Summit Hotel Properties, Inc.: Form 10-Q for the period ended Mar 31, 2024

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, 2023, 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, 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, performance or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

• global, national, regional and local economic and geopolitical conditions and events, including wars or potential hostilities, such as terrorist attacks, that may affect business transient, group and other travel or consumer behavior;
• macroeconomic conditions related to, and our ability to manage, inflationary pressures for labor, commodities, and other costs of our business;
• 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;
• levels of spending for business and leisure travel;
• adverse changes in occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) and other lodging property operating metrics;
• potential changes in operations as a result of new 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;
• effects of infectious disease outbreaks or pandemics;
• default by borrowers to which we lend;
• supply and demand factors in our markets or sub-markets;
• the effect of alternative accommodations on our business;
• financial condition of, and our relationships with, third-party property managers and franchisors;
• the degree and nature of our competition;
• increased interest rates or continued high rates of interest;
• 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;
• significant increases in the cost of real property taxes and/or insurance;
• 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 or other federal and state taxing authorities;
• 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 Internal Revenue Code of 1986, as amended (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;
• 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 insurance policies on our properties on commercially reasonable terms;
• the effect 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 manage our Environmental, Social and Governance 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, 2023.

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, 2024, we owned, directly and indirectly, approximately 87% 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 6.25% Series E and 5.875% 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 (as defined in Note 4 -Debt to the accompanying Condensed Consolidated Financial Statements). We collectively refer to preferred units of limited partnership interests of our Operating Partnership as "Preferred Units."

At March 31, 2024, our portfolio consisted of 99 lodging properties with a total of 14,785 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, 2024, we own 100% of the outstanding equity interests in 56 of our 99 lodging properties. We own a 51% controlling interest in 40 lodging properties through a joint venture that was formed in July 2019 with USFI G-Peak, Ltd. ("GIC"), a private limited company incorporated in the Republic of Singapore (the “GIC Joint Venture”). 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 primarily 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"), and the Nordic Lodge in Steamboat, CO that we acquired in June 2023, which is an independent property.

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:

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 guest 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, and therefore hotel revenues, include changes in gross domestic product, corporate profits, capital investments, and employment. From a cost perspective, elevated inflation has been pervasive since 2022, increasing the cost of salaries, wages, supplies, material, freight, insurance and energy. Higher costs from broad inflationary pressures have been partially offset by lodging price increases. While growth rates have decelerated, inflation is still increasing faster than historical norms, which may continue in 2024.

During the three months ended March 31, 2024, we experienced continued revenue growth driven increasingly by strong group travel and improvements in business transient demand, in addition to continued strength in leisure travel. Strong room night demand coupled with minimal forecasted growth in supply over the next several years positions the industry for continued growth.

Our Lodging Property Portfolio

According to current chain scales as defined by Smith Travel Research, Inc., as of March 31, 2024, six of our lodging properties with a total of 953 guestrooms are categorized as Upper-upscale hotels, 77 of our hotel properties with a total of 11,776 guestrooms are categorized as Upscale hotels and 14 of our lodging properties with a total of 1,998 guestrooms are categorized as Upper-midscale hotels. We have one lodging asset that is an 11-unit glamping property, and one 47-unit independent lodging property. Lodging property information as of March 31, 2024 is as follows:

31

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" to the Condensed Consolidated Financial Statements for further information related to lodging property acquisitions and dispositions.

Comparison of the Three Months Ended March 31, 2024 with the Three Months Ended March 31, 2023

The following table contains key operating metrics for our total portfolio for the three months ended March 31, 2024 compared with the three months ended March 31, 2023 (dollars in thousands, except ADR and RevPAR):

Changes from the three months ended March 31, 2024 compared with the three months ended March 31, 2023 were due to the following:

• Revenues and RevPAR. The increase in total revenues and RevPAR for our total and same-store portfolios during the three months ended March 31, 2024 compared with the three months ended March 31, 2023 was due to improving business transient and group demand, continued strength in leisure travel, as well as strong marketing and revenue management. The increase in total revenues and RevPAR for our total portfolio is also partially due to the net effect of the acquisitions of the Nordic Lodge - Steamboat Springs, CO and the Residence Inn - Scottsdale, AZ in June 2023, partially offset by the disposition of a portfolio of four properties in May 2023, the disposition of the Hyatt Place - Baltimore (Owings Mills), MD in December 2023, and the disposition of the Hyatt Place - Dallas (Plano), TX during the three months ended March 31, 2024. On a same store basis, the improvements in our business resulted in an increase of approximately 3.1% in occupancy, partially offset by a 1.3% decrease in average daily rate during the three months ended March 31, 2024, which resulted in a 1.7% increase in same-store RevPAR. For our total portfolio, we experienced an increase of approximately 4.2% in our occupancy and an increase of 0.6% in average daily rate during the three months ended March 31, 2024 in comparison to the three months ended March 31, 2023. This resulted in an increase in RevPAR of 4.9% over the same period in the prior year.
• Room Expenses. Room expenses for our total portfolio were essentially flat for the three months ended March 31, 2024 and 2023 as a result of strong expense management as well as the net effect of transactions during the period, which included the acquisitions of the Nordic Lodge - Steamboat Springs, CO and the Residence Inn - Scottsdale, AZ in June 2023, partially offset by the disposition of a portfolio of four properties in May 2023, the disposition of the Hyatt Place - Baltimore (Owings Mills), MD in December 2023, and the sale of the Hyatt Place - Dallas (Plano), TX during the three months ended March 31, 2024. Room expenses for our same-store portfolio increased less than the increase in same-store portfolio revenue despite higher occupancy during the three months ended March 31, 2024 as a result of strong expense management.
• Food and Beverage Revenues and Expenses. Total portfolio and same-store Food and beverage revenues increased during the three months ended March 31, 2024 as a result of an increase in occupancy across our portfolio and an increase in group-related catering. The increases in total portfolio and same-store Food and beverage revenues were partially offset by the disposition of a portfolio of four properties in May 2023 and the sale of the Hyatt Place - Dallas (Plano), TX during the three months ended March 31, 2024.
• Other Revenues and Other Lodging Property Operating Expenses. The increase in Other revenues for the total portfolio and same-store resulted from miscellaneous revenues, such as cancellation fees and marketplace purchases related to increased occupancy, an increase in parking and resort fees, and ancillary revenues driven by increased group demand. The increase in other lodging property operating expenses was attributable to increased marketing costs, labor costs, credit card commissions and other expenses resulting primarily from increased occupancy as compared with the same period of the prior year.

The following table is a comparison of other consolidated income and expenses (dollars in thousands).

¹ Not meaningful.

Changes from the three months ended March 31, 2024 compared with the three months ended March 31, 2023 were due to the following:

• Property Taxes, Insurance and Other. The decrease in Property taxes, insurance and other is primarily due to an increase in property tax refunds of $0.5 million as a result of successful appeal efforts to reduce property tax assessments, coupled with a reduction of state franchise tax accruals during the period of $0.5 million, partially offset by an increase in property and casualty insurance premiums of $0.4 million and a $0.1 million increase in variable lease expense.
• Management Fees. The increase in Management fees during the current period is consistent with the increase in room revenue for the three months ended March 31, 2024 compared with the same period of the prior year. Management fees increased during the current period due to the acquisitions of the Nordic Lodge - Steamboat, CO and the Residence Inn - Scottsdale, AZ in June 2023, partially offset by the disposition of the Hyatt Place - Dallas (Plano), TX during the three months ended March 31, 2024 and a re-negotiation of property management agreements with two of our properties managers in 2023 that resulted in lower property management fees.
• Depreciation and Amortization. Depreciation and amortization remained consistent between the three months ended March 31, 2024 and 2023, which is the net result of acquisitions of the of the Nordic Lodge - Steamboat Springs, CO and the Residence Inn - Scottsdale, AZ in June 2023, and capital expenditures on our lodging properties over the prior twelve months, offset by the reclassification of four hotel properties to Assets Held for Sale on December 31, 2023, which suspended depreciation expense during the first quarter of 2024, disposition of a portfolio of four properties in May 2023, the disposition of the Hyatt Place - Baltimore (Owings Mills), MD in December 2023, and the sale of the Hyatt Place - Dallas (Plano), TX during the three months ended March 31, 2024.
• Corporate General and Administrative. The increase in Corporate general and administrative expenses is primarily due to an increase in non-cash stock compensation expense during the three months ended March 31, 2024 compared with the three months ended March 31, 2023.
• Interest Expense. Interest expense increased during the three months ended March 31, 2024 due to higher base rates on our floating rate debt that is not hedged in comparison with the three months ended March 31, 2023, partially offset by lower interest incurred during the three months ended March 31, 2024 due to lower average outstanding debt for the current period compared with the same period of the prior year.
• Income Tax Expense (Benefit). Income taxes in interim quarters are based on an estimated annual effective tax rate. The Company recorded $0.2 million in income tax expense for the three months ended March 31, 2024, which represents a $0.7 increase from the three months ended March 31, 2023. 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 ("EBITDAre") and Adjusted EBITDAre (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 the National Association of Real Estate Investment Trusts ("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 income (loss), determined in accordance with GAAP, to FFO and AFFO (in thousands, except per share/unit amounts):

(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, 2024 and 2023 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, 2024 and 2023 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, 2024 and 2023 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.

(3) Loss on disposal of assets and other dispositions, net for the three months ended March 31, 2023 is recorded in Other income (loss) in our Condensed Consolidated Statement of Operations due to the nominal amount.

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):

AFFO applicable to shares of Common Stock and Common Units increased by $3.7 million for the three months ended March 31, 2024 in comparison with the three months ended March 31, 2023 primarily as a result of the improvement in our business that was primarily driven by improving demand for business transient and group travel and continued strength in leisure travel, and the acquisitions of the Nordic Lodge - Steamboat Springs, CO and the Residence Inn Scottsdale, AZ, in June 2023, partially offset by the sale of a portfolio of four properties in May 2023, the disposition of the Hyatt Place - Baltimore (Owings Mills), MD in December 2023 and the sale of the Hyatt Place - Dallas (Plano), TX during the three months ended March 31, 2024.

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.

EBITDAre and Adjusted EBITDAre

EBITDAre 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. EBITDAre 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.

EBITDAre, 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 EBITDAre 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 EBITDAre 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 EBITDAre, 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 income (loss), determined in accordance with GAAP, to EBITDA, EBITDAre and Adjusted EBITDAre, (in thousands):

(1) Loss on disposal of assets and other dispositions, net for the three months ended March 31, 2023 is recorded in Other income (loss) in our Condensed Consolidated Statement of Operations due to the nominal amount.

The increase in Adjusted EBITDAre for the three months ended March 31, 2024 in comparison with the three months ended March 31, 2023 is primarily a result of the improvement in our business that was primarily driven by improving demand for business transient and group travel and continued strength in leisure travel, and the acquisitions of the Nordic Lodge - Steamboat Springs, CO and the Residence Inn Scottsdale, AZ, in June 2023 partially offset by the sale of a portfolio of four properties in May 2023, the disposition of the Hyatt Place - Baltimore (Owings Mills), MD in December 2023 and the sale of the Hyatt Place - Dallas (Plano), TX during the three months ended March 31, 2024.

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, corporate insurance and rent expenses. Cash requirements for our corporate overhead expenses (excluding non-cash equity-based compensation), which are generally paid from operating cash flows, were $6.5 million for each of the three months ended March 31, 2024 and 2023. 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 dividends and distributions, scheduled debt payments, including maturing loans, capital required for renovations and other non-recurring capital expenditures that periodically are made with respect to our lodging properties, and lease obligations.

Our sources of cash are primarily from operating cash flows, sales of lodging properties, principal and interest payments from borrowers on notes receivable, and debt financing.

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, 2024, we had $55.0 million of outstanding borrowings under our $400 Million Revolver, $200.0 million outstanding on our $200 Million Term Loan, and $200.0 million outstanding on our 2024 Term Loan (each of such credit facilities are defined in "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements). Each of the credit facilities was supported by the 52 lodging properties included in the credit facility borrowing base. We also had $287.5 million of Convertible Notes outstanding. In April 2024, we repaid the $55.0 million outstanding balance on our $400 Million Revolver from the net proceeds of the sale of a portfolio of two lodging properties in New Orleans, LA.

For more information concerning the 2023 Senior Credit and Term Loan Facility, see "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements.

At March 31, 2024, the GIC Joint Venture had $200.0 million outstanding under the GIC Joint Venture Credit Facility (defined in "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements), which included borrowings of $75.0 million on its $75 Million Term Loan and $125.0 million on its $125 Million Revolver. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the equity interests in the subsidiaries that own the 13-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.

Our outstanding indebtedness requires us to comply with various financial and other covenants. At March 31, 2024, we and our GIC Joint Venture are in compliance with all loan covenants. However, a lender has asserted that we are in technical default under a mortgage loan. We believe that the lender's assertion of default is without merit. See "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements related to our financing arrangements.

To complete the NCI Transaction during the first quarter of 2022, the GIC Joint Venture entered into the $410.0 million GIC Joint Venture Term Loan secured by the 27 lodging properties and two parking garages acquired in the transaction and assumed a Property Assessed Clean Energy ("PACE") loan totaling $6.5 million. The outstanding balance of the PACE loan is $6.0 million at March 31, 2024. See "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements.

Additionally, the GIC Joint Venture has a mortgage loan outstanding totaling $12.7 million at March 31, 2024 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 balance of the mortgage loan is $47.0 million at March 31, 2024. See "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements.

As of March 31, 2024, we have scheduled debt principal amortization payments during the next twelve months totaling $16.4 million. 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, 2024, we and our GIC Joint Venture are in compliance with all loan covenants.

A summary of our gross debt at March 31, 2024 is as follows (dollars in thousands):

(1) The 2023 Senior Credit and Term Loan Facility is supported by a borrowing base of 52 unencumbered hotel properties.

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

(3) 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 13 lodging properties. Each individually can be extended for a single twelve-month period through September 2028 at the option of the GIC Joint Venture, subject to certain conditions.

(4) The GIC Joint Venture Term Loan is secured by pledges of the equity in the entities (and affiliated entities) that own 26 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.

In January 2024, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into a $100.0 million interest rate swap to fix one-month term SOFR until January 2026. The interest rate swap has an effective date of October 1, 2024 and a termination date of January 13, 2026. Pursuant to the interest rate swap, we will pay a fixed rate of 3.77% and receive the one-month term SOFR floating rate index.

During the three months ended March 31, 2024, the fair value of our interest rate swaps increased $5.7 million due to a change 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 3.77%.

Capital Expenditures

During the three months ended March 31, 2024, we funded $18.1 million in capital expenditures ($15.3 million on a pro rata basis) at our lodging properties. We anticipate spending approximately $65.0 million to $85.0 million on capital expenditures on a pro rata basis during 2024. 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 is as follows (in thousands):

Changes from the three months ended March 31, 2024 compared with the three months ended March 31, 2023 were due to the following:

• Cash provided by operating activities. Cash provided by operating activities for the three months ended March 31, 2024 was the result of net income of $43.5 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a net increase in working capital of $15.4 million. Cash provided by operating activities for the three months ended March 31, 2023 was the result of net income of $37.8 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a net increase in working capital of $5.8 million. The change in working capital for the first quarter of 2024 was primarily due to prepayment in full of insurance premiums during the period totaling approximately $10.7 million.
• Cash used in investing activities. The decrease in cash used in investing activities was primarily due to the net effect of capital expenditures related to hotel property renovations during each period, offset by the proceeds from the sale of the Hyatt Place - Dallas (Plano), TX during the first quarter of 2024.
• Cash provided by financing activities. Cash used in financing activities for the three months ended March 31, 2024 was primarily related to net borrowings on our line of credit of $55.0 million (net of repayments), partially offset by the payment of dividends and distributions of approximately $12.0 million, the payment of principal on our term loans of $33.5 million, financing costs of approximately $2.4 million related to the 2024 Term Loan and our $200 Million GIC Joint Venture Credit Facility (as defined in "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements), and $0.8 million related to shares acquired for employee withholding requirements.

Cash provided by financing activities for the three months ended March 31, 2023 was primarily related to net borrowings on our line of credit of $15.0 million and the sale of preferred stock in our GIC Joint Venture of $1.4 million, offset by the payment of dividends of $9.5 million, principal payments of term debt of $0.7 million, financing costs of $0.6 million, distributions to our joint venture partners of $0.8 million, and $1.3 million related to shares acquired for employee withholding requirements.

Critical Accounting Policies

For critical accounting policies, see "Note 2 - Basis of Presentation and Significant Accounting Policies" to the accompanying Condensed Consolidated Financial Statements and our Annual Report on Form 10-K for the year ended December 31, 2023.

Cybersecurity

The hospitality industry and certain of the major brand and franchise companies have in the past 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 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. As of July 1, 2023, all of our outstanding loans are now indexed to SOFR. Therefore, our primary interest rate exposure is to SOFR. We primarily use derivative financial instruments to manage interest rate risk.

At March 31, 2024, we were party to seven interest rate derivative agreements, of which six were in effect, pursuant to which we receive variable-rate payments in exchange for making fixed-rate payments (dollars in thousands):

At March 31, 2024, after giving effect to our interest rate derivative agreements, $956.0 million, or 65%, of our consolidated debt had fixed interest rates and $511.4 million, or 35%, had variable interest rates. At March 31, 2024, debt related to our wholly-owned properties and our pro rata share of joint venture debt has a fixed-rate debt ratio of approximately 73% of our total pro rata indebtedness when taking into consideration interest rate swaps. In April 2024, after repayment of the outstanding $55.0 million balance of our $400 Million Revolver from the proceeds of the sale of a portfolio of two lodging properties in New Orleans, LA and a $6.0 million paydown to the GIC Joint Venture Term Loan from the proceeds of the sale of the Hilton Garden Inn - Bryan (College Station), TX, debt related to our wholly-owned properties and our pro rata share of joint venture debt has a fixed-rate debt ratio of approximately 77% of our total pro rata indebtedness when taking into consideration interest rate swaps.

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 $5.1 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, 2024, we have scheduled debt principal amortization payments during the next twelve months totaling $16.4 million.

In January 2024, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into a $100.0 million interest rate swap to fix one-month term SOFR until January 2026. The interest rate swap has an effective date of October 1, 2024 and a termination date of January 13, 2026. Pursuant to the interest rate swap, we will pay a fixed rate of 3.77% and receive the one-month term SOFR floating rate index.

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, 2024. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2024, 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 Security Exchange Commission’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.

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, 2023.