell.
(2) We recorded a $38,851 net gain on sale of real estate during the three months ended June 30, 2022 in connection with the sale of 52 hotels and 11 net lease properties, a $10,849 net gain on sale of real estate during the three months ended June 30, 2021 in connection with the sale of six hotels and two net lease properties, a $44,399 gain on sale of real estate during the six months ended June 30, 2022 in connection with the sale of 56 hotels and 13 net lease properties, and a $10,840 net gain on sale of real estate during the six months ended June 30, 2021 in connection with the sale of six hotels and three 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) Transaction related costs for the three and six months ended June 30, 2022, $743 and $1,920, respectively, primarily consisted of legal and other professional services costs related to our hotel rebrandings. Transaction related costs for the three months ended June 30, 2021 includes $3,700 of working capital we previously funded under its agreement with Hyatt that we expensed as a result of the amount no longer expected to be recoverable, $1,110 of legal costs related to our arbitration claim against Marriott and $1,341 of hotel manager transition costs. Transaction related costs for the three months ended March 31, 2021 includes $19,634 of hotel manager transition related costs resulting from the rebranding of 88 hotels during the period.
(6) We recorded a $791 loss on extinguishment of debt during the three months ended June 30, 2022 related to the write off of deferred financing costs and unamortized discounts relating to our amendment to our revolving credit facility and the repayment of $500,000 of unsecured senior notes.
(7) Represents weighted average common shares adjusted to reflect the potential dilution of unvested share awards, if any.
41
Table of Contents