Summit Hotel Properties, Inc.: Form 10-Q for the period ended Sep 30, 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 political 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 properties 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 September 30, 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 Holdings, LLC and NewcrestImage Holdings II, LLC own 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 5 -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 September 30, 2024, our portfolio consisted of 96 lodging properties with a total of 14,255 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 September 30, 2024, we own 100% of the outstanding equity interests in 54 of the 96 lodging properties. We own a 51% controlling interest in 39 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 Springs, CO that we acquired in June 2023, which is an independent lodging property.

We have elected to be taxed as a 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" or "TRSs"). 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 parking, cancellation fees, 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.

During the nine months ended September 30, 2024, we experienced continued same-store revenue growth as a result of strong group travel and improvements in business transient demand which offset normalization in leisure demand. RevPAR growth decelerated in the third quarter of 2024 from the first half of the year, predominantly driven by the continued normalization of leisure demand over the summer months. The long-term outlook for the industry remains favorable as forecasted room night demand growth and increases in average daily rate, coupled with minimal supply growth, are expected to drive continued industry RevPAR growth over the next several years.

Our Lodging Property Portfolio

According to current chain scales as defined by Smith Travel Research, Inc. ("STR"), as of September 30, 2024, six of our lodging properties with a total of 953 guestrooms are categorized as Upper-upscale hotels, 74 of our lodging properties with a total of 11,247 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 46-unit independent lodging property that are not categorized by STR. Lodging property information at September 30, 2024 is as follows:

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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.

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 September 30, 2024 with the Three Months Ended September 30, 2023

The following table contains key operating metrics for our portfolio for the three months ended September 30, 2024 compared with the three months ended September 30, 2023 (dollars in thousands, except ADR and RevPAR).

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The portfolio information above for the three months ended September 30, 2024 and 2023 reflects operating results for various portions of each period for certain lodging properties as a result of the sales of lodging properties. The following table details how the disposition transactions affect each reporting period:

Changes from the three months ended September 30, 2024 compared with the three months ended September 30, 2023 were due to the following:

• Revenues and RevPAR. Room revenues for our total portfolio during the third quarter of 2024 compared with the third quarter of 2023 decreased by $4.3 million as a result of a $0.3 million increase in same-store revenues driven by improving business transient and group demand which mitigated the effect of the normalization in leisure demand, offset by a $4.6 million decrease in room revenues due to the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023. For the applicable periods, the number of properties in our total portfolio declined from 101 lodging properties at September 30, 2023 to 96 lodging properties at September 30, 2024.

The 2.7% increase in RevPAR for our total portfolio during the third quarter of 2024 compared with the third quarter of 2023 was due to a 0.4% increase in occupancy and a 2.3% increase in ADR. The increase in RevPAR is partially the result of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023, all of which generally had lower nominal RevPAR than the remaining portfolio. On a same store basis, we experienced a decrease of 1.0% in occupancy and an increase of 1.2% in ADR in the third quarter of 2024, which resulted in a 0.2% increase in same-store RevPAR. See "Industry Trends and Outlook" for further information.

• Room Expenses. Room expenses for our total portfolio for the third quarter of 2024 compared with the third quarter of 2023 decreased $0.2 million as a result of a $1.3 million increase in same-store room expenses driven by increases in hourly wages combined with normalized staffing levels, offset by a $1.5 million decrease in room expenses due to the effect of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023.
• Food and Beverage Revenues and Expenses. The $0.7 million decrease in total portfolio food and beverage revenues during the third quarter of 2024 compared with the third quarter of 2023 was driven by a $0.5 million decrease in same-store food and beverage revenues as a result of a 1.0% decrease in occupancy, coupled with a $0.2 million decrease in food and beverage revenues as a result of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023.

Total portfolio food and beverage expenses decreased by $0.4 million as a result of a $0.2 million decrease in same-store food and beverage expenses driven by lower same-store food and beverage revenues resulting from a 1.0% decrease in occupancy, and a $0.2 million decrease in food and beverage expenses due to the effect of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023.

• Other Lodging Property Operating Revenues and Expenses. Other lodging property and operating revenues for our total portfolio during the third quarter of 2024 compared with the third quarter of 2023 remained flat as a result of a $0.2 million increase in same-store other lodging property operating revenues driven by an increase in parking and resort fees, offset by a $0.2 million decline in other lodging property operating revenues due to the effect of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023.

The $0.5 million increase in other lodging property operating expenses for the total portfolio for the three months ended September 30, 2024 in comparison with the three months ended September 30, 2023 was attributable to a $2.5 million increase in same-store other lodging property operating expenses. This increase was driven by labor costs, credit card commissions, sales and marketing costs, and utilities. These increases were offset by a $2.0 million decrease in other lodging property operating expenses due to the effect of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023.

The following table includes other consolidated income and expenses for the three months ended September 30, 2024 compared with the three months ended September 30, 2023 (dollars in thousands):

¹ Not meaningful.

Changes from the three months ended September 30, 2024 compared with the three months ended September 30, 2023 were due to the following:

• Property Taxes, Insurance and Other. The decrease in Property taxes, insurance and other during the three months ended September 30, 2024 is primarily due to an increase in property tax refunds of $0.6 million as a result of successful appeal efforts to reduce property tax assessments, coupled with a reduction of state franchise taxes and other tax accruals during the period of $0.5 million.
• Management Fees. Management fees decreased during the current period due to the effect of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023, and amendments to certain property management agreements that resulted in lower average management fees in the current period.
• Depreciation and Amortization. Depreciation and amortization decreased by $1.2 million during the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily due to the effect of the sale of four lodging properties during the nine months ended September 30, 2024 and the sale of one lodging property in December 2023, partially offset by additional depreciation and amortization related to the reclassification of a lodging property from Assets held for sale and renovation costs incurred during the three months ended September 30, 2023 and thereafter.
• Corporate General and Administrative. Corporate general and administrative expenses decreased by $0.7 million during the three months ended September 30, 2024 primarily due to a decrease in legal and professional fees and corporate employee-related costs.
• Interest Expense. Interest expense decreased by $1.6 million during the three months ended September 30, 2024 primarily due to lower average outstanding debt for the current period compared with the three months ended September 30, 2023.
• Other Income, net. Other income, net for the three months ended September 30, 2024 consists primarily of $0.5 million of third-party tenant income, the realization of approximately $0.8 million of tax rebates related to the NCI Transaction during the period, partially offset by a net casualty loss of $0.2 million.

Other income, net for the three months ended September 30, 2023 consists primarily of $0.4 million of third-party tenant income, the realization of approximately $0.6 million of tax rebates related to the NCI Transaction during the period, partially offset by a net casualty loss of $0.4 million.

• Income Tax Expense. Income taxes in interim quarters are based on an estimated annual effective tax rate. The Company recorded a $0.3 million income tax expense during the three months ended September 30, 2024, which represents a decrease of $1.0 million when compared with 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.

Comparison of the Nine Months Ended September 30, 2024 with the Nine Months Ended September 30, 2023

The following table contains key operating metrics for our portfolio for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 (dollars in thousands, except ADR and RevPAR):

The total portfolio information above for the nine months ended September 30, 2024 and 2023 reflects operating results for various portions of each period for certain lodging properties as a result of the sales and acquisitions of lodging properties. The following table details how the acquisition and disposition transactions affect each reporting period:

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Changes from the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 were due to the following:

• Revenues and RevPAR. Room revenues for our total portfolio for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 decreased by $1.1 million as a result of a $10.6 million decrease in room revenues due to the net effect of the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, all of which generally had lower nominal RevPAR than the remaining portfolio, and the acquisition of two lodging properties during the nine months ended September 30, 2023, partially offset by a $9.5 million increase in same-store revenues driven by improving business transient and group demand which mitigated the effect of the normalization in leisure demand. For the applicable periods, the number of properties in our total portfolio declined from 101 lodging properties at September 30, 2023 to 96 lodging properties at September 30, 2024.

The 4.1% increase in RevPAR for our total portfolio for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 was due to a 2.3% increase in our occupancy and a 1.6% increase in ADR driven by improving business transient and group demand. On a same-store basis, the improvements in our business from business transient and group business resulted in an increase of approximately 1.3% in occupancy and a 0.3% increase in ADR during the nine months ended September 30, 2024, which resulted in a 1.6% increase in same-store RevPAR.

• Room Expenses. Room expenses for our total portfolio for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 decreased by $0.9 million as a result of a $3.3 million increase in same-store room expenses driven by a 1.3% increase in same-store occupancy, offset by a $4.2 million decline in room expenses due to the net effect of the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023.
• Food and Beverage Revenues and Expenses. Total portfolio food and beverage revenues for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 decreased by $0.7 million as a result of a $0.2 million decrease in same-store food and beverage revenues and a $0.5 million decrease in expenses due to the net effect of the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023.

Total portfolio food and beverage expenses decreased by $0.5 million as a result of same-store food and beverage expenses remaining flat primarily due to a minimal decrease in same-store revenues, and a $0.5 million decrease in food and beverage expenses due to the net effect of the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023.

• Other Revenues and Other Lodging Property Operating Expenses. Other lodging property operating revenues for our total portfolio during the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 increased by $2.0 million as a result of a $2.5 million increase in same-store other lodging property and operating revenues related to an increase in parking and resort fees due to higher occupancy, partially offset by a $0.5 million decrease in other lodging property operating revenues driven by the net effect the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023.

The $0.3 million increase in other lodging property operating expenses for the total portfolio for the nine months ended September 30, 2024 in comparison with the nine months ended September 30, 2023 was driven by increased labor costs, credit card commissions, sales and marketing costs, and utilities. These increases were partially offset by a $4.9 million decrease in other lodging property operating expenses due to the net effect of the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023.

The following table includes other consolidated income and expenses for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 (dollars in thousands):

¹ Not meaningful.

Changes from the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 were due to the following:

• Property Taxes, Insurance and Other. The $2.5 million decrease in Property taxes, insurance and other during the nine months ended September 30, 2024 is primarily due to an increase in property tax refunds of $1.4 million as a result of successful appeal efforts to reduce property tax assessments, coupled with a reduction of state franchise taxes and other tax accruals during the period of $1.1 million.
• Management Fees. Management fees decreased during the nine months ended September 30, 2024 due to the net effect of the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023, and amendments to certain property management agreements that resulted in lower property management fees for the nine months ended September 30, 2024.
• Depreciation and Amortization. Depreciation and amortization decreased by $2.3 million during the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 primarily due to the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, partially offset by an increase in depreciation and amortization from the reclassification of a lodging property from Assets held for sale and the acquisition of two lodging properties during the nine months ended September 30, 2023.
• Corporate General and Administrative. Corporate general and administrative expenses decreased by $0.7 million during the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 due to a decrease in legal and professional fees of $1.0 million, partially offset by a $0.3 million increase in corporate employee-related costs.
• Gain (loss) on Disposal of Assets, net. Gain (loss) on disposal of assets, net of $28.8 million for the nine months ended September 30, 2024 was primarily the result of a $28.3 million gain recorded on the sale of a portfolio of two lodging properties in New Orleans, LA during the nine months ended September 30, 2024.
• Interest Expense. Interest expense decreased by $2.3 million during the nine months ended September 30, 2024 primarily due to lower average outstanding debt for the current period compared with the same period of the prior year.
• Gain on Extinguishment of Debt. The gain on extinguishment of debt for the nine months ended September 30, 2024 was the result of the repayment of the MetaBank Loan (as defined in "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements) in June 2024 prior to its scheduled maturity date, which resulted in a gain on extinguishment of debt of $3.0 million after legal fees and unamortized debt issuance costs that were written-off on the closing date.
• Other Income, net. Other income, net for the nine months ended September 30, 2024 consists primarily of third-party tenant income of $1.7 million, the realization of $1.5 million of tax rebates related to the NCI Transaction (as defined in "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements) during the period, and net casualty income of $0.6 million.

Other income, net for the nine months ended September 30, 2023 consists primarily of third-party tenant income of $1.1 million and the realization of $1.5 million of tax rebates related to the NCI Transaction during the period, partially offset by net casualty losses of $1.9 million, and other costs of $0.3 million.

• Income Tax Expense. Income taxes in interim quarters are based on an estimated annual effective tax rate. The Company recorded $2.9 million in income tax expense for the nine months ended September 30, 2024, which represents an increase of $1.2 million from the nine months ended September 30, 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 (loss) income, 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 September 30, 2024 and the three and nine months ended September 30, 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 and nine months ended September 30, 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.

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

(1) 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 and nine months ended September 30, 2024 and 2023 exclude the potential dilution related to our Convertible Notes as we intend to settle the principal amount of the Convertible Notes in cash.

AFFO applicable to shares of Common Stock and Common Units increased by $1.1 million for the three months ended September 30, 2024 in comparison with the three months ended September 30, 2023 due to lower interest expense, partially offset by a decline in hotel EBITDA of $0.6 million related to the net effect of the disposition of four lodging properties during the nine months ended September 30, 2024 and one lodging property in December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023.

AFFO applicable to shares of Common Stock and Common Units increased by $8.0 million for the nine months ended September 30, 2024 in comparison with the three and nine months ended September 30, 2023 due to modest growth in RevPAR, expense management, and lower interest expense. The increase was also the result of the net effect on hotel EBITDA from the acquisition and disposition activities as described below under Adjusted EBITDAre for the nine months ended September 30, 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 (loss) income, determined in accordance with GAAP, to EBITDA, EBITDAre and Adjusted EBITDAre, (in thousands):

The $1.0 million decrease in Adjusted EBITDAre for the three months ended September 30, 2024 in comparison with the three months ended September 30, 2023 was primarily the result of the disposition of four lodging properties during the nine months ended September 2024 and one lodging property in December 2023, which resulted in a decline in hotel EBITDA of $0.6 million, and a decrease in same-store hotel EBITDA driven by flat revenue and modest expense growth.

The $6.4 million increase in Adjusted EBITDAre for the nine months ended September 30, 2024 in comparison with the nine months ended September 30, 2023 was due to modest growth in RevPAR from improving demand for business transient and group travel which mitigated the effect of the normalization in leisure demand as well as expense management. The increase in Adjusted EBITDAre was partially offset by a decrease in hotel EBITDA of $0.2 million from net effect of the sale of four lodging properties during the nine months ended September 30, 2024 and five lodging properties in May and December 2023, and the acquisition of two lodging properties during the nine months ended September 30, 2023.

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 $18.2 million and $19.3 million, for the nine months ended September 30, 2024 and 2023, 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 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 September 30, 2024, we had no 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 53 lodging properties included in the credit facility borrowing base. We also had $287.5 million of Convertible Notes (as defined in "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements) outstanding.

At September 30, 2024, the GIC Joint Venture had $200.0 million outstanding under the 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 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.

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 (as defined in "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements) that was originally 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 $5.9 million at September 30, 2024.

Additionally, the GIC Joint Venture has a mortgage loan outstanding totaling $12.6 million at September 30, 2024 related to the acquisition of the Embassy Suites in Tucson, AZ in December 2021.

In June 2017, Summit Meta 2017, LLC, a subsidiary of our Operating Partnership, entered into a $47.6 million secured, non-recourse loan with MetaBank (the "MetaBank Loan"). In June 2024, the outstanding balance of the loan was $42.3 million, at which time we repaid the MetaBank Loan for $39.1 million prior to its scheduled maturity date, which represented a discount of $3.2 million and resulted in a gain on extinguishment of debt of $3.0 million after legal fees and unamortized debt issuance costs that were written-off on the closing date. As a result of this repayment, the three lodging properties previously held as collateral for the MetaBank Loan were released.

For more information concerning our indebtedness, see "Note 5 - Debt" to the accompanying Condensed Consolidated Financial Statements

At September 30, 2024, we have scheduled debt principal amortization payments during the next twelve months totaling $2.1 million. Additionally, our City National Bank of Florida loan with a current principal balance of $46.5 million matures in June 2025. We expect to refinance this loan prior to maturity. Currently, we have the capacity to pay scheduled principal payments using cash on hand or draws under our $400 Million Revolver. Our outstanding indebtedness requires us to comply with various financial and other covenants. We are in compliance with our various financial and other covenants and expect to continue to be in compliance over the next four quarters.

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.

A summary of our debt at September 30, 2024 is as follows (dollars in thousands):

(1) The 2023 Senior Credit Facility and the 2024 Term Loan Facility are supported by a borrowing base of 53 unencumbered hotel properties.

(2) 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.

(3) The GIC Joint Venture Term Loan is secured by pledges of the equity in the entities and affiliated entities that own 25 lodging properties and two parking garages.

Capital Expenditures

During the nine months ended September 30, 2024, we funded $61.5 million in capital expenditures ($52.1 million on a pro rata basis) at our lodging properties. We anticipate spending approximately $75.0 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 on 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):

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Changes from the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 were due to the following:

• Cash provided by operating activities. Cash provided by operating activities for the nine months ended September 30, 2024 was the result of net income of $128.2 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a net change in working capital of $6.0 million. Cash provided by operating activities for the nine months ended September 30, 2023 was the result of net income of $116.1 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a net change in working capital of $7.0 million.
• Cash provided by (used in) investing activities. The increase in cash provided by investing activities was primarily due to the sale of four lodging properties during the nine months ended September 30, 2024 and the realization of a $9.9 million tax incentive related to the NCI Transaction during the nine months ended September 30, 2024, partially offset by $65.5 million of renovation and development expenditures.

Cash used in investing activities for the nine months ended September 30, 2023 was due to the acquisitions of the Residence Inn by Marriott - Scottsdale, AZ and the Nordic Lodge - Steamboat Springs, CO in June 2023, the funding of the Onera Mezzanine Loan (as defined in "Note 4 - Investment in Real Estate Loans" to the accompanying Consolidated Financial Statements) of $4.6 million, and $63.0 million of renovation expenditures, partially offset by the sale of four lodging properties during the nine months ended September 30, 2023.

• Cash used in financing activities. Cash used in financing activities for the nine months ended September 30, 2024 was primarily related to the repayment of the MetaBank and Bank of the Cascades term loans with an aggregate total of $94.1 million, the payment of dividends and distributions of approximately $58.9 million, financing costs of approximately $3.0 million related to the 2024 Term Loan and our GIC Joint Venture Credit Facility, and $0.9 million related to shares acquired for employee withholding requirements.

Cash used in financing activities for the nine months ended September 30, 2023 was primarily the net result of contributions by our GIC Joint Venture partner of $20.3 million, offset by financing fees of approximately $10.3 million related to the amendment of our prior senior credit facility that was in effect during the nine months ended September 30, 2023 and was replaced by the 2024 Senior Credit Facility, dividends and distributions of approximately $42.3 million, and $1.4 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. All of our outstanding loans are now indexed to the Secured Overnight Funding Rate ("SOFR"), and therefore, our primary interest rate exposure is to SOFR. We primarily use derivative financial instruments to manage interest rate risk.

At September 30, 2024, we were party to seven interest rate derivative agreements, pursuant to which we received variable-rate payments in exchange for making fixed-rate payments (dollars in thousands):

At September 30, 2024, after giving effect to our interest rate derivative agreements, $906.0 million, or 67%, of our consolidated debt had fixed interest rates and $442.6 million, or 33%, had variable interest rates. At September 30, 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 77% of our total pro rata indebtedness when taking into consideration interest rate swaps that are currently in effect.

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 $4.4 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 a few years ago. At September 30, 2024, we have scheduled debt principal amortization payments during the next twelve months totaling $2.1 million. Additionally, our City National Bank of Florida loan with a current principal balance of $46.5 million matures in June 2025. We expect to refinance this loan prior to maturity.

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 September 30, 2024. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 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.