The following discussion and analysis should be read in conjunction with Item 8, the Consolidated Financial Statements and Notes thereto, the introduction of Part I regarding "Forward-Looking Statements," and Item 1A, "Risk Factors" appearing elsewhere in this Annual Report on Form 10-K.
Overview
The Company is aVirginia corporation that has elected to be treated as a REIT for federal income tax purposes. The Company is self-advised and invests in income-producing real estate, primarily in the lodging sector, in theU.S. As ofDecember 31, 2020 , the Company owned 234 hotels with an aggregate of 29,937 rooms located in urban, high-end suburban and developing markets throughout 34 states, including one hotel with 118 rooms classified as held for sale, which is expected to be sold to an unrelated party in the first quarter of 2021. Substantially all of the Company's hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 17 hotel management companies, none of which are affiliated with the Company. The Company's common shares are listed on the NYSE under the ticker symbol "APLE."
COVID-19 and the Company's Actions to Mitigate its Impact
The effects of the COVID-19 pandemic on the hotel industry are unprecedented. COVID-19 has disrupted the industry and has dramatically reduced business and leisure travel, which has had a significant adverse impact on, and management expects will continue to significantly adversely impact and disrupt, the Company's business, financial performance and condition, operating results and cash flows. While the economy has shown signs of recovery as some of the initial restrictions put into place during the first half of 2020 have eased, occupancy and average daily rate are still significantly below 2019 levels. Additionally, while vaccines have been developed and were put into distribution beginning inDecember 2020 , there can be no assurances of how quickly they will slow the spread of the pandemic and allow the economy to recover. The Company expects this significant decline in revenue associated with COVID-19 and the overall decline in theU.S. economy to negatively impact the Company's revenue and operating results for an extended period of time. The Company does not expect a material improvement in results until business travel and general consumer confidence related to the economy and risks associated with COVID-19 improve and government restrictions impacting travel and business operations are broadly lifted.
The following is a brief summary of certain measures the Company, its management companies and its brands have taken to minimize costs and cash outflow to maintain a sound liquidity position:
? Beginning in
companies implemented cost elimination and efficiency initiatives at each
of the Company's hotels by reducing labor costs, reducing or eliminating
certain amenities and reducing rates under various service contracts. As
of
operations at five hotels, down from 38 hotels as of
market clusters to maximize operational efficiencies. The cost structure
of the Company's primarily rooms-focused hotels allows them to operate
cost effectively even at very low occupancy levels.
? Together with its third-party management companies, the Company enhanced
its sales efforts by focusing on COVID-19-specific demand opportunities in
certain markets and strategically targeting and maximizing performance
based on available demand, such as leisure, government, health care, construction, disaster recovery, insurance, athletics, education, manufacturing and maintenance-focused business.
? The Company postponed all non-essential capital improvement projects
planned for 2020, resulting in a reduction of approximately
from originally planned capital improvements for the year. ? The Company suspended its monthly distributions, with the last distribution paidMarch 16, 2020 . The Company's Board of Directors, in
consultation with management, will continue to monitor hotel operations
and intends to resume distributions at a time and level determined to be prudent in relation to the Company's other cash requirements and as allowed under the Company's amended unsecured credit facilities, as discussed below.
? The Company terminated its written trading plan under its Share Repurchase
Program in
under its Share Repurchase Program for the balance of 2020. 38
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? The Company's Executive Chairman voluntarily agreed to forego six months of salary, the Chief Executive Officer volunteered to reduce his target
compensation by 60 percent and the non-employee directors on the Board of
Directors volunteered as a group to reduce their annual director fees by
more than 15 percent, in each case for calendar year 2020.
? The Company entered into amendments to its unsecured credit facilities to
temporarily waive the financial covenant testing until
further discussion in Note 4 titled "Debt" in the Company's Consolidated
Financial Statements and Notes thereto, appearing elsewhere in this Annual
Report on Form 10-K.
Despite the cost reduction initiatives discussed above, the Company does not expect to be able to fully, or even materially, offset revenue losses from COVID-19. The extent and duration of COVID-19 effects are not currently known and these uncertainties continue to make it difficult to predict operating results for the Company's hotels for the near future. Therefore, while the ongoing vaccination efforts suggest that conditions may continue to gradually improve during 2021, there can be no assurances that the Company will not experience further declines in hotel revenues or earnings at its hotels or how long the effects will continue to impact the Company's operating results.
The following discussion regarding the Company's approach to acquisitions and dispositions reflects the Company's historical strategy. While the Company anticipates it will continue to approach the acquisition and disposition of hotels similarly over the long term, the detrimental impact of COVID-19 to the Company and overall lodging industry has and may continue to limit the Company's ability to effectively acquire or dispose of hotels until the industry recovers. The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term. Consistent with this strategy and the Company's focus on investing in rooms-focused hotels, in 2018 the Company entered into contracts to purchase a combined 224-room dual-brandedHampton Inn & Suites and Home2 Suites complex to be constructed inCape Canaveral, Florida and a combined 259-room dual-branded Hyatt House andHyatt Place complex to be constructed inTempe, Arizona . Construction of the hotels was completed in 2020 and the Company acquired the hotels. The aggregate purchase price of these hotels was approximately$111.3 million , funded by$25.0 million of available cash,$64.6 million of borrowings under the Company's revolving credit facility and a one-year secured note for$21.7 million payable inMay 2021 , which principal amount was reduced by$1.1 million inJuly 2020 , representing a credit from the developer for shared construction savings. Also, as ofDecember 31, 2020 , the Company had an outstanding contract that was entered into prior to 2020 for the potential purchase of a hotel under development for a total expected purchase price of approximately$49.6 million , which was completed and opened for business inFebruary 2021 , at which time the closing on this hotel occurred. The Company utilized borrowings under its revolving credit facility for this acquisition. For its existing portfolio, the Company monitors each property's profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property. As a result, in 2020, the Company sold three hotels for a total combined gross sales price of$55.3 million and recognized a gain on sale of approximately$10.9 million . Additionally, as ofDecember 31, 2020 , the Company had an outstanding contract to sell one of its hotels for a gross sales price of approximately$10.3 million , which is expected to be sold in the first quarter of 2021. Although the Company is working towards the sale of the remaining hotel, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closing on this hotel will occur under the outstanding purchase and sale agreement. The Company used the proceeds from the sales, and expects the net proceeds from the remaining sale, to be used to pay down borrowings on the Company's revolving credit facility, subject to certain restrictions during the Covenant Waiver Period pursuant to the Company's amended unsecured credit facilities, as discussed further in Note 4 titled "Debt" of the Consolidated Financial Statements and Notes thereto in Part II, Item 8 in this Annual Report on Form 10-K. See Note 2 titled "Investment in Real Estate" and Note 3 titled "Assets Held for Sale and Dispositions" in the Company's Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, for additional information concerning these transactions. EffectiveJanuary 20, 2020 , the Company converted itsNew York, New York Renaissance hotel to an independent boutique hotel. The Company incurred total conversion costs of approximately$1.0 million to complete the transition, of which approximately$0.1 million was incurred in 2019. The intent of the conversion was to provide greater long-term flexibility with the operations of the hotel. As anticipated, the operating results of the hotel declined in the first quarter of 2020 (prior to COVID-19) as compared to the first quarter of 2019 as the management team worked to replace revenue that 39 -------------------------------------------------------------------------------- was historically generated from the Renaissance brand system and have experienced further declines due to COVID-19. With the conversion of this hotel and theOctober 2019 acquisition of the existing independent boutique hotel inRichmond, Virginia , mentioned above, the Company has two independent boutique hotels with a combined total of 263 rooms.
As ofDecember 31, 2020 , the Company owned 234 hotels with a total of 29,937 rooms as compared to 233 hotels with a total of 29,870 rooms as ofDecember 31, 2019 . Results of operations are included only for the period of ownership for hotels acquired or disposed of during all periods presented. During 2020, the Company acquired two newly constructed hotels onApril 30, 2020 and two newly constructed hotels onAugust 13, 2020 , and sold one hotel each onJanuary 16, 2020 ,February 27, 2020 andDecember 30, 2020 . During 2019, the Company acquired one newly developed hotel onMarch 19, 2019 and two existing hotels (one onMarch 4, 2019 and one onOctober 9, 2019 ), and sold 11 hotels (nine onMarch 28, 2019 , one onDecember 19, 2019 and one onDecember 30, 2019 ). As a result, in addition to the impacts of COVID-19, the comparability of results for the years endedDecember 31, 2020 and 2019 as discussed below is also impacted by these transactions.
In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, ADR and RevPAR, and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below.
The following is a summary of the results from operations of the Company's hotels for their respective periods of ownership by the Company:
Year Ended December 31, Percent Percent Change Percent Change (in thousands, except of of 2019 to of 2018 to statistical data) 2020 Revenue 2019 Revenue 2020 2018 Revenue 2019 Total revenue$ 601,879 100.0 %$ 1,266,597
100.0 % -52.5 %
402,278 66.8 % 724,416
57.2 % -44.5 % 715,934 56.3 % 1.2 % Property taxes, insurance and other
expense 76,729 12.7 % 75,840
6.0 % 1.2 % 74,640 5.9 % 1.6 % Operating ground lease expense(1)
1,509 0.3 % 1,658 0.1 % -9.0 % 11,364 0.9 % -85.4 % General and administrative expense 29,374 4.9 % 36,210 2.9 % -18.9 % 24,294 1.9 % 49.0 % Loss on impairment of depreciable real estate assets 5,097 6,467 n/a 3,135 n/a Depreciation and amortization expense(1) 199,786 193,240 3.4 % 183,482 5.3 % Gain on sale of real estate 10,854 5,021 116.2 % 152 n/a Interest and other expense, net(1) 70,835 61,191 15.8 % 51,185 19.5 % Income tax expense 332 679 -51.1 % 587 15.7 % Net income (loss) (173,207 ) 171,917 -200.8 % 206,086 -16.6 % Adjusted hotel EBITDA (2) 121,985 464,995 -73.8 % 472,806 -1.7 % Number of hotels owned at end of period 234 233 0.4 % 241 -3.3 % ADR$ 111.49 $ 137.30 -18.8 %$ 136.04 0.9 % Occupancy 46.1 % 77.0 % -40.1 % 76.9 % 0.1 % RevPAR$ 51.34 $ 105.72 -51.4 %$ 104.66 1.0 %
(1) Effective
842), electing to recognize and measure its leases prospectively at the
beginning of the period of adoption through a cumulative-effect adjustment to
shareholders' equity without restating the presentation of periods prior to
the effective date. Under the new lease accounting standard, the Company
classified four ground leases as finance leases that were previously
classified as operating leases in accordance with the previous accounting
standard. In 2020 and 2019, the Company recognized approximately
and
finance leases. Results prior to
therefore, for the year ended
approximately
these four ground leases. See Note 10 titled "Lease Commitments" in Part II,
Item 8, of the Consolidated Financial Statements and Notes thereto, appearing
elsewhere in this Annual Report on Form 10-K for additional information on
the adoption of the new lease accounting standard.
(2) See reconciliation of
Financial Measures" below. 40
-------------------------------------------------------------------------------- The following table highlights the quarterly impact of COVID-19 on the Company's ADR, Occupancy, RevPAR and adjusted hotel earnings before interest, income taxes, depreciation and amortization for real estate ("Adjusted Hotel EBITDA ") during 2020 as compared to 2019 (in thousands except statistical data): 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year 2020 2020 2020 2020 2020 2019 2019 2019 2019 2019 ADR$ 132.55 $ 100.76 $ 104.78 $ 97.87 $ 111.49 $ 136.36 $ 141.60 $ 139.21 $ 131.41 $ 137.30 Occupancy 60.9 % 28.2 % 48.6 % 46.5 % 46.1 % 73.9 % 81.4 % 79.9 % 72.9 % 77.0 % RevPAR$ 80.66 $ 28.44 $ 50.94 $ 45.46 $ 51.34 $ 100.71 $ 115.30 $ 111.17 $ 95.85 $ 105.72 Net income (loss)$ (2,769 ) $ (78,243 ) $ (40,948 ) $ (51,247 ) $ (173,207 ) $ 38,151 $ 62,090 $ 46,223 $ 25,453 $ 171,917 Adjusted Hotel EBITDA (1)$ 63,297 $ 704$ 34,688 $ 23,296 $ 121,985 $ 108,804 $ 134,759 $ 124,596 $ 96,836 $ 464,995
(1) See reconciliation of
Financial Measures" below. Beginning inMarch 2020 , COVID-19 caused widespread cancellations of both business and leisure travel throughout theU.S. , resulting in significant decreases in RevPAR throughout the Company's hotel portfolio and the hospitality industry as a whole. With the overall uncertainty of the longevity of COVID-19 in theU.S. and the resulting economic decline, it is difficult to project the duration of revenue declines for the industry and Company; however, the Company currently expects the decline in revenue and operating results as compared to 2019 to continue throughout 2021 and potentially into future years. The Company experienced its most significant decline in operating results during the second quarter of 2020 as compared to the second quarter of 2019, with a 65% decrease in occupancy and a 75% decrease in RevPAR. Occupancy and RevPAR improved in the third and fourth quarters of 2020, with 39% and 36% decreases in occupancy and 54% and 53% decreases in RevPAR, as compared to the third and fourth quarters of 2019, respectively, led by leisure demand. Although the Company expects to experience a gradual recovery as vaccines are distributed to the population, future revenues and operating results could be negatively impacted if, among other things, COVID-19 cases continue to increase, state and local governments and businesses revert back to tighter mitigation restrictions or consumer sentiment deteriorates.
Comparable Hotels Operating Results
The following table reflects certain operating statistics for the Company's 233 hotels owned and held for use as ofDecember 31, 2020 . The Company defines metrics fromComparable Hotels as results generated by the 233 hotels owned and held for use as of the end of the reporting period, and excludes the hotel held for sale. For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company's ownership using information provided by the properties' prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions and assets held for sale, results have been excluded for the Company's period of ownership. Year Ended December 31, Change 2019 Change 2018 2020 2019 to 2020 2018 to 2019 ADR$ 111.62 $ 138.09 -19.2 %$ 137.85 0.2 % Occupancy 46.0 % 77.1 % -40.3 % 77.2 % -0.1 % RevPAR$ 51.33 $ 106.45 -51.8 %$ 106.43 - 41
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Same Store Operating Results
The following table reflects certain operating statistics for the 221 hotels owned and held for use by the Company as ofJanuary 1, 2018 and during the entirety of the reporting periods being compared ("Same Store Hotels "). This information has not been audited. Year Ended December 31, Change 2019 Change 2018 2020 2019 to 2020 2018 to 2019 ADR$ 111.46 $ 137.82 -19.1 %$ 137.53 0.2 % Occupancy 46.4 % 77.2 % -39.9 % 77.3 % -0.1 % RevPAR$ 51.67 $ 106.46 -51.5 %$ 106.35 0.1 % As discussed above, hotel performance is impacted by many factors, including the economic conditions in theU.S. as well as each individual locality. COVID-19 has been negatively affecting theU.S. hotel industry sinceMarch 2020 . As a result of COVID-19, the Company's revenue and operating results declined during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , which is consistent with the overall lodging industry. Compared to 2019, the Company expects the declines in revenue and operating results to continue into 2021 and potentially into 2022, but the Company can give no assurances of the amount or period of decline due to the uncertainty regarding the duration and long-term impact of, and governmental and consumer response to, COVID-19.
Results of Operations
A discussion regarding the Company's results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 is presented below. A discussion regarding the results of operations for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 can be found under the section titled "Results of Operations for Years 2019 and 2018" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 24, 2020 , which is incorporated herein by reference and which is available free of charge on theSEC's website at www.sec.gov and in the Investor Information section of the Company's website at www.applehospitalityreit.com.
Revenues
The Company's principal source of revenue is hotel revenue consisting of room, food and beverage, and other related revenue. For the years endedDecember 31, 2020 and 2019, the Company had total revenue of$0.6 billion and$1.3 billion , respectively. For the years endedDecember 31, 2020 and 2019, respectively,Comparable Hotels achieved combined average occupancy of 46.0% and 77.1%, ADR of$111.62 and$138.09 and RevPAR of$51.33 and$106.45 . ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR. Compared to 2019, the Company experienced decreases in ADR and occupancy in 2020, resulting in a decrease of 51.8% in RevPAR, forComparable Hotels . DuringMarch 2020 , the hotel industry and the Company began to see a significant decrease in occupancy as both mandated and voluntary restrictions on travel were implemented throughout theU.S. For Comparable Hotels , average occupancy declined to 17.7% in April before improving to 38.2% in June, 51.7% in September and ending with approximately 46.4% in the fourth quarter of 2020 driven predominately by increased leisure demand over the summer months as a result of improved consumer confidence in travel and the lifting of some COVID-19 mitigation restrictions, but also from a wide variety of demand generators such as government, healthcare, construction, disaster recovery, insurance, athletics, education and local and regional business-related travel. The Company expects this trend to gradually continue, however, future revenues could be negatively impacted if COVID-19 cases continue to increase, state and local governments tighten or implement new mitigation restrictions or consumer sentiment deteriorates.
The Company, its management companies and the brands the Company's hotels are franchised with have all aggressively worked to mitigate costs and uses of cash associated with operating the hotels in a low-occupancy environment and are thoughtfully working to position the hotels to adapt to the changes that may occur to guest preferences in the future. The impact of the situation has varied and will continue to vary by market and hotel. With the support of its brands and third-party management companies, the Company will continue to evaluate and implement additional measures as the situation evolves. 42 -------------------------------------------------------------------------------- Hotel operating expense consists of direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. For the years endedDecember 31, 2020 and 2019, respectively, hotel operating expense totaled$402.3 million and$724.4 million or 66.8% and 57.2% of total revenue for each respective year. Included in hotel operating expense for the year endedDecember 31, 2020 were approximately$2.5 million , net of employee retention credits, in separation and furlough costs for hotel employees as a result of the occupancy declines discussed above. The Company has worked and will continue to work with its management companies to optimize staffing models, consolidate operations in markets with multiple properties, and adjust food and beverage offerings and other amenities, among other efficiency initiatives to mitigate the impact of revenue declines on its results of operations. For example, in some markets the Company is "clustering" hotels, whereby multiple properties in a market have consolidated their operations to increase efficiency; the Company has negotiated relaxation of certain brand standards; and the Company has also successfully reduced rates under various service contracts. Although certain operating costs of a hotel are more fixed in nature, such as base utility and maintenance costs, the Company has worked and will continue to work to reduce all non-essential costs including service contracts, utilities in areas not utilized and certain maintenance costs. However, the Company may continue to see ongoing cost increases related to the supplying of personal protective equipment for employees and guests as well as increased sanitation, social distancing and other measures.
Property Taxes, Insurance and Other Expense
Property taxes, insurance and other expense for the years endedDecember 31, 2020 and 2019 totaled$76.7 million and$75.8 million , respectively, or 12.7% and 6.0% of total revenue for each respective year, which is consistent withComparable Hotels expense as a percentage of revenue for the same period. Although the Company will continue to aggressively appeal tax assessments in certain jurisdictions in an attempt to minimize tax increases, as warranted, and will continue to monitor locality guidance as a result of COVID-19, it does not currently anticipate significant decreases in property taxes in 2021 as compared to 2020.
Operating Ground Lease Expense
Operating ground lease expense for the years endedDecember 31, 2020 and 2019 was$1.5 million and$1.7 million , respectively. Operating ground lease expense primarily represents the expense incurred by the Company to lease land for nine of its hotel properties.
General and Administrative Expense
General and administrative expense for the years endedDecember 31, 2020 and 2019 was$29.4 million and$36.2 million , respectively, or 4.9% and 2.9% of total revenue for each respective year. The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses. The decrease in general and administrative expense in 2020 as compared to 2019 was primarily due to voluntary reductions in compensation for the Company's Executive Chairman, Chief Executive Officer and non-employee directors on the Board of Directors, as well as decreased accruals for incentive plan payments associated with the impact on the 2020 Incentive Plan resulting from the decline in operating results as compared to 2019 (see Note 8 titled "Compensation Plans" in the Company's Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional details). These decreases were partially offset by approximately$2.5 million in 2020 for separation benefits awarded in connection with the previously announced retirements of the Company's former Chief Operating Officer and former Chief Financial Officer onMarch 31, 2020 . General and administrative expense for 2019 included approximately$2.1 million related to separation agreements with two executive officers who departed during the year. In order to minimize costs in 2020, the Company's Executive Chairman voluntarily agreed to forego six months of salary, the Chief Executive Officer volunteered to reduce his target compensation by 60 percent and the non-employee directors on the Board of Directors volunteered as a group to reduce their annual director fees by more than 15 percent.
Loss on Impairment of Depreciable Real Estate Assets
Loss on impairment of depreciable real estate assets was approximately$5.1 million and$6.5 million for the years endedDecember 31, 2020 and 2019, respectively, consisting of impairment losses totaling$5.1 million for theMemphis, Tennessee Homewood Suites in 2020 and$6.5 million for theWinston-Salem, North Carolina Courtyard in 2019. See Note 3 titled "Assets Held for Sale and Dispositions" in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning these impairment losses. 43
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Depreciation and Amortization Expense
Depreciation and amortization expense for the years endedDecember 31, 2020 and 2019 was$199.8 million and$193.2 million , respectively. Depreciation and amortization expense primarily represents expense of the Company's hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. The increase was primarily due to the acquisition of four hotels in 2020 and three hotels in 2019 and renovations completed throughout 2020 and 2019, partially offset by the sale of three hotels in 2020 and 11 hotels in 2019. Additionally, depreciation and amortization expense for the years endedDecember 31, 2020 and 2019 includes approximately$6.4 million and$4.5 million of expense associated with amortization of the Company's finance ground leases.
Interest and Other Expense, net
Interest and other expense, net for the years endedDecember 31, 2020 and 2019 was$70.8 million and$61.2 million , respectively, and is net of approximately$0.9 million and$1.3 million , respectively, of interest capitalized associated with renovation projects. Additionally, interest and other expense, net for the years endedDecember 31, 2020 and 2019 includes approximately$11.4 million and$8.2 million of interest recorded on the Company's finance lease liabilities. Interest expense related to the Company's debt instruments increased as a result of increased average borrowings and increased interest rate margins on the Company's unsecured term loans in 2020 as compared to 2019, partially offset by a decrease in the interest rate indexes on which the Company's variable-rate loans are based. However, the Company anticipates interest expense to be higher in 2021 compared to 2020 due to increased average interest rates as compared to 2020. InMarch 2020 , the Company drew the remaining availability under its revolving credit facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the financial markets resulting from COVID-19. As ofDecember 31, 2020 , the Company had repaid approximately$319.2 million in connection with the amendments of its unsecured credit facilities (discussed below) and as a result of improved operating cash flow in the second half of 2020. See Note 4 titled "Debt" in the Company's Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, for additional discussion of the Company's amended unsecured credit facilities. In addition to increases in interest due to the Company's unsecured credit facilities, interest on the Company's finance leases increased approximately$3.2 million during 2020 as compared to 2019 due to a required increase under one of its leases.
Non-GAAP Financial Measures
The Company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: Funds from Operations ("FFO"), Modified FFO ("MFFO"), Earnings Before Interest, Income Taxes, Depreciation and Amortization ("EBITDA"), Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate ("EBITDAre"), Adjusted EBITDAre ("Adjusted EBITDAre") andAdjusted Hotel EBITDA . These non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss), cash flow from operations or any other operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre andAdjusted Hotel EBITDA are not necessarily indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions. Although FFO, MFFO, EBITDA, EBITDAre,Adjusted EBITDAre and Adjusted Hotel EBITDA, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre andAdjusted Hotel EBITDA , as reported by other companies that do not define such terms exactly as the Company defines such terms, the Company believes these supplemental measures are useful to investors when comparing the Company's results between periods and with other REITs. FFO and MFFO The Company calculates and presents FFO in accordance with standards established by theNational Association of Real Estate Investment Trusts ("Nareit"), which defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), extraordinary items as defined by GAAP, and the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated affiliates. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company's operations. The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the Nareit definition. FFO as presented by the Company is applicable only to its common shareholders, but does not represent an amount that accrues directly to common shareholders. 44 -------------------------------------------------------------------------------- The Company calculates MFFO by further adjusting FFO for the exclusion of amortization of finance ground lease assets, amortization of favorable and unfavorable operating leases, net and non-cash straight-line operating ground lease expense, as these expenses do not reflect the underlying performance of the related hotels. The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.
The following table reconciles the Company's GAAP net income (loss) to FFO and
MFFO for the years ended
Year Ended December 31, 2020 2019 2018 Net income (loss)$ (173,207 ) $ 171,917 $ 206,086 Depreciation of real estate owned 192,346 187,729
182,527
Gain on sale of real estate (10,854 ) (5,021 ) (152 ) Loss on impairment of depreciable real estate assets 5,097 6,467
3,135
Funds from operations 13,382 361,092
391,596
Amortization of finance ground lease assets 6,433 4,517
- Amortization of favorable and unfavorable operating leases, net 442 124
647
Non-cash straight-line operating ground lease expense 180 188
3,542
Modified funds from operations$ 20,437 $ 365,921 $ 395,785
EBITDA, EBITDAre, Adjusted EBITDAre and
EBITDA is a commonly used measure of performance in many industries and is defined as net income (loss) excluding interest, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). In addition, certain covenants included in the agreements governing the Company's indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance. In addition to EBITDA, the Company also calculates and presents EBITDAre in accordance with standards established by Nareit, which defines EBITDAre as EBITDA, excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), plus real estate related impairments, and adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates. The Company presents EBITDAre because it believes that it provides further useful information to investors in comparing its operating performance between periods and between REITs that report EBITDAre using the Nareit definition. The Company also considers the exclusion of non-cash straight-line operating ground lease expense from EBITDAre useful, as this expense does not reflect the underlying performance of the related hotels. The Company further excludes actual corporate-level general and administrative expense for the Company from Adjusted EBITDAre (Adjusted Hotel EBITDA ) to isolate property-level operational performance over which the Company's hotel operators have direct control. The Company believesAdjusted Hotel EBITDA provides useful supplemental information to investors regarding operating performance and is used by management to measure the performance of the Company's hotels and effectiveness of the operators of the hotels. 45
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The following table reconciles the Company's GAAP net income (loss) to EBITDA,
EBITDAre, Adjusted EBITDAre and
Year Ended December 31, 2020 2019 2018(1) Net income (loss)$ (173,207 ) $ 171,917 $ 206,086 Depreciation and amortization 199,786 193,240
183,482
Amortization of favorable and unfavorable operating leases, net 442 124
647
Interest and other expense, net 70,835 61,191 51,185 Income tax expense 332 679 587 EBITDA 98,188 427,151 441,987 Gain on sale of real estate (10,854 ) (5,021 ) (152 ) Loss on impairment of depreciable real estate assets 5,097 6,467
3,135
EBITDAre 92,431 428,597
444,970
Non-cash straight-line operating ground lease expense 180 188
3,542
Adjusted EBITDAre 92,611 428,785
448,512
General and administrative expense 29,374 36,210 24,294 Adjusted Hotel EBITDA$ 121,985 $ 464,995 $ 472,806
(1) EBITDA, EBITDAre, Adjusted EBITDAre and
ended
payments recorded to operating ground lease expense related to four of the
Company's ground leases that were classified as operating leases prior to
2019. Under the current lease accounting standard, effective
2019, these four ground leases are classified as finance leases, for which
the Company recognizes amortization expense and interest expense in the
Company's consolidated statements of operations (both of which are excluded
from EBITDA, EBITDAre, Adjusted EBITDAre andAdjusted Hotel EBITDA calculations), instead of operating ground lease expense. The following tables reconcile the Company's GAAP net income (loss) to EBITDA, EBITDAre, Adjusted EBITDAre andAdjusted Hotel EBITDA by quarter for the years endedDecember 31, 2020 and 2019 (in thousands). 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2020 2020 2020 2020 Net income (loss)$ (2,769 ) $ (78,243 ) $ (40,948 ) $ (51,247 ) Depreciation and amortization 49,522 49,897 50,171 50,196 Amortization of favorable and unfavorable operating leases, net 101 101 103 137 Interest and other expense, net 15,566 18,386 18,531 18,352 Income tax expense 146 58 61 67 EBITDA 62,566 (9,801 ) 27,918 17,505 (Gain) loss on sale of real estate (8,839 ) 54 - (2,069 ) Loss on impairment of depreciable real estate assets - 4,382 - 715 EBITDAre 53,727 (5,365 ) 27,918 16,151 Non-cash straight-line operating ground lease expense 47 44 44 45 Adjusted EBITDAre 53,774 (5,321 ) 27,962 16,196 General and administrative expense 9,523 6,025 6,726 7,100 Adjusted Hotel EBITDA$ 63,297 $ 704$ 34,688 $ 23,296 46
-------------------------------------------------------------------------------- 1st Quarter 2nd Quarter
3rd Quarter 4th Quarter
2019 2019 2019 2019 Net income (loss)$ 38,151 $ 62,090 $ 46,223 $ 25,453 Depreciation and amortization 47,950 48,109 47,887 49,294 Amortization of favorable and unfavorable operating leases, net 31 31 31 31 Interest and other expense, net 15,494 15,857 14,759 15,081 Income tax expense 206 156 143 174 EBITDA 101,832 126,243 109,043 90,033 (Gain) loss on sale of real estate (1,213 ) 161 - (3,969 ) Loss on impairment of depreciable real estate assets - - 6,467 - EBITDAre 100,619 126,404 115,510 86,064 Non-cash straight-line operating ground lease expense 48 47 47 46 Adjusted EBITDAre 100,667 126,451 115,557 86,110 General and administrative expense 8,137 8,308 9,039 10,726 Adjusted Hotel EBITDA$ 108,804 $ 134,759 $ 124,596 $ 96,836 Hotels Owned As ofDecember 31, 2020 , the Company owned 234 hotels with an aggregate of 29,937 rooms located in 34 states, including one hotel with 118 rooms classified as held for sale, which is expected to be sold to an unrelated party in the first quarter of 2021. See "Management and Franchise Agreements" in Part I, Item 1, Business, appearing elsewhere in this Annual Report on Form 10-K, for a table summarizing the number of hotels and rooms by brand. Refer to Part I, Item 2, of this Annual Report on Form 10-K for tables summarizing the number of hotels and rooms by state, and summarizing the location, brand, manager, date acquired or completed and number of rooms for each of the 234 hotels the Company owned as ofDecember 31, 2020 . Related Parties The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm's length and the results of the Company's operations may be different if these transactions were conducted with non-related parties. See Note 6 titled "Related Parties" in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the Company's related party transactions.
Liquidity and Capital Resources
Contractual Commitments
The following is a summary of the Company's significant contractual obligations
as of
Amount of
Commitments Expiring per Period
Total 1 Year 2-3 Years 4-5 Years Over 5 Years Property Purchase Commitments$ 49,632 $ 49,632 $ - $ - $ - Debt (including interest of$247.9 million ) 1,736,451 129,133 606,731 633,273 367,314 Finance Leases 506,819 9,618 19,883 22,851 454,467 Operating Leases 36,019 1,108 1,699 1,541 31,671$ 2,328,921 $ 189,491 $ 628,313 $ 657,665 $ 853,452 Capital Resources The Company's principal short term sources of liquidity are the operating cash flows generated from the Company's properties and availability under its revolving credit facility. Periodically, the Company may receive proceeds from strategic additional secured and unsecured debt financing, dispositions of its hotel properties (such as the sale of three hotels in 2020 for proceeds of approximately$55 million discussed above in "2020Hotel Portfolio Activities ") and offerings of the Company's common shares, including pursuant to the 2020 ATM Program. As a result of declines in occupancy caused by 47 -------------------------------------------------------------------------------- COVID-19, the Company anticipates significantly reduced cash from operations until travel increases in theU.S. To increase readily available liquidity, inMarch 2020 , the Company drew the remaining availability under its$425 million revolving credit facility. In connection with entering into amendments for each of its unsecured credit facilities (discussed below) and as a result of improved operating cash flows during the second half of 2020, the Company has repaid approximately$319.2 million of borrowings under its revolving credit facility as ofDecember 31, 2020 . In 2020, the Company took additional steps to preserve capital and increase liquidity, including postponing approximately$50 million of non-essential capital improvements, suspending its monthly distributions and entering into contracts for potential dispositions. Additionally, as a result of the effects of COVID-19 on the economic environment, for certain hotels, the lenders for the associated mortgage loans granted the Company's request for temporary deferrals of principal and interest payments, which have all resumed as ofDecember 31, 2020 . The Company anticipates funding its near-term cash needs with operating cash flows generated from the Company's properties and availability under its revolving credit facility. As ofDecember 31, 2020 , the Company had approximately$1.5 billion of total outstanding debt consisting of$512.8 million of mortgage debt and$975.8 million outstanding under its credit facilities, excluding unamortized debt issuance costs and fair value adjustments. As ofDecember 31, 2020 , the Company had available corporate cash on hand of approximately$5.6 million . The Company's unused borrowing capacity under its$425 million revolving credit facility as ofDecember 31, 2020 was$319.2 million . In the near term, the impact of COVID-19 on the global economy, including any sustained decline in the Company's performance, may make it more difficult or costly for the Company to raise debt or equity capital to fund long-term liquidity requirements. The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios and restrictions on certain investments. As a result of COVID-19 and the associated disruption to the Company's operating results, duringApril 2020 , the Company anticipated that it may not be able to maintain compliance with certain of these covenants in future periods. As a result, onJune 5, 2020 , the Company entered into amendments to each of the unsecured credit facilities. The amendments suspend the testing of the Company's existing financial maintenance covenants under the unsecured credit facilities until the date the compliance certificate is required to be delivered for the fiscal quarter endingJune 30, 2021 (unless the Company elects an earlier date) (the "Covenant Waiver Period"), and provide for, among other restrictions, the following during the Covenant Waiver Period:
? Mandatory prepayments of amounts outstanding under the Company's unsecured
credit facilities, of net cash proceeds from certain debt and equity issuances, and asset dispositions, subject to various exceptions. A portion of the mandatory prepayments will be available for future borrowing under the revolving credit facility; ? A minimum liquidity covenant of$100 million ;
? A requirement to pledge the equity interests of each direct or indirect
owner of certain unencumbered property in favor of the administrative
agents if average liquidity for any month is less than
total amount outstanding under the revolving credit facility exceeds
million; ? Restrictions on the Company's and its subsidiaries' ability to incur additional indebtedness or prepay certain existing indebtedness;
? Restrictions on the Company's ability to make cash distributions (except
to the extent required to maintain REIT status) and share repurchases;
? Maximum discretionary capital expenditures of$50 million ; ? Limitations on additional investments; and ? An increase in the applicable interest rate under the unsecured credit facilities until the end of the Covenant Waiver Period to a rate that corresponds to the highest leverage-based applicable interest rate margin with respect to the unsecured credit facilities. The amendments also modify the calculation of the existing financial covenants for the four quarters subsequent to the end of the Covenant Waiver Period to annualize calculated amounts to the extent the most recently ended fiscal quarter is not at least four fiscal quarters from the end of the Covenant Waiver Period, and provide for an increase in the LIBOR floor under the credit agreements from 0 to 25 basis points for Eurodollar Rate Loans and establish a Base Rate floor of 1.25% on the revolving credit facility, and any term loans under the credit agreements that are not hedged. Except as otherwise set forth in the amendments, the terms of the credit agreements remain in effect. 48 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , the Company was in compliance with the applicable covenants of the credit agreements as amended. However, as a result of the continued disruption from COVID-19 and the related uncertainty on the Company's operating results, the Company anticipates that it could potentially not be in compliance with certain of the covenants as amended in future periods if the existing Covenant Waiver Period is not further extended. InJanuary 2021 , the Company notified lenders under its credit facilities of the anticipated potential non-compliance with certain covenants and anticipates entering into amendments to each of the credit facilities to extend the waiver period for the testing of all but two of its financial maintenance covenants throughMarch 31, 2022 . The waiver period for the testing of the ratio of Adjusted Consolidated EBITDA to Consolidated Fixed Charges and the ratio of Unencumbered Adjusted NOI to Consolidated Implied Interest Expense for Consolidated Unsecured Indebtedness is anticipated to be extended throughDecember 31, 2021 . The Company anticipates that the conditions to obtaining the waivers that currently apply during the Covenant Waiver Period, as implemented in theJune 2020 amendments, will generally continue to apply during the extended covenant waiver period described above, including restrictions on the amount of the Company's distributions, capital expenditures, and share repurchases and acquisitions, but the Company anticipates that the amendments will provide additional flexibility regarding certain of the conditions relative to the current restrictions, including an increased allowance for acquiring unencumbered assets through either proceeds from unencumbered asset sales or equity issuances. The Company also anticipates that the anticipated amendments will provide for less restrictive thresholds for certain financial covenant ratios once covenant testing recommences at the end of the extended covenant waiver period for a transitional period. As part of the amendments, the interest rate under each of its credit facilities is expected to increase 15 basis points during the extended covenant waiver period. Although the Company is close to finalizing these amendments and anticipates completing them in the near future, the amendments have not yet been finalized and the final terms could change. Thus, no assurances can be given as to the final terms of the amendments or that the Company will be able to complete the amendments. If the contemplated amendments are not entered into, and the Company does not meet its applicable covenant requirements in future periods, the Company will be in default under each credit facility. Defaults may result in additional interest expense and a potential acceleration of amounts due under each credit facility, which would have a material adverse effect on the Company if it is unable to obtain alternative sources of capital to repay such amounts. See Note 4 titled "Debt" in the Company's Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, for a description of the Company's debt instruments as ofDecember 31, 2020 . The Company has a universal shelf registration statement on Form S-3 (No. 333-231021) that was automatically effective upon filing onApril 25, 2019 . The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company's preferred shares; (4) warrants exercisable for the Company's common shares, preferred shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. Future offerings will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company's common shares and opportunities for uses of any proceeds. In connection with the shelf registration statement, onAugust 12, 2020 , the Company entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of$300 million of its common shares under an at-the-market offering program (the "ATM Program"). As ofDecember 31, 2020 , the Company has not sold any common shares under the ATM Program. The Company plans to use the net proceeds from the sale of these shares to pay down borrowings on its revolving credit facility and, under certain circumstances, to repay proportionally amounts under each of the Company's revolving credit facility, term loans and senior notes. The Company plans to use the corresponding increased availability under the revolving credit facility for general corporate purposes which may include, among other things, acquisitions of additional properties, the repayment of other outstanding indebtedness, capital expenditures, improvement of properties in its portfolio and working capital, subject to certain restrictions during the Covenant Waiver Period pursuant to the Company's amended unsecured credit facilities, as discussed further in Note 4 titled "Debt" of the Consolidated Financial Statements and Notes thereto in Part II, Item 8 in this Annual Report on Form 10-K. The Company may also use the net proceeds to acquire another REIT or other company that invests in income producing properties. During April andMay 2020 , the Company applied for and received approximately$18 million in loans under the CARES Act Paycheck Protection Program. Due to subsequent guidance issued by theSmall Business Administration and theDepartment of Treasury , related to the intended participants in this program, the Company repaid all amounts received. The Company will continue to evaluate relief initiatives and stimulus packages, including any accompanying restrictions on its business that would be imposed by such packages, that may be or become available to the Company under government stimulus programs. 49 -------------------------------------------------------------------------------- As discussed in Note 3, "Assets Held for Sale and Dispositions" of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, as ofDecember 31, 2020 , the Company had an outstanding contract to sell one of its hotels for a gross sales price of approximately$10.3 million . The Company expects to complete the sale of this hotel in the first quarter of 2021. The net proceeds from the sale will be used to pay down borrowings on the Company's revolving credit facility.
Capital Uses
Although there can be no assurances, the Company anticipates that available cash and availability under its revolving credit facility as ofDecember 31, 2020 , including increased availability from repayments with proceeds from sales of properties, will be adequate to meet its near-term potential operating cash flow deficits that may result from the effects of COVID-19, debt service, hotel acquisitions and capital expenditures. Though not expected, if the Company is unable to meet its near-term anticipated capital uses as currently planned, it may raise capital through dispositions of assets, issuances of equity or debt, which may be more costly to the Company in the current environment.
Distributions
To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions paid for the years endedDecember 31, 2020 , 2019 and 2018 were$0.30 ,$1.20 and$1.20 per common share, respectively and were paid at a monthly rate of$0.10 per common share throughMarch 2020 for a total of approximately$67.4 million ,$268.7 million and$275.9 million , respectively. For the same periods, the Company's net cash generated from operations was approximately$26.7 million ,$381.7 million and$404.8 million , respectively. The shortfall for 2020 includes a return of capital and was funded primarily by borrowings on the Company's revolving credit facility. As a result of COVID-19 and the impact on its business, the Company suspended its monthly distributions inMarch 2020 . The Company's Board of Directors, in consultation with management, will continue to monitor hotel operations and intends to resume distributions at a time and level determined to be prudent in relation to the Company's other cash requirements or in order to maintain its REIT status for federal income tax purposes, subject to any applicable distribution restrictions under the Company's unsecured credit facilities. As discussed in Note 4 titled "Debt" of the Consolidated Financial Statements and Notes thereto in Part II, Item 8 in this Annual Report on Form 10-K, distributions are currently subject to certain restrictions that apply during the Covenant Waiver Period pursuant to the terms of theJune 2020 amendments to the Company's unsecured credit facilities. The Company incurred a net loss for the year endedDecember 31, 2020 resulting in a net loss carryforward for federal income tax purposes of approximately$67.0 million , which will be applied to future taxable earnings subject to limitations imposed by the Code, as amended, which will likely delay the need to make additional distributions to maintain the Company's REIT status.
Share Repurchases
InMay 2020 , the Company's Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of$345 million . The Share Repurchase Program may be suspended or terminated at any time by the Company and will end inJuly 2021 if not terminated earlier. During 2020, 2019 and 2018, the Company purchased, under its Share Repurchase Program, approximately 1.5 million, 0.3 million and 6.6 million of its common shares, respectively, at a weighted-average market purchase price of approximately$9.42 ,$14.92 and$15.87 per common share, respectively, for an aggregate purchase price, including commissions, of approximately$14.3 million ,$4.3 million and$104.3 million , respectively. The shares were repurchased under a written trading plan that provided for share repurchases in open market transactions and was intended to comply with Rule 10b5-1 under the Exchange Act. InMarch 2020 the Company terminated its written trading plan under the Share Repurchase Program and did not engage in additional repurchases under the Share Repurchase Program during the balance of 2020. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to any applicable restrictions under the Company's unsecured credit facilities. As discussed in Note 4 titled "Debt" of the Consolidated Financial Statements and Notes thereto in Part II, Item 8 in this Annual Report on Form 10-K, share repurchases are currently subject to certain restrictions that apply during the Covenant Waiver Period pursuant to the terms of theJune 2020 amendments to the Company's unsecured credit facilities. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon prevailing market conditions, regulatory requirements and other factors.
Capital Improvements
Management routinely monitors the condition and operations of its hotels and plans renovations and other improvements as it deems prudent. The Company has ongoing capital commitments to fund its capital improvements. To maintain and enhance each property's competitive position in its market, the Company has invested in and plans to continue 50 -------------------------------------------------------------------------------- to reinvest in its hotels. Under certain loan and management agreements, the Company is required to place in escrow funds for the repair, replacement and refurbishing of furniture, fixtures, and equipment, based on a percentage of gross revenues, provided that such amount may be used for the Company's capital expenditures with respect to the hotels. As ofDecember 31, 2020 , the Company held approximately$25.3 million in reserve related to these properties. During 2020, the Company invested approximately$37.6 million in capital expenditures, which was approximately$50 million less than originally planned as the Company postponed all planned non-essential capital improvements afterMarch 2020 in order to maintain a sound liquidity position as a result of COVID-19. The Company anticipates spending approximately$25 to$30 million during 2021, which includes various renovation projects. The amended covenants on the Company's unsecured debt contain restrictions on the amount and type of spending for capital improvements during the Covenant Waiver Period, as discussed further in "Capital Resources" above. The Company does not currently have any existing or planned projects for new property development.
As ofDecember 31, 2020 , the Company had one outstanding contract, which was entered into prior to 2020, for the potential purchase of a newly developed hotel for a total expected purchase price of approximately$49.6 million . The hotel was completed and opened for business inFebruary 2021 , at which time closing on this hotel occurred. The Company utilized borrowings under its revolving credit facility to purchase the hotel.
Lease Commitments
Under the terms of the Company's ground leases, certain minimum lease payments are subject to change based on criteria specified in the lease. Minimum lease payments may be estimated if the change date occurs and the new minimum lease payments are not yet determinable. During 2019, the Company estimated a required increase in lease payments under one of its finance ground leases, resulting in an increase in the finance ground lease right-of-use ("ROU") asset and liability at the anticipated date of the change. The amount of the increase and the effective date of the change are subject to agreement with the lessor and could increase in the future. As ofDecember 31, 2020 , the Company and the lessor had not reached an agreement on the increase in future lease payments and, as a result, the projected future lease payments and impact on the lease ROU asset and liability is uncertain. See Note 10 titled "Lease Commitments" in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, for additional information.
Cash Management Activities
As part of the cost sharing arrangements discussed in Note 6 titled "Related Parties" in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, certain day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under the cash management process, each company may advance or defer up to$1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies.
Management and Franchise Agreements
Each of the Company's 234 hotels owned as ofDecember 31, 2020 is operated and managed under separate management agreements with 17 hotel management companies, none of which are affiliated with the Company. Fifteen of the Company's hotels are managed by affiliates of Marriott or Hilton. The remainder of the Company's hotels are managed by companies that are not affiliated with either Marriott, Hilton or Hyatt, and as a result, the branded hotels they manage were required to obtain separate franchise agreements with the applicable franchisor. See Note 9 titled "Management and Franchise Agreements" in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information pertaining to the management and franchise agreements, including a listing of the Company's hotel management companies. Business Interruption Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes it has adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company's financial position or results of operations. 51
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Seasonality
The hotel industry has been historically seasonal in nature. Seasonal variations in occupancy at the Company's hotels may cause quarterly fluctuations in its revenues. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. However, due to the effects of COVID-19, these typical seasonal patterns did not have as significant of an impact on the overall fluctuations in occupancy rates and hotel revenues in the first half of 2020, although the Company experienced some seasonal decrease in demand in November and December. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
Critical Accounting Policies
The following contains a discussion of what the Company believes to be its critical accounting policies. These items should be read to gain a further understanding of the principles used to prepare the Company's financial statements. These principles include application of judgment; therefore, changes in judgments may have a significant impact on the Company's reported results of operations and financial condition.
Investment Policy
Upon acquisition of real estate properties, the Company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, and assumed debt based on the evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparables and other information which is subjective in nature. The Company has not assigned any value to management contracts and franchise agreements as such contracts are generally at current market rates based on the remaining terms of the contracts and any other value attributable to these contracts is not considered material. Acquisitions of hotel properties are generally accounted for as acquisitions of a group of assets, with costs incurred to effect an acquisition, including title, legal, accounting, brokerage commissions and other related costs, being capitalized as part of the cost of the assets acquired, instead of accounted for separately as expenses in the period that they are incurred.
Capitalization Policy
The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least$500 , including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical assets, the unit cost for each asset must be at least$50 , including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to a single asset, the repair must be at least$2,500 and the useful life of the asset must be substantially extended.
Impairment Losses Policy
The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties over their estimated remaining useful life, based on historical and industry data, is less than the properties' carrying amount. Indicators of impairment include a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and an asset's carrying value may not be recoverable. The Company monitors its properties on an ongoing basis by analytically reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. As many indicators of impairment are subjective, such as general economic and market declines, the Company also prepares an annual recoverability analysis for each of its properties to assist with its evaluation of impairment indicators. The analysis compares each property's net book value to each property's estimated operating income using current operating results for each stabilized property and projected stabilized operating results based on the property's market for properties that recently opened, were recently renovated or experienced other short-term business disruption. The Company's planned initial hold period for each property is generally 39 years. If events or circumstances change, such as the Company's intended hold period for a property or if the operating performance of a property declines substantially for an extended period of time, the Company's carrying value for a particular property may not be recoverable, and an impairment loss will be recorded. Impairment losses are measured as the difference between the asset's fair value and its carrying value. The Company's ongoing analyses and annual recoverability analyses have not identified any impairment losses other than the losses on impairment of one property recorded in 2020, one property recorded in 2019 and three properties recorded in 2018 totaling approximately$5.1 million ,$6.5 million and$3.1 52 -------------------------------------------------------------------------------- million, respectively, as discussed herein in Note 3 titled "Assets Held for Sale and Dispositions" in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. New Accounting Standards See Note 1 titled "Organization and Summary of Significant Accounting Policies" in Part II, Item 8 of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, for information on the adoption of the new fair value measurement accounting standard onJanuary 1, 2020 and the guidance in the reference rate reform accounting standard effective inMarch 2020 . Subsequent Events OnFebruary 18, 2021 , the Company closed on the purchase of the newly developed 176-roomHilton Garden Inn inMadison, Wisconsin , for a gross purchase price of approximately$49.6 million , utilizing borrowings on the Company's revolving credit facility. 53
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