Ashford Hospitality Trust Inc: Form 10-Q for the period ended Sep 30, 2023

FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with the unaudited financial statements and notes thereto appearing elsewhere herein. This report contains forward-looking statements within the meaning of the federal securities laws. Ashford Hospitality Trust, Inc. (the “Company,” “we,” “our” or “us”) cautions investors that any forward-looking statements presented herein, or which management may express orally or in writing from time to time, are based on management’s beliefs and assumptions at that time.

Throughout this Form 10-Q, we make forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature:

• our business and investment strategy;
• anticipated or expected purchases, sales or dispositions of assets;
• our projected operating results;
• completion of any pending transactions;
• our ability to restructure existing property-level indebtedness;
• our ability to secure additional financing to enable us to operate our business;
• our understanding of our competition;
• projected capital expenditures; and
• the impact of technology on our operations and business.

Such forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance taking into account all information currently known to us. These beliefs, assumptions, and expectations can change as a result of many potential events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations, plans, and other objectives may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our securities. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

• factors discussed in our Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (“SEC”) on March 10, 2023, including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties,” as supplemented by our subsequent Quarterly Reports on Form 10-Q and other filings under the Exchange Act;
• rising interest rates and inflation;
• macroeconomic conditions, such as a prolonged period of weak economic growth and volatility in capital markets;
• uncertainty in the banking sector and market volatility due to the failures of Silicon Valley Bank, New York Signature Bank and First Republic Bank;
• extreme weather conditions may cause property damage or interrupt business;
• actions by the lenders of the Oaktree Credit Agreement to foreclose on our assets which are pledged as collateral;
• general volatility of the capital markets and the market price of our common and preferred stock;
• general and economic business conditions affecting the lodging and travel industry;
• changes in our business or investment strategy;
• availability, terms, and deployment of capital;
• unanticipated increases in financing and other costs;
• changes in our industry and the market in which we operate and local economic conditions;
• the degree and nature of our competition;
• actual and potential conflicts of interest with Ashford LLC, Remington Hospitality, Premier, Braemar, our executive officers and our non-independent directors;
• changes in personnel of Ashford LLC or the lack of availability of qualified personnel;
• changes in governmental regulations, accounting rules, tax rates and similar matters;
• legislative and regulatory changes, including changes to the Internal Revenue Code of 1986, as amended (the “Code”), and related rules, regulations and interpretations governing the taxation of real estate investment trusts (“REITs”);
• limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes; and
• future sales and issuances of our common stock or other securities might result in dilution and could cause the price of our common stock to decline.

When considering forward-looking statements, you should keep in mind the matters summarized under “Item 1A. Risk Factors” in Part I of our 2022 Form 10-K filed on March 10, 2023 and this Quarterly Report, and the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Quarterly Report. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Quarterly Report to conform these statements to actual results and performance, except as may be required by applicable law.

EXECUTIVE OVERVIEW

General

As of September 30, 2023, our portfolio consisted of 100 consolidated operating hotel properties which represents 22,316 total rooms. Currently, all of our hotel properties are located in the United States.

Based on our primary business objectives and forecasted operating conditions, our current key priorities and financial strategies include, among other things:

• maintaining significant cash and cash equivalents liquidity;
• opportunistically exchanging preferred stock into common stock;
• disposition of non-core hotel properties;
• pursuing capital market activities to enhance long-term stockholder value;
• implementing selective capital improvements designed to increase profitability;
• implementing effective asset management strategies to minimize operating costs and increase revenues;
• financing or refinancing hotels on competitive terms;
• modifying or extending property-level indebtedness;
• utilizing hedges and derivatives to mitigate risks;
• pursuing opportunistic value-add additions to our hotel portfolio; and
• making other investments or divestitures that our board of directors deems appropriate.

Our current investment strategy is to focus on owning predominantly full-service hotels in the upper upscale segment in domestic markets that have RevPAR generally less than twice the national average. We believe that as supply, demand, and capital market cycles change, we will be able to shift our investment strategy to take advantage of new lodging-related investment opportunities as they may develop. Our board of directors may change our investment strategy at any time without stockholder approval or notice. We will continue to seek ways to benefit from the cyclical nature of the hotel industry.

We are advised by Ashford LLC, a subsidiary of Ashford Inc., through an advisory agreement. All of the hotel properties in our portfolio are currently asset-managed by Ashford LLC. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC.

We do not operate any of our hotel properties directly; instead we employ hotel management companies to operate them for us under management contracts. As of September 30, 2023, Remington Hospitality, a subsidiary of Ashford Inc., managed 68 of our 100 hotel properties. Third-party management companies managed the remaining hotel properties.

Ashford Inc. also provides other products and services to us or our hotel properties through certain entities in which Ashford Inc. has an ownership interest. These products and services include, but are not limited to, design and construction services, debt placement and related services, audio visual services, real estate advisory services, insurance claims services, hypoallergenic premium rooms, broker-dealer and distribution services and mobile key technology.

Mr. Monty J. Bennett is chairman and chief executive officer of Ashford Inc. and, together with his father Mr. Archie Bennett, Jr., as of September 30, 2023, hold a controlling interest in Ashford Inc. The Bennetts owned approximately 610,261 shares of Ashford Inc. common stock, which represented an approximate 19.0% ownership interest in Ashford Inc., and owned 18,758,600 shares of Ashford Inc. Series D Convertible Preferred Stock, which, along with all unpaid accrued and accumulated dividends thereon, was convertible (at a conversion price of $117.50 per share) into an additional approximate 4,154,013 shares of Ashford Inc. common stock, which if converted as of September 30, 2023, would have increased the Bennetts’ ownership interest in Ashford Inc. to 64.7%. The 18,758,600 shares of Series D Convertible Preferred Stock owned by Mr. Monty J. Bennett and Mr. Archie Bennett, Jr. include 360,000 shares owned by trusts.

Recent Developments

The KEYS mortgage loans were entered into on June 13, 2018, each of which had a two-year initial term and five one-year extension options. In order to qualify for a one-year extension in June of 2023, each KEYS loan pool was required to achieve a certain debt yield test. On July 7, 2023, the Company elected not to make the required paydowns to extend its KEYS Pool A loan, KEYS Pool B loan and KEYS Pool F loan, thereby defaulting on such loans. The Company is currently in discussions with its lenders on these loan pools seeking modifications to the extension tests; however, it appears that the most likely outcome will be a consensual transfer of these hotels to the respective lenders. Below is a summary of the hotel properties securing the KEYS Loan Pools A, B and F mortgage loans:

KEYS A Loan Pool

Courtyard Columbus Tipton Lakes – Columbus, IN

Courtyard Old Town – Scottsdale, AZ

Residence Inn Hughes Center – Las Vegas, NV

Residence Inn Phoenix Airport – Phoenix, AZ

Residence Inn San Jose Newark – Newark, CA

SpringHill Suites Manhattan Beach – Hawthorne, CA

SpringHill Suites Plymouth Meeting – Plymouth Meeting, PA

KEYS B Loan Pool

Courtyard Basking Ridge – Basking Ridge, NJ

Courtyard Newark Silicon Valley – Newark, CA

Courtyard Oakland Airport – Oakland, CA

Courtyard Plano Legacy Park – Plano, TX

Residence Inn Plano – Plano, TX

SpringHill Suites BWI Airport – Baltimore, MD

TownePlace Suites Manhattan Beach – Hawthorne, CA

KEYS F Loan Pool

Embassy Suites Flagstaff – Flagstaff, AZ

Embassy Suites Walnut Creek – Walnut Creek, CA

Marriott Bridgewater – Bridgewater, NJ

Marriott Research Triangle Park – Durham, NC

W Atlanta Downtown – Atlanta, GA

On August 1, 2023, the Company sold the WorldQuest Resort in Orlando, Florida for $14.8 million in cash. The sale resulted in a gain of approximately $6.4 million for the three and nine months ended September 30, 2023.

On August 8, 2023, the board of directors of the Company approved amendments to the Company’s Second Amended and Restated Bylaws, as amended.

RESULTS OF OPERATIONS

Key Indicators of Operating Performance

We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel’s contribution to cash flow and its potential to provide attractive long-term total returns. These key indicators include:

• ***Occupancy—***Occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to measure demand at a specific hotel or group of hotels in a given period.
• ***ADR—***ADR means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. We use ADR to assess the pricing levels that we are able to generate.
• ***RevPAR—***RevPAR means revenue per available room and is calculated by multiplying ADR by the average daily occupancy. RevPAR is one of the commonly used measures within the hotel industry to evaluate hotel operations. RevPAR does not include revenues from food and beverage sales or parking, telephone or other non-rooms revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire period). RevPAR improvements attributable to increases in occupancy are generally accompanied by increases in most categories of variable operating costs. RevPAR improvements attributable to increases in ADR are generally accompanied by increases in limited categories of operating costs, such as management fees and franchise fees.

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (including housekeeping services, utilities and room supplies) and could also result in increased other operating department revenue and expense. Changes in ADR typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs.

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only rooms revenue. Rooms revenue is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms.

We also use funds from operations (“FFO”), Adjusted FFO, earnings before interest, taxes, depreciation and amortization for real estate (“EBITDAre”) and Adjusted EBITDAre as measures of the operating performance of our business. See “Non-GAAP Financial Measures.”

The following table summarizes the changes in key line items from our consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands):

All hotel properties held during the three and nine months ended September 30, 2023 and 2022 have been included in our results of operations during the respective periods in which they were held. Based on when a hotel property was acquired or disposed, operating results for certain hotel properties are not comparable for the three and nine months ended September 30, 2023 and 2022. The hotel properties listed below are not comparable hotel properties for the periods indicated and all other hotel properties are considered comparable hotel properties. The following transactions affect the reporting comparability of our consolidated financial statements:

(1) Referred to as “Hotel Dispositions”

(2) Referred to as “Hotel Acquisition”

The following table illustrates the key performance indicators of the 100 operating hotel properties and WorldQuest included in our results of operations:

The following table illustrates the key performance indicators of the 99 hotel properties that were included in our results of operations for the full nine months ended September 30, 2023 and 2022, respectively:

Comparison of the Three Months Ended September 30, 2023 and 2022

Net Income (Loss) Attributable to the Company. Net loss attributable to the Company increased $41.5 million, from $22.1 million for the three months ended September 30, 2022 (the “2022 quarter”) to $63.6 million for the three months ended September 30, 2023 (the “2023 quarter”) as a result of the factors discussed below.

Revenue. Rooms revenue from our hotel properties increased $10.0 million, or 3.8%, to $270.6 million in the 2023 quarter compared to the 2022 quarter as our hotel properties recover from the effects of the COVID-19 pandemic. This increase is attributable to higher rooms revenue of $10.2 million at our comparable hotel properties and $2.3 million from our Hotel Acquisition partially offset by a decrease of $2.5 million from our Hotel Dispositions. Our comparable hotel properties experienced an increase of 2.1% in room rates and a 126 basis point increase in occupancy.

Food and beverage revenue increased $3.6 million, or 7.3%, to $52.2 million. This increase is attributable to higher sales of food and beverage of $3.1 million at our comparable hotel properties and $723,000 from our Hotel Acquisition partially offset by a decrease of $221,000 from our Hotel Dispositions.

Other hotel revenue, which consists mainly of Internet access, parking, and spa revenue, increased $1.4 million, or 7.4%, to $19.5 million. This increase is primarily attributable to an increase of $1.6 million at our comparable hotel properties and $98,000 from our Hotel Acquisition partially offset by a decrease of $384,000 from our Hotel Dispositions. Other non-hotel revenue decreased $59,000, or 8.1%, to $665,000 in the 2023 quarter as compared to the 2022 quarter.

Hotel Operating Expenses. Hotel operating expenses increased $16.4 million, or 7.6%, to $232.6 million. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and management fees. Direct expenses increased $6.7 million in the 2023 quarter as compared to the 2022 quarter, which was primarily comprised of an increase of $6.3 million from our comparable hotel properties and $900,000 from our Hotel Acquisition partially offset by a decrease $500,000 from our Hotel Dispositions. Direct expenses were 31.4% of total hotel revenue for the 2023 quarter and 30.8% for the 2022 quarter. Indirect expenses and management fees increased $9.7 million in the 2023 quarter as compared to the 2022 quarter, which was primarily comprised of an increase of $8.8 million from our comparable hotel properties and $1.2 million from our Hotel Acquisition partially offset by a decrease of $426,000 from our Hotel Dispositions.

Property Taxes, Insurance and Other. Property taxes, insurance and other expense decreased $196,000, or 1.1%, to $17.3 million during the 2023 quarter compared to the 2022 quarter, which was primarily due to a decrease of $69,000 from our comparable hotel properties and a decrease of $158,000 from our Hotel Dispositions partially offset by an increase of $31,000 from our Hotel Acquisition.

Depreciation and Amortization. Depreciation and amortization decreased $3.5 million, or 7.0%, to $46.0 million during the 2023 quarter compared to the 2022 quarter, which was primarily due to a decrease of $3.5 million from our comparable hotel properties primarily related to fully depreciated assets and $122,000 from our Hotel Dispositions partially offset by an increase of $135,000 from our Hotel Acquisition.

Advisory Services Fee. Advisory services fee decreased $118,000, or 0.9%, to $12.4 million in the 2023 quarter compared to the 2022 quarter. The advisory services fee represents fees incurred in connection with the advisory agreement between Ashford Inc. and the Company. In the 2023 quarter, the advisory services fee was comprised of a base advisory fee of $8.1 million, equity-based compensation of $1.4 million associated with equity grants of our common stock, PSUs, LTIP units and Performance LTIP units awarded to the officers and employees of Ashford Inc. and reimbursable expenses of $2.9 million. In the 2022 quarter, the advisory services fee was comprised of a base advisory fee of $8.9 million, equity-based compensation of $1.2 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. and reimbursable expenses of $2.4 million.

Corporate, General and Administrative. Corporate, general and administrative expense changed $4.8 million from a credit of $884,000 in the 2022 quarter to an expense of $3.9 million in the 2023 quarter. The increase was primarily attributable to higher reimbursed operating expenses of Ashford Securities of $4.7 million. During the 2022 quarter, the funding estimate was revised based on the latest capital raise estimates of the aggregate equity offerings raised by Ashford Securities, this resulted in a credit to expense of approximately $3.9 million.

Gain (Loss) on Consolidation of VIE and Disposition of Assets. Gain on consolidation of VIE and disposition of assets increased $6.4 million from $11,000 in the 2022 quarter to $6.4 million in the 2023 quarter. The gain in the 2023 quarter primarily related to the sale of WorldQuest Resort in Orlando, Florida. The loss in the 2022 quarter was primarily related to the sale of the Sheraton Ann Arbor.

Equity in Earnings (Loss) of Unconsolidated Entities. Equity in loss of unconsolidated entities decreased $9,000 during the 2023 quarter compared to the 2022 quarter. The 2023 quarter included equity in loss of $125,000 from OpenKey and $13,000 from an investment in an entity that owns the Meritage Resort and Spa and the Grand Reserve at the Meritage in Napa, California. The 2022 quarter included equity in loss of $147,000 from OpenKey.

Interest Income. Interest income was $1.9 million and $1.6 million for the 2023 quarter and the 2022 quarter, respectively. The increase in interest income in the 2023 quarter was primarily attributable to higher short-term interest rates on excess cash and the Company’s cash management agreement with Ashford LLC.

Other Income (Expense). Other income consisted of miscellaneous income of $34,000 in the 2023 quarter. In the 2022 quarter, we recorded other income of $241,000 of other income.

Interest Expense and Amortization of Discounts and Loan Costs. Interest expense and amortization of discounts and loan costs increased $38.4 million, or 62.9%, to $99.4 million during the 2023 quarter compared to the 2022 quarter. The increase is primarily due to higher interest expense of $28.3 million at our comparable hotel properties primarily due to higher interest rates on our variable rate debt, a $2.5 million increase primarily attributable to the amortization of the Oaktree debt discount and lower credits to interest expense of $8.0 million related to the amortization credit of default interest and late charges recorded on mortgage loans previously in default. These increases were partially offset by a decrease of $399,000 from our Hotel Dispositions. The average SOFR rates for the 2023 quarter and the 2022 quarter were 5.08% and 2.08%, respectively. The average LIBOR rate for the 2022 quarter was 2.47%, respectively.

Write-off of Premiums, Loan Costs and Exit Fees. Write-off of premiums, loan costs and exit fees decreased $115,000 to $1.3 million in the 2023 quarter compared to the 2022 quarter. In the 2023 quarter, we incurred fees of $1.3 million related to loan refinances and modifications. In the 2022 quarter, we wrote off unamortized loan costs of $265,000 and a pro rata write-off of the Oaktree loan discount in the amount of $514,000 upon making a $4.0 million pay down on the Oaktree loan. Additionally, we incurred third-party fees of $599,000.

Realized and Unrealized Gain (Loss) on Derivatives. Realized and unrealized gain (loss) on derivatives changed $12.5 million from a gain of $9.8 million in the 2022 quarter to a loss of $2.7 million in the 2023 quarter. In the 2023 quarter, we recognized an unrealized loss of $12.6 million associated with interest rate caps and an unrealized loss of $436,000 from the revaluation of the embedded debt derivative in the Oaktree Agreement, partially offset by a realized gain of $10.3 million related to payments from counterparties on interest rate caps. In the 2022 quarter, we recognized an unrealized gain of $719,000 from the revaluation of the embedded debt derivative and an unrealized gain of $9.1 million associated with interest rate caps.

Income Tax (Expense) Benefit. Income tax expense decreased $4.5 million, from $4.7 million in the 2022 quarter to $127,000 in the 2023 quarter. This decrease was primarily due to a decrease in the profitability of our Ashford TRS entities in the 2023 quarter compared to the 2022 quarter.

Net (Income) Loss Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net losses of $889,000 in the 2023 quarter and $231,000 in the 2022 quarter. Redeemable noncontrolling interests represented ownership interests of 1.28% and 0.91% in the operating partnership at September 30, 2023 and 2022, respectively.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Net Income (Loss) Attributable to the Company. Net loss attributable to the Company increased $65.4 million from $83.7 million for the nine months ended September 30, 2022 (“2022 period”) to $149.1 million for the nine months ended September 30, 2023 (“2023 period”) as a result of the factors discussed below.

Revenue. Rooms revenue from our hotel properties increased $86.0 million, or 11.8%, to $817.5 million in the 2023 period compared to the 2022 period. This increase is attributable to higher rooms revenue of $85.1 million at our comparable hotel properties as our hotel properties recover from the effects of the COVID-19 pandemic and an increase of $6.5 million from our Hotel Acquisition partially offset by a decrease of $5.6 million from our Hotel Dispositions. Our comparable hotel properties experienced an increase of 4.9% in room rates and an increase of 442 basis points in occupancy.

Food and beverage revenue increased $33.2 million, or 23.8%, to $172.9 million in the 2023 period compared to the 2022 period. This increase is attributable to higher sales of food and beverage of $31.8 million at our comparable hotel properties and an increase of $2.3 million from our Hotel Acquisition partially offset by a decrease of $880,000 from our Hotel Dispositions.

Other hotel revenue, which consists mainly of Internet access, parking, and spa revenue, increased $5.1 million, or 10.2%, to $55.1 million in the 2023 period compared to the 2022 period. This increase is attributable to higher other revenue of $5.5 million from our comparable hotel properties as our hotel properties recover from the effects of the COVID-19 pandemic and an increase of $266,000 from our Hotel Acquisition partially offset by a decrease of $639,000 from our Hotel Dispositions. Other revenue decreased $70,000, or 3.2%, to $2.1 million in the 2023 period compared to the 2022 period.

Hotel Operating Expenses. Hotel operating expenses increased $84.2 million, or 13.7%, to $698.4 million in the 2023 period compared to the 2022 period. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and management fees. Direct expenses increased $41.5 million in the 2023 period compared to the 2022 period, comprised of an increase of $40.7 million from our comparable hotel properties and an increase of $2.6 million from our Hotel Acquisition, partially offset by a decrease of $1.8 million from our Hotel Dispositions. Direct expenses were 30.7% of total hotel revenue for the 2023 period and 30.3% for the 2022 period. Indirect expenses and management fees increased $42.8 million in the 2023 period compared to the 2022 period, comprised of an increase of $41.3 million from our comparable hotel properties and $3.6 million from our Hotel Acquisition partially offset by $2.1 million from our Hotel Dispositions.

Property Taxes, Insurance and Other. Property taxes, insurance and other expense increased $1.6 million or 3.1%, to $52.9 million in the 2023 period compared to the 2022 period, which was primarily due to an increase of $1.9 million from our comparable hotel properties and $108,000 from our Hotel Acquisition partially offset by a decrease of $453,000 from our Hotel Dispositions.

Depreciation and Amortization. Depreciation and amortization decreased $11.5 million or 7.5%, to $141.0 million in the 2023 period compared to the 2022 period, which consisted of lower depreciation of $10.5 million from our comparable hotel properties primarily related to fully depreciated assets and $1.4 million from our Hotel Dispositions partially offset by an increase of $402,000 from our Hotel Acquisition.

Advisory Services Fee. Advisory services fee decreased $526,000, or 1.4%, to $37.7 million in the 2023 period compared to the 2022 period. The advisory services fee represents fees incurred in connection with the advisory agreement between Ashford Inc. and the Company. In the 2023 period, the advisory services fee was comprised of a base advisory fee of $24.8 million, equity-based compensation of $3.6 million associated with equity grants of our common stock, PSUs, LTIP units and Performance LTIP units awarded to the officers and employees of Ashford Inc. and reimbursable expenses of $9.2 million. In the 2022 period, the advisory services fee was comprised of a base advisory fee of $26.2 million, equity-based compensation of $4.6 million associated with equity grants of our common stock and LTIP units awarded to the officers and employees of Ashford Inc. and reimbursable expenses of $7.4 million.

Corporate, General and Administrative. Corporate, general and administrative expense increased $4.7 million, or 69.2%, to $11.4 million in the 2023 period compared to the 2022 period. The increase was primarily attributable to higher reimbursed operating expenses of Ashford Securities of $4.6 million. During the third quarter of 2022, the funding estimate was revised based on the latest capital raise estimates of the aggregate equity offerings raised by Ashford Securities, this resulted in a credit to expense of approximately $3.9 million.

Gain (Loss) on Consolidation of VIE and Disposition of Assets. Gain on consolidation of VIE and disposition of assets increased $7.2 million, from $273,000 in the 2022 period to $7.4 million in the 2023 period. The gain in the 2023 period was primarily related to a $1.1 million gain for the consolidation of the VIE, which is represented by the difference between the fair value of the assets and liabilities recognized, the fair value of the non-controlling interest and the previous carrying value of the Company’s investment in 815 Commerce MM and $6.4 million related to the sale of WorldQuest in Orlando, Florida. The gain in the 2022 period was primarily related to a gain related to the sale of six WorldQuest condominiums.

Equity in Earnings (Loss) of Unconsolidated Entities. Equity in loss of unconsolidated entities was $715,000 in the 2023 period, which consisted of equity in loss of $427,000 from OpenKey and $288,000 in the Napa resort investment and $451,000 in the 2022 period, which consisted of our share of loss in OpenKey.

Interest Income. Interest income was $6.8 million and $2.2 million in the 2023 period and the 2022 period, respectively. The increase in interest income in the 2023 quarter was primarily attributable to higher short-term interest rates on excess cash and the Company’s cash management agreement with Ashford LLC.

Other Income (Expense). Other income decreased $149,000 from $426,000 in the 2022 period to $277,000 in the 2023 period. In the 2023 period we recorded miscellaneous income of $372,000. In the 2022 period, we recorded other income of $426,000.

Interest Expense and Amortization of Discounts and Loan Costs. Interest expense and amortization of discounts and loan costs increased $117.5 million, or 76.8%, to $270.5 million in the 2023 period compared to the 2022 period. The increase was primarily due to a $103.8 million increase in interest expense at our comparable hotel properties primarily due to higher interest rates on our variable rate debt, lower credits to interest expense of $10.9 million related to the amortization credit of default interest and late charges recorded on mortgage loans previously in default and a $4.0 million increase primarily attributable to the amortization of the Oaktree debt discount. These increases were partially offset by a decrease of $1.1 million from our Hotel Dispositions. The average SOFR rates for the 2023 period and the 2022 period were 4.78% and 0.97%, respectively. The average LIBOR rate for the 2022 period was 1.24%.

Write-off of Premiums, Loan Costs and Exit Fees. Write-off of premiums, loan costs and exit fees decreased $443,000 to $2.6 million in the 2023 period compared to the 2022 period. In the 2023 period, we incurred fees of $2.6 million related to loan refinances and modifications. In the 2022 period, we recognized Lismore fees of $643,000 that reflects the amortization over the service period of the Lismore Agreement. We wrote off unamortized loan costs of $265,000 and a pro rata write-off of the Oaktree loan discount in the amount of $514,000 upon making a $4.0 million pay down on the Oaktree loan. Additionally, we incurred fees of $1.7 million related to loan refinances and modifications.

Realized and Unrealized Gain (Loss) on Derivatives. Realized and unrealized gain on derivatives decreased $14.6 million from $19.1 million in the 2022 period to $4.5 million in the 2023 period. In the 2023 period, we recognized a realized gain of $30.8 million related to payments from counterparties on interest rate caps and an unrealized gain of $591,000 from the revaluation of the embedded debt derivative in the Oaktree Agreement, partially offset by an unrealized loss of $26.9 million associated with interest rate caps. In the 2022 period, we recorded an unrealized gain of $4.6 million from the revaluation of the embedded debt derivative in the Oaktree Credit Agreement and an unrealized gain of $14.4 million from interest rate caps.

Income Tax (Expense) Benefit. Income tax expense decreased $7.9 million, from $10.3 million in the 2022 period to $2.4 million in the 2023 period. This decrease was primarily due to a decrease in the profitability of our Ashford TRS entities in the 2023 period compared to the 2022 period.

Net (Income) Loss Attributable to Redeemable Noncontrolling Interests in Operating Partnership. Noncontrolling interests in operating partnership were allocated net losses of $1.8 million and $679,000 in the 2023 period and the 2022 period, respectively. Redeemable noncontrolling interests represented ownership interests of 1.28% and 0.91% in the operating partnership at September 30, 2023 and 2022, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

As of September 30, 2023, the Company held cash and cash equivalents of $184.7 million and restricted cash of $172.2 million (including amounts held for sale), the vast majority of which is comprised of lender and manager-held reserves. As of September 30, 2023, $24.1 million was also due to the Company from third-party hotel managers, most of which is held by one of the Company’s managers and is available to fund hotel operating costs. At September 30, 2023, our net debt to gross assets was 69.0%.

The Company’s cash and cash equivalents are primarily comprised of corporate cash invested in short-term U.S. Treasury securities with maturity dates of less than 90 days and corporate cash held at commercial banks in Insured Cash Sweep (“ICS”) accounts, which are fully insured by the FDIC. The Company’s cash and cash equivalents also includes property-level operating cash deposited with commercial banks that have been designated as a Global Systemically Important Bank (“G-SIB”) by the Financial Stability Board (“FSB”) and a small amount deposited with other commercial banks.

Based on our current level of operations, our cash flow from operations and our existing cash balances should be adequate to meet upcoming anticipated requirements for interest and principal payments on debt (excluding any potential final maturity payments and paydowns for extension tests), working capital, and capital expenditures for the next 12 months and dividends required to maintain our status as a REIT for U.S. federal income tax purposes. With respect to upcoming maturities, no assurances can be given that we will be able to refinance our upcoming maturities. Additionally, no assurances can be given that we will obtain additional financings or, if we do, what the amount and terms will be. Our failure to obtain future financing under favorable terms could adversely impact our ability to execute our business strategy or may result in lender foreclosure.

Our cash position from operations is affected primarily by macro industry movements in occupancy and rate as well as our ability to control costs. Further, interest rates can greatly affect the cost of our debt service as well as the value of any financial hedges we may put in place. We monitor industry fundamentals and interest rates very closely. Capital expenditures above our reserves will affect cash flow as well and are impacted by inflation.

Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of our hotels declines below a threshold. When these provisions are triggered, substantially all of the profit generated by our hotels is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. During a cash trap, certain disbursements from these hotel operating cash receipts would require consent of our lenders. At September 30, 2023, 31% of our hotels were in cash traps and approximately $4.0 million of our restricted cash was subject to these cash traps. Our loans currently in cash traps may remain subject to cash trap provisions for a substantial period of time which could limit our flexibility and adversely affect our financial condition or our qualification as a REIT.

We have extension options relating to certain property-level loans that will permit us to extend the maturity date of our loans if certain conditions are satisfied at the respective extension dates, including the achievement of debt yield targets required in order to extend such loans. To the extent we decide to extend the maturity date of the debt outstanding under the loans, we may be required to prepay a significant amount of the loans in order to meet the required debt yield targets. There can be no assurances that we will be able to meet the conditions for extensions pursuant to the respective terms of such loans.

If we violate covenants in our debt agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of Ashford Trust or Ashford Trust OP, our operating partnership, and the liabilities of such subsidiaries do not constitute the obligations of Ashford Trust or Ashford Trust OP.

Mortgage and mezzanine loans are nonrecourse to the borrowers, except for customary exceptions or carve-outs that trigger recourse liability to the borrowers in certain limited instances. Recourse obligations typically include only the payment of costs and liabilities suffered by lenders as a result of the occurrence of certain bad acts on the part of the borrower. However, in certain cases, carve-outs could trigger recourse obligations on the part of the borrower with respect to repayment of all or a portion of the outstanding principal amount of the loans. We have entered into customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of the borrowers that result from non-recourse carve-outs (which include, but are not limited to, fraud, misrepresentation, willful conduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, and certain environmental liabilities). In the opinion of management, none of these guaranty agreements, either individually or in the aggregate, are likely to have a material adverse effect on our business, results of operations, or financial condition.

We have entered into certain customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of our subsidiaries or joint ventures that may result from non-recourse carve-outs, which include, but are not limited to, fraud, misrepresentation, willful misconduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, delinquency of trade payables and certain environmental liabilities. Certain of these guarantees represent a guaranty of material amounts, and if we are required to make payments under those guarantees, our liquidity could be adversely affected.

We are committed to an investment strategy where we will pursue hotel-related investments as suitable situations arise. Funds for future hotel-related investments are expected to be derived, in whole or in part, from cash on hand, future borrowings under a credit facility or other loans, or proceeds from additional issuances of common stock, preferred stock (including net proceeds from the sale of any shares of Series J Preferred Stock or Series K Preferred Stock), or other securities, asset sales, and joint ventures. However, we have no formal commitment or understanding to invest in additional assets, and there can be no assurance that we will successfully make additional investments. We may, when conditions are suitable, consider additional capital raising opportunities.

Our existing hotel properties are mostly located in developed areas with competing hotel properties. Future occupancy, ADR, and RevPAR of any individual hotel could be materially and adversely affected by an increase in the number or quality of competitive hotel properties, home sharing companies or apartment operators offering short-term rentals in its market area. Competition could also affect the quality and quantity of future investment opportunities.

Debt Transactions

On February 9, 2023, the Company amended its JP Morgan Chase – 8 hotel mortgage loan, which had a current maturity in February 2023. As part of the amendment, the Company repaid $50.0 million in principal, exercised the 2023 loan extension and reduced the 2024 debt yield extension test from 9.25% to 8.50%.

On April 6, 2023, the Company extended its BAML Highland mortgage loan to April 2024. As part of the extension, the Company repaid $45.0 million in principal and the interest rate increased from LIBOR + 3.20% to LIBOR + 3.47%.

On May 19, 2023, we refinanced our $73.5 million mortgage, secured by the Hilton Alexandria and our $25.0 million mortgage, secured by the La Posada de Santa Fe. The new mortgage loan totals $98.5 million. The mortgage loan is interest only and provides for an interest rate of SOFR + 4.00%. The stated maturity is May 2026 with two one-year extension options, subject to the satisfaction of certain conditions. The mortgage loan is secured by the Hilton Alexandria and the La Posada de Santa Fe.

On June 9, 2023, the Company exercised a one-year extension option for its Keys Pool C mortgage loan to extend the loan to June 2024. As part of the extension, the Company repaid approximately $62.4 million in principal.

On June 21, 2023, the Company and Ashford Hospitality Limited Partnership, an indirect subsidiary of the Company, entered into Amendment No. 2 with the Lenders and Oaktree Fund Administration, LLC. Amendment No. 2, subject to the conditions set forth therein, provides that, among other things:

(i) the DDTL Commitment Expiration Date will be July 7, 2023, or such earlier date that the Borrower makes an Initial DDTL draw to be used by the Borrower to prepay certain mortgage indebtedness;

(ii) notwithstanding the occurrence of the DDTL Commitment Expiration Date, up to $100,000,000 of Initial DDTLs will be made available by the Lenders for a period of twelve (12) months ending July 7, 2024, subject to the Borrower paying an unused fee of 9% per annum on the undrawn amount;

(iii) Ashford Trust and the Borrower will be permitted to make certain Restricted Payments, including without limitation dividends on Ashford Trust’s preferred stock, without having to maintain Unrestricted Cash in an amount not less than the sum of (x) $100,000,000 plus (y) the aggregate principal amount of DDTLs advanced prior to the date thereof or contemporaneously therewith;

(iv) a default on certain pool mortgage loans will not be counted against the $400,000,000 Mortgage Debt Threshold Amount;

(v) for purposes of the Mortgage Debt Threshold Amount, a certain mortgage loan, with a current aggregate principal amount of $415,000,000, will be deemed to have a principal amount of $400,000,000; and

(vi) when payable by the Borrower under the Credit Agreement, at least 50% of the Exit Fee shall be paid as a Cash Exit Fee.

Effective June 30, 2023, LIBOR is no longer published. Accordingly, all variable interest rate mortgage loans held by the Company that use the LIBOR index transitioned to SOFR beginning on July 1, 2023. Not all lenders will execute loan amendment documents and instead will defer to original loan documents that dictate changes in index rates.

The KEYS mortgage loans were entered into on June 13, 2018, each of which had a two-year initial term and five one-year extension options. In order to qualify for a one-year extension in June of 2023, each KEYS loan pool was required to achieve a certain debt yield test. The Company extended its KEYS Pool C loan with a paydown of approximately $62.4 million, its KEYS Pool D loan with a paydown of approximately $25.6 million, and its KEYS Pool E loan with a paydown of approximately $41.0 million. On June 9, 2023 the Company received a 30-day extension to satisfy the extension conditions in order to negotiate modifications to the respective extension tests. On July 7, 2023, the Company elected not to make the required paydowns to extend its KEYS Pool A loan, KEYS Pool B loan and KEYS Pool F loan, thereby defaulting on such loans. The Company is currently in discussions with its lenders on these loan pools seeking modifications to the extension tests;

however, it appears that the most likely outcome will be a consensual transfer of these hotels to the respective lenders. Below is a summary of the hotel properties securing the KEYS mortgage loans:

KEYS A Loan Pool

Courtyard Columbus Tipton Lakes – Columbus, IN

Courtyard Old Town – Scottsdale, AZ

Residence Inn Hughes Center – Las Vegas, NV

Residence Inn Phoenix Airport – Phoenix, AZ

Residence Inn San Jose Newark – Newark, CA

SpringHill Suites Manhattan Beach – Hawthorne, CA

SpringHill Suites Plymouth Meeting – Plymouth Meeting, PA

KEYS B Loan Pool

Courtyard Basking Ridge – Basking Ridge, NJ

Courtyard Newark Silicon Valley – Newark, CA

Courtyard Oakland Airport – Oakland, CA

Courtyard Plano Legacy Park – Plano, TX

Residence Inn Plano – Plano, TX

SpringHill Suites BWI Airport – Baltimore, MD

TownePlace Suites Manhattan Beach – Hawthorne, CA

KEYS C Loan Pool

Hyatt Coral Gables – Coral Gables, FL

Hilton Ft. Worth – Fort Worth, TX

Hilton Minneapolis Airport – Bloomington, MN

Sheraton San Diego – San Diego, CA

Sheraton Bucks County, PA – Langhorne, PA

KEYS D Loan Pool

Marriott Beverly Hills – Los Angeles, CA

One Ocean Resort – Atlantic Beach, FL

Marriott Suites Dallas – Dallas, TX

Hilton Santa Fe – Santa Fe, NM

Embassy Suites Dulles – Herndon, VA

KEYS E Loan Pool

Marriott Fremont – Fremont, CA

Embassy Suites Philadelphia – Philadelphia, PA

Marriott Memphis – Memphis, TN

Sheraton Anchorage – Anchorage, AK

Lakeway Resort Austin – Lakeway, TX

KEYS F Loan Pool

Embassy Suites Flagstaff – Flagstaff, AZ

Embassy Suites Walnut Creek – Walnut Creek, CA

Marriott Bridgewater – Bridgewater, NJ

Marriott Research Triangle Park – Durham, NC

W Atlanta Downtown – Atlanta, GA

Equity Transactions

On September 9, 2021, the Company and M3A LP (“M3A”) entered into a purchase agreement (the “M3A Purchase Agreement”), which provides that subject to the terms and conditions set forth therein, the Company may sell to M3A up to approximately 6.0 million shares of common stock, from time to time during the term of the M3A Purchase Agreement. The Company filed a Form S-3, which was declared effective by the SEC on April 1, 2022, to replace the previous Form S-11 and to register for resale any future resales by M3A under the M3A Purchase Agreement. As of November 6, 2023, the Company has issued approximately 900,000 shares of common stock for gross proceeds of approximately $12.9 million under the M3A Purchase Agreement.

On March 4, 2022, the Company filed an initial registration statement on Form S-3 with the SEC, as amended on April 29, 2022, related to the Company’s non-traded Series J Preferred Stock and Series K Preferred Stock. The registration statement was declared effective by the SEC on May 4, 2022, and contemplates the offering of up to (i) 20.0 million shares of Series J Preferred Stock or Series K Preferred Stock in a primary offering and (ii) 8.0 million shares of Series J Preferred Stock or Series K Preferred Stock pursuant to a dividend reinvestment plan. On May 5, 2022, we filed our prospectus for the offering with the SEC. Ashford Securities, a subsidiary of Ashford Inc., serves as the dealer manager for the offering. As of November 6, 2023, the Company has issued approximately 2.9 million shares of Series J Preferred Stock and received net proceeds of approximately $65.4 million and approximately 166,000 shares of Series K Preferred Stock and received net proceeds of approximately $4.0 million.

On April 6, 2022, the board of directors approved a stock repurchase program (the “Repurchase Program”) pursuant to which the board of directors granted a repurchase authorization to acquire shares of the Company’s common stock and preferred stock having an aggregate value of up to $200 million. The board of directors’ authorization replaced the 2017 Repurchase Program that the board of directors authorized in December 2017. No shares have been repurchased under the Repurchase Program.

On April 11, 2022, the Company entered into the Virtu Equity Distribution Agreement with Virtu, to sell from time to time shares of the Company’s common stock having an aggregate offering price of up to $100 million. We will pay Virtu a commission of approximately 1% of the gross sales price of the shares of our common stock sold. The Company may also sell some or all of the shares of our common stock to Virtu as principal for its own account at a price agreed upon at the time of sale. As of November 6, 2023, the Company has not issued any common stock pursuant to the Virtu Equity Distribution Agreement.

Sources and Uses of Cash

Our principal sources of funds to meet our cash requirements include cash on hand, cash flow from operations, capital market activities, property refinancing proceeds and asset sales. Additionally, our principal uses of funds are expected to include possible operating shortfalls, owner-funded capital expenditures, dividends, new investments, and debt interest and principal payments. Items that impacted our cash flow and liquidity during the periods indicated are summarized as follows:

Net Cash Flows Provided by (Used in) Operating Activities. Net cash flows provided by operating activities, pursuant to our consolidated statements of cash flows, which includes changes in balance sheet items, were $36.0 million and $39.5 million for the nine months ended September 30, 2023 and 2022, respectively. Cash flows provided by operations were impacted by changes in hotel operations, our hotel dispositions in 2022 and 2023, our hotel acquisition in 2022 as well as the timing of collecting receivables from hotel guests, paying vendors, settling with derivative counterparties, settling with related parties and settling with hotel managers.

Net Cash Flows Provided by (Used in) Investing Activities. For the nine months ended September 30, 2023, net cash flows used in investing activities were $65.9 million. Cash outflows consisted of $99.5 million for capital improvements made to various hotel properties, $402,000 of payments for franchise fees and $5.7 million from the issuance of a note receivable, partially offset by cash inflows of $18.2 million related to restricted cash received from initial consolidation of VIE, $1.8 million from property insurance proceeds and $5.3 million of proceeds from the payment of a note receivable.

For the nine months ended September 30, 2022, net cash flows used in investing activities were $28.3 million. Cash outflows primarily consisted of $68.1 million for capital improvements made to various hotel properties. Cash outflows were partially offset by cash inflows of $34.7 million from proceeds received from the sale of Sheraton Ann Arbor and six WorldQuest condominium units and $1.0 million of proceeds from property insurance and $4.0 million of proceeds from notes receivable.

Net Cash Flows Provided by (Used in) Financing Activities. For the nine months ended September 30, 2023, net cash flows used in financing activities were $172.2 million. Cash outflows primarily consisted of $342.9 million for repayments of indebtedness, $10.5 million for payments of loan costs and exit fees, $10.6 million of payments for preferred dividends and $22.3 million of payments for derivatives, partially offset by cash inflows of $101.7 million from borrowings on indebtedness, $60.1 million of net proceeds from preferred stock offerings, $5.2 million of contributions from noncontrolling interest in consolidating entities and $47.6 million from counterparty payments primarily comprised of $31.7 million from in-the-money interest rate caps and $16.1 million from sales of interest rate caps.

For the nine months ended September 30, 2022, net cash flows used in financing activities were $65.2 million. Cash outflows primarily consisted of $49.3 million for repayments of indebtedness, $2.3 million for payments of loan costs and exit fees, $9.3 million of payments for preferred dividends, $5.3 million of payments for derivatives, partially offset by $1.6 million of borrowings on indebtedness.

Dividend Policy. Distributions are authorized by our board of directors and declared by us based upon a variety of factors deemed relevant by our directors. The board of directors will continue to review our distribution policy on at least a quarterly basis. Our ability to pay distributions to our preferred or common stockholders will depend, in part, upon our receipt of distributions from our operating partnership. This, in turn, may depend upon receipt of lease payments with respect to our properties from indirect subsidiaries of our operating partnership, the management of our properties by our hotel managers and general business conditions. Distributions to our stockholders are generally taxable to our stockholders as ordinary income. However, since a portion of our investments are equity ownership interests in hotels, which result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a non-taxable return of capital, to the extent of a stockholder’s tax basis in the stock. To the extent that it is consistent with maintaining our REIT status, we may maintain accumulated earnings of Ashford TRS in that entity.

On December 6, 2022, our board of directors reviewed and approved our 2023 dividend policy. We do not anticipate paying any dividends on our outstanding common stock for any quarter during 2023 and expect to pay dividends on our outstanding preferred stock during 2023. Declaration of dividends in 2023 on our preferred stock may require a determination by our board of directors, at the time of any determination, that the Company would continue to have positive equity on a fair value basis, among other considerations. Our board of directors will continue to review our dividend policy and make future announcements with respect thereto. We may incur indebtedness to meet distribution requirements imposed on REITs under the Code to the extent that working capital and cash flow from our investments are insufficient to fund required distributions. We may pay dividends in excess of our cash flow.

SEASONALITY

Our properties’ operations historically have been seasonal as certain properties maintain higher occupancy rates during the summer months, while certain other properties maintain higher occupancy rates during the winter months. This seasonality pattern can cause fluctuations in our quarterly lease revenue under our percentage leases. Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as pandemics, extreme weather conditions, natural disasters, terrorist attacks or alerts, civil unrest, government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. To the extent that cash flows from operations are insufficient during any quarter to enable us to make quarterly distributions to maintain our REIT status due to temporary or seasonal fluctuations in lease revenue, we expect to utilize cash on hand, borrowings and common stock to fund required distributions. However, we cannot make any assurances that we will make distributions in the future.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Our accounting policies that are critical or most important to understanding our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2022 Form 10-K. There have been no material changes in these critical accounting policies.

NON-GAAP FINANCIAL MEASURES

The following non-GAAP presentations of EBITDA, EBITDAre, Adjusted EBITDAre, FFO and Adjusted FFO are presented to help our investors evaluate our operating performance.

EBITDA is defined as net income (loss) before interest expense and amortization of discounts and loan costs, net, income taxes, depreciation and amortization, as adjusted to reflect only the Company’s portion of EBITDA of unconsolidated entities. In addition, we exclude gain/loss on consolidation of VIE and disposition of assets and gain/loss of unconsolidated entities to calculate EBITDAre, as defined by NAREIT.

We then further adjust EBITDAre to exclude certain additional items such as write-off of premiums, loan costs and exit fees, other income/expense, net, transaction and conversion costs, legal, advisory and settlement costs, advisory services incentive fee and stock/unit-based compensation and non-cash items such as amortization of unfavorable contract liabilities, realized and unrealized gains/losses on derivative instruments, as well as our portion of adjustments to EBITDAre of unconsolidated entities.

We present EBITDA, EBITDAre and Adjusted EBITDAre because we believe they are useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions. EBITDA, EBITDAre and Adjusted EBITDAre as calculated by us may not be comparable to EBITDA, EBITDAre and Adjusted EBITDAre reported by other companies that do not define EBITDA, EBITDAre and Adjusted EBITDAre exactly as we define the terms. EBITDA, EBITDAre and Adjusted EBITDAre do not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income (loss) or net income (loss) determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as determined by GAAP as an indicator of liquidity.

The following table reconciles net income (loss) to EBITDA, EBITDAre and Adjusted EBITDAre (in thousands):

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We calculate FFO and Adjusted FFO in the following table. FFO is calculated on the basis defined by NAREIT, which is net income (loss) attributable to common stockholders, computed in accordance with GAAP, excluding gains or losses on consolidation of VIE and disposition of assets, plus depreciation and amortization of real estate assets, impairment charges on real estate assets, and after adjustments for unconsolidated entities and noncontrolling interests in the operating partnership. Adjustments for unconsolidated entities are calculated to reflect FFO on the same basis. NAREIT developed FFO as a relative measure of performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the basis determined by GAAP. Our calculation of Adjusted FFO excludes write-off of premiums, loan costs and exit fees, other income/expense, net, transaction and conversion costs, legal, advisory and settlement costs, stock/unit-based compensation and non-cash items such as deemed dividends on redeemable preferred stock, amortization of loan costs, amortization of credit facility exit fee, default interest and late fees, unrealized gains/losses on derivative instruments, as well as our portion of adjustments to FFO related to unconsolidated entities. We exclude items from Adjusted FFO that are either non-cash or are not part of our core operations in order to provide a period-over-period comparison of our operating results. We present FFO and Adjusted FFO because we consider FFO and Adjusted FFO important supplemental measures of our operational performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO and Adjusted FFO when reporting their results. FFO and Adjusted FFO are intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and Adjusted FFO exclude depreciation and amortization related to real estate assets, gains and losses from real property dispositions and impairment losses on real estate assets, FFO and Adjusted FFO provide performance measures that, when compared year over year, reflect the effect to operations from trends in occupancy, guestroom rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We consider FFO and Adjusted FFO to be appropriate measures of our ongoing normalized operating performance as a REIT. We compute FFO in accordance with our interpretation of standards established by NAREIT, which may not be comparable to FFO reported by other REITs that either do not define the term in accordance with the current NAREIT definition or interpret the NAREIT definition differently than we do. FFO and Adjusted FFO do not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to a) GAAP net income or loss as an indication of our financial performance or b) GAAP cash flows from operating activities as a measure of our liquidity, nor is it indicative of funds available to satisfy our cash needs, including our ability to make cash distributions. However, to facilitate a clear understanding of our historical operating results, we believe that FFO and Adjusted FFO should be considered along with our net income or loss and cash flows reported in the consolidated financial statements.

The following table reconciles net income (loss) to FFO and Adjusted FFO (in thousands):

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HOTEL PORTFOLIO

The following table presents certain information related to our hotel properties as of September 30, 2023:

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(1) The Company entered into a new franchise agreement with Marriott to convert the La Pavillon in New Orleans, Louisiana to an Autograph Collection property. The agreement with Marriott calls for the hotel to be converted to an Autograph property by April 1, 2024.

(2) The ground lease expires in 2084.

(3) The Company entered into a franchise agreement with Marriott to convert the Crowne Plaza La Concha Key West Hotel in Key West, Florida to an Autograph Collection property. The agreement with Marriott calls for the hotel to operate under Marriott White Label beginning on November 15, 2023 and to be converted to an Autograph property by April 1, 2025.

(4) The ground lease expires in 2059 with one 25-year extension option.

(5) The lease expires in 2054 and includes the lease of the land, hotel and conference center (including the building, improvements, furniture, fixtures and equipment).

(6) The lease expires in 2120 and includes the lease of the land and building. The property is under development.

Our primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

At September 30, 2023, our total indebtedness of $3.6 billion included $3.3 billion of variable-rate debt. The impact on our results of operations of a 25-basis point change in interest rate on the outstanding balance of variable-rate debt at September 30, 2023 would be approximately $8.2 million per year. However, we currently have various interest rate caps in place that limit this exposure. Interest rate changes have no impact on the remaining $306.0 million of fixed-rate debt.

The above amounts were determined based on the impact of hypothetical interest rates on our borrowings and assume no changes in our capital structure. As the information presented above includes only those exposures that existed at September 30, 2023, it does not consider exposures or positions that could arise after that date. Accordingly, the information presented herein has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the period, the hedging strategies in place at the time, and the related interest rates.

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023 (“Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective (i) to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms; and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner. In addition to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2022, the following risk factor should be carefully considered in evaluating us and our business.

Our cash, cash equivalents and investments could be adversely affected if the financial institutions in which we hold our cash, cash equivalents and investments fail.

We regularly maintain cash balances at third-party financial institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) insurance limit. The FDIC took control and was appointed receiver of Silicon Valley Bank, New York Signature Bank and First Republic Bank on March 10, 2023, March 12, 2023 and May 1, 2023, respectively. The Company does not have any direct exposure to Silicon Valley Bank, New York Signature Bank or First Republic Bank. However, if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition.