NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
General
Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
We focus on owning premium-branded hotel properties with efficient operating models primarily in the Upscale segment of the lodging industry. At June 30, 2022, our portfolio consisted of 102 hotel properties with a total of 15,323 guestrooms located in 24 states. As of June 30, 2022, we own 100% of the outstanding equity interests in 61 of our 102 hotel properties. We own a 51% controlling interest in 39 hotel properties through a joint venture that was formed in July 2019 with GIC (the “GIC Joint Venture”), Singapore’s sovereign wealth fund. We also own a 90% controlling interest in two hotel properties that we acquired in June 2022 through another joint venture (the "Brickell Joint Venture").
We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotel properties. Accordingly, all of our hotel properties are leased to our taxable REIT subsidiaries (“TRS Lessees”).
During the six months ended June 30, 2022, the Operating Partnership and the GIC Joint Venture closed on a transaction with
NewcrestImage Holdings, LLC, a Delaware limited liability company, and NewcrestImage Holdings II, LLC, a Delaware
limited liability company (together, “NewcrestImage”), to purchase from NewcrestImage a portfolio of 27 hotel properties,
containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces and various financial incentives for an aggregate purchase price of $822.0 million (the "NCI Transaction"). In June 2022, the Operating Partnership exercised an option to acquire a 90% equity interest in the AC Hotel by Marriott and Element Miami Brickell Hotel in Miami, FL. (together the "AC/Element Hotel") based on a gross hotel option exercise price of $89.0 million (the "Brickell Transaction"). See "Note 3 - Investment in Hotel Properties, net" for further information.
Risks and Uncertainties
Beginning in March 2020, we experienced the negative effects of the novel coronavirus, designated as COVID-19 (“COVID-19”) and its variants (collectively, the "Pandemic"), which had a significant negative effect on the U.S. and global economies, including a rapid and sharp decline in all forms of travel, both domestic and international, and a significant decline in hotel demand. As such, we experienced a substantial decline in our revenues, profitability and cash flows from operations during the years ended December 31, 2020 and 2021. Additionally, there has been a sharp increase in inflation and interest rates during the six months ended June 30, 2022. The extended effects of the Pandemic and macroeconomic conditions may result in additional risks and uncertainties related to our business and our ability to recover to pre-Pandemic levels and beyond.
During the three and six months ended June 30, 2022, we experienced significant improvement in our business, driven primarily by leisure travel and to a lesser extent modest improvement in other demand segments, including corporate and group. The improvement was the result of a significant increase in the availability and administration of vaccines globally as well as the easing of government restrictions and guidance in most jurisdictions. We anticipate that continued improvement in operating trends will be dependent on continued strength in leisure travel and a recovery of business travel. More broadly, a return to normalized levels of operations is dependent upon a continuation in the recovery of our business, further dissipation of concerns related to the Pandemic, geopolitical stability, moderating inflation, a normalized labor market, and maintaining a high-quality portfolio aligned with evolving guest preferences.
For additional information related to the effects of the Pandemic on our business, please see our Annual Report on Form 10-K for the year ended December 31, 2021.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenues and expenses in the reporting period. Actual results could differ from those estimates. As interim statements, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three and six months ended June 30, 2022 may not be indicative of the results that may be expected for the full year of 2022. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying Condensed Consolidated Financial Statements consolidate the accounts of all entities in which we have a controlling financial interest, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.
We evaluate joint venture partnerships to determine if they should be consolidated based on whether the partners exercise joint control. For a joint venture where we exercise primary control and we also own a majority of the equity interests, we consolidate the joint venture partnership. We have consolidated the accounts of our joint venture partnerships in our accompanying Condensed Consolidated Financial Statements. See "Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests" for further information.
Non-controlling Interests
Non-controlling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Non-controlling interests are reported in the Condensed Consolidated Balance Sheets within equity, separately from stockholders’ equity. Revenues, expenses and net income attributable to both the Company and the non-controlling interests are reported in the Condensed Consolidated Statements of Operations.
Our Condensed Consolidated Financial Statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties and third-party minority ownership interests in our joint ventures.
Redeemable Non-controlling Interests
Redeemable non-controlling interests represent redeemable preferred units issued by our Operating Partnership ("Redeemable Preferred Units") in connection with the NCI Transaction (see "Note 3 - Investments in Hotel Properties, net" for additional information). The Redeemable Preferred Units are presented as temporary equity related to our Operating Partnership on our Condensed Consolidated Balance Sheets under the caption of "Redeemable Non-controlling Interests." See "Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests" for further information. We record Redeemable non-controlling interests at fair value on the issuance date of the securities. When the carrying value (the acquisition date fair value adjusted for the non-controlling interest’s share of net income (loss) and dividends) is less than the redemption value, we adjust the redeemable non-controlling interest to equal the redemption value with changes recognized as an adjustment to Accumulated deficit and distributions in excess of retained earnings. Any such adjustment, when necessary, is recorded as of the applicable balance sheet date.
Trade Receivables and Credit Policies
We grant credit to qualified customers, generally without collateral, in the form of trade accounts receivable. Trade receivables result from the rental of hotel guestrooms and the sales of food, beverage, and banquet services and are payable under normal trade terms. Trade receivables also include credit and debit card transactions that are in the process of being settled. Trade receivables are stated at the amount billed to the customer and do not accrue interest. We regularly review the collectability of our trade receivables. A provision for losses is determined on the basis of previous loss experience and current economic conditions. Our allowance for doubtful accounts was $0.1 million at June 30, 2022 and $0.2 million at December 31, 2021. Bad debt expense was $0.1 million for both the three months ended June 30, 2022 and 2021, and $0.1 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively.
Use of Estimates
Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP, which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions that affect reported amounts and related disclosures in our Condensed Consolidated Financial Statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations, which could materially affect our expectations for our consolidated financial position and results of operations.
Reclassifications
Certain amounts at December 31, 2021 related to intangible assets totaling approximately $3.5 million and accumulated amortization of approximately $1.0 million have been reclassified within Investments in Hotel Properties, net to conform to the current period presentation.
New Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). ASU No. 2020-04 contains practical expedients for reference rate reform related activities that affect debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the year ended December 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The implementation of ASU No. 2020-04 will not have a material effect on our consolidated financial position or results of operations.
NOTE 3 - INVESTMENT IN HOTEL PROPERTIES, NET
Investment in Hotel Properties, net
Investment in hotel properties, net is as follows (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| Hotel buildings and improvements | | $ | 2,840,004 | | | $ | 2,127,782 | |
| Land | | 378,105 | | | 323,276 | |
| Furniture, fixtures and equipment | | 253,936 | | | 167,245 | |
| Construction in progress | | 38,444 | | | 18,321 | |
| Intangible assets | | 39,954 | | | 10,834 | |
| Real estate development loan | | — | | | 27,595 | |
| | 3,550,443 | | | 2,675,053 | |
| Less accumulated depreciation | | (651,931) | | | (583,080) | |
| | $ | 2,898,512 | | | $ | 2,091,973 | |
During the year ended December 31, 2019, we executed a mezzanine loan to provide financing of $29.9 million for a mixed-use development project that includes the AC/Element Hotel with 264 guestrooms, retail space, and parking. In connection with the mezzanine loan, we had a purchase option to purchase a 90% equity interest in the AC/Element Hotel (the "Initial Purchase Option") upon completion of construction, which occurred in December 2021. The mezzanine loan was classified as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at December 31, 2021. See "Note 4 - Investment in Real Estate Loans" for further information. In June 2022, the balance of the mezzanine loan was extinguished with the exercise of the Initial Purchase Option to acquire the AC/Element Hotel as part of the Brickell Transaction described below.
Brickell Transaction
On June 10, 2022, we formed the Brickell Joint Venture (see "Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the exercise of our Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. The exercise price of the Initial Purchase Option was $89.0 million and primarily funded with the conversion of the mezzanine loan of $29.9 million to equity and $7.9 million in cash. We accounted for the acquisition of the AC/Element Hotel as an asset acquisition. The allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of the AC/Element Hotel is as follows (in thousands):
| | | | | | | | | | | | | | |
| Assets and Liabilities Acquired | | | Net Cash Disbursed | |
| Land | $ | 14,378 | | | Purchase price (1) | $ | 94,522 | |
| Hotel buildings and improvements | 75,113 | | | Acquisition costs | 593 | |
| Furniture, fixtures and equipment | 5,624 | | | | $ | 95,115 | |
| Intangible assets | 1,972 | | | | |
| Total assets acquired | 97,087 | | | Cash | $ | 8,518 | |
| Debt assumed | (47,000) | | | Conversion of mezzanine loan | 29,875 | |
| Other liabilities | (1,972) | | | Initial purchase option | 2,800 | |
| Net assets acquired | $ | 48,115 | | | Contribution by joint venture partner | 6,922 | |
| | | Debt assumed | 47,000 | |
| | | | $ | 95,115 | |
(1) The purchase price of the Brickell Transaction was based on the exercise price of the initial purchase option of $89.0 million. The transaction included the assumption of $47.0 million of debt resulting in a net consideration payment requirement of $42.0 million. We paid 90% of the required net consideration with the conversion of our $29.9 million mezzanine loan into equity and a cash payment of $7.9 million. The carrying amount of our Initial Purchase Option of $2.8 million is also included in the total amount allocated to the assets acquired. The Brickell Joint Venture partner’s non-controlling interest represents 10% of the fair value of the net assets on the transaction date of $6.9 million, determined by a third-party valuation expert based on discounted forecasted future cash flows of the net assets acquired. We also incurred $0.6 million of transaction costs. The result is a total amount allocated to the assets acquired of $95.1 million plus an intangible asset totaling $2.0 million related to the assumption of the franchises for the hotel properties and a related key money liability.
We also have an option to purchase the remaining 10% interest in the hotel property in December 2026 (the "Second Purchase Option"). The exercise price of the Second Purchase Option will be at its market value on the exercise date.
NCI Transaction
During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on the NCI Transaction for the acquisition of a portfolio of 27 hotel properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces, and various financial incentives for an aggregate purchase price of $822.0 million, paid in
the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 preferred units of limited partnership of
the Operating Partnership newly designated as 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation Preference
$25 Per Unit) (the “Series Z Preferred Units”), a cash draw of $410.0 million from a term loan entered into by subsidiaries of the Joint Venture, the assumption by a subsidiary of the Joint Venture of approximately $6.5 million in PACE loan debt,
$5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the Joint Venture, and approximately
$185.2 million cash contributed by GIC at closing. GIC also contributed to the Joint Venture an additional $18.5 million in cash
for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating
Partnership as reimbursement for transaction costs paid by the Operating Partnership.
We valued the Common Units and Series Z Preferred Units at fair market value on the closing dates of the NCI Transaction,
which resulted in us recording the issued Common Units and Series Z Preferred Units at $157.5 million and $50.0 million,
respectively. The Common Units were recorded at the closing prices of our Common Stock on the closing dates since the
Common Units are redeemable for shares of our Common Stock on a 1:1 basis. We estimated the fair value of the Series Z
Preferred Units based on the features and stated dividend coupon of the Series Z Preferred Units relative to similar securities
with more readily determinable market values. We recorded the Series Z Preferred Units at their redemption value of
$50.0 million which approximates fair value on the closing dates.
Our Joint Venture assumed $335.2 million of debt in connection with the NCI Transaction and immediately repaid
$328.7 million of the assumed debt on the closing date using proceeds from borrowings on the Joint Venture Term Loan (as
described below). We recorded debt assumed in connection with the NCI Transaction at its face amount, which approximated fair market value on the closing date.
The allocation of the aggregate purchase price to the fair value of the assets and liabilities acquired for the NCI Transaction is as follows (in thousands):
| | | | | | | | | | | | | | |
| Assets and Liabilities Acquired | | | Net Cash Disbursed | |
| Land | $ | 52,797 | | | Purchase price (1) | $ | 823,056 | |
| Hotel buildings and improvements | 676,607 | | | Acquisition costs | 3,027 | |
| Furniture, fixtures and equipment | 76,729 | | | Deferred financing fees | 4,625 | |
| Incentives and other intangibles | 23,670 | | | | $ | 830,708 | |
Other assets (2) | 5,318 | | | | |
| Total assets acquired | 835,121 | | | Cash | $ | 208,819 | |
| Debt assumed | (335,205) | | | Preferred Operating Partnership Units | 50,000 | |
Other liabilities (3) | (9,361) | | | Common Units (1) | 157,513 | |
| Net assets acquired | $ | 490,555 | | | Debt | 414,376 | |
| | | | $ | 830,708 | |
(1) The contractual purchase price for the NCI Transaction was $822.0 million based on the issuance of Common OP Units totaling $160.0 million on the contract date. However, the fair value of the Common OP Units on the closing dates totaled $157.5 million based on the closing prices of our Common Stock on January 13, 2022 and March 23, 2022 of $9.94 and $9.61 per share, respectively. As such, the purchase price has been adjusted to reflect the fair value of the Common Units issued on the closing dates of the NCI Transaction plus additional costs incurred to close the transaction.
(2) Amount includes right-of-use assets related to assumed leases totaling approximately $5.3 million.
(3) Amount includes assumed key money liabilities of approximately $3.9 million, lease liabilities of approximately $5.1 million, and other liabilities of approximately $0.4 million.
Incentives and other intangibles include tax incentives totaling approximately $19.8 million associated with certain of the acquired hotel properties in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 9.1 years, which is the period in which we expect to meet the requirements to receive payment of the tax incentives. Other intangible assets totaling approximately $3.9 million are related to key money associated with certain of the hotel properties acquired in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 19.7 years, which is the remaining key money contract period with the franchisor.
Intangible assets, net is as follows (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| Indefinite-lived Intangible assets: | | | | |
| Air rights | | $ | 10,754 | | | $ | 10,754 | |
| Other | | 80 | | | 80 | |
| | 10,834 | | | 10,834 | |
| Finite-lived intangible assets: | | | | |
| | | | |
| Tax incentives | | 19,750 | | | — | |
| Key money | | 9,370 | | | — | |
| | | | |
| | | | |
| | 29,120 | | | — | |
| Intangible assets | | 39,954 | | | 10,834 | |
| Less accumulated amortization | | (3,067) | | | — | |
| Intangible assets, net | | $ | 36,887 | | | $ | 10,834 | |
We recorded amortization expense related to intangible assets of approximately $1.1 million and $2.0 million for the three and six months ended June 30, 2022, respectively. We did not record any amortization expense related to intangible assets for the three and six months ended June 30, 2021.
Future amortization expense related to intangible assets is as follows (in thousands):
| | | | | | | | |
| 2022 | | $ | 2,165 | |
| 2023 | | 4,331 | |
| 2024 | | 4,296 | |
| 2025 | | 1,625 | |
| 2026 | | 1,625 | |
| Thereafter | | 12,011 | |
| | $ | 26,053 | |
| | |
We did not acquire any hotel properties during the six months ended June 30, 2021.
Asset Sales
In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture during the three months ended June 30, 2022.
Assets Held for Sale
Assets Held for Sale at June 30, 2022 and December 31, 2021 include a land parcel in Flagstaff, AZ.
NOTE 4 — INVESTMENT IN REAL ESTATE LOANS
Investment in real estate loans, net is as follows (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| Real estate loans | | $ | 2,100 | | | $ | 2,350 | |
| Allowance for credit losses | | (2,100) | | | (2,350) | |
| | | | |
| | $ | — | | | $ | — | |
The amortized cost bases of our Investment in real estate loans, net approximate their fair values.
Real Estate Development Loans
During the year ended December 31, 2019, we executed a mezzanine loan to fund up to $28.9 million for a mixed-use
development project that includes the AC/Element Hotel, retail space, and parking. In December 2021, we modified the loan agreement to increase our funding commitment by $1.0 million. During the six months ended June 30, 2022, we completed the funding of our entire $29.9 million commitment. The loan was converted to equity in June 2022 upon the exercise of our Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. The loan was recorded as Investment in hotel properties, net on our Consolidated Balance Sheets at December 31, 2021.
Seller-Financing Loans
On June 29, 2018, we sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling
price of $24.9 million. We provided seller financing totaling $3.6 million on the sale of these properties under two, 3.5 year
second mortgage notes with a blended interest rate of 7.38% that are further collateralized by a personal guarantee from the
principal of the borrower. During the year ended December 31, 2020, we recorded an allowance for credit losses in an amount equal to the outstanding balance of the loans due to a borrower default caused by the negative effects of the Pandemic. On June 1, 2021, we amended the terms of the seller-financing loans and extended the maturity date of each loan to December 31, 2022. Interest is accruing at a rate of 9.00% monthly, including 5.00% payable in cash and 4.00% paid-in-kind. Semiannual principal payments of $0.3 million began on April 15, 2022. At June 30, 2022, the outstanding principal balance of the notes of $2.1 million is fully reserved.
NOTE 5 - DEBT
At June 30, 2022, our indebtedness was comprised of borrowings under our 2018 Senior Credit Facility (as defined below), the 2018 Term Loan (as defined below), the GIC Joint Venture Credit Facility (as defined below), the GIC Joint Venture Term Loan (as defined below), the PACE Loan (as defined below), the Brickell Mortgage Loan (as defined below), the Convertible Notes (as defined below), and other indebtedness secured by first priority mortgage liens on various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 3.95% at June 30, 2022 and 3.35% at December 31, 2021.
Debt, net of debt issuance costs, is as follows (in thousands):
| | | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 |
| Revolving debt | | $ | 125,000 | | | $ | 68,500 | |
| Term loans | | 910,000 | | | 562,000 | |
| Convertible notes | | 287,500 | | | 287,500 | |
| Mortgage loans | | 214,582 | | | 163,315 | |
| | | 1,537,082 | | | 1,081,315 | |
| Unamortized debt issuance costs | | (13,552) | | | (11,518) | |
| Debt, net of debt issuance costs | | $ | 1,523,530 | | | $ | 1,069,797 | |
We have entered into interest rate swaps to fix the interest rates on a portion of our variable interest rate indebtedness. See "Note 7 - Derivative Financial Instruments and Hedging" to the Condensed Consolidated Financial Statements for additional information. Our total fixed-rate and variable-rate debt, after considering our interest rate derivative agreements that are currently effective, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 | | Percentage | | December 31, 2021 | | Percentage |
| Fixed-rate debt¹ | | $ | 847,258 | | | 55% | | $ | 842,858 | | | 78% |
| Variable-rate debt | | 689,824 | | | 45% | | 238,457 | | | 22% |
| | $ | 1,537,082 | | | | | $ | 1,081,315 | | | |
¹ Debt related our wholly-owned properties coupled with our pro rata share of debt related to our our joint ventures results in fixed-rate debt of approximately 70% when including the effect of interest rate swaps.
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 | | |
| | | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value | | Valuation Technique |
| Convertible notes | | $ | 287,500 | | | $ | 245,525 | | | $ | 287,500 | | | $ | 300,384 | | | Level 1 - Market approach |
| Fixed-rate mortgage loans | | 159,758 | | | 158,798 | | | 155,358 | | | 155,765 | | | Level 2 - Market approach |
| | $ | 447,258 | | | $ | 404,323 | | | $ | 442,858 | | | $ | 456,149 | | | |
At June 30, 2022 and December 31, 2021, we had $400.0 million of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional information on our use of derivatives as interest rate hedges, refer to "Note 7 - Derivative Financial Instruments and Hedging."
$600 Million Senior Credit and Term Loan Facility
On December 6, 2018, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into a $600.0 million senior credit facility (the “2018 Senior Credit Facility”) with Deutsche Bank AG New York Branch, as administrative agent, and a syndicate of lenders. The 2018 Senior Credit Facility is comprised of a $400.0 million revolver (the "$400 Million Revolver") and a $200.0 million term loan facility (the “$200 Million Term Loan”). At June 30, 2022, we had $200.0 million borrowed and $400.0 million available to borrow. On July 21, 2022, Bank of America, N.A. entered into successor administrative agent documentation to succeed Deutsche Bank AG New York Branch as administrative agent on the 2018 Senior Credit Facility.
Amendments to the 2018 Senior Credit Facility
Between May 2020 and July 2022, the Company entered into several amendments to the 2018 Senior Credit Facility (the “Credit Facility Amendments”). We entered into the most recent amendment to the 2018 Senior Credit Facility on July 21, 2022 (the "Amendment"). Under the Amendment, the requirement that we grant first lien mortgages and assignments of leases on the unencumbered assets upon any advance that would cause the total amount outstanding under the revolving credit facility to exceed $350.0 million was eliminated in its entirety. The Amendment also provides improvements to certain of the key financial covenants including eliminating the minimum liquidity covenant.
At June 30, 2022, we had no borrowings outstanding on the $400 Million Revolver. Under the amendment executed on July 21, 2022, the $400 Million Revolver and $200 Million Term Loan each now have two additional six-month extension options available, subject to certain conditions, that result in a fully extended maturity date of March 31, 2025 for the $400 Million Revolver and April 1, 2025, for the $200 Million Term Loan.
On July 21, 2022, the interest rate on the 2018 Senior Credit Facility was transitioned from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The interest rate on the 2018 Senior Credit Facility is based on a pricing grid ranging from 140 basis points to 240 basis points plus SOFR plus a 10 basis point credit spread adjustment for the $400 Million Revolver and 135 basis points to 235 basis points plus SOFR plus a 10 basis point credit spread adjustment for the $200 Million Term Loan, depending on the Company's leverage ratio. For purposes of the $400 Million Revolver and the 2018 Senior Credit Facility, SOFR is subject to a floor of 25 basis points.
The Credit Facility Amendments require the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own all properties included in the unencumbered asset pool supporting the facility (“Unencumbered Properties”), as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for their release. The Credit Facility Amendments also permitted the Company to complete the Convertible Notes Offering (defined below), the Series F preferred shares offering (defined below), and close on the NCI Transaction and enter into equity transactions and indebtedness related thereto.
The 2018 Senior Credit Facility has an accordion feature which allows the Company to increase the total commitments by an aggregate of up to $300.0 million. The $400 Million Revolver will mature on March 31, 2023 and can be extended to March 31, 2025 at the Company’s option, subject to certain conditions. The $200 Million Term Loan will mature on April 1, 2024, and can be extended to April 1, 2025 at the Company’s option, subject to certain conditions.
Term Loans
2018 Term Loan
On February 15, 2018, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a $225.0 million term loan (the “2018 Term Loan”) with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation, which is fully drawn as of June 30, 2022. The 2018 Term Loan has an accordion feature that allows us to increase the total commitments by $150.0 million prior to the maturity date of February 14, 2025, subject to certain conditions.
Amendments to the 2018 Term Loan
Between May 2020 and July 2022, the Company entered into several amendments to the First Amended and Restated Credit Agreement (the “2018 Term Loan Amendments”). The amendments to the 2018 Term Loan are substantially the same as the Amendments described above related to the 2018 Senior Credit Facility. There was no modification to the maturity date of the 2018 Term Loan.
We pay interest on advances at varying rates, based upon, at our option, either (i) daily, 1-, 3-, or 6-month SOFR (subject to a floor of 25 basis points), plus a SOFR adjustment equal to 10 basis points and an applicable margin between 1.35% and 2.15%, depending upon our leverage ratio (as defined in the loan documents). We are required to pay other fees, including customary arrangement and administrative fees. The interest rate at June 30, 2022 was 3.94%.
Financial and Other Covenants. We are required to comply with various financial and other covenants to draw and maintain borrowings under the 2018 Term Loan. The 2018 Term Loan Amendments provide that certain financial and other covenants under the 2018 Term Loan were waived or adjusted. The waivers and adjustments are the same as under the amendments to the Company’s 2018 Senior Credit Facility. At June 30, 2022, we were in compliance with all financial covenants.
Unencumbered Assets. The 2018 Term Loan Amendments require the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the Unencumbered Properties, as well as the equity interests in the TRS lessees related to such Unencumbered Properties until the borrower meets certain conditions for the release of such pledges. During the period that the pledges are in place, as well as at all other times during the term of the facility, borrowings under the 2018 Term Loan are limited by the value of the Unencumbered Assets.
2017 Term Loan
On September 26, 2017, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a $225.0 million term loan (the "2017 Term Loan") with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation. The 2017 Term Loan had an original maturity date of November 2022. During the three months ended June 30, 2022, we repaid in full the balance of the 2017 Term Loan of $62.0 million with our share of the proceeds from the sale of the 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA, along with cash on hand, and formally terminated the facility.
Convertible Senior Notes and Capped Call Options
On January 7, 2021, we entered into an underwriting agreement (the “Convertible Notes Offering”) pursuant to which the Company agreed to offer and sell $287.5 million aggregate principal amount of 1.50% convertible senior notes due 2026 (the “Convertible Notes"). The net proceeds from the Convertible Notes Offering, after deducting underwriting discounts and commissions and offering expenses payable by the Company (including net proceeds from the full exercise by the underwriters of their over-allotment option to purchase additional Convertible Notes), were approximately $280.0 million before consideration of the Capped Call Transactions (as described below). These proceeds were used to pay the cost of the Capped Call Transactions and to partially repay outstanding obligations under the 2018 Senior Credit Facility and 2017 Term Loan.
The Convertible Notes bear interest at a rate of 1.50% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. The Convertible Notes will mature on February 15, 2026 (the “Maturity Date”), unless earlier converted, purchased or redeemed. Prior to August 15, 2025, the Convertible Notes will be convertible only upon certain circumstances and during certain periods. On or after August 15, 2025 and through the Maturity Date, holders may convert any of their Convertible Notes into shares of the Company’s common stock, at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day prior to the Maturity Date, unless the Convertible Notes have been previously purchased or redeemed by the Company. During the three months ended June 30, 2022 and 2021, the Company recorded coupon interest expense of $1.1 million for each period. For the six months ended June 30, 2022 and 2021, the Company recorded coupon interest expense of $2.1 million and $2.0 million, respectively. Additionally, for the three months ended June 30, 2022 and 2021, the Company amortized $0.4 million for each period and for the six months ended June 30, 2022 and 2021 the Company amortized $0.7 million for each period of the $7.6 million debt issuance costs related to the Convertible Notes Offering. Including the amortization of the debt issuance costs, the current effective interest rate on the Convertible Notes is approximately 2.00% for the six months ended June 30, 2022 and 2021.
The initial conversion rate of the Convertible Notes is 83.4028 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of $11.99 per share of common stock based on the 37.5% base conversion premium on the reference price of $8.72 per share. In no event will the conversion rate exceed 114.6788 shares of common stock per $1,000 principal amount of Convertible Notes, subject to certain adjustments defined in the Convertible Notes Offering.
On January 7, 2021, in connection with the pricing of the Convertible Notes, and on January 8, 2021, in connection with the full exercise by the Underwriters of their option to purchase additional Convertible Notes pursuant to the Underwriting Agreement, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters or their respective affiliates and another financial institution (the “Capped Call Counterparties”). The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of shares of common stock underlying the Convertible Notes. The Capped Call Transactions are generally expected to reduce the potential dilution to holders of shares of common stock upon conversion of the Convertible Notes or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction or offset subject to a cap.
The effective strike price of the Capped Call Transactions is initially $15.26, which represents a premium of 75.0% over the last reported sale price of our common stock on the New York Stock Exchange on January 7, 2021, and is subject to certain adjustments under the terms of the Capped Call transactions.
MetaBank Loan
On June 30, 2017, we entered into a $47.6 million secured, non-recourse loan with MetaBank (the "MetaBank Loan"). The MetaBank Loan provides for a fixed interest rate of 4.44%, amortizes over 25 years, and matures on July 1, 2027. The MetaBank Loan is secured by three hotel properties and is subject to a prepayment penalty if prepaid prior to April 1, 2027. On May 1, 2020, MetaBank waived the annual minimum debt service covenant ratio for the year ended December 31, 2020, and on April 12, 2021, MetaBank extended such waiver for the year ended December 31, 2021. The next covenant measurement date is December 31, 2022.
Mortgage Loans
At June 30, 2022 and December 31, 2021, we had mortgage loans totaling $214.6 million and $163.3 million, respectively, that are secured primarily by first mortgage liens on 19 and 16 hotel properties, respectively.
GIC Joint Venture Credit Facility
On October 8, 2019, a subsidiary of the GIC Joint Venture, Summit JV MR 1, LLC (the “Borrower”), as borrower, and Summit Hospitality JV, LP (the “Parent”), as parent (which is the GIC Joint Venture), and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $200.0 million credit facility (the “GIC Joint Venture Credit Facility”) with Bank of America, N.A., as administrative agent and sole initial lender, and BofA Securities, Inc., as sole lead arranger and sole bookrunner. The Operating Partnership and the Company are not borrowers or guarantors of the GIC Joint Venture Credit Facility. The GIC Joint Venture Credit Facility is guaranteed by all of the Borrower’s existing and future subsidiaries, subject to certain exceptions.
The GIC Joint Venture Credit Facility is comprised of a $125.0 million revolving credit facility (the “$125 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). The GIC Joint Venture Credit Facility has an accordion feature which allows us to increase the total commitments by up to $300.0 million, for aggregate potential borrowings of up to $500.0 million on the GIC Joint Venture Credit Facility. At June 30, 2022, we had $125.0 million outstanding under the $125 Million Revolver.
The $125 Million Revolver and the $75 Million Term Loan will mature on October 8, 2023. Each can be extended for a single twelve-month period at the Borrower's option, subject to certain conditions.
Interest is paid on revolving credit advances at varying rates based upon, at the Borrower's option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a margin of 2.15% for Eurodollar rate advances, or (ii) LIBOR, plus a margin of 2.15% for LIBOR floating rate advances. The interest rate at June 30, 2022 was 2.75%. The applicable margin for a term loan advance shall be five basis points less than revolving credit advances referenced above. The GIC Joint Venture Credit Facility has been amended to accommodate the transition from LIBOR to SOFR, when LIBOR is no longer available. At June 30, 2022, we were in compliance with all financial covenants.
Amendments to $200 Million GIC Joint Venture Credit Facility
On June 18, 2020, the Company entered into a Second Amendment to Credit Agreement related to the GIC Joint Venture Credit Facility (“Second Amendment”). The Second Amendment resulted in waivers or adjustments to certain financial and other covenants under the GIC Joint Venture Credit Facility, which are described in the Current Report on Form 8-K filed by the Company on June 24, 2020.
On April 29, 2021, the Borrower, Parent, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a Third Amendment to Credit Agreement concerning the GIC Joint Venture Credit Facility (the “GIC Joint Venture Amendment”).
Certain financial and other covenants under the GIC Joint Venture Credit Facility were waived or adjusted as follows:
• Increase of the Maximum Leverage Ratio through the initial maturity date;
• Increase of the Borrowing Base Leverage through the initial maturity date;
During the covenant waiver period, the applicable margin was increased to 230 basis points and 225 basis points for the $125 million Revolver and $75 million Term Loan, respectively. The covenant waiver period has expired so the applicable margin has reverted to 215 basis points and 210 basis points for the $125 million Revolver and $75 million Term Loan, respectively.
The GIC Joint Venture Amendment provides that the Borrower may make additional advances on the $125 Million Revolver, subject to certain financial covenant limitations. Certain other similar limitations and conditions for credit facilities of this nature were included among the provisions in the amendments including, among other provisions, limitations on the use of revolving facility advances, certain restrictions on payments of dividends and limitations on investments and dispositions. We retain the right to opt out of certain additional restrictive covenants upon demonstration of compliance with the required financial covenants.
Borrowing Base Assets. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that hold 11 assets financed by the facility, and the related TRS entities, which wholly own the TRS Lessees that lease each of the borrowing base assets. There are currently 11 hotel properties deemed borrowing base assets and an additional seven hotel properties that may be contributed to the borrowing base to increase borrowing availability.
GIC Joint Venture Term Loan
In connection with the NCI Transaction, on January 13, 2022, certain subsidiaries of the GIC Joint Venture, Summit JV MR 2, LLC, Summit JV MR 3, LLC and Summit NCI NOLA BR 184, LLC (collectively, the “Borrowers”), the GIC Joint Venture, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $410.0 million senior secured term loan facility (the “GIC Joint Venture Term Loan”) with Bank of America, N.A., as administrative agent and initial lender, Wells Fargo Bank, National Association, as syndication agent and an initial lender, and BofA Securities, Inc. and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners.
Neither the Operating Partnership nor the Company are borrowers or guarantors of the GIC Joint Venture Term Loan. The GIC Joint Venture Term Loan is guaranteed by the GIC Joint Venture and all of the Borrowers’ existing and future subsidiaries, subject to certain exceptions.
The GIC Joint Venture Term Loan provides for a $410.0 million term loan. The GIC Joint Venture Term Loan has an accordion feature which permits an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan will mature on January 13, 2026 and can be extended for one 12-month period at the option of the GIC Joint Venture, subject to certain conditions.
As of June 30, 2022, we had $410.0 million outstanding on the GIC Joint Venture Term Loan bearing interest at a floating rate of SOFR plus 2.86%. The interest rate at June 30, 2022 was 4.55%.
Borrowing Base Assets
The GIC Joint Venture Term Loan is secured primarily by a first priority pledge of the Borrowers’ equity interests in the subsidiaries that hold a direct or indirect interest in the 27 hotel properties and two parking facilities purchased in the NCI Transaction that constitute borrowing base assets. The GIC Joint Venture Term Loan contains terms, conditions and covenants for typical for similar credit facilities.
For additional information concerning the GIC Joint Venture Term Loan, please see our Current Report on Form 8-K filed on January 14, 2022.
PACE Loan
As part of the NCI Transaction, a subsidiary of the GIC Joint Venture assumed a PACE loan of approximately $6.5 million. The loan bears fixed interest at 6.10%, has an amortization period of 20 years, and matures on July 31, 2040. The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender.
Brickell Mortgage Loan
In June 2022, the Company entered into a joint venture (the "Brickell Joint Venture") with C-F Brickell, LLC, a Delaware limited liability company that was the developer of the AC/Element Hotel ("C-F Brickell"), to facilitate the exercise of the Initial Purchase Option to acquire a 90% equity interest in the Brickell Joint Venture, which owned a 100% interest in the AC/Element Hotel. On June 10, 2022, the Brickell Joint Venture entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida to finance the dual-branded 264-guestroom AC/Element Hotel. The City National Bank Loan provides for an interest rate equal to one-month term SOFR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize based on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank Loan is prepayable at any time without penalty.
NOTE 6 - LEASES
The Company has operating leases related to the land under certain hotel properties, conference centers, parking spaces, automobiles, our corporate office and other miscellaneous office equipment. These leases have remaining terms of 1 year to 77 years, some of which include options to extend the leases for additional years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
Certain of our lease agreements include rental payments based on a percentage of revenue over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or restrictive covenants that materially affect our business. In addition, we lease certain owned real estate to third parties. We recorded gross third-party tenant income of $2.1 million and $0.5 million during the three months ended June 30, 2022 and 2021, respectively, and $4.4 million and $1.1 million for the six months ended June 30, 2022 and 2021, respectively, which were recorded in Other income in the Condensed Consolidated Statement of Operations.
On January 1, 2019, the Company adopted ASC No. 842, Leases, and recognized right-of-use assets and related liabilities. The right-of-use assets and related liabilities include renewal options reasonably certain to be exercised. We base our lease calculations on our estimated incremental borrowing rate. As of June 30, 2022, our weighted average incremental borrowing rate was 4.76%.
During the three months ended June 30, 2022 and 2021, the Company's total operating lease cost was $1.0 million and $0.8 million, respectively, and the operating cash outflow from operating leases was $0.9 million and $0.7 million, respectively. During the six months ended June 30, 2022 and 2021, the Company's total operating lease cost was $1.9 million and $1.6 million, respectively, and the operating cash outflow from operating leases was $1.8 million and $1.4 million, respectively. As of June 30, 2022, the weighted average operating lease term was 36.6 years.
Operating lease maturities as of June 30, 2022 are as follows (in thousands):
| | | | | |
| 2022 | $ | 998 | |
| 2023 | 1,264 | |
| 2024 | 1,205 | |
| 2025 | 1,209 | |
| 2026 | 1,222 | |
| Thereafter | 37,808 | |
Total lease payments (1) | 43,706 | |
| Less interest | (21,982) | |
| Total | $ | 21,724 | |
(1)Certain payments above include future increases to the minimum fixed rent based on the Consumer Price Index in effect at the initial measurement of the lease balances.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Information about our derivative financial instruments at June 30, 2022 and December 31, 2021 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Notional Amount | | Fair Value |
| Contract date | | Effective Date | | Expiration Date | | Average Annual Effective Fixed Rate | | June 30, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
| October 2, 2017 | | January 29, 2018 | | January 31, 2023 | | 1.98 | % | | $ | 100,000 | | | $ | 100,000 | | | $ | 482 | | | $ | (1,617) | |
| October 2, 2017 | | January 29, 2018 | | January 31, 2023 | | 1.98 | % | | 100,000 | | | 100,000 | | | 476 | | | (1,629) | |
| June 11, 2018 | | September 28, 2018 | | September 30, 2024 | | 2.87 | % | | 75,000 | | | 75,000 | | | 299 | | | (3,831) | |
| June 11, 2018 | | December 31, 2018 | | December 31, 2025 | | 2.93 | % | | 125,000 | | | 125,000 | | | 30 | | | (8,646) | |
| | | | | | | | $ | 400,000 | | | $ | 400,000 | | | $ | 1,287 | | | $ | (15,723) | |
In July 2022, we entered into two new interest rate swap agreements. One interest rate swap agreement has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of six years. Regions Bank is the counterparty and the swap provides for a fixed rate of 2.5625%. The second interest rate swap has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of four years. Capital One Bank, N.A. is the counterparty and the swap provides for a fixed rate of 2.6%.
Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At June 30, 2022, our four interest rate swaps were in an asset position. At December 31, 2021, all of our interest rate swaps were in a liability position. The substantial change in value related to our interest rate swaps during the first and second quarters of 2022 was due to increases in interest rates. Derivative assets related to our interest rate swaps are recorded in Other assets, and other and derivative liabilities are included in Accrued expenses and other in our Condensed Consolidated Balance Sheets. We are not required to post any collateral related to these agreements and are not in breach of any financial provisions of the agreements.
Changes in the fair value of the hedging instruments are deferred in Other comprehensive income and are reclassified to Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings. In the next twelve months, we estimate that $1.4 million will be reclassified from Other comprehensive income and recorded as an decrease to Interest expense.
The table below details the location in the financial statements of the realized and unrealized gain or loss related to derivative financial instruments designated as cash flow hedges (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the
Three Months Ended
June 30, | | For the
Six Months Ended
June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Unrealized gain (loss) recorded in Other comprehensive income on derivative financial instruments | | $ | 3,211 | | | $ | (1,004) | | | $ | 13,024 | | | $ | 2,881 | |
| Loss reclassified from Other comprehensive income to Interest expense | | $ | (1,685) | | | $ | (2,366) | | | $ | (3,985) | | | $ | (4,684) | |
| Total interest expense in which the effects of cash flow hedges are recorded | | $ | (15,118) | | | $ | (10,962) | | | $ | (28,557) | | | $ | (21,750) | |
| | | | | | | | |
NOTE 8 - EQUITY
Common Stock
The Company is authorized to issue up to 500,000,000 shares of common stock, $0.01 par value per share (the "Common Stock"). Each outstanding share of our Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power.
On May 9, 2022, the Company and the Operating Partnership entered into an equity distribution agreement (the “Equity Distribution Agreement”) with a group of underwriters as sales agents for the Company, principals and/or, with certain exceptions, forward sellers (in any such capacity, each a “Manager” and, collectively, the “Managers”) and certain banks as forward purchasers (in such capacity, each a “Forward Purchaser” and, collectively, the “Forward Purchasers”), providing for the offer and sale of shares of the Company’s Common Stock, having a maximum aggregate offering price of up to $200,000,000 through or to the Managers, as the Company’s sales agents or, if applicable, as forward sellers, or directly to the Managers, as principals (the “2022 ATM Program”). To date, we have not sold any shares of our Common Stock under the 2022 ATM Program.
Changes in Common Stock during the six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| For the Six Months Ended
June 30, |
| 2022 | | 2021 |
| Beginning common shares outstanding | 106,337,724 | | | 105,708,787 | |
| | | |
| Common Unit redemptions | — | | | 2,500 | |
| Grants under the Equity Plan | 735,371 | | | 860,910 | |
| Annual grants to independent directors | 84,889 | | | 60,546 | |
| | | |
| | | |
| Performance share and other forfeitures | (3,173) | | | (60,823) | |
| Shares retained for employee tax withholding requirements | (260,800) | | | (155,605) | |
| Ending common shares outstanding | 106,894,011 | | | 106,416,315 | |
Preferred Stock
The Company is authorized to issue up to 100,000,000 shares of preferred stock, $0.01 par value per share, of which 89,600,000 is currently undesignated, 6,400,000 shares have been designated as 6.25% Series E Cumulative Redeemable Preferred Stock (the "Series E preferred shares") and 4,000,000 shares have been designated as 5.875% Series F Cumulative Redeemable Preferred Stock (the "Series F preferred shares").
The Company's outstanding shares of preferred stock (collectively, “Preferred Shares”) rank senior to our Common Stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirements. The Company may not redeem the Series E or Series F preferred shares prior to November 13, 2022 and August 12, 2026, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25 per share, plus any accumulated, accrued and unpaid distributions up to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s Common Stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each Series E preferred share is 3.1686 shares of Common Stock and each Series F preferred share is 5.8275 shares of Common Stock, all subject to certain adjustments.
The Company pays dividends at an annual rate of $1.5625 for each Series E preferred share and $1.46875 for each Series F preferred share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
NOTE 9 - NON-CONTROLLING INTERESTS AND REDEEMABLE NON-CONTROLLING INTERESTS
Non-controlling Interests in Operating Partnership
Pursuant to the limited partnership agreement of our Operating Partnership, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of Common Stock at the time of redemption; however, the Company has the option to redeem Common Units with shares of our Common Stock on a one-for-one basis. The number of shares of our Common Stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations. On January 13, 2022 and March 23, 2022, in connection with the NCI Transaction, the Operating Partnership issued 15,864,674 Common Units as partial consideration for the purchase.
At June 30, 2022 and December 31, 2021, NewcrestImage and other unaffiliated third parties owned 15,989,471 and 124,797 of Common Units of the Operating Partnership, respectively, representing approximately 13% and less than 1% of the Common Units of the Operating Partnership for each period.
We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (loss) allocated to these Common Units is included on the Company’s Condensed Consolidated Statements of Operations as Net income (loss) attributable to non-controlling interests.
Non-controlling Interests in Joint Ventures
At June 30, 2022, the Company is a partner with a majority equity interest in two joint ventures as described below. We classify the non-controlling interests in our joint ventures as a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (losses) allocated to these non-controlling interests is included on the Company’s Condensed Consolidated Statements of Operations as Net income (losses) attributable to non-controlling interests.
GIC Joint Venture
In July 2019, the Company entered into a joint venture agreement with GIC, Singapore’s sovereign wealth fund, to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the GIC Joint Venture and intends to invest 51% of the equity capitalization of the limited partnership, with GIC investing the remaining 49%. The Company earns fees for providing services to the GIC Joint Venture and will have the potential to earn incentive fees based on the GIC Joint Venture achieving certain return thresholds. As of June 30, 2022, the GIC Joint Venture owns the 39 hotel properties containing 5,414 guestrooms in nine states.
The GIC Joint Venture owns the hotel properties through master real estate investment trusts (“Master REIT”) and subsidiary REITs (“Subsidiary REIT”). All of the hotel properties owned by the GIC Joint Venture are leased to taxable REIT subsidiaries of the Subsidiary REITs (“Subsidiary REIT TRSs”). To qualify as a REIT, the Master REIT and each Subsidiary REIT must meet all of the REIT requirements provided in the the Internal Revenue Code. Taxable income related to the Subsidiary REIT TRSs is subject to federal, state and local income taxes at applicable tax rates.
Brickell Joint Venture
In June 2022, the Company entered into the Brickell Joint Venture to facilitate the exercise of the Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. Our joint venture partner, C-F Brickell, owns the remaining 10% equity interest in the Brickell Joint Venture. The Company has an option to purchase the remaining 10% equity interest in the Brickell Joint Venture from C-F Brickell in December 2026 pursuant to the exercise of the Second Purchase Option at its market value on the exercise date. The Company serves as the managing member of the Brickell Joint Venture.
Redeemable Non-controlling Interests
In connection with the NCI Transaction, Summit Hotel GP, LLC, a wholly-owned subsidiary of the Company and the sole general partner of the Operating Partnership, on its own behalf as general partner of the Operating Partnership and on behalf of the limited partners of the Operating Partnership, on January 13, 2022, entered into the Tenth Amendment (the “Tenth Amendment”) to the First Amended and Restated Agreement of Limited Partnership of the Operating Partnership, to provide for the issuance of up to 2,000,000 Series Z Preferred Units. The Series Z Preferred Units rank on a parity with the Operating
Partnership’s Series E and Series F Preferred Units and holders will receive quarterly distributions at a rate of 5.25% per year. From issuance until the tenth anniversary of their issuance, the Series Z Preferred Units will be redeemable at the holder’s request at any time, or in connection with a change of control of the Company, for, at the Company’s election, cash or shares of the Company’s 5.25% Series Z Cumulative Perpetual Preferred Stock (which will be designated and authorized following notice of redemption by holder of the Series Z Preferred Units) on a one-for-one basis. After the fifth anniversary of their issuance, the Company may redeem the Series Z Preferred Units for cash at a redemption amount of $25 per unit. For a 90-day period immediately following both the tenth and the eleventh anniversaries of their issuance or in connection with a change of control of the Company, the Series Z Preferred Units will be redeemable at the holder’s request for cash at a redemption amount of $25 per unit. On January 13, 2022 and March 23, 2022, in connection with the NCI Transaction, the Operating Partnership issued 2,000,000 Series Z Preferred Units as partial consideration for the purchase. At June 30, 2022, the redeemable Series Z Preferred Units issued in connection with the NCI Transaction are recorded as temporary equity and reflected as Redeemable non-controlling interests on our Consolidated Condensed Balance Sheet.
NOTE 10 - FAIR VALUE MEASUREMENT
The following table presents information about our financial instruments measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at June 30, 2022 using |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Interest rate swaps | | $ | — | | | $ | 1,287 | | | $ | — | | | $ | 1,287 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2021 using |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| | | | | | | | |
| Purchase option related to real estate loans | | $ | — | | | $ | — | | | $ | 2,800 | | | $ | 2,800 | |
| Liabilities: | | | | | | | | |
| Interest rate swaps | | — | | | 15,723 | | | — | | | 15,723 | |
The original fair value of the Initial Purchase Option was estimated using the Black-Scholes model. The Initial Purchase Option related to the acquisition of the AC/Element Hotel and did not have a readily determinable fair value at December 31, 2021. As such, the Initial Purchase Option was recorded at historical cost that was estimated using the Black-Scholes model.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Franchise Agreements
We expensed fees related to our franchise agreements of $12.9 million and $5.9 million for the three months ended June 30, 2022 and 2021, respectively, and $23.0 million and $10.0 million for the six months ended June 30, 2022, and 2021, respectively.
Management Agreements
Our hotel properties operate pursuant to management agreements with various professional third-party management companies. The terms of our management agreements range from month-to-month to twenty-five years with various extension provisions. Each management company receives a base management fee, which is a percentage of total hotel property revenues. In some
cases there are also monthly fees for certain services, such as accounting, based on the number of guestrooms. Generally, there
are also incentive fees based on attaining certain financial thresholds. Management fee expenses were $5.0 million and $2.3 million for the three months ended June 30, 2022 and 2021, respectively, and $8.8 million and $3.9 million for the six months ended June 30, 2022, and 2021, respectively.
Litigation
We are involved from time to time in litigation arising in the ordinary course of business. There are currently no pending legal actions that we believe would have a material effect on our financial position or results of operations.
NOTE 12 - EQUITY-BASED COMPENSATION
Our currently outstanding equity-based awards were issued under the Equity Plan which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive awards. Stock options granted may be either incentive stock options or non-qualified stock options. Vesting terms may vary with each grant, and stock option terms are generally five to ten years. At June 30, 2022, we only have outstanding restricted stock awards. All of our outstanding equity-based awards are classified as equity awards.
Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes time-based restricted stock award activity under our Equity Plan for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | | Number
of Shares | | Weighted Average
Grant Date
Fair Value | | Aggregate
Current Value |
| | | | | (per share) | | (in thousands) |
| Non-vested at December 31, 2021 | | 605,470 | | | $ | 9.98 | | | $ | 5,909 | |
| Granted | | 316,643 | | | 9.83 | | | |
| Vested | | (259,044) | | | (10.05) | | | |
| Forfeited | | (3,173) | | | (10.29) | | | |
| Non-vested at June 30, 2022 | | 659,896 | | | $ | 9.85 | | | $ | 4,797 | |
The awards granted to our non-executive employees prior to 2022 vest over a four-year period based on continuous service (20% on the first, second and third anniversary of the grant date and 40% on the fourth anniversary of the grant date). The awards granted to our non-executive employees in 2022 vest over a three-year period based on continuous service (25% on the first and second anniversary of the grant date and 50% on the third anniversary of the grant date).
The awards granted to our executive officers generally vest over a three-year period based on continuous service (25% on the first and second anniversary of the grant date and 50% on the third anniversary of the grant date) or in certain circumstances upon a change in control.
The holders of these awards have the right to vote their unvested restricted shares of common stock and receive all dividends declared and paid whether or not vested. The fair value of time-based restricted stock awards granted is calculated based on the market value of our common stock on the date of grant.
Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes performance-based restricted stock activity under the Equity Plan for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | | Number
of Shares | | Weighted Average
Grant Date
Fair Value (1) | | Aggregate
Current Value |
| | | | | (per share) | | (in thousands) |
| Non-vested at December 31, 2021 | | 1,002,866 | | | $ | 11.92 | | | $ | 9,788 | |
| Granted | | 306,435 | | | 9.83 | | | |
| Vested | | (302,327) | | | (12.81) | | | |
| | | | | | |
| Non-vested at June 30, 2022 | | 1,006,974 | | | $ | 11.76 | | | $ | 7,321 | |
(1) The amounts included in this column represent the expected future value of the performance-based restricted stock awards calculated using the Monte Carlo simulation valuation model.
Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our common stock on the grant date. The fair value of the performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model. These awards cliff vest on the third anniversary of the grants based on our percentile ranking within the SNL U.S. REIT Hotel Index at the end of the period or upon a change in control. The awards require continuous service during the measurement period and are subject to the other conditions described in the Equity Plan or award document.
The number of shares the executive officers may earn under these awards range from zero shares to twice the number of shares granted based on our percentile ranking within the index at the end of the measurement period. In addition, a portion of the performance-based shares may be earned based on the Company's absolute total shareholder return calculated during the performance period.
The holders of these grants have the right to vote the granted shares of Common Stock and any dividends declared accrue and will be subject to the same vesting conditions as the awards. Further, if additional shares are earned based on our percentile ranking within the index, dividend payments will be issued as if the additional shares had been held throughout the measurement period.
Equity-Based Compensation Expense
Equity-based compensation expense included in Corporate general and administrative expenses in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Time-based restricted stock | | $ | 651 | | | $ | 843 | | | $ | 1,645 | | | $ | 1,508 | |
| Performance-based restricted stock | | 720 | | | 974 | | | 3,393 | | | 1,878 | |
| Director stock | | 770 | | | 583 | | | 802 | | | 583 | |
| | $ | 2,141 | | | $ | 2,400 | | | $ | 5,840 | | | $ | 3,969 | |
We recognize equity-based compensation expense ratably over the vesting periods. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions. During the six months ended June 30, 2022, we granted a new member of our Board of Directors 3,234 shares of fully vested shares of our Common Stock at $9.94 per share and we granted members of our Board of Directors 81,655 shares of fully vested shares of our Common stock at $9.43 per share.
Unrecognized equity-based compensation expense for all non-vested awards pursuant to our Equity Plan was $10.9 million at June 30, 2022 and will be recorded as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2022 | | 2023 | | 2024 | | 2025 | | |
| Time-based restricted stock | | $ | 5,225 | | | $ | 1,302 | | | $ | 2,334 | | | $ | 1,396 | | | $ | 193 | | | |
| Performance-based restricted stock | | 5,658 | | | 1,439 | | | 2,552 | | | 1,458 | | | 209 | | | |
| | | $ | 10,883 | | | $ | 2,741 | | | $ | 4,886 | | | $ | 2,854 | | | $ | 402 | | | |
The Company's former Executive Vice President and Chief Operating Officer retired in March 2022. The Company recorded $1.3 million of additional stock-based compensation expense during the period related to the modification of certain stock award agreements. This amount was comprised of $0.4 million related to time-based restricted stock awards and $0.9 million related to performance-based restricted stock awards.
NOTE 13 - INCOME TAXES
As a REIT, we generally will not be subject to U.S. federal income tax on ordinary income and capital gains income generated by our REIT activities that we distribute to our stockholders. We are subject to federal and state income taxes on the earnings of our TRS Lessees. In addition, our Operating Partnership is subject to tax in a limited number of local and state jurisdictions.
The Company recorded income tax expense of $6.4 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded income tax expense of $4.4 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively. Due to the effects of the Pandemic, certain of our TRS Lessees have incurred operating losses in the past and are expected to be in a cumulative loss for the foreseeable future. A cumulative loss is significant negative evidence that the realizability of our deferred tax assets at June 30, 2022 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all our deferred tax assets at June 30, 2022.
We had no unrecognized tax benefits at June 30, 2022. We expect no significant changes in unrecognized tax benefits within the next year.
NOTE 14 - EARNINGS PER SHARE
We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested time-based restricted stock awards with non-forfeitable dividends and for our common stock. Our non-vested time-based restricted stock awards with non-forfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested time-based restricted stock awards with non-forfeitable dividends do not have such an obligation so they are not allocated losses.
Below is a summary of the components used to calculate basic earnings per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the
Three Months Ended
June 30, | | For the
Six Months Ended
June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | | |
| Net income before amounts allocable to non-controlling interests and participating securities | | $ | 23,313 | | | $ | (20,569) | | | $ | 14,340 | | | $ | (53,440) | |
| Less: | | | | | | | | |
| Preferred dividends | | (3,968) | | | (3,709) | | | (7,938) | | | (7,418) | |
| Dividends paid on additional performance shares earned | | (83) | | | — | | | (83) | | | — | |
| Preferred distributions | | (655) | | | — | | | (1,210) | | | — | |
| (Income) loss allocable to participating securities | | (1,310) | | | — | | | — | | | — | |
| (Income) loss attributable to non-controlling interest in Operating Partnership | | — | | | 34 | | | (678) | | | 88 | |
| (Income) loss attributable to non-controlling interest in joint ventures | | (9,031) | | | 1,843 | | | (8,949) | | | 3,295 | |
| Net income (loss) attributable to common stockholders | | $ | 8,266 | | | $ | (22,401) | | | $ | (4,518) | | | $ | (57,475) | |
| Denominator: | | | | | | | | |
| Weighted average common shares outstanding - basic | | 105,199 | | | 104,495 | | | 105,049 | | | 104,387 | |
| | | | | | | | |
| Net income (loss) per share available to common stockholders - basic | | $ | 0.08 | | | $ | (0.21) | | | $ | (0.04) | | | $ | (0.55) | |
Below is a summary of the components used to calculate diluted earnings per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the
Three Months Ended
June 30, | | For the
Six Months Ended
June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | | |
| Net income (loss) per share attributable to common stockholders | | $ | 8,266 | | | $ | (22,401) | | | $ | (4,518) | | | $ | (57,475) | |
| | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted average common shares outstanding - basic | | 105,199 | | | 104,495 | | | 105,049 | | | 104,387 | |
| Dilutive effect of equity-based compensation awards | | 164 | | | — | | | — | | | — | |
| Dilutive effect of Common Units of Operating Partnership | | 15,989 | | | — | | | — | | | — | |
| Weighted average common shares outstanding - diluted | | 121,352 | | | 104,495 | | | 105,049 | | | 104,387 | |
| | | | | | | | |
| Net income (loss) per share available to common stockholders - diluted | | $ | 0.07 | | | $ | (0.21) | | | $ | (0.04) | | | $ | (0.55) | |
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures.
Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the
restricted cash reserves.
Supplemental cash flow information for the six months ended June 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | |
| | Six Months Ended
June 30, |
| | 2022 | | 2021 |
| | | | |
| Cash payments for interest | | $ | 23,395 | | | $ | 18,184 | |
| Accrued acquisitions and improvements to hotel properties | | $ | 9,381 | | | $ | 1,804 | |
| | | | |
| Cash payments for income taxes, net of refunds | | $ | 2,268 | | | $ | 214 | |
| Debt assumed to complete acquisition of properties | | $ | 382,205 | | | $ | — | |
| Assumption of leases and other assets and liabilities in connection with the acquisition of a portfolio of properties | | $ | 9,206 | | | $ | — | |
| Conversion of a mezzanine loan to complete acquisition of hotel properties | | $ | 29,875 | | | $ | — | |
| Exercise of purchase option to complete acquisition of hotel properties | | $ | 2,800 | | | $ | — | |
| Non-controlling contribution to complete an acquisition of hotel properties | | $ | 6,922 | | | $ | — | |
| Non-controlling interests in operating partnership issued to complete acquisition of a portfolio of properties | | $ | 157,513 | | | $ | — | |
| Redeemable non-controlling interests in operating partnership issued to complete acquisition of a portfolio of properties | | $ | 50,000 | | | $ | — | |
NOTE 16 - SUBSEQUENT EVENTS
Dividends
On August 2, 2022, our Board of Directors declared cash dividends of $0.390625 per share of 6.25% Series E Cumulative Redeemable Preferred Stock and $0.3671875 per share of 5.875% Series F Cumulative Redeemable Preferred Stock. The Board of Directors also declared on behalf of the Operating Partnership, a cash dividend of $0.328125 per share of the Operating Partnership's unregistered 5.25% Series Z Cumulative Perpetual Preferred Units.
On August 2, 2022, our Board of Directors also reinstated and declared a quarterly cash dividend of $0.04 per share on our Common Stock and per Common Unit of the Operating Partnership.
These dividends are payable on August 31, 2022 to holders of record as of August 17, 2022.
Amendments to the 2018 Senior Credit Facility
In July 2022, we executed certain modifications to our 2018 Senior Credit Facility which adjusted certain of the key financial covenants, changed the benchmark rate from LIBOR to SOFR, and provided for two-six month extension options applicable to each of the $400 million Revolver and the $200 million Term Loan. In July 2022, Bank of America, N.A. entered into successor administrative agent documentation to succeed Deutsche Bank AG New York Branch as administrative agent on the 2018 Senior Credit Facility. See “Note 5 – Debt” for additional information.
Interest Rate Swaps
In July 2022, we entered into two new interest rate swap agreements. One interest rate swap agreement has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of six years. Regions Bank is the counterparty and the swap provides for a fixed rate of 2.5625%. The second interest rate swap has a notional amount of $100.0 million and an effective date of January 31, 2023 with a term of four years. Capital One Bank, N.A. is the counterparty and the swap provides for a fixed rate of 2.6%.
PART I - FINANCIAL INFORMATION
