At both March 31, 2019 and December 31, 2018, the noncontrolling interest reported in the Company’s consolidated financial statements consisted of a third-party’s 25.0% ownership interest in the Hilton San Diego Bayfront.
Investment in Hotel Properties
Investments in hotel properties, including land, buildings, furniture, fixtures and equipment (“FF&E”) and identifiable intangible assets are recorded at fair value upon acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation is removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations.
Depreciation expense is based on the estimated life of the Company’s assets. The life is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish the Company’s hotels, as well as specific market and economic conditions. Hotel properties are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 40 years for buildings and improvements and three to 12 years for FF&E. Intangible assets are amortized using the straight-line method over their estimated useful life or over the length of the related agreement, whichever is shorter.
The Company’s investment in hotel properties, net also includes initial franchise fees which are recorded at cost and amortized using the straight-line method over the terms of the franchise agreements ranging from 14 to 27 years. All other franchise fees that are based on the Company’s results of operations are expensed as incurred.
While the Company believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of the Company’s hotels. The Company has not changed the useful lives of any of its assets during the periods discussed.
Impairment losses are recorded on long-lived assets to be held and used by the Company when indicators of impairment are present and the future undiscounted net cash flows expected to be generated by those assets, based on the Company’s anticipated investment horizon, are less than the assets’ carrying amount. If such assets are considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment loss is recognized. The impairment loss recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The Company performs a fair value assessment using a discounted cash flow analysis to estimate the fair value of its hotel properties, taking into account each property’s expected cash flow from operations, the Company’s estimate of how long it will continue to own each property and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company’s judgement is required in determining the discount rate applied to estimated cash flows, the estimated growth of revenues and expenses, net operating income and margins, the need for capital expenditures, as well as specific market and economic conditions.
Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing. The realization of the Company’s investment in hotel properties is dependent upon future uncertain events and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from their estimated fair values.
Restricted Cash
Restricted cash is comprised of reserve accounts for debt service, interest reserves, seasonality reserves, capital replacements, ground leases and property taxes. These restricted funds are subject to supervision and disbursement approval by certain of the Company’s lenders and/or hotel managers.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to hotel guests, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Room revenue is recognized over a guest’s stay at a previously agreed upon daily rate. Additionally, some of the Company’s hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, revenue for the room is recognized by the Company at the price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays the Company directly, revenue for the room is recognized by the Company on a gross basis, with the related discount or commission recognized in room expense. A majority of the Company’s hotels participate in frequent guest programs sponsored by the hotel brand owners whereby the hotel allows guests to earn loyalty points during their hotel stay. The Company
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Sunstone Hotel Investors, Inc. (the “Company,” “we,” “our” or “us”) is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust (“REIT”). A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which, directly or indirectly, leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.
Our business is to acquire, own, asset manage and renovate primarily hotels that we consider to be Long-Term Relevant Real Estate® (or LTRR®) in the United States, specifically hotels in urban and resort locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As part of our ongoing portfolio management strategy, we may also selectively sell hotel properties. As of March 31, 2019, we had interests in 21 hotels currently held for investment (the “21 hotels”), which average 513 rooms in size. Of the 21 hotels, we classify 18 as upper upscale, two as upscale and one as luxury as defined by STR, Inc. All but two (the Boston Park Plaza and the Oceans Edge Resort & Marina) of our 21 hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. Our two unbranded hotels are located in top urban and resort markets that have enabled them to build awareness with both group and transient customers.
Our mission is to create meaningful value for our stockholders by producing superior long-term returns through the ownership of LTRR® in the hospitality sector. Our values include transparency, trust, ethical conduct, honest communication and discipline. As demand for lodging generally fluctuates with the overall economy, we seek to own hotels that will maintain a high appeal with travelers over long periods of time and will generate economic earnings materially in excess of recurring capital requirements. Our strategy is to maximize stockholder value through focused asset management and disciplined capital recycling, which is likely to include selective acquisitions and dispositions, while maintaining balance sheet flexibility and strength. Our goal is to maintain appropriate leverage and financial flexibility to position the Company to create value throughout all phases of the operating and financial cycles.
Operating Activities
Revenues.
Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
|
·
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|
Room revenue
, which is the product of the number of rooms sold and the average daily room rate, or “ADR,” as defined below;
|
|
·
|
|
Food and beverage revenue
, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and
|
|
·
|
|
Other operating revenue
, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone/internet, parking, spa, facility fees, entertainment and other guest services. Additionally, this category includes, among other things, attrition and cancellation revenue, tenant revenue derived from hotel space and marina slips leased by third parties and any business interruption proceeds or performance guarantee payments received.
|
Expenses.
Our expenses consist of the following:
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·
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Room expense
, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue;
|
|
·
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|
Food and beverage expense
, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue;
|
|
·
|
|
Other operating expense
, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise costs;
|
|
·
|
|
Property tax, ground lease and insurance expense
, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, however property tax is subject to regular revaluations based on the specific tax regulations and practices of each municipality, along with amortization on our operating lease right-of-use assets;
|
|
·
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|
Other property-level expenses
, which includes our property-level general and administrative expenses, such as payroll, benefits and other employee-related expenses, contract and professional fees, credit and collection expenses, employee recruitment, relocation and training expenses, consulting fees, management fees and other expenses;
|
|
·
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|
Corporate overhead expense,
which includes our corporate-level expenses, such as payroll, benefits and other employee-related expenses, amortization of deferred stock compensation, business acquisition and due diligence expenses, legal expenses, association, contract and professional fees, board of director expenses, entity-level state franchise and minimum taxes, travel expenses, office rent and other customary expenses; and
|
|
·
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|
Depreciation and amortization expense
, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment (“FF&E”), along with amortization on our finance lease right-of-use assets, franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to FF&E for our corporate office.
|
Other Revenue and Expense.
Other revenue and expense consists of the following:
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·
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|
Interest and other income,
which includes interest we have earned on our restricted and unrestricted cash accounts, as well as any energy or other rebates or property insurance proceeds we have received, miscellaneous income or any gains or losses we have recognized on sales or redemptions of assets other than real estate investments;
|
|
·
|
|
Interest expense,
which includes interest expense incurred on our outstanding fixed and variable rate debt and finance lease obligations, gains or losses on interest rate derivatives, amortization of deferred financing costs, and any loan fees incurred on our debt;
|
|
·
|
|
Gain on sale of assets
, which includes the gains we recognized on our hotel sales that do not qualify as discontinued operations;
|
|
·
|
|
Income tax benefit, net
, which includes federal and state income taxes related to continuing operations charged to the Company net of any refunds received, any adjustments to deferred tax assets, liabilities or valuation allowance, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred;
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·
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|
Income from consolidated joint venture attributable to noncontrolling interest,
which includes net income attributable to a third-party’s 25.0% ownership interest in the joint venture that owns the Hilton San Diego Bayfront; and
|
|
·
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|
Preferred stock dividends,
which includes dividends accrued on our Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) and our Series F Cumulative Redeemable Preferred Stock (“Series F preferred stock”).
|
Operating Performance Indicators
.
The following performance indicators are commonly used in the hotel industry:
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·
|
|
Occupancy
, which is the quotient of total rooms sold divided by total rooms available;
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·
|
|
Average daily room rate,
or ADR, which is the quotient of room revenue divided by total rooms sold;
|
|
·
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|
Revenue per available room,
or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue;
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·
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|
Comparable RevPAR,
which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our “Comparable Portfolio.” Currently, our Comparable Portfolio is comprised of the 21 hotels;
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|
·
|
|
RevPAR index,
which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than the average of its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index;
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·
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EBITDAre
, which is net income (loss) excluding: interest expense; benefit or provision for income taxes, including any changes to deferred tax assets, liabilities or valuation allowances and income taxes applicable to the sale of assets; depreciation and amortization; gains or losses on disposition of depreciated property (including gains or losses on change in control); and any impairment write-downs of depreciated property;
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|
·
|
|
Adjusted EBITDAre, excluding noncontrolling interest
, which is EBITDA
re
adjusted to exclude: the net income (loss) allocated to a third-party’s 25.0% ownership interest in the joint venture that owns the Hilton San Diego Bayfront, along with the noncontrolling partner’s pro rata share of any EBITDA
re
components; amortization of deferred stock compensation; amortization of favorable and unfavorable contracts; amortization of right-of-use assets; the cash component of ground lease expense for our finance lease obligations that has been included in interest expense; the impact of any gain or loss from undepreciated asset sales or property damage from natural disasters; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; and any other nonrecurring identified adjustments;
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|
·
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|
Funds from operations (“FFO”) attributable to common stockholders
, which is net income (loss), excluding: preferred stock dividends; the noncontrolling partner’s pro rata share of any FFO components; gains and losses from sales of property; real estate-related depreciation and amortization (excluding amortization of deferred financing costs and right-of-use assets); and any real estate-related impairment losses; and
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|
·
|
|
Adjusted FFO attributable to common stockholders
, which is FFO attributable to common stockholders adjusted to exclude: amortization of favorable and unfavorable contracts; real estate-related amortization of right-of-use assets; noncash interest on our derivative and finance lease obligations; prior year property tax assessments or credits; income tax benefits or provisions associated with any changes to deferred tax assets, liabilities or valuation allowances, the application of net operating loss carryforwards and uncertain tax positions; the noncontrolling interest’s pro rata share of any Adjusted FFO components; non-real estate-related impairment losses; gains or losses due to property damage from natural disasters; the write-off of development costs associated with abandoned projects; and any other nonrecurring identified adjustments.
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Factors Affecting Our Operating Results.
The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
|
·
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|
Demand.
The demand for lodging generally fluctuates with the overall economy. In 2018, Comparable Portfolio RevPAR, which was impacted by renovations at the Hyatt Regency San Francisco, the JW Marriott New Orleans, the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport, increased 2.8% as compared to 2017, with a 30 basis point decrease in occupancy. Our first quarter 2019 Comparable Portfolio RevPAR, which was impacted by renovations at the Hilton San Diego Bayfront and the Renaissance Harborplace, increased 4.3% in 2019 as compared to the same period in 2018. Occupancy remained at 79.2% for both the three months ended March 31, 2019 and 2018.
|
|
·
|
|
Supply
. The addition of new competitive hotels affects the ability of existing hotels to absorb demand for lodging and, therefore, impacts the ability to drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. In aggregate, we expect the U.S. hotel supply to increase over the near term. On a market-by-market basis, some markets may experience new hotel room openings at or greater than historic levels, including in Boston, New York City, Orlando and Portland where there are currently higher-than-average new hotel room openings. Additionally, an increase in the supply of vacation rental or sharing services such as Airbnb also affects the ability of existing hotels to drive RevPAR and profits.
|
|
·
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|
Revenues and expenses
. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators’ effectiveness in maximizing revenues. Similarly, we also evaluate our operators’ effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues.
|
With respect to improving RevPAR index, we continually work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Increased capital investment in our properties may lead to short-term revenue
disruption and negatively impact RevPAR index. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses such as housekeeping, guest supplies, labor and utilities expense. Our Comparable Portfolio RevPAR index increased 450 basis points during the first three months of 2019 as compared to the same period in 2018. The increase in our Comparable Portfolio RevPAR index was primarily due to increases in the RevPAR index at the Wailea Beach Resort post-repositioning, the Hilton Times Square, which benefited from the temporary closure of a nearby Hilton hotel, and at the Hyatt Regency San Francisco, the JW Marriott New Orleans, the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport, which were under renovation during various times in 2018. These increases were partially offset by decreases in the RevPAR index at the Hilton San Diego Bayfront and the Renaissance Harborplace, which were under renovation during the first quarter of 2019.
We continue to work with our operators to identify operational efficiencies designed to reduce expenses while minimally affecting guest experience and hotel employee satisfaction. Key asset management initiatives include working with our operators to optimize hotel staffing levels (albeit ultimate staffing levels are determined by our operators), increase the efficiency of the hotels, such as installing energy efficient management and inventory control systems, and selectively combine certain food and beverage outlets. Our operators may have difficulty implementing certain operational efficiency initiatives and success levels may vary, as most categories of variable operating expenses, such as utilities and housekeeping labor costs, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. Our operators have experienced, either currently or in the past, increases in hourly wages, employee benefits, utility costs and property insurance, which have negatively affected our operating margins. Moreover, our operators are limited in their ability to reduce expenses without affecting brand standards or the competitiveness of our hotels.
Operating Results.
The following table presents our unaudited operating results for our total portfolio for the three months ended March 31, 2019 and 2018, including the amount and percentage change in the results between the two periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
Change $
|
|
Change %
|
|
|
(in thousands, except statistical data)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
171,858
|
|
$
|
180,276
|
|
$
|
(8,418)
|
|
(4.7)
|
%
|
Food and beverage
|
|
|
69,113
|
|
|
74,266
|
|
|
(5,153)
|
|
(6.9)
|
%
|
Other operating
|
|
|
16,709
|
|
|
16,904
|
|
|
(195)
|
|
(1.2)
|
%
|
Total revenues
|
|
|
257,680
|
|
|
271,446
|
|
|
(13,766)
|
|
(5.1)
|
%
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating
|
|
|
156,731
|
|
|
167,308
|
|
|
(10,577)
|
|
(6.3)
|
%
|
Other property-level expenses
|
|
|
32,840
|
|
|
33,907
|
|
|
(1,067)
|
|
(3.1)
|
%
|
Corporate overhead
|
|
|
7,516
|
|
|
7,102
|
|
|
414
|
|
5.8
|
%
|
Depreciation and amortization
|
|
|
36,387
|
|
|
36,688
|
|
|
(301)
|
|
(0.8)
|
%
|
Total operating expenses
|
|
|
233,474
|
|
|
245,005
|
|
|
(11,531)
|
|
(4.7)
|
%
|
Interest and other income
|
|
|
4,924
|
|
|
1,491
|
|
|
3,433
|
|
230.2
|
%
|
Interest expense
|
|
|
(14,326)
|
|
|
(8,876)
|
|
|
(5,450)
|
|
(61.4)
|
%
|
Gain on sale of assets
|
|
|
—
|
|
|
15,659
|
|
|
(15,659)
|
|
(100.0)
|
%
|
Income before income taxes
|
|
|
14,804
|
|
|
34,715
|
|
|
(19,911)
|
|
(57.4)
|
%
|
Income tax benefit, net
|
|
|
3,112
|
|
|
3,740
|
|
|
(628)
|
|
(16.8)
|
%
|
NET INCOME
|
|
|
17,916
|
|
|
38,455
|
|
|
(20,539)
|
|
(53.4)
|
%
|
Income from consolidated joint venture attributable to noncontrolling interest
|
|
|
(1,599)
|
|
|
(2,439)
|
|
|
840
|
|
34.4
|
%
|
Preferred stock dividends
|
|
|
(3,207)
|
|
|
(3,207)
|
|
|
—
|
|
—
|
%
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
13,110
|
|
$
|
32,809
|
|
$
|
(19,699)
|
|
(60.0)
|
%
|
Operating Statistics
.
The following table includes comparisons of the key operating metrics for our Comparable Portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Comparable Portfolio
|
|
79.2
|
%
|
$
|
223.78
|
|
$
|
177.23
|
|
79.2
|
%
|
$
|
214.63
|
|
$
|
169.99
|
|
—
|
bps
|
4.3
|
%
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Operating Results
. The year-over-year comparability of our operations is affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. We sold six hotels in 2018 (the “Six Sold Hotels”). In addition, renovations at the Hilton San Diego Bayfront and the Renaissance Harborplace (the “Two 2019 Renovation Hotels”) negatively impacted our operating results during the first quarter of 2019, and renovations at the Hyatt Regency San Francisco, the Marriott Boston Long Wharf and the Renaissance Los Angeles Airport (the “Three 2018 Renovation Hotels”) negatively impacted our operating results during the first quarter of 2018.
Room revenue
. Room revenue decreased $8.4 million, or 4.7%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
The Six Sold Hotels caused room revenue to decrease by $15.4 million in the first quarter of 2019 as compared to the same period in 2018.
Room revenue generated by the 21 hotels increased $7.0 million during the first quarter of 2019 as compared to the same period in 2018, all of which was due to increases in ADR as occupancy remained flat. The overall increase in ADR was primarily driven by increases net of decreases in the average daily rate at the following hotels:
|
|
|
ADR
|
Increases
|
|
Decreases
|
Hyatt Regency San Francisco (1)
|
|
Chicago hotels
|
JW Marriott New Orleans
|
|
Boston hotels (1)
|
Oceans Edge Resort & Marina
|
|
|
Renaissance Washington DC
|
|
|
Wailea Beach Resort
|
|
|
|
(1)
|
|
ADR was both positively and negatively impacted by two of the Three 2018 Renovation Hotels during the first quarter of 2019.
|
Room revenue generated by the 21 hotels was negatively impacted during the first quarter of 2019 as compared to the same period in 2018 by the Two 2019 Renovation Hotels, where a combined total of 9,400 room nights were out of service at the hotels, displacing approximately $2.1 million in room revenue based on the hotels achieving a combined potential 69.8% occupancy rate and RevPAR of $163.26 without the renovations.
Food and beverage revenue
.
Food and beverage revenue decreased $5.2 million, or 6.9%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
The Six Sold Hotels caused food and beverage revenue to decrease by $7.0 million in the first quarter of 2019 as compared to the same period in 2018.
Food and beverage revenue generated by our 21 hotels increased $1.8 million during the first quarter of 2019 as compared to the same period in 2018 primarily due to a net increase in banquet and event technology revenue along with a net increase in outlet revenue at the following hotels:
|
|
|
Banquet and Event Technology Revenue
|
Increases
|
|
Decreases
|
Boston hotels (1)
|
|
Hilton San Diego Bayfront (2)
|
Hyatt Centric Chicago Magnificent Mile
|
|
Renaissance Harborplace (2)
|
Hyatt Regency San Francisco (1)
|
|
Renaissance Orlando at SeaWorld®
|
JW Marriott New Orleans
|
|
|
Renaissance Washington DC
|
|
|
Wailea Beach Resort
|
|
|
|
|
|
|
|
|
Outlet Revenue
|
Increases
|
|
Decreases
|
Boston hotels (1)
|
|
Hilton San Diego Bayfront (2)
|
Oceans Edge Resort & Marina
|
|
Hyatt Regency San Francisco (1)
|
Wailea Beach Resort
|
|
Renaissance Orlando at SeaWorld®
|
|
|
|
|
|
|
|
(1)
|
|
Food and beverage revenue was both positively and negatively impacted by two of the Three 2018 Renovation Hotels during the first quarter of 2019.
|
|
(2)
|
|
Renovation-related disruption at the Two 2019 Renovation Hotels negatively impacted food and beverage revenue during the first quarter of 2019.
|
Other operating revenue
. Other operating revenue decreased $0.2 million, or 1.2%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
The Six Sold Hotels caused other operating revenue to decrease by $1.2 million in the first quarter of 2019 as compared to the same period in 2018.
Other operating revenue generated by the 21 hotels increased $1.0 million during the three months ended March 31, 2019 as compared to the same period in 2018, primarily due to increased facility fees, tenant lease revenue, marina and watersports revenue and other miscellaneous revenues. These increases were partially offset as we recognized $0.8 million in business interruption proceeds related to Hurricane Irma at the Oceans Edge Resort & Marina during the first quarter of 2018, with no corresponding revenue recognized during the first quarter of 2019.
Hotel operating expenses
.
Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance, and other hotel operating expenses decreased $10.6 million, or 6.3%, during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
The Six Sold Hotels caused hotel operating expenses to decrease by $15.2 million in the first quarter of 2019 as compared to the same period in 2018.
Hotel operating expenses generated by the 21 hotels increased $4.6 million during the three months ended March 31, 2019 as compared to the same period in 2018. This increase is primarily related to the corresponding increases in room revenue, food and beverage revenue and other operating revenue. In addition, hotel operating expenses increased in the first quarter of 2019 as compared to the same period in 2018 due to the following increased expenses: advertising and promotion due to increased payroll and related expenses in this department; repairs and maintenance due to increased payroll and related expenses in this department, as well as increased building repairs; property and liability insurance due to increased rates; property taxes due to increased rates and assessments received at several of our hotels; taxes at the Hyatt Regency San Francisco due to new taxes imposed by the city; and Hawaii general excise tax due to higher revenue at the Wailea Beach Resort. Slightly offsetting these increases, the following expenses decreased: rent expense at the Renaissance Washington DC due to our May 2018 purchase of the exclusive perpetual rights to a small portion of the hotel’s meeting space, restaurant and fitness center that were previously leased; ground lease expense at the JW Marriott New Orleans due to our purchase of the land underlying the hotel in July 2018; and utility expenses.
Other property-level expenses
.
Other property-level expenses decreased $1.1 million, or 3.1%, during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
The Six Sold Hotels caused other property-level expenses to decrease by $3.8 million in the first quarter of 2019 as compared to the same period in 2018.
Other property-level expenses generated by our 21 hotels increased $2.7 million in the first quarter of 2019 as compared to the same period in 2018, primarily due increases in the following expenses caused by higher revenue: payroll and related expenses; basic and incentive management fees; credit and collection; computer hardware and software; and other expenses.
Corporate overhead expense
.
Corporate overhead expense increased $0.4 million, or 5.8%, during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018, primarily due to increased payroll and related expenses, deferred stock compensation and office rent, partially offset by decreased due diligence expenses.
Depreciation and amortization expense
.
Depreciation and amortization expense decreased $0.3 million, or 0.8%, during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
The Six Sold Hotels caused depreciation and amortization to decrease by $2.1 million in the first quarter of 2019 as compared to the same period in 2018.
Depreciation and amortization expense generated by our 21 hotels increased $1.8 million in the first quarter of 2019 as compared to the same period in 2018, due to increased depreciation and amortization at our newly renovated hotels and corporate office space. These increases were partially offset by decreases in the amortization of intangible assets, consisting of advanced deposits related to our purchases of the Boston Park Plaza and the Wailea Beach Resort, which were fully amortized in June 2018 and July 2018, respectively, as well as by assets at our hotels being fully depreciated.
Interest and other income
.
Interest and other income increased $3.4 million, or 230.2%, during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. During the first quarter of 2019, we recognized $3.8 million in interest and miscellaneous income, $1.0 million related to an area of protection agreement with Hyatt Corporation for the Hyatt Regency San Francisco and $0.1 million in energy rebates due to energy efficient renovations at our hotels. During the first quarter of 2018, we recognized $1.5 million in interest and miscellaneous income.
Interest expense
.
We incurred interest expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Interest expense on debt and finance lease obligations
|
|
$
|
11,509
|
|
$
|
11,266
|
Noncash interest on derivatives and finance lease obligations, net
|
|
|
2,119
|
|
|
(3,137)
|
Amortization of deferred financing costs
|
|
|
698
|
|
|
747
|
Total interest expense
|
|
$
|
14,326
|
|
$
|
8,876
|
Interest expense increased $5.5 million, or 61.4%, during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
Interest expense on our debt and finance lease obligations increased $0.2 million during the three months ended March 31, 2019 as compared to the same period in 2018 due to higher interest on our variable rate debt. This increase was partially offset by decreases in interest expense resulting from lower debt balances due to monthly amortization and lower interest expense on our term loans, which we amended and repriced in October 2018.
Noncash interest on derivatives and finance lease obligations, net increased $5.3 million during the three months ended March 31, 2019 as compared to the same period in 2018, due primarily to changes in the fair market values of our derivatives as noncash interest on our finance lease obligations remained relatively flat.
Finally, amortization of deferred financing costs decreased interest expense by a nominal amount during the first quarter of 2019 as compared to the same period in 2018 resulting from the October 2018 amendment and extension of our credit facility.
Our weighted average interest rate per annum, including our variable rate debt obligation, was approximately 4.2% and 4.1% at March 31, 2019 and 2018, respectively. Approximately 77.6% and 77.7% of our outstanding notes payable had fixed interest rates at March 31, 2019 and 2018, respectively.
Gain on sale of assets
.
Gain on sale of assets totaled zero and $15.7 million for the three months ended March 31, 2019 and 2018, respectively. During the first three months of 2018, we recognized a $15.7 million gain on sale of the Marriott Philadelphia and the Marriott Quincy.
Income tax benefit, net
.
Income tax benefit, net totaled $3.1 million and $3.7 million for the three months ended March 31, 2019 and 2018, respectively. We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and the Operating Partnership may also be subject to various state and local income taxes.
During the first quarter of 2019, we recognized a deferred income tax benefit of $3.3 million related to an increase in our deferred tax assets, net. Our earnings are seasonal, resulting in quarterly fluctuations in our taxable income. We anticipate our deferred tax assets will decrease during 2019 as our earnings increase based on the historical seasonal earnings pattern of our hotels. The deferred income tax benefit was slightly reduced in the first quarter of 2019 as we recognized combined current federal and state income tax expense of $0.2 million based on 2019 projected taxable income net of operating loss carryforwards for our taxable entities.
During the first quarter of 2018, we recognized a deferred income tax benefit of $4.0 million related to an increase in our deferred tax assets, net. This benefit was slightly reduced as we recognized combined current federal and state income tax expense of $0.2 million based on 2018 projected taxable income net of operating loss carryforwards for our taxable entities.
Income from consolidated joint venture attributable to noncontrolling interest
. Income from consolidated joint venture attributable to noncontrolling interest totaled $1.6 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively, and represents the outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront.
Preferred stock dividends
.
Preferred stock dividends were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Series E preferred stock
|
|
$
|
1,998
|
|
$
|
1,998
|
Series F preferred stock
|
|
|
1,209
|
|
|
1,209
|
Total preferred stock dividends
|
|
$
|
3,207
|
|
$
|
3,207
|
Non-GAAP Financial Measures
. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDA
re;
Adjusted EBITDA
re
, excluding noncontrolling interest; FFO attributable to common stockholders; Adjusted FFO attributable to common stockholders; and Comparable Portfolio revenues. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. In addition, our calculation of these measures may not be comparable to other companies that do not define such terms exactly the same as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to net income, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. For example, we believe that Comparable Portfolio revenues are useful to both us and investors in evaluating our operating performance by removing the impact of non-hotel results such as the amortization of favorable and unfavorable tenant lease contracts. We also believe that our use of Comparable Portfolio revenues is useful to both us and our investors as it facilitates the comparison of our operating results from period to period by removing fluctuations caused by any acquisitions or dispositions, as well as by those hotels that we classify as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.
We present EBITDA
re
in accordance with guidelines established by the National Association of Real Estate Investment Trusts (“NAREIT”), as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate.” We believe EBITDA
re
is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. NAREIT defines EBITDA
re
as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity’s share of EBITDA
re
of unconsolidated affiliates.
We make additional adjustments to EBITDA
re
when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the
presentation of Adjusted EBITDA
re
, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. In addition, we use both EBITDA
re
and Adjusted EBITDA
re
, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions. We adjust EBITDA
re
for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDA
re
, excluding noncontrolling interest:
|
·
|
|
Amortization of deferred stock compensation
: we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels.
|
|
·
|
|
Amortization of favorable and unfavorable contracts
: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Wailea Beach Resort. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period.
|
|
·
|
|
Amortization of right-of-use assets
: we exclude the amortization of our right-of-use assets, which includes the amortization of our operating lease intangible, as well as the noncash expense incurred from straight-lining our lease obligations, as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels.
|
|
·
|
|
Finance lease obligation interest – cash ground rent
: We include an adjustment for the cash finance lease expenses recorded on the ground lease at the Courtyard by Marriott Los Angeles and the building lease at the Hyatt Centric Chicago Magnificent Mile. We determined that both of these leases are finance leases, and, therefore, we include a portion of the lease payments each month in interest expense. We adjust EBITDA
re
for these two finance leases in order to more accurately reflect the actual rent due to both hotels’ lessors in the current period, as well as the operating performance of both hotels.
|
|
·
|
|
Undepreciated asset transactions
: we exclude the effect of gains and losses on the disposition of undepreciable assets because we believe that including them in Adjusted EBITDA
re
, excluding noncontrolling interest is not consistent with reflecting the ongoing performance of our assets.
|
|
·
|
|
Gains or losses from debt transactions
: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure.
|
|
·
|
|
Acquisition costs
: under GAAP, costs associated with completed acquisitions that meet the definition of a business are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels.
|
|
·
|
|
Noncontrolling interest
: we exclude the noncontrolling partner’s pro rata share of the net income (loss) allocated to the Hilton San Diego Bayfront partnership, as well as the noncontrolling partner’s pro rata share of any EBITDA
re
and Adjusted EBITDA
re
components.
|
|
·
|
|
Cumulative effect of a change in accounting principle
: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period.
|
|
·
|
|
Other adjustments
: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; property-level restructuring, severance and management transition costs; lease terminations; and property insurance proceeds or uninsured losses.
|
The following table reconciles our unaudited net income to EBITDA
re
and Adjusted EBITDA
re
, excluding noncontrolling interest for our total portfolio for the three months ended March 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Net income
|
|
$
|
17,916
|
|
$
|
38,455
|
Operations held for investment:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
36,387
|
|
|
36,688
|
Interest expense
|
|
|
14,326
|
|
|
8,876
|
Income tax benefit, net
|
|
|
(3,112)
|
|
|
(3,740)
|
Gain on sale of assets
|
|
|
—
|
|
|
(15,669)
|
EBITDA
re
|
|
|
65,517
|
|
|
64,610
|
|
|
|
|
|
|
|
Operations held for investment:
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
2,122
|
|
|
2,000
|
Amortization of favorable and unfavorable contracts, net
|
|
|
—
|
|
|
3
|
Amortization of right-of-use assets (1)
|
|
|
(19)
|
|
|
(218)
|
Finance lease obligation interest — cash ground rent
|
|
|
(589)
|
|
|
(589)
|
Hurricane-related uninsured losses
|
|
|
—
|
|
|
69
|
Prior year property tax adjustments, net
|
|
|
189
|
|
|
(19)
|
Noncontrolling interest:
|
|
|
|
|
|
|
Income from consolidated joint venture attributable to noncontrolling interest
|
|
|
(1,599)
|
|
|
(2,439)
|
Depreciation and amortization
|
|
|
(639)
|
|
|
(638)
|
Interest expense
|
|
|
(560)
|
|
|
(435)
|
Amortization of right-of-use asset (1)
|
|
|
72
|
|
|
72
|
|
|
|
(1,023)
|
|
|
(2,194)
|
Adjusted EBITDA
re
, excluding noncontrolling interest
|
|
$
|
64,494
|
|
$
|
62,416
|
|
(1)
|
|
Amounts originally reported for the three months ended March 31, 2018 for amortization of lease intangibles and noncash ground rent have been reclassified to amortization of right-of-use assets to conform to the current year’s reporting.
|
Adjusted EBITDA
re
, excluding noncontrolling interest was $64.5 million and $62.4 million for the three months ended March 31, 2019 and 2018, respectively. Adjusted EBITDA
re
, excluding noncontrolling interest increased during the three months ended March 31, 2019 as compared to the same period in 2018, primarily due to additional earnings generated by the 21 hotels, including the Three 2018 Renovation Hotels, partially offset by the sale of the Six Sold Hotels, as well as renovation-related disruption at the Two 2019 Renovation Hotels.
We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the NAREIT definition of “FFO applicable to common shares.” Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.
We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
|
·
|
|
Amortization of favorable and unfavorable contracts
: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Wailea Beach Resort. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period.
|
|
·
|
|
Real estate amortization of right-of-use assets
: we exclude the amortization of our real estate right-of-use assets, which includes the amortization of both our finance and operating lease intangibles, as well as the noncash expense incurred from straight-lining our lease obligations (with the exception of our corporate operating lease), as these expenses are based on historical cost accounting and do not reflect the actual rent amounts due to the respective lessors or the underlying performance of our hotels.
|
|
·
|
|
Gains or losses from debt transactions
: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired, as well as the noncash interest on our derivatives and finance lease obligations. We believe that these items are not reflective of our ongoing finance costs.
|
|
·
|
|
Acquisition costs
: under GAAP, costs associated with completed acquisitions that meet the definition of a business are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels.
|
|
·
|
|
Noncontrolling interest
: we deduct the noncontrolling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership.
|
|
·
|
|
Cumulative effect of a change in accounting principle
: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period.
|
|
·
|
|
Other adjustments
: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: lawsuit settlement costs; prior year property tax assessments or credits; the write-off of development costs associated with abandoned projects; changes to deferred tax assets, liabilities or valuation allowances; property-level restructuring, severance and management transition costs; lease terminations; property insurance proceeds or uninsured losses; and income tax benefits or provisions associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets other than real estate investments.
|
The following table reconciles our unaudited net income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our total portfolio for the three months ended March 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Net income
|
|
$
|
17,916
|
|
$
|
38,455
|
Preferred stock dividends
|
|
|
(3,207)
|
|
|
(3,207)
|
Operations held for investment:
|
|
|
|
|
|
|
Real estate depreciation and amortization (1)
|
|
|
35,770
|
|
|
36,228
|
Gain on sale of assets
|
|
|
—
|
|
|
(15,669)
|
Noncontrolling interest:
|
|
|
|
|
|
|
Income from consolidated joint venture attributable to noncontrolling interest
|
|
|
(1,599)
|
|
|
(2,439)
|
Real estate depreciation and amortization
|
|
|
(639)
|
|
|
(638)
|
FFO attributable to common stockholders
|
|
|
48,241
|
|
|
52,730
|
|
|
|
|
|
|
|
Operations held for investment:
|
|
|
|
|
|
|
Amortization of favorable and unfavorable contracts, net
|
|
|
—
|
|
|
3
|
Real estate amortization of right-of-use assets (1)
|
|
|
151
|
|
|
148
|
Noncash interest on derivatives and finance lease obligations, net
|
|
|
2,119
|
|
|
(3,137)
|
Hurricane-related uninsured losses
|
|
|
—
|
|
|
69
|
Prior year property tax adjustments, net
|
|
|
189
|
|
|
(19)
|
Noncash income tax benefit, net
|
|
|
(3,284)
|
|
|
(3,966)
|
Noncontrolling interest:
|
|
|
|
|
|
|
Real estate amortization of right-of-use asset (1)
|
|
|
72
|
|
|
72
|
Noncash interest on derivative, net
|
|
|
—
|
|
|
3
|
|
|
|
(753)
|
|
|
(6,827)
|
Adjusted FFO attributable to common stockholders
|
|
$
|
47,488
|
|
$
|
45,903
|
|
(1)
|
|
Amounts originally reported for the three months ended March 31, 2018 for real estate depreciation and amortization related to finance leases, amortization of lease intangibles and noncash ground rent have been reclassified to real estate amortization of right-of-use assets to conform to the current year’s reporting.
|
Adjusted FFO attributable to common stockholders was $47.5 million and $45.9 million for the three months ended March 31, 2019 and 2018, respectively. Adjusted FFO attributable to common stockholders increased in the first quarter of 2019 as compared to the same period in 2018, primarily due to the same reasons noted in the discussion above regarding Adjusted EBITDA
re
, excluding noncontrolling interest.
Liquidity and Capital Resources
During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from sales of hotels and other assets. Our primary uses of cash were for capital expenditures for hotels and other assets, operating expenses, repayment of notes payable, dividends and distributions on our common and preferred stock and distributions to our joint venture partner. We cannot be certain that traditional sources of funds will be available in the future.
Operating activities
.
Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in hotel revenue and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $31.6 million and $30.6 million for the three months ended March 31, 2019 and 2018, respectively. The net increase to cash provided by operating activities during the first three months of 2019 as compared to the same period in 2018 was primarily due to increased operating cash generated by the 21 hotels, including the Three 2018 Renovation Hotels, partially offset by the sale of the Six Sold Hotels and renovation-related disruption at the Two 2019 Renovation Hotels.
Investing activities
. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels and other assets. Net cash used in or provided by investing activities during the first three months of 2019 as compared to the first three months of 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
2018
|
|
Proceeds from sales of assets
|
|
$
|
—
|
|
$
|
136,993
|
|
Renovations and additions to hotel properties and other assets
|
|
|
(24,520)
|
|
|
(39,321)
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(24,520)
|
|
$
|
97,672
|
|
During the first three months of 2019, we invested $24.5 million for renovations and additions to our portfolio and other assets.
During the first three months of 2018, we received proceeds of $137.0 million from our sales of the Marriott Philadelphia, the Marriott Quincy and surplus FF&E. These cash inflows were partially offset as we invested $39.3 million for renovations and additions to our portfolio and other assets.
Financing activities
. Our net cash provided by or used in financing activities fluctuates primarily as a result of our distributions paid, issuance of common stock, issuance and repayment of notes payable, and our issuance and redemption of other forms of capital, including preferred equity. Net cash used in financing activities during the first three months of 2019 as compared to the first three months of 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
Repurchase of common stock for employee withholding obligations
|
|
$
|
(4,435)
|
|
$
|
(4,232)
|
Payments on notes payable
|
|
|
(1,834)
|
|
|
(1,893)
|
Payments of deferred financing costs
|
|
|
—
|
|
|
(5)
|
Dividends and distributions paid
|
|
|
(126,461)
|
|
|
(133,894)
|
Distributions to noncontrolling interest
|
|
|
(1,950)
|
|
|
(1,169)
|
Net cash used in financing activities
|
|
$
|
(134,680)
|
|
$
|
(141,193)
|
During the first three months of 2019, we paid the following: $4.4 million to repurchase common shares to satisfy the tax obligations in connection with the vesting of restricted common shares issued to employees; $1.8 million in principal payments on our notes payable; $126.5 million in dividends and distributions to our common and preferred stockholders; and $2.0 million in distributions to the noncontrolling interest in the Hilton San Diego Bayfront.
During the first three months of 2018, we paid the following: $4.2 million to repurchase common shares to satisfy the tax obligations in connection with the vesting of restricted common shares issued to employees; $1.9 million in principal payments on our notes payable; $5,000 in deferred financing costs related to refinancing the loan secured by the Hilton San Diego Bayfront; $133.9 million in dividends and distributions to our common and preferred stockholders; and $1.2 million in distributions to the noncontrolling interest in the Hilton San Diego Bayfront.
Future.
We expect our primary uses of cash to be for operating expenses, capital investments in our hotels, repayment of principal on our notes payable and possibly our credit facility, interest expense, dividends and distributions on our common and preferred stock, potential repurchases of our common stock, potential purchases of debt or other securities in other hotels, and acquisitions of hotels or interests in hotels, including possibly hotel portfolios. We expect our primary sources of cash will continue to be our operating activities, working capital, notes payable and our credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the maintenance of our credit ratios, appropriate levels of liquidity and continued balance sheet strength. Consistent with maintaining our low leverage and balance sheet strength, in the near-term, we expect to fund future acquisitions, if any, largely through cash on hand, appropriate amounts of newly-issued debt, the issuance of common or preferred equity, provided that our stock price is at an attractive level, or by proceeds received from sales of existing assets in order to selectively grow the quality and scale of our portfolio. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility, including under the ATM agreements we entered into in February 2017. Under the terms of the agreements, we may issue and sell from time to time through or to the managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $300.0 million. Through March 31, 2019, we have received $122.3 million in net proceeds from the issuance of 7,467,709 shares of our common stock in connection with the ATM Agreements, leaving $175.5 million available for sale under the ATM Agreements. However, when needed, the capital markets may not be available to us on favorable terms or at all.
Cash Balance
. As of March 31, 2019, our unrestricted cash balance was $684.0 million. By minimizing our need to access external capital by maintaining higher than typical cash balances, our financial security and flexibility are meaningfully enhanced because we are able to fund our business needs (including payment of cash distributions on our common stock, if declared) and near-term debt maturities with our cash on hand.
Debt.
As of March 31, 2019, we had $981.0 million of consolidated debt, $734.7 million of cash and cash equivalents, including restricted cash, and total assets of $3.9 billion. We believe that by controlling debt levels, staggering maturity dates and maintaining a highly flexible capital structure, we will have lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants.
As of March 31, 2019, all of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, except the $220.0 million non-recourse mortgage on the Hilton San Diego Bayfront, which is subject to an interest rate cap agreement that caps the interest rate at 6.0% until December 2020. Our remaining mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to our mortgage debt, as of March 31, 2019, we have two unsecured corporate-level term loans as well as the Senior Notes. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt.
As of March 31, 2019, we have no outstanding amounts due under our credit facility.
We may in the future seek to obtain mortgages on one or all of our 16 unencumbered hotels, 14 of which are currently held by subsidiaries whose interests are pledged to our credit facility. Our 16 unencumbered hotels include: Boston Park Plaza; Courtyard by Marriott Los Angeles; Embassy Suites Chicago; Hilton Garden Inn Chicago Downtown/Magnificent Mile; Hilton New Orleans St. Charles; Hyatt Centric Chicago Magnificent Mile; Hyatt Regency San Francisco; Marriott Boston Long Wharf; Marriott Portland; Oceans Edge Resort & Marina; Renaissance Harborplace; Renaissance Long Beach; Renaissance Los Angeles Airport; Renaissance Orlando at SeaWorld®; Renaissance Westchester; and Wailea Beach Resort. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility may be reduced.
Contractual Obligations
. The following table summarizes our payment obligations and commitments as of March 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
|
|
|
|
|
Less Than
|
|
1 to 3
|
|
3 to 5
|
|
More than
|
|
|
|
Total
|
|
1 year
|
|
years
|
|
years
|
|
5 years
|
|
Notes payable
|
|
$
|
980,996
|
|
$
|
8,030
|
|
$
|
414,192
|
|
$
|
192,098
|
|
$
|
366,676
|
|
Interest obligations on notes payable (1)
|
|
|
184,637
|
|
|
42,459
|
|
|
64,473
|
|
|
39,308
|
|
|
38,397
|
|
Finance lease obligations, including imputed interest (2)
|
|
|
147,640
|
|
|
2,357
|
|
|
4,770
|
|
|
4,906
|
|
|
135,607
|
|
Operating lease obligations, including imputed interest (2) (3)
|
|
|
117,708
|
|
|
7,480
|
|
|
15,115
|
|
|
15,324
|
|
|
79,789
|
|
Payments-in-lieu of taxes obligation
|
|
|
64,297
|
|
|
892
|
|
|
1,789
|
|
|
1,789
|
|
|
59,827
|
|
Construction commitments
|
|
|
55,952
|
|
|
55,952
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employment obligations
|
|
|
2,651
|
|
|
2,651
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,553,881
|
|
$
|
119,821
|
|
$
|
500,339
|
|
$
|
253,425
|
|
$
|
680,296
|
|
|
(1)
|
|
Interest on our variable-rate debt obligation is calculated based on the variable rate at March 31, 2019, and includes the effect of our interest rate derivative agreements.
|
|
(2)
|
|
See Note 8 – Leases in the Notes to the Unaudited Consolidated Financial Statements (Item 1 of this Form 10-Q).
|
|
(3)
|
|
Operating lease obligations on one of our ground leases expiring in 2071 requires a reassessment of rent payments due after 2025, agreed upon by both us and the lessor; therefore, no amounts are included in the above table for this ground lease after 2025.
|
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground, building and air leases, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested $24.5 million in our portfolio and other assets during the first three months of 2019. As of March 31, 2019, we have contractual construction commitments totaling $56.0 million for ongoing renovations. If we renovate or develop additional hotels or other assets in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel’s applicable annual revenue. As of March 31, 2019, our balance sheet includes restricted cash of $48.6 million, which was held in FF&E reserve accounts for future capital expenditures at the majority of the 21 hotels. According to certain loan agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year.
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (
e.g
., the first quarter is strong in Hawaii, Key West and Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for Hawaii, Key West and New York City). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, natural disasters, terrorist attacks or alerts, civil unrest, public health concerns, government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. Revenues for our Comparable Portfolio by quarter for 2018 and 2019 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
Revenues
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
271,446
|
|
$
|
317,447
|
|
$
|
289,308
|
|
$
|
280,852
|
|
$
|
1,159,053
|
|
Sold hotel revenues (1)
|
|
|
(23,610)
|
|
|
(24,514)
|
|
|
(12,440)
|
|
|
(6,501)
|
|
|
(67,065)
|
|
Non-hotel revenues (2)
|
|
|
(832)
|
|
|
(21)
|
|
|
(25)
|
|
|
(4,987)
|
|
|
(5,865)
|
|
Total Comparable Portfolio revenues (3)
|
|
$
|
247,004
|
|
$
|
292,912
|
|
$
|
276,843
|
|
$
|
269,364
|
|
$
|
1,086,123
|
|
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues
|
|
|
22.7
|
%
|
|
27.0
|
%
|
|
25.5
|
%
|
|
24.8
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
257,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-hotel revenues (2)
|
|
|
(23)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comparable Portfolio revenues (3)
|
|
$
|
257,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Sold hotel revenues include those generated by the Six Sold Hotels, which we sold in January 2018, July 2018, October 2018 and December 2018.
|
|
(2)
|
|
Non-hotel revenues include the amortization of favorable and unfavorable tenant lease contracts received in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Wailea Beach Resort. Non-hotel revenues for the first quarter and fourth quarter of 2018 also include business interruption insurance proceeds of $0.8 million and $5.0 million, respectively, for the Oceans Edge Resort & Marina.
|
|
(3)
|
|
Total Comparable Portfolio revenues include those generated by our 21 hotel Comparable Portfolio.
|
Inflation
Inflation may affect our expenses, including, without limitation, by increasing such costs as labor, employee-related benefits, food, commodities, taxes, property and casualty insurance and utilities.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
|
·
|
|
Impairment of long-lived assets
. We periodically review each property for possible impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. We perform a fair value assessment, using a discounted cash flow analysis to estimate the fair value of our properties, taking into account each property’s expected cash flow from operations, our estimate of how long we plan to own each property and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. Our judgment is required in determining the discount rate applied to estimated cash flows, the estimated growth of revenues and expenses, net operating income and margins, the need for capital expenditures, as well as specific market and economic conditions.
|
|
·
|
|
Acquisition related assets and liabilities
. Accounting for the acquisition of a hotel property or other entity requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective relative fair values for an asset acquisition or at their estimated fair values for a business combination. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, intangible assets and finance lease obligations that are assumed as part of the acquisition of a leasehold interest. When we acquire a hotel property or other entity, we use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, we believe that the recording of acquired assets and liabilities is a critical accounting policy.
|
In addition, the acquisition of a hotel property or other entity requires an analysis to determine if it qualifies as the purchase of a business or an asset. If the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the transaction is an asset acquisition. Transaction costs associated with asset acquisitions are capitalized and subsequently depreciated over the life of the related asset, while the same costs associated with a business combination are expensed as incurred and included in corporate overhead on our consolidated statements of operations. Also, asset acquisitions are not subject to a measurement period, as are business combinations.
|
·
|
|
Depreciation and amortization expense
. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties, including related assets under finance leases, are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 40 years for buildings and improvements and three to 12 years for FF&E. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels. We have not changed the estimated useful lives of any of our assets during the periods discussed.
|
|
·
|
|
Income Taxes
.
To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to our stockholders. As a REIT, we generally will not be subject to federal corporate income tax on that portion of our taxable income that is currently distributed to stockholders. We are subject to certain state and local taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income. In addition, our wholly owned TRS, which leases our hotels from the Operating Partnership, is subject to federal and state income taxes. We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the
|
differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
|
We review any uncertain tax positions and, if necessary, we will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements.
Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
To the extent that we incur debt with variable interest rates, our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have no derivative financial instruments held for trading purposes. We use derivative financial instruments, which are intended to manage interest rate risks on our floating rate debt.
As of March 31, 2019, 77.6% of our debt obligations are fixed in nature, which largely mitigates the effect of changes in interest rates on our cash interest payments. If the market rate of interest on our variable-rate debt increases or decreases by 100 basis points, interest expense would increase or decrease, respectively, our future consolidated earnings and cash flows by approximately $2.2 million based on the variable rate at March 31, 2019. After adjusting for the noncontrolling interest in the Hilton San Diego Bayfront, this increase or decrease in interest expense would increase or decrease, respectively, our future consolidated earnings and cash flows by $1.7 million, based on the variable rates at March 31, 2019.
Item 4.
Controls and Procedures
Attached as exhibits to this Form 10-Q are the certifications required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This section includes information concerning the controls and control evaluations referred to in the certifications.
Evaluation of Disclosure Controls and Procedures
.
Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
During our fiscal quarter to which this Quarterly Report on Form 10-Q relates, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.