WATERMARK LODGING TRUST, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management's Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2020 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Business Overview We are a self-managed, publicly owned, non-traded REIT that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties inthe United States . We own a diversified lodging portfolio, including full-service, select-service and resort hotels. Our 2021 results of operations were significantly affected by the COVID-19 pandemic, as discussed further below. Our results of operations are significantly impacted by seasonality and by hotel renovations. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations. As ofMarch 31, 2021 , we held ownership interests in 31 hotels, with a total of 9,612 rooms.
Significant Developments
COVID-19 Pandemic
The COVID-19 pandemic has had a material adverse effect on our business, results of operations, financial condition and cash flows and will continue to do so for the reasonably foreseeable future. As ofMay 12, 2021 , all of our hotels are open but the majority are operating at significantly reduced levels of occupancy, staffing and expenses. While we have seen improving demand at some of our properties as government-imposed restrictions and limitations on travel and large gatherings have loosened and as the vaccine has become more widely available, we expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. Given the uncertainty as to the ultimate severity and duration of the COVID19 outbreak and its effects, and the potential for its recurrence, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.
We have taken decisive actions to help mitigate the effects of the COVID-19 pandemic on our operating results and to preserve our liquidity at both the operating level and corporate level, including:
•Completing the July Capital Raise transaction, as discussed above; •Significantly reducing hotel operating costs while demand remained low; •Working with our lenders on debt forbearance plans, as discussed below; •Suspending distributions on, and redemptions of, our common stock, subject to limited exceptions; •Actively pursuing certain asset sales; •Significantly reducing our planned renovation activity by either canceling or deferring this activity to future periods, other than completing projects that are near completion; •Funding expenses using existing reserve accounts and temporarily suspending required contributions to reserves to the extent permitted by our lenders; and •Reducing a portion of the cash compensation paid to our senior management and the Board of Directors in 2020. We have worked with our lenders on debt forbearance plans and sought relief to defer interest and principal payments and temporarily waive the application of certain cash flow covenants. As of the date of this Report, we have executed loan modifications on 24 of our 29Consolidated Hotel mortgage loans. In addition, we refinanced or extended the maturity date of eight mortgage loans to address loans with near-term mortgage maturities. WLT3/31/2021 10-Q - 25 --------------------------------------------------------------------------------
Financial and Operating Highlights
(Dollars in thousands, except average daily rate ("ADR") and revenue per
available room ("RevPAR"))
Three Months Ended March 31,
2021 2020
Hotel revenues $ 96,273 $ 114,978
Net loss attributable to Common Stockholders (75,567) (170,005)
Cash distributions paid - 20,357
Net cash used in operating activities (29,523) (9,951)
Net cash used in investing activities (4,198)
(8,566)
Net cash used in financing activities (6,438)
(15,072)
Supplemental Financial Measures: (a) FFO attributable to Common Stockholders (43,168)
(9,891)
MFFO attributable to Common Stockholders (33,733)
(5,874)
Consolidated Hotel Operating Statistics Occupancy 30.7 % 55.7 % ADR$ 244.95 $ 243.59 RevPAR 75.26 133.65 ___________ (a)We consider funds from operations ("FFO") and MFFO, which are supplemental measures that are not defined by GAAP ("non-GAAP measures"), to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures. The comparison of our results year over year is influenced by both the number and size of the hotels consolidated in each of the respective years. As ofMarch 31, 2021 and 2020 we owned 29 and 20Consolidated Hotels , respectively. WLT 3/31/2021 10-Q - 26 --------------------------------------------------------------------------------
Portfolio Overview
The following table sets forth certain information for each of our
Number
Hotels State of Rooms % Owned Hotel Type
Consolidated Hotels
Charlotte Marriott City Center NC 446 100% Full-Service
Courtyard Nashville Downtown TN 192 100% Select-Service
Courtyard Pittsburgh Shadyside PA 132 100% Select-service
Courtyard Times Square West NY 224 100% Select-service
CO 403 100% Full-Service
Equinox, a Luxury Collection Golf Resort & Spa VT 199 100% Resort
Fairmont Sonoma Mission Inn & Spa CA 226 100% Resort
Hawks Cay Resort (a) FL 417 100% Resort
Hilton Garden Inn/Homewood Suites Atlanta Midtown GA 228 100% Select-service
Holiday Inn Manhattan 6th Avenue Chelsea NY 226 100% Full-service
Hyatt Place Austin Downtown TX 296 100% Select-service
Le Méridien Arlington VA 154 100% Full-Service
Le Méridien Dallas, The Stoneleigh TX 176 100% Full-service
Marriott Kansas City Country Club Plaza MO 295 100% Full-service
Marriott Raleigh City Center NC 401 100% Full-service
Marriott Sawgrass Golf Resort & Spa FL 514 100% Resort
Renaissance Atlanta Midtown Hotel GA 304 100% Full-Service
Renaissance Chicago Downtown IL 560 100% Full-service
Ritz-Carlton Bacara, Santa Barbara CA 358 100% Resort
Ritz-Carlton Fort Lauderdale (b) FL 198 70% Resort
Ritz-Carlton Key Biscayne (c) FL 443 66.7% Resort
Ritz-Carlton San Francisco CA 336 100% Full-Service
Sanderling Resort NC 128 100% Resort
San Diego Marriott La Jolla CA 376 100% Full-Service
San Jose Marriott CA 510 100% Full-Service
Seattle Marriott Bellevue WA 384 100% Full-Service
Sheraton Austin Hotel at the Capitol TX 367 80% Full-Service
Westin Minneapolis MN 214 100% Full-Service
Westin Pasadena CA 350 100% Full-Service
9,057
Unconsolidated Hotels
Hyatt Centric New Orleans French Quarter (d) LA 254 80% Full-service
Ritz-Carlton Philadelphia PA 301 60% Full-service
555
_________
(a)Includes 240 privately owned villas that participate in the villa/condo
rental program as of March 31, 2021 .
(b)Includes 32 condo-hotel units that participate in the villa/condo rental
program as of March 31, 2021 .
(c)Includes 141 condo-hotel units that participate in the resort rental program
as of March 31, 2021 .
(d)On April 6, 2021 , we acquired the remaining 20% interest in the Hyatt Centric
French Quarter Venture from an unaffiliated third party, bringing our ownership
interest to 100% ( Note 14 ).
WLT 3/31/2021 10-Q - 27--------------------------------------------------------------------------------
Results of Operations
We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing the value in our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net (loss) income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation. In addition, we use other information that may not be financial in nature, including statistical information, to evaluate the operating performance of our business, including occupancy rate, ADR and RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy rate, is an important statistic for monitoring operating performance at our hotels. Our occupancy rate, ADR and RevPAR performance may be impacted by macroeconomic factors such asU.S. economic conditions, regional and local employment growth, personal income and corporate earnings, business relocation decisions, business and leisure travel, new hotel construction and the pricing strategies of competitors. The results of operations for the three months endedMarch 31, 2021 will not be comparable to the same period in 2020 as a result of the impact of the COVID-19 pandemic and the Merger. Beginning inMarch 2020 , we experienced a significant decline in occupancy and RevPAR. The economic downturn and restrictions on travel resulting from the COVID-19 pandemic has significantly impacted our business and the overall lodging industry. As discussed above, certain of our hotel properties temporarily suspended all operations and our other hotel properties had operated, and continue to operate, in a limited capacity. Additionally, as a result of the Merger, the historical financial information included herein as of any date, or for any periods, prior toApril 13, 2020 , represents the pre-merger financial information of CWI 1 on a stand-alone basis, therefore comparisons of the period to period financial information of WLT as set forth herein may not be meaningful. The following table presents our comparative results of operations (in thousands): Three Months Ended March 31, 2021 2020 Change Hotel Revenues$ 96,273 $ 114,978 $ (18,705) Hotel Operating Expenses 126,186 120,710 5,476 Corporate general and administrative expenses 7,257 3,589 3,668 Gain on property-related insurance claims (1,166) - (1,166) Impairment charges - 120,220 (120,220) Asset management fees to affiliate - 3,316 (3,316) Transaction costs - 1,809 (1,809) Total Expenses 132,277 249,644 (117,367) Operating Loss (36,004) (134,666) 98,662 Interest expense (42,383) (14,429) (27,954) Equity in losses of equity method investments in real estate, net (3,920) (23,393) 19,473 Other income (expense) 77 (20) 97 Loss Before Income Taxes (82,230) (172,508) 90,278 (Provision for) benefit from income taxes (125) 3,363 (3,488) Net Loss (82,355) (169,145) 86,790 Loss (income) attributable to noncontrolling interests 6,788 (860) 7,648 Net Loss Attributable to the Common Stockholders (75,567) (170,005) 94,438 Supplemental Financial Measure:(a) MFFO Attributable to Common Stockholders$ (33,733) $
(5,874)
___________
(a)We consider MFFO, a non-GAAP measure, to be an important metric in the
evaluation of our results of operations and capital resources. We evaluate our
results of operations with a primary focus on the ability to generate cash flow
necessary
WLT 3/31/2021 10-Q - 28
--------------------------------------------------------------------------------to meet our objective of funding distributions to stockholders. See
Supplemental Financial Measures below for our definition of non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
As ofMarch 31, 2021 and 2020, we owned 29 and 20Consolidated Hotels , respectively. Based on when a hotel is acquired or sold, the operating results for certain hotel properties are not comparable for the three months endedMarch 31, 2021 and 2020. OurSame Store Hotels included 17Consolidated Hotels and excluded the hotels acquired in the Merger, two hotels that were disposed of betweenJanuary 1, 2020 andMarch 31, 2021 and one hotel that was accounted for as held for sale as ofMarch 31, 2021 .
The following table sets forth the average occupancy rate, ADR and RevPAR for
the three months ended
Three Months Ended March 31,
Same Store Hotels 2021 2020
Occupancy Rate (a) 35.1 % 56.8 %
ADR $ 285.57 $ 248.74
RevPAR 100.18 141.21
___________
(a)Occupancy rates for our Same Store Hotels for January, February and March
2021 were 23.2%, 34.6% and 47.4%, respectively, as compared to occupancy rates
for January, February and March 2020 of 64.3%, 74.7% and 31.5%, respectively.
For the three months endedMarch 31, 2021 as compared to the same period in 2020, hotel revenues decreased by$18.7 million . Our Same Store Hotel revenue decreased by$40.6 million primarily due to the impact of the COVID-19 pandemic on our hotel operations and revenue decreased by$6.2 million as a result of dispositions. These decreases were partially offset by an increase in revenue resulting from the hotels acquired in the Merger totaling$28.1 million .
Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including occupancy, labor costs, utilities and insurance costs. For the three months endedMarch 31, 2021 as compared to the same period in 2020, aggregate hotel operating expenses increased by$5.5 million . Our Same Store Hotel expenses decreased by$34.6 million primarily due to the impact of the COVID-19 pandemic on our hotel operations and expenses decreased by$8.0 million as a result of dispositions. These decreases were partially offset by an increase in hotel operating expenses resulting from the hotels acquired in the Merger totaling$48.1 million .
Corporate General and Administrative Expenses
For the three months endedMarch 31, 2021 as compared to the same period in 2020, corporate general and administrative expenses increased by$3.7 million primarily as a result of the impact of the Merger. Corporate general and administrative expenses for the three months endedMarch 31, 2021 reflect the impact of the Company being self-managed and includes the compensation of our employees. Impairment Charges During the three months endedMarch 31, 2020 , we recognized impairment charges totaling$120.2 million on sixConsolidated Hotels in order to reduce the carrying value of the properties to their estimated fair values, resulting from the adverse effect of the COVID-19 pandemic on our hotel operations. No impairments were recognized during the three months endedMarch 31, 2021 .
Our impairment charges are more fully described in Note 4 .
WLT 3/31/2021 10-Q - 29
--------------------------------------------------------------------------------Asset Management Fees to Affiliate
For the three months ended
Interest Expense
For the three months endedMarch 31, 2021 , as compared to the same period in 2020, interest expense increased by$28.0 million primarily due to assuming the mortgage loans of the hotels acquired in the Merger totaling$9.6 million , the aggregate amortization of the debt discount related to the mortgage loans assumed in the Merger and the fair value discount related to the Series A Preferred Stock and Series B Preferred Stock totaling$10.3 million and the dividends recorded in connection with our Series A Preferred Stock and Series B Preferred Stock totaling$7.1 million .
Equity in Losses of Equity Method Investments in Real Estate, Net
Equity in losses of equity method investments in real estate, net represents (losses) earnings from our equity investments inUnconsolidated Hotels recognized in accordance with each investment agreement and based upon the allocation of the investment's net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period ( Note 5 ). We are required to periodically compare an investment's carrying value to its estimated fair value and recognize an impairment charge to the extent that the carrying value exceeds the estimated fair value and is determined to be other than temporary. We recognized$17.8 million of other-than-temporary impairment charges on our equity method investments in real estate during the three months endedMarch 31, 2020 . No such charges were recognized during the three months endedMarch 31, 2021 . The following table sets forth our share of equity in (losses) earnings from ourUnconsolidated Hotels , which are based on the HLBV model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands): Three Months Ended March 31, Venture 2021 2020 Ritz-Carlton Philadelphia Venture$ (3,063) $ (3,058) Hyatt Centric French Quarter Venture (a) (b) (857) (6) Ritz-Carlton Bacara, Santa Barbara Venture (c) (d) - (20,456) Marriott Sawgrass Golf Resort & Spa Venture (c) - 127 Total equity in losses of equity method investments in real estate, net$ (3,920) $ (23,393) ___________ (a)The increase in our share of equity in losses for the three months endedMarch 31, 2021 as compared to the same period in 2020 was primarily a result of the impact of the COVID-19 pandemic on our hotel operations. (b)OnApril 6, 2021 , we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party for$2.1 million , bringing our ownership interest to 100% ( Note 14 ). (c)Upon closing of the Merger onApril 13, 2020 , the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore the amounts for the three months endedMarch 31, 2020 represent the equity in (losses) earnings prior to the Merger. (d)Includes an other-than-temporary impairment charge of$17.8 million recognized on this investment during the three months endedMarch 31, 2020 to reduce the carrying value of our equity investment in the venture to its estimated fair value.
(Provision for) Benefit from Income Taxes
For the three months endedMarch 31, 2021 , we recognized a provision for income taxes of$0.1 million compared to a benefit from income taxes of$3.4 million for the three months endedMarch 31, 2020 . Benefit from income taxes during the three months endedMarch 31, 2020 included a$3.6 million current tax benefit resulting from carrying back certain net operating losses allowable under the CARES Act. WLT3/31/2021 10-Q - 30
--------------------------------------------------------------------------------
Loss (Income) Attributable to Noncontrolling Interests
The following table sets forth our loss (income) attributable to noncontrolling
interests (in thousands):
Three Months Ended March 31,
Venture 2021 2020
Sheraton Austin Hotel at the Capitol Venture $ 516 $ 49
Ritz-Carlton Fort Lauderdale Venture (86) 245
Ritz-Carlton Key Biscayne Venture (8) (1,154)
Operating Partnership - Noncontrolling interest (a) 6,366 -
Total loss (income) attributable to noncontrolling
interests $ 6,788 $ (860)
___________(a)Reflects the OP Units' and Warrant Units' proportionate share of net loss.
Modified Funds from Operations
MFFO is a non-GAAP measure that we use to evaluate our business. For a definition of MFFO and a reconciliation to net income or loss attributable to Common Stockholders, see Supplemental Financial Measures below.
For the three months ended
Liquidity and Capital Resources
Our primary cash uses over the next 12 months are expected to be payment of debt
service, costs associated with the refinancing or restructuring of indebtedness,
funding corporate and hotel level operations, payment of real estate taxes and
insurance and payment of preferred stock dividends. Our primary capital sources
to meet such uses are expected to be funds generated by hotel operations, cash
on hand, any additional issuances of Series B Preferred Stock and proceeds from
additional asset sales.
Due to the COVID-19 pandemic and as a result of numerous government mandates,
health official mandates and significantly reduced demand, as of the date of
this Report, the Company has limited operations at a majority of hotel
properties. Significant events affecting travel, including the COVID-19
pandemic, typically have an impact on booking patterns, with the full extent of
the impact generally determined by the duration of the event and its impact on
travel decisions. We believe the ongoing effects of the COVID-19 pandemic on our
operations have had, and will continue to have, a material adverse impact on our
financial results and liquidity, and such adverse impact may continue well
beyond the containment of such outbreak.
WLT 3/31/2021 10-Q - 31
--------------------------------------------------------------------------------
As of March 31, 2021 , we had cash and cash equivalents of $117.5 million .
Additionally, under the terms of our agreements with the investors in the July
Capital Raise, we have the option to require such investors to purchase up to
$150.0 million aggregate liquidation preference of additional shares of Series B
Preferred Stock during the 18 months after the closing of the July Capital Raise
for additional working capital needs, including the repayment, refinancing or
restructuring of indebtedness, subject to our satisfaction of customary
conditions. As of March 31, 2021 , the mortgage loans for our Consolidated Hotels
had an aggregate principal balance totaling $2.2 billion outstanding, all of
which is mortgage indebtedness and is generally non-recourse, subject to
customary non-recourse carve-outs, except that we have provided certain lenders
with limited corporate guaranties aggregating $7.3 million for items such as
taxes, deferred debt service and amounts drawn from furniture, fixtures and
equipment reserves to pay expenses, in connection with loan modification
agreements. Of the $2.2 billion of indebtedness outstanding as of March 31,
2021 , approximately $813.1 million is scheduled to mature during the 12 months
after the date of this Report. We have worked with our lenders on debt
forbearance plans and sought relief to defer interest and principal payments and
temporarily waive the application of certain cash flow covenants. As of May 12,
2021 , we have executed loan modifications on 24 of our 29 Consolidated Hotel
mortgage loans, aggregating $1.9 billion of indebtedness, which had resulted in
a temporary deferral of interest and principal payments and/or the granting of
temporary covenant relief, which generally lasted for periods ranging from three
months to four months. Although these loan modifications have generally expired,
we are continuing to work with our lenders on longer-term modifications that
will help preserve our liquidity. In addition, we refinanced or extended the
maturity date of eight Consolidated Hotel mortgage loans, aggregating
$585.6 million of indebtedness, to address loans with near-term mortgage
maturities. As of March 31, 2021 , we have effectively entered into cash
management agreements with the lenders on 27 of our 29 mortgage loans either
because the minimum debt service coverage ratio was not met or as a result of a
loan modification agreement. The cash management agreements generally permit
cash generated from the operations of each hotel to fund the hotel's operating
expenses, debt service, taxes and insurance but restrict distributions of excess
cash flow, if any, to the Company to fund corporate expenses. If the Company is
unable to repay, refinance or extend maturing mortgage loans, we may choose to
market these assets for sale or the lenders may declare events of default and
seek to foreclose on the underlying hotels or we may also seek to surrender
properties back to the lender. Even if we are able to obtain payment or covenant
relief, we may incur increased costs and increased interest rates and we may
agree to additional restrictive covenants and other lender protections related
to the mortgage loans.
In addition to raising capital in the July Capital Raise and through asset
sales, we have taken various actions to help mitigate the effects of the
COVID-19 pandemic on our operational results and to preserve our liquidity at
both the operational and corporate level, including among others: reducing
capital expenditures and reducing operating expenses, suspending distributions
on and redemption of our common stock and temporarily suspending required
contributions to the furniture, fixture and equipment replacement reserve at
certain of our hotels.
Sources and Uses of Cash During the Period
Operating Activities - For the three months endedMarch 31, 2021 , net cash used in operating activities was$29.5 million as compared to$10.0 million for the three months endedMarch 31, 2020 . This change in operating cash flows primarily reflects the impact of the COVID-19 pandemic on our hotel operations.
Investing Activities - During the three months ended
Financing Activities - Net cash used in financing activities for the three
months ended
Distributions and Redemptions
OnMarch 18, 2020 , in light of the impact that the COVID-19 pandemic has had on our business, we announced that we were suspending future distributions on our common stock. We also announced that redemptions would be suspended including, as ofDecember 2, 2020 , special circumstances redemptions. Requests for special circumstances redemptions may continue to be submitted, however, the Company will not take any action with regard to those requests until the Board of Directors has elected to lift the suspension and provided the terms and conditions for any continuation of the program. Distributions and redemptions in respect of future periods will be evaluated by the Board of Directors based on circumstances and expectations existing at the time of consideration, and are also subject to the terms of the Series A and Series B Preferred Stock. WLT3/31/2021 10-Q - 32 -------------------------------------------------------------------------------- Among other terms of the Series A and Series B Preferred Stock, the Series A and Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless all accrued dividends on the Series A and Series B Preferred Stock are paid in cash for all past dividend periods and the dividend for the current dividend period is also paid in cash. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's DRIP. Summary of Financing
The table below summarizes our non-recourse debt, net (dollars in thousands):
March 31, 2021 December 31, 2020
Carrying Value
Fixed rate (a) $ 1,286,839 $ 1,286,839
Variable rate (a):
Amount subject to interest rate caps 363,269 362,193
Amount subject to floating interest rate 347,811 345,712
Amount subject to interest rate swaps 176,001 175,158
887,081 883,063
$ 2,173,920 $ 2,169,902
Percent of Total Debt
Fixed rate 59 % 59 %
Variable rate 41 % 41 %
100 % 100 %
Weighted-Average Interest Rate at End of Period
Fixed rate 4.3 % 4.3 %
Variable rate (b) 4.1 % 4.1 %
_________
(a)Aggregate debt balance includes unamortized debt discount of $38.4 million
and $46.5 as of March 31, 2021 and December 31, 2020 , respectively, and
unamortized deferred financing costs totaling $6.4 million and $6.9 million as
of March 31, 2021 and December 31, 2020 , respectively.
(b)The impact of our derivative instruments is reflected in the weighted-average
interest rates.
Covenants
Pursuant to our mortgage loan agreements, our consolidated subsidiaries are
subject to various operational and financial covenants, including minimum debt
service coverage and debt yield ratios. Most of our mortgage loan agreements
contain "lock-box" provisions, which permit the lender to access or sweep a
hotel's excess cash flow and could be triggered by the lender under limited
circumstances, including the failure to maintain minimum debt service coverage
ratios. If a lender requires that we enter into a cash management agreement, we
would generally be permitted to spend an amount equal to our budgeted hotel
operating expenses, taxes, insurance and capital expenditure reserves for the
relevant hotel. The lender would then hold all excess cash flow after the
payment of debt service in an escrow account until certain performance hurdles
are met. As of March 31, 2021 , we have effectively entered into cash management
agreements with the lenders on 27 of our 29 Consolidated Hotel mortgage loans
either because the minimum debt service coverage ratio was not met or as a
result of a loan modification agreement. We have worked with our lenders on debt
forbearance plans and sought relief to defer interest and principal payments and
temporarily waive the application of certain cash flow covenants. See Note 1
for further discussion.
Cash Resources
At
WLT 3/31/2021 10-Q - 33
--------------------------------------------------------------------------------Cash Requirements
Our primary cash uses throughMarch 31, 2022 are expected to be payments of debt service, real estate taxes and insurance, payment of preferred stock dividends, costs associated with the refinancing or restructuring of indebtedness and funding corporate and hotel level operations. Our primary capital sources to meet such uses are expected to be cash on hand, funds generated by hotel operations, any additional issuances of Series B Preferred Stock and proceeds from additional asset sales. We expect to satisfy certain debt maturities during this period by turning the properties back to the lenders.
Capital Expenditures and Reserve Funds
With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures sufficient to cover the cost of routine improvements and alterations at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel's total gross revenue. As ofMarch 31, 2021 andDecember 31, 2020 ,$48.9 million and$51.0 million , respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures and is included in Restricted cash in the consolidated financial statements. In addition, due to the effects of the COVID-19 pandemic on our operations, we have been working with the brands, management companies and lenders and have used a portion of the available restricted cash reserves to cover operating costs at our properties, of which$2.7 million is subject to replenishment
Supplemental Financial Measures
In the real estate industry, analysts and investors employ certain non-GAAP supplemental financial measures in order to facilitate meaningful comparisons between periods and among peer companies. Additionally, in the formulation of our goals and in the evaluation of the effectiveness of our strategies, we use FFO and MFFO, which are non-GAAP measures defined by our management. We believe that these measures are useful to investors to consider because they may assist them to better understand and measure the performance of our business over time and against similar companies. A description of FFO and MFFO, and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures, are provided below. FFO and MFFO Due to certain unique operating characteristics of real estate companies, as discussed below, theNational Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a non-GAAP measure known as FFO, which we believe to be an appropriate supplemental measure, when used in addition to and in conjunction with results presented in accordance with GAAP, to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental non-GAAP measure. FFO is not equivalent to, nor a substitute for, net income or loss as determined under GAAP. We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by theBoard of Governors of NAREIT, as restated inDecember 2018 . The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, impairment charges on real estate, and depreciation and amortization from real estate assets; and after adjustments for unconsolidated partnerships and jointly owned investments. Adjustments for unconsolidated partnerships and jointly owned investments are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above. However, NAREIT's definition of FFO does not distinguish between the conventional method of equity accounting and the HLBV method of accounting for unconsolidated partnerships and jointly owned investments. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization, as well as impairment charges of real estate-related assets, provides a more complete understanding of our performance to investors and to management; and when compared year WLT3/31/2021 10-Q - 34 -------------------------------------------------------------------------------- over year, reflects the impact on our operations from trends in occupancy rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income or loss. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions, which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist. For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property's asset group to the estimated future net undiscounted cash flow that we expect the property's asset group will generate, including any estimated proceeds from the eventual sale of the property's asset group. It should be noted, however, that the property's asset group's estimated fair value is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. In cases where the available market information is not deemed appropriate, we perform a future net cash flow analysis discounted for inherent risk associated with each asset to determine an estimated fair value. While impairment charges are excluded from the calculation of FFO described above due to the fact that impairments are based on estimated future undiscounted cash flows, it could be difficult to recover any impairment charges. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or loss or in its applicability in evaluating the operating performance of the company. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP measures FFO and MFFO and the adjustments to GAAP in calculating FFO and MFFO. Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) were put into effect subsequent to the establishment of NAREIT's definition of FFO. Management believes these cash-settled expenses, such as acquisition fees that are typically accounted for as operating expenses, do not affect our overall long-term operating performance. Publicly-registered, non-traded REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that non-traded REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Due to the above factors and other unique features of publicly registered, non-traded REITs, theInstitute for Portfolio Alternatives (formerly known as theInvestment Program Association ) ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-traded REITs and which we believe to be another appropriate non-GAAP measure to reflect the operating performance of a non-traded REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance now that our offering has been completed and once essentially all of our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-traded REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance, with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. MFFO should only be used to assess the sustainability of a company's operating performance after a company's offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on a company's operating performance during the periods in which properties are acquired. We define MFFO consistent with the IPA's Practice Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline"), issued by the IPA inNovember 2010 . This Practice Guideline defines MFFO as FFO further adjusted for the following items, included in the determination of GAAP net income or loss, as applicable: acquisition fees and expenses; accretion of discounts and amortization of premiums on debt investments; where applicable, payments of loan principal made by our equity investees accounted for under the HLBV model where such payments reduce our equity in earnings of equity method investments in real estate, nonrecurring impairments of real estate-related investments (i.e., infrequent or unusual, not reasonably likely to recur in the ordinary course of business); mark-to-market adjustments included in net income or loss; nonrecurring gains or losses included in net income or loss from the extinguishment or sale of debt, hedges, derivatives or securities holdings, where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for Consolidated andUnconsolidated Hotels , with such adjustments calculated to WLT3/31/2021 10-Q - 35 -------------------------------------------------------------------------------- reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income or loss in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses that are unrealized and may not ultimately be realized. Our MFFO calculation complies with the Practice Guideline described above. In calculating MFFO, we exclude acquisition-related expenses, fair value adjustments of derivative financial instruments and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income or loss. These expenses are paid in cash by a company. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income or loss in determining cash flow from operating activities. We account for certain of our equity investments using the HLBV model which is based on distributable cash as defined in the operating agreement. Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-traded REITs, which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that MFFO and the adjustments used to calculate it allow us to present our performance in a manner that takes into account certain characteristics unique to non-traded REITs, such as their limited life, defined acquisition period and targeted exit strategy, and is therefore a useful measure for investors. For example, acquisition costs are generally funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information. Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income or loss as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. Neither theSEC , NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, theSEC , NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry and we would have to adjust our calculation and characterization of FFO and MFFO accordingly. WLT3/31/2021 10-Q - 36 --------------------------------------------------------------------------------
FFO and MFFO were as follows (in thousands):
Three
Months Ended
2021 2020
Net loss attributable to Common Stockholders $ (75,567) (170,005)
Adjustments:
Depreciation and amortization of real property 31,920 18,856 Impairment charges - 120,220
Proportionate share of adjustments for partially-owned entities - FFO adjustments (a)
479 21,038
Total adjustments 32,399 160,114
FFO attributable to Common Stockholders (as defined by NAREIT)
(43,168) (9,891)
Adjustments:
Amortization of fair value adjustments 9,723 - Straight-line and other rent adjustments 1,336 1,935 Gain on property-related insurance claims (b) (1,166) - Transaction costs (b) - 1,809
Proportionate share of adjustments for partially owned entities - MFFO adjustments
(458) 273
Total adjustments 9,435 4,017
MFFO attributable to Common Stockholders $
(33,733)
___________
(a)This adjustment includes an other-than-temporary impairment charge of$17.8 million recognized on our equity investment in theRitz-Carlton Bacara , Santa Barbara Venture during the three months endedMarch 31, 2020 ( Note 5 ). (b)We have excluded these costs because of their non-recurring nature. By excluding such costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties. WLT3/31/2021 10-Q - 37
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