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 2022 Annual Report.
Overview (dollar amounts in thousands, except share amounts and per-room hotel data)
We are a REIT organized under the laws of the State of Maryland. As of September 30, 2023, we owned 982 properties in 46 states, the District of Columbia, Canada and Puerto Rico.
In response to inflationary pressures, the U.S. Federal Reserve has increased the federal funds rate multiple times since the beginning of 2022 and further increases may occur. These inflationary pressures and rising interest rates in the United States and globally have given rise to economic uncertainty and they have caused disruptions in the financial markets. Consumer confidence, corporate travel and lodging demand will continue to be affected by economic and market conditions, unemployment levels, work from home policies, use of technologies and broader economic trends. Increased labor costs and other price inflation may continue to negatively impact our hotel operations and the operations of our tenants. An economic recession or continued or intensified disruptions in the financial markets could adversely affect our financial condition, operations at our hotels, our tenants and their ability or willingness to renew our leases or pay rent to us, may restrict our ability to obtain new or replacement financing, would likely increase our cost of capital, and may cause the values of our properties and of our securities to decline.
Management Agreements and Leases . At September 30, 2023, we owned 221 hotels operated under four agreements. We leased all of these hotels to our wholly owned TRSs that are managed by hotel operating companies as of that date. At September 30, 2023, we owned 761 service oriented properties leased to 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 of our managed hotels and rental income and other operating expenses from our net lease properties.
Hotel Portfolio. As of September 30, 2023, we owned 221 hotels. In the three and nine months ended September 30, 2023, 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 2022 periods. The following table provides a summary for all of our hotels with these revenue metrics for the periods presented, which we believe are key indicators of performance at our hotels.
Three Months Ended September 30,
Nine Months Ended September 30,
2023 2022 Change 2023 2022 Change
All Hotels
No. of hotels 221 242 (21) 221 242 (21)
No. of rooms or suites 37,777 40,563 (2,786) 37,777 40,563 (2,786)
Occupancy 67.2 % 65.8 % 1.4 pts 64.2 % 61.9 % 2.3 pts
ADR $ 140.77 $ 140.05 0.5 % $ 142.05 $ 134.19 5.9 %
RevPAR $ 94.60 $ 92.15 2.7 % $ 91.20 $ 83.06 9.8 %
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 nine months ended September 30, 2023 and 2022, our comparable results exclude two hotels. One of the hotels was not owned for the entirety of the periods and the other suspended operations during part of the periods presented. The following table provides a summary of these revenue metrics for the periods presented.
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Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 Change 2023 2022 Change
Comparable Hotels
No. of hotels 219 219 — 219 219 —
No. of rooms or suites 37,429 37,429 — 37,429 37,429 —
Occupancy 67.3 % 66.4 % 0.9 pts 64.3 % 62.6 % 1.7 pts
ADR $ 140.47 $ 141.23 (0.5) % $ 140.97 $ 135.32 4.2 %
RevPAR $ 94.54 $ 93.78 0.8 % $ 90.64 $ 84.71 7.0 %
Net Lease Portfolio . As of September 30, 2023, we owned 761 service oriented retail properties with 13,430,345 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 $374,445. Our net lease properties were 95.8% occupied as of September 30, 2023 with a weighted (by annual minimum rent) lease term of 9.1 years, operating under 135 brands in 21 distinct industries. TA is our largest tenant. On May 15, 2023, BP completed the TA Merger and we amended our TA leases. We received $379,292 in cash as part of the transaction, including $188,000 of prepaid rent, $101,892 for outstanding TA common shares we owned and $89,400 for certain tradenames and trademarks associated with TA’s businesses we owned. As of September 30, 2023, we leased 176 of our travel centers to TA under five leases that expire in 2033 and require annual minimum rents of $254,000, and BP Corporation North America Inc. guarantees payment under these leases, subject to a cap. TA receives an annual credit of $25,000 as a result of the prepaid rent.
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.
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Results of Operations (dollar amounts in thousands, except share amounts)
Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022
For the Three Months Ended September 30,
Increase % Increase
2023 2022 (Decrease) (Decrease)
Revenues:
Hotel operating revenues $ 395,526 $ 400,453 $ (4,927) (1.2) %
Rental income 101,299 97,798 3,501 3.6 %
Total revenues 496,825 498,251 (1,426) (0.3) %
Expenses:
Hotel operating expenses 317,752 318,266 (514) (0.2) %
Other operating expenses 4,802 3,511 1,291 36.8 %
Depreciation and amortization - hotels 54,402 55,780 (1,378) (2.5) %
Depreciation and amortization - net lease properties 40,096 45,734 (5,638) (12.3) %
Total depreciation and amortization 94,498 101,514 (7,016) (6.9) %
General and administrative 10,849 11,293 (444) (3.9) %
Transaction related costs 115 — 115 n/m
Loss on asset impairment, net 512 1,172 (660) (56.3) %
Total expenses 428,528 435,756 (7,228) (1.7) %
Other operating income:
Gain (loss) on sale of real estate 123 (164) 287 n/m
Gain on equity securities, net — 23,056 23,056 (100.0) %
Interest income 5,626 1,442 4,184 n/m
Interest expense (82,280) (81,740) 540 0.7 %
Income before income taxes and equity in losses of an investee (8,234) 5,089 (13,323) n/m
Income tax benefit (expense) 2,242 (390) 2,632 n/m
Equity in earnings of an investee 1,864 2,801 (937) (33.5) %
Net (loss) income $ (4,128) $ 7,500 $ (11,628) n/m
Weighted average shares outstanding (basic and diluted) 165,027 164,745 282 0.2 %
Net (loss) income per common share (basic and diluted) $ (0.03) $ 0.05 $ (0.08) n/m
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
Hotel operating revenues. The decrease in hotel operating revenues is primarily a result of our sale of certain hotels since July 1, 2022 ($21,734), partially offset by higher ADR and RevPAR at certain of our hotels ($16,807). Additional operating statistics of our hotels are included in the table on page 33.
Rental income. The increase in rental income is primarily a result of the amended TA leases in the 2023 period.
Hotel operating expenses. The decrease in hotel operating expenses is primarily a result of our sale of certain hotels since July 1, 2022 ($19,473), partially offset by an increase in occupancy at certain managed hotels resulting in an increase in wages and benefits ($9,718), and an increase in rooms, food and beverage, marketing and sales expenses, management fees and other operating expenses ($9,241).
Other operating expenses. The increase in other operating expenses is primarily the result of higher operating expenses at certain net lease properties ($1,300), partially offset by our sale of certain net lease properties since July 1, 2022 ($9).
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Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is primarily a result of certain of our depreciable assets becoming fully depreciated ($1,975) and our sale of certain hotels since July 1, 2022 ($2,116), partially offset by depreciation and amortization related to capital expenditures made since July 1, 2022 ($1,771) and our acquisition of a hotel in the 2023 period ($942).
Depreciation and amortization - net lease properties. The decrease in depreciation and amortization - net lease properties is primarily a result of certain of our depreciable assets being fully depreciated ($4,257), our sale of certain net lease properties since July 1, 2022 ($187), and depreciation and amortization related to other capital expenditures ($1,194).
General and administrative. The decrease in general and administrative costs is primarily due to a decrease in franchise and other taxes ($415).
Transaction related costs . Transaction related costs for the three months ended September 30, 2023 primarily consisted of costs related to hotel rebranding activity.
Loss on asset impairment, net. We recorded a $512 loss on asset impairment, net during the three months ended September 30, 2023 to reduce the carrying value of three net lease properties to their estimated fair value less costs to sell. We recorded a $1,172 loss on asset impairment, net during the three months ended September 30, 2022 to reduce the carrying value of three hotels and one net lease property to their estimated fair value less costs to sell.
Gain (loss) on sale of real estate. We recorded a $123 net gain on sale of real estate during the three months ended September 30, 2023 in connection with the sale of two net lease properties. We recorded a $164 net loss on sale of real estate during the three months ended September 30, 2022 in connection with the sale of five hotels and six net lease properties.
Gain on equity securities, net. Gain on equity securities, net represents the adjustment to the carrying value of our former investment in shares of TA common stock to its fair value.
Interest income. The increase in interest income is due to higher interest rates during the 2023 period.
Interest expense. The increase in interest expense is primarily due to amounts incurred in relation to the net lease mortgage notes issued in the 2023 period.
Income tax benefit (expense). The change in income tax benefit (expense) is primarily a result of recording state and foreign tax benefits during the 2023 period compared to income tax expense in the 2022 period.
Equity in earnings of an investee. Equity in earnings of an investee represents our proportionate share of the earnings of Sonesta.
Net (loss) income. Our net (loss) income and net (loss) income per common share (basic and diluted) each changed in the 2023 period compared to the 2022 period primarily due to the revenue and expense changes discussed above.
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Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022
For the Nine Months Ended September 30,
Increase % Increase
2023 2022 (Decrease) (Decrease)
Revenues:
Hotel operating revenues $ 1,134,649 $ 1,116,843 $ 17,806 1.6 %
Rental income 295,164 290,949 4,215 1.4 %
Total revenues 1,429,813 1,407,792 22,021 1.6 %
Expenses:
Hotel operating expenses 926,418 933,803 (7,385) (0.8) %
Other operating expenses 13,079 9,162 3,917 42.8 %
Depreciation and amortization - hotels 161,236 167,821 (6,585) (3.9) %
Depreciation and amortization - net lease properties 127,872 138,326 (10,454) (7.6) %
Total depreciation and amortization 289,108 306,147 (17,039) (5.6) %
General and administrative 34,180 35,743 (1,563) (4.4) %
Transaction related costs 1,933 1,920 13 0.7 %
Loss on asset impairment, net 9,517 9,720 (203) (2.1) %
Total expenses 1,274,235 1,296,495 (22,260) (1.7) %
Other operating income:
Gain on sale of real estate 41,959 44,235 (2,276) (5.1) %
Gain on equity securities, net 48,837 2,737 46,100 n/m
Interest income 11,880 2,735 9,145 n/m
Interest expense (246,363) (263,904) (17,541) (6.6) %
Loss on early extinguishment of debt (282) (791) 509 64.3 %
Income (loss) before income taxes and equity in losses of an investee 11,609 (103,691) 115,300 (111.2) %
Income tax benefit (expense) 775 (1,558) 2,333 149.7 %
Equity in (losses) earnings of an investee (1,840) 4,277 (6,117) n/m
Net income (loss) $ 10,544 $ (100,972) $ 111,516 n/m
Weighted average shares outstanding (basic and diluted) 164,933 164,697 236 0.1 %
Net income (loss) per common share (basic and diluted) $ 0.06 $ (0.61) $ 0.67 n/m
References to changes in the income and expense categories below relate to the comparison of consolidated results for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Hotel operating revenues. The increase in hotel operating revenues is primarily a result of higher occupancies and average rates at certain of our hotels in the 2023 period ($115,084), partially offset by our sale of certain hotels since January 1, 2022 ($97,278). Additional operating statistics of our hotels are included in the table on page 33.
Rental income. The increase in rental income is primarily a result of the amended TA leases in the 2023 period ($6,930), partially offset by our sale of certain net lease properties since January 1, 2022 ($3,919).
Hotel operating expenses. The decrease in hotel operating expenses is primarily a result of our sale of certain hotels since January 1, 2022 ($93,369), partially offset by an increase in occupancy at certain managed hotels resulting in an increase in wages and benefits ($53,388), an increase in rooms, food and beverage, marketing and sales expenses, management fees and other operating expenses ($32,596).
Other operating expenses. The increase in other operating expenses is primarily the result of higher operating expenses at certain net lease properties ($4,370), partially offset by our sale of certain net lease properties since January 1, 2022 ($453).
Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is primarily a result of certain of our depreciable assets becoming fully depreciated since January 1, 2022 ($6,618) and our sale of certain hotels
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($6,344), partially offset by depreciation and amortization related to capital expenditures made since January 1, 2022 ($5,121) and our acquisition of a hotel in the 2023 period ($1,256).
Depreciation and amortization - net lease properties. The decrease in depreciation and amortization - net lease properties is primarily a result of certain of our depreciable assets being fully depreciated since January 1, 2022 and our sale of certain net lease properties since January 1, 2022 ($12,184), partially offset by depreciation and amortization related to other capital expenditures ($1,730).
General and administrative. The decrease in general and administrative costs is primarily due to a decrease in business management fees ($2,495), partially offset by increases in share award expenses ($664) and other professional fees ($268).
Transaction related cos ts. Transaction related costs for the nine months ended September 30, 2023 are primarily related to hotel rebranding activity, demolition of certain vacant properties and potential acquisitions. Transaction related costs for the nine months ended September 30, 2022 are primarily costs related to exploration of possible financing transactions.
Loss on asset impairment, net. We recorded a $9,517 loss on asset impairment, net during the nine months ended September 30, 2023 to reduce the carrying value of 16 net lease properties to their estimated fair value less costs to sell. We recorded a $9,720 loss on asset impairment during the nine months ended September 30, 2022 to reduce the carrying value of 25 hotels and four net lease properties to their estimated fair value less costs to sell.
Gain on sale of real estate. We recorded a $41,959 net gain on sale of real estate in the 2023 period in connection with the sale of 18 hotels and four net lease properties. We recorded a $44,235 net gain on sale of real estate in the 2022 period in connection with the sales of 61 hotels and 19 net lease properties.
Gain on equity securities, net. Gain on equity securities, net represents the adjustment to the carrying value of our former investment in shares of TA common stock to its fair value.
Interest income. The increase in interest income is primarily due to higher interest rates during the 2023 period.
Interest expense. The decrease in interest expense is due to lower outstanding debt balances, partially offset by higher weighted average interest rates in the 2022 period.
Loss on early extinguishment of debt. We recorded a $282 loss on early extinguishment of debt in connection with our redemption of certain senior unsecured notes and the write off of certain deferred financing costs relating to the amendment of our revolving credit facility in the 2023 period. 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 benefit (expense). The change in income tax benefit (expense) is primarily a result of recording a state income tax benefit in the 2023 period compared to income tax expense in the 2022 period.
Equity in (losses) earnings of an investee. Equity in (losses) earnings of an investee represents our proportionate share of the earnings (losses) of Sonesta.
Net income (loss). Our net income (loss) and net income (loss) per common share (basic and diluted) each changed in the 2023 period compared to the 2022 period primarily due to the revenue and expense changes discussed above.
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Liquidity and Capital Resources (dollar amounts in thousands, except share amounts)
Our Managers and Tenants
As of September 30, 2023, all 221 of our hotels were managed by four hotel operating companies. Our 761 net lease properties were leased to 174 tenants as of September 30, 2023. 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 September 30, 2023, our hotel managers included Sonesta (195 hotels), Hyatt (17 hotels), Radisson (eight hotels), and IHG (one hotel). TA is our largest tenant (176 travel centers).
We reduced reserves for uncollectable amounts and increased rental income by $1,041 for the three months ended September 30, 2023 and increased reserves and reduced rental income by $4,312 for the nine months ended September 30, 2023, based on our assessment of the collectability of rents. We increased our reserves for uncollectable amounts and reduced rental income by $352 for the three months ended September 30, 2022 and reduced our reserves and increased rental income by $315 for the nine months ended September 30, 2022, based on our assessment of the collectability of rents. We had reserves for uncollectable rents of $2,825 and $7,697 as of September 30, 2023 and December 31, 2022, respectively, included in other assets in our condensed consolidated balance sheets.
We define net lease coverage as earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, divided by the annual minimum rent due to us weighted by the minimum rent of the property to total minimum rents of the net lease portfolio. Tenants with no minimum rent required under the lease are excluded. EBITDAR amounts used to determine rent coverage are generally for the latest twelve-month period, 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. In instances where we do not have tenant financial information, we calculate an implied coverage ratio for the period based on other tenants with available financial statements operating the same brand or within the same industry. As a result, we believe using this implied coverage metric provides a more reasonable estimated representation of recent operating results and financial condition for those tenants. Our net lease properties generated coverage of 2.72x and 2.88x as of September 30, 2023 and 2022, 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 that these sources of funds will be sufficient to meet our operating expenses and capital expenditures, pay debt service obligations and make distributions to our shareholders for the next twelve months and for the foreseeable future thereafter. However, as a result of economic conditions, including if the U.S. enters an economic recession, or otherwise, our managers and tenants may become unable or unwilling to pay owner’s priority returns and rents to us when due, and, as a result, our cash flows and net income would decline and we may need to reduce the amount of, or even eliminate, our distributions to common shareholders.
The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands):
Nine Months Ended September 30,
2023 2022
Cash and cash equivalents and restricted cash at the beginning of the period $ 45,420 $ 947,418
Net cash provided by (used in):
Operating activities 401,958 147,114
Investing activities 50,966 396,980
Financing activities (62,816) (1,413,375)
Cash and cash equivalents and restricted cash at the end of the period $ 435,528 $ 78,137
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The increase in cash provided by operating activities for the 2023 period compared to the prior year period is primarily due to $188,000 of prepaid rent received from TA, higher returns earned from our hotel portfolio and lower interest expense in the 2023 period. The decrease in cash flows provided by investing activities in the 2023 period compared to the 2022 period is primarily due to lower proceeds from the sale of real estate, our hotel acquisition and increased real estate improvements during the 2023 period, partially offset by proceeds from the TA Merger. The decrease in cash flows used in financing activities in the 2023 period compared to the prior year is primarily due to higher debt repayments made in the 2022 period, partially offset by proceeds from our net lease mortgage notes issuance and increased distributions during the 2023 period.
We maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 221 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 with funding for capital improvements to our hotels in excess of amounts otherwise available in escrowed FF&E reserves or when no FF&E reserves are available. During the nine months ended September 30, 2023, we funded $122,667 for capital improvements in excess of FF&E reserves available to our hotels. We currently expect to fund $75,000 for capital improvements to certain hotels during the last three months of 2023 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 nine months ended September 30, 2023, certain of our hotel managers deposited $5,487 to these accounts and spent $3,941 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of September 30, 2023, there was $8,534 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 and tenants under these leases are generally required to maintain the leased properties, including structural and non-structural components. We may provide tenant improvement allowances to tenants in certain cases or may develop sites with the intent to lease them. During the nine months ended September 30, 2023, we funded $3,323 for capital improvements to our net lease properties. As of September 30, 2023, we had $2,692 of unspent leasing-related obligations related to certain net lease tenants.
During the nine months ended September 30, 2023, we sold 18 hotels with 2,526 rooms for an aggregate sales price of $157,230, excluding closing costs and four net lease properties with 41,517 square feet for an aggregate sales price of $4,345, excluding closing costs. From October 1, 2023 through November 3, 2023, we sold two net lease properties with an aggregate 9,537 square feet and carrying value of $1,594 for an aggregate sales price of $1,190. As of November 3, 2023, we have entered into agreements to sell six net lease properties with an aggregate 82,159 square feet for an aggregate sales price of $6,093. These pending sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales, that these sales will not be delayed or that the terms will not change. We continue to market 11 net lease properties with an aggregate 162,676 square feet for sale. We expect to use the proceeds from the asset sales for general business purposes, which may include the repayment of debt.
BP completed its acquisition of TA on May 15, 2023. We received $379,293 in cash as part of this transaction, including $188,000 in prepaid rent from TA, $101,892 in merger consideration for the outstanding TA common shares we owned, and $89,400 for certain tradenames and trademarks associated with TA’s business we owned.
During the nine months ended September 30, 2023, we purchased one hotel in Miami, FL with 250 rooms for a sales price of $165,400, excluding closing costs using cash on hand.
During the nine months ended September 30, 2023, we declared and paid regular quarterly distributions to common shareholders using cash on hand as follows:
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Declaration Date Record Date Paid Date Dividend Per Common Share Total Distributions
January 12, 2023 January 23, 2023 February 16, 2023 $ 0.20 $ 33,090
April 13, 2023 April 24, 2023 May 18, 2023 0.20 33,089
July 13, 2023 July 24, 2023 August 17, 2023 0.20 33,096
$ 0.60 $ 99,275
On October 12, 2023, we declared a regular quarterly distribution to common shareholders of record as of October 23, 2023 of $0.20 per share, or approximately $33,096. We expect to pay this amount on or about November 16, 2023.
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 $650,000 secured revolving credit facility which is governed by the amended and restated credit agreement we entered into on June 29, 2023. This new facility replaced our prior $800,000 secured revolving credit facility, which had a maturity date of July 15, 2023, and is available for general business purposes, including acquisitions. We can borrow, repay, and reborrow funds available under the new facility until maturity and no principal repayments are due until maturity. The maturity date of the new facility is June 29, 2027, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to further extend the stated maturity date of the new facility by two additional six-month periods.
Interest payable on drawings under the new facility is based on SOFR plus a margin ranging from 1.50% to 3.00% based on our leverage ratio, as defined in our credit agreement, which was 2.50% as of September 30, 2023. Our obligations under the new facility are secured by 69 properties, including 66 hotels and three net lease properties, with an undepreciated book value of $1,544,227 as of September 30, 2023. We also pay unused commitment fees of 20 to 30 basis points per annum on the total amount of lending commitments under our revolving credit facility based on amounts outstanding. As of September 30, 2023, the annual interest rate payable on borrowings under our revolving credit facility was 7.93%. We had no borrowings outstanding under either the new or prior facility for either the three or nine months ended September 30, 2023. The weighted average annual interest rate for borrowings under the prior facility was 4.37% and 3.36%, respectively, for the three and nine months ended September 30, 2022.
Our term debt maturities (other than our revolving credit facility) as of September 30, 2023 were as follows:
Type Year Maturity
Senior unsecured notes 2024 $ 1,175,000
Senior unsecured notes 2025 1,150,000
Senior unsecured notes 2026 800,000
Senior unsecured notes 2027 850,000
Senior unsecured notes 2028 400,000
Net lease mortgage notes 2028 609,058
Senior unsecured notes 2029 425,000
Senior unsecured notes 2030 400,000
$ 5,809,058
None of our unsecured debt obligations require principal or sinking fund payments prior to their maturity dates. Our mortgage notes require monthly principal payments as described in Part I, Item 3 of this Quarterly Report on Form 10-Q.
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On February 10, 2023, the Issuer issued $610,200 in aggregate principal amount of net lease mortgage notes. The notes are non-recourse and secured by the assets of the Issuer, which includes 308 net lease properties with annual minimum rents of $65,137 and a gross book carrying value of $754,966 as of September 30, 2023. The net proceeds from this issuance were $550,564 after initial purchaser discounts and offering costs. We simultaneously announced the early redemption of our outstanding 4.50% Senior Notes due in 2023 at a redemption price equal to the principal amount of $500,000, plus accrued and unpaid interest to, but excluding the date of redemption. This redemption occurred March 8, 2023 using the proceeds from the net lease mortgage notes described.
The net lease mortgage notes are summarized as follows:
Note Class S&P Rating Principal Outstanding as of September 30, 2023
Coupon Rate Term Maturity
Class A AAA $ 304,110 5.15% 5 years February 2028
Class B AA 172,748 5.55% 5 years February 2028
Class C A 132,200 6.70% 5 years February 2028
Total / weighted average $ 609,058 5.60%
We currently expect to use cash on hand, the cash flows from our operations, borrowings under our revolving credit facility, net proceeds from any asset sales and net proceeds of offerings of equity or the incurrence of debt 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, 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. 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 depend 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 impacts of the current, and possibly future, inflationary conditions, increasing or sustained high interest rates and a possible economic 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.
Debt Covenants
Our debt obligations at September 30, 2023 consisted of $5,200,000 of publicly issued term debt and $609,058 aggregate principal amounts of mortgage notes secured by 308 net lease properties. For further information regarding our indebtedness, see Note 7 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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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. Our credit agreement, net lease mortgage notes 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 September 30, 2023, we believe we were in compliance with all of the covenants under our indentures and their supplements, net lease mortgage notes and our credit agreement.
Senior Notes Indenture Covenants
The following table summarizes the results of the financial tests required by the indentures and related supplements for our senior unsecured notes as of September 30, 2023:
Actual Results Covenant Requirement
Total debt / adjusted total assets 53.2% Maximum of 60%
Secured debt / adjusted total assets 5.6% Maximum of 40%
Consolidated income available for debt service / debt service 2.02x Minimum of 1.50x
Total unencumbered assets / unsecured debt 163.2% Minimum 150%
As of September 30, 2023, adjusted total assets for covenant purposes as defined in our unsecured senior notes indentures were $10,923,462 and assets encumbered under our revolving credit facility or serving as collateral for our net lease mortgage notes represented $2,438,949 of adjusted total assets, as defined in our unsecured senior notes indentures. Our unencumbered hotels, travel centers, other net lease properties and other corporate assets represent $4,528,912, $2,484,633, $924,907 and $546,061 of adjusted total assets, respectively.
The following table presents the calculation of adjusted total assets to total assets in accordance with GAAP:
Total assets
$ 7,604,311
Plus: accumulated depreciation
3,129,087
Plus: impairment and other adjustments to reflect original cost of real estate assets
416,879
Less: accounts receivable and intangibles
(226,815)
Adjusted total assets
$ 10,923,462
Our ability to incur additional debt is subject to meeting the required covenant levels and subject to the provisions of our credit agreement and senior notes indentures.
Acceleration and Cross-Default
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. 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.
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 $3,950,000 of senior unsecured notes do not have the benefit of any guarantees.
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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 Investor Services, or Moody’s, or BBB (or the equivalent) by Standard & Poor’s Ratings Services, or S&P, or if Moody’s or S&P ceases to rate the notes for reasons outside of our control, the equivalent investment grade rating from any other rating agency and (b) no default or event of default has occurred and is continuing under the indenture. Our non-guarantor subsidiaries are separate and distinct legal entities and will have no obligation, contingent or otherwise, to pay any amounts due on these notes or the guarantees, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of these notes to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and any preferred equity holders. As a result, these notes and the related guarantees will be structurally subordinated to all indebtedness, guarantees and other liabilities of our subsidiaries that do not guarantee these notes, including guarantees of or pledges under other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity.
The following table presents summarized financial information for us and the subsidiary guarantors, on a combined basis after elimination of (i) intercompany transactions and balances among us and the subsidiary guarantors and (ii) equity in earnings from, and any investments in, any of our non-guarantor subsidiaries:
As of September 30, 2023 As of December 31, 2022
Real estate properties, net (1)
$ 4,882,719 $ 5,316,318
Intercompany balances (2)
388,183 580,684
Other assets, net 771,009 723,092
Indebtedness, net $ 5,164,302 $ 5,655,530
Other liabilities 535,402 366,936
Nine Months Ended
September 30, 2023
Revenues
$ 997,930
Expenses
1,032,657
Net loss
(34,727)
(1) Real estate properties, net as of September 30, 2023 includes $684,728 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.
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Property and Operating Statistics (dollar amounts in thousands, except hotel statistics)
As of September 30, 2023, 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 distinct 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 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.
Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Three Months Ended
September 30, Three Months Ended
September 30, Three Months Ended
September 30,
Brand 2023 2022 Change 2023 2022 Change 2023 2022 Change
Sonesta Hotels & Resorts Full Service 22 7,149 67.9 % 63.2 % 4.7 pts $ 153.34 $ 154.00 (0.4) % $ 104.12 $ 97.33 7.0 %
Royal Sonesta Full Service 17 5,663 62.3 % 60.3 % 2.0 pts 230.44 241.75 (4.7) % 143.56 145.78 (1.5) %
Radisson Hotel Full Service 5 1,149 64.1 % 65.8 % (1.7) pts 148.18 138.88 6.7 % 94.98 91.38 3.9 %
Crowne Plaza Full Service 1 495 62.5 % 59.0 % 3.5 pts 142.56 135.27 5.4 % 89.10 79.81 11.6 %
Country Inn and Suites Full Service 3 430 76.4 % 74.1 % 2.3 pts 155.66 160.31 (2.9) % 118.92 118.79 0.1 %
Full Service Total/Average 48 14,886 65.5 % 62.4 % 3.1 pts 180.63 184.93 (2.3) % 118.31 115.40 2.5 %
Sonesta Select Select Service 44 6,427 59.1 % 58.0 % 1.1 pts 121.79 124.46 (2.1) % 71.98 72.19 (0.3) %
Hyatt Place Select Service 17 2,107 70.8 % 71.1 % (0.3) pts 121.65 121.30 0.3 % 86.13 86.24 (0.1) %
Select Service Total/Average 61 8,534 62.0 % 61.2 % 0.8 pts 121.75 123.55 (1.5) % 75.49 75.61 (0.2) %
Sonesta ES Suites Extended Stay 60 7,643 72.6 % 72.5 % 0.1 pts 129.21 130.19 (0.8) % 93.81 94.39 (0.6) %
Sonesta Simply Suites Extended Stay 50 6,366 72.1 % 75.5 % (3.4) pts 90.56 88.70 2.1 % 65.29 66.97 (2.5) %
Extended Stay Total/Average 110 14,009 72.4 % 73.8 % (1.4) pts 111.73 111.07 0.6 % 80.89 81.97 (1.3) %
Comparable Hotels Total/Average 219 37,429 67.3 % 66.4 % 0.9 pts $ 140.47 $ 141.23 (0.5) % $ 94.54 $ 93.78 0.8 %
Comparable Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Nine Months Ended
September 30, Nine Months Ended
September 30, Nine Months Ended
September 30,
Brand 2023 2022 Change 2023 2022 Change 2023 2022 Change
Sonesta Hotels & Resorts Full Service 22 7,149 64.4 % 61.0 % 3.4 pts $ 154.07 $ 152.54 1.0 % $ 99.22 $ 93.05 6.6 %
Royal Sonesta Full Service 17 5,663 57.7 % 52.5 % 5.2 pts 238.60 236.17 1.0 % 137.67 123.99 11.0 %
Radisson Hotel Full Service 5 1,149 64.8 % 64.5 % 0.3 pts 148.68 134.84 10.3 % 96.34 86.97 10.8 %
Crowne Plaza Full Service 1 495 63.5 % 54.6 % 8.9 pts 140.97 130.66 7.9 % 89.52 71.34 25.5 %
Country Inn and Suites Full Service 3 430 69.0 % 65.5 % 3.5 pts 139.86 138.52 1.0 % 96.50 90.73 6.4 %
Full Service Total/Average 48 14,886 62.0 % 57.9 % 4.1 pts 182.90 178.95 2.2 % 113.40 103.61 9.4 %
Sonesta Select Select Service 44 6,427 56.2 % 52.0 % 4.2 pts 119.71 118.60 0.9 % 67.28 61.67 9.1 %
Hyatt Place Select Service 17 2,107 69.7 % 68.1 % 1.6 pts 124.17 118.99 4.4 % 86.55 81.03 6.8 %
Select Service Total/Average 61 8,534 59.5 % 56.0 % 3.5 pts 121.00 118.72 1.9 % 72.00 66.48 8.3 %
Sonesta ES Suites Extended Stay 60 7,643 69.2 % 70.8 % (1.6) pts 129.69 124.30 4.3 % 89.75 88.00 2.0 %
Sonesta Simply Suites Extended Stay 50 6,366 70.1 % 72.7 % (2.6) pts 90.65 84.96 6.7 % 63.55 61.77 2.9 %
Extended Stay Total/Average 110 14,009 69.6 % 71.7 % (2.1) pts 111.91 106.32 5.3 % 77.89 76.23 2.2 %
Comparable Hotels Total/Average 219 37,429 64.3 % 62.6 % 1.7 pts $ 140.97 $ 135.32 4.2 % $ 90.64 $ 84.71 7.0 %
* 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 nine months ended September 30, 2023 and 2022, our comparable results exclude two hotels from our comparable results. One of the hotels was not owned for the entirety of the periods and the other suspended operations during part of the periods presented.
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All Hotels*
No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Three Months Ended
September 30, Three Months Ended
September 30, Three Months Ended
September 30,
Brand 2023 2022 Change 2023 2022 Change 2023 2022 Change
Sonesta Hotels & Resorts Full Service 23 7,399 67.8 % 63.4 % 4.4 pts $154.46 $157.15 (1.7) % $ 104.72 $ 99.63 5.1 %
Royal Sonesta Full Service 17 5,663 62.3 % 60.3 % 2.0 pts 230.44 241.75 (4.7) % 143.56 145.78 (1.5) %
Radisson Hotel Full Service 5 1,149 64.1 % 65.8 % (1.7) pts 148.18 138.88 6.7 % 94.98 91.38 3.9 %
Crowne Plaza Full Service 1 495 62.5 % 59.0 % 3.5 pts 142.56 135.27 5.4 % 89.10 79.81 11.6 %
Country Inn and Suites Full Service 3 430 76.4 % 74.1 % 2.3 pts 155.66 160.31 (2.9) % 118.92 118.79 0.1 %
Full Service Total/Average 49 15,136 65.5 % 62.6 % 2.9 pts 180.76 185.91 (2.8) % 118.40 116.38 1.7 %
Sonesta Select Select Service 44 6,427 59.1 % 58.0 % 1.1 pts 121.79 124.46 (2.1) % 71.98 72.19 (0.3) %
Hyatt Place Select Service 17 2,107 70.8 % 71.1 % (0.3) pts 121.65 121.30 0.3 % 86.13 86.24 (0.1) %
Select Service Total/Average 61 8,534 62.0 % 61.2 % 0.8 pts 121.75 123.55 (1.5) % 75.49 75.61 (0.2) %
Simply ES Suites Extended Stay 60 7,643 72.6 % 72.5 % 0.1 pts 129.21 130.19 (0.8) % 93.81 94.39 (0.6) %
Sonesta Simply Suites Extended Stay 51 6,464 71.4 % 74.7 % (3.3) pts 90.56 88.70 2.1 % 64.66 66.26 (2.4) %
Extended Stay Total/Average 111 14,107 72.1 % 73.5 % (1.4) pts 111.73 111.07 0.6 % 80.56 81.64 (1.3) %
All Hotels Total/Average 221 37,777 67.2 % 66.3 % 0.9 pts $140.77 $141.90 (0.8) % $ 94.60 $ 94.08 0.6 %
All Hotels* No. of Rooms or Suites Occupancy ADR RevPAR
Service Level No. of Hotels Nine Months Ended
September 30, Nine Months Ended
September 30, Nine Months Ended
September 30,
Brand 2023 2022 Change 2023 2022 Change 2023 2022 Change
Sonesta Hotels & Resorts Full Service 23 7,399 64.4 % 61.0 % 3.4 pts $159.13 $160.40 (0.8) % $ 102.48 $ 97.84 4.7 %
Royal Sonesta Full Service 17 5,663 57.7 % 52.5 % 5.2 pts 238.60 236.17 1.0 % 137.67 123.99 11.0 %
Radisson Hotel Full Service 5 1,149 64.8 % 64.5 % 0.3 pts 148.68 134.84 10.3 % 96.34 86.97 10.8 %
Crowne Plaza Full Service 1 495 63.5 % 54.6 % 8.9 pts 140.97 130.66 7.9 % 89.52 71.34 25.5 %
Country Inn and Suites Full Service 3 430 69.0 % 65.5 % 3.5 pts 139.86 138.52 1.0 % 96.50 90.73 6.4 %
Full Service Total/Average 49 15,136 62.0 % 58.0 % 4.0 pts 184.96 182.46 1.4 % 114.68 105.83 8.4 %
Sonesta Select Select Service 44 6,427 56.2 % 52.0 % 4.2 pts 119.71 118.60 0.9 % 67.28 61.67 9.1 %
Hyatt Place Select Service 17 2,107 69.7 % 68.1 % 1.6 pts 124.17 118.99 4.4 % 86.55 81.03 6.8 %
Select Service Total/Average 61 8,534 59.5 % 56.0 % 3.5 pts 121.00 118.72 1.9 % 72.00 66.48 8.3 %
Simply ES Suites Extended Stay 60 7,643 69.2 % 70.8 % (1.6) pts 129.69 124.30 4.3 % 89.75 88.00 2.0 %
Sonesta Simply Suites Extended Stay 51 6,464 69.4 % 71.9 % (2.5) pts 90.65 84.96 6.7 % 62.91 61.09 3.0 %
Extended Stay Total/Average 111 14,107 69.3 % 71.3 % (2.0) pts 111.91 106.32 5.3 % 77.55 75.81 2.3 %
All Hotels Total/Average 221 37,777 64.2 % 62.5 % 1.7 pts $142.05 $136.91 3.8 % $ 91.20 $ 85.57 6.6 %
* Results of all hotels owned as of September 30, 2023. Excludes the results of hotels sold during the periods presented and includes data for one hotel for periods prior to when we acquired it.
Net Lease Portfolio
As of September 30, 2023, our net lease properties were 95.8% occupied and we had 32 properties available for lease. During the nine months ended September 30, 2023, we entered into lease renewals for 5,592,790 rentable square feet (206 properties) at weighted (by rentable square feet) average rents that were 9.5% above the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 10.2 years. We also entered into new leases for 111,109 rentable square feet (three properties) for rent that was 32.1% above the prior rent for the same space. The weighted (by rentable square feet) average lease term for these leases was 10.3 years.
Generally, lease agreements with our net lease tenants require payment of minimum rent to us. Certain of these minimum rent payment amounts are secured by full or limited guarantees. Annualized minimum rent represents cash amounts and excludes adjustments, if any, necessary to record scheduled rent changes on a straight line basis or any expense reimbursement. Annualized minimum rent excludes the impact of rents prepaid by TA.
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As of September 30, 2023, our net lease tenants operated across 135 brands. The following table identifies the top ten brands based on annualized minimum rent.
Brand No. of Properties Investment (1)
Percent of Total Investment Annualized Minimum Rent (2)
Percent of Total Annualized
Minimum Rent Coverage (3)
1. TravelCenters of America Inc. 132 $ 2,258,977 44.5 % $ 173,403 46.3 % 2.26 x (5)
2. Petro Stopping Centers 44 1,015,156 20.0 % 80,597 21.5 % 2.26 x (5)
3. The Great Escape 14 98,242 1.9 % 7,711 2.1 % 6.20 x
4. Life Time Fitness 3 92,617 1.8 % 5,770 1.5 % 2.35 x
5. AMC Theatres 8 77,738 1.5 % 4,713 1.3 % 1.46 x
6. Buehler's Fresh Foods 5 76,469 1.5 % 5,657 1.5 % 3.08 x
7. Heartland Dental 59 61,120 1.2 % 4,699 1.3 % 4.24 x
8. Norms 10 53,673 1.1 % 3,693 1.0 % 3.35 x
9. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.32 x
10. Pizza Hut 40 45,285 0.9 % 3,401 0.9 % 2.35 x
Other (4)
423 1,247,146 24.6 % 81,084 21.6 % 3.74 x
Total 761 $ 5,076,147 100.0 % $ 374,445 100.0 % 2.72 x
(1) Represents historical cost of our properties plus capital improvements funded by us less impairment write-downs, if any.
(2) See page 34 for our definition of annualized minimum rent.
(3) See page 27 for our definition of coverage.
(4) Consists of 125 distinct brands with an average investment of $2,948 and average annual minimum rent of $192 per property.
(5) Rent coverage information provided by tenant is for all 176 sites on a consolidated basis and is as of September 30, 2023.
As of September 30, 2023, our top ten net lease tenants based on annualized minimum rent are listed below.
Tenant Brand Affiliation No. of Properties Investment (1)
Percent of Total Investment Annualized
Minimum Rent (2)
Percent of Total Annualized
Minimum Rent Coverage (3)
1. TravelCenters of America Inc. TravelCenters of America / Petro Stopping Centers 176 $ 3,274,133 64.5 % $ 254,000 67.8 % 2.26x (4)
2. Universal Pool Co., Inc. The Great Escape 14 98,242 1.9 % 7,711 2.1 % 6.20x
3. Healthy Way of Life II, LLC Life Time Fitness 3 92,617 1.8 % 5,770 1.5 % 2.35x
4. American Multi-Cinema, Inc. AMC Theatres 8 77,738 1.5 % 4,713 1.3 % 1.46x
5. Styx Acquisition, LLC Buehler's Fresh Foods 5 76,469 1.5 % 5,657 1.5 % 3.08x
6. Professional Resource Development, Inc. Heartland Dental 59 61,120 1.2 % 4,699 1.3 % 4.24x
7. Norms Restaurants, LLC Norms 10 53,673 1.1 % 3,693 1.0 % 3.35x
8. Express Oil Change, L.L.C. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.32x
9. Pilot Travel Centers LLC Flying J Travel Plaza 3 41,681 0.8 % 3,247 0.9 % 6.40x
10. Capitol Racquet Sports, Inc. Courthouse Athletic Club 4 39,688 0.8 % 1,906 0.5 % 1.25x
Subtotal, top 10 305 3,865,085 76.1 % 295,113 78.9 % 2.48x
11. Other (5)
Various 456 1,211,062 23.9 % 79,332 21.1 % 3.63x
Total 761 $ 5,076,147 100.0 % $ 374,445 100.0 % 2.72x
(1) Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.
(2) See page 34 for our definition of annualized minimum rent.
(3) See page 27 for our definition of coverage.
(4) TA is our largest tenant. We lease 176 travel centers (132 under the TravelCenters of America brand and 44 under the Petro Stopping Centers brand) to a subsidiary of TA under five master leases that expire in 2033. TA has five renewal options for 10 years each for all of the travel centers. BP Corporation North America Inc. guarantees payments under each of the five master leases, limited by an initial aggregate cap of approximately $3,040,000. Annualized minimum rent excludes the impact of rents prepaid by TA. Rent coverage was 2.17x, 2.31x, 2.32x, 2.42x and 2.15x, for our TA leases no. 1, no. 2, no. 3, no. 4 and no. 5, respectively. Rent coverage is as of September 30, 2023.
(5) Consists of 164 tenants with an average investment of $2,656 and an average annual minimum rent of $174 per property.
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As of September 30, 2023, our net lease tenants operated across 21 distinct industries within the service oriented retail sector of the U.S. economy.
Industry No. of Properties Investment (1)
Percent of Total Investment Annualized
Minimum Rent (2)
Percent of Total Annualized
Minimum Rent Coverage (3)
Travel Centers 179 $ 3,315,814 65.3% $ 257,247 68.6 % 2.31 x
(4)
Restaurants - Quick Service 209 283,225 5.6% 19,284 5.1 % 2.85 x
Health and Fitness 13 186,362 3.7% 11,148 2.9 % 1.99 x
Restaurants - Casual Dining 51 184,262 3.6% 11,549 3.0 % 2.92 x
Movie Theaters 18 160,060 3.2% 8,941 2.4 % 1.72 x
Grocery Stores 19 129,152 2.5% 9,223 2.5 % 3.65 x
Home Goods and Leisure 20 121,066 2.4% 10,505 2.8 % 5.36 x
Automotive Equipment and Services 64 107,054 2.1% 7,737 2.1 % 4.41 x
Medical, Dental Office 70 103,849 2.0% 7,713 2.1 % 3.72 x
Automotive Dealers 8 62,651 1.2% 4,964 1.3 % 5.84 x
Entertainment 4 61,436 1.2% 4,329 1.2 % 3.35 x
Educational Services 8 54,759 1.1% 4,356 1.2 % 1.63 x
General Merchandise Stores 4 55,457 1.1% 3,929 1.0 % 2.53 x
Building Materials 29 33,464 0.7% 2,832 0.8 % 7.50 x
Car Washes 5 28,658 0.6% 2,214 0.6 % 3.07 x
Miscellaneous Manufacturing 5 24,148 0.5% 1,711 0.5 % 15.25 x
Drug Stores and Pharmacies 7 19,251 0.4% 1,245 0.3 % 0.55 x
Sporting Goods 3 17,742 0.3% 1,092 0.3 % 5.47 x
Legal Services 5 11,362 0.2% 1,054 0.3 % 5.49 x
Dollar Stores 3 2,971 0.1% 189 0.1 % 2.54 x
Other 5 27,244 0.5% 3,183 0.9 % 5.70 x
Vacant 32 86,160 1.7% — — % — x
Total 761 $ 5,076,147 100.0% $ 374,445 100.0% 2.72 x
(1) Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.
(2) See page 34 for our definition of annualized minimum rent.
(3) See page 27 for our definition of coverage.
(4) Rent coverage for TA is as of September 30, 2023.
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As of September 30, 2023, lease expirations at our net lease properties by year are as follows:
Year (1)
Square Feet Annualized Minimum Rent Expiring (2)
Percent of Total Annualized Minimum Rent Expiring Cumulative Percent of Total Annualized Minimum Rent Expiring
2023 113,612 $ 397 0.1% 0.1%
2024 711,352 8,482 2.3% 2.4%
2025 436,038 8,975 2.4% 4.8%
2026 1,053,914 11,833 3.2% 8.0%
2027 939,989 12,504 3.3% 11.3%
2028 670,157 10,880 2.9% 14.2%
2029 256,618 5,630 1.5% 15.7%
2030 138,590 4,208 1.1% 16.8%
2031 372,186 4,731 1.3% 18.1%
2032 143,954 2,972 0.8% 18.9%
2033 5,349,669 259,674 69.4% 88.3%
2034 307,101 4,953 1.3% 89.6%
2035 1,089,282 18,713 5.0% 94.6%
2036 297,074 5,271 1.4% 96.0%
2037 296,403 2,145 0.6% 96.6%
2038 66,700 1,254 0.3% 96.9%
2039 134,901 3,219 0.9% 97.8%
2040 115,142 2,406 0.6% 98.4%
2041 216,040 2,225 0.6% 99.0%
2042 — — —% 99.0%
2043 57,543 155 —% 99.0%
2044 83,635 125 —% 99.0%
2045 63,490 3,693 1.0% 100.0%
Total 12,913,390 $ 374,445 100%
(1) The year of lease expiration is pursuant to contract terms.
(2) See page 34 for our definition of annualized minimum rent.
As of September 30, 2023, shown below is the list of our top ten states where our net lease properties are located. No other state represents more than 3% of our net lease annual minimum rents.
State Square Feet Annualized Minimum Rent (1)
Percent of Total Annualized Minimum Rent
Texas 1,176,854 $ 33,407 8.9%
Ohio 1,339,304 26,876 7.2%
Illinois 1,010,047 26,990 7.2%
California 399,045 25,260 6.7%
Georgia 590,245 20,377 5.4%
Florida 529,040 16,598 4.4%
Arizona 476,651 16,062 4.3%
Indiana 654,927 15,679 4.2%
Pennsylvania 544,003 15,437 4.1%
New Mexico 246,478 11,602 3.1%
Other 6,463,751 166,157 44.5%
Total 13,430,345 $ 374,445 100.0%
(1) See page 34 for our definition of annualized minimum rent.
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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 5, 6, 9 and 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 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 2022 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.
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 VIEs, 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 2022 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2022.
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 (loss) income as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net (loss) income 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 (loss) income. 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 (loss) income, 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 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, 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 and nine months ended September 30, 2023 and 2022 and reconciliations of net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to those amounts appear in the following table (amounts in thousands, except per share amounts).
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2023 2022 2023 2022
Net (loss) income $ (4,128) $ 7,500 $ 10,544 $ (100,972)
Add (less):
Depreciation and amortization
94,498 101,514 289,108 306,147
Loss on asset impairment, net (1)
512 1,172 9,517 9,720
(Gain) loss on sale of real estate, net (2)
(123) 164 (41,959) (44,235)
Gain on equity securities, net (3)
— (23,056) (48,837) (2,737)
Adjustments to reflect our share of FFO attributable to an investee (4)
972 1,103 3,003 2,674
FFO 91,731 88,397 221,376 170,597
Add (less): Transaction related costs (5)
115 — 1,933 1,920
Loss on early extinguishment of debt (6)
— — 282 791
Adjustments to reflect our share of Normalized FFO attributable to an investee (4)
263 61 791 899
Normalized FFO $ 92,109 $ 88,458 $ 224,382 $ 174,207
Weighted average shares outstanding (basic and diluted) (7)
165,027 164,745 164,933 164,697
Basic and diluted per common share amounts:
Net (loss) income $ (0.03) $ 0.05 $ 0.06 $ (0.61)
FFO $ 0.56 $ 0.54 $ 1.34 $ 1.04
Normalized FFO $ 0.56 $ 0.54 $ 1.36 $ 1.06
Distributions declared per share $ 0.20 $ 0.01 $ 0.60 $ 0.03
(1) We recorded a net loss on asset impairment of $512 to reduce the carrying value of three net lease properties to their estimated fair value less costs to sell during the three months ended September 30, 2023, a net loss on impairment of $9,517 to reduce the carrying value of 16 net lease properties to their estimated fair value less costs to sell during the nine months ended September 30, 2023, a net loss on impairment of $1,172 to reduce the carrying value of three hotels and one net lease property to their estimated fair value less costs to sell during the three months ended September 30, 2022, and a net loss on impairment of $9,720 to reduce the carrying value of 28 hotels and five net lease properties to their estimated fair value less costs to sell during the nine months ended September 30, 2022.
(2) We recorded a $123 net gain on sale of real estate during the three months ended September 30, 2023 in connection with the sale of two net lease properties, a $164 net loss on sale of real estate during the three months ended September 30, 2022 in connection with the sale of five hotels and six net lease properties, a $41,959 net gain on sale of real estate during the nine months ended September 30, 2023 in connection with the sale of 18 hotels and four net lease properties and a $44,235 net gain on sale of real estate during the nine months ended September 30, 2022 in connection with the sale of 61 hotels and 19 net lease properties.
(3) Gain on equity securities, net represents the adjustment required to adjust the carrying value of our former 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 nine months ended September 30, 2023 of $115 and $1,933, respectively, primarily consisted of costs related to hotel rebranding activity, demolition of certain vacant properties, and potential acquisitions. Transaction related costs for the nine months ended September 30, 2022 of $1,920 primarily consisted of costs related to our exploration of possible financing transactions.
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(6) We recorded a $282 loss on early extinguishment of debt during the nine months ended September 30, 2023 related to the write off of unamortized issuance costs relating to our amendment to our revolving credit agreement and the write off of deferred financing costs relating to our repayment of $500,000 of unsecured senior notes due in March 2023. We recorded a $791 loss on early extinguishment of debt during the three and nine months ended September 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.