Chatham Lodging Trust: Form 10-Q for the period ended Jun 30, 2020

Dollar amounts presented in this Item 2 are in thousands, except per share data, unless otherwise specified.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019. In this report, we use the terms “the Company," “we” or “our” to refer to Chatham Lodging Trust and its consolidated subsidiaries, unless the context indicates otherwise.

COVID-19 Pandemic

The lodging industry has been significantly impacted by the COVID-19 pandemic. Steps have been taken to restrict inbound international travel and there has been a significant decline in domestic travel. The full impact of the COVID-19 pandemic on the lodging industry continues to evolve and will depend on future developments including the duration and spread of the outbreak, the existence of governmental stay-at-home orders, peoples' willingness to travel and the strength and timing of an economic recovery. All of these factors are uncertain, and the full impact of the COVID-19 pandemic on the lodging industry and the Company cannot be predicted at this time. The full magnitude of the impact of the COVID-19 pandemic on the Company’s financial condition, liquidity, and future results of operations will depend on future developments which are highly uncertain. The Company has taken actions to mitigate the operating and financial impact of the COVID-19 pandemic including suspending monthly dividends, reducing 2020 capital expenditures, borrowing under its credit facility, obtaining credit facility covenant waivers, and temporarily reducing executive compensation.

Statement Regarding Forward-Looking Information

The following information contains forward-looking statements, including those with regard to the potential future impact of the COVID-19 pandemic, within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include information about possible or assumed future results of the lodging industry and our business, financial condition, liquidity, results of operations, cash flow and plans and objectives. These statements generally are characterized by the use of the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Important factors that we think could cause our actual results to differ materially from expected results are summarized below. One of the most significant factors, however, is the ongoing impact of the current outbreak of the COVID-19 pandemic on the United States, regional and global economies, the broader financial markets, our customers and employees, governmental responses thereto and the operation changes we have and may implement in response thereto. The current outbreak of the COVID-19 pandemic has also impacted, and is likely to continue to impact, directly or indirectly, many of the other important factors below. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of the COVID-19 pandemic at this time due to, among other factors, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local governments' efforts to contain the spread of COVID-19 and respond to its direct and indirect impact on the U.S. economy and economic activity. Some factors that might cause such a difference include the following: local, national and global economic conditions, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in lodging industry fundamentals, increased operating costs, seasonality of the lodging industry, our ability to obtain debt and equity financing on satisfactory terms, changes in interest rates, our ability to identify suitable investments, our ability to close on identified investments, inaccuracies of our accounting estimates, the uncertainty and economic impact of pandemics, epidemics or other public health emergencies or fear of such events, such as the recent COVID-19 pandemic the impact of and changes to various government programs, including in response to COVID-19, the timing of the development of any effective cure or treatment for COVID-19, the restoration of public confidence in domestic and international travel and or ability to dispose of selected hotel properties on the terms and timing we expect, if at all. Given these uncertainties, undue reliance should not be placed on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. The forward-looking statements should also be read in light of the risk factors identified in the “Risk Factors” section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 as updated by the Company's subsequent filings with the SEC under the Exchange Act, including the Quarterly Report for the three months ended March 31, 2020 and this Quarterly Report on Form 10-Q for the three months ended June 30, 2020.

Overview

We are a self-advised hotel investment company organized in October 2009 that commenced operations in April 2010. Our investment strategy is to invest in upscale extended-stay and premium-branded select-service hotels in geographically diverse markets with high barriers to entry near strong demand generators. We may acquire portfolios of hotels or single hotels. We expect that a significant portion of our portfolio will consist of hotels in the upscale extended-stay or select-service categories, including brands such as Homewood Suites by Hilton®, Residence Inn by Marriott®, Hyatt Place®, Courtyard by Marriott®, SpringHill Suites by Marriott®, Hilton Garden Inn by Hilton®, Embassy Suites®, Hampton Inn® and Hampton Inn and Suites®.

The Company's future hotel acquisitions may be funded by issuances of both common and preferred shares or the issuance of partnership interests in our operating partnership, Chatham Lodging, L.P. (the "Operating Partnership"), draw-downs under our revolving credit facility, the incurrence or assumption of debt, available cash, proceeds from dispositions of assets or distributions from our 10.3% investment in a joint venture with affiliates of Colony Capital, Inc. (“CLNY”) that owns 46 hotels (the "NewINK JV"). We intend to acquire quality assets at attractive prices and improve their returns through knowledgeable asset management and seasoned, proven hotel management while remaining prudently leveraged.

At June 30, 2020, our leverage ratio was 36.6% measured as the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash equivalents) to hotel investments at cost, including the JV investments. Over the past several years, we have maintained a leverage ratio between the mid-30s and the low 50s to fund our acquisitions and JV investments. As of June 30, 2020, we have total debt of $665.4 million at an average interest rate of approximately 4.3%.

We are a real estate investment trust (“REIT”) for federal income tax purposes. In order to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), we cannot operate our hotels. Therefore, our Operating Partnership and its subsidiaries lease our hotel properties to taxable REIT subsidiary lessees (“TRS Lessees”), who in turn engage eligible independent contractors to manage the hotels. Each of the TRS Lessees is treated as a taxable REIT subsidiary for federal income tax purposes and is consolidated within our financial statements for accounting purposes. However, since we control both the Operating Partnership and the TRS Lessees, our principal source of funds on a consolidated basis is from the operations of our hotels. The earnings of the TRS Lessees are subject to taxation as regular C corporations, as defined in the Code, potentially reducing the TRS Lessees’ cash available to pay dividends to us, and therefore our funds from operations and the cash available for distribution to our shareholders.

Key Indicators of Operating Performance and Financial Condition

We measure financial condition and hotel operating performance by evaluating non-financial and financial metrics and measures such as:

• Average Daily Rate (“ADR”), which is the quotient of room revenue divided by total rooms sold,
• Occupancy, which is the quotient of total rooms sold divided by total rooms available,
• Revenue Per Available Room (“RevPAR”), which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue,
• Funds From Operations (“FFO”),
• Adjusted FFO,
• Earnings before interest, taxes, depreciation and amortization (“EBITDA”),
• EBITDAre,
• Adjusted EBITDA, and
• Adjusted Hotel EBITDA.

We evaluate the hotels in our portfolio and potential acquisitions using these metrics to determine each hotel’s contribution toward providing income to our shareholders through increases in distributable cash flow and increasing long-term total returns through appreciation in the value of our common shares. RevPAR, ADR and Occupancy are hotel industry measures commonly used to evaluate operating performance.

See “Non-GAAP Financial Measures” for further discussion of FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA.

Results of Operations

Industry Outlook

The lodging industry has been significantly impacted by the COVID-19 pandemic. Steps have been taken to restrict inbound international travel and there has been a significant decline in domestic travel. Smith Travel Research reported that US lodging industry RevPAR declined 69.9% for the three months ended June 30, 2020, with RevPAR down 79.9% in April 2020, down 71.0% in May 2020 and down 60.6% in June 2020. We expect the current trend of significant RevPAR declines to continue until public concerns regarding the severity of the ongoing COVID-19 pandemic are assuaged. The full impact of the COVID-19 pandemic on the lodging industry continues to evolve and will depend on future developments including the duration and spread of the outbreak, the existence of governmental stay-at-home orders, peoples' willingness to travel, and the strength and timing of an economic recovery. All of these factors are uncertain, and the full impact of the COVID-19 pandemic on the lodging industry cannot be predicted at this time.

Comparison of the three months ended June 30, 2020 to the three months ended June 30, 2019

Results of operations for the three months ended June 30, 2020 include the operating activities of our 40 wholly owned hotels that were owned for the entire period and our investments in the NewINK JV and Inland JV. We sold one hotel in Altoona, PA on May 7, 2019 and one hotel in Washington, PA on May 15, 2019. Our financial results were adversely impacted by decreased visitation at our properties due to the COVID-19 pandemic. The comparisons below are influenced by these dispositions and the COVID-19 pandemic.

Revenues

Revenue, which consists primarily of room, food and beverage and other operating revenues from our wholly owned hotels, was as follows for the periods indicated (dollars in thousands):

Total revenue was $20.2 million for the quarter ended June 30, 2020, down $67.7 million compared to total revenue of $87.9 million for the corresponding 2019 period. The primary decrease in total revenue was related to the COVID-19 pandemic. Total revenue related to the two hotels sold in 2019 contributed $0.6 million of the decrease. Since all of our hotels are select-service or limited-service hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue comprised 91.2% and 91.0%, respectively, of total revenue for the quarters ended June 30, 2020 and 2019. Room revenue was $18.4 million and $80.0 million for the quarters ended June 30, 2020 and 2019, respectively, and the decrease in room revenue primarily was related to the COVID-19 pandemic. Room revenue related to the two hotels sold in 2019 contributed $0.5 million of the decrease.

Food and beverage revenue was $0.1 million for the quarter ended June 30, 2020, down $2.4 million compared to $2.5 million for the corresponding 2019 period. The decrease in food and beverage revenue primarily was related to a decline in occupancies at our hotels due to the COVID-19 pandemic.

Other operating revenue, comprised of parking, meeting room, gift shop, in-room movie and other ancillary amenities revenue, was down $3.0 million for the three months ended June 30, 2020. Other operating revenue was $0.9 million and $3.9 million for the quarters ended June 30, 2020 and 2019, respectively. The decrease in other operating revenue primarily was related to a decline in occupancies at our hotels due to the COVID-19 pandemic.

Reimbursable costs from unconsolidated real estate entities, comprised of payroll costs at the JVs and Castleblack Owner Holding, LLC ("Castleblack"), which is 97.5% owned by affiliates of CLNY and 2.5% by Mr. Fisher, where the Company is the employer, were $0.8 million and $1.4 million for the three months ended June 30, 2020 and 2019, respectively. The cost reimbursements were offset by the reimbursed costs from unconsolidated real estate entities included in operating expenses.

As reported by Smith Travel Research, U.S lodging industry RevPAR for the three months ended June 30, 2020 and 2019 decreased 69.9% and increased 1.1%, respectively, in the 2020 and 2019 periods as compared to the respective prior periods. Smith Travel Research reported that US lodging industry RevPAR declined 79.9% in April 2020, declined 71.0% in May 2020 and declined 60.6% in June 2020. We expect the current trend of significant RevPAR declines to continue until public concerns regarding the severity of the ongoing COVID-19 pandemic are assuaged.

In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the periods presented. Same property Occupancy, ADR, and RevPAR results for the 40 hotels wholly owned by the Company as of June 30, 2020 that have been in operation for a full year regardless of our ownership during the period presented, which is a non-GAAP financial measure. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us.

For the three months ended June 30, 2020 same property RevPAR decreased 76.9% due to a decrease in ADR of 42.9% and an decrease in occupancy of 59.4% primarily related to the COVID-19 pandemic. Same property RevPAR declined 82.7% in April 2020, declined 77.9% in May 2020, and declined 70.6% in June 2020. Same property RevPAR was $23.83 in April 2020, $30.93 in May 2020, and $44.81 in June 2020.

Hotel Operating Expenses

Hotel operating expenses consist of the following for the periods indicated (dollars in thousands):

26

Hotel operating expenses decreased $28.4 million or 64.3% to $15.7 million for the three months ended June 30, 2020 from $44.1 million for the three months ended June 30, 2019. The primary cause of the decrease in hotel operating expenses was related to the decrease in revenues and occupancy caused by the COVID-19 pandemic. Our hotel managers have taken significant steps to reduce operating costs in light of the reduction in demand caused by the COVID-19 pandemic. Total hotel operating expense related to the two hotels sold in 2019 contributed $0.5 million of the decrease.

Room expenses, which are the most significant component of hotel operating expenses, decreased $11.9 million from $16.4 million in 2019 to $4.5 million in the second quarter of 2020. The decrease in room expenses primarily was related to a decline in occupancies and revenues at our hotels due to the COVID-19 pandemic. Room expenses related to the two hotels sold in 2019 contributed $0.2 million of the decrease.

The remaining hotel operating expenses decreased $16.6 million, from $27.8 million in the second quarter of 2019 to $11.2 million in the second quarter of 2020. The decrease in other remaining expenses primarily was related to a decline in occupancies and revenues at our hotels due to the COVID-19 pandemic. A decrease of $0.3 million in hotel operating expenses related to the two hotels sold in 2019.

Depreciation and Amortization

Depreciation and amortization expense increased $0.7 million from $13.0 million for the three months ended June 30, 2019 to $13.7 million for the three months ended June 30, 2020. The increase was primarily due to renovations. Depreciation is generally recorded on our assets over 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally assumed to be the difference between the date of acquisition and the date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise agreement.

Property Taxes, Ground Rent and Insurance

Total property taxes, ground rent and insurance expenses decreased from $6.2 million for the three months ended June 30, 2019 to $5.9 million for the three months ended June 30, 2020. The decrease was primarily related to decreased ground rent at our hotels due to lower revenues.

General and Administrative

General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses and amortization of restricted stock and awards of long-term incentive plan units. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based compensation of $1.1 million and $1.2 million for the three months ended June 30, 2020 and 2019, respectively) decreased to $1.3 million for the three months ended June 30, 2020 from $2.4 million in the three months ended June 30, 2019 with the decrease primarily due to a reduction in compensation.

Other Charges

Other charges increased from $25 thousand for the three months ended June 30, 2019 to $0.2 million for the three months ended June 30, 2020. Other charges primarily include deductibles related to insurance claims.

Reimbursable Costs from Unconsolidated Real Estate Entities

Reimbursable costs from unconsolidated real estate entities, comprised of corporate payroll and rent costs of the NewINK JV, Inland JVs and Castleblack, which is 2.5% owned by Mr. Fisher, where the Company is the employer, were $0.8 million and $1.4 million for the three months ended June 30, 2020 and 2019, respectively. The cost reimbursements were offset by the cost reimbursements from unconsolidated real estate entities included in revenues.

Gain (loss) on Sale of Hotel Property

Gain on sale of hotel property decreased $3.3 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to the $3.3 million loss from the sales of the Courtyard Altoona, PA on May 7, 2019 and the SpringHill Suites Washington, PA on May 15, 2019 and no comparable loss in 2020.

Interest and Other Income

Interest on cash and cash equivalents and other income decreased $27 thousand from $66 thousand for the three months ended June 30, 2019 to $39 thousand for the three months ended June 30, 2020. The decrease is primarily related to reimbursements from escrow accounts from previous lenders in 2019.

Interest Expense, Including Amortization of Deferred Fees

Interest expense decreased $0.1 million from $7.1 million for the three months ended June 30, 2019 to $7.0 million for the three months ended June 30, 2020 and is comprised of the following (dollars in thousands):

The decrease in interest expense for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 is primarily related to an increase in capitalized interest and a decrease in interest expense on the Company's mortgage debt due to lower principal balances for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

(Loss) income from Unconsolidated Real Estate Entities

Income from unconsolidated real estate entities was $0.5 million for the three months ended June 30, 2019 compared to a loss of $1.6 million for the three months ended June 30, 2020. The decrease is due primarily to a decline in operating performance due to the COVID-19 pandemic.

Income Tax Expense

Income tax expense for the three months ended June 30, 2020 and 2019 was $0.0 million and $0.0 million, respectively. We are subject to income taxes based on the taxable income of our TRS Lessees at a combined federal and state tax rate of approximately 25%. The Company’s TRS is expecting taxable losses in 2020 and recognizes full valuation allowance equal to 100% of the gross deferred tax assets, with the exception of the AMT tax credit, due to the uncertainty of the TRS's ability to utilize these deferred tax assets.

Net loss

Net loss was $27.2 million for the three months ended June 30, 2020, compared to net loss of $9.5 million for the three months ended June 30, 2019. The change in net income was due to the factors discussed above.

Comparison of the six months ended June 30, 2020 to the six months ended June 30, 2019

Results of operations for the six months ended June 30, 2020 include the operating activities of our 40 wholly owned hotels that were owned for the entire period, partial period results for two hotels which were sold during this period, and our investments in the NewINK JV and Inland JV. We sold one hotel in Altoona, PA on May 7, 2019 and one hotel in Washington, PA on May 15, 2019. Our financial results were adversely impacted by decreased visitation at our properties due to the COVID-19 pandemic. The majority of the negative impact of the COVID-19 pandemic on our hotels’ operations began during the second half of March 2020, so the results of operations for the six months ended June 30, 2020 reflect the negative impact of the COVID-19 pandemic for only a portion of the period. The comparisons below are influenced by these dispositions and the COVID-19 pandemic.

Revenues

Revenue, which consists primarily of room, food and beverage and other operating revenues from our wholly owned hotels, was as follows for the periods indicated (dollars in thousands):

Total revenue was $80.4 million for the six months ended June 30, 2020, down $83.2 million compared to total revenue of $163.6 million for the corresponding 2019 period. The decrease in total revenue primarily was related to the COVID-19 pandemic. Total revenue related to the two hotels sold in 2019 contributed $1.6 million of the decrease. Since all of our hotels are select-service or limited-service hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue comprised 88.9% and 90.5% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Room revenue was $71.4 million and $148.1 million for the six months ended June 30, 2020 and 2019, respectively, and the decrease in room revenue primarily was related to the COVID-19 pandemic. Room revenue related to the two hotels sold in 2019 contributed $1.5 million of the decrease.

Food and beverage revenue was $2.2 million, for the six months ended June 30, 2020, down $2.8 million, compared to $5.0 million for the corresponding 2019 period. The decrease in food and beverage revenue primarily was related to a decline in occupancies at our hotels due to the COVID-19 pandemic.

Other operating revenue, comprised of parking, meeting room, gift shop, in-room movie and other ancillary amenities revenue was down $3.2 million for the six months ended June 30, 2020. Other operating revenue was $4.4 million and $7.6 million for the six months ended June 30, 2020 and 2019, respectively. The decrease in other operating revenue primarily was related to a decline in occupancies at our hotels due to the COVID-19 pandemic.

Reimbursable costs from unconsolidated real estate entities, comprised of payroll costs at the JVs and an entity, Castleblack, which is 97.5% owned by affiliates of CLNY and 2.5% by Mr. Fisher, where the Company is the employer, were $2.4 million and $2.9 million for the six months ended June 30, 2020 and 2019, respectively. The cost reimbursements were offset by the reimbursed costs from unconsolidated real estate entities included in operating expenses.

As reported by Smith Travel Research, industry RevPAR for the six months ended June 30, 2020 and 2019 decreased 45.5% and increased 1.2%, respectively, in the 2020 and 2019 periods as compared to the respective prior year periods. We expect the current trend of significant RevPAR declines to continue until public concerns regarding the severity of the ongoing COVID-19 pandemic are assuaged.

In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the periods presented. Same property Occupancy, ADR, and RevPAR results for the 40 hotels wholly owned by the Company as of June 30, 2020 that have been in operation for a full year regardless of our ownership during the period presented, which is a non-GAAP financial measure. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us.

For the six months ended June 30, 2020 same property RevPAR decreased 51.5% due to a decrease in ADR of 19.9% and a decrease in occupancy of 39.5% primarily related to the COVID-19 pandemic.

Hotel Operating Expenses

Hotel operating expenses consist of the following for the periods indicated (dollars in thousands):

Hotel operating expenses decreased $33.9 million to $52.1 million for the six months ended June 30, 2020 from $86.0 million for the six months ended June 30, 2019. The primary cause of the decrease in hotel operating expenses was related to the decrease in revenues and occupancy caused by the COVID-19 pandemic. Our hotel managers have taken significant steps to reduce operating costs in light of the reduction in demand caused by the COVID-19 pandemic. Total hotel operating expense related to the two hotels sold in 2019 contributed $1.3 million of the decrease.

Room expenses, which are the most significant component of hotel operating expenses, decreased $14.0 million from $31.9 million for the six months ended June 30, 2019 to $17.9 million for the six months ended June 30, 2020. Room expenses related to the two hotels sold in 2019 contributed $0.4 million of the decrease. The decrease in room expenses primarily was related to a decline in occupancies and revenues at our hotels due to the COVID-19 pandemic.

The remaining hotel operating expenses decreased $19.8 million, from $54.0 million for the six months ended June 30, 2019 to $34.2 million for the six months ended June 30, 2020. The decrease in other remaining expenses primarily was related to a decline in occupancies and revenues at our hotels due to the COVID-19 pandemic. A decrease of $0.9 million in hotel operating expenses related to the two hotels sold in 2019.

Depreciation and Amortization

Depreciation and amortization expense increased $0.9 million from $25.8 million for the six months ended June 30, 2019 to $26.7 million for the six months ended June 30, 2020. The increase was primarily due to renovations. Depreciation is generally recorded on our assets over 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally assumed to be the difference between the date of acquisition and the date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise agreement.

Impairment Loss on Investment in Unconsolidated Real Estate Entities

Impairment loss on investment in unconsolidated real estate entities increased $15.3 million for the six months ended June 30, 2020. The Company recorded an impairment of the entire carrying value of $15.3 million on our investment in the Inland JV during the six months ended June 30, 2020 related to a decline in operating performance caused by the COVID-19 pandemic.

Property Taxes, Ground Rent and Insurance

Total property taxes, ground rent and insurance expenses decreased $0.4 million from $12.4 million for the six months ended June 30, 2019 to $12.0 million for the six months ended June 30, 2020. The decrease was primarily related to decreased ground rent at our hotels due to lower revenues and a reduction of $0.1 million from the two hotels sold in 2019.

General and Administrative

General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses and amortization of restricted stock and awards of LTIP units. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based compensation of $2.4 million and $2.3 million for the six months ended June 30, 2020 and 2019, respectively) decreased $1.9 million to $2.9 million for the six months ended June 30, 2020 from $4.8 million for the six months ended June 30, 2019 with the decrease primarily due to a reduction in compensation.

Other Charges

Other charges increased $2.9 million from $42.0 thousand for the six months ended June 30, 2019 to $3.0 million for the six months ended June 30, 2020. Other charges primarily include severance costs and accelerated vesting of LTIP awards related to the departure of our former Chief Investment Officer and deductibles for insurance claims.

Reimbursable Costs from Unconsolidated Real Estate Entities

Reimbursable costs from unconsolidated real estate entities, comprised of corporate payroll costs at the JVs and an entity, Castleblack, which is 97.5% owned by affiliates of CLNY and 2.5% by Mr. Fisher, where the Company is the employer, were $2.4 million and $2.9 million for the six months ended June 30, 2020 and 2019, respectively. The cost reimbursements were offset by the cost reimbursements from unconsolidated real estate entities included in revenues.

Gain (loss) on Sale of Hotel Property

Gain on sale of hotel property decreased $3.3 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due to the $3.3 million loss from the sales of the Courtyard Altoona, PA on May 7, 2019 and the SpringHill Suites Washington, PA on May 15, 2019 and no comparable loss in 2020.

Interest and Other Income

Interest on cash and cash equivalents and other income remained level from $0.1 million for the six months ended June 30, 2019 to $0.1 million for the six months ended June 30, 2020.

Interest Expense, Including Amortization of Deferred Fees

Interest expense decreased $0.4 million from $14.3 million for the six months ended June 30, 2019 to $13.9 million for the six months ended June 30, 2020 and is comprised of the following (dollars in thousands):

The decrease in interest expense for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 is primarily due to an increase in capitalized interest for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

(Loss) income from Unconsolidated Real Estate Entities

(Loss) income from unconsolidated real estate entities increased $4.6 million from a loss of $0.7 million for the six months ended June 30, 2019 to a loss of $5.3 million for the six months ended June 30, 2020. The increase is due primarily to a decline in operating performance due to the COVID-19 pandemic.

Income Tax Expense

Income tax expense for the six months ended June 30, 2020 and 2019 was $0.0 million and $0.0 million, respectively. We are subject to income taxes based on the taxable income of our TRS Lessees at a combined federal and state tax rate of approximately 25%. The Company’s TRS is expecting taxable losses in 2020 and recognizes full valuation allowance equal to 100% of the gross deferred tax assets, with the exception of the AMT tax credit, due to the uncertainty of the TRS's ability to utilize these deferred tax assets.

Net loss

Net loss was $55.3 million for the six months ended June 30, 2020, compared to net income of $11.2 million for the six months ended June 30, 2019. The change in net income was due to the factors discussed above.

Non-GAAP Financial Measures

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) EBITDAre, (5) Adjusted EBITDA and (6) Adjusted Hotel EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as prescribed by GAAP as a measure of our operating performance.

FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities under GAAP and should not be considered as alternatives to net income or loss, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA are not measures of our liquidity, nor are FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA indicative of funds available to fund our cash needs, including our ability to make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties.

We calculate FFO in accordance with standards established by the National Association of Real Estate Investment

Trusts ("NAREIT"), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, impairment write-downs, the cumulative effect of changes in accounting principles, plus depreciation and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures following the same approach. We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it measures our performance without regard to specified non-cash items such as real estate depreciation and amortization, gain or loss on sale of real estate assets and certain other items that we believe are not indicative of the property level performance of our hotel properties. We believe that these items reflect historical cost of our asset base and our acquisition and disposition activities and are less reflective of our ongoing operations, and that by adjusting to exclude the effects of these items, FFO is useful to investors in comparing our operating performance between periods and between REITs that also report FFO using the NAREIT definition.

We calculate Adjusted FFO by further adjusting FFO for certain additional items that are not addressed in NAREIT’s definition of FFO, including other charges, costs associated with the departure of our former Chief Investment Officer, losses on the early extinguishment of debt and similar items related to our unconsolidated real estate entities that we believe do not represent costs related to hotel operations. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs that make similar adjustments to FFO.

The following is a reconciliation of net income to FFO and Adjusted FFO for the three and six months ended June 30, 2020 and 2019 (in thousands, except share data):

Diluted weighted average common share count used for calculation of adjusted FFO per share may differ from diluted weighted average common share count used for calculation of GAAP Net Income per share by LTIP units, which may be converted to common shares of beneficial interest if Net Income per share is negative and Adjusted FFO is positive. Unvested restricted shares and unvested LTIP units that could potentially dilute basic earnings per share in the future would not be included in the computation of diluted loss per share for the periods where a loss has been recorded because they would have been anti-dilutive for the periods presented.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sales of assets; (3) depreciation and amortization; and (4) unconsolidated real estate entity items including interest, depreciation and amortization excluding gains and losses from sales of real estate. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions.

In addition to EBITDA, we present EBITDAre in accordance with NAREIT guidelines, which defines EBITDAre as net income or loss excluding interest expense, income tax expense, depreciation and amortization expense, gains or losses from sales of real estate, impairment, and adjustments for unconsolidated joint ventures. We believe that the presentation of EBITDAre provides useful information to investors regarding the Company's operating performance and can facilitate comparisons of operating performance between periods and between REITs.

We also present Adjusted EBITDA, which includes additional adjustments for items such as other charges, gains or losses on extinguishment of indebtedness, costs associated with the departure of our former Chief Investment officer, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income, EBITDA and EBITDAre, is beneficial to an investor's understanding of our performance.

The following is a reconciliation of net income to EBITDA, EBITDAre and Adjusted EBITDA for the three and six months ended June 30, 2020 and 2019 (in thousands):

35

Adjusted Hotel EBITDA is defined as net income before interest, income taxes, depreciation and amortization, corporate general and administrative, impairment loss, loss on early extinguishment of debt, other charges, interest and other income, losses on sales of hotel properties and income or loss from unconsolidated real estate entities. We present Adjusted Hotel EBITDA because we believe it is useful to investors in comparing our hotel operating performance between periods and comparing our Adjusted Hotel EBITDA margins to those of our peer companies. Adjusted Hotel EBITDA represents the results of operations for our wholly owned hotels only.

The following is a presentation of Adjusted Hotel EBITDA for the three and six months ended June 30, 2020 and 2019 (in thousands):

Although we present FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA because we believe they are useful to investors in comparing our operating performance between periods and between REITs that report similar measures, these measures have limitations as analytical tools. Some of these limitations are:

• FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
• FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
• FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect funds available to make cash distributions;
• EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may need to be replaced in the future, and FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect any cash requirements for such replacements;
• Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period using Adjusted EBITDA;
• Adjusted FFO, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the impact of certain cash charges (including acquisition transaction costs) that result from matters we consider not to be indicative of the underlying performance of our hotel properties; and
• Other companies in our industry may calculate FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA differently than we do, limiting their usefulness as a comparative measure.

In addition, FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities as determined by GAAP and should not be considered as alternatives to net income or loss, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA are not measures of our liquidity. Because of these limitations, FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA only supplementally. Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with GAAP.

Sources and Uses of Cash

Our principal sources of cash include net cash from operations and proceeds from debt and equity issuances. Our principal uses of cash include acquisitions, capital expenditures, operating costs, corporate expenditures, interest costs, debt repayments and distributions to equity holders.

As of June 30, 2020 and December 31, 2019, we had cash, cash equivalents and restricted cash of approximately $45.7 million and $20.2 million, respectively.

For the six months ended June 30, 2020, net cash flows used in operations were $15.7 million, driven by net loss of $55.3 million, $50.4 million of non-cash items, including $27.2 million of depreciation and amortization, $2.3 million of share-based compensation expense, $0.3 million of accelerated LTIP compensation, $5.3 million related to loss from unconsolidated entities and $15.3 million related to the impairment of out interest in the Inland JV. In addition, changes in operating assets and liabilities due to the timing of cash receipts, payments for real estate taxes, payments of corporate compensation and payments from our hotels resulted in net cash outflow of $10.8 million. Net cash flows used in investing activities were $20.5 million, primarily related to capital improvements on our 40 wholly owned hotels of $10.4 million and $10.1 million related to the development of a new hotel. Net cash flows provided by financing activities were $61.8 million, comprised of $0.1 million of common equity proceeds raised through sales under our DRSPP and ATM, net borrowings of our senior unsecured revolving credit facility of $83.0 million, offset by principal payments on mortgage debt of $4.5 million, payments of financing and offering costs of $0.6 million and distributions to shareholders of $16.2 million.

For the six months ended June 30, 2019, net cash flows provided by operations were $37.8 million, driven by net income of $11.2 million, $29.1 million of non-cash items, including $26.2 million of depreciation and amortization, $2.3 million of share-based compensation expense and $0.6 million related to loss from unconsolidated entities. In addition, a loss on the sale of two hotels of $3.3 million and changes in operating assets and liabilities due to the timing of cash receipts, payments for real estate taxes, payments of corporate compensation and payments from our hotels resulted in net cash outflow of $5.8 million. Net cash flows used in investing activities were $13.8 million, primarily related to capital improvements on our 40 wholly owned hotels of $23.2 million, offset by proceeds from the sale of the Altoona and Washington, PA hotels of $9.0 million and distributions of $0.4 million received from unconsolidated real estate entities. Net cash flows used by financing activities were $29.4 million, comprised of $7.1 million of common equity proceeds raised through sales under our DRSPP and ATM, offset by net repayments of our senior unsecured revolving credit facility of $2.5 million, by principal payments on mortgage debt of $2.6 million, payments of financing and offering costs of $0.2 million, and distributions to shareholders of $31.2 million.

We declared total dividends of $0.22 and $0.22 per common share and LTIP unit for the six months ended June 30, 2020 and $0.66 and $0.66 per common share and LTIP unit for the six months ended June 30, 2019, respectively.

Liquidity and Capital Resources

At June 30, 2020, our leverage ratio was approximately 36.6% measured as the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash equivalents) to hotel investments at cost, including our JV investments. Over the past several years, we have maintained a leverage ratio between the mid-30s and the low 50s to fund our acquisitions and investments in joint ventures. At June 30, 2020, we have total debt of $665.4 million at an average interest rate of approximately 4.3%.

At June 30, 2020 and December 31, 2019, we had $173.0 million and $90.0 million, respectively, in outstanding borrowings under our $250.0 million revolving credit facility. We also had mortgage debt on individual hotels aggregating $492.4 million and $496.9 million at June 30, 2020 and December 31, 2019, respectively.

Our credit facility contains representations, warranties, covenants, terms and conditions customary for credit facilities of this type, including a maximum leverage ratio, a minimum fixed charge coverage ratio and minimum net worth financial covenants, limitations on (i) liens, (ii) incurrence of debt, (iii) investments, (iv) distributions, and (v) mergers and asset dispositions, covenants to preserve corporate existence and comply with laws, covenants on the use of proceeds of the revolving credit facility and default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults and guarantor defaults.

On May 6, 2020, the company amended its credit facility to provide it with certain relief from the effects of the COVID-19 pandemic. The amendment provides for the waiver of certain financial covenants through March 31, 2021 and allows Chatham to borrow up to the entire $250 million facility size during this period. During this covenant waiver period, Chatham will be required to maintain a minimum liquidity of $25 million which will include both unrestricted cash and credit facility availability. In connection with the amendment, Chatham added six hotels to the credit facility’s borrowing base which now has a total of 18 properties. The amendment provided Chatham’s credit facility lenders with pledges of the equity in the 18 borrowing base hotels. The amendment places additional limits on Chatham’s ability to incur debt, pay dividends, and make capital expenditures during the covenant waiver period. During the covenant waiver period interest will be calculated as LIBOR (subject to a 0.5% floor) plus a spread of 2.5% if borrowings remain at or below $200 million and a spread of 3.0% if borrowings exceed $200 million. We were in compliance with all modified financial covenants at June 30, 2020.

We expect to meet our short-term liquidity requirements generally through existing cash balances and availability under our credit facility. We believe that our existing cash balances and availability under our credit facility will be adequate to fund operating obligations, pay interest on any borrowings and fund dividends in accordance with the requirements for qualification as a REIT under the Code. We expect to meet our long-term liquidity requirements, such as hotel property acquisitions and debt maturities or repayments through additional long-term secured and unsecured borrowings, the issuance of additional equity or debt securities or the possible sale of existing assets.

The COVID-19 pandemic has caused, and is continuing to cause, significant disruption in the financial markets both globally and in the United States, and will continue to impact, possibly materially, our business, financial condition and results of operations. We cannot predict the degree, or duration, to which our operations will be affected by the COVID-19 outbreak, and the effects could be material. While we believe the liquidity provided by our unrestricted cash and credit facility availability, valuable unencumbered assets and aggressive cost reduction initiatives will enable us to fund our current obligations for the foreseeable future, COVID-19 has resulted in significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future. Because the situation is ongoing, and because the duration and severity remain unclear, it is difficult to forecast any impacts on our future results.

Dividend Policy

Our common share dividend policy has been to distribute, annually, approximately 100% of our annual taxable income. We suspended dividends after the March 2020 payment due to the decline in operating performance caused by the COVID-19 pandemic. We plan to pay dividends required to maintain REIT status. The aggregate amount of dividends and distributions declared for the six months ended June 30, 2020 was $0.22 per common share and LTIP unit. The amount of any dividends is determined by our Board of Trustees.

Capital Expenditures

We intend to maintain each hotel property in good repair and condition and in conformity with applicable laws and regulations and in accordance with the franchisors' standards and any agreed-upon requirements in our management and loan agreements. After we acquire a hotel property, we may be required to complete a property improvement plan (“PIP”) in order to be granted a new franchise license for that particular hotel property. PIPs are intended to bring the hotel property up to the franchisors' standards. Certain of our loans require that we escrow, for property improvement purposes, at the hotels collateralizing these loans, amounts up to 5% of gross revenue from such hotels. We intend to spend amounts necessary to

comply with any reasonable loan or franchisor requirements and otherwise to the extent that such expenditures are in the best interest of the hotel. To the extent that we spend more on capital expenditures than is available from our operations, we intend to fund those capital expenditures with available cash and borrowings under our revolving credit facility.

For the three months ended June 30, 2020 and 2019, we invested approximately $4.3 million and $11.5 million for renovations and other non-recurring capital expenditures on our existing hotels, respectively, and for the six months ended June 30, 2020 and 2019, we invested approximately $10.4 million and $20.7 million, respectively. As a result of the COVID-19 pandemic, we have reduced our planned 2020 capital expenditures by approximately $10 million. We expect to invest an additional $4.0 million on renovations, discretionary and emergency expenditures on our existing hotels for the remainder of 2020, including improvements required under any brand PIP.

We are developing a hotel in Los Angeles, CA on a parcel of land owned by us. We expect that the total development costs for construction of the hotel to be approximately $70 million, which includes the cost of the land. We have incurred $30.5 million of costs to date, which includes $6.6 million of the land acquisition costs and $23.9 million of other development costs.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 30, 2020, other than non-recourse debt associated with the NewINK JV and the Inland JV. In connection with certain non-recourse mortgage loans in either the NewINK JV or Inland JV, our Operating Partnership could require us to repay our pro rata share of portions of each respective JVs indebtedness in connection with certain customary non-recourse carve-out provisions such as environmental conditions, misuse of funds and material misrepresentations.

Contractual Obligations

The following table sets forth our contractual obligations as of June 30, 2020 and the effect these obligations are expected to have on our liquidity and cash flow in future periods (in thousands).

1. The Company entered into a corporate office lease in 2015. The lease is for eleven years and includes a 12-month rent abatement period and certain tenant improvement allowances. The Company shares the space with related parties and is reimbursed for the pro-rata share of rentable space occupied by related parties.

2. Does not reflect paydowns or additional borrowings under the revolving credit facility after June 30, 2020. Interest payments are based on the interest rate in effect as of June 30, 2020. See Note 7, “Debt” to our unaudited consolidated financial statements for additional information relating to our property loans.

In addition to the above listed obligations, we pay management and franchise fees to our hotel management companies and franchisors based on the revenues of our hotels. The table above also does not include $4.0 million that we expect to invest on renovations, discretionary and emergency capital expenditures on our existing hotels for the remainder of 2020, or $39.5 million of estimated remaining costs associated with our Los Angeles hotel development. Our contracts associated with these planned capital expenditures contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract.

The Company’s ownership interests in the JVs are subject to change in the event that either we or CLNY calls for additional capital contributions to the respective JVs necessary for the conduct of that JV's business, including contributions to fund costs and expenses related to capital expenditures. We manage the NewINK JV and Inland JV and will receive a promote interest in the applicable JV if it meets certain return thresholds. CLNY may also approve certain actions related to the JVs without the Company’s consent, including certain property dispositions conducted at arm’s length, certain actions related to the restructuring of the JVs and removal of the Company as managing member in the event the Company fails to fulfill its material obligations under the respective joint venture agreements.

In connection with certain non-recourse mortgage loans in either the NewINK JV or Inland JV, our Operating Partnership could require us to repay our pro rata share of portions of each respective JVs indebtedness in connection with certain customary non-recourse carve-out provisions such as environmental conditions, misuse of funds and material misrepresentations.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.

Seasonality

Demand for our hotels is affected by recurring seasonal patterns. Generally, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. These general trends are, however, influenced by overall economic cycles and the geographic locations of our hotels.

Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with GAAP, which 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 from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. 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, 2019.

Recently Issued Accounting Standards

Refer to Note 2, Summary of Significant Accounting Policies for all new recently issued accounting standards.

We may be exposed to interest rate changes primarily as a result of our assumption of long-term debt in connection with our acquisitions and upon refinancing of existing debt. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we seek to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With respect to variable rate financing, we will assess interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates. Rates take into consideration general market conditions, maturity and fair value of the underlying collateral. The estimated fair value of the Company’s fixed rate debt at June 30, 2020 and December 31, 2019 was $479.5 million and $501.5 million, respectively.

At June 30, 2020, our consolidated debt was comprised of floating and fixed interest rate debt. The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at the date presented, at then current market interest rates. The following table provides information about the maturities of our financial instruments as of June 30, 2020 that are sensitive to changes in interest rates (dollars in thousands):

(1) Weighted average interest rate based on borrowings at LIBOR of 0.50% plus a margin of 2.50% at June 30, 2020.

All of our floating rate debt is currently subject to a 0.5% LIBOR floor. At June 30, 2020 1-month LIBOR was 0.17%. We estimate that a hypothetical 100 basis points increase in LIBOR would result in additional interest of approximately $1.2 million annually. This assumes that the amount outstanding under our floating rate debt remains $173.0 million, the balance as of June 30, 2020.

Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our Annual Report on Form 10-K for the year ended December 31, 2019 includes detailed discussions of our risk factors under the heading “Risk Factors.”

The current COVID-19 pandemic had, and may continue to have, or a future pandemic could have, adverse effects on our financial condition, results of operations, cash flows and performance.

The global pandemic caused by the coronavirus known as COVID-19 has had a severe and negative impact on both the U.S. economy and the global economy. Financial markets have experienced significant volatility during the first half of 2020, which is expected to continue over the upcoming quarters. Globally and throughout the United States, federal and local governments have instituted quarantines, restrictions on travel, school closings, "shelter in place" orders, and restrictions on types of businesses that may continue operations. Although certain of these restrictions have begun, and may continue, to ease in some places, the ongoing COVID-19 pandemic, including large outbreaks of COVID-19 in various regions, has resulted, and may continue to result, in their reinstitution. These restrictions have had a severe impact on the U.S. lodging industry and some of our hotels continue to operate at a significantly reduced occupancy.

The following factors should be considered since the COVID-19 pandemic has significantly adversely affected the ability of our hotel managers to successfully operate our hotels and has, or the continued and prolonged effects of the COVID-19 may have, a significant adverse effect on our financial condition, results of operations and cash flows due to, among other factors:

• Significant reduction of operations at some of our properties;
• a variety of factors related to the COVID-19 pandemic have caused, and are expected to continue to cause, a sharp decline in group, business and leisure travel, including but not limited to (i) restrictions on travel mandated by governmental entities or voluntarily imposed by employers, (ii) the postponement or cancellation of conventions and conferences, music and arts festivals, sporting events and other large public gatherings, (iii) the closure of amusement parks, museums and other tourist attractions, (iv) the closure of colleges and universities, and (v) negative public perceptions of travel and public gatherings in light of the perceived risks associated with COVID-19;
• travelers are, and may continue to be, wary to travel where, or because, they may view the risk of contagion as increased and contagion or virus-related deaths linked or alleged to be linked to travel to our properties, whether accurate or not, may injure our reputation;
• travelers may be dissuaded from traveling due to possible enhanced COVID-19-related screening measures which are being implemented across multiple markets we serve;
• travelers may be dissuaded from traveling due to the concern that additional travel restrictions implemented between their departure and return may affect their ability to return to their homes;
• commercial airline service has been reduced or suspended to many of the areas in which our hotels are located, and if scheduled airline service does not increase or return to normal levels once our resorts are re-opened it could negatively affect our revenues;
• the reduced economic activity could also result in an economic recession, and increased unemployment, which could negatively impact future ability or desire to travel lodging demand and, therefore, our revenues, even after the temporary restrictions are lifted;
• a decrease in the ancillary revenue from amenities at our properties;
• the financial impact of the COVID-19 pandemic could negatively impact our future compliance with the financial covenants of our credit facility or other debt obligations, and result in a default and potentially an acceleration of indebtedness which would adversely affect our financial condition and liquidity;
• difficulty in accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital;
• the general decline in business activity and demand for real estate transactions adversely affecting our ability to acquire additional properties;
• the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during and after this disruption;
• the increase in number of our employees working remotely has increased certain risks to our business, including increased demand on our information technology resources and systems, greater potential for phishing and other cybersecurity attacks, and an increase in the number of points of potential attack;
• we may be subject to increased risks related to employee matters, including increased employment litigation and claims for severance or other benefits tied to termination or furloughs as a result of reduced operations prompted by the effects of the pandemic; and
• the reduction in our cash flows caused the suspension of dividends during the first quarter of 2020, and continued suspension through the second quarter of 2020, and could impact our ability to pay dividends to our stockholders at expected levels in the future.

The rapid development and fluidity of the COVID-19 pandemic makes it extremely difficult to assess its full adverse economic impact, and future impact, on our financial condition, results of operations, cash flows and performance. In addition, an outbreak of another disease or similar public health threat, or fear of such an event, that affects travel demand, travel behavior or travel restrictions could have a material adverse impact on the Company's business, financial condition and operating results. Outbreaks of other diseases could also result in increased government restrictions and regulation, such as those actions described above or otherwise, which could adversely affect our operations.

The potential effects of the COVID-19 pandemic also could intensify or otherwise affect many of our other risk factors that are included in Part 1-Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the "Annual Report"). Because the COVID-19 situation is unprecedented and continuously evolving, the other potential impacts to our risk factors that are further described in our Annual Report are uncertain.