Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Basis of Presentation
Organization and Business
CorePoint Lodging Inc., a Maryland corporation, is a publicly traded (NYSE: CPLG) self-administered lodging real estate investment trust (“REIT”) primarily serving the upper midscale and midscale segments, with a portfolio of select-service hotels located in the United States (“U.S.”). As used herein, “CorePoint,” “we,” “us,” “our,” or the “Company” refer to CorePoint Lodging Inc. and its subsidiaries unless the context otherwise requires.
The following table sets forth the number of owned and joint venture hotels and approximate number of rooms at such hotels as of March 31, 2020 and December 31, 2019, respectively:
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March 31, 2020
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December 31, 2019
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Hotels
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|
Rooms
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Hotels
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Rooms
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Owned
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247
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|
32,100
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|
270
|
|
34,800
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|
Joint Venture
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1
|
|
200
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|
1
|
|
200
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|
Totals
|
248
|
|
32,300
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|
271
|
|
35,000
|
For U.S. federal income tax purposes, we made an election to be taxed as a REIT, effective May 31, 2018, with the filing of our U.S. federal income tax return for the year ended December 31, 2018. We believe that we are organized and operate in a REIT-qualified manner and we intend to continue to operate as such. As a REIT, we are generally not subject to federal corporate income tax on the portion of our net income that is currently distributed to our stockholders. To maintain our REIT status, we are required to meet several requirements as provided by the Internal Revenue Code of 1986, as amended (the “Code”). These include that the Company cannot operate or manage our hotels. Therefore, we lease the hotel properties to CorePoint TRS L.L.C., our wholly-owned taxable REIT subsidiary (“CorePoint TRS”), which engages third-party eligible independent contractors to manage the hotels. CorePoint TRS is subject to federal, state and local income taxes. To maintain our REIT status, we must distribute annually at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. We intend to continue to meet our distribution and other requirements as required by the Code.
Interim Unaudited Financial Information
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, including normal recurring items, necessary to present fairly our condensed consolidated financial position as of March 31, 2020 and December 31, 2019, and our condensed consolidated results of operations and cash flows for the periods ended March 31, 2020 and 2019.
The accompanying condensed consolidated financial statements include our accounts, as well as our wholly owned subsidiaries and any consolidated variable interest entities (“VIEs”). We recognize noncontrolling interests for the proportionate share of operations for ownership interests not held by our stockholders. All intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. These estimates include such items as: income taxes; impairment of long-lived assets; casualty losses; fair value evaluations; depreciation and amortization; equity-based compensation measurements; and going concern evaluations. Actual results could differ from those estimates.
2. Significant Accounting Policies and Recently Issued Accounting Standards
Investment in Real Estate
Property and equipment and other investments in real estate are stated at cost less accumulated depreciation computed using a straight-line method over the following estimated useful life of each asset. Buildings and improvements have an estimated useful life of 5 to 40 years, furniture, fixtures and other equipment have an estimated useful life of 2 to 10 years, and leasehold improvements are depreciated over the shorter of the underlying lease term or the useful lives of the related assets, generally ranging from one to 25 years.
We capitalize expenditures that increase the overall value of an asset or extend an asset’s life, typically associated with hotel refurbishment, renovation, and major repairs. Such costs primarily include third-party contract labor, materials, professional design and other direct costs, and during the redevelopment and renovation period interest, real estate taxes and insurance costs. The interest, real estate taxes and insurance capitalization period begins when the activities related to the development have begun and ceases when the project is substantially complete, and the assets are held available for use or occupancy. Once such a project is substantially complete and the associated assets are ready for intended use, interest, real estate taxes and insurance costs are no longer capitalized. Normal maintenance and repair costs are expensed as incurred.
Impairment of Real Estate Related Assets
For our investments in real estate, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. When such events or changes are present, we assess the property’s recoverability by comparing the carrying amount of the asset to our estimate of the aggregate undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition. If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property. Any such impairment is treated for accounting purposes similar to an asset acquisition at the estimated fair value, which includes establishing a new cost basis and the elimination of the asset’s accumulated depreciation and amortization.
In evaluating our investments for impairment, we undergo continuous evaluations of property level performance and real estate trends, and management makes several estimates and assumptions, including, but not limited to, the projected date of disposition, estimated sales price and future cash flows of each property during our estimated holding period. If our analysis or assumptions regarding the projected cash flows expected to result from the use and eventual disposition of our properties change, we incur additional costs and expenses during the holding period, or our expected hold periods decrease, we may incur future impairment losses.
Sales of Real Estate
We classify hotels as held for sale when the criteria are met, in accordance with GAAP. At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that asset. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.
Upon the disposition of a property, we recognize a gain or loss at a point in time when we determine control of the underlying asset has been transferred to the buyer. Our performance obligation is generally satisfied at the closing of the transaction. Any continuing involvement is analyzed as a separate performance obligation in the contract, and a portion of the sales price is allocated to each performance obligation. There is significant judgment applied to estimate the amount of any variable consideration identified within the sales price and assess its probability of occurrence based on current market information, historical transactions, and forecasted information that is reasonably available.
For sales of real estate (or assets classified as held for sale), we evaluate whether the disposition is a strategic shift that will have a major effect on our operations and financial results. When a disposition represents a strategic shift that will have a major effect on our operations and financial results, it will be classified as discontinued operations in our consolidated financial statements for all periods presented.
Cash and Cash Equivalents
We classify all cash on hand, demand deposits with financial institutions, and short-term highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair market value.
We classify cash and cash equivalents as restricted cash when contractual agreements or arrangements impose restrictions on our ability to freely access and utilize the cash and cash equivalent amounts.
Accounts Receivable
Accounts receivable primarily consists of receivables due from insurance settlements, our hotel manager, hotel guests, and credit card companies and are carried at estimated collectable amounts. We periodically evaluate our receivables for collectability based on expected losses incurred over the life of the receivable, considering our historical experience, the length of time receivables are past due and the financial condition of the debtor. Accounts receivable are written off when collection is not probable. We record uncollectible operating lease receipts as a direct offset to room revenues. Our insurance settlement receivables are recorded based upon the terms of our insurance policies and our estimates of insurance losses. As of March 31, 2020 and December 31, 2019, we had $9 million and $12 million of insurance settlement receivables, respectively. As of March 31, 2020 and December 31, 2019, we had $6 million and $9 million of receivables, respectively, related to the 2019 settlement of disputes with our hotel manager (the “Wyndham Settlement”). Remaining payments on the Wyndham Settlement are required to be paid no later than June 2021.
Debt and Deferred Debt Issuance Costs
Deferred debt issuance costs include costs incurred in connection with issuance of debt, including costs associated with the entry into our loan agreements and revolving credit facility, and are presented as a direct reduction from the carrying amount of debt. These debt issuance costs are deferred and amortized to expense on a straight-line basis over the term of the debt, which approximates the effective interest amortization method. This amortization expense is included as a component of interest expense. When debt is paid prior to its scheduled maturity date and the underlying terms are materially modified, the remaining carrying value of deferred debt issuance costs, along with certain other payments to lenders, is included in loss on extinguishment of debt.
Lessee Accounting
We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for ground leases and our corporate office lease, where the asset is classified within “right of use assets” and the operating lease liability is classified within “other liabilities” in our condensed consolidated balance sheets.
Right of use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Right of use assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Our variable lease payments consist of payments based on a rate or index established subsequent to the lease commencement date and non-lease services related to the ground lease, primarily real estate taxes. Variable lease payments are excluded from the right of use assets and operating lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As our leases do not provide an implicit rate, we use our incremental borrowing rate. Our incremental borrowing rate is based on information available at the commencement date using our actual borrowing rates commensurate with the lease terms and a fully levered borrowing. Extension options on our leases are included in our minimum lease terms when they are reasonably certain to be exercised. In our evaluation of the lease term, we consider other arrangements, primarily our debt and franchise agreements, which may have economic consequences related to failure to renew certain ground leases. For accounting purposes, such lease terms are not adjusted unless the contractual terms are modified. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels, which are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Valuations in this category are inherently less reliable than actively quoted market prices due to the degree of subjectivity involved in determining appropriate methodologies and the applicable underlying observable market assumptions.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. These inputs cannot be validated by readily determinable market data and generally involve considerable judgment by management.
We use the highest level of observable market data if such data is available without undue cost and effort.
Derivative Instruments
We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for trading or speculative purposes.
We record all derivatives at fair value. On the date the derivative contract is entered into, we designate the derivative as one of the following: a hedge of a forecasted transaction or the variability of cash flows to be paid (“Cash Flow Hedge”), a hedge of the fair value of a recognized asset or liability (“Fair Value Hedge”), or an undesignated hedge instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a Cash Flow Hedge are recorded in comprehensive income (loss) until they are reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a Fair Value Hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the consolidated statements of cash flows. Changes in fair value of undesignated hedge instruments are recorded in current period earnings. As of March 31, 2020 and December 31, 2019, our only derivative, an interest rate cap, is an undesignated hedge instrument.
Revenue Recognition
Our revenues primarily consist of operating lease revenues from room rentals, which are accounted for under GAAP in accordance with lease accounting standards. Room revenue is recognized as earned on a daily basis, net of customer incentive discounts, cash rebates, and refunds. Other lease revenues primarily include lease revenue from restaurants, billboards and cell towers, all of which are operating leases. Such leases are recognized on a straight-line basis over the term of the lease when collections are considered probable and as earned and collected when collections are not considered probable. Uncollectible lease amounts are recorded as a direct offset to revenues.
As a lessor, our operating leases do not contain purchase options or require significant assumptions or judgments. Some of our operating leases contain extension options. For those with extension options we assess the likelihood such options will be exercised in determining the lease term.
Customer revenues include other hotel guest revenues generated by the incidental support of hotel operations and are recognized under the revenue accounting standard as the service obligation is completed.
Purchase of Common Stock
Purchases of common stock are recorded on the trade date at cost, including commissions and other costs, through a removal of the stated par value with the excess recorded as additional paid-in-capital.
Equity-Based Compensation
We have a stock-based incentive award plan for our employees and directors, which primarily includes time-based and performance-based awards. We recognize the cost of services received in an equity-based payment transaction with an employee or director as services are received and record either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria. Measurement for these equity awards is the estimated fair value at the grant date of the equity instruments.
The equity-based compensation expense is recognized for awards earned or expected to be earned. Accordingly, the compensation expense for all equity awards is recognized straight-line over the vesting period of the last separately identified vesting portion of the award. Forfeitures for time-based and market-based performance awards are recognized as they occur. Performance awards with targets other than market-based are assessed at each balance sheet date with respect to the expected achievement of the target. Equity-based compensation expense is classified in corporate general and administrative expenses. Dividend equivalent cash payments related to unvested employee and director awards are charged to corporate general and administrative expenses. Dividends awarded as additional stock grants are included in equity-based compensation expense.
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of our common stock outstanding plus other potentially dilutive securities, except when the effect would be anti-dilutive. Dilutive securities include equity-based awards issued under long-term incentive plans, as discussed in Note 11 “Equity-Based Compensation.” Dilutive securities are excluded from the calculation of earnings per share for all periods presented because the effect would be anti-dilutive. The earnings per share amounts are calculated using unrounded amounts and shares which may result in differences in rounding of the presented per share amounts.
Income Taxes
We are organized in conformity with and operate in a manner that allows us to be taxed as a REIT for U.S. federal income tax purposes. To the extent we continue to qualify as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities that we distribute to our stockholders. Accordingly, no provision for U.S. federal income tax expense has been included in our accompanying condensed consolidated financial statements for the three months ended March 31, 2020 or 2019 related to our REIT operations; however, CorePoint TRS, our wholly owned taxable REIT subsidiary, is subject to U.S. federal, state and local income taxes and we may be subject to state and local taxes. We were subject to U.S. federal, state and local taxes prior to our REIT election.
We use the asset and liability method of accounting for income taxes. Under this method, current income tax expense represents the amounts expected to be reported on our income tax returns, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be applied to taxable income in the years in which those temporary differences are expected to reverse.
In determining our tax expense for financial statement reporting purposes, we must evaluate our compliance with the Code, including the transfer pricing determinations used in establishing rental payments between the REIT and CorePoint TRS. Accounting for income taxes requires, among others, interpretation of the Code, estimated tax effects of transactions, and evaluation of probabilities of sustaining tax positions, including realization of tax benefits. We recognize tax positions only after determining that the relevant tax authority would more likely than not sustain the position following the audit. The final resolution of those assessments may subject us to additional taxes. In addition, we may incur expenses defending our positions during Internal Revenue Service (“IRS”) tax examinations, even if we are able to eventually sustain our position with the tax authorities.
Concentrations of Credit Risk and Business Risk
We have cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels. We utilize financial institutions that we consider to be of high credit quality and consider the risk of default to be minimal. We also monitor the creditworthiness of our customers and financial institutions before extending credit or making investments.
Substantially all of our revenues are derived from our lodging operations at our hotels. Lodging operations are particularly sensitive to adverse economic, social and competitive conditions and trends, including the novel coronavirus (“COVID-19”) pandemic, which could adversely affect our business, financial condition and results of operations.
We have a concentration of hotels operating in Texas, Florida and California. The number of hotels and percentages of total hotels as of March 31, 2020 and 2019, and the percentages of our total revenues from these states for the three months ended March 31, 2020 and 2019 is as follows:
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March 31, 2020
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March 31, 2019
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Number of Hotels
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Percentage of Total Hotels
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|
Percentage of Total Revenue
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|
Number of Hotels
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|
Percentage of Total Hotels
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|
Percentage of Total Revenue
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|
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Texas
|
47
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|
19
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%
|
|
18
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%
|
|
68
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|
22
|
%
|
|
21
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%
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|
Florida
|
45
|
|
18
|
%
|
|
25
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%
|
|
49
|
|
16
|
%
|
|
22
|
%
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|
California
|
21
|
|
8
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%
|
|
12
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%
|
|
21
|
|
6
|
%
|
|
10
|
%
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|
Total
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113
|
|
45
|
%
|
|
55
|
%
|
|
138
|
|
44
|
%
|
|
53
|
%
|
The decrease in hotels from March 31, 2019 to March 31, 2020 is due to the sale of hotels.
Segment Reporting
Our hotel investments have similar economic characteristics and our service offerings and delivery of services are provided in a similar manner, using the same types of facilities and similar technologies. Our chief operating decision maker reviews our financial information on an aggregated basis. As a result, we have concluded that we have one operating and reportable business segment.
Principal Components of Expenses
As more fully explained in Note 8 “Commitments and Contingencies” our management company is responsible for the day to day operations of our hotels. For many expenses, the manager directly contracts for the services in the capacity as a principal, and we reimburse our manager in accordance with the agreements. We present the following expense components and only classify the fee portion of expense as management and royalty fees. We classify all amounts owed to our manager and franchisor in accounts payable and accrued expenses.
Rooms — These expenses include hotel operating expenses of housekeeping, reservation systems (per our franchise agreements), room and breakfast supplies and front desk costs.
Other departmental and support — These expenses include expenses that constitute non-room operating expenses, including parking, telecommunications, on-site administrative labor, sales and marketing, loyalty program, recurring repairs and maintenance and utility expenses.
Property tax, insurance and other — These expenses consist primarily of real and personal property taxes, other local taxes, ground rent, equipment rent and insurance.
Newly Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance enhances and simplifies various aspects of the current income tax guidance and reduces complexity by removing certain exceptions to the general framework. The guidance is effective for us January 1, 2021. We do not expect the adoption of this guidance to have a material impact on our consolidated financial position and results of operations.
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements for fair value measurements. While some disclosures have been removed or modified, new disclosures have been added. We adopted this guidance on January 1, 2020, and it did not have a material impact on our consolidated financial position and results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance primarily affects financial assets and net investment in leases that are not accounted for at fair value through net income but excludes operating lease receivables. The guidance primarily applies to our non-lease trade receivables, casualty insurance claim receivables, Wyndham Settlement receivable and any future financial assets that have the contractual right to receive cash that we may acquire in the future. We adopted this guidance on January 1, 2020, and it did not have a material impact on our consolidated financial position and results of operations.
3. Investments in Real Estate
During the three months ended March 31, 2020, 23 hotels were sold for gross proceeds of $100 million resulting in a gain on sale of $23 million.
For the three months ended March 31, 2020 we recorded an impairment loss of $2 million, related to final disposal costs related to a previously impaired hotel property. In connection with our impairment analysis as of March 31, 2020, we considered the financial effects related to the COVID-19 pandemic as a change in circumstances requiring an impairment review. We performed the impairment analysis consistent with GAAP which incorporated the real estate carrying value adjustments resulting from the impairment losses in 2019 and 2018 of $141 million and $154 million, respectively. We also considered the market information related to the hotels we sold in 2019 and those sold in the three months ended March 31, 2020 which resulted in gain on sales of $32
million and $23 million, respectively, as well as hotels under sales contracts as of March 31, 2020, each in relation to the underlying real estate carrying amounts. After also considering other factors related to recoverability of our real estate assets, we have concluded there were no additional impairment losses for the three months ended March 31, 2020. We will continue to monitor events and changes in circumstances related to our real estate assets, including updated COVID-19 data and analysis related to our operations, fair value and cash flow assumptions, that may indicate that the carrying amounts of our real estate assets may not be recoverable. Those changes in circumstances and analysis may result in impairment losses in future periods. We had no impairment loss for the three months ended March 31, 2019.
We have experienced hurricane and fire related damages to certain of our hotels. We carry comprehensive property, casualty, flood and business interruption insurance that we anticipate will cover our losses at these hotels, subject to deductibles. For the three months ended March 31, 2020 we had no involuntary conversion write-off of net book value of damaged assets. Certain of our hotels had closures and disruptions to business primarily due to hurricanes and fires. For the three months ended March 31, 2020 and 2019, we recorded business interruption insurance proceeds of $2 million, and $1 million, respectively, which are included in “other income, net” on our condensed consolidated statements of operations. As of March 31, 2020, we have not recognized any potential claims related to the COVID-19 pandemic losses. Given the contractual uncertainty of those claims, we cannot provide any assessment of whether such claims are realizable.
Construction in progress primarily includes capitalized costs for ongoing projects that have not yet been put into service. We have pledged substantially all of our investments in real estate as collateral for our CMBS Facility (as defined below).
4. Other Assets
The following table presents other assets as of March 31, 2020 and December 31, 2019 (in millions):
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|
|
March 31, 2020
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|
December 31, 2019
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|
Lender and other escrows
|
$
|
21
|
|
|
$
|
20
|
|
|
Prepaid expenses
|
17
|
|
|
10
|
|
|
Intangible assets, net
|
4
|
|
|
4
|
|
|
Federal and state tax receivables
|
4
|
|
|
—
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|
|
Other assets, primarily hotel supplies
|
7
|
|
|
9
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|
|
Total other assets
|
$
|
53
|
|
|
$
|
43
|
|
5. Debt
The following table presents the carrying amount of our debt as of March 31, 2020 and December 31, 2019 (in millions):
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|
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|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Interest Rate (1)
|
|
Maturity Date
|
|
CMBS Facility
|
$
|
871
|
|
|
$
|
921
|
|
|
One-month LIBOR + 2.75%
|
|
June 2020(2)
|
|
Revolving Facility
|
110
|
|
|
—
|
|
|
One-month LIBOR + 4.50%
|
|
May 2020(3)
|
|
|
981
|
|
|
921
|
|
|
|
|
|
|
Less deferred finance costs
|
(2
|
)
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|
(6
|
)
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Total debt, net
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$
|
979
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|
|
$
|
915
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|
____________________
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(1)
|
One-month LIBOR at March 31, 2020 and December 31, 2019 was 0.99% and 1.76%, respectively.
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(2)
|
After maturity in June 2020, includes five one-year extension options at our option, provided there is no event of default existing as of the commencement of the applicable extension period and the CorePoint CMBS Borrower (as defined below) either extends the current interest rate cap or purchases a new interest rate cap covering the extension period at a strike price as set forth in the CMBS Loan Agreement (as defined below).
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(3)
|
After maturity in May 2020, includes a one-year extension option at our option, subject to certain conditions, including that the maturity of the CMBS Facility be extended to a date no earlier than the maturity of the Revolving Facility (as defined below).
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CMBS Facility
Certain indirect wholly-owned subsidiaries of CorePoint Lodging Inc. (collectively, the “CorePoint CMBS Borrower”), CorePoint TRS and CorePoint Operating Partnership L.P. (“CorePoint OP”) are parties to a loan agreement (the “CMBS Loan Agreement”) providing for a secured mortgage loan secured primarily by mortgages for substantially all of our wholly-owned and ground leased hotels, an excess cash flow pledge for seven owned and ground leased hotels and other collateral customary for mortgage loans of this type (the “CMBS Facility”).
The CMBS Facility bears interest at a rate equal to the sum of (i) one-month LIBOR and (ii) 2.75% per annum for the first five years of the term, 2.90% for the sixth year of the term and 3.00% for the seventh year of the term. Interest is generally payable monthly.
The CMBS Facility matures on June 9, 2020, with five one-year extension options, exercisable at the CorePoint CMBS Borrower’s election, provided there is no event of default existing as of the commencement of the applicable extension period and the CorePoint CMBS Borrower either extends the current interest rate cap or purchases a new interest rate cap covering the extension period at a strike price as set forth in the CMBS Loan Agreement. No principal payments are due prior to the scheduled or extended maturity date. The CMBS Facility is pre-payable in whole or in part subject to payment of all accrued interest through the end of the applicable accrual period. In March 2020, we provided notice to extend the CMBS Facility for one year upon maturity. In connection with the extension, in April 2020, we purchased a new interest rate cap with a termination date of June 15, 2021. We believe we have met and will meet all requirements to extend the CMBS Facility for one year from the current maturity date.
We may obtain the release of individual properties from the CMBS Facility provided that certain conditions of the CMBS Loan Agreement are satisfied. The most restrictive of these conditions provide that after giving effect to such release the debt yield for the CMBS Facility (generally defined as hotel property operating net income before interest, depreciation and a fixed amount of corporate general and administrative expenses divided by the outstanding principal balance of the CMBS Facility, “Debt Yield”) is not less than the greater of (x) 16.44% and (y) the lesser of (i) the Debt Yield in effect immediately prior to such release and (ii) 16.94% (such result the “Release Debt Yield”). However, if such release is in connection with the sale of a property to an unrelated third party, such sold property may be released if the CMBS Borrower prepays an amount equal to the greater of (x) the allocated portion of the outstanding CMBS Facility plus a premium ranging from 5% to 10%, as defined in the CMBS Loan Agreement, and (y) the lesser of (i) the full net proceeds from the sale of the property received by us and (ii) the amount necessary to satisfy the Release Debt Yield. Accordingly, such CMBS Loan Agreement release provisions could affect our ability to sell properties or restrict the use of sale proceeds only to (or substantially to) the required partial prepayment of the CMBS Facility. During the three months ended March 31, 2020, primarily in connection with the sale of 23 secured hotel properties, $50 million of the net proceeds were used to pay down the principal of the CMBS Facility.
The CMBS Facility includes customary non-recourse carve-out guarantees, affirmative and negative covenants and events of default, including, among other things, guarantees for certain losses arising out of customary “bad-boy” acts of CorePoint OP and its affiliates and environmental matters (which will be recourse for environmental matters only to the CorePoint CMBS Borrower provided that the required environmental insurance is delivered to the lender), a full recourse guaranty with respect to certain bankruptcy events, restrictions on the ability of the CorePoint CMBS Borrower to incur additional debt and transfer, pledge or assign certain equity interests or its assets, and covenants requiring the CorePoint CMBS Borrower to exist as “special purpose entities,” maintain certain ongoing reserve funds and comply with other customary obligations for commercial mortgage-backed securities loan financings. As of March 31, 2020, we believe we were in compliance with these covenants.
At the origination of the CMBS Facility, the CorePoint CMBS Borrower deposited in the loan servicer’s account $15 million in upfront reserves for property improvement and environmental remediation, which funds may be periodically disbursed to the CorePoint CMBS Borrower throughout the term of the loan to cover such costs. In addition, the CMBS Facility lender has the right to control the disbursement of hotel operating cash receipts during the continuation of an event of default under the loan or if and while the Debt Yield for the CMBS Facility falls below 12.33% through May 30, 2023 and 12.83% thereafter, in each case, for two consecutive quarters. As of March 31, 2020, we believe we were in compliance with these covenants.
Revolving Facility
CorePoint Borrower L.L.C. (the “CorePoint Revolver Borrower”), our indirect wholly-owned subsidiary and the direct wholly-owned subsidiary of CorePoint OP, and CorePoint OP are parties to a credit agreement (the “Revolver Credit Agreement”) providing for the $150 million Revolving Facility (“Revolving Facility”). The Revolving Facility matures on May 30, 2020, with an election to extend the maturity for one additional year subject to certain conditions, including that the maturity of the CMBS Facility be extended to a date no earlier than the maturity of the Revolving Facility. We have provided notice to extend the Revolving Facility for one year upon maturity. As of March 31, 2020, $110 million was outstanding under the Revolving Facility and we had no additional borrowings available. In addition, as of March 31, 2020, there is a $2 million outstanding letter of credit issued under the Revolving Facility. On May 19, 2020, CorePoint OP, the CorePoint Revolver Borrower and certain of the CorePoint Revolver Borrower’s subsidiaries entered into an amendment to the Revolver Credit Agreement (the “Revolver Credit Agreement Amendment”) that included, among other things, an elimination of certain financial covenants and increased debt service over the remaining term. For additional details regarding the material terms of the Revolver Credit Agreement Amendment, see Note 16 “Subsequent Events.”
Interest under the Revolving Facility is, at the option of the CorePoint Revolver Borrower, either at a base rate plus a margin of 3.5% or a LIBOR rate plus a margin of 4.5%. With respect to base rate loans, interest will be payable at the end of each quarter. With respect to LIBOR loans, interest will be payable at the end of the selected interest period but no less frequently than quarterly. Additionally, there is a commitment fee payable at the end of each quarter equal to 0.5% of unused commitments under the Revolving Facility and customary letter of credit fees.
The Revolving Facility contains customary representations and warranties, affirmative and negative covenants and defaults, including financial maintenance covenants consisting of a maximum total net leverage ratio financial covenant and minimum interest coverage ratio financial covenant, in each case, as defined, and tested as of the last day of any fiscal quarter in which borrowings under the Revolving Facility and outstanding letters of credit exceed 10% of the aggregate commitments of the Revolving Facility. As of March 31, 2020, we believe we were in compliance with these covenants.
The obligations under the Revolving Facility are unconditionally and irrevocably guaranteed by CorePoint OP, and, subject to certain exceptions, each of the CorePoint Revolver Borrower and its existing and future domestic subsidiaries that own equity interests in any CorePoint CMBS Borrower.
6. Mandatorily Redeemable Preferred Shares
We have 15,000 shares of Cumulative Redeemable Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), held by an unrelated third-party. The Series A Preferred Stock has an aggregate liquidation preference of $15 million, plus any accrued and unpaid dividends thereon. The Series A Preferred Stock is senior to our common stock with respect to dividends and with respect to dissolution, liquidation or winding up of the Company. For all periods the Series A Preferred Stock has been outstanding, we have paid a cash dividend equal to 13% per annum, paid quarterly. If our leverage ratio, as defined, exceeds 7.5 to 1.0 as of the last day of any fiscal quarter, or if an event of default occurs (or has occurred and has not been cured) with respect to the Series A Preferred Stock, we will be required to pay a cash dividend on the Series A Preferred Stock equal to 15% per annum. Our dividend rate on the Series A Preferred Stock will increase to 16.5% per annum if, at any time, we are both in breach of the leverage ratio covenant and an event of default occurs (or has occurred and has not been cured) with respect to the Series A Preferred Stock. As of March 31, 2020, none of these ratios have been exceeded and we have not triggered any of the events that would result in an increased dividend rate. The COVID-19 pandemic has caused significant disruptions to our operations, and there can be no assurance that our future operating performance will be adequate for us to continue to pay dividends on the Series A Preferred Stock.
The Series A Preferred Stock is mandatorily redeemable by us in 2028, upon the tenth anniversary of the date of issuance. Beginning in 2025, upon the seventh anniversary of the issuance of the Series A Preferred Stock, we may redeem the outstanding Series A Preferred Stock for an amount equal to its aggregate liquidation preference, plus any accrued but unpaid dividends. The holders of the Series A Preferred Stock may also require us to redeem the Series A Preferred Stock upon a change of control of the Company for an amount equal to its aggregate liquidation preference plus any accrued and unpaid dividends thereon (and a premium if the change of control occurs prior to the seventh anniversary of the issuance of the Series A Preferred Stock). Due to the fact that the Series A Preferred Stock is mandatorily redeemable, the preferred shares are classified as a liability on the accompanying condensed consolidated balance sheet, and dividends on these preferred shares are classified as interest expense in the accompanying condensed consolidated statements of operations.
Holders of Series A Preferred Stock generally have no voting rights. However, without the prior consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, we are prohibited from (i) authorizing or issuing any additional shares of Series A Preferred Stock, or (ii) amending our charter or entering into, amending or altering any other agreement in any manner that would adversely affect the Series A Preferred Stock. Holders of shares of the Series A Preferred Stock have certain preemptive rights over issuances by us of any class or series of our stock ranking on parity with the Series A Preferred Stock. If we are either (a) in arrears on the payment of dividends that were due on the Series A Preferred Stock on six or more quarterly dividend payment dates, whether or not such dates are consecutive, or (b) in default of our obligations to redeem the Series A Preferred Stock or following a change of control, the preferred stockholders may designate a representative to attend meetings of our board of directors as a non-voting observer until all unpaid Series A Preferred Stock dividends have either been paid or declared with an amount sufficient for payment set aside for payment, or the shares required to be redeemed have been redeemed, as applicable. As of March 31, 2020, neither event described above has occurred.
7. Accounts Payable and Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities include the following as of March 31, 2020 and December 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Due to hotel manager
|
$
|
34
|
|
|
$
|
26
|
|
|
Real estate taxes
|
14
|
|
|
22
|
|
|
Sales and occupancy taxes
|
5
|
|
|
7
|
|
|
Interest
|
2
|
|
|
2
|
|
|
Other accounts payable and accrued expenses
|
22
|
|
|
25
|
|
|
Total accounts payable and accrued expenses
|
$
|
77
|
|
|
$
|
82
|
|
|
|
|
|
|
|
Operating lease liabilities
|
$
|
24
|
|
|
$
|
25
|
|
|
Property insurance financing
|
9
|
|
|
2
|
|
|
Below market leases, net
|
4
|
|
|
5
|
|
|
Other liabilities
|
13
|
|
|
11
|
|
|
Total other liabilities
|
$
|
50
|
|
|
$
|
43
|
|
8. Commitments and Contingencies
Hotel Management and Franchise Agreements
Management Fees
On May 30, 2018, wholly owned subsidiaries of the Company entered into separate hotel management agreements with LQ Management L.L.C. (“LQM”), whereby we pay a fee equal to 5% of total gross revenues, as defined. The term of the management agreements is 20 years subject to two renewals of five years each, at LQM’s option. There are penalties for early termination.
LQM generally has sole responsibility for all activities necessary for the operation of the hotels, including establishing room rates, processing reservations and promoting and publicizing the hotels. LQM also provides all employees for the hotels, prepares reports, budgets and projections, and provides other administrative and accounting support services to the hotels. We have consultative and limited approval rights with respect to certain actions of LQM, including entering into long-term or high value contracts, engaging in certain actions relating to legal proceedings, approving the operating budget, making certain capital expenditures and the hiring of certain management personnel. We are also responsible for reimbursing LQM for certain costs incurred by LQM during the fulfillment of their duties, such as payroll costs for certain employees, general liability insurance and other costs that the manager incurs to operate the hotels.
For the three months ended March 31, 2020 and 2019, our management fee expense was $7 million and $11 million, respectively.
Royalty Fees
On May 30, 2018, we entered into separate hotel franchise agreements with La Quinta Franchising LLC (“LQ Franchising”). Pursuant to the franchise agreements, we were granted a limited, non-exclusive license to use our franchisor’s brand names, marks and system in the operation of our hotels. The franchisor also may provide us with a variety of services and benefits, including centralized reservation systems, participation in customer loyalty programs, national advertising, marketing programs and publicity designed to increase brand awareness, as well as training of personnel. In return, we are required to operate franchised hotels consistent with the applicable brand standards.
Our franchise agreements require that we pay a 5% royalty fee on gross room revenue. The term of the franchise agreements is through 2038, subject to one renewal of 10 years, at the franchisor’s option. There are penalties for early termination. For the three months ended March 31, 2020 and 2019, our royalty fee expense was $7 million and $10 million, respectively. LQ Franchising has authorized that payment of the royalty and certain other franchise fees for March through May 2020 can be deferred (interest-free) until September 1, 2020, due to the impact of the COVID-19 pandemic.
In addition to the royalty fee, the franchise agreements include a reservation fee of 2% of gross room revenues, a marketing fee of 2.5% of gross room revenues, a loyalty program fee of 5% of eligible room night revenues, and other miscellaneous ancillary
fees. Reservation fees are included within rooms expense and the marketing fee and loyalty program fees are included within other departmental and support in the accompanying consolidated statements of operations.
Our requirement to meet certain brand standards imposed by our franchisor includes requirements that we incur certain capital expenditures, generally ranging from $1,500 to $7,500 per hotel room (with various specific amounts within this range being applicable to different groups of our hotels) during a prescribed period generally ranging from two to eleven years. These amounts are over and above the capital expenditures we are required to make each year for recurring furniture, fixtures and equipment maintenance. However, these amounts that we are required to spend are subject to reduction, in varying degrees, by the amount of capital expenditures made for hotels in the applicable group over and above the capital expenditures required for the recurring maintenance in one or more years before receipt of the franchisor’s notice. The initial period during which the franchisor can notify us that we must make these capital expenditures is through 2028. At the franchisor’s discretion, subject to the franchise agreement provisions governing when such requirements may be imposed, the franchisor may provide a notice obligating us to meet those capital expenditure requirements generally within two to nine years of the notice. We expect to meet these requirements primarily through our recurring capital expenditure program. As of March 31, 2020, $15 million was held in lender escrows that can be used to finance these requirements. As a result of the impact of the COVID-19 pandemic, our franchisor has waived any brand standards that requires capital investment (except for health and safety standards) until January 1, 2021.
Litigation
We are a party to a number of pending claims and lawsuits arising in the normal course of business. We do not consider our ultimate liability with respect to any such claims or lawsuits, or the aggregate of such claims and lawsuits, to be material in relation to our condensed consolidated financial condition, results of operations or our cash flows taken as a whole.
We maintain general and other liability insurance; however, certain costs of defending lawsuits, such as those within the retention or insurance deductible amount, are not covered by or are only partially covered by insurance policies. We regularly evaluate our ultimate liability costs with respect to such claims and lawsuits. We accrue costs from litigation as they become probable and estimable.
Tax Contingencies
We are subject to regular audits by federal and state tax authorities, which may result in additional tax liabilities. In 2018, La Quinta Holdings Inc. completed the distribution to its stockholders of all the then-outstanding shares of common stock of CorePoint Lodging Inc. following which we became an independent, self-administered, publicly traded company (the “Spin-Off”). Subsequently, La Quinta Holdings Inc. merged with Wyndham Hotels & Resorts, Inc. (“Wyndham”). Entities in existence prior to the Spin-Off are currently under audit by the IRS for tax years ended December 31, 2010 to 2013. We have agreed to indemnify Wyndham for any obligations and expenses arising from these IRS audits, including the legal and accounting defense expenses.
In 2014, the IRS commenced a tax audit, primarily related to transfer pricing for internal rents charged by our prior REIT. Subsequently, we have supplied information to the IRS supporting our position. In November 2019, the IRS issued notices of proposed adjustments (“NOPA”, also known as a 30 Day Letter) proposing a redetermined rent adjustment totaling $138 million, attributable to tax years 2010 and 2011, exclusive of penalties and interest. Additionally, the November 2019 NOPA proposed an adjustment resulting in the loss of tax operating loss carryforwards generated in tax years 2006 through 2009. The adjustment to the tax operating loss carryforwards, measured at the tax rates enacted during the year of utilization and exclusive of penalties and interest, is $31 million.
We responded to the IRS in disagreement with their NOPA in January 2020. In April 2020, the IRS responded in disagreement to our response. Due to the COVID-19 pandemic and IRS offices being temporarily closed, the transfer of the audit to IRS Appeals office is delayed, and no date has been established for when it will be transferred to the IRS Appeals office and the appeals process will commence.
We believe the IRS transfer pricing methodologies applied in the audits contain flaws and that the IRS proposed tax and adjustments are inconsistent with the U.S. federal tax laws. We have concluded that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more-likely-than-not to be sustained upon conclusion of the examination. Accordingly, as of March 31, 2020, we have not established any reserves related to this proposed adjustment or any other issues reflected on the returns under examination. If, however, we are unsuccessful in challenging the IRS, an excise tax would be imposed on the REIT related to the excess rent and we would be responsible for additional income taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the trading price of our common stock. Such adjustments could also give rise to additional state income taxes.
Purchase Commitments
As of March 31, 2020, we had approximately $25 million of purchase commitments related to certain continuing redevelopment and renovation projects and other hotel service contracts in the ordinary course of business. Approximately $20 million of this amount relates to long-term hotel service contracts payable over approximately 5 years.
Lease Commitments
As a lessee, our arrangements are primarily ground leases for certain of our hotels. These ground leases generally include base rents, which may be reset based on inflation indexes or pre-established increases, contingent rents based upon the respective hotel’s revenues, and reimbursement or primary responsibility for related real estate taxes and insurance expenses. The initial base terms for the leases are generally in excess of 25 years, with initial term maturities occurring between 2020 and 2096. Many of these arrangements also contain renewal options at the conclusion of the initial lease term, generally at fair value or pre-set amounts. Our other operating leases primarily relate to our corporate office.
The contractual maturity analysis of all of our operating lease liabilities on an undiscounted basis as of March 31, 2020 is as follows (in millions):
|
|
|
|
|
|
|
|
Year
|
Amount
|
|
2020 (remaining nine months)
|
$
|
3
|
|
|
2021
|
3
|
|
|
2022
|
3
|
|
|
2023
|
3
|
|
|
2024
|
3
|
|
|
2025
|
2
|
|
|
Thereafter
|
58
|
|
|
|
$
|
75
|
|
The difference between the undiscounted contractual payments of $75 million above and the March 31, 2020 operating lease liabilities of $24 million (included in our “other liabilities”) is the present value of imputed interest. Contractual payments include base rents that have been contractually reset based on inflation indexes as of March 31, 2020.
For the three months ended March 31, 2020, total rent expense included in property tax, insurance and other expenses in our condensed consolidated statement of operations was $1 million, of which $0.1 million related to contingent rents. For the three months ended March 31, 2019, total rent expense was $1 million, of which $0.1 million related to contingent rents. Differences between amounts expensed and cash paid were not significant.
Post-employment Benefits
We have entered into severance plans with all executives and other employees. New employees are added at their date of employment. The plans include salary continuation, severance benefits, continuation of health care coverage and other supplemental post-employment benefits, all which vary depending on the employee’s position and apply where there is termination without cause. We had no expenses related to these severance plans in the three months ended March 31, 2020.
9. Equity
On March 21, 2019, our board of directors authorized a $50 million share repurchase program. Under the share repurchase program, we may purchase common stock in the open market, in privately negotiated transactions or in such other manner as determined by us, including through repurchase plans complying with the rules and regulations of the SEC. The share repurchase program does not obligate us to repurchase any dollar amount or number of shares of common stock and the program may be suspended or discontinued at any time. During 2019, we acquired 2.6 million shares at a weighted average cost per share of $11.34 under the share repurchase program. No shares have been acquired in 2020 under the share repurchase program.
In April 2020, our board of directors suspended the common stock dividend for the second quarter of 2020 and for the remainder of the year. In addition, the Revolver Credit Agreement Amendment restricts our ability to pay cash dividends on our common stock. See Note 16 “Subsequent Events.” Our board of directors will reassess at the end of the year any additional common dividend amount that may be declared and paid for 2020 in addition to the dividend we paid with respect to the first quarter of 2020.
10. Revenues
Revenues for the three months ended March 31, 2020 and 2019 are comprised of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
Operating lease revenues:
|
|
|
|
|
Rooms
|
$
|
143
|
|
|
$
|
204
|
|
|
Other
|
1
|
|
|
1
|
|
|
Total lease revenues
|
144
|
|
|
205
|
|
|
|
|
|
|
|
Customer revenues
|
2
|
|
|
3
|
|
|
Total revenues
|
$
|
146
|
|
|
$
|
208
|
|
Operating lease revenues other primarily include lease arrangements for restaurants, billboards and cell towers. Customer revenues, which are classified within other revenues, generally relate to amounts generated by the incidental support of the hotel operations, including service fees, parking and food. For both of the three month periods ended March 31, 2020 and 2019, we had an insignificant amount of variable lease revenue.
As of March 31, 2020, 19 hotels with approximately 2,300 rooms were temporarily not accepting transient guests or most other reservations. As of April 30, 2020, 30 hotels with approximately 3,700 rooms were temporarily not accepting transient guests or most other reservations. Because these hotels are expected to resume normal operations after the COVID-19 pandemic subsides, these hotels were classified as operating at March 31, 2020.
Beginning in April 2020, we began deferring portions of certain operating lease agreement rent collections, primarily restaurants. Amounts deferred through April 30, 2020 were less than $0.1 million.
11. Equity-Based Compensation
Our 2018 Omnibus Incentive Plan (the “Plan”), authorizes the grant of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), Performance Stock Units (“PSUs”), non-qualified and incentive stock options, dividend equivalents, and other stock-based awards. A total of eight million shares of common stock has been authorized for issuance under the Plan and approximately six million shares of common stock were available for issuance as of March 31, 2020.
The RSAs and RSUs are time-based, where the awards vest over time, generally three to four years, and are not subject to future performance targets. RSAs and RSUs are initially recorded at market price of our common stock at the time of the grant. The PSUs are subject to performance-based vesting, where the ultimate award is based on the achievement of established performance targets, generally over two to three years. As of March 31, 2020, these performance targets relate to relative and absolute total shareholder returns, as defined, which are treated as market-based conditions. Accordingly, these market-based PSUs are recorded at the fair value of the award using a Monte Carlo simulation valuation model. The currently outstanding PSUs vest over two to three years. RSAs, RSUs and PSUs are subject to accelerated vesting in the event of certain defined events. For both of the three month periods ended March 31, 2020, and 2019, we recognized $2 million of equity-based compensation expense.
The following table summarizes the activity of our RSAs, RSUs and PSUs during the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSAs
|
|
PSUs
|
|
RSUs
|
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding at January 1, 2020
|
653,790
|
|
|
$
|
20.30
|
|
|
368,969
|
|
|
$
|
6.99
|
|
|
5,072
|
|
|
$
|
6.05
|
|
|
Granted
|
856,559
|
|
|
3.90
|
|
|
979,482
|
|
|
5.42
|
|
|
101
|
|
|
10.25
|
|
|
Vested
|
(3,241
|
)
|
|
10.25
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding at March 31, 2020
|
1,507,108
|
|
|
$
|
11.00
|
|
|
1,348,451
|
|
|
$
|
5.85
|
|
|
5,173
|
|
|
$
|
6.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSAs
|
|
PSUs
|
|
RSUs
|
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding at January 1, 2019
|
884,068
|
|
|
$
|
20.50
|
|
|
—
|
|
|
$
|
—
|
|
|
14,624
|
|
|
$
|
5.77
|
|
|
Granted
|
351,276
|
|
|
10.58
|
|
|
447,527
|
|
|
6.99
|
|
|
239
|
|
|
12.43
|
|
|
Vested
|
(74,810
|
)
|
|
3.00
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
(811
|
)
|
|
6.85
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding at March 31, 2019
|
1,159,723
|
|
|
$
|
18.64
|
|
|
447,527
|
|
|
$
|
6.99
|
|
|
14,863
|
|
|
$
|
5.88
|
|
RSAs are included in amounts for issued and outstanding common stock but are excluded in the computation of basic earnings (loss) per share.
12. Income Taxes
The following table presents our income tax benefit (expense) for the three months ended March 31, 2020 and 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
Current tax benefit (expense)
|
$
|
4
|
|
|
$
|
(5
|
)
|
|
Deferred tax expense
|
(2
|
)
|
|
—
|
|
|
Total income tax benefit (expense)
|
$
|
2
|
|
|
$
|
(5
|
)
|
The provision for income taxes for both periods differs from the statutory federal tax rate of 21%, due to the impact of the REIT election, accelerated deductions for certain real estate expenditures and state income taxes.
13. Fair Value Measurements
Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
We use interest rate cap arrangements with financial institutions to manage our exposure to interest rate changes for our loans that utilize floating interest rates. We have an interest rate cap we entered into in 2018, which is classified within other assets. As of March 31, 2020 and December 31, 2019, the fair value of this interest rate cap was zero.
Financial Instruments Not Reported at Fair Value
For those financial instruments not carried at fair value, the carrying amount and estimated fair values of our financial assets and liabilities were as follows as of March 31, 2020 and December 31, 2019 (in millions):
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March 31, 2020
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December 31, 2019
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Carrying
Amount
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Fair
Value
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Carrying
Amount
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Fair
Value
|
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Debt - CMBS Facility(1)(2)
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$
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871
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$
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749
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$
|
921
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$
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921
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|
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Debt - Revolving Facility(1)(2)
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$
|
110
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$
|
91
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$
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—
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$
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—
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Mandatorily redeemable preferred shares(1)
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$
|
15
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$
|
8
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|
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$
|
15
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$
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15
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____________________
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(1)
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Classified as Level 3 under the fair value hierarchy.
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(2)
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Carrying amount excludes deferred finance costs of $2 million as of March 31, 2020 and $6 million as of December 31, 2019.
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We estimate the fair value of our debt and mandatorily redeemable preferred stock by using risk adjusted discounted cash flow analysis and current market inputs for similar types of arrangements. For the fair values as of March 31, 2020, we also included market inputs related to the COVID-19 pandemic, primarily higher required interest rates and decreased discounted cash flow projections. Fluctuations in these assumptions, including changes in market assessments related to the COVID-19 financial effects, will result in different estimates of fair value.
We believe the carrying amounts of our cash and cash equivalents, accounts receivable and lender and other escrows, and other liabilities approximate fair value as of March 31, 2020 and December 31, 2019, due to their short-term nature.
14. Related Party Transactions
As of March 31, 2020, affiliates of The Blackstone Group Inc. (“Blackstone”) beneficially owned approximately 30% of our outstanding shares of common stock and held horizontal risk retention certificates issued by the trust that holds our CMBS Facility indebtedness (“Class HRR Certificates”). As of March 31, 2020 and December 31, 2019, the portion of our CMBS Facility outstanding balance that correlates to the Class HRR Certificates was $83 million and $88 million, respectively. Total interest payments made to Blackstone as a holder of such Class HRR Certificates for the three months ended March 31, 2020 and 2019 was $1 million and $2 million, respectively.
15. Supplemental Disclosures of Cash Flow Information
The following table presents the supplemental cash flow information for the three months ended March 31, 2020 and 2019 (in millions):
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Three Months Ended March 31,
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2020
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2019
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Supplemental disclosure of cash flow information:
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Interest paid during the period
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$
|
10
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$
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14
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Income taxes paid during the period, net of refunds
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$
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—
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$
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—
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Non-cash investing and financing activities:
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Capital expenditures included in accounts payable and accrued expenses
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$
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—
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$
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10
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Transfer of real estate from construction in progress to operating real estate
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$
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—
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$
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9
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Dividends payable on common stock
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$
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11
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$
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12
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Recognition of right of use operating lease assets and operating lease liabilities
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$
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—
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$
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27
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Financing of property insurance prepaids
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$
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9
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$
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—
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16. Subsequent Events
On March 12, 2020, our board of directors authorized, and we declared, a cash dividend of $0.20 per share of common stock with respect to the first quarter of 2020. The first quarter dividend was paid on April 15, 2020 to stockholders of record as of March 31, 2020. In April 2020, our board of directors suspended the common stock dividend for the second quarter of 2020 and for the remainder of the year. Our board of directors will reassess at the end of the year any additional common dividend amount that may be declared and paid for 2020 in addition to the dividend we paid with respect to the first quarter of 2020.
Subsequent to March 31, 2020, we sold, in separate transactions, three operating hotels for gross sales price of $13 million, recognizing an estimated gain on sales of approximately $2 million. As of March 31, 2020, none of these hotels were classified as assets held for sale because they did not meet the accounting criteria established for such classification. We used $6 million of the net sales proceeds to pay down the principal of the CMBS Facility.
On May 19, 2020, CorePoint OP, the CorePoint Revolver Borrower and certain of the CorePoint Revolver Borrower’s subsidiaries entered into the Revolver Credit Agreement Amendment. After giving effect to the Revolver Credit Agreement Amendment, the commitments under our Revolving Facility are reduced to $110 million, any existing or new letters of credit are required to be cash collateralized at 102% and the CorePoint Revolver Borrower is required to prepay outstanding revolving loans in an amount equal to $5 million, on a monthly basis, for a period of five months commencing on August 15, 2020 (the “Scheduled Payments”). Additionally, the interest rate margin under our Revolving Facility increased by 0.50% per annum to be, at the option of the CorePoint Revolver Borrower, either at a base rate plus a margin of 4.00% per annum or LIBOR plus a margin of 5.00% per annum and the commitment fee increased from 0.50% per annum to 0.75% per annum payable at the end of each quarter. The
Revolver Credit Agreement Amendment extended the maturity of our Revolving Facility to May 31, 2021, which maturity may be accelerated if our CMBS Facility is not extended to a date no earlier than such date on or prior to its stated maturity on June 9, 2020.
The Revolver Credit Agreement Amendment further restricts our ability to incur certain additional debt and liens and make certain investments and restricted payments, such as paying dividends on or repurchasing common stock, but provides for the ability to incur debt consisting of certain government loan programs and make restricted payments in order for CorePoint Lodging Inc. to maintain its status as a REIT. We may also pay dividends to stockholders if required to maintain our status as a REIT, where such payment must be in the form of a stock dividend to the extent permitted by IRS regulations and the Code. Additionally, the total net leverage ratio and interest coverage ratio financial covenants were eliminated through the maturity date of our Revolving Facility. In addition to the extension of the maturity of the Revolving Facility granted by Revolving Facility lenders, we sought the elimination of such covenants in order to avoid the possibility of breaching such covenants, which we believed was otherwise likely based on our projections. The Revolver Credit Agreement Amendment requires that we maintain a minimum of $60 million of liquidity (exclusive of certain restricted cash), at all times. The minimum liquidity amount is reduced on a dollar-for-dollar basis in respect of 50% of any amounts utilized to repay our Revolving Facility and permanently reduce the commitments thereunder (other than in respect of the Scheduled Payments). Further, due to the disruptions in our operations from the COVID-19 pandemic, our Revolving Facility lenders currently control the disbursement of our hotel operating cash receipts (referred to as a “cash trap”). We will be subject to a cash trap until we come into compliance with the debt yield threshold under the Revolving Facility, which we may be unable to do during the remainder of the term of the Revolving Facility. In consideration of the lenders under our Revolving Facility consenting to the Revolver Credit Agreement Amendment, each of CorePoint Lodging Inc. and CorePoint OP GP L.L.C. agreed to provide a guarantee of the obligations under the Revolving Facility and pledge the equity of CorePoint OP owned by it as security for such obligations.