COREPOINT LODGING INC.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") is intended to help provide an understanding of our
business and results of operations. This MD&A should be read in conjunction with
our unaudited condensed consolidated financial statements and the related notes
thereto included elsewhere in this Quarterly Report on Form 10-Q. This report,
including the following MD&A, contains forward-looking statements regarding
future events or trends that should be read in conjunction with the factors
described under "Special Note Regarding Forward-Looking Statements" above in
this Quarterly Report on Form 10-Q and "Risk Factors" in this Quarterly Report
on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
December 31, 2020 ("Annual Report on Form 10-K"). Actual results may differ
materially from those projected in such statements as a result of the factors
described under "Special Note Regarding Forward-Looking Statements" and in "Risk
Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form
10-K.
Overview
Our Business
CorePoint is a leading owner in the midscale and upper midscale select-service
hotel segments, primarily under the La Quinta brand. Our portfolio, as of
September 30, 2021 , consisted of 160 hotels representing approximately 22,000
rooms across 29 states in locations in or near employment centers, airports, and
major travel thoroughfares. Approximately 45% of our revenue is derived from our
hotels located in Florida , Texas and California and approximately 17% from the
state of Florida alone. These hotels are currently experiencing consistently
higher levels of recovery from the COVID-19 pandemic disruptions than most
full-service hotels, largely attributable to "drive to destination-oriented"
leisure travelers. Based on local economies, we expect these regions to continue
to have improved travel demand, which would positively affect our operations;
however, until business travel returns to pre-pandemic levels, we do not expect
to consistently achieve 2019 operating results for our Comparable Hotels . All
but one of our hotels is wholly-owned. We primarily derive our revenues from our
select-service hotel operations, with approximately 98% of our revenues derived
from daily room rentals.
Generally, our hotels include the land, related easements and rights,
buildings, improvements, furniture, fixtures and equipment. As of September 30,
2021 , we have 13 hotels located on land leased by us pursuant to ground leases
with third parties.
Proposed Transaction
On November 6, 2021 , we entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Cavalier Acquisition JV LP , a Delaware limited
partnership ("Parent"), and Cavalier Acquisition Owner LP , a Delaware limited
partnership and a wholly-owned subsidiary of Parent ("Merger Sub"), pursuant to
which, on the terms and subject to the conditions set forth in the Merger
Agreement, we will merge with and into Merger Sub (the "Merger"), with Merger
Sub continuing as the surviving entity in the Merger as a wholly-owned
subsidiary of Parent. Our board of directors has approved the Merger Agreement
and the transactions contemplated thereby, including the Merger.
The Merger is subject to customary closing conditions. There can be no assurance
that the transaction will be completed on the terms or timeline currently
contemplated or at all. If the Merger is not completed, we would continue to
focus on our previously stated business strategies for the upcoming year. The
discussions below in Management's Discussion and Analysis of Financial Condition
and Results of Operations do not include any effect of a transaction. See Note
16 "Subsequent Events" to our condensed consolidated financial statements
included elsewhere in this report and "Item, 1A. Risk Factors-The failure to
complete the transaction announced on November 8, 2021 in a timely manner or at
all could negatively impact the market price of our common stock, as well as our
future business and our financial condition, results of operations and cash
flows" for additional detail.
Impact of the COVID-19 Pandemic
Update
Due to reduced COVID-19 infection rates in the U.S. and overall favorable trends
in the economy, we have observed an increase in travel demand throughout most of
our hotel portfolio. This has resulted in improvements during the third quarter
of 2021 in our revenues, Hotel Adjusted EBITDAre (see "Non-GAAP Financial
Measures" discussed below) and financial position, particularly related to
liquidity and debt leverage, both on a sequential basis, as compared to the
second quarter of 2021, as well as over the comparable period in 2020.
During the COVID-19 pandemic, we believe our hotel portfolio generally performed
better than the lodging industry as a whole, primarily in comparison to full
service hotels in urban or resort destination areas, and specifically as a
result of the following portfolio characteristics: (1) our select-service
business model; (2) our predominant focus on the midscale and upper midscale
chain scales; (3) location in suburban market locations, with a concentration in
sunbelt states near multiple demand generators and stronger local economies; and
(4) leisure travel and transient focus. We also believe our portfolio
characteristics positioned us to benefit from
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pent-up travel demand. If travelers continue to be more comfortable traveling
and if businesses and travel destinations continue to re-open, we expect
continued improvements in our operations. We have experienced a faster recovery
in leisure travel. For the nine months ended September 30, 2021 , our Friday and
Saturday occupancy, which is generally more attributable to leisure travelers,
was 70%, while our weekday occupancy, which is generally more attributable to
business travelers, was approximately 56%. For our most recent quarter, the
three months ended September 30, 2021 , the trend toward leisure travel was
similar as our Friday and Saturday occupancy was approximately 73%, while our
weekday occupancy was approximately 60%. As the economy recovers, more
businesses open and convention and related activity resumes, we expect increases
in business travel, although with the potential for delays in the recovery due
to COVID-19 variants or other reasons.
Operating Results
DuringMarch 2021 , we reached the one year anniversary of COVID-19 being declared a global pandemic by theWorld Health Organization . The first quarter of 2020 had less than one month of the full impact of the operational disruptions due to the COVID-19 pandemic. Accordingly, we are monitoring our progress compared to the similar periods in 2020 and in 2019, the last full year of pre-COVID-19 pandemic operations. Room revenues for the third quarter of 2021 were approximately 3% higher than the second quarter of 2021 and approximately 32% higher than the third quarter of 2020, primarily driven by increased consumer demand and higher room rates. These increases were despite dispositions of certain of our non-core hotels, as described below. On a Comparable Hotel basis, revenues were up approximately 69% for the third quarter of 2021 compared to the third quarter of 2020. Our Comparable Hotel occupancy and RevPAR are illustrated in the charts and the graph below.
2021 to 2020 to 2019 Comparison -
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2021 to 2020 to 2019 Comparison -
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2021 -
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Subsequent to the first quarter of 2021, we have exceeded 2020 operating levels
for all periods and have narrowed the variance between 2021 and 2019
performance. In the first quarter of 2021, our Comparable Hotel RevPAR deficit
to the same period in 2019 was $30 . Since the first quarter of 2021, that
variance has been reduced to $11 in the second quarter and to only $4 in the
third quarter. During July 2021 , Comparable Hotel RevPAR performance for the
month exceeded July 2019 . Since then, monthly 2021 Comparable Hotel RevPAR has
been 90% to 93% of 2019 Comparable Hotel RevPAR , with our October 2021
Comparable Hotel RevPAR at 93% of October 2019 Comparable Hotel RevPAR . We note
that the number of Comparable Hotels in October was reduced to reflect the
October 2021 sale of four hotels. We believe these results are primarily driven
by leisure travelers, with a slight reduction toward the end of summer due to
the termination of COVID-19 stimulus payments, back to school shifts in travel
and the weakening effects of the COVID-19 pandemic on overall travel, and, in
particular, business, group and convention travel.
Cost Management
In response to the COVID-19 pandemic, along with our hotel manager, we put in place a number of actions to reduce portions of our operating expenses, primarily related to hotel labor, supplies and maintenance. These cost saving measures primarily began inApril 2020 and have substantially continued into 2021. The most significant of these actions were the suspension of buffet- style breakfast services, reduced hotel and housekeeping labor and deferred non-health or safety maintenance and capital expenditures. These expense savings were marginally offset by additional cleaning expenses and supplies and costs of furloughing and rehiring hotel employees. These expense controls have continued; however, as occupancy demand continues to improve, we have and will continue to restore some of the expenses related to the underlying cost controls. In particular, we expect to have increased hotel labor, particularly housekeeping staff, as our hotel manager initiated new incentive programs inJune 2021 to recruit and retain staff. Additionally, grab-and-go breakfast options are now offered at most of our hotels. A full resumption of buffet-style breakfast will increase expenses. When possible, we have instituted and expect to continue to institute these changes and the corresponding increase in operating expenses in line with revenue increases; however, given that certain of these items require some lead time to hire staff and order supplies, we may experience increases in operating expenses in advance of the realization of increased revenues. This may result in temporary decreases in operating margins and cash flows. However, certain supply constraints may result in longer term operating cost increases. These may result from competition for labor, which may be exacerbated by a decreased supply of workers and minimum wage actions setting higher wage expectations for all labor sectors. The cost and disruption to labor availability may be one of the longer term consequences from the pandemic. In addition, we have experienced expense increases that are outside of our direct control, such as increased travel commissions that have been shifting to more expensive online and franchisor sources. The COVID-19 pandemic has also contributed to certain raw material, energy, transportation and other supply constraints which are increasing costs. 26 -------------------------------------------------------------------------------- We also have taken aggressive steps at the corporate level to control costs and preserve capital to mitigate the ongoing operational and financial impact in response to the COVID-19 pandemic. These initiatives include suspending our common stock dividend, restricting corporate travel and deferring all non-essential administrative expenses and capital expenditures. Similar to operating expense, these measures have continued into 2021. However, we have experienced certain administrative expense increases in 2021, primarily related to the resumption of travel and other activities.
Cash Flows
During 2021, we have had positive cash flow from operations each quarter. For the nine months endedSeptember 30, 2021 , we reported$69 million net cash provided by operating activities as compared to$21 million net cash used in operating activities for the nine months endedSeptember 30, 2020 . This trend was primarily as a result of improved operations in the second and third quarters of 2021, which combined generated approximately$66 million of cash provided by operating activities, due to revenue improvements, operating cost control measures and reduced interest expense. Our limits on capital expenditures also improved our cash flows compared to 2020. During the nine months endedSeptember 30, 2021 we used$6 million for capital expenditures, net of collection of insurance proceeds, compared to$7 million and$48 million for capital expenditures, net of insurance proceeds, in the same periods for 2020 and 2019, respectively. As noted above, we are currently restricting our capital expenditures to only essential expenditures. However, as occupancy and revenues increase, we expect our capital expenditures to also increase. While we generally expect future operations will continue to improve, due to uncertainties regarding the magnitude and timing of the resumption of business travel and other activities, including in-person work, schools, colleges, sporting events, special events and conferences, we expect higher volatility in travel demand, with certain regions experiencing a greater or smaller recovery at any given time frame. There is also uncertainty as to the effects on travel from the COVID-19 pandemic, particularly whether travel will continue based on the most recent trends or whether there will be a reduction due to restrictions imposed from increased infections and local and international restrictions. Accordingly, we are unable to forecast our near term operating results. Until travel demand fully returns and stabilizes, we may experience future periodic improvements and declines in cash flows from operations which may extend into the remainder of 2021 and beyond. Based on our 2021 operating performance to date, we believe we have adequate liquidity to fund our operations. We have$174 million of cash and cash equivalents as ofSeptember 30, 2021 , an increase of$31 million fromDecember 31, 2020 . We have also reduced our debt by$273 million , primarily from the execution of the non-core disposition program. Should operations continue to improve or continue at current levels, we would expect further improvements in our cash position, debt leverage and access to capital. (See "Liquidity and Capital Resources" below for additional discussion.)Non-Core Hotel Disposition Strategy Our strategy has identified opportunities to dispose of our lower performing hotels and we refer to these as our non-core hotels. These hotels are generally older and have lower RevPAR (defined below) and higher capital expenditure requirements. As ofDecember 31, 2019 , we identified 166 hotels as non-core, and we have sold or disposed of 111 of these hotels as ofSeptember 30, 2021 . We anticipate the non-core disposition program will be completed by the end of 2022; however, this period could be extended or shortened depending on market conditions, COVID-19 pandemic status and availability of capital for hotel purchasers. There can be no assurance as to the timing of any future sales, whether any approvals required under applicable franchise or ground lease agreements will be obtained or upon what terms, whether such sales will be completed at all, or, if completed, their effect on our future results. The table below provides certain summary information of our core and non-core hotels as ofSeptember 30, 2021 . Due to the disruptions to 2020 and 2021 RevPAR from the COVID-19 pandemic, we have provided RevPAR based on 2019 annual amounts. We believe the 2019 annual amounts are more comparable to historical metrics. Average hotel age Number of hotels Approximate number of rooms (years) 2019 RevPAR Core 105 15,100 29$ 72.67 Non-Core 55 6,900 33$ 55.28 Total 160 22,000 30$ 67.18 During the nine months endedSeptember 30, 2021 , we sold 49 non-core hotels for gross consideration of$281 million . Subsequent toSeptember 30, 2021 , we sold an additional five non-core hotels for gross consideration of$36 million . As these hotels were among our lowest performing hotels, we believe these dispositions will positively impact portfolio RevPAR and gross margin. Further, as the net sales proceeds were substantially used to retire portions of our existing debt, these dispositions will reduce interest 27 --------------------------------------------------------------------------------
expense. We expect to also benefit from no longer incurring capital expenditures for these sold hotels, increasing the availability of liquidity for other uses.
Certain historical information related to the operating hotels sold during the nine months endedSeptember 30, 2021 is presented in the table below. Due to the disruptions to 2020 and 2021 metrics from the COVID-19 pandemic, we have provided metrics based on 2019 annual amounts. We believe the 2019 annual amounts provide measures that may be more comparable to historical metrics. As the COVID-19 pandemic continues over a longer period, these metrics as well as the number of hotel sales may be affected ($ amounts in millions, except for RevPAR and price per key): Gross sales Gain on Approximate price 2021 Quarterly Activity Number of hotels sold
Approximate number of rooms price sales
per key (5) Revenue multiple (1)
1st Quarter 9 1,100 $ 42 $ 10 $ 39,000 2.5x
2nd Quarter 25 2,900 143 42 $ 50,000 2.7x
3rd Quarter 15 1,800 96 29 $ 54,000 2.8x
2021 49 5,800 $ 281 $ 81 $ 49,000 2.7x
2019 Annual Operating Data for Non-Core Hotels sold in the nine months
ended September 30, 2021 Amount
Revenues $ 103.1
RevPAR (2) $ 48.88
Hotel Adjusted EBITDAre (3) $ 20.3
Hotel Adjusted EBITDAre multiple (4) 13.8 x
FFO (3) $ 12.7
Capital expenditures $ 7.2
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(1)Revenue multiple is calculated as the gross sales price divided by 2019
annual revenues. Closing costs, management termination fees and other costs from
the sale of the hotels have not been deducted in the gross sales price and have
generally averaged approximately 10% of the gross sales price.
(2)Our Comparable Hotel RevPAR for the year ended December 31, 2019 was $67.18
and our Comparable Hotel RevPAR for core hotels alone was $72.67 .
(3)Hotel Adjusted EBITDAre and FFO are non-GAAP financial measures. See
"Non-GAAP Financial Measures" below for definitions and limitations of these
terms. The FFO amount includes the related annualized interest expense based on
the actual debt principal paid down for each hotel sale using the September 30,
2021 interest rate of 3.12%. The FFO amount includes only directly associated
hotel expenses and does not include any general and administrative or other
corporate expenses.
(4)Hotel Adjusted EBITDAre multiple is calculated as gross sales price divided
by 2019 Hotel Adjusted EBITDAre .
(5)Approximate price per key is defined as gross sales price divided by the
total rooms for hotels sold.
As noted, the statistics above are based on the 2019 annual operating amounts.
More current data would likely result in lower absolute amounts and higher
multiples and yields as a result of the COVID-19 pandemic's effects on hotel
operations.
The hotel sales closed to date have been on substantially similar terms and
pricing as previously experienced prior to the COVID-19 pandemic. The favorable
trend in price per key is primarily due to the staging of sales, where lower
performing, older and higher capital expenditure dependent hotels were generally
sold first. During 2021, we also experienced continued demand for the non-core
hotels as buyer revenue and operating expectations from the pandemic recovery
were more favorable as the year progressed and capital for purchasers became
more available. However, there can be no assurance as to the timing of any
future sales, whether the terms of such sales will be similar to prior terms,
whether any approvals required under applicable franchise agreements will be
obtained or upon what terms, whether proposed federal income tax changes will
affect buyer capital or demand and whether buyers will be able to complete such
purchases, or, if completed, their effect on future results.
As noted above, the sale of hotels during 2021 contributed positively to our
RevPAR and occupancy. Since substantially all of the proceeds from these hotel
sales have been used to pay down debt, with no current or anticipated
re-investments, these dispositions, in isolation from other changes in
operations, are expected to result in reductions in revenues and other net
operating results in future periods.
During the nine months endedSeptember 30, 2021 , we invested approximately$13 million in capital investments in our hotels. These represent approximately 3% of revenues for the nine months endedSeptember 30, 2021 . We generally expect these capital expenditures to fall within a range of 5% to 10% of annual revenues, with quarterly variances due to seasonality of revenues and timing of capital expenditures. Due to the COVID-19 pandemic, we have and expect to continue to defer elective capital expenditures, with the exception of life safety or critical operational needs. Deferring capital expenditures may result in additional 28 -------------------------------------------------------------------------------- maintenance expenses when operations begin to improve and higher capital expenditures in future periods. However, to the extent we are able to complete the dispositions of non-core hotels, we anticipate that our total recurring maintenance and upgrade capital expenditures will decline on an absolute basis. We also anticipate that as operations improve deferred capital expenditures will increase and be given a priority from available liquidity. InAugust 2021 , Hurricane Ida damaged four of our hotel properties located in and aroundNew Orleans, Louisiana with damages estimated at approximately$15 million . We expect a majority of these costs to be reimbursed by insurance. As ofSeptember 30, 2021 , we have recorded an insurance claim receivable of$8 million for the net book value of damaged assets and the restoration expenses incurred as ofSeptember 30, 2021 . We continue to work closely with our insurance adjusters, claims adjusters and construction staff to bring the affected rooms back online as quickly as possible. As ofOctober 31, 2021 , approximately 450 rooms remained out of service due to the impact of the hurricane. We expect these rooms to be placed back in service on a staggered basis over the next several months. Property and business interruption insurance claims will be made as determined through the evaluation process; however, the timing and amount of insurance proceeds are uncertain and may not be sufficient to cover all losses. We expect to fund restoration work from insurance proceeds and cash on hand.
Seasonality
The hotel industry is seasonal in nature. Generally, our revenues are greater in the second and third quarters than in the first and fourth quarters. The timing of holidays, local special events and weekends can also impact our quarterly results. The periods during which our properties experience higher revenues may depend on specific locations and accordingly may vary from property to property. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margin, net earnings and cash provided by operating activities. Additionally, our quarterly results may be seasonally affected by the timing of certain marketing programs or hotel maintenance. In addition, certain of our manager and franchisor fees are based on revenues which, as noted above, vary by season. Further, the impact of disruptions due to the COVID-19 pandemic, the timing of opening of newly constructed or renovated hotels and the timing of any hotel dispositions may cause a variation of revenue and earnings from quarter to quarter. Accordingly, our results for any partial period may not be indicative of our full year results or trends. Further, the COVID-19 pandemic began disrupting our operations duringMarch 2020 . The first quarter of 2020 was not affected by the COVID-19 pandemic until the last weeks ofMarch 2020 . Subsequent 2020 quarterly results also have different levels of operating disruptions. Accordingly, certain comparisons of 2021 results to similar periods in 2020 should be reviewed in the context of the status of the COVID-19 pandemic. Due to the fluidity of these disruptive developments and the degree and timing of the related recovery, we are not able to accurately project the level of operations for 2021 or if and when we will achieve pre-pandemic operating levels on a stable basis.
Segment Reporting
Our hotel investments have similar economic characteristics and our service offerings and delivery of services are provided in a similar manner, using the same types of facilities and similar technologies. Our chief operating decision maker reviews our financial information on an aggregated basis. As a result, we have concluded that we have one reportable business segment.
Key components and factors affecting our results of operations Revenues
Room revenues are primarily derived from room lease rentals at our hotels. We recognize room revenues on a daily basis, based on an agreed-upon daily rate, after the guest has stayed at one of our hotels. Customer incentive discounts, cash rebates, and refunds are recognized as a reduction of room revenues. Occupancy, hotel, and sales taxes collected from customers and remitted to the taxing authorities are excluded from revenues in our condensed consolidated statements of operations. Principal Components of Revenues
Rooms. These revenues represent room lease rentals at our hotels and account for a substantial majority of our total revenue.
Other revenue. These revenues represent revenue generated by the incidental
support of operations at our hotels, including charges to guests for vending
commissions, meeting and banquet rooms, and other rental income from operating
leases associated with leasing space for restaurants, billboards and cell
towers.
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Hotel dispositions. As noted above, we continue dispositions of our non-core hotels. We sold 49 hotels during the nine months endedSeptember 30, 2021 , and we sold or disposed of 62 hotels during the year endedDecember 31, 2020 . The revenue from these sold or disposed hotels was$39 million and$84 million , for the nine months endedSeptember 30, 2021 and 2020, respectively. Customer demand. Our customer mix includes both leisure travelers and business travelers. Customer demand for our products and services is closely linked to the performance of the general economy on both a national and regional basis and is sensitive to business and personal discretionary spending levels. As a result of the COVID-19 pandemic, leisure and business travel lodging demand continues to be impacted, and our mix of customers has changed to a higher proportion of leisure travelers which represents approximately two-thirds of our hotel portfolio. We are benefiting from "drive to" consumer demand, particularly for our hotels adjacent to highways and suburban areas. We are also benefiting from our hotel properties located in sunbelt states, primarilyFlorida ,Texas andSouthern California , that are experiencing an increase in post-pandemic travel demand. These areas are especially attractive to consumers looking for a two or three day trip. Weekend travel demand has been particularly high with occupancy rates at approximately 25% greater than weekday demand. Accordingly, we believe our customer demand is highly dependent on the timing and magnitude of the return of consumer and business travel, the proportion of the traveling population that is vaccinated and feels safe traveling, government assistance programs (such as unemployment benefits, child tax credits and stimulus payments) and the return of convention, sporting and other local events. Supply. New room supply is an important factor that can affect the lodging industry's performance. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth and decline when supply growth exceeds demand growth. Our hotels have benefited from being open while competing hotels and substitute lodging options (e.g. homeowner rental programs) were temporarily closed or not fully operational; however, as travel demand increases, competition has increased and our competitive advantage has diminished or has been eliminated. Beginning in the third quarter of 2020, we noted instances where our hotels were losing pricing power relative to our competitors. We are also observing that many of the competitor hotels that temporarily closed in 2020 have re-opened. However, we do expect that the COVID-19 pandemic will reduce new supply coming into our markets, at least in the near term, as existing hotel projects were delayed and new projects would require some time for planning, governmental approvals and construction. The lodging industry in total may actually experience negative absorption during this lag, as some portion of the existing hotel stock may be taken out of operation. Age and amenities. Newly constructed or remodeled hotels generally will drive higher room rates and occupancy than older properties with deferred maintenance. Similarly, hotels with greater and more current amenities, which are in demand by customers, will also be able to achieve higher room rates and occupancy. The average age of our hotels is approximately 30 years.
Expenses
Principal Components of Certain Expenses
Rooms. These expenses include hotel operating expenses of housekeeping, reservation systems (per our franchise agreements), room and breakfast supplies and front desk costs.
Other departmental and support. These expenses include hotel operating expenses that constitute non-room operating expenses, including parking, telecommunications, on-site administrative labor, sales and marketing, loyalty program, recurring repairs and maintenance and utility expenses.
Property tax, insurance and other. These expenses consist primarily of real and personal property taxes, other local taxes, ground rent, equipment rent and insurance.
Management and royalty fees. Management and royalty fees represent fees paid to third parties and are computed as a percentage of revenues. Factors Affecting our Costs and Expenses
Variable expenses. Expenses associated with our room expenses are mainly affected by occupancy and correlate closely with their respective revenues. Housekeeping labor, travel agency commissions and consumable supplies are most clearly associated with occupancy. Actual charges relating to travel agency commissions depend on our revenue channel distribution mix. For the nine months endedSeptember 30, 2021 , online travel agencies represented approximately 38% of our revenue channel mix. Our management and royalty fees are also primarily driven by our level of gross revenues or room revenues. Management fees represent 5% of total gross revenue and royalty fees represent 5% of our room revenues. In response to the COVID-19 pandemic, we implemented programs to reduce labor and consumable supplies (including eliminated or reduced breakfast offerings), and we have experienced reductions in royalty fees, management fees, travel agency commissions and supplies. However, as our revenue and occupancy demand returns, these expenses have increased and we expect will continue to increase. Limited labor supply and wage 30 -------------------------------------------------------------------------------- pressures have increased, and we expect this will increase our labor costs, including through the impact of new worker incentive programs offered to recruit and retain staff. Further, some of these costs must be incurred in advance of the realization of increased revenue, as staff must be hired and supplies procured in time to meet the demand. Accordingly, certain variable expenses may temporarily increase at times faster than revenues. Fixed expenses. Many of the other expenses associated with our hotels are relatively fixed. These expenses include portions of administrative field staff salaries, rent expense, property taxes, insurance and utilities. Since we generally are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, any resulting decline in our revenues can have a greater effect on our net cash flow, margins and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth, as was the case during the early stages of the COVID-19 pandemic. The effectiveness of our cost-cutting efforts was limited by the amount of fixed costs inherent in our business. An operating hotel requires a minimum number of staff to manage the hotel front desk and provide administrative support and maintain the property. As a result, we were unable to fully offset revenue reductions through cost cutting. Individuals employed at certain of our hotels are party to collective bargaining agreements with our hotel managers that may also limit the manager's ability to make timely staffing or labor changes in response to declining revenues. In addition, any efforts to reduce costs, or to defer or cancel capital improvements, could adversely affect the economic value of our hotels. We have taken steps to date to reduce our fixed costs and expect to continue these efforts throughout 2021 until revenues return. However, as the economy appears to be in the recovery phase of the COVID-19 pandemic and as our revenues return to prior levels, we anticipate positive impacts on our net cash flow, margins and profits as the increases in these fixed labor and other expenses will be proportionately less than the increase in room revenues. Changes in depreciation and amortization expense. Changes in depreciation expense are due to renovations of existing hotels, acquisition or development of new hotels, the disposition of existing hotels through sale or changes in estimates of the useful lives for new capital improvements. As we incur additions to our hotels or place new assets into service, we will be required to recognize additional depreciation expense on those assets. Conversely, impairment losses, which are effectively accelerated depreciation, will reduce future depreciation expenses at these hotels. Continued dispositions of non-core hotels will also reduce future depreciation. Hotel dispositions. We continue dispositions of our non-core hotels, reducing hotel operating expenses. We sold 49 hotels during the nine months endedSeptember 30, 2021 , and we sold or disposed of 62 hotels during the year endedDecember 31, 2020 .Age. As hotels age, maintenance expense tends to increase. These expenses include more frequent and higher costing repairs, higher utility and insurance expenses, increased supplies and higher labor costs. If these costs result in capitalized improvements, depreciation expense could increase over time as discussed above. Renovations and other hotel improvements can mitigate the maintenance expenses of older properties.
Key indicators of financial condition and operating performance
We use a variety of financial and other information in monitoring the
financial condition and operating performance of our business. Some of this
information is financial information that is prepared in accordance with GAAP,
while other information may be financial in nature and may not be prepared in
accordance with GAAP. Our management also uses other information that may not be
financial in nature, including statistical information and comparative data that
are commonly used within the lodging industry to evaluate hotel financial and
operating performance. Our management uses this information to measure the
performance of hotel properties and/or our business as a whole. Historical
information is periodically compared to budgets, as well as against
industry-wide information. We use this information for planning and monitoring
our business, as well as in determining management and employee compensation.
Average daily rate ("ADR") represents hotel room revenues divided by total
number of rooms rented in a given period. ADR measures the average room price
attained by a hotel or group of hotels, and ADR trends provide useful
information concerning pricing policies and the nature of the guest base of a
hotel or group of hotels. Changes in room rates have an impact on overall
revenues and profitability. ADR is also used by the lodging industry to classify
hotels by chain scale.
Occupancy represents the total number of rooms rented in a given period
divided by the total number of rooms available at a hotel or group of hotels.
Occupancy measures the utilization of our hotels' available capacity, which may
be affected from time to time by our repositioning, property casualties and
other activities. Management uses occupancy to gauge demand at a specific hotel
or group of hotels in a given period. Occupancy levels also help us determine
achievable ADR levels as demand for hotel rooms increases or decreases.
Revenue per available room ("RevPAR") is defined as the product of the ADR
charged and the average daily occupancy achieved. RevPAR does not include bad
debt expense or other ancillary, non-room revenues, such as food and beverage
revenues or parking, telephone or other guest service revenues generated by a
hotel, which are not significant for us.
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RevPAR changes that are driven predominately by occupancy have different
implications for overall revenue levels and incremental hotel operating profit
than changes driven predominately by ADR. For example, increases in occupancy at
a hotel would lead to increases in room and other revenues, as well as
incremental operating costs (including, but not limited to, housekeeping
services, utilities and room amenity costs). RevPAR increases due to higher ADR,
however, would generally not result in additional operating costs, with the
exception of those charged or incurred as a percentage of revenue, such as
management and royalty fees, credit card fees and booking commissions. As a
result, changes in RevPAR driven by increases or decreases in ADR generally have
a greater effect on operating profitability at our hotels than changes in RevPAR
driven by occupancy levels.
Comparable Hotels are defined as hotels that were active and operating in our
system for at least one full calendar year as of the end of the applicable
reporting period and were active and operating as of January 1st of the previous
year. Comparable Hotels exclude: (i) hotels that sustained substantial property
damage or other business interruption; (ii) hotels that are sold or classified
as held for sale; or (iii) hotels in which comparable results are otherwise not
available. Management uses Comparable Hotels as the basis upon which to evaluate
ADR, occupancy, and RevPAR. Management calculates comparable ADR, occupancy, and
RevPAR using the same set of Comparable Hotels as defined above. Further, we
report variances in comparable ADR, occupancy, and RevPAR between periods for
the set of Comparable Hotels existing at the reporting date versus the results
of the same set of hotels in the prior period. As of September 30, 2021 , all 160
owned hotels have been classified as Comparable Hotels .
As an owner of hotels, we can capture the full benefit of increases in
operating profits during periods of increasing demand or ADR. As demand and ADR
increase over time, the pace of increase in operating profits typically is
higher than the pace of increase of revenues. We benefited from this favorable
operating environment during the third quarter of 2021, as Comparable Hotel
occupancy was generally flat from the second quarter to the third quarter, but
Comparable Hotel ADR increased, and consequently RevPAR, was up approximately
12%. Hotel ownership is capital intensive, as we are responsible for the costs
and capital expenditures for our hotels. The profits realized by us are
generally significantly affected by economic downturns and declines in revenues.
Given the performance disruptions from the COVID-19 pandemic and the resulting
recovery, we expect increased volatility in revenues and operating profits
during the near term.
The rent potential for a hotel is measured by its ADR and is primarily a factor
of its chain scale, location, local demand drivers and competition. Chain scale
groupings are determined using lodging industry standards. Accordingly, as a
result of the COVID-19 pandemic, certain hotels have experienced decreases in
ADR which has resulted in a temporary reclassification to lower scales and we
expect these to be reclassified to higher scales as ADR trends stabilize. The
table below reflects our chain scale groupings for hotels owned as of
September 30, 2021 , using annual 2019 ADR and occupancy metrics. We believe the
2019 annual amounts provide measures that may be more comparable to historical
metrics. There is no assurance as to when or whether these hotels will return to
their 2019 operating levels. In addition, 55 of the hotels are classified as
non-core and are included in our disposition program.
2019 Annual ADR and Occupancy for hotels owned as of
September 30, 2021 Number of Hotels ADR Occupancy
Upper upscale 3 $ 164.22 78.6 %
Upscale 18 $ 130.40 71.2 %
Upper midscale 54 $ 104.31 66.5 %
Midscale 79 $ 84.81 67.6 %
Economy 6 $ 62.82 71.2 %
Total 160 $ 98.62 68.1 %
Non-GAAP Financial Measures
We also evaluate the performance of our business through certain other
financial measures that are not recognized under GAAP. Each of these non-GAAP
financial measures should be considered by investors as supplemental measures to
GAAP performance measures such as total revenues, operating profit and net
income. These measurements are not to be considered more relevant or accurate
than the measurements presented in accordance with GAAP. In compliance with SEC
requirements, our non-GAAP measurements are reconciled to the most directly
comparable GAAP performance measurement. For all non-GAAP measurements, neither
the SEC nor any other regulatory body has passed judgment on these non-GAAP
measurements.
32
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EBITDA, EBITDAre, Adjusted EBITDAre and
"EBITDA." Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") is a commonly used measure in many REIT and non-REIT
related industries. We believe EBITDA is useful in evaluating our operating
performance because it provides an indication of our ability to incur and
service debt, to satisfy general operating expenses, and to make capital
expenditures. We calculate EBITDA excluding discontinued operations. EBITDA is
intended to be a supplemental non-GAAP financial measure that is independent of
a company's capital structure.
"EBITDAre." We present EBITDAre in accordance with guidelines established by
the National Association of Real Estate Investment Trusts ("Nareit"). Nareit
defines EBITDAre as EBITDA adjusted for gains or losses on the disposition of
properties, impairments, and adjustments to reflect the entity's share of
EBITDAre of unconsolidated affiliates. We believe EBITDAre is a useful
performance measure to help investors evaluate and compare the results of our
operations from period to period.
"Adjusted EBITDAre." Adjusted EBITDAre is calculated as EBITDAre adjusted for
certain items, such as restructuring and separation transaction expenses,
acquisition transaction expenses, stock-based compensation expense, severance
expense, and other items not indicative of ongoing operating performance.
"Hotel Adjusted EBITDAre " measures property-level results at our hotels before
corporate-level expenses and is a key measure of a hotel's profitability. We
present Hotel Adjusted EBITDAre to assist us and our investors in evaluating the
ongoing operating performance of our properties.
We believe that EBITDA, EBITDAre, Adjusted EBITDAre and Hotel Adjusted
EBITDAre provide useful information to investors about our financial condition
and results of operations for the following reasons: (i) EBITDA, EBITDAre,
Adjusted EBITDAre and Hotel Adjusted EBITDAre are among the measures used by our
management to evaluate its operating performance and make day-to-day operating
decisions; and (ii) EBITDA, EBITDAre, Adjusted EBITDAre and Hotel Adjusted
EBITDAre are frequently used by securities analysts, investors, lenders and
other interested parties as a common performance measure to compare results or
estimate valuations across companies in and apart from our industry sector.
EBITDA, EBITDAre, Adjusted EBITDAre, and Hotel Adjusted EBITDAre have
limitations as analytical tools and should not be considered either in isolation
or as a substitute for net income (loss), cash flow or other methods of
analyzing our results as reported under GAAP. Some of these limitations are that
these measures:
• do not reflect changes in, or cash requirements for, our working capital
needs;
• do not reflect our interest expense, or the cash requirements necessary to
service interest or principal payments, on our indebtedness;
• do not reflect our tax expense or the cash requirements to pay our taxes;
• do not reflect historical cash expenditures or future requirements for
capital expenditures or contractual commitments;
• EBITDAre, Adjusted EBITDAre and Hotel Adjusted EBITDAre do not include gains
or losses on the disposition of properties which may be material to our
operating performance and cash flow;
• Adjusted EBITDAre and Hotel Adjusted EBITDAre do not reflect the impact on
earnings or changes resulting from matters that we consider not to be indicative
of our future operations, including but not limited to impairment, acquisition
and disposition activities and restructuring expenses;
• although depreciation, amortization and impairment are non-cash charges, the
assets being depreciated, amortized or impaired will often have to be replaced,
upgraded or repositioned in the future, and EBITDA, EBITDAre, Adjusted EBITDAre,
and Hotel Adjusted EBITDAre do not reflect any cash requirements for such
replacements; and
•other companies in our industry may calculate EBITDA, EBITDAre, Adjusted
EBITDAre, and Hotel Adjusted EBITDAre differently, limiting their usefulness as
comparative measures.
Because of these limitations, EBITDA, EBITDAre, Adjusted EBITDAre and Hotel
Adjusted EBITDAre should not be considered as a replacement to net income (loss)
presented in accordance with GAAP, discretionary cash available to us to
reinvest in the growth of our business or as measures of cash that will be
available to us to meet our obligations.
33
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The following is a reconciliation of our net income (loss) to EBITDA,
EBITDAre, Adjusted EBITDAre and
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net income (loss) $ 17 $ (8) $ 14 $ (136)
Interest expense 6 9 20 35
Income tax benefit - (3) - (6)
Depreciation and amortization 33 39 108 121
EBITDA 56 37 142 14
Gain on sales of real estate (29) (27) (81) (59)
Gain on casualty - (4) (3) (7)
Impairment loss 4 - 4 54
EBITDAre 31 6 62 2
Equity-based compensation expense 2 3 7 8
Income from lease modification (1) - (1) -
Strategic alternatives exploration expenses 1 - 1 -
Income from terminated hotel sale contracts - (1) - (1)
Other, net 1 - (1) 1
Adjusted EBITDAre 34 8 68 10
Corporate general and administrative
expenses 6 4 15 12
Hotel Adjusted EBITDAre $ 40 $ 12 $ 83 $ 22
Additional information:
•Other, net represents additional income and expenses that are not
representative of our current or future operating performance, which are
individually less significant. For the three and nine months ended September 30,
2021 , other, net includes $1 million and $2 million of business interruption
insurance proceeds, respectively. For the three and nine months ended September
30, 2020 , other, net includes $2 million and $4 million of business interruption
insurance proceeds, respectively.
•Corporate general and administrative expenses include the additional
corporate-level expenses not already adjusted in calculating Adjusted EBITDAre.
Nareit FFO attributable to common stockholders and Adjusted FFO attributable to
common stockholders
We present Nareit FFO attributable to common stockholders (as defined below)
as non-GAAP measures of our performance. We calculate funds from operations
("FFO") attributable to common stockholders for a given operating period in
accordance with standards established by Nareit, as net income or loss
(calculated in accordance with GAAP), excluding depreciation and amortization
related to real estate, gains or losses on sales of certain real estate assets,
impairment write-downs of real estate assets, discontinued operations, income
taxes related to sales of certain real estate assets, and the cumulative effect
of changes in accounting principles, plus similar adjustments for unconsolidated
joint ventures. Adjustments for unconsolidated joint ventures are calculated to
reflect our pro rata share of the FFO of those entities on the same basis. Since
real estate values historically have risen or fallen with market conditions,
many industry investors have considered presentation of operating results for
real estate companies that use historical cost accounting to be insufficient by
themselves. For these reasons, Nareit adopted the FFO metric in order to promote
an industry wide measure of REIT operating performance. We believe Nareit FFO
provides useful information to investors regarding our operating performance and
can facilitate comparisons of operating performance between periods and between
REITs.
We also present Adjusted FFO attributable to common stockholders when
evaluating our performance because we believe that the exclusion of certain
additional items described below provides useful supplemental information to
investors regarding our ongoing operating performance. Management historically
has made the adjustments detailed below in evaluating our performance and in our
annual budget process. We believe that the presentation of Adjusted FFO provides
useful supplemental information that is beneficial to an investor's complete
understanding of our operating performance. We adjust Nareit FFO attributable to
common stockholders for the following items, and refer to this measure as
Adjusted FFO attributable to common stockholders: transaction expense associated
with the potential disposition of or acquisition of real estate or businesses;
severance expense; share-based compensation expense; litigation gains and losses
outside the ordinary course of business; amortization of debt issuance costs;
reorganization costs and separation transaction expenses; loss on early
extinguishment of debt; straight-line ground lease expense;
34
--------------------------------------------------------------------------------casualty losses; deferred tax expense; and other items that we believe are not representative of our current or future operating performance.
Nareit FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Nareit FFO is not an indication of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to fund dividends. Nareit FFO is also not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining Nareit FFO. Investors are cautioned that we may not recover any impairment charges in the future. Accordingly, Nareit FFO should be reviewed in connection with GAAP measurements. We believe our presentation of Nareit FFO is in accordance with the Nareit definition; however, our Nareit FFO may not be comparable to amounts calculated by other REITs. The following table provides a reconciliation of net income (loss) to Nareit FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for the three and nine months endedSeptember 30, 2021 and 2020 (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income (loss) $ 17$ (8) $ 14$ (136) Depreciation and amortization 33 39 108 121 Gain on sales of real estate (29) (27) (81) (59) Gain on casualty - (4) (3) (7) Impairment loss 4 - 4 54 Nareit defined FFO attributable to common stockholders 25 - 42 (27) Equity-based compensation expense 2 3 7 8 Non-cash income tax benefit - (3) - (2) Amortization expense of debt issuance costs 1 1 1 7 Income from lease modification (1) - (1) - Strategic alternatives exploration expenses 1 - 1 - Income from terminated hotel sale contracts - (1) - (1) Other, net 1 - (1) 1 Adjusted FFO attributable to common stockholders $ 29 $ - $ 49$ (14) Weighted average number of shares outstanding, diluted 61.3 56.7 61.0 56.6 Additional information: •Other, net represents additional income and expenses that are not representative of our current or future operating performance, which are individually less significant. For the three and nine months endedSeptember 30, 2021 , other, net includes$1 million and$2 million of business interruption insurance proceeds, respectively. For the three and nine months endedSeptember 30, 2020 , other, net includes$2 million and$4 million of business interruption insurance proceeds, respectively. •Weighted average number of shares outstanding, diluted presented above may differ from weighted average number of shares outstanding, diluted presented for GAAP purposes when there is a net loss and all potentially dilutive securities are anti-dilutive. There are no dilutive securities for purposes of calculating net loss or negative FFO. The increases in each of our non-GAAP performance measures is primarily due to the 2021 improvements from the 2020 COVID-19 pandemic disruptions. Our operations are also benefiting from increased rental rates while maintaining approximately the same variable occupancy expenses. The 2021 increase in our operations is partially offset by the impact from the sale of hotels. As ofSeptember 30, 2021 we owned 160 hotels, compared to 220 hotels owned as ofSeptember 30, 2020 . FFO and Adjusted FFO also improved from our use of proceeds to reduce total outstanding debt and consequently, less interest expense. For the nine months endedSeptember 30, 2021 , interest expense was$15 million less than the comparable period in 2020. See further discussion below regarding operating activity, debt repayments and property sales. 35 --------------------------------------------------------------------------------
Operational Overview
The following discussion provides an overview of our operations and transactions for the nine months endedSeptember 30, 2021 and should be read in conjunction with the full discussion of our operating results, liquidity, capital resources and risk factors included elsewhere in this Quarterly Report on Form 10-Q. During the nine months endedSeptember 30, 2021 , we reported net income of$14 million as compared to net loss of$136 million for the same period in 2020. The increase was primarily due to$50 million more impairment losses recorded in the nine months endedSeptember 30, 2020 as compared to the same period in 2021. Gain on sales of real estate increased$22 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. We sold 49 hotels sold in the nine months endedSeptember 30, 2021 as compared to 50 hotels for the nine months endedSeptember 30, 2020 . In addition, ourHotel Adjusted EBITDAre for the nine months endedSeptember 30, 2021 improved$61 million over the same period in 2020 (see details in the tables below). Offsetting these increases were revenue decreases due to execution of our non-core disposition program. As ofDecember 31, 2019 , we identified 166 hotels as non-core with the intent to dispose of these hotels generally by the end of 2022. As ofSeptember 30, 2021 , we have sold or disposed of 111 of these non-core hotels. These sold or disposed properties contributed$5 million in revenue for the three months endedSeptember 30, 2021 as compared to$26 million in revenue for the three months endedSeptember 30, 2020 . These sold or disposed properties contributed$39 million in revenue for the nine months endedSeptember 30, 2021 as compared to$84 million in revenue for the nine months endedSeptember 30, 2020 .
As of
The following table provides additional information aboutComparable Hotels and non-comparable hotels for the three and nine months endedSeptember 30, 2021 and 2020 (in millions): Comparable Hotels (1) Non-comparable Hotels Total Three Months Ended September 30, Three Months Ended September 30, Three Months Ended
September 30,
2021 2020 2021 2020 2021 2020
Total Revenues $ 137 $ 81 $ 5 $ 26 $ 142 $ 107
Property-level expenses (98) (71) (4) (24) (102) (95)
Hotel Adjusted EBITDAre $ 39 $ 10 $ 1 $ 2 $ 40 $ 12
Comparable Hotels (1) Non-comparable Hotels Total
Nine Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020
Total Revenues $ 338 $ 241 $ 39 $ 84 $ 377 $ 325
Property-level expenses (260) (221) (34) (82) (294) (303)
Hotel Adjusted EBITDAre $ 78 $ 20 $ 5 $ 2 $ 83 $ 22
_____________
(1) Comparable Hotels includes the 160 hotels in our portfolio as of
September 30, 2021 . During the nine months ended September 30, 2021 , we sold 49
hotels, and during the year ended December 31, 2020 , we sold or disposed of 62
hotels.
Results of Operations
Three months ended
Revenues
Room revenues for the three months endedSeptember 30, 2021 were$139 million as compared to$105 million for the three months endedSeptember 30, 2020 , an increase of$34 million or 32.4%. The increase was primarily driven by 71.4% higher RevPAR at ourComparable Hotels for the three months endedSeptember 30, 2021 as compared to the prior year period. The increase in RevPAR was driven primarily by a 40.0% increase in ADR and an increase in occupancy of 1,170 basis points. This increase is primarily due to increased demand in 2021 allowing for higher rates as compared to the COVID-19 pandemic impacted 2020 demand, particularly for business and weekday travelers. We have experienced strong demand and room rental rates for weekends and for most of the summer, we exceeded RevPAR as compared to 2019 levels. We continue to experience increased demand for our hotels located 36 --------------------------------------------------------------------------------
in sunbelt states, particularly
These increases were partially offset by a decline in revenues due to the sales of our non-core hotels. During the nine months endedSeptember 30, 2021 , we sold 49 hotels. During the year endedDecember 31, 2020 , we sold or disposed of 62 hotels. These 111 previously sold or disposed properties contributed$5 million in revenue for the three months endedSeptember 30, 2021 as compared to$26 million of revenue in the three months endedSeptember 30, 2020 , a decrease of$21 million .
The following table summarizes our key operating statistics for our
Three Months Ended September 30,
2021 2020
Occupancy 63.3 % 51.6 %
ADR $ 104.93 $ 74.97
RevPAR $ 66.38 $ 38.72
RevPAR growth is more the result of higher ADR than occupancy improvements. This
is primarily due to the ability to increase rates for leisure travelers. The
effect was also greater during the 2021 summer months and is not as pronounced
during earlier periods of 2021.
Expenses
Rooms expense was$58 million for the three months endedSeptember 30, 2021 as compared to$52 million for the three months endedSeptember 30, 2020 , an increase of$6 million or 11.5%. This percentage increase was substantially less than the revenue increase of 32% due to the larger impact on revenue from ADR, rather than occupancy, which would have the effect of decreasing the required operating costs for rooms for the given revenue level. The increase in rooms expenses was also a result of the 2020 cost containment measures which were put in place in response to the COVID-19 pandemic, which are gradually being reduced in 2021. These costs primarily related to housekeeping labor, suspension of buffet-style breakfast and consumable supplies, where we manage the expenses based on overall traveler demand and guest expectations. This increase is partially offset by fewer operating hotels in the hotel portfolio in 2021 as compared to 2020. We may incur additional costs in future periods, such as staff re-hiring costs, full resumption of buffet-style breakfasts, cleaning costs and additional hygiene costs due to increased occupancy, increased operating requirements or other factors. Labor costs may also be affected by supply constraints and wage pressures. Such increases could be temporarily higher than our increases in revenue for certain periods. Property tax, insurance and other was$10 million for the three months endedSeptember 30, 2021 as compared to$14 million for the three months endedSeptember 30, 2020 , a decrease of$4 million . The decrease was primarily due to fewer hotels in the portfolio and lower COVID-19 related property tax valuations for certain of our properties in the current and prior years. Management and royalty fees were$14 million for the three months endedSeptember 30, 2021 as compared to$11 million for the three months endedSeptember 30, 2020 , an increase of$3 million , due to increased revenue. Our management fees are computed as 5% of total gross revenue and royalty fees are computed as 5% of total gross room revenues. Corporate general and administrative expenses were$10 million for the three months endedSeptember 30, 2021 as compared to$7 million for the three months endedSeptember 30, 2020 , an increase of$3 million , primarily due to increased salary and bonus expense, performance-based stock compensation expenses and expenses related to our exploration of strategic alternatives including professional costs and staff retention. Depreciation and amortization expenses were$33 million for the three months endedSeptember 30, 2021 as compared to$39 million for the three months endedSeptember 30, 2020 , a decrease of$6 million . The decrease was primarily due to fewer hotels and the effects of prior year impairment cost basis adjustments. Gain on sales of real estate was$29 million for the three months endedSeptember 30, 2021 as a result of the sale of 15 properties. We had$27 million of gain on sales of real estate for the three months endedSeptember 30, 2020 , as the result of the sale of 20 properties. 37 -------------------------------------------------------------------------------- We had impairment loss of$4 million for the three months endedSeptember 30, 2021 as a result of a change in expected holding period for one of our hotel properties related to a ground lease. We had no impairment loss for the three months endedSeptember 30, 2020 . Interest expense was$6 million for the three months endedSeptember 30, 2021 as compared to$9 million for the three months endedSeptember 30, 2020 , a decrease of$3 million . The decrease was primarily due to lower borrowings due to the repayment of outstanding principal, primarily in connection with hotel sales. The interest rate and the amount outstanding on our CMBS Facility was 3.12% and$477 million , respectively, as ofSeptember 30, 2021 , compared to 2.94% and$767 million , respectively, as ofSeptember 30, 2020 . The interest rate and the amount outstanding on our Revolving Facility was 6.13% and$60 million , respectively, as ofSeptember 30, 2021 , compared to 5.15% and$100 million , respectively, as ofSeptember 30, 2020 .
Nine months ended
Revenues
Room revenues for the nine months endedSeptember 30, 2021 were$369 million as compared to$318 million for the nine months endedSeptember 30, 2020 , an increase of$51 million or 16.0%. The increase was primarily driven by 42.1% higher RevPAR at ourComparable Hotels for the nine months endedSeptember 30, 2021 as compared to the prior year period. The increase in RevPAR was driven primarily by a 12.2% increase in ADR and an increase in occupancy of 1,260 basis points, a more balanced proportion of occupancy and rate increases as compared to what was experienced in the third quarter of 2021 on a standalone basis. This increase is primarily as a result of increased demand in 2021 as compared to the COVID-19 pandemic impacted 2020 demand, particularly for leisure weekend travelers. We continue to experience increased demand for our hotels located in sunbelt states, particularlyFlorida ,Texas andSouthern California . Business and weekday traveler RevPAR continues to have slower improvement compared to pre-pandemic levels, which is reflective of work from home, fewer conventions and group activity. This increase was partially offset by a decline in revenues due to the sales of our non-core hotels. During the nine months endedSeptember 30, 2021 , we sold 49 hotels. We sold or disposed of 62 hotels in 2020. These 111 sold or disposed properties contributed$39 million in revenue for the nine months endedSeptember 30, 2021 , as compared to$84 million for the nine months endedSeptember 30, 2020 , a decrease of$45 million . The following table summarizes our key operating statistics for ourComparable Hotels for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, 2021 2020 Occupancy 59.7 % 47.1 % ADR$ 92.30 $ 82.26 RevPAR$ 55.08 $ 38.77 As noted above, the Comparable Hotel operating statistics for the nine months endedSeptember 30, 2021 reflect a more even balance between growth of occupancy and ADR, than what was achieved during the third quarter of 2021 on a standalone basis. Operating expenses Rooms expense was$161 million for the nine months endedSeptember 30, 2021 as compared to$171 million for the nine months endedSeptember 30, 2020 , a decrease of$10 million or 5.8%. The decrease was primarily a result of fewer operating hotels in the hotel portfolio in 2021 as compared to 2020 and cost containment measures put in place as a result of the COVID-19 pandemic. As the cost containment measures are gradually being reduced in 2021, the variable portion of room expenses is more in line with the increased revenues for the comparable periods of 2021 and 2020. These costs primarily relate to housekeeping labor, and consumable supplies. We may incur additional costs in future periods, such as staff re-hiring costs, cleaning costs, and additional hygiene costs due to increased occupancy, increased operating requirements or other factors. Such increases could be disproportionate to our increases in revenue. Property tax, insurance and other was$37 million for the nine months endedSeptember 30, 2021 as compared to$45 million for the nine months endedSeptember 30, 2020 , a decrease of$8 million . The decrease was primarily due to fewer hotels in the portfolio and lower COVID-19 related property tax valuations for certain of our properties in the current and prior years. Management and royalty fees were$37 million for the nine months endedSeptember 30, 2021 as compared to$32 million for the nine months endedSeptember 30, 2020 , an increase of$5 million due to increased revenue. Our management fees are computed as 5% of total gross revenue and royalty fees are computed as 5% of total gross rooms revenues. 38 -------------------------------------------------------------------------------- Corporate general and administrative expenses were$24 million for the nine months endedSeptember 30, 2021 as compared to$21 million for the nine months endedSeptember 30, 2020 , an increase of$3 million , primarily due to increased salary and bonus expense, performance-based stock compensation expenses and expenses related to our exploration of strategic alternatives including professional costs and staff retention. Depreciation and amortization expenses were$108 million for the nine months endedSeptember 30, 2021 as compared to$121 million for the nine months endedSeptember 30, 2020 , a decrease of$13 million . The decrease was primarily due to fewer hotels and the effects of prior year impairment cost basis adjustments. Gain on sales of real estate was$81 million for the nine months endedSeptember 30, 2021 as a result of the sale of 49 hotels. We had gain on sales of real estate of$59 million for the nine months endedSeptember 30, 2020 as the result of the sale of 50 properties. We had$4 million in impairment loss for the nine months endedSeptember 30, 2021 as a result of a change in expected holding period for one of our hotel properties related to a ground lease. Impairment loss was$54 million for the nine months endedSeptember 30, 2020 primarily due to lower valuation of certain of our properties related to the impact of the COVID-19 pandemic on the lodging industry. Interest expense was$20 million for the nine months endedSeptember 30, 2021 as compared to$35 million for the nine months endedSeptember 30, 2020 , a decrease of$15 million . The decrease was primarily due to lower borrowings due to the repayment of outstanding principal, primarily in connection with hotel sales. The interest rate and the amount outstanding on our CMBS Facility was 3.12% and$477 million , respectively, as ofSeptember 30, 2021 , compared to 2.94% and$767 million , respectively, as ofSeptember 30, 2020 . The interest rate and the amount outstanding on our Revolving Facility was 6.13% and$60 million , respectively, as ofSeptember 30, 2021 , compared to 5.15% and$100 million , respectively, as ofSeptember 30, 2020 .
Cash Flow Analysis
Nine months ended
Net cash provided by operating activities was$69 million for the nine months endedSeptember 30, 2021 , as compared to net cash used in operating activities of$21 million for the nine months endedSeptember 30, 2020 , an increase of$90 million . The increase was generally consistent with the increase inHotel Adjusted EBITDAre of$61 million , explained above, and interest expense reductions of$15 million due to the debt repayments from the proceeds from the sales of real estate. Investing activities Net cash provided by investing activities during the nine months endedSeptember 30, 2021 was$244 million , as compared to$188 million for the nine months endedSeptember 30, 2020 . The$56 million increase in net cash provided by investing activities was primarily attributable to a$53 million increase in proceeds from the sales of real estate and a$5 million decrease in capital expenditures. Due to the COVID-19 pandemic, we have reduced or deferred certain discretionary capital expenditures. We may incur higher levels of capital expenditures in future periods.
Financing activities
Net cash used in financing activities during the nine months endedSeptember 30, 2021 was$282 million as compared to$87 million during the nine months endedSeptember 30, 2020 . The$195 million increase in net cash used in financing activities was primarily due to the 2021 debt repayment of$273 million as compared to the 2020 repayments of debt, net of proceeds from debt, of$54 million . Debt repayments were primarily driven from use of proceeds from sales of real estate and required contractual repayments. We also had cash dividends paid on common stock of$22 million during the nine months endedSeptember 30, 2020 and no cash dividends paid on common stock during the nine months endedSeptember 30, 2021 . We have suspended our common stock dividend for the near term. Our debt repayments primarily relate to the use of real estate sale proceeds to partially retire our CMBS Facility debt, as well as repayments on the Revolving Facility. To the extent we continue disposing of real estate assets as a part of our property strategy review, we expect debt repayments to be a significant use of cash flow in financing activities. To the extent we generate certain excess liquidity, as defined in the Revolver Credit Agreement, we are required to make additional principal payments up to$5 million during the fourth quarter of 2021. 39 -------------------------------------------------------------------------------- Liquidity and Capital Resources Short-term liquidity As ofSeptember 30, 2021 , we had total cash and cash equivalents of$174 million , which is our current primary source of liquidity. Our known liquidity requirements primarily consist of funds necessary to pay for operating expenses associated with our hotels and other expenditures, including corporate expenses, legal costs, interest and scheduled principal payments on our outstanding indebtedness, capital expenditures for renovations and maintenance at our hotels and other purchase commitments, primarily related to prior years' storm and other casualty damages. We have no borrowing availability under our Revolving Facility and require consent from the Revolving Facility lenders to incur certain other indebtedness. Our CMBS Facility currently requires that all proceeds from hotel sales are applied to principal repayments. Accordingly, hotel sales are not expected to be a significant source of liquidity in the near term. For the nine months endedSeptember 30, 2021 , we reported$69 million of net cash provided by operating activities and our cash and cash equivalents increased by$31 million . The increase was primarily due to improved operations in the second and third quarter of 2021. With the increased operating cash flow, we have been able to fund our Revolving Facility principal payments since inception of$50 million and still increase cash and cash equivalents. An additional$5 million principal payment was made inOctober 2021 , as our liquidity (as defined in the Revolver Credit Agreement) exceeded$100 million . Not included in our cash and cash equivalents is$45 million of lender escrows. These escrows are primarily held in reserve for future capital expenditures, as discussed below, hotel operations, insurance claim repairs and collateralized issued letters of credit. To the extent these escrows are not used for such purposes, we would expect the lender escrows to be returned to the Company as cash at the final maturity of the CMBS Facility. As ofSeptember 30, 2021 , we are subject to a cash trap on both our Revolving Facility and our CMBS Facility. Each of the cash traps impose restrictions on our use of cash, which, so long as there is no continuing event of default, generally allow for payment of our hotel operating expenses. Certain disbursements, primarily other corporate general and administrative expenditures, dividends to common stockholders and repurchases of our common stock, would require consent of our lenders. As ofSeptember 30, 2021 , the cash and cash equivalents subject to these cash traps was$94 million . In the second quarter of 2021 we began to generate surplus operating cash from the hotels, where such surplus liquidity is controlled by our lenders for the disbursements noted above. Most uses of that cash for corporate purposes or payments to stockholders require lender consents. We expect to be subject to these cash traps through 2021. With the maturity of the Revolving Facility inMay 2022 and continued similar operating trends through early 2022, we may be released from all lender cash traps during the second quarter of 2022. However, until such time, which cannot be assured, our cash balances and the source of those balances, including amounts subject to the cash traps, represent the critical determinant of our short term liquidity. As ofSeptember 30, 2021 , the Revolving Facility requires that we maintain a minimum liquidity of$67.5 million of cash and cash equivalents, as defined thereunder, at all times. The minimum liquidity amount is reduced by 50% of any additional repayment amounts utilized to repay and reduce commitments under the Revolving Facility. We believe our cash will be adequate to meet anticipated requirements for operating expenses, debt service and other expenditures, including corporate expenses, payroll and related benefits, dividends to preferred stockholders, legal costs, and purchase commitments under existing operating conditions for the foreseeable future. To the extent that our hotel operations required additional liquidity, we would consider contributing additional funds into the cash traps. Our CMBS Facility matures inJune 2022 with three one-year extension options remaining. We currently intend to refinance the CMBS Facility before its maturity or extend the maturity for an additional year. Our Revolving Facility matures inMay 2022 with no extension options contractually available. We currently intend to retire the Revolving Facility with cash on hand or from refinancing proceeds. Any future refinancing will be dependent on the current status of the capital markets, the economy and the economic recovery, particularly in the lodging industry, related to the COVID-19 pandemic. As we execute our disposition strategy, we expect to utilize a significant portion of the net sales proceeds to retire our CMBS Facility. Accordingly, the disposition strategy may reduce our outstanding debt, and the related interest expense, but may not be a significant source of immediate liquidity. However, as we reduce our total outstanding debt, we may reduce our interest expense and improve our ability to obtain other capital sources.Hotel Sales In the execution of our disposition strategy, during the nine months endedSeptember 30, 2021 , we sold 49 hotels for gross sales consideration of$281 million . These properties produced approximately$20 million of annualHotel Adjusted EBITDAre in 40 --------------------------------------------------------------------------------
2019; however, these sold hotels also incurred approximately
The provisions of our CMBS Facility require that a portion of, and in certain instances all, net proceeds from a secured hotel sale be applied to the outstanding principal balance. Due to disruptions from the COVID-19 pandemic, currently all sales proceeds are required to be applied to pay down debt and accordingly, net sales proceeds will not be a near term source of liquidity. However, as the principal balance is reduced and other factors change over time, particularly if operations improve or lower EBITDA earning hotels are sold, other uses of net disposition proceeds may be available to us. Further, any remaining net sales proceeds after any applicable debt paydowns are currently subject to our lender cash traps. As ofSeptember 30, 2021 , we have 55 remaining non-core hotels. These hotels are older, have lower RevPAR and have higher capital expenditures. We anticipate we will complete the sale of these properties by the end of 2022. The volume and timing of future hotel sales activity could be dependent on the participation by lenders and continuation of these incentive programs as well as the timing, scope and success of vaccine deployments. We believe the completion of our disposition strategy will reposition our hotel portfolio to be more focused on our key markets with younger hotels, higher RevPAR and less capital requirements. However, as we dispose of the non-core hotels we would expect to report decreased revenue andHotel Adjusted EBITDAre .
Capital Expenditures and Commitments
Our capital expenditures are generally paid using cash on hand and, to the extent available, cash flows from operations, although other sources discussed herein may also be used. During the nine months endedSeptember 30, 2021 , we invested$13 million in hotel related capital expenditures. During the nine months endedSeptember 30, 2020 , we invested$18 million in capital expenditures. Capital expenditures for the year endedDecember 31, 2019 , related to the 49 hotels sold during the nine months endedSeptember 30, 2021 , were$7 million . As ofSeptember 30, 2021 , we had outstanding commitments under capital expenditure and other contracts of$12 million related to certain continuing redevelopment and renovation projects, casualty replacements, information technology enhancements and other hotel service contracts in the ordinary course of business. Approximately$8 million of this amount relates to long-term hotel service contracts payable over approximately three years. As the services related to these contracts are standard for our hotel operations, we expect to continue these service contracts either with the current provider or a new provider at the end of the term; however, if cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract. Due to the impact of the COVID-19 pandemic, we are currently deferring all non-committed, non-essential capital investments and expenditures, with the exception of life safety or critical operational needs, resulting in an expected annual capital spend estimate of$15 million to$20 million . As a result of deferring certain of these capital expenditures as a result of the pandemic, we may incur higher levels of capital expenditures in future periods. Should operations improve and provide additional liquidity, we expect to prioritize certain of these deferred capital expenditures as well as consider revenue enhancing improvements. Accordingly, such capital expenditures may begin to increase over time and could include a mixture of expenditures to preserve existing revenue as well as to generate incrementally new revenues. Our ability to fund those capital expenditures will be dependent on cash flow from operations and other sources discussed. Until post COVID-19 pandemic operations have stabilized, there is no assurance those funding sources will be available or of sufficient size when needed. Long-term Liquidity As ofSeptember 30, 2021 , we had cash and cash equivalents of$174 million and no borrowing availability under our Revolving Facility. We do not expect to have any additional borrowing capacity under our Revolving Facility for the remainder of the Revolving Facility term. As discussed above, our loan agreements require that we maintain minimum liquidity requirements and subject us to lender cash traps. Due to the disruptions to our operations from the COVID-19 pandemic and the contractual lender requirements related to these lender provisions, we are uncertain when or if these provisions will be removed prior to the full maturity of each of these debts. Maintaining minimum cash amounts and being subject to cash traps and potential excess liquidity principal payments will restrict our access to portions of our cash on hand and affect our long-term liquidity, even if our operations improve in the future. Accordingly, these lender provisions may impair our access to liquidity for new investments, stockholder payments and other corporate initiatives. We will seek to amend or refinance these debts prior to their maturity, but there is no assurance such refinancings are available to us or on favorable terms. The Revolving Facility matures inMay 2022 with no extension options. We intend to fund the repayment of the outstanding principal from existing cash and cash equivalents or proceeds from refinancing. 41 -------------------------------------------------------------------------------- The CMBS Facility matures inJune 2022 with three remaining one-year extension options. As ofSeptember 30, 2021 , the outstanding principal balance on the CMBS Facility is$477 million , a reduction of$558 million from the initial aggregate principal amount of this debt, due primarily to proceeds from hotel sales. As discussed above, we expect that future hotel sales will also be applied to reduce the outstanding principal balance. Accordingly, we may refinance the existing CMBS Facility prior to the next scheduled maturity if favorable terms are available. Otherwise, we would expect to exercise our extension option. The Series A Preferred Stock has a mandatory redemption repayment of$15 million by 2028, with elective redemption by us beginning in 2025. Due to exceeding a leverage ratio of 7.5 to 1.0, the Series A Preferred Stock dividend rate was set at 15% per annum, beginningJuly 1, 2020 , an increase from the previous dividend rate of 13%. Beginning onOctober 1, 2021 , our leverage ratio was less than the 7.5 to 1.0 ratio, and accordingly, the Series A Preferred Stock dividend rate will return to 13% per annum for the fourth quarter of 2021. Other than the daily liquidity requirement under our Revolving Facility, the Revolving Facility, CMBS Facility and Series A Preferred Stock do not have financial covenant requirements that would provide rights for the holders to demand payment of the outstanding amounts due to covenant or financial metric requirements. However, as discussed above, failure to meet certain financial metric requirements have resulted in cash traps, an increased dividend rate and increased amounts of hotel sales proceeds to be used to pay down outstanding debt. The Revolving Facility and CMBS Facility each uses London Interbank Offering Rate ("LIBOR") as a benchmark for establishing the interest rate. As a result of reference rate reform, the LIBOR index for new contracts will cease as ofDecember 31, 2021 and the LIBOR index will no longer be published afterJune 30, 2023 . Our Revolving Facility and CMBS Facility provide for alternate interest rate calculations, which could be implemented prior toJune 30, 2023 . There is no assurance that such alternative interest rate calculations will not increase our cost of borrowing under the Revolving Facility and CMBS Facility or their refinanced debt. We may also access other debt and equity capital sources, which may include refinancing of the CMBS Facility. However, due to restrictions from the Revolving Facility, our access to such sources may require us to fully retire and terminate the Revolving Facility. Further, due to operating disruptions from the COVID-19 pandemic, such capital sources may require significant cash reserves. Accordingly, there is no assurance that such capital sources would be available to us or that net proceeds available would be sufficient to retire the Revolving Facility or provide significant net liquidity to us. Dividends and Share Repurchases Dividends are authorized at the discretion of our board of directors based on an analysis of our prior performance, market distribution rates of our industry peer group, our desire to minimize our income tax liability, expectations of performance for future periods, including actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, dispositions, general financial condition and other factors that our board of directors deems relevant. The board's decision will be influenced, in part, by its obligation to ensure that we maintain our status as a REIT. To date, income tax capital gains have not been a significant factor in our taxable income. However, as we execute our disposition strategy, we may recognize increased capital gains, which may result in additional regular or special distributions. Such distributions are not required in order to maintain REIT status and are at the discretion of our board of directors. Our Revolver Credit Agreement restricts our ability to pay cash dividends on our common stock, except in circumstances when such dividends are required to maintain our REIT tax status. OnMarch 21, 2019 , our board of directors authorized a$50 million share repurchase program. Due to restrictions imposed by the covenants governing our indebtedness, our share repurchase program has been temporarily suspended and no share repurchases have been made under the program sinceSeptember 2019 . As ofSeptember 30, 2021 , approximately$21 million remained available for share repurchases under the program authorized by our board of directors. Off-balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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--------------------------------------------------------------------------------New Accounting Pronouncements
See Note 2 "Significant Accounting Policies and Recently Issued Accounting Standards" to our condensed consolidated financial statements included elsewhere in this report for a description of recently adopted accounting pronouncements. Critical Accounting Policies and Estimates The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the condensed consolidated financial statements and accompanying footnotes. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K describes the critical accounting estimates used in preparation of our condensed consolidated financial statements. There have been no material changes to our significant accounting policies or other new significant estimates that are considered material to our condensed consolidated financial statements as compared to the critical accounting policies and estimates as described in our Annual Report on Form 10-K.
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