# Summit Hotel Properties, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Summit Hotel Properties, Inc.](/companies/inn.md) (CIK 1497645)
- Form: 10-Q
- Filed: 2023-05-03
- Accepted by EDGAR: May 3, 2023, 16:42 ET
- Period: 2023-03-31
- Accession: 0001497645-23-000011
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1497645/000149764523000011/inn-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1497645/000149764523000011/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $182.4m | us-gaap:Revenues |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $18.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $20.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | −$472.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$2.0m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.05 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 105,312,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $32.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $4.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-03-31 | $60.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-03-31 | $3.03bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $1.59bn | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $1.47bn | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-03-31 | $946.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,677 characters.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2022 and our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Unless stated otherwise or the context otherwise requires, references in this report to “we,” “our,” “us,” “our company” or “the company” mean Summit Hotel Properties, Inc. and its consolidated subsidiaries.

### Cautionary Statement about Forward-Looking Statements

This report contains certain forward-looking statements 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”). We intend 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 include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “forecast,” “project,” “potential,” “continue,” “likely,” “will,” “would” or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

- the effects of the novel Coronavirus ("COVID-19") and its variants (the "Pandemic") and other infectious disease outbreaks;
- potential changes in operations as a result of regulations or changes in brand standards;
- financing risks, including the risk of leverage and the corresponding risk of default on our existing indebtedness and potential inability to refinance or extend the maturities of our existing indebtedness;
- default by borrowers to which we lend or provide seller financing;
- global, national, regional and local economic and geopolitical conditions and events, including wars or potential hostilities, such as terrorist attacks, that may affect travel;
- supply and demand factors in our markets or sub-markets;
- the effect of competing alternative accommodations on our business;
- levels of spending for business and leisure travel;
- macroeconomic conditions related to, and our ability to manage, inflationary pressures for commodities, labor and other costs of our business as well as consumer purchasing power and overall behavior, or a potential recessionary environment, which could adversely affect our costs, liquidity, consumer confidence, and demand for travel and lodging;
- adverse changes in, occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) and other lodging property operating metrics;
- financial condition of, and our relationships with, third-party property managers and franchisors;
- the degree and nature of our competition;
- increased interest rates;
- increased operating costs, including but not limited to labor costs;
- increased renovation costs, which may cause actual renovation costs to exceed our current estimates;
- supply-chain disruption, which may reduce access to operating supplies or construction materials and increase related costs;
- changes in zoning laws;
- increases in real property taxes that are significantly higher than our expectations;
- risks associated with lodging property acquisitions, including the ability to ramp up and stabilize newly acquired lodging properties with limited or no operating history or that require substantial amounts of capital improvements for us to earn economic returns consistent with our expectations at the time of acquisition;
- risks associated with dispositions of lodging properties, including our ability to successfully complete the sale of lodging properties under contract to be sold, including the risk that the purchaser may not have access to the capital needed to complete the purchase;
- the nature of our structure and transactions such that our federal and state taxes are complex and there is risk of successful challenges to our tax positions by the Internal Revenue Service (“IRS”) or other federal and state taxing authorities;
- the recognition of taxable gains from the sale of lodging properties as a result of the inability to complete certain like-kind exchanges in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (the “IRC”);
- availability of and the abilities of our property managers and us to retain qualified personnel at our lodging property and corporate offices;
- our failure to maintain our qualification as a real estate investment trust (“REIT”) under the IRC;
- changes in our business or investment strategy;
- availability, terms and deployment of capital;
- general volatility of the capital markets and the market price of our common stock ("Common Stock");
- environmental uncertainties and risks related to natural disasters;
- our ability to recover fully under third-party indemnities or our existing insurance policies for insurable losses and our ability to maintain adequate or full replacement cost "all-risk" property
- our ability to obtain insurance policies on our properties on commercially reasonable terms;
- the effect on our business or customer confidence of a data breach or significant disruption of property operator information technology networks as a result of cyber-attacks that are greater than insurance coverages or indemnities from service providers;
- our ability to effectively manage our joint ventures with our joint venture partners;
- current and future changes to the IRC;
- our ability to continue to effectively enhance our Environmental, Social and Governance ("ESG") program to achieve expected social, environment and governance objectives and goals; and
- the other factors discussed under the heading "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

### Overview

Summit Hotel Properties, Inc. is a self-managed lodging property investment company that was organized in June 2010 and completed its initial public offering in February 2011. We focus on owning lodging properties with efficient operating models that generate strong margins and investment returns. Our lodging properties are typically located in markets with multiple demand generators such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, and leisure attractions. Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership, Summit Hotel OP, LP (the “Operating Partnership”). Through a wholly-owned subsidiary, we are the sole general partner of the Operating Partnership. At March 31, 2023, we owned, directly and indirectly, approximately 87.0% of the Operating Partnership’s issued and outstanding common units of limited partnership interest (“Common Units”), and all of the Operating Partnership’s issued and outstanding Series E and Series F preferred units of limited partnership interest. NewcrestImage Image Holdings, LLC owns all of the issued and outstanding 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation preference $25 per unit) of the Operating Partnership ("Series Z Preferred Units"), which was issued as part of the NCI Transaction (described in *"Note 3 - Investments in Lodging Property, net"* to the Condensed Consolidated Financial Statements.). We collectively refer to preferred units of limited partnership interests of our Operating Partnership as "Preferred Units."

At March 31, 2023, our portfolio consisted of 103 lodging properties with a total of 15,334 guestrooms located in 24 states. We own our lodging properties in fee simple, except for seven lodging properties which are subject to ground leases or subleases. As of March 31, 2023, we own 100% of the outstanding equity interests in 61 of our 103 lodging properties. We own a 51% controlling interest in 39 lodging properties through a joint venture that was formed in July 2019 with GIC (the “GIC Joint Venture”), Singapore’s sovereign wealth fund. We also own 90% equity interests in two separate joint ventures (the "Brickell Joint Venture" and the "Onera Joint Venture"). The Brickell Joint Venture owns two lodging properties, and the Onera Joint Venture owns one lodging property.

Our hotel properties operate under premium franchise brands owned by Marriott® International, Inc. (“Marriott”), Hilton® Worldwide (“Hilton”), Hyatt® Hotels Corporation (“Hyatt”) and InterContinental® Hotels Group (“IHG”). We own one glamping property that operates under the independent brand of Onera Escapes ("Onera").

We have elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes commencing with our short taxable year ended December 31, 2011. To qualify as a REIT, we cannot operate or manage our lodging properties. Accordingly, all of our lodging properties are leased to our taxable REIT subsidiaries ("TRS Lessees"). All of our lodging properties are operated pursuant to lodging property management agreements between our TRS Lessees and professional, third-party lodging property management companies that are not affiliated with us as follows:

| Management Company | Number of Properties | Number of Guestrooms |
| --- | ---: | ---: |
| Affiliates of Aimbridge Hospitality, including Interstate Management Company, LLC | 62 | 9,166 |
| OTO Development, LLC | 15 | 2,164 |
| Stonebridge Realty Advisors, Inc. and affiliates | 8 | 1,143 |
| Affiliates of Marriott, including Courtyard Management Corporation, SpringHill SMC Corporation and Residence Inn by Marriott, Inc. | 6 | 973 |
| Crestline Hotels & Resorts, LLC | 4 | 570 |
| White Lodging Services Corporation | 2 | 453 |
| Hersha Hospitality Management | 2 | 338 |
| Concord Hospitality Enterprises | 2 | 264 |
| InterContinental Hotel Group Resources, Inc., an affiliate of IHG | 1 | 252 |
| Blink Data Services, LLC | 1 | 11 |
| **Total** | 103 | 15,334 |

Our typical lodging property management agreement requires us to pay a base fee to our lodging property manager calculated as a percentage of lodging property revenues. In addition, our typical lodging property management agreements generally provide that the lodging property manager can earn an incentive fee for hotel-level Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") over certain thresholds of a required investment return to us. Our TRS Lessees may employ other lodging property managers in the future. We currently do not have any ownership or economic interest in any of the lodging property management companies engaged by our TRS Lessees. However, we have a purchase option to acquire a 10% to 15% equity interest in the entity that owns the Onera brand, which is an affiliate of Blink Data Services, LLC., if we reach certain investment thresholds in Onera-branded properties.

Our revenues are derived from lodging property operations and consist of room revenue, food and beverage revenue and other lodging property operations revenue. Revenues from our other lodging property operations consist of ancillary revenues related to meeting rooms and other customer services provided at certain of our lodging properties.

### Industry Trends and Outlook

Room-night demand in the U.S. lodging industry is generally correlated to certain macroeconomic trends. Key drivers of lodging demand include changes in gross domestic product, corporate profits, capital investments, employment and more recently, travel-related health and safety restrictions and concerns. Volatility in the economy and risks arising from global and domestic political or economic conditions may cause slowing economic growth, which would have an adverse effect on lodging demand. The global and U.S. economies and the travel and lodging industries experienced a significant downturn as a result of the Pandemic during the years ended December 31, 2020 and 2021. During the year ended December 31, 2022 and the three months ended March 31, 2023, we experienced a significant recovery in lodging demand driven primarily by leisure travelers. Corporate and group demand continues to meaningfully accelerate but remains below historical levels. In recent months, our RevPAR levels are generally in line with pre-Pandemic results.

Rising inflation has been pervasive since 2022, increasing the cost of salaries, wages, material, freight, and energy. Higher costs due to general business inflation were partially offset by lodging price increases, which offset the effect of inflation on our operating results. We expect relatively higher inflation to continue in 2023 resulting in higher costs. Consumers may be resistant to further lodging price increases to offset the continued high inflation, which could have an adverse effect on our consolidated financial condition and results of operations.

### Effects of the Pandemic

Beginning in March 2020, we experienced the negative effects of the Pandemic, which had a significant negative effect on the U.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in hotel demand. As such, we experienced a substantial decline in our revenues, profitability and cash flows from operations during the years ended December 31, 2020 and 2021. During the three months ended March 31, 2022 and thereafter, we experienced significant improvement in our business, driven primarily by leisure travel and to a lesser extent modest improvement in other demand segments, including corporate and group. During the three months ended March 31, 2023, our business has experienced a strong recovery enabling us to return to operating results that are at or above pre-Pandemic levels. A continued growth in operating results is dependent upon a continuation in the recovery of travel, geopolitical stability, moderating inflation, a normalized labor market, and maintaining a high-quality portfolio aligned with evolving guest preferences.

### Our Lodging Property Portfolio

According to current chain scales as defined by Smith Travel Research, Inc. ("STR"), as of March 31, 2023, six of our lodging properties with a total of 953 guestrooms are categorized as Upper-upscale hotels, 81 of our hotel properties with a total of 12,279 guestrooms are categorized as Upscale hotels and 15 of our lodging properties with a total of 2,091 guestrooms are categorized as Upper-midscale hotels. We have one lodging asset that is an 11-unit glamping property. Lodging property information as of March 31, 2023 is as follows:

| Franchise/Brand Marriott | Number of Lodging Properties | Number of Guestrooms |
| --- | ---: | ---: |
| Courtyard by Marriott | 17 | 3,049 |
| Residence Inn by Marriott | 15 | 2,136 |
| AC Hotel by Marriott | 6 | 1,026 |
| SpringHill Suites by Marriott | 7 | 983 |
| TownePlace Suites | 2 | 225 |
| Marriott | 1 | 165 |
| Fairfield Inn & Suites by Marriott | 1 | 140 |
| Element by Marriott | 1 | 108 |
| Four Points by Sheraton | 1 | 101 |
| Total Marriott | 51 | 7,933 |
| **Hilton** |  |  |
| Hilton Garden Inn | 9 | 1,291 |
| Hampton Inn & Suites | 8 | 1,162 |
| Homewood Suites | 3 | 369 |
| Embassy Suites | 2 | 346 |
| Canopy Hotel | 2 | 326 |
| DoubleTree by Hilton | 1 | 210 |
| Total Hilton | 25 | 3,704 |
| **Hyatt** |  |  |
| Hyatt Place | 17 | 2,419 |
| Hyatt House | 3 | 466 |
| Total Hyatt | 20 | 2,885 |
| **IHG** |  |  |
| Holiday Inn Express & Suites | 4 | 564 |
| Staybridge Suites | 1 | 121 |
| Hotel Indigo | 1 | 116 |
| Total IHG | 6 | 801 |
| **Independent** |  |  |
| Onera | 1 | 11 |
| **Total** | 103 | 15,334 |

### Lodging Property Portfolio Activity

We continually evaluate alternatives to refine our portfolio to drive growth and create value. In the normal course of business, we evaluate opportunities to acquire additional properties that meet our investment criteria and opportunities to recycle capital through the disposition of properties. As such, the composition and size of our portfolio of properties may change materially over time. Significant changes to our portfolio of properties could have a material effect on our Condensed Consolidated Financial Statements.

See *"Note 3 - Investments in Lodging Property, net"* of the accompanying Condensed Consolidated Financial Statements for further information related to lodging property acquisitions and dispositions.

### Results of Operations

The comparisons that follow should be reviewed in conjunction with the unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

### Comparison of the Three months ended March 31, 2023 with the Three months ended March 31, 2022

The following table contains key operating metrics for our total portfolio for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 (dollars in thousands, except ADR and RevPAR).

| Revenues: | For the Three Months Ended March 31, 2023 Total Portfolio (103 properties) | Same-Store Portfolio (99 properties) | 2022 Total Portfolio (101 properties)¹ | Same-Store Portfolio (99 properties)¹ | Quarter-over-Quarter Dollar Change Total Portfolio (103/101 properties) | Same-Store Portfolio (99 properties) | Quarter-over-Quarter Percentage Change Total Portfolio (103/101 properties) | Same-Store Portfolio (99 properties) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Room | $163,089 | $155,747 | $128,810 | $130,544 | $34,279 | $25,203 | 26.6% | 19.3% |
| Food and beverage | 10,630 | 8,268 | 5,662 | 5,897 | 4,968 | 2,371 | 87.7% | 40.2% |
| Other | 8,664 | 7,995 | 7,397 | 7,530 | 1,267 | 465 | 17.1% | 6.2% |
| Total | $182,383 | $172,010 | $141,869 | $143,971 | $40,514 | $28,039 | 28.6% | 19.5% |
| **Expenses:** |  |  |  |  |  |  |  |  |
| Room | $35,909 | $34,541 | $28,410 | $28,920 | $7,499 | $5,621 | 26.4% | 19.4% |
| Food and beverage | 7,955 | 6,385 | 4,114 | 4,633 | 3,841 | 1,752 | 93.4% | 37.8% |
| Other lodging property operating expenses | 56,125 | 53,628 | 46,277 | 46,332 | 9,848 | 7,296 | 21.3% | 15.7% |
| Total | $99,989 | $94,554 | $78,801 | $79,885 | $21,188 | $14,669 | 26.9% | 18.4% |
| **Operational Statistics:** |  |  |  |  |  |  |  |  |
| Occupancy | 68.9% | 68.7% | 64.2% | 64.0% | n/a | n/a | 7.3% | 7.3% |
| ADR | $171.63 | $169.33 | $152.79 | $152.30 | $18.84 | $17.03 | 12.3% | 11.2% |
| RevPAR | $118.18 | $116.28 | $98.05 | $97.46 | $20.13 | $18.82 | 20.5% | 19.3% |

¹ Operating results for the same-store portfolio of 99 properties for the three months ended March 31, 2022 include the 26 hotel properties and two parking garages acquired in the first closing of the NCI Transaction on January 13, 2022 (the "First Closing Hotels") and exclude the acquisition of the Canopy New Orleans (the "Canopy"), which was acquired upon completion of construction in the second closing of the NCI Transaction on March 23, 2022. As such, the same-store operating results for the First Closing Hotels for the three months ended March 31, 2022 include the operating results related to the prior owner for the period from January 1, 2022 through the first closing date of the NCI Transaction of January 13, 2022 (the "Pre-Ownership Results"). Operating results for the total portfolio of 101 properties for the three months ended March 31, 2022 include actual operating results for the First Closing Hotels and the Canopy only from the closing dates of the NCI Transaction through March 31, 2022. As such, the same-store operating results for the three months ended March 31, 2022 are higher than the total portfolio operating results for the same period due to the inclusion of the Pre-Ownership Results in the same-store operating results for the three months ended March 31, 2022.

Changes from the three months ended March 31, 2023 compared with the three months ended March 31, 2022 were due to the following:

- *Revenues and RevPAR*. The increase in total revenues and RevPAR for our total portfolio during the first quarter of 2023 compared to the first quarter of 2022 was due to continued strength in leisure travel as well improving corporate and group demand resulting in steady improvement in both weekend and weekday results. We generated additional revenues during the first quarter of 2023 as a result of the acquisition of the Canopy New Orleans hotel upon completion of the second closing of the NCI Transaction at the end of March 2022 and the acquisition of the AC/Element Hotel upon completion of the Brickell Transaction in June 2022. These revenue increases were partially offset by the sale of the Hilton Garden Inn San Francisco Airport North in May 2022. Additionally, revenues for the three months ended March 31, 2022 were negatively affected by the effect of the Omicron variant of COVID-19. On a same store basis, the improvements in our business resulted in an increase of approximately 7.3% in occupancy and 11.2% in average daily rate in the first quarter of 2023, which resulted in a 19.3% increase in same-store RevPAR. For the total portfolio, we experienced an increase of approximately 7.3% in our occupancy and an increase of 12.3% in average daily rate in the first quarter of 2023 in comparison to the first quarter of 2022. This resulted in an increase in RevPAR of 20.5% over the same period in the prior year. See "*Industry Trends and Outlook*" for further information.
- *Room Expenses*. The increase in room expenses for both our total and the same-store portfolio is highly correlated to the increase in room revenues driven by increasing occupancy across our portfolio. Additional factors contributing to higher room expenses include increasing labor costs driven by higher wage rates and more costly contract labor needed to meet room demand. We also incurred additional operating expenses during the first quarter of 2023 as a result of the acquisition of the Canopy New Orleans hotel upon completion of the second closing of the NCI Transaction at the end of March 2022 and the acquisition of the AC/Element Hotel upon completion of the Brickell Transaction in June 2022. These operating expense increases were partially offset by the sale of the Hilton Garden Inn San Francisco Airport North in May 2022.
- *Food and beverage Revenues and Expenses*. Total and same-store food and beverage revenues increased during the quarter ended March 31, 2023 as a result of an expanded food and beverage offering and an increase in occupancy across our portfolio during the period. In the first quarter of 2022, we were offering a limited food and beverage offering due to the effects of the Omicron variant of the COVID-19 virus. The increases in food and beverage expenses were consistent with the increases in food and beverage revenues as we have been able to increase food and beverage prices commensurate with the inflationary and other increases in food and beverage costs.
- *Other lodging property operating Revenues and Expenses*. The increase in other lodging property operating revenues resulted from user fees related to increased occupancy and an increase in parking and resort fees. The increase in other lodging property operating expenses was attributable to increased marketing costs, labor costs, credit card commissions and other occupancy driven increases resulting primarily from increased occupancy as compared with the same period of the prior year.

The following table includes other consolidated income and expenses for the three months ended March 31, 2023 compared with the three months ended March 31, 2022 (dollars in thousands).

|  | For the Three Months Ended March 31, 2023 2023 | 2022 | Dollar Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Property taxes, insurance and other | $14,724 | $13,138 | $1,586 | 12.1% |
| Management fees | 4,805 | 3,795 | 1,010 | 26.6% |
| Depreciation and amortization | 36,908 | 36,274 | 634 | 1.7% |
| Corporate general and administrative | 8,005 | 9,137 | (1,132) | (12.4)% |
| Interest expense | 20,909 | 13,439 | 7,470 | 55.6% |
| Other income, net | 265 | 1,742 | (1,477) | nm¹ |
| Income tax benefit | (472) | (2,000) | 1,528 | (76.4)% |

¹ Not meaningful.

Changes from the three months ended March 31, 2023 compared with the three months ended March 31, 2022 were due to the following:

- *Property Taxes, Insurance and Other*. The increase in Property taxes, insurance and other is primarily due to an increase in franchise taxes and property casualty insurance, which was renewed in the first quarter of 2023.
- *Management Fees*. The increase in Management fees during the current period is primarily due to increased revenues as our business has experienced a steady improvement in performance during the three months ended March 31, 2023.
- *Depreciation and Amortization*. The increase in Depreciation and amortization is due to increased renovation activities at our lodging properties during the quarter ended March 31, 2023 and additional depreciation expense related to the completion of the Brickell Transaction and the Onera Transaction during the year ended December 31, 2022, offset by a decrease in depreciation expense as a result of the sale of the 169-guestroom Hilton Garden Inn San Francisco Airport North in May 2022.
- *Corporate General and Administrative*. The decrease in Corporate general and administrative expenses is primarily due to the departure of the Company's former Executive Vice President and Chief Operating Officer in the first quarter of 2022, which resulted in the Company recording $1.3 million of additional stock-based compensation expense during the period related to the modification of certain stock award agreements.
- *Interest Expense*. Interest expense has increased during the three months ended March 31, 2023 due to higher base rates on our floating rate debt that is not hedged during the three months ended March 31, 2023 in comparison with the three months ended March 31, 2022 and the additional debt related to the Brickell Transaction which closed in May 2022.
- *Other Income, net*. The decrease in Other income, net in the first quarter of 2023 compared to the same period in 2022 is primarily due to interest income that was previously earned on a mezzanine loan in connection with the Brickell acquisition. This mezzanine loan was repaid in connection with the Brickell Transaction which closed in May 2022.
- *Income Tax Benefit.* Income taxes in interim quarters are based on an estimated annual effective tax rate. The Company recorded a $0.5 million income tax benefit during the three months ended March 31, 2023, which represents a decrease of $1.5 million when compared to the same period in the previous year. Seasonality in quarterly net income (loss), and changes in the forecasted earnings causes variability in income taxes recorded in each quarter.

### Non-GAAP Financial Measures

We disclose certain “non-GAAP financial measures,” which are measures of our historical financial performance. Non-GAAP financial measures are financial measures not prescribed by Generally Accepted Accounting Principles ("GAAP"). These measures are as follows: (i) Funds From Operations (“FFO”) and Adjusted Funds from Operations ("AFFO"), (ii) Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"), Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate ("EBITDA*re")* and Adjusted EBITDA*re* (as described below). We caution investors that amounts presented in accordance with our definitions of non-GAAP financial measures may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP financial measures in the same manner. Our non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss) as a measure of our operating performance. Our non-GAAP financial measures may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, debt service obligations and other commitments and uncertainties. Although we believe that our non-GAAP financial measures can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures are not necessarily better indicators of any trend as compared to a comparable measure prescribed by GAAP such as net income (loss).

### FFO and AFFO

As defined by Nareit, FFO represents net income or loss (computed in accordance with GAAP), excluding preferred dividends, gains (or losses) from sales of real property, impairment losses on real estate assets, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization related to real estate assets, and adjustments for unconsolidated partnerships, and joint ventures. AFFO represents FFO excluding amortization of deferred financing costs, franchise fees, equity-based compensation expense, debt transaction costs, premiums on redemption of preferred shares, losses from net casualties, non-cash lease expense, non-cash interest income and non-cash income tax related adjustments to our deferred tax assets. Unless otherwise indicated, we present FFO and AFFO applicable to our Common Stock and Common Units. We present FFO and AFFO because we consider FFO and AFFO important supplemental measures of our operational performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO and AFFO when reporting their results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and AFFO exclude depreciation and amortization related to real estate assets, gains and losses from real property dispositions and impairment losses on real estate assets, FFO and AFFO provide performance measures that, when compared year over year, reflect the effect to operations from trends in occupancy, guestroom rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. Our computation of FFO differs slightly from the computation of Nareit-defined FFO related to the reporting of corporate depreciation and amortization expense, which is de minimus. Our computation of FFO may also differ from the methodology for calculating FFO used by other equity REITs and, accordingly, may not be comparable to such other REITs. FFO and AFFO should not be considered as alternatives to net income (loss) (computed in accordance with GAAP), as an indicator of our liquidity, nor are they indicative of funds available to meet our cash needs, including our ability to pay dividends or make distributions. Where indicated in this Quarterly Report on Form 10-Q, FFO is based on our computation of FFO and not the computation of Nareit-defined FFO unless otherwise noted.

The following is an unaudited reconciliation of our net loss, determined in accordance with GAAP, to FFO and AFFO for the three months ended March 31, 2023 and 2022, (in thousands, except per share/unit amounts):

|  | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net loss | $(1,970) | $(8,973) |
| Preferred dividends | (3,970) | (3,970) |
| Distributions to and accretion of redeemable non-controlling interests | (657) | (555) |
| Loss related to non-controlling interests in consolidated joint ventures | 680 | 82 |
| Net loss applicable to Common Stock and Common Units | (5,917) | (13,416) |
| Real estate-related depreciation | 35,727 | 35,195 |
| Disposition of assets, net | 48 | — |
| Adjustments related to non-controlling interests in consolidated joint ventures | (7,782) | (7,286) |
| FFO applicable to Common Stock and Common Units | 22,076 | 14,493 |
| Recoveries of credit losses | (250) | — |
| Amortization of debt issuance costs | 1,399 | 1,412 |
| Amortization of franchise fees | 142 | 168 |
| Amortization of intangible assets, net | 903 | 911 |
| Equity-based compensation | 1,469 | 3,698 |
| Debt transaction costs | 87 | — |
| Non-cash interest income | (130) | (122) |
| Non-cash lease expense, net | 133 | 128 |
| Casualty losses, net | 536 | 185 |
| Change in deferred tax asset valuation allowance | 63 | — |
| Other non-cash items, net | 711 | — |
| Adjustments related to non-controlling interests in consolidated joint ventures | (878) | (732) |
| AFFO applicable to Common Stock and Common Units | $26,261 | $20,141 |
| FFO per share of Common Stock and Common Units | $0.18 | $0.12 |
| AFFO per share of Common Stock and Common Units | $0.22 | $0.17 |
| Weighted-average diluted shares of Common Stock and Common Units |  |  |
| FFO (1) | 122,010 | 118,976 |
| AFFO (1) (2) | 122,010 | 118,976 |

(1) The weighted-average diluted shares of Common Stock and Common Units used to calculate FFO and AFFO per share of Common Stock and Common Units for the three months ended March 31, 2023 and 2022 includes the dilutive effect of our outstanding restricted stock awards. These shares were excluded from our weighted-average shares outstanding used to calculate net loss per share because they would have been antidilutive. The weighted-average shares of Common Stock and Common Units used to calculate FFO and AFFO per share of Common Stock and Common Units for the three months ended March 31, 2023 and 2022 exclude the potential dilution related to our Convertible Notes as we intend to settle the principal value of the Convertible Notes in cash.

(2) AFFO applicable to Common Stock and Common Units for the three months ended March 31, 2023 and 2022 has not been adjusted for interest related to our Convertible Notes for purposes of calculating AFFO per share of Common Stock and Common Units because we intend to settle the principal portion of the Convertible Notes in cash and we did not include in the denominator of our calculation of AFFO per share of Common Stock and Common Units the potential dilutive effect of shares that would be issued if the principal portion of the Convertible Notes were converted into shares of our Common Stock.

The following is an unaudited reconciliation of weighted-average diluted shares of Common Stock to non-GAAP weighted-average diluted shares of Common Stock and Common Units for FFO and AFFO (in thousands):

|  | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Weighted-average shares of Common Stock outstanding | 105,312 | 104,896 |
| Dilutive effect of unvested restricted stock awards | 138 | 627 |
| Dilutive effect of shares of Common Stock issuable upon conversion of convertible debt | 24,324 | 23,978 |
| Adjusted weighted diluted shares of Common Stock | 129,774 | 129,501 |
| Non-GAAP adjustment for dilutive effects of Common Units | 15,977 | 13,453 |
| Non-GAAP adjustment for dilutive effects of restricted stock awards | 583 | — |
| Non-GAAP adjustment for dilutive effect of shares of Common Stock issuable upon conversion of convertible debt | (24,324) | (23,978) |
| Non-GAAP weighted diluted share of Common Stock and Common Units | 122,010 | 118,976 |

The increase in AFFO applicable to shares of Common Stock and Common Units was due to a substantial improvement in our operating performance during the three months ended March 31, 2023 that has been primarily driven by leisure travel and improvements in other demand segments such as business and group. The increase in AFFO during the three months ended March 31, 2023 was also the result of the acquisition of the Canopy New Orleans hotel upon completion of the second closing of the NCI Transaction at the end of March 2022 and the acquisition of the AC/Element Hotel in Miami upon completion of the Brickell Transaction in June 2022. These increases in AFFO were partially offset by the sale of the Hilton Garden Inn San Francisco Airport North in May 2022. AFFO applicable to shares of Common Stock and Common Units increased $6.1 million for the three months ended March 31, 2023 compared to the same period in 2022.

### EBITDA, EBITDAre and Adjusted EBITDAre

#### EBITDA

EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions.

*EBITDA*re *and Adjusted EBITDA*re

EBITDA*re* is based on EBITDA and is expected to provide additional relevant information about REITs as real estate companies in support of growing interest among generalist investors. EBITDA*re* is intended to be a supplemental non-GAAP performance measure that is independent of a company’s capital structure and will provide a uniform basis to measure the enterprise value of a company compared to other REITs.

EBITDA*re*, as defined by Nareit, is calculated as EBITDA, excluding: (i) loss and gains on disposition of property and (ii) asset impairments, if any. We believe EBITDA*re* is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.

We make additional adjustments to EBITDA*re* when evaluating our performance, such as adjustments related to the provision for credit losses, because we believe that the exclusion of certain additional non-recurring or certain non-cash items described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of Adjusted EBITDA*re*, when combined with the primary GAAP presentation of net income, is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.

The following is an unaudited reconciliation of our net loss, determined in accordance with GAAP, to EBITDA, EBITDA*re* and Adjusted EBITDA*re* for the three months ended March 31, 2023 and 2022, (in thousands):

|  | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net loss | $(1,970) | $(8,973) |
| Depreciation and amortization | 36,908 | 36,274 |
| Interest expense | 20,909 | 13,439 |
| Interest income | (83) | (2) |
| Income tax benefit | (472) | (2,000) |
| EBITDA | 55,292 | 38,738 |
| Disposition of assets, net | 48 | — |
| EBITDAre | 55,340 | 38,738 |
| Recoveries of credit losses | (250) | — |
| Amortization of key money liabilities | (136) | — |
| Equity-based compensation | 1,469 | 3,698 |
| Debt transaction costs | 87 | — |
| Non-cash interest income | (130) | (122) |
| Non-cash lease expense, net | 133 | 128 |
| Casualty losses, net | 536 | 185 |
| Loss related to non-controlling interests in consolidated joint ventures | 680 | 82 |
| Other non-cash items, net | 711 | — |
| Adjustments related to non-controlling interests in consolidated joint ventures | (14,012) | (9,788) |
| Adjusted EBITDAre | $44,428 | $32,921 |

The increase in Adjusted EBITDA*re* is due to a substantial improvement in our operating performance during the three months ended March 31, 2023 that has been primarily driven by leisure travel and improvements in other demand segments such as business and group. The increase in EBITDAre during the three months ended March 31, 2023 was also the result of the acquisition of the Canopy New Orleans hotel upon completion of the second closing of the NCI Transaction at the end of March 2022 and the acquisition of the AC/Element Hotel upon completion of the Brickell Transaction in June 2022. These increases in EBITDAre were partially offset by the sale of the Hilton Garden Inn San Francisco Airport North in May 2022. Adjusted EBITDA*re* increased $11.5 million for the three months ended March 31, 2023 compared to the same period in 2022.

### Liquidity and Capital Resources

Our short-term cash obligations consist primarily of operating expenses and other expenditures directly associated with our lodging properties, recurring maintenance and capital expenditures necessary to maintain our lodging properties in accordance with internal and brand standards, capital expenditures to improve our lodging properties, interest payments, settlement of interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, our joint venture acquisitions and capital requirements, contractual lease payments, corporate overhead, and dividends and distributions to our stockholders and unitholders when declared and paid. Our corporate overhead primarily consists of employee compensation expenses, professional fees and corporate insurance and rent expenses. Cash requirements for our corporate overhead expenses (excluding non-cash stock-based compensation), which are generally paid from operating cash flows, were $6.5 million and $5.4 million for the three months ended March 31, 2023 and 2022, respectively. We generally expect our corporate overhead expenses to remain consistent with the level of our operating activities and market conditions for goods and services.

Our long-term cash obligations consist primarily of the costs of acquiring additional lodging properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our lodging properties, dividends and distributions and scheduled debt payments, including maturing loans.

To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to distribute a sufficient amount of our taxable income to maintain our status as a REIT and to avoid tax on undistributed income. Because we anticipate distributing a substantial amount of our available cash from operations, if sufficient funds are not available to us from lodging property dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business.

### Outstanding Indebtedness

At March 31, 2023, we had $30.0 million of outstanding borrowings under our $400 Million Revolver (as defined in "*Note 5 - Debt*" to the accompanying Condensed Consolidated Financial Statements), $200.0 million outstanding on our $200 Million Term Loan (as defined in "*Note 5 - Debt*" to the accompanying Condensed Consolidated Financial Statements), and $225.0 million outstanding on our 2018 Term Loan (as defined in "*Note 5 - Debt*" to the accompanying Condensed Consolidated Financial Statements). As of April 30, 2023, our $400 Million Revolver had $25.0 million in outstanding borrowings due to repayments subsequent to March 31, 2023. Each of the credit facilities was supported by the 57 lodging properties included in the credit facility borrowing base and a pledge of the equity securities in each of the entities that own the 57 lodging properties, and the respective TRS Lessees. We also had $287.5 million of Convertible Notes outstanding.

At March 31, 2023, the GIC Joint Venture had $200.0 million outstanding under our GIC Joint Venture Credit Facility (as defined in "*Note 5 - Debt*" to the accompanying Condensed Consolidated Financial Statements), which included borrowings of $75.0 million on its $75.0 million term loan and $125.0 million on its $125.0 million revolving line of credit. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the equity interests in the subsidiaries that own the 11-lodging property borrowing base assets, and the related TRS entities, which wholly own the TRS Lessees. See "*Note 5 - Debt*" to the accompanying Condensed Consolidated Financial Statements for additional information.

To complete the NCI Transaction during the first quarter of 2022, the GIC Joint Venture entered into a $410.0 million senior secured term loan facility (the “GIC Joint Venture Term Loan”) secured by the 27 lodging properties and two parking garages acquired in the transaction and assumed a PACE loan totaling $6.5 million. The GIC Joint Venture Term Loan has an accordion feature which provides for an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan will mature on January 13, 2026 and can be extended for one 12-month period at the GIC Joint Venture's option, subject to certain conditions. The GIC Joint Venture Term Loan is interest-only and provides for a floating interest rate equal to SOFR plus 2.86%. The outstanding balance of the PACE loan is $6.2 million at March 31, 2023.

Additionally, the GIC Joint Venture has a mortgage loan outstanding totaling $13.0 million at March 31, 2023 related to the acquisition of the Embassy Suites in Tucson, AZ in December 2021.

In June 2022, the Brickell Joint Venture, as borrower, and the Operating Partnership, as the non-recourse guarantor, entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida ("City National Bank") to finance the dual-branded 264-guestroom AC/Element Hotel. The City National Bank loan provides for an interest rate equal to one-month LIBOR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank loan is prepayable at any time without penalty. The balance of the mortgage loan is $47.0 million at March 31, 2023.

As of March 31, 2023, we have scheduled debt principal amortization payments during the next twelve months totaling $2.2 million when taking into consideration extension options available to us. Currently, we have the capacity to pay these scheduled principal payments using cash on hand or draws under our $400 Million Revolver.

We have obtained financing through debt instruments having staggered maturities and intend to continue to do so in the future. Our debt includes, and may include in the future, debt secured by equity pledges, debt secured by first priority mortgage liens on certain lodging properties and unsecured debt. We believe that we will have adequate liquidity to meet the requirements for scheduled maturities and principal repayments. However, we can provide no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable terms.

Our outstanding indebtedness requires us to comply with various financial and other covenants. At March 31, 2023, we are in compliance with all of our loan agreements. We have entered into certain amendments of the 2018 Senior Credit Facility and the 2018 Term Loan that give us full access to the $400 Million Revolver (subject to certain conditions) and improve certain financial covenant measures through December 31, 2023. Additionally, we have amended the GIC Joint Venture Credit Facility to provide for certain financial covenant waivers and adjustments as described in “*Note 5 – Debt”* to the Condensed Consolidated Financial Statements. Our outstanding indebtedness requires us to comply with various financial and other covenants. At March 31, 2023, we and our GIC Joint Venture are in compliance with all loan covenants.

See "*Note 5 - Debt*" to the accompanying Condensed Consolidated Financial Statements related to our financing arrangements.

A summary of our gross debt at March 31, 2023 is as follows (dollars in thousands):

| Lender 2018 Senior Credit Facility Bank of America, NA | Interest Rate | Maturity Date | Number of Encumbered Properties | Principal Amount Outstanding |
| --- | ---: | --- | ---: | ---: |
| $400 Million Revolver (1)(2) | 6.86% | September 30, 2023 | n/a | $30,000 |
| $200 Million Term Loan (1)(3) | 6.81% | April 1, 2024 | n/a | 200,000 |
| Total Senior Credit and Term Loan Facility |  |  |  | 230,000 |
| **Term Loans** |  |  |  |  |
| KeyBank National Association Term Loan (1) | 6.64% | February 14, 2025 | n/a | 225,000 |
| **Convertible Notes** | 1.50% | February 15, 2026 | n/a | 287,500 |
| **Secured Mortgage Indebtedness** |  |  |  |  |
| MetaBank | 4.44% | July 1, 2027 | 3 | 43,518 |
| Bank of the Cascades (First Interstate Bank) (4) | 6.60% | December 19, 2024 | 1 | 7,624 |
|  | 4.30% | December 19, 2024 | — | 7,624 |
| Total Mortgage Loans |  |  | 4 | 58,766 |
|  |  |  |  | 801,266 |
| **Brickell Joint Venture Mortgage Loan** |  |  |  |  |
| City National Bank of Florida | 7.86% | June 30, 2025 | 2 | 47,000 |
| **GIC Joint Venture Credit Facility and Term Loans** |  |  |  |  |
| Bank of America, N.A. |  |  |  |  |
| $125 Million Revolver (5) | 6.99% | October 8, 2023 | n/a | 125,000 |
| $75 Million Term Loan (5) | 6.94% | October 8, 2023 | n/a | 75,000 |
| Bank of America, N.A. (6) | 7.63% | January 13, 2026 | n/a | 410,000 |
| Wells Fargo | 4.99% | June 6, 2028 | 1 | 12,969 |
| PACE loan | 6.10% | July 31, 2040 | 1 | 6,197 |
| Total GIC Joint Venture Credit Facility and Term Loans |  |  | 2 | 629,166 |
| Total Joint Venture Debt |  |  | 2 | 676,166 |
| Total Debt |  |  | 6 | $1,477,432 |

(1) The 2018 Senior Credit Facility and Term Loans are supported by a borrowing base of 57 unencumbered hotel properties and a pledge of the equity securities of the entities that own and operate the 57 unencumbered hotels.

(2) We have exercised our option to extend the maturity date for the $400 Million Revolver to September 30, 2023 and we have additional options to extend the maturity date to March 31, 2025, subject to certain conditions.

(3) The maturity date for the $200 Million Term Loan can be extended to April 1, 2025 at the Company’s option, subject to certain conditions.

(4) The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.

(5) The $125 Million Revolver and the $75 Million Term Loan are secured by pledges of the equity in the entities (and affiliated entities) that own 11 lodging properties.

(6) The GIC Joint Venture's $410 million term loan with Bank of America, N.A. is secured by pledges of the equity in the entities (and affiliated entities) that own 27 lodging properties.

We are exposed to interest rate risk through our variable-rate debt. We manage this risk primarily by managing the amount, sources, and duration of our debt funding and through the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage our exposure to known or expected cash payments related to our variable-rate debt.

On March 24, 2023, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into two $100.0 million interest rate swaps to fix one-month term SOFR until January 2026. The interest rate swaps have an effective date of July 1, 2023 and a termination date of January 13, 2026. Pursuant to the interest rate swaps, we will pay a fixed rate of 3.354% and receive the one-month term SOFR floating rate index.

During the three months ended March 31, 2023, the fair value of our interest rate swaps decreased $4.4 million due to a decrease in interest rate expectations. Each interest rate swap fixes the interest rates on portions of our variable interest rate indebtedness and converts SOFR from a floating rate to average fixed rates ranging from 2.56% to 2.92%.

### Capital Expenditures

During the three months ended March 31, 2023, we funded $24.1 million in capital expenditures ($19.5 million on a pro rata basis) at our lodging properties. We anticipate spending approximately $40.3 million to $60.3 million on capital expenditures on a pro rata basis during the remainder of 2023. We expect to fund these expenditures through a combination of cash flows from operations and borrowings under our $400 Million Revolver, or other potential sources of capital, to the extent available to us.

### Cash Flows

Unaudited cash flow information for the three months ended March 31, 2023 and 2022 is as follows (in thousands):

|  | Three Months Ended March 31, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $32,006 | $25,505 | $6,501 |
| Net cash used in investing activities | (25,408) | (284,818) | 259,410 |
| Net cash provided by financing activities | 3,425 | 277,602 | (274,177) |
| Net change in cash, cash equivalents and restricted cash | $10,023 | $18,289 | $(8,266) |

Changes from the three months ended March 31, 2023 compared to the three months ended March 31, 2022 were due to the following:

- *Cash provided by operating activities*. The increase in cash provided by operating activities primarily resulted from an increase in net income of $5.4 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and net changes in working capital of $1.1 million.
- *Cash used in investing activities*. The decrease in cash used in investing activities was primarily due to the closing of the NCI Transaction in the first quarter of 2022. Cash used in investing activities during the three months ended March 31, 2023 primarily related to renovation capital and the funding of the Onera Mezzanine Loan (see "*Note 3 - Investments in Lodging Property, net*" to the accompanying Condensed Consolidated Financial Statements).
- *Cash provided by financing activities*. The decrease in cash provided by financing activities for the three months ended March 31, 2023 was primarily the result of contributions by our GIC Joint Venture partner and net borrowings to complete the NCI Transaction in the first quarter of 2022.

### Critical Accounting Policies

For critical accounting policies, see *"Note 2 - Basis of Presentation and Significant Accounting Policies"* to the accompanying Condensed Consolidated Financial Statements.

### Cybersecurity

The hospitality industry and certain of the major brand and franchise companies have experienced cybersecurity breaches. We are not aware of any material cybersecurity losses at any of our properties. Cybersecurity risks at our lodging properties are managed through our franchisors and property management companies. An important part of our cybersecurity risk mitigation efforts includes maintaining cybersecurity insurance and indemnifications in certain of our property management agreements. Our Board of Directors, primarily through the Audit Committee, oversees management's approach to managing cybersecurity risks.

## Market risk

As filed, 4,164 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 exposed is interest rate risk. Our primary interest rate exposure is to SOFR. We primarily use derivative financial instruments to manage interest rate risk.

In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified SOFR as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. The transition from LIBOR to SOFR or another benchmark interest rate may result in a different calculation of our variable interest rates that are currently indexed to LIBOR. Our 2018 Senior Credit Facility, 2018 Term Loan and GIC Joint Venture Credit Facility and GIC Joint Venture Term Loans have each been amended to transition from LIBOR to SOFR. As of March 31, 2023, we have two remaining outstanding loans that are indexed to LIBOR.

At March 31, 2023, we were party to six interest rate derivative agreements pursuant to which we receive variable-rate payments in exchange for making fixed-rate payments (dollars in thousands):

| Contract date | Effective Date | Expiration Date | Average Annual Effective Fixed Rate | Notional Amount |
| --- | --- | --- | ---: | ---: |
| June 11, 2018 | September 28, 2018 | September 30, 2024 | 2.86% | $75,000 |
| June 11, 2018 | December 31, 2018 | December 31, 2025 | 2.92% | 125,000 |
| July 26, 2022 | January 31, 2023 | January 31, 2027 | 2.60% | 100,000 |
| July 26, 2022 | January 31, 2023 | January 31, 2029 | 2.56% | 100,000 |
| March 24, 2023 | July 1, 2023 | January 13, 2026 | 3.35% | 100,000 |
| March 24, 2023 | July 1, 2023 | January 13, 2026 | 3.35% | 100,000 |
|  |  |  |  | $600,000 |

At March 31, 2023, after giving effect to our interest rate derivative agreements, $757.8 million, or 51.3%, of our consolidated debt had fixed interest rates and $719.6 million, or 48.7%, had variable interest rates.

Our variable rate debt increased $90.0 million compared to the same period of the prior year, due in part to $47.0 million of new variable rate debt obtained in the Brickell transaction, and the defeasance of $88.4 million of fixed rate debt (funded with available cash and line of credit borrowings) during the third and fourth quarters of 2022.

At December 31, 2022, after giving effect to our interest rate derivative agreements, $758.4 million, or 51.8%, of our debt had fixed interest rates and $704.7 million, or 48.2%, had variable interest rates. Taking into consideration our existing interest rate swaps an increase or decrease in interest rates of 1.0% would decrease or increase, respectively, our cash flows by approximately $7.2 million per year. See "*Note 7 - Derivative Financial Instruments and Hedging"* to the accompanying Condensed Consolidated Financial Statements for additional information.

As our fixed-rate debts mature, they will become subject to interest rate risk. In addition, as our variable-rate debts mature, lenders may impose interest rate floors on new financing arrangements because of the low interest rates experienced during the past few years. As of March 31, 2023, we have scheduled debt principal amortization payments during the next twelve months totaling $2.2 million when taking into consideration extension options available to us.

On March 24, 2023, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into two $100.0 million interest rate swaps to fix one-month term SOFR until January 2026. The interest rate swaps have an effective date of July 1, 2023 and a termination date of January 13, 2026. Pursuant to the interest rate swaps, we will pay a fixed rate of 3.354% and receive the one-month term SOFR floating rate index.

## Controls and procedures

As filed, 1,337 characters.

### Controls and Procedures

### Disclosure Controls and Procedures

Our management team evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2023. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that 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 were no changes in our internal control over financial reporting during the three-month period covered by this Quarterly Report on Form 10-Q, which were identified in connection with management’s evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 169 characters.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022.

Filed May 3, 2023.
Source: SEC EDGAR, the filing index for accession 0001497645-23-000011. Last ingested by Listed: Nov 4, 2026, 08:21 ET. No prices; not investment advice.