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 2023 Annual Report.
Overview (dollars in thousands, except per share amounts and per room hotel data)
We are a REIT organized under the laws of the State of Maryland. As of March 31, 2024, we owned 969 properties in 46 states, the District of Columbia, Canada and Puerto Rico.
In response to significant and prolonged increases in inflation, the U.S. Federal Reserve raised interest rates multiple times since the beginning of 2022. Although the U.S. Federal Reserve has indicated that it may lower rates in 2024, we cannot be sure that it will do so, and interest rates may remain at the current high levels or continue to increase. These inflationary pressures in the United States, as well as global geopolitical instability and tensions, have given rise to uncertainty regarding economic downturns or a possible recession and potential 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, including due to supply chain challenges, 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 to decline.
Management Agreements and Leases . At March 31, 2024, we owned 220 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 March 31, 2024, we also owned 749 service-focused retail properties leased to 177 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 net lease operating expenses from our net lease properties.
Hotel Portfolio. As of March 31, 2024, we owned 220 hotels. During the three months ended March 31, 2024, the U.S. hotel industry generally realized increases in revenue per available room, or RevPAR, compared to the same period in 2023. Our hotels produced year over year declines in RevPAR, which we believe is partially a result of disruption and displacement at certain of our hotels undergoing renovation and decreased business activity in areas where some of our hotels are located. 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 March 31,
2024 2023 Change
All Hotels
No. of hotels 220 220 —
No. of rooms or suites 37,697 37,527 170
Occupancy 56.3 % 57.6 % (1.3) pts
ADR $ 139.83 $ 138.73 0.8 %
RevPAR $ 78.69 $ 79.91 (1.5) %
Comparable Hotels Data . We present RevPAR, average daily rate, or ADR, and occupancy for the periods presented on a comparable basis to facilitate comparisons between periods. We define comparable hotels as those that were owned by us and were open and operating for the entirety of the periods being compared. For the three months ended March 31, 2024 and 2023, 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 March 31,
2024 2023 Change
Comparable Hotels
No. of hotels 218 218 —
No. of rooms or suites 37,349 37,349 —
Occupancy 56.2 % 57.8 % (1.6) pts
ADR $ 137.61 $ 138.81 (0.9) %
RevPAR $ 77.35 $ 80.18 (3.5) %
Net Lease Portfolio . As of March 31, 2024, we owned 749 service-focused retail net lease properties with an aggregate of 13,384,219 square feet leased to 177 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rents of $374,941. Our net lease properties were 97.3% occupied as of March 31, 2024 with a weighted (by annual minimum rent) average lease term of 8.7 years, operating under 137 brands in 21 distinct industries. TA is our largest tenant and as of March 31, 2024, leased 175 of our travel centers under five master leases that expire in 2033 and require annual minimum rents of $254,000. In addition, TA receives an annual credit of $25,000 as a result of prepaid rent. BP Corporation North America Inc. guarantees payment under these leases, subject to a cap.
Additional details of our hotel operating agreements and our net lease agreements are set forth in Note 6 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Results of Operations (amounts in thousands, except per share data)
Three Months Ended March 31, 2024, Compared to the Three Months Ended March 31, 2023
Three Months Ended March 31,
2024 2023 Increase (Decrease) % Increase (Decrease)
Revenues:
Hotel operating revenues $ 336,236 $ 334,796 $ 1,440 0.4 %
Rental income 100,014 94,413 5,601 5.9 %
Total revenues 436,250 429,209 7,041 1.6 %
Expenses:
Hotel operating expenses 305,086 299,566 5,520 1.8 %
Net lease operating expenses 4,723 3,905 818 20.9 %
Depreciation and amortization - hotels 55,086 53,385 1,701 3.2 %
Depreciation and amortization - net lease properties 38,021 46,654 (8,633) (18.5) %
Total depreciation and amortization 93,107 100,039 (6,932) (6.9) %
General and administrative 10,506 10,911 (405) (3.7) %
Transaction related costs — 887 (887) n/m
Loss on asset impairment 2,451 — 2,451 n/m
Total expenses 415,873 415,308 565 0.1 %
(Loss) gain on sale of real estate, net (2,963) 41,898 (44,861) (107.1) %
Gain on equity securities, net — 49,430 (49,430) n/m
Interest income 1,962 2,786 (824) (29.6) %
Interest expense (91,414) (81,580) (9,834) 12.1 %
Loss on early extinguishment of debt — (44) 44 n/m
(Loss) income before income tax (expense) benefit and equity in losses of an investee (72,038) 26,391 (98,429) n/m
Income tax (expense) benefit (1,007) 3,780 (4,787) (126.6) %
Equity in losses of an investee (5,338) (4,221) (1,117) 26.5 %
Net (loss) income $ (78,383) $ 25,950 $ (104,333) n/m
Weighted average common shares outstanding (basic and diluted) 165,158 164,867 291 0.2 %
Net (loss) income per common share (basic and diluted) $ (0.48) $ 0.16 $ (0.64) n/m
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.
Hotel operating revenues. The increase in hotel operating revenues is primarily a result of our hotel acquisition ($9,886), partially offset by the sale of certain of our hotels since January 1, 2023 ($7,829) and the displacement and disruption at certain of our hotels undergoing renovation and decreased business activity in areas where some of our hotels are located ($617). Additional operating statistics of our hotels are included in the tables beginning on page 29.
Rental income. The increase in rental income is primarily a result of the amended TA leases that were effective starting in May 2023.
Hotel operating expenses. The increase in hotel operating expenses is primarily a result of our hotel acquisition ($6,575), increases in wages and benefits ($5,470) and property insurance and other operating expenses ($3,843), partially offset by our sale of certain hotels since January 1, 2023 ($10,368).
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Net lease operating expenses. The increase in net lease operating expenses is primarily the result of increased property management fees in the 2024 period ($549) and increases in other operating expenses at certain net lease properties ($574), partially offset by our sale of certain net lease properties since January 1, 2023 ($305).
Depreciation and amortization - hotels. The increase in depreciation and amortization - hotels is primarily a result of depreciation and amortization related to capital expenditures made since January 1, 2023 and our acquisition of a hotel in June 2023 ($4,053), partially offset by certain of our depreciable assets becoming fully depreciated since January 1, 2023 ($2,352).
Depreciation and amortization - net lease properties. The decrease in depreciation and amortization - net lease properties is primarily a result of our sale of certain net lease properties since January 1, 2023 ($5,543) and certain of our depreciable assets becoming fully depreciated ($3,090).
General and administrative. The decrease in general and administrative costs is primarily due to a decrease in business management fees in the 2024 period ($628), partially offset by an increase in other professional fees ($223).
Transaction related costs . Transaction related costs for the 2023 period primarily consisted of costs related to potential acquisitions.
Loss on asset impairment. We recorded a $2,451 loss on asset impairment during the 2024 period to reduce the carrying value of five net lease properties to their estimated fair value less costs to sell.
(Loss) gain on sale of real estate, net. We recorded a $2,963 net loss on sale of real estate during the 2024 period in connection with the sales of three net lease properties and one hotel. We recorded a $41,898 net gain on sale of real estate during the 2023 period in connection with the sale of 18 hotels.
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 decrease in interest income is due to lower average cash balances invested during the 2024 period.
Interest expense. The increase in interest expense is primarily due to higher weighted average interest rates during the 2024 period.
Loss on early extinguishment of debt. We recorded a $44 loss on early extinguishment of debt in the 2023 period in connection with our redemption of certain senior unsecured notes.
Income tax (expense) benefit. The change in income tax (expense) benefit is primarily a result of recording state and foreign tax expense during the 2024 period compared to state and foreign tax benefits in the 2023 period.
Equity in losses of an investee. Equity in losses of an investee represents our proportionate share of the losses of Sonesta.
Net (loss) income. Our net (loss) income and net (loss) income per common share (basic and diluted) each decreased in the 2024 period compared to the 2023 period primarily due to the revenue and expense changes discussed above.
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Liquidity and Capital Resources (dollars in thousands, except per share amounts)
Our Managers and Tenants
As of March 31, 2024, all 220 of our hotels were managed by four hotel operating companies. Our 749 service-focused retail net lease properties were leased to 177 tenants as of March 31, 2024. 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 these parties themselves fund our owner’s priority returns and rents, from their separate resources. As of March 31, 2024, our hotel managers included Sonesta (195 hotels), Hyatt (17 hotels), Radisson (seven hotels), and IHG (one hotel). TA is our largest tenant (175 travel centers).
We recorded reserves for uncollectable amounts and reduced rental income by $665 and $3,540 for the three months ended March 31, 2024 and 2023, respectively, based on our assessment of the collectability of rents. We had reserves for uncollectable rents of $4,101 and $3,436 as of March 31, 2024 and December 31, 2023, respectively, included in other assets, net 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 our tenants. Operating statements furnished by our tenants 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 the financial condition for those tenants. Our net lease properties generated coverage of 2.37x and 2.98x as of March 31, 2024 and 2023, 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 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:
Three Months Ended March 31,
2024 2023
Cash and cash equivalents and restricted cash at the beginning of the period $ 197,830 $ 45,420
Net cash (used in) provided by:
Operating activities (926) 12,373
Investing activities (74,829) 114,252
Financing activities (34,749) 23,791
Cash and cash equivalents and restricted cash at the end of the period $ 87,326 $ 195,836
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The change from cash flow provided by operating activities in the 2023 period to cash flow used in operating activities in the 2024 period is primarily due to higher interest expense and lower hotel returns in the 2024 period. The change from cash flow provided by investing activities in the 2023 period to cash flow used in investing activities in the 2024 period is primarily due to lower proceeds from the sale of real estate and increased real estate improvements during the 2024 period. The change from cash flow provided by financing activities in the 2023 period to cash flow used in financing activities in the 2024 period is primarily due to lower net borrowings in the 2024 period.
We maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 220 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 three months ended March 31, 2024, we funded $67,656 for capital improvements in excess of FF&E reserves available to our hotels. We currently expect to fund $232,000 for capital improvements to certain hotels during the last nine months of 2024 using cash on hand and borrowings under our revolving credit facility.
Various percentages of total sales at some of our hotels are escrowed as FF&E reserves to fund future capital improvements. We own all the FF&E escrows for our hotels. During the three months ended March 31, 2024, certain of our hotel managers deposited $871 to these accounts and spent $1,002 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of March 31, 2024, there was $5,551 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 three months ended March 31, 2024, we funded $511 for capital improvements to our net lease properties. As of March 31, 2024, we had $2,696 of unspent leasing-related obligations related to certain net lease tenants.
During the three months ended March 31, 2024, we sold three net lease properties with an aggregate of 34,849 square feet for an aggregate sales price of $2,932, excluding closing costs, and one hotel with 84 rooms for a sales price of $3,315, excluding closing costs. As of May 3, 2024, we have entered into an agreement to sell one net lease property with 3,381 square feet for a sale price of $1,250, excluding closing costs. This pending sale is subject to conditions; accordingly, we cannot be sure that we will complete this sale, that this sale will not be delayed or that the terms will not change. We continue to market 12 net lease properties with an aggregate of 138,948 square feet for sale. We believe it is more likely than not that the sales of these properties will be completed within one year. In addition, we are also marketing 22 Sonesta hotels with an aggregate of 2,832 rooms for sale, including nine Sonesta ES Suites®, seven Sonesta Select®, five Sonesta Simply Suites® and one Sonesta Hotels & Resorts®. We cannot be sure we will sell any of these hotels or sell them for prices in excess of their carrying values. We expect to use the proceeds from these asset sales for general business purposes, which may include the repayment of debt.
During the three months ended March 31, 2024, we made a $3,392 pro rata capital contribution to Sonesta to support its growth initiatives, including its franchising efforts, and maintain our ownership percentage of Sonesta, using cash on hand.
During the three months ended March 31, 2024, we declared and paid regular quarterly distributions to our common shareholders using cash on hand as follows:
Declaration Date Record Date Paid Date Dividend Per Common Share Total Distributions
January 11, 2024 January 22, 2024 February 15, 2024 $ 0.20 $ 33,154
On April 11, 2024, we declared a regular quarterly distribution to common shareholders of record as of April 22, 2024 of $0.20 per common share, or approximately $33,152. We expect to pay this amount on or about May 16, 2024 using cash on hand.
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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 a credit agreement. This revolving credit facility is available for general business purposes, including acquisitions. We can borrow, repay, and reborrow funds available under the revolving credit facility until maturity and no principal repayments are due until maturity. Availability of borrowings under our credit agreement is subject to ongoing minimum performance and market values of the collateral properties, satisfying certain financial covenants and other credit facility conditions. The maturity date of our revolving credit 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 by two additional six-month periods.
Interest payable on drawings under our revolving credit 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 March 31, 2024. As collateral for all loans and other obligations under the facility, certain of our subsidiaries pledged all of their respective equity interests in certain of our direct and indirect property owning subsidiaries, and our pledged subsidiaries provided first mortgage liens on 69 properties, including 66 hotels and three net lease properties, with an aggregate undepreciated carrying value of $1,612,216 as of March 31, 2024. In addition, in order to maintain compliance with the minimum collateral property availability covenant as defined in the credit agreement, in February 2024, we added three hotels with an aggregate undepreciated carrying value of $115,039 as of March 31, 2024 as collateral under the agreement. 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 March 31, 2024 and 2023, the annual interest rate payable on borrowings under our revolving credit facility was 7.84% and 7.36%, respectively. We had no borrowings outstanding under our revolving credit facility as of March 31, 2024.
Our debt maturities (other than our revolving credit facility) as of March 31, 2024 were as follows:
Year Maturity
2024 $ 1,468
2025 1,151,958
2026 801,958
2027 851,958
2028 1,000,737
2029 425,000
2030 400,000
2031 1,000,000
$ 5,633,079
None of our senior note 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.
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.
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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 March 31, 2024 consisted of $5,025,000 aggregate principal amounts of senior notes and $608,079 aggregate principal amounts of mortgage notes secured by 308 net lease retail properties. For further information regarding our indebtedness, see Note 8 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our publicly and privately issued senior notes are 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, secured senior notes and unsecured senior notes, indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR ceasing to act as our business manager. As of March 31, 2024, 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 secured and unsecured notes as of March 31, 2024:
Actual Results Covenant Requirement
Total debt / adjusted total assets 52.9% Maximum of 60%
Secured debt / adjusted total assets 15.1% Maximum of 40%
Consolidated income available for debt service / debt service 1.78x Minimum of 1.50x
Total unencumbered assets / unsecured debt 177.5% Minimum 150%
As of March 31, 2024, adjusted total assets for covenant purposes as defined in our senior notes indentures were $10,650,576 and assets encumbered under our revolving credit facility, serving as collateral for our net lease mortgage notes or secured senior notes represented $3,508,130 of adjusted total assets, as defined in our senior notes indentures. Our unencumbered hotels, travel centers, other net lease properties and other corporate assets represent $4,478,040, $1,623,324, $829,546 and $211,536 of adjusted total assets, respectively.
The following table presents the calculation of adjusted total assets to total assets in accordance with GAAP:
Total assets $ 7,231,519
Plus: accumulated depreciation 3,237,999
Plus: impairment and other adjustments to reflect original cost of real estate assets 406,582
Less: accounts receivable and intangibles (225,524)
Adjusted total assets $ 10,650,576
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.
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Acceleration and Cross-Default
Our 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, and our indenture entered into in November 2023 and its supplement). 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 7.50% senior notes due 2025, or the 2025 Notes, and our 5.50% 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 and our net lease mortgage notes. 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 $2,775,000 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 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 March 31, 2024 As of December 31, 2023
Real estate properties, net (1)
$ 4,286,630 $ 4,372,682
Other assets, net 446,628 552,196
Indebtedness, net $ 4,964,796 $ 4,961,344
Intercompany balances (2)
729,097 752,146
Other liabilities 386,804 395,433
Three Months Ended March 31, 2024
Revenues
$ 372,287
Expenses
448,451
Net loss
(76,164)
(1) Real estate properties, net as of March 31, 2024 includes $168,727 of properties owned directly by us and not included in the assets of the subsidiary guarantors.
(2) Intercompany balances represent payables to non-guarantor subsidiaries.
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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 6, 10 and 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2023 Annual Report, our definitive Proxy Statement for our 2024 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 2023 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 2023 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2023.
Property and Operating Statistics (dollars in thousands, except hotel statistics)
As of March 31, 2024, we owned and managed a diverse portfolio of hotels and net lease properties across the United States and in Puerto Rico and Canada with 146 distinct brands across 22 industries.
Hotel Portfolio
The following tables summarize the operating statistics, including occupancy, ADR, 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
March 31, Three Months Ended
March 31, Three Months Ended
March 31,
Brand 2024 2023 Change 2024 2023 Change 2024 2023 Change
Sonesta Hotels & Resorts® Full Service 22 7,153 54.5 % 56.9 % (2.4) pts $ 152.67 $ 152.38 0.2 % $ 83.16 $ 86.72 (4.1) %
Royal Sonesta Hotels® Full Service 17 5,663 50.7 % 47.3 % 3.4 pts 236.71 238.96 (0.9) % 120.10 112.96 6.3 %
Radisson® Hotels & Resorts Full Service 5 1,149 60.5 % 65.4 % (4.9) pts 151.08 152.87 (1.2) % 91.40 100.04 (8.6) %
Crowne Plaza® Full Service 1 495 64.6 % 58.4 % 6.2 pts 148.98 139.80 6.6 % 96.17 81.70 17.7 %
Country Inn & Suites® by Radisson Full Service 2 346 60.3 % 59.1 % 1.2 pts 134.86 128.97 4.6 % 81.29 76.18 6.7 %
Full Service Total/Average 47 14,806 54.0 % 54.0 % — pts 182.12 180.68 0.8 % 98.31 97.49 0.8 %
Sonesta Select® Select Service 44 6,427 49.5 % 51.1 % (1.6) pts 114.56 118.88 (3.6) % 56.72 60.78 (6.7) %
Hyatt Place® Select Service 17 2,107 47.5 % 63.9 % (16.4) pts 119.88 124.44 (3.7) % 56.91 79.56 (28.5) %
Select Service Total/Average 61 8,534 49.0 % 54.3 % (5.3) pts 115.83 120.50 (3.9) % 56.77 65.42 (13.2) %
Sonesta ES Suites® Extended Stay 60 7,643 64.3 % 63.5 % 0.8 pts 123.12 128.10 (3.9) % 79.16 81.33 (2.7) %
Sonesta Simply Suites® Extended Stay 50 6,366 61.3 % 64.4 % (3.1) pts 88.10 90.85 (3.0) % 54.02 58.49 (7.6) %
Extended Stay Total/Average 110 14,009 62.9 % 63.9 % (1.0) pts 107.62 111.16 (3.2) % 67.74 71.02 (4.6) %
Comparable Hotels Total/Average 218 37,349 56.2 % 57.8 % (1.6) pts $ 137.61 $ 138.81 (0.9) % $ 77.35 $ 80.18 (3.5) %
* We define comparable hotels as those that were owned by us and were open and operating for the entirety of the periods being compared. For the three months ended March 31, 2024 and 2023, our comparable results exclude two hotels; one of the hotels was not owned for the entirety of the periods presented and the other hotel 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
March 31, Three Months Ended
March 31, Three Months Ended
March 31,
Brand 2024 2023 Change 2024 2023 Change 2024 2023 Change
Sonesta Hotels & Resorts® Full Service 23 7,403 55.4 % 57.2 % (1.8) pts $163.37 $163.09 0.2 % $ 90.45 $ 93.31 (3.1) %
Royal Sonesta Hotels® Full Service 17 5,663 50.7 % 47.3 % 3.4 pts 236.71 238.96 (0.9) % 120.10 112.96 6.3 %
Radisson® Hotels & Resorts Full Service 5 1,149 60.5 % 65.4 % (4.9) pts 151.08 152.87 (1.2) % 91.40 100.04 (8.6) %
Crowne Plaza® Full Service 1 495 64.6 % 58.4 % 6.2 pts 148.98 139.80 6.6 % 96.17 81.70 17.7 %
Country Inn & Suites® by Radisson Full Service 2 346 60.3 % 59.1 % 1.2 pts 134.86 128.97 4.6 % 81.29 76.18 6.7 %
Full Service Total/Average 48 15,056 54.4 % 54.2 % 0.2 pts 186.74 185.60 0.6 % 101.65 100.51 1.1 %
Sonesta Select® Select Service 44 6,427 49.5 % 51.1 % (1.6) pts 114.56 118.88 (3.6) % 56.72 60.78 (6.7) %
Hyatt Place® Select Service 17 2,107 47.5 % 63.9 % (16.4) pts 119.88 124.44 (3.7) % 56.91 79.56 (28.5) %
Select Service Total/Average 61 8,534 49.0 % 54.3 % (5.3) pts 115.83 120.50 (3.9) % 56.77 65.42 (13.2) %
Sonesta ES Suites® Extended Stay 60 7,643 64.3 % 63.5 % 0.8 pts 123.12 128.10 (3.9) % 79.16 81.33 (2.7) %
Sonesta Simply Suites® Extended Stay 51 6,464 60.7 % 63.7 % (3.0) pts 88.10 90.85 (3.0) % 53.50 57.91 (7.6) %
Extended Stay Total/Average 111 14,107 62.7 % 63.6 % (0.9) pts 107.62 111.16 (3.2) % 67.44 70.71 (4.6) %
All Hotels Total/Average 220 37,697 56.3 % 57.7 % (1.4) pts $139.83 $140.96 (0.8) % $ 78.69 $ 81.36 (3.3) %
* Includes results of all hotels owned as of March 31, 2024. 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 March 31, 2024, our net lease properties were 97.3% occupied and we had 20 properties available for lease. During the three months ended March 31, 2024, we entered into lease renewals for 128,375 rentable square feet (eleven properties) at weighted (by rentable square feet) average rents that were 3.6% above the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 6.2 years. We also entered into new leases for 96,114 rentable square feet (two properties) at weighted (by rentable square feet) average rents that were 3.3% below the prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 19.2 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 as used herein 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 also excludes the impact of rents prepaid by TA.
As of March 31, 2024, our net lease tenants operated across 137 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 Percent of Total Annualized
Minimum Rent
Coverage (2)
1. TravelCenters of America Inc. 131 $ 2,254,950 44.7 % $ 173,327 46.2 % 1.75 x (3)
2. Petro Stopping Centers 44 1,015,156 20.1 % 80,673 21.5 % 1.75 x (3)
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. Buehler's Fresh Foods 5 76,469 1.5 % 5,657 1.5 % 3.25 x
6. Heartland Dental 59 61,120 1.2 % 4,699 1.3 % 4.41 x
7. Norms 10 53,673 1.1 % 3,759 1.0 % 3.40 x
8. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.32 x
9. AMC Theatres 5 57,243 1.1 % 3,541 0.9 % 2.17 x
10. Pizza Hut 40 45,285 0.9 % 3,429 0.9 % 2.41 x
Other (4)
415 1,244,809 24.7 % 82,658 22.1 % 3.60 x
Total 749 $ 5,049,288 100.0 % $ 374,941 100.0 % 2.37 x
(1) Represents the historical cost of our properties plus capital improvements funded by us less impairment write-downs, if any.
(2) See page 24 for our definition of coverage.
(3) Rent coverage information provided by tenant is for all 175 sites on a consolidated basis and is as of March 31, 2024.
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(4) Consists of 127 distinct brands with an average investment of $3,000 and average annual minimum rent of $199 per property.
As of March 31, 2024, our top ten net lease tenants based on our annualized minimum rent are listed below:
Tenant Brand Affiliation No. of Properties Investment (1)
Percent of Total Investment Annualized
Minimum Rent Percent of Total Annualized
Minimum Rent Coverage (2)
1. TravelCenters of America Inc. (3)
TravelCenters of America / Petro Stopping Centers 175 $ 3,270,106 64.8 % $ 254,000 67.7 % 1.75x
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. Styx Acquisition, LLC Buehler's Fresh Foods 5 76,469 1.5 % 5,657 1.5 % 3.25x
5. Professional Resource Development, Inc. Heartland Dental 59 61,120 1.2 % 4,699 1.3 % 4.41x
6. Norms Restaurants, LLC Norms 10 53,673 1.1 % 3,759 1.0 % 3.40x
7. Express Oil Change, L.L.C. Express Oil Change 23 49,724 1.0 % 3,717 1.0 % 4.32x
8. American Multi-Cinema, Inc. AMC Theatres 5 57,243 1.1 % 3,541 0.9 % 2.17x
9. Pilot Travel Centers LLC Flying J Travel Plaza 3 41,681 0.8 % 3,279 0.9 % 4.94x
10. Automotive Remarketing Group, Inc. America's Auto Auction 6 38,314 0.8 % 3,216 0.9 % 7.16x
Subtotal, top 10 303 3,839,189 76.0 % 295,349 78.8 % 2.10x
11. Other (4)
Various 446 1,210,099 24.0 % 79,592 21.2 % 3.35x
Total 749 $ 5,049,288 100.0 % $ 374,941 100.0 % 2.37x
(1) Represents the historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.
(2) See page 24 for our definition of coverage.
(3) TA is our largest tenant. We lease 175 travel centers (131 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 under each lease. BP Corporation North America Inc. guarantees payments under each of the five master leases. The aggregate guaranty as of March 31, 2024 was approximately $3,037,475. Annualized minimum rent excludes the impact of rents prepaid by TA. Rent coverage was 1.66x, 1.71x, 1.84x, 1.89x and 1.67x, for our TA leases no. 1, no. 2, no. 3, no. 4 and no. 5, respectively. Rent coverage is as of March 31, 2024.
(4) Consists of 167 tenants with an average investment of $2,713 and an average annual minimum rent of $178 per property.
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As of March 31, 2024, our net lease tenants operated across 21 distinct industries within the service-focused retail sector of the U.S. economy.
Industry No. of Properties Investment (1)
Percent of Total Investment Annualized
Minimum Rent Percent of Total Annualized
Minimum Rent Coverage (2)
1. Travel Centers 178 $ 3,311,787 65.5% $ 257,281 68.5 % 1.79 x (3)
2. Restaurants - Quick Service 211 285,625 5.6% 19,521 5.2 % 3.20 x
3. Restaurants - Casual Dining 53 186,183 3.7% 11,824 3.2 % 3.05 x
4. Health and Fitness 13 186,365 3.7% 11,168 3.0 % 1.70 x
5. Home Goods and Leisure 20 121,128 2.4% 10,649 2.8 % 4.90 x
6. Medical, Dental Office 71 116,991 2.3% 9,560 2.5 % 3.54 x
7. Grocery Stores 19 129,152 2.6% 9,235 2.5 % 3.82 x
8. Movie Theaters 15 139,565 2.8% 8,334 2.2 % 2.28 x
9. Automotive Equipment and Services 64 107,054 2.1% 7,745 2.1 % 4.17 x
10. Automotive Dealers 8 62,656 1.2% 4,964 1.3 % 6.28 x
11. Educational Services 8 54,759 1.1% 4,356 1.2 % 1.44 x
12. Entertainment 4 61,436 1.2% 4,347 1.2 % 2.87 x
13. General Merchandise Stores 4 55,457 1.1% 3,928 1.0 % 3.71 x
14. Building Materials 29 33,747 0.7% 2,853 0.8 % 6.72 x
15. Car Washes 6 30,798 0.6% 2,367 0.6 % 2.87 x
16. Miscellaneous Manufacturing 5 24,156 0.5% 1,702 0.5 % 13.76 x
17. Drug Stores and Pharmacies 6 17,111 0.3% 1,122 0.3 % 1.15 x
18. Legal Services 5 11,362 0.2% 1,075 0.3 % 5.23 x
19. Sporting Goods 3 17,742 0.4% 718 0.2 % 3.57 x
20. Dollar Stores 3 2,971 0.1% 189 0.1 % 2.21 x
21. Other (4)
4 14,296 0.3% 2,003 0.5 % 6.42 x
22. Vacant 20 78,947 1.6% — — % — x
Total 749 $ 5,049,288 100.0% $ 374,941 100.0% 2.37 x
(1) Represents the historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs, if any.
(2) See page 24 for our definition of coverage.
(3) Rent coverage for TA is as of March 31, 2024.
(4) Consists of miscellaneous businesses with an average investment of $3,574 per property.
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As of March 31, 2024, lease expirations at our net lease properties by year are as follows:
Year (1)
Number of Properties Square Feet Annualized Minimum Rent Expiring Percent of Total Annualized Minimum Rent Expiring Cumulative Percent of Total Annualized Minimum Rent Expiring
2024 33 450,219 $ 4,823 1.3% 1.3%
2025 25 442,306 8,549 2.3% 3.6%
2026 111 1,055,461 11,638 3.1% 6.7%
2027 37 942,288 12,582 3.4% 10.1%
2028 26 672,496 10,943 2.9% 13.0%
2029 59 383,243 7,935 2.1% 15.1%
2030 33 157,770 4,835 1.3% 16.4%
2031 20 357,433 4,597 1.2% 17.6%
2032 35 145,509 2,853 0.8% 18.4%
2033 212 5,342,487 259,892 69.4% 87.8%
2034 17 308,491 5,272 1.4% 89.2%
2035 44 1,152,479 19,071 5.1% 94.3%
2036 14 303,206 5,511 1.5% 95.8%
2037 7 296,403 2,711 0.7% 96.5%
2038 7 66,700 1,255 0.3% 96.8%
2039 10 140,780 3,412 0.9% 97.7%
2040 18 115,142 2,406 0.6% 98.3%
2041 6 216,040 2,225 0.6% 98.9%
2042 — — — —% 98.9%
2043 1 57,543 155 —% 98.9%
2044 3 126,116 353 0.1% 99.0%
2045 11 154,966 3,923 1.0% 100.0%
Total 729 12,887,078 $ 374,941 100%
(1) The year of lease expiration is pursuant to contract terms.
As of March 31, 2024, 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 annualized minimum rents.
State Number of Properties Square Feet Annualized Minimum Rent Percent of Total Annualized Minimum Rent
Texas 55 1,168,354 $ 33,447 9.0%
Ohio 39 1,368,924 27,125 7.2%
Illinois 54 976,308 27,068 7.2%
California 22 399,045 25,456 6.8%
Georgia 73 590,245 20,417 5.4%
Arizona 25 476,651 16,786 4.5%
Florida 46 529,040 16,673 4.4%
Indiana 40 620,950 15,731 4.2%
Pennsylvania 28 544,003 15,488 4.1%
New Mexico 16 246,478 11,655 3.1%
Other 351 6,464,221 165,095 44.1%
Total 749 13,384,219 $ 374,941 100.0%
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Non-GAAP Financial Measures
We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, including funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs.
Funds From Operations and Normalized Funds From Operations
We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, excluding any gain or loss on sale of real estate 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.
Our calculations of FFO and Normalized FFO for the three months ended March 31, 2024 and 2023 and reconciliations of net income (loss), 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):
Three Months Ended March 31,
2024 2023
Net (loss) income $ (78,383) $ 25,950
Add (less): Depreciation and amortization 93,107 100,039
Loss on asset impairment 2,451 —
Loss (gain) on sale of real estate, net 2,963 (41,898)
Gain on equity securities, net — (49,430)
Adjustments to reflect our share of FFO attributable to an investee 966 1,233
FFO 21,104 35,894
Add (less): Transaction related costs — 887
Loss on early extinguishment of debt — 44
Adjustments to reflect our share of Normalized FFO attributable to an investee 2 321
Normalized FFO $ 21,106 $ 37,146
Weighted average common shares outstanding (basic and diluted) 165,158 164,867
Basic and diluted per common share amounts:
Net (loss) income $ (0.48) $ 0.16
FFO $ 0.13 $ 0.22
Normalized FFO $ 0.13 $ 0.23
Distributions declared per share $ 0.20 $ 0.20
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