# DiamondRock Hospitality Co: Form 10-Q for the period ended Sep 30, 2023

- Company: [DiamondRock Hospitality Co](/companies/drh.md) (CIK 1298946)
- Form: 10-Q
- Filed: 2023-11-03
- Accepted by EDGAR: Nov 3, 2023, 15:23 ET
- Period: 2023-09-30
- Accession: 0001298946-23-000093
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1298946/000129894623000093/drh-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1298946/000129894623000093/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $276.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $811.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $16.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $48.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $224.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $420.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $27.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $75.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 212,204,989 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 212,129,712 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $184.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $25.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $2.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $102.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $3.26bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $1.61bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $1.18bn | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $1.64bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 58,856 characters.

*This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. These forward-looking statements are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risks discussed herein and the risk factors discussed from time to time in our periodic filings with the Securities and Exchange Commission, including in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect events, circumstances or changes in expectations after the date of this report.*

*Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:*

- *negative developments in the economy, including, but not limited to rising inflation and interest rates, job loss or growth trends, an increase in unemployment or a decrease in corporate earnings and investment;*
- *increased competition in the lodging industry and from alternative lodging channels or third party internet intermediaries in the markets in which we own properties;*
- *failure to effectively execute our long-term business strategy and successfully identify and complete acquisitions and dispositions;*
- *risks and uncertainties affecting hotel management, operations and renovations (including, without limitation, rising inflation, construction delays, increased construction costs, disruption in hotel operations and the risks associated with our management and franchise agreements);*
- *risks associated with the availability and terms of financing and the use of debt to fund acquisitions and renovations or refinance existing indebtedness, including the impact of higher interest rates on the cost and/or availability of financing;*
- *risks associated with our level of indebtedness and our ability to satisfy our obligations under our debt agreements;*
- *risks associated with the lodging industry overall, including, without limitation, decreases in the frequency of travel and increases in operating costs;*
- *risks and uncertainties associated with our obligations under our management agreements and franchise agreements;*
- *risks associated with the increase in labor costs and the availability of labor at our hotels;*
- *risks associated with natural disasters and other unforeseen catastrophic events, including the emergence of a pandemic or other widespread health emergency;*
- *the adverse impact of COVID-19 or any future pandemic, epidemic or outbreak of any other highly infectious disease on the U.S., regional and global economies, travel, the hospitality industry, and on our financial condition and results of operations and our hotels;*
- *costs of compliance with government regulations, including, without limitation, the Americans with Disabilities Act;*
- *potential liability for uninsured losses and environmental contamination;*
- *risks associated with security breaches through cyber-attacks or otherwise, as well as other significant disruptions of our and our hotel managers’ information technologies and systems, which support our operations and those of our hotel managers;*
- *risks associated with our potential failure to maintain our qualification as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”);*
- *possible adverse changes in tax and environmental laws; and*
- *risks associated with our dependence on key personnel whose continued service is not guaranteed.*

### Overview

DiamondRock Hospitality Company is a lodging-focused real estate company operating as a real estate investment trust (“REIT”) for U.S. federal income tax purposes that owns a portfolio of premium hotels and resorts. As of September 30, 2023, we owned a portfolio of 36 premium hotels and resorts that contain 9,745 guest rooms located in 25 different markets in the United States.

As an owner, rather than an operator, of lodging properties, we receive all of the operating profits or losses generated by our hotels after the payment of fees due to hotel managers and hotel brands, which are calculated based on the revenues and profitability of each hotel.

Our strategy is to apply aggressive asset management, prudent financial strategy, and disciplined capital allocation to high quality lodging properties in North American urban and resort markets with superior growth prospects and high barriers-to-entry. Our goal is to deliver long-term stockholder returns that exceed those generated by our peers through a combination of dividends and enduring capital appreciation.

Our primary business is to acquire, own, asset manage and renovate premium hotel properties in the United States. Our portfolio is concentrated in major urban markets and destination resort locations. Each of our hotels is managed by a third party—either an independent operator or a brand operator, such as Marriott International, Inc.

We critically evaluate each of our hotels to ensure that we own a portfolio of hotels that conforms to our vision, supports our mission and corresponds with our strategy. On a regular basis, we analyze our portfolio to identify opportunities to invest capital in certain projects or market non-core assets for sale in order to increase our portfolio quality. We are committed to a conservative capital structure with prudent leverage. We regularly assess the availability and affordability of capital in order to maximize stockholder value and minimize enterprise risk. In addition, we are committed to following sound corporate governance practices and to being open and transparent in our communications with our stockholders.

### Our Revenues and Expenses

Our revenue is primarily derived from hotel operations, including rooms revenue, food and beverage revenue and other revenue, which consists of parking, spa, resort fees, other guest services, and tenant leases, among other items.

Our operating costs and expenses consist of the costs to provide hotel services, including rooms expense, food and beverage expense, other departmental and support expenses, management and franchise fees, and other property-level expenses. Rooms expense includes housekeeping and front office wages and payroll taxes, room supplies, laundry services and other costs. Food and beverage expense includes the cost of food, beverages and associated labor costs. Other departmental and support expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, sales and marketing, information technology systems, repairs and maintenance and utility costs. Our hotels that are subject to franchise agreements are charged a royalty fee, plus additional fees for marketing, central reservation systems and other franchisor costs, in order for the hotel properties to operate under the respective brands. Franchise fees are based on a percentage of room revenue and for certain hotels additional franchise fees are charged for food and beverage revenue. We enter into management agreements with independent third-party management companies to operate our hotels. The management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. Other property-level expenses include property taxes, insurance, ground lease expense, and other fixed costs.

### Key Indicators of Financial Condition and Operating Performance

We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), as well as other financial information that is not prepared in accordance with U.S. GAAP. 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 performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:

- Occupancy percentage;
- Average Daily Rate (“ADR”);
- Revenue per Available Room (“RevPAR”);
- Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate (“EBITDA*re”*), and Adjusted EBITDA; and
- Funds From Operations (“FFO”) and Adjusted FFO.

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 67% of our total revenues for the nine months ended September 30, 2023 and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms.

Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions generally, increasing inflation, increasing interest rates, regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, increased use of lodging alternatives, new hotel construction and the pricing strategies of our competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the success of our hotels' brands and managers.

We also use EBITDA, EBITDA*re*, Adjusted EBITDA, FFO and Adjusted FFO as measures of the financial performance of our business. See “Non-GAAP Financial Measures” for further discussion on these financial measures.

### Our Hotels

The following tables set forth certain operating information for the nine months ended September 30, 2023 for each of our hotels owned during the period.

| Property | Location | Number of Rooms | Occupancy (%) | ADR ($) | RevPAR ($) | % Change from 2022 RevPAR(1) |
| --- | --- | ---: | ---: | ---: | ---: | ---: |
| Chicago Marriott Downtown Magnificent Mile | Chicago, Illinois | 1,200 | 60.7% | $246.14 | $149.41 | 14.8% |
| Westin Boston Seaport District | Boston, Massachusetts | 793 | 85.3% | 243.78 | 207.90 | 15.5% |
| Salt Lake City Marriott Downtown at City Creek | Salt Lake City, Utah | 510 | 63.3% | 190.89 | 120.75 | 13.5% |
| Worthington Renaissance Fort Worth Hotel | Fort Worth, Texas | 504 | 74.5% | 194.08 | 144.59 | 14.2% |
| Westin San Diego Bayview | San Diego, California | 436 | 79.9% | 214.93 | 171.62 | 13.6% |
| Westin Fort Lauderdale Beach Resort | Fort Lauderdale, Florida | 433 | 73.3% | 274.94 | 201.56 | (6.4)% |
| Westin Washington, D.C. City Center | Washington, D.C. | 410 | 75.9% | 216.66 | 164.39 | 32.7% |
| The Dagny | Boston, Massachusetts | 403 | 75.3% | 291.35 | 219.35 | (4.6)% |
| The Hythe Vail | Vail, Colorado | 344 | 61.1% | 435.10 | 265.81 | 12.5% |
| Courtyard New York Manhattan/Midtown East | New York, New York | 321 | 90.5% | 314.26 | 284.44 | 16.7% |
| Atlanta Marriott Alpharetta | Atlanta, Georgia | 318 | 68.5% | 154.52 | 105.84 | 27.9% |
| The Gwen Hotel | Chicago, Illinois | 311 | 74.5% | 299.15 | 222.97 | 3.8% |
| Hilton Garden Inn New York/Times Square Central | New York, New York | 282 | 89.4% | 252.61 | 225.73 | (0.4)% |
| Embassy Suites by Hilton Bethesda | Bethesda, Maryland | 272 | 71.9% | 163.58 | 117.54 | 66.7% |
| Hilton Burlington Lake Champlain | Burlington, Vermont | 258 | 76.2% | 252.40 | 192.25 | 4.4% |
| Henderson Beach Resort | Destin, Florida | 254 | 61.7% | 458.10 | 282.64 | (18.1)% |
| Hotel Palomar Phoenix | Phoenix, Arizona | 242 | 76.0% | 221.99 | 168.72 | 15.4% |
| Bourbon Orleans Hotel | New Orleans, Louisiana | 220 | 76.9% | 236.68 | 182.12 | 29.3% |
| Hotel Clio | Denver, Colorado | 199 | 71.2% | 320.35 | 227.96 | 7.4% |
| Courtyard New York Manhattan/Fifth Avenue | New York, New York | 189 | 95.1% | 270.33 | 257.20 | 11.1% |
| Margaritaville Beach House Key West | Key West, Florida | 186 | 84.3% | 403.61 | 340.19 | (12.9)% |
| The Lodge at Sonoma Resort | Sonoma, California | 182 | 62.7% | 455.78 | 285.78 | (2.8)% |
| Courtyard Denver Downtown | Denver, Colorado | 177 | 78.4% | 220.51 | 172.83 | 10.6% |
| The Lindy Renaissance Charleston Hotel | Charleston, South Carolina | 167 | 89.2% | 352.01 | 313.99 | 1.3% |
| Kimpton Shorebreak Resort | Huntington Beach, California | 157 | 81.3% | 338.09 | 274.92 | (5.9)% |
| Cavallo Point, The Lodge at the Golden Gate | Sausalito, California | 142 | 55.8% | 590.72 | 329.54 | (10.7)% |
| Chico Hot Springs Resort | Pray, Montana | 117 | 79.6% | 183.71 | 146.31 | 10.8% |
| Havana Cabana Key West | Key West, Florida | 106 | 84.2% | 305.56 | 257.20 | (13.3)% |
| Tranquility Bay Beachfront Resort | Marathon, Florida | 103 | 77.8% | 652.82 | 507.60 | (15.2)% |
| Hotel Emblem San Francisco | San Francisco, California | 96 | 67.0% | 245.70 | 164.55 | (1.7)% |
| Kimpton Fort Lauderdale Beach Resort | Fort Lauderdale, Florida | 96 | 66.3% | 217.03 | 143.81 | (6.6)% |
| L'Auberge de Sedona | Sedona, Arizona | 88 | 60.0% | 907.24 | 544.22 | (22.3)% |
| The Landing Lake Tahoe Resort & Spa | South Lake Tahoe, California | 82 | 53.0% | 472.57 | 250.32 | (10.1)% |
| Orchards Inn Sedona | Sedona, Arizona | 70 | 59.6% | 281.82 | 167.87 | (15.2)% |
| Lake Austin Spa Resort | Austin, Texas | 40 | 58.5% | 1,071.67 | 627.30 | (16.1)% |
| Henderson Park Inn | Destin, Florida | 37 | 70.2% | 627.97 | 440.90 | (15.1)% |
| TOTAL/WEIGHTED AVERAGE |  | 9,745 | 73.3% | $281.92 | $206.76 | 4.1% |

(1) The percentage change from 2022 RevPAR reflects the comparable period in 2022 to our 2023 ownership period for our 2023 and 2022 acquisitions.

### Results of Operations

At September 30, 2023 and 2022, we owned 36 and 34 hotels, respectively. All properties owned during these periods have been included in our results of operations during the respective periods since their date of acquisition. Based on when a property was acquired, operating results for certain properties are not comparable for the three and nine months ended September 30, 2023 and 2022. The properties detailed in the table below are hereinafter referred to as “non-comparable properties” and all other properties are referred to as “comparable properties”:

| Property | Location | Acquisition Date |
| --- | --- | --- |
| Tranquility Bay Beachfront Resort | Marathon, Florida | January 6, 2022 |
| Kimpton Fort Lauderdale Beach Resort | Fort Lauderdale, Florida | April 1, 2022 |
| Lake Austin Spa Resort | Austin, Texas | November 21, 2022 |
| Chico Hot Springs Resort | Pray, Montana | August 1, 2023 |

#### Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022

*Revenue*. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (dollars in millions):

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Rooms | $186.3 | $185.0 | $1.3 | 0.7% |
| Food and beverage | 64.7 | 61.9 | 2.8 | 4.5% |
| Other | 25.5 | 21.3 | 4.2 | 19.7% |
| Total revenues | $276.5 | $268.2 | $8.3 | 3.1% |

Rooms revenues increased by $1.3 million from the three months ended September 30, 2022 to the three months ended September 30, 2023, consisting of a $3.0 million increase due to non-comparable properties, offset by a $1.7 million decrease at our comparable properties. The decrease of $1.7 million at our comparable properties was primarily due to a decline in occupancy and ADR at our resort hotels due to the normalizing of leisure demand, partially offset by higher occupancy at our urban hotels.

The following are key hotel operating statistics for the three months ended September 30, 2023 and 2022. The 2022 operating statistics reflect the period in 2022 comparable to our ownership period in 2023 for hotels acquired in 2023 and 2022.

|  | Three Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Occupancy % | 76.3% | 74.9% | 1.4% |
| ADR | $273.56 | $282.03 | (3.0)% |
| RevPAR | $208.78 | $211.32 | (1.2)% |

Food and beverage revenues increased $2.8 million from the three months ended September 30, 2022 to the three months ended September 30, 2023, $1.3 million of which was due to non-comparable properties. The remaining increase was the result of higher outlet revenues at our comparable properties.

Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased by $4.2 million from the three months ended September 30, 2022 to the three months ended September 30, 2023, $2.8 million of which was due to non-comparable properties. The remaining increase of $1.4 million was primarily due to increases in resort fees and parking revenues at our comparable properties.

*Hotel operating expenses.* The operating expenses consisted of the following (dollars in thousands):

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Rooms | $45,773 | $43,899 | $1,874 | 4.3% |
| Food and beverage | 45,428 | 43,227 | 2,201 | 5.1% |
| Other departmental and support expenses | 65,952 | 62,271 | 3,681 | 5.9% |
| Management fees | 7,323 | 6,697 | 626 | 9.3% |
| Franchise fees | 8,913 | 8,709 | 204 | 2.3% |
| Other property-level expenses | 25,704 | 21,047 | 4,657 | 22.1% |
| Total hotel operating expenses | $199,093 | $185,850 | $13,243 | 7.1% |

-28-

Our hotel operating expenses increased $13.2 million from the three months ended September 30, 2022 to the three months ended September 30, 2023, $5.8 million of which was due to non-comparable properties. The remaining increase in hotel operating expenses was primarily due to increased occupancy and related labor costs. Other property-level expenses increased due to higher property tax assessments and insurance premiums.

*Depreciation and amortization.* Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $0.6 million, or 2.3%, from the three months ended September 30, 2022 primarily due to properties acquired during 2022 and 2023.

*Corporate expenses.* Corporate expenses principally consist of employee-related costs, including payroll, bonus, restricted stock and benefits. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses were at $7.5 million for both of the three months ended September 30, 2022 and 2023.

*Business interruption insurance income.* During the three months ended September 30, 2023, we recognized $0.5 million of business interruption insurance income related to an electrical fire at the Hilton Garden Inn New York/Times Square Central that caused the hotel to be closed for seven days. No business interruption insurance income was recorded during the three months ended September 30, 2022.

*Interest expense.* Our interest expense increased $6.9 million, from $9.1 million for the three months ended September 30, 2022 to $16.0 million for the three months ended September 30, 2023, and was comprised of the following (in millions):

|  | Three Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Mortgage debt interest | $4.1 | $6.2 |
| Unsecured term loan interest | 11.0 | 4.1 |
| Credit facility interest and unused fees | 0.3 | 1.9 |
| Amortization of debt issuance costs and debt premium | 0.6 | 0.7 |
| Interest rate swap mark-to-market | — | (3.8) |
|  | $16.0 | $9.1 |

The increase in interest expense is primarily related to rising interest rates on our variable rate debt, our unsecured term loans that we entered into in September 2022 and the conversion of certain of our interest rate swaps to cash flow hedges as of April 1, 2023.

#### Comparison of the Nine Months Ended September 30, 2023 to the Nine Months Ended September 30, 2022

Our results of operations for the nine months ended September 30, 2023 improved relative to the nine months ended September 30, 2022 as group and corporate travel demand increased.

*Revenue*. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (dollars in millions):

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Rooms | $544.3 | $510.2 | $34.1 | 6.7% |
| Food and beverage | 192.9 | 176.3 | 16.6 | 9.4% |
| Other | 74.1 | 60.0 | 14.1 | 23.5% |
| Total revenues | $811.3 | $746.5 | $64.8 | 8.7% |

Rooms revenues increased by $34.1 million from the nine months ended September 30, 2022 to the nine months ended September 30, 2023, $10.0 million of which was due to non-comparable properties. The remaining increase of $24.1 million was the result of improved occupancy and ADR at our urban hotels as group and corporate business continued to improve, partially offset by declines in occupancy and ADR at our resort hotels due to the normalizing of leisure demand.

The following are key hotel operating statistics for the nine months ended September 30, 2023 and 2022. The 2022 operating statistics reflect the period in 2022 comparable to our ownership period in 2023 for hotels acquired in 2023 and 2022.

|  | Nine Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Occupancy % | 73.3% | 68.7% | 4.6% |
| ADR | $281.92 | $289.03 | (2.5)% |
| RevPAR | $206.76 | $198.55 | 4.1% |

Food and beverage revenues increased $16.6 million from the nine months ended September 30, 2022 to the nine months ended September 30, 2023, of which $2.4 million was due to non-comparable properties. The remaining increase of $14.2 million was primarily due to an increase in banquet revenues, particularly at our urban hotels.

Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased by $14.1 million from the nine months ended September 30, 2022 to the nine months ended September 30, 2023, $8.8 million of which was due to non-comparable properties. The remaining increase of $5.3 million was primarily due to increases in resort fees and parking revenues.

*Hotel operating expenses.* The operating expenses consisted of the following (dollars in thousands):

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Rooms | $131,092 | $120,374 | $10,718 | 8.9% |
| Food and beverage | 134,486 | 119,919 | 14,567 | 12.1% |
| Other departmental and support expenses | 193,365 | 170,328 | 23,037 | 13.5% |
| Management fees | 19,196 | 17,029 | 2,167 | 12.7% |
| Franchise fees | 26,393 | 23,212 | 3,181 | 13.7% |
| Other property-level expenses | 76,755 | 63,997 | 12,758 | 19.9% |
| Total hotel operating expenses | $581,287 | $514,859 | $66,428 | 12.9% |

Our hotel operating expenses increased $66.4 million from the nine months ended September 30, 2022 to the nine months ended September 30, 2023, $16.0 million of which was due to non-comparable properties. Hotel operating expenses at our comparable properties increased primarily due to increased occupancy and related labor costs. Other property-level expenses increased due to higher property tax assessments and insurance premiums.

*Depreciation and amortization.* Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $1.9 million, or 2.3%, from the nine months ended September 30, 2022 primarily due to the properties acquired during 2022 and 2023, as well as the renovations and rebrandings that were completed in 2022 and 2023.

*Impairment losses.* During the nine months ended September 30, 2023, we recorded an impairment loss of $0.9 million related to the write-off of construction in progress that was determined not to be recoverable. During the nine months ended September 30, 2022, we recorded an impairment loss of $2.8 million on the right-to-manage intangible asset related to rental management agreements at Tranquility Bay Beachfront Resort upon our acquisition of four third-party owned units.

*Corporate expenses.* Corporate expenses principally consist of employee-related costs, including payroll, bonus, restricted stock and benefits. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses increased $1.4 million, or 6.3%, from $22.3 million for the nine months ended September 30, 2022 to $23.7 million for the nine months ended September 30, 2023, primarily due to increases in employee-related costs. Additionally, during the nine months ended September 30, 2022, we recognized the reversal of compensation expense resulting from the forfeiture of long-term incentive awards related to the resignation of our former Executive Vice President, Asset Management and Chief Operating Officer.

*Business interruption insurance income.* During the nine months ended September 30, 2023, we recognized $0.5 million of business interruption insurance income related to an electrical fire at the Hilton Garden Inn New York/Times Square Central that caused the hotel to be closed for seven days and $0.1 million related to an insurance claim at the Worthington Renaissance Fort Worth Hotel. During the nine months ended September 30, 2022, we recognized $0.5 million of business interruption insurance income related to the impact of the Caldor wildfire at The Landing Lake Tahoe Resort & Spa, which caused the hotel to be closed for 21 days in 2021.

*Interest expense.* Our interest expense increased $25.8 million, from $22.9 million for the nine months ended September 30, 2022 to $48.7 million for the nine months ended September 30, 2023, and was comprised of the following (in millions):

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Mortgage debt interest | $12.3 | $18.3 |
| Unsecured term loan interest | 31.9 | 11.5 |
| Credit facility interest and unused fees | 0.9 | 5.1 |
| Amortization of debt issuance costs and debt premium | 1.6 | 2 |
| Interest rate swap mark-to-market | 2.0 | (14.0) |
|  | $48.7 | $22.9 |

The increase in interest expense is primarily related to rising interest rates on our variable rate debt, our unsecured term loans that we entered into in September 2022 and the change in the fair value of certain of our interest rate swaps not designated as cash flow hedges, which were designated as cash flow hedges as of April 1, 2023.

### Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service, operating expenses, ground lease payments, capital expenditures directly associated with our hotels, any share repurchases, distributions to our common and preferred stockholders, and the cost of acquiring additional hotels. We have one mortgage loan that matures within one year which has a principal balance of $74.8 million as of September 30, 2023. We intend to repay mortgage debt using cash flow from operations or available capacity on our senior unsecured credit facility, which is sufficient to meet the principal due within the next twelve months.

Our mortgage debt agreements contain “cash trap” provisions that are triggered when the hotel’s operating results fall below a certain debt service coverage ratio. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio is reached and maintained for a certain period of time. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt. As of September 30, 2023, we had no cash traps in place.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, certain redemption of limited operating partnership units (“common OP units”), ground lease payments, share repurchases, and making distributions to our common and preferred stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including common OP units, and/or debt securities and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and our intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us.

### Our Financing Strategy

Since our formation in 2004, we have been committed to a conservative capital structure with prudent leverage. Our outstanding debt consists of fixed interest rate mortgage debt, unsecured term loans and periodic borrowings on our senior unsecured credit facility. We have a preference to maintain a significant portion of our portfolio as unencumbered in order to provide balance sheet flexibility. We expect that our strategy will enable us to maintain a balance sheet with an appropriate amount of debt throughout all phases of the lodging cycle. We believe that it is prudent to reduce the inherent risk of highly cyclical lodging fundamentals through a low leveraged capital structure.

We prefer a relatively simple but efficient capital structure. We generally structure our hotel acquisitions to be straightforward and to fit within our capital structure; however, we will consider a more complex transaction, such as the issuance of common OP units in connection with the acquisition of Cavallo Point, The Lodge at the Golden Gate, if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.

We believe that we maintain a reasonable amount of debt. As of September 30, 2023, we had $1.2 billion of debt outstanding with a weighted average interest rate of 5.07% and a weighted average maturity date of approximately 2.7 years. We have limited near-term mortgage debt maturities, and 32 of our 36 hotels are unencumbered by mortgage debt. We remain committed to our core strategy of prudent leverage.

Information about our financing activities is available in Note 5 to the accompanying consolidated financial statements.

### ATM Program

We maintain an “at-the-market” equity offering program (the “ATM Program”), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200.0 million. We have not sold any shares under the ATM Program.

### Share Repurchase Program

Our board of directors has authorized a share repurchase program pursuant to which we are authorized to repurchase up to $200.0 million of our common stock through February 2025. During the nine months ended September 30, 2023, we repurchased 318,454 shares of common stock at an average price of $7.60 per share for a total purchase price of $2.4 million.

### Short-Term Borrowings

Other than borrowings under our senior unsecured credit facility, discussed below, we do not utilize short-term borrowings to meet liquidity requirements.

### Senior Unsecured Credit Facility and Unsecured Term Loans

We are party to a Sixth Amended and Restated Credit Agreement that provides us with a $400 million senior unsecured revolving credit facility and two term loan facilities in the aggregate amount of $800 million. The revolving credit facility matures on September 27, 2026, which we may extend for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions. The term loan facilities consist of a $500 million term loan that matures on January 3, 2028 and a $300 million term loan that matures on January 3, 2025. The maturity date of the $300 million term loan may be extended for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions. We have the right to increase the aggregate amount of the facilities to $1.4 billion upon the satisfaction of certain standard conditions.

Additional information about the credit facilities, including a summary of significant covenants, can be found in Note 5 to the accompanying consolidated financial statements.

### Sources and Uses of Cash

We expect that our principal sources of cash will include one or more of the following: net cash flow from hotel operations, sales of our equity and debt securities, debt financings and proceeds from any hotel dispositions. Our principal uses of cash are acquisitions of hotel properties, debt service and maturities, share repurchases, capital expenditures, operating costs, ground lease payments, corporate expenses, and distributions to holders of common stock, common units and preferred stock. As of September 30, 2023, we had $102.7 million of unrestricted cash, $42.5 million of restricted cash and no outstanding borrowings on our senior unsecured credit facility.

Our net cash provided by operations was $184.7 million for the nine months ended September 30, 2023. Our cash from operations generally consists of the net cash flow from hotel operations, offset by cash paid for corporate expenses and other working capital changes.

Our net cash used in investing activities was $101.2 million for the nine months ended September 30, 2023, which consisted of $67.4 million of capital expenditures at our hotels, $1.8 million of cash paid for the acquisition of a land parcel underlying the parking structure at the Worthington Renaissance Fort Worth Hotel, and $31.9 million paid for the acquisition of Chico Hot Springs Resort and adjacent ranch.

Our net cash used in financing activities was $45.4 million for the nine months ended September 30, 2023, which consisted of $25.5 million of distributions paid to holders of common stock and common units, $7.4 million of distributions paid to holders of preferred stock, $7.1 million of scheduled mortgage debt principal payments, $3.0 million of shares repurchased for the payment of tax withholding obligations upon the vesting of restricted stock and $2.4 million of shares repurchased under our share repurchase program.

We currently anticipate our significant source of cash for the remainder of the year ending December 31, 2023 will be the net cash flow from hotel operations. We expect our estimated uses of cash for the remainder of the year ending December 31, 2023 will be scheduled debt service payments, capital expenditures, distributions to preferred and common stockholders, corporate expenses, and potential share repurchases.

### Dividend Policy

We intend to distribute to our stockholders dividends at least equal to our REIT taxable income to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiaries, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:

- 90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, plus
- 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus
- any excess non-cash income.

The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including our financial performance, restrictions under applicable law and our current and future loan agreements, our debt service requirements, our capital expenditure requirements, the requirements for qualification as a REIT under the Code and other factors that our board of directors may deem relevant from time to time.

We have paid the following dividends to holders of our common stock and distributions to holders of common OP units and LTIP units during 2023, and through the date of this report:

| Payment Date | Record Date | Dividend per Share |
| --- | --- | ---: |
| January 12, 2023 | December 30, 2022 | $0.06 |
| April 12, 2023 | March 31, 2023 | $0.03 |
| July 12, 2023 | June 30, 2023 | $0.03 |
| October 12, 2023 | September 29, 2023 | $0.03 |

We have paid the following dividends per share to holders of our Series A Preferred Stock during 2023, and through the date of this report:

| Payment Date | Record Date | Dividend per Share |
| --- | --- | ---: |
| March 31, 2023 | March 17, 2023 | $0.515625 |
| June 30, 2023 | June 20, 2023 | $0.515625 |
| September 29, 2023 | September 18, 2023 | $0.515625 |

### Capital Expenditures

The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement funds to cover, among other things, the cost of replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. Contributions to the property improvement fund are calculated as a percentage of hotel revenues. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement fund under the applicable management or franchise agreement. As of September 30, 2023, we have set aside $36.5 million for capital projects in property improvement funds, which are included in restricted cash.

In 2023, we expect to spend approximately $100 million on capital improvements at our hotels, of which we have invested approximately $67.4 million during the nine months ended September 30, 2023. Significant projects in 2023 include the following:

- ***The Dagny:*** We completed a comprehensive renovation to rebrand the Hilton Boston Downtown/Faneuil Hall as The Dagny, an independent lifestyle hotel, during the third quarter of 2023.
- ***Salt Lake City Marriott:*** We completed a renovation of the guestrooms during the third quarter of 2023.
- ***Hilton Burlington Lake Champlain:*** We commenced a repositioning of the hotel to rebrand it as a Curio Collection hotel. The repositioning is expected to be completed in the summer of 2024 and includes a new restaurant concept by a well-known, award-winning chef.

### Non-GAAP Financial Measures

We use the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: EBITDA, EBITDA*re*, Adjusted EBITDA, FFO and Adjusted FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with U.S. GAAP. EBITDA, EBITDA*re*, Adjusted EBITDA, FFO and Adjusted FFO, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company.

### Use and Limitations of Non-GAAP Financial Measures

Our management and Board of Directors use EBITDA, EBITDA*re*, Adjusted EBITDA, FFO and Adjusted FFO to evaluate the performance of our hotels and to facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital intensive companies. The use of these non-GAAP financial measures has certain limitations. These non-GAAP financial measures as presented by us, may not be comparable to non-GAAP financial measures as calculated by other real estate companies. These measures do not reflect certain expenses or expenditures that we incurred and will incur, such as depreciation, interest and capital expenditures. We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparable U.S. GAAP financial measures, and our consolidated statements of operations and comprehensive income and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures.

These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with U.S. GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by U.S. GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our U.S. GAAP results and the reconciliations to the corresponding U.S. GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

### EBITDA, EBITDAre and FFO

EBITDA represents net income (calculated in accordance with U.S. GAAP) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. The Company computes EBITDA*re* in accordance with the National Association of Real Estate Investment Trusts (“Nareit”) guidelines, as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate.” EBITDA*re* represents net income (calculated in accordance with U.S. GAAP) adjusted for: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization; (4) gains or losses on the disposition of depreciated property, including gains or losses on change of control; (5) impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate; and (6) adjustments to reflect the entity's share of EBITDA*re* of unconsolidated affiliates.

We believe EBITDA and EBITDA*re* are useful to an investor in evaluating our operating performance because they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization, and in the case of EBITDA*re*, impairment and gains or losses on dispositions of depreciated property) from our operating results. In addition, covenants included in our debt agreements use EBITDA as a measure of financial compliance. We also use EBITDA and EBITDA*re* as measures in determining the value of hotel acquisitions and dispositions.

The Company computes FFO in accordance with standards established by Nareit, which defines FFO as net income determined in accordance with U.S. GAAP, excluding gains or losses from sales of properties and impairment losses, plus real estate related depreciation and amortization. The Company believes that the presentation of FFO provides useful information to investors regarding its operating performance because it is a measure of the Company's operations without regard to specified non-cash items, such as real estate related depreciation and amortization and gains or losses on the sale of assets. The Company also uses FFO as one measure in assessing its operating results.

### Adjustments to EBITDAre and FFO

We adjust EBITDA*re* and FFO when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA and Adjusted FFO, when combined with U.S. GAAP net income, EBITDA*re* and FFO, is beneficial to an investor's complete understanding of our consolidated operating performance. We adjust EBITDA*re* and FFO for the following items:

- *Non-Cash Lease Expense and Other Amortization*: We exclude the non-cash expense incurred from the straight line recognition of expense from our ground leases and other contractual obligations and the non-cash amortization of our favorable and unfavorable contracts, originally recorded in conjunction with certain hotel acquisitions. We exclude these non-cash items because they do not reflect the actual cash amounts due to the respective lessors in the current period and they are of lesser significance in evaluating our actual performance for that period.
- *Cumulative Effect of a Change in Accounting Principle*: The Financial Accounting Standards Board promulgates new accounting standards that require or permit the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude the effect of these adjustments, which include the accounting impact from prior periods, because they do not reflect the Company’s actual underlying performance for the current period.
- *Gains or Losses from Early Extinguishment of Debt*: We exclude the effect of gains or losses recorded on the early extinguishment of debt because these gains or losses result from transaction activity related to the Company’s capital structure that we believe are not indicative of the ongoing operating performance of the Company or our hotels.
- *Hotel Acquisition Costs*: We exclude hotel acquisition costs expensed during the period because we believe these transaction costs are not reflective of the ongoing performance of the Company or our hotels.
- *Severance Costs*: We exclude corporate severance costs, or reversals thereof, incurred with the termination of corporate-level employees and severance costs incurred at our hotels related to lease terminations or structured severance programs because we believe these costs do not reflect the ongoing performance of the Company or our hotels.
- *Hotel Manager Transition Items*: We exclude the transition items associated with a change in hotel manager because we believe these items do not reflect the ongoing performance of the Company or our hotels.
- *Hotel Pre-Opening Costs*: We exclude the pre-opening costs associated with the redevelopment or rebranding of a hotel because we believe these items do not reflect the ongoing performance of the Company or our hotels.
- *Other Items*: From time to time we incur costs or realize gains that we consider outside the ordinary course of business and that we do not believe reflect the ongoing performance of the Company or our hotels. Such items may include, but are not limited to the following: lease preparation costs incurred to prepare vacant space for marketing; management or franchise contract termination fees; gains or losses from legal settlements; costs incurred related to natural disasters; and gains on property insurance claim settlements, other than income related to business interruption insurance.

In addition, to derive Adjusted FFO we exclude any unrealized fair value adjustments to interest rate swaps. We exclude these non-cash amounts because they do not reflect the underlying performance of the Company.

The following table is a reconciliation of our U.S. GAAP net income to EBITDA, EBITDA*re* and Adjusted EBITDA (in thousands):

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Net income** | $27,330 | $28,555 | $75,652 | $91,316 |
| Interest expense | 15,973 | 9,072 | 48,712 | 22,866 |
| Income tax expense | 224 | 312 | 420 | 949 |
| Real estate related depreciation and amortization | 27,683 | 27,053 | 82,995 | 81,097 |
| **EBITDA** | 71,210 | 64,992 | 207,779 | 196,228 |
| Impairment losses | — | — | 941 | 2,843 |
| **EBITDAre** | 71,210 | 64,992 | 208,720 | 199,071 |
| Non-cash lease expense and other amortization | 1,533 | 1,551 | 4,620 | 4,675 |
| Hotel pre-opening costs | 496 | — | 1,038 | — |
| Hotel manager transition items | — | 11 | — | 247 |
| Severance costs (1) | — | — | — | (532) |
| Loss on early extinguishment of debt | — | 9,698 | — | 9,698 |
| **Adjusted EBITDA** | $73,239 | $76,252 | $214,378 | $213,159 |

(1) Consists of severance costs incurred, or adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statements of operations and comprehensive income.

The following table is a reconciliation of our U.S. GAAP net income to FFO and Adjusted FFO (in thousands):

|  | Three Months Ended September 30, 2023 | 2022 |  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| **Net income** | $27,330 | $28,555 |  | 75,652 | $91,316 |
| Real estate related depreciation and amortization | 27,683 | 27,053 |  | 82,995 | 81,097 |
| Impairment losses | — | — |  | 941 | 2,843 |
| **FFO** | 55,013 | 55,608 |  | 159,588 | 175,256 |
| Distributions to preferred stockholders | (2,454) | (2,454) |  | (7,362) | (7,362) |
| **FFO available to common stock and unit holders** | 52,559 | 53,154 |  | 152,226 | 167,894 |
| Non-cash lease expense and other amortization | 1,533 | 1,551 |  | 4,620 | 4,675 |
| Hotel pre-opening costs | 496 | — |  | 1,038 | — |
| Hotel manager transition items | — | 11 |  | — | 247 |
| Severance costs (1) | — | — |  | — | (532) |
| Loss on early extinguishment of debt | — | 9,698 |  | — | 9,698 |
| Fair value adjustments to interest rate swaps | — | (3,780) |  | 2,033 | (14,002) |
| **Adjusted FFO available to common stock and unit holders** | $54,588 | $60,634 | $— | $159,917 | $167,980 |

(1) Consists of severance costs incurred, or adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statements of operations and comprehensive income.

### Critical Accounting Estimates and Policies

Our unaudited consolidated financial statements include the accounts of DiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:

#### Investment in Hotels

Investment purchases of hotel properties, land, land improvements, building and furniture, fixtures and equipment, lease assets and liabilities, and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based upon total accumulated cost of the acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost.

Identifiable intangible assets are typically related to contracts, including ground lease agreements and hotel management agreements, which are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates for corresponding contracts. Contracts acquired that are at market do not have significant value. We enter into a hotel management agreement at the time of acquisition and such agreements are generally based on market terms. Intangible assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.

We review our investments in hotels for impairment whenever events or changes in circumstances indicate that the carrying amount of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform a review include, but are not limited to, adverse changes in the demand for lodging at our properties, current or projected losses from operations, and an expectation that the property is more likely than not to be sold significantly before the end of its previously estimated useful life. If such events or circumstances are identified, management performs an analysis to compare the estimated undiscounted future cash flows from operations and the net proceeds from the ultimate disposition of a hotel to the carrying amount of the asset. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotels' estimated fair value is recorded and an impairment loss is recognized. The fair value is determined through various valuation techniques, including discounted cash flow models with estimated discount and terminal capitalization rates, comparable market transactions, third-party appraisals, the net sales proceeds from pending offers, or from transactions that closed subsequent to the end of the reporting period.

### Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Generally, our management companies may adjust room rates daily, excluding previous contractually committed reservations. However, competitive pressures or other factors may limit the ability of our management companies to raise room rates. Inflation may also affect our expenses and cost of capital improvements, including, without limitation, by increasing the costs of labor, employee-related benefits, food, commodities and other materials, taxes, property and casualty insurance and utilities.

Inflation has increased recently to levels not seen in years. The United States Federal Reserve has raised, and may continue to raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty, and increasing the cost of new indebtedness and servicing our outstanding variable debt.

### Seasonality

The periods during which our hotels experience higher revenues vary from property to property, depending principally upon location and the customer base served. Accordingly, we expect some seasonality in our business. Volatility in our financial performance from the seasonality of the lodging industry could adversely affect our financial condition and results of operations.

### New Accounting Pronouncements Not Yet Implemented

See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.

## Market risk

As filed, 715 characters.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk to which we are currently exposed, and, to which we expect to be exposed in the future, is interest rate risk. The face amount of our outstanding debt as of September 30, 2023 was $1.2 billion, of which $425.0 million was variable rate. If market rates of interest on our variable rate debt fluctuate by 100 basis points, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows, by $4.3 million annually.

## Controls and procedures

As filed, 1,200 characters.

The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, and has concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to give reasonable assurances that information we disclose in reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during the Company’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 147 characters.

There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Filed Nov 3, 2023.
Source: SEC EDGAR, the filing index for accession 0001298946-23-000093. Last ingested by Listed: Nov 3, 2026, 20:20 ET. No prices; not investment advice.