RLJ Lodging Trust: Form 10-Q for the period ended Sep 30, 2022

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in our Annual Report, which is accessible on the SEC’s website at www.sec.gov (http://www.sec.gov).

Statement Regarding Forward-Looking Information

The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words "believe," "project," "expect," "anticipate," "estimate," "plan," "may," "will," "will continue," "intend," "should," or similar expressions. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements.

Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Forward-Looking Statements," "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, as well as the risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.

Overview

We are a self-advised and self-administered Maryland REIT that owns primarily premium-branded, high-margin, focused-service and compact full-service hotels. We own a geographically diversified portfolio of hotels located in high-growth urban markets that exhibit multiple demand generators and attractive long-term growth prospects. We believe that our investment strategy allows us to generate high levels of Revenue per Available Room ("RevPAR"), strong operating margins and attractive returns.

Our strategy is to own primarily premium-branded, focused-service and compact full-service hotels. Focused-service and compact full-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space, and require fewer employees than traditional full-service hotels. We believe these types of hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve RevPAR levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.

As of September 30, 2022, we owned 97 hotel properties with approximately 21,400 rooms, located in 23 states and the District of Columbia. We owned, through wholly-owned subsidiaries, a 100% interest in 95 of our hotel properties, a 95% controlling interest in one hotel property, and a 50% non-controlling interest in an entity owning one hotel property. We consolidate our real estate interests in the 96 hotel properties in which we hold a controlling interest, and we record the real estate interests in the one hotel property in which we hold a 50% non-controlling interest using the equity method of accounting. We lease 96 of the 97 hotel properties to our TRS, of which we own a controlling financial interest.

For U.S. federal income tax purposes, we elected to be taxed as a REIT commencing with our taxable year ended December 31, 2011. Substantially all of our assets and liabilities are held by, and all of our operations are conducted through our Operating Partnership. We are the sole general partner of the Operating Partnership. As of September 30, 2022, we owned, through a combination of direct and indirect interests, 99.5% of the units of limited partnership interest in the OP units.

2022 Significant Activities

Our significant activities reflect our commitment to creating long-term shareholder value through enhancing our hotel portfolio's quality, recycling capital and maintaining a prudent capital structure. The following significant activities have taken place in 2022:

• Paid off the $200.0 million outstanding balance on our Revolver using cash on hand.
• Sold two hotel properties for a combined sales price of approximately $49.9 million.
• Exercised a one-year extension option on a mortgage loan extending the maturity to April 2023.
• Purchased and retired approximately 4.9 million shares for $57.1 million under a new share repurchase program.
• Acquired the 124-room 21c Hotel in Nashville, Tennessee for $59.0 million.
• Satisfied the requirements to exit the Covenant Relief Period, Leverage Relief Period, and Covenant Relief Pledged Collateral Period under our Revolver and Term Loan agreements.
• Amended a term loan agreement to increase the amount of the term loan up to $200.0 million and extend the maturity to January 2026.
• Exercised a one-year extension option on approximately $225.0 of the principal balances on certain term loans extending the maturities to January 2024.

Our Customers

The majority of our hotels consist of premium-branded, focused-service and compact full-service hotels. As a result of this property profile, the majority of our customers are transient in nature. Transient business typically represents individual business or leisure travelers. The majority of our hotels are located in business districts within major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our hotels. As a result, macroeconomic factors impacting business travel have a greater effect on our business than factors impacting leisure travel.

Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. Given the limited meeting space at the majority of our hotels, group business that utilizes meeting space represents a small component of our customer base.

A number of our hotel properties are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer.

Our Revenues and Expenses

Our revenues are primarily derived from the operation of hotels, including the sale of rooms, food and beverage revenue and other revenue, which consists of parking fees, resort fees, gift shop sales and other guest service fees.

Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management and franchise fees and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and the associated labor costs. Other operating expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance and utility costs. Our hotels that are subject to franchise agreements are charged a royalty fee, plus additional fees for marketing, central reservation systems and other franchisor costs, in order for the hotel properties to operate under the respective brands. Franchise fees are based on a percentage of room revenue and for certain hotels additional franchise fees are charged for food and beverage revenue. Our hotels are managed by independent, third-party management companies under long-term agreements pursuant to which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel property. We generally receive a cash distribution from the management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.

Key Indicators of Financial Performance

We use a variety of operating, financial and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including industry standard statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisition opportunities to determine each hotel's contribution to cash flow and its potential to provide attractive long-term total returns. The key indicators include:

• Average Daily Rate ("ADR")
• Occupancy
• RevPAR

ADR, Occupancy and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel property level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue.

We also use non-GAAP measures such as FFO, Adjusted FFO, EBITDA, EBITDAre and Adjusted EBITDA to evaluate the operating performance of our business. For a more in depth discussion of the non-GAAP measures, please refer to the "Non-GAAP Financial Measures" section.

Critical Accounting Policies and Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. Our Annual Report contains a discussion of our critical accounting policies and estimates. There have been no significant changes to our critical accounting policies and estimates since December 31, 2021.

Results of Operations

At September 30, 2022 and 2021, we owned 97 and 98 hotel properties, respectively. Based on when a hotel property is acquired, sold or closed for renovation, the operating results for certain hotel properties are not comparable for the three and nine months ended September 30, 2022 and 2021. The non-comparable properties include ten hotel properties that were sold or otherwise disposed in 2022 and 2021 and four acquisitions that were completed in 2022 and 2021.

Comparison of the three months ended September 30, 2022 to the three months ended September 30, 2021

(amounts in thousands)

28

Revenues

Total revenues increased $84.3 million to $318.1 million for the three months ended September 30, 2022 from $233.8 million for the three months ended September 30, 2021. The increase was the result of a $67.3 million increase in room revenue, a $13.6 million increase in food and beverage revenue, and a $3.4 million increase in other revenue.

Room Revenue

Room revenue increased $67.3 million to $267.4 million for the three months ended September 30, 2022 from $200.1 million for the three months ended September 30, 2021. The increase was the result of a $63.9 million increase in room revenue attributable to the comparable properties and a $3.4 million increase in room revenue attributable to the non-comparable properties. The increase in room revenue from the comparable properties was attributable to an increase in RevPAR, including a significant increase in ADR, resulting from an increase in demand as compared to the prior period. Though RevPAR increased over the comparable period in 2021, it remained below the comparable period in 2019.

The following are the quarter-to-date key hotel operating statistics for the comparable properties:

Food and Beverage Revenue

Food and beverage revenue increased $13.6 million to $30.6 million for the three months ended September 30, 2022 from $17.0 million for the three months ended September 30, 2021. The increase was the result of a $13.1 million increase in food and beverage revenue attributable to the comparable properties and a $0.5 million increase in food and beverage revenue attributable to the non-comparable properties. The increase in food and beverage revenue attributable to the comparable properties was due to an increase in group business and the reopening of certain food and beverage outlets.

Other Revenue

Other revenue increased $3.4 million to $20.1 million for the three months ended September 30, 2022 from $16.7 million for the three months ended September 30, 2021. The increase was the result of a $3.2 million increase in other revenue attributable to the comparable properties and a $0.2 million increase in other revenue attributable to the non-comparable properties. The increase in other revenue attributable to the comparable properties was primarily due to an increase in parking fees, resort fees, and cancellation fees that corresponded to the increase in demand over the prior period.

Property Operating Expenses

Property operating expenses increased $50.8 million to $199.2 million for the three months ended September 30, 2022 from $148.4 million for the three months ended September 30, 2021. The increase was due to a $51.9 million increase in property operating expenses attributable to the comparable properties, which was partially offset by a $1.1 million decrease in property operating expenses attributable to the non-comparable properties.

The components of our property operating expenses for the comparable properties were as follows (in thousands):

29

The increase in property operating expenses attributable to the comparable properties corresponded to an increase in demand over the prior period. Management and franchise fee expense for the three months ended September 30, 2022 and 2021 included a reduction to management and franchise fee expense of $1.2 million and $3.7 million, respectively, related to the recognition of the Wyndham termination payment. The decrease in the recognition of the Wyndham termination payment was primarily due to certain Wyndham agreements expiring in 2021.

Impairment Loss

During the three months ended September 30, 2021, we recorded an impairment loss of $138.9 million related to the DoubleTree Metropolitan New York City as we determined that the carrying value of the hotel property was not recoverable. There was no impairment loss recorded during the three months ended September 30, 2022.

Property Tax, Insurance and Other

Property tax, insurance and other expense decreased $0.5 million to $20.7 million for the three months ended September 30, 2022 from $21.3 million for the three months ended September 30, 2021. The decrease was attributable to a $1.5 million decrease in property tax, insurance and other expense attributable to the non-comparable properties, which was partially offset by a $1.0 million increase in property tax, insurance and other expense attributable to the comparable properties. The increase in property tax, insurance and other expense attributable to the comparable properties was primarily related to an increase in insurance premiums and an increase in ground rent expense caused by higher percentage rent obligations and the impact of increases in the consumer price index.

General and Administrative

General and administrative expense increased $0.8 million to $13.4 million for the three months ended September 30, 2022 from $12.6 million for the three months ended September 30, 2021. The increase was primarily attributable to an increase in non-cash compensation expense and an increase in payroll tax expense due to payroll tax credits in the prior year that did not recur in the current year.

Interest Expense

Interest expense decreased $4.3 million to $22.6 million for the three months ended September 30, 2022 from $26.9 million for the three months ended September 30, 2021. Interest expense decreased due to lower average debt balances and lower effective interest rates, including the impact of exiting the Covenant Relief Period under our Revolver and Term Loan agreements. The components of our interest expense for the three months ended September 30, 2022 and 2021 were as follows (in thousands):

(Loss) Gain on Sale of Hotel Properties, net

During the three months ended September 30, 2021, we sold three hotel properties for an aggregate sales price of approximately $21.8 million and recorded a net gain on sale of approximately $1.5 million. There were no hotels sold during the three months ended September 30, 2022.

Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021

(amounts in thousands)

31

Revenues

Total revenues increased $343.9 million to $891.5 million for the nine months ended September 30, 2022 from $547.6 million for the nine months ended September 30, 2021. The increase was the result of a $284.4 million increase in room revenue, a $46.4 million increase in food and beverage revenue, and a $13.0 million increase in other revenue.

Room Revenue

Room revenue increased $284.4 million to $753.8 million for the nine months ended September 30, 2022 from $469.4 million for the nine months ended September 30, 2021. The increase was the result of a $276.5 million increase in room revenue attributable to the comparable properties, and a $7.9 million increase in room revenue attributable to the non-comparable properties. The increase in room revenue from the comparable properties was attributable to an increase in RevPAR, including a significant increase in ADR, resulting from an increase in demand over the prior period. The increase was also attributable to the impact of hotels that were closed for all or a portion of the prior period being open for the entirety of the current period. Though RevPAR increased over the comparable period in 2021, it remained below the comparable period in 2019.

The following are the year-to-date key hotel operating statistics for the comparable properties:

Food and Beverage Revenue

Food and beverage revenue increased $46.4 million to $82.7 million for the nine months ended September 30, 2022 from $36.2 million for the nine months ended September 30, 2021. The increase was the result of a $45.2 million increase in food and beverage revenue attributable to the comparable properties and a $1.3 million increase in food and beverage revenue attributable to the non-comparable properties. The increase in food and beverage revenue attributable to the comparable properties was due to an increase in group business and the reopening of certain food and beverage outlets. The increase was also attributable to the impact of hotels that were closed for all or a portion of the prior period being open for the entirety of the current period.

Other Revenue

Other revenue increased $13.0 million to $55.0 million for the nine months ended September 30, 2022 from $42.0 million for the nine months ended September 30, 2021. The increase was the result of a $12.1 million increase in other revenue attributable to the comparable properties and a $0.9 million increase in other revenue attributable to the non-comparable properties. The increase in other revenue attributable to the comparable properties was primarily due to an increase in parking fees, resort fees, and gift shop sales that corresponded to the increase in demand over the prior period.

Property Operating Expenses

Property operating expenses increased $190.8 million to $548.7 million for the nine months ended September 30, 2022 from $357.9 million for the nine months ended September 30, 2021. The increase was due to a $193.3 million increase in property operating expenses attributable to the comparable properties, which was partially offset by a $2.5 million decrease in property operating expenses attributable to the non-comparable properties.

The components of our property operating expenses for the comparable properties were as follows (in thousands):

The increase in property operating expenses attributable to the comparable properties corresponded to an increase in demand over the prior period. The increase was also attributable to the impact of hotels that were closed for all or a portion of the prior period being open for the entirety of the current period. Management and franchise fee expense for the nine months ended September 30, 2022 and 2021 included a reduction in management and franchise fee expense of $3.3 million and $12.7 million, respectively, related to the recognition of the Wyndham termination payment. The decrease in the recognition of the Wyndham termination payment was due to certain Wyndham agreements expiring in 2021 coupled with the remaining agreements being extended and recognized over a longer period.

Impairment Losses

During the nine months ended September 30, 2021, we recorded impairment losses of $5.9 million related to two hotel properties that were sold in May 2021. In addition, we recorded an impairment loss of $138.9 million related to the DoubleTree Metropolitan New York City as we determined that the carrying value of the hotel property was not recoverable. There was no impairment loss recorded during the nine months ended September 30, 2022.

Property Tax, Insurance and Other

Property tax, insurance and other expense increased $0.8 million to $66.2 million for the nine months ended September 30, 2022 from $65.4 million for the nine months ended September 30, 2021. The increase was attributable to a $5.4 million increase in property tax, insurance and other expense attributable to the comparable properties, which was partially offset by a $4.6 million decrease in property tax, insurance and other expense attributable to the non-comparable properties. The increase in property tax, insurance and other expense attributable to the comparable properties was attributable to recognizing a larger benefit during the nine months ended September 30, 2021 than during the nine months ended September 30, 2022 related to the reversal of accrued real estate tax liabilities in excess of the amounts owed for certain of our California hotels acquired in our merger with FelCor Lodging Trust. Additionally, the increase was attributable to an increase in insurance premiums and an increase in ground rent expense caused by higher percentage rent obligations and the impact of increases in the consumer price index.

General and Administrative

General and administrative expense increased $5.4 million to $40.9 million for the nine months ended September 30, 2022 from $35.6 million for the nine months ended September 30, 2021. The increase was primarily attributable to an increase in non-cash compensation expense and an increase in payroll tax expense due to payroll tax credits in the prior year that did not recur in the current year.

Other Income (Expense), net

Other income (expense), net increased $17.3 million to income of $8.7 million for the nine months ended September 30, 2022 from expense of $8.6 million for the nine months ended September 30, 2021. The increase was primarily attributable to the reclassification of unrealized gains and losses from accumulated other comprehensive income (loss) due to the discontinuation of certain cash flow hedges in each of the periods.

Interest Expense

Interest expense decreased $10.2 million to $71.0 million for the nine months ended September 30, 2022 from $81.2 million for the nine months ended September 30, 2021. Interest expense decreased due to lower average debt balances and lower effective interest rates, including the impact of exiting the Covenant Relief Period under our Revolver and Term Loan agreements. The components of our interest expense for the nine months ended September 30, 2022 and 2021 were as follows (in thousands):

Gain on Sale of Hotel Properties, net

During the nine months ended September 30, 2022, we sold two hotel properties for an aggregate sales price of approximately $49.9 million and recorded a net gain on sale of approximately $1.0 million. During the nine months ended September 30, 2021, we sold six hotel properties for an aggregate sales price of approximately $39.5 million and recorded a net gain on sale of approximately $2.6 million.

Non-GAAP Financial Measures

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) EBITDAre and (5) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as a measure of our operating performance. FFO, Adjusted FFO, EBITDA, EBITDAre, and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Adjusted FFO, EBITDA, EBITDAre and Adjusted EBITDA as reported by other companies that do not define such terms exactly as we define such terms.

Funds From Operations

We calculate funds from operations ("FFO") in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as net income or loss, excluding gains or losses from sales of real estate, impairment, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance and can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs. We present FFO attributable to common shareholders, which includes our OP units, because our OP units may be redeemed for common shares. We believe it is meaningful for the investor to understand FFO attributable to all common shares and OP units.

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, such as hotel transaction costs, pre-opening costs, non-cash income tax expense or benefit, the amortization of share-based compensation, non-cash expense related to discontinued interest rate hedges, and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted FFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and FFO, is beneficial to an investor’s understanding of our operating performance.

The following table is a reconciliation of our GAAP net income (loss) to FFO attributable to common shareholders and unitholders and Adjusted FFO attributable to common shareholders and unitholders for the three and nine months ended September 30, 2022 and 2021 (in thousands):

(1) Includes depreciation and amortization expense allocated to the noncontrolling interest in the consolidated joint ventures.

(2) Includes our ownership interest in the depreciation and amortization expense of the unconsolidated joint ventures.

(3) Severance for the three and nine months ended September 30, 2021 includes severance for associates at hotels operating under collective bargaining agreements.

(4) Reclassification of interest rate swap (gains) losses from accumulated other comprehensive income (loss) to earnings for discontinued interest rate hedges.

(5) Represents expenses and income outside of the normal course of operations, including $0.3 million and $0.5 million of non-cash interest expense related to discontinued interest rate hedges, and $0.9 million and $1.5 million of pre-opening costs during the three and nine months ended September 30, 2022, respectively. Other expenses for the three and nine months ended September 30, 2021 included hurricane costs not covered by insurance of $1.5 million.

EBITDA and EBITDAre

EBITDA is defined as net income or loss excluding: (1) interest expense; (2) income tax expense; and (3) depreciation and amortization expense. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization expense) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and disposals.

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

We also present Adjusted EBITDA, which includes additional adjustments for items such as hotel transaction costs, pre-opening costs, the amortization of share-based compensation, non-cash expense related to discontinued interest rate hedges, and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income, EBITDA, and EBITDAre, is beneficial to an investor’s understanding of our operating performance.

The following table is a reconciliation of our GAAP net income (loss) to EBITDA, EBITDAre and Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021 (in thousands):

(1) Includes our ownership interest in the interest, depreciation, and amortization expense of the unconsolidated joint ventures.

(2) Severance for the three and nine months ended September 30, 2021 includes severance for associates at hotels operating under collective bargaining agreements.

(3) Reclassification of interest rate swap (gains) losses from accumulated other comprehensive income (loss) to earnings for discontinued interest rate hedges.

(4) Represents expenses and income outside of the normal course of operations, including $0.9 million and $1.5 million of pre-opening costs during the three and nine months ended September 30, 2022, respectively. Other expenses for the three and nine months ended September 30, 2021 includes hurricane costs not covered by insurance of $1.5 million.

Liquidity and Capital Resources

Our liquidity requirements consist primarily of the funds necessary to pay for operating expenses and other expenditures directly associated with our hotel properties, including:

• funds necessary to pay for the costs of acquiring hotel properties;
• redevelopments, conversions, renovations and other capital expenditures that need to be made periodically to our hotel properties;
• recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with brand standards;
• interest expense and scheduled principal payments on outstanding indebtedness;
• distributions on common and preferred shares; and
• corporate and other general and administrative expenses.

As of September 30, 2022, we had $539.7 million of cash and cash equivalents and restricted cash reserves.

Sources and Uses of Cash

Cash flows from Operating Activities

The net cash flow provided by operating activities totaled $203.7 million and $20.2 million for the nine months ended September 30, 2022 and 2021, respectively. Our cash flows provided by operating activities generally consist of the net cash generated by our hotel operations, the cash paid for corporate expenses and other working capital changes. Refer to the "Results of Operations" section for further discussion of our operating results for the nine months ended September 30, 2022 and 2021.

Cash flows from Investing Activities

The net cash flow used in investing activities totaled $97.8 million for the nine months ended September 30, 2022 primarily due to a $59.2 million acquisition of a hotel property and $86.6 million in capital improvements and additions to our hotel properties. The net cash flow used in investing activities was partially offset by $48.1 million in proceeds from the sale of hotel properties.

The net cash flow used in investing activities totaled $63.9 million for the nine months ended September 30, 2021 primarily due to a $58.6 million acquisition of a hotel property, $36.2 million in routine capital improvements and additions to our hotel properties and $5.0 million in purchase deposits paid. The net cash flow used in investing activities was partially offset by $36.2 million in proceeds from the sale of hotel properties.

Cash flows from Financing Activities

The net cash flow used in financing activities totaled $280.1 million for the nine months ended September 30, 2022 primarily due to the $200.0 million repayment of the outstanding balance on the Revolver, $50.0 million paid to repurchase common shares under a share repurchase program, $24.0 million in distributions to shareholders and unitholders, $2.6 million in distributions to joint venture partners, and $3.6 million paid to repurchase common shares to satisfy employee tax withholding requirements.

The net cash flow used in financing activities totaled $230.8 million for the nine months ended September 30, 2021 primarily due to the redemption of the $475.0 million senior notes due 2025 with a redemption premium of $9.5 million, $200.0 million in repayment on the Revolver, $356.3 million in repayment of term loans, $149.2 million in repayment of mortgage loans, $23.9 million in distributions to shareholders and unitholders, $14.0 million in deferred financing cost payments, $2.5 million paid to repurchase common shares to satisfy employee tax withholding requirements, and $1.5 million in scheduled mortgage loan principal payments. The net cash flow used in financing activities was partially offset by $1.0 billion in gross proceeds from the issuances of the senior notes.

Capital Expenditures and Reserve Funds

We maintain each of our hotel properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. The cost of routine improvements and alterations are paid out of FF&E reserves, which are funded by a portion of each hotel property’s gross revenues. Routine capital expenditures may be administered by the property management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our hotel properties.

From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. In addition, upon acquisition of a hotel property we often are required to complete a property improvement plan in order to bring the hotel up to the respective franchisor’s standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. To the extent that the FF&E reserves are not available or sufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with cash and cash equivalents on hand, our Revolver and/or other sources of available liquidity.

With respect to some of our hotels that are operated under franchise agreements with major national hotel brands and for some of our hotels subject to first mortgage liens, we are obligated to maintain FF&E reserve accounts for future capital expenditures at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels, and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of September 30, 2022, approximately $43.9 million was held in FF&E reserve accounts for future capital expenditures.

Market risk includes the risks that arise from changes in interest rates, equity prices and other market changes that affect market sensitive instruments. Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of September 30, 2022, we had approximately $1.2 billion of total variable rate debt outstanding (or 53.9% of total indebtedness) with a weighted-average interest rate of 3.21% per annum. After taking into consideration the effect of interest rate swaps, 98.9% of our total indebtedness was fixed or effectively fixed. As of September 30, 2022, if market interest rates on our variable rate debt not subject to interest rate swaps were to increase by 1.00%, or 100 basis points, interest expense would decrease future earnings and cash flows by approximately $0.2 million annually, taking into account our existing contractual hedging arrangements.

Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. We have entered into derivative financial instruments such as interest rate swaps to mitigate our interest rate risk or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes.

The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations outstanding as of September 30, 2022, the following table presents the principal repayments and related weighted-average interest rates by contractual maturity dates (in thousands):

(1) Excludes $2.3 million, $0.6 million and $11.3 million of net deferred financing costs on the Term Loans, mortgage loans and Senior Notes, respectively.

(2) The weighted-average interest rate gives effect to interest rate swaps, as applicable.

(3) Excludes $2.3 million related to a fair value adjustment on debt.

Our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates and our hedging strategies at that time.

Changes in market interest rates on our fixed rate debt impact the fair value of our debt, but such changes have no impact to our consolidated financial statements. As of September 30, 2022, the estimated fair value of our fixed rate debt was $845.8 million, which is based on having the same debt service requirements that could have been borrowed at the date presented, at prevailing current market interest rates. If interest rates were to rise by 1.00%, or 100 basis points, and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease by approximately $38.6 million.

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company’s management, under the supervision and participation of the Company's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 and 15d-15 of the Exchange Act) during the period ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

For a discussion of our potential risks and uncertainties, please refer to the "Risk Factors" section in our Annual Report, which is accessible on the SEC’s website at www.sec.gov (http://www.sec.gov). There have been no material changes to the risk factors previously disclosed in our Annual Report.