SUNSTONE HOTEL INVESTORS, INC. The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report. Information regarding comparisons between the years endedDecember 31, 2018 and 2017, as well as certain 2018 and 2017 transactions and other details, is included in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission (the "SEC") onFebruary 14, 2019 , under the caption "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
OverviewSunstone Hotel Investors, Inc. is aMaryland corporation. We operate as a self-managed and self-administered real estate investment trust ("REIT"). A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust for federal income tax purposes. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests ofSunstone Hotel Partnership, LLC (the "Operating Partnership"), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary,Sunstone Hotel TRS Lessee, Inc. , which, directly or indirectly, leases all of our hotels from theOperating Partnership , and engages independent third-parties to manage
our hotels. We own hotels that we consider to be LTRR® inthe United States , specifically hotels in urban and resort locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As part of our ongoing portfolio management strategy, on an opportunistic basis, we may also selectively sell hotel properties that we believe do not meet our criteria of LTRR®. As ofDecember 31, 2019 , we had interests in 20 hotels held for investment (the "20 Hotels"). All but two (theBoston Park Plaza and theOceans Edge Resort & Marina) of the 20 Hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. Our two unbranded hotels are located in top urban and resort markets that have enabled them to establish awareness with both group and transient customers. The following tables summarize our total portfolio and room data fromJanuary 1, 2017 throughDecember 31, 2019 , adjusted for the hotels acquired and sold during the respective periods. 2019 2018 2017
Portfolio Data-Hotels Number of hotels-beginning of period 21 27 28 Add: Acquisitions
- - 1
Less: Dispositions (1) (6) (2)
Number of hotels-end of period (1) 20 21 27
(1) As of
due to their subsequent sales in January 2018 .
2019 2018 2017Portfolio Data-Rooms Number of rooms-beginning of period 10,780 13,203 13,666 Add: Acquisitions
- - 175
Add: Room expansions 17 4 5
Less: Dispositions (187) (2,427) (643)
Number of rooms-end of period 10,610 10,780 13,203
Average rooms per hotel-end of period 531 513 489
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2019 Highlights
During 2019, we repurchased 3,783,936 shares of our common stock for$50.1 million , including fees and commissions. InFebruary 2020 , our board of directors increased the authorized capacity under our stock repurchase program up to an aggregate of$500.0 million of our common and preferred stock. Future repurchases will depend on various factors, including our capital needs, as well as the price of our common and preferred stock. InOctober 2019 , we sold the leasehold interest in the 187-room Courtyard byMarriott Los Angeles for net proceeds of$49.5 million , and recognized a net gain on the sale of$42.9 million . The sale of the hotel did not represent a strategic shift that had a major impact on our business plan or our primary markets; therefore, the hotel did not qualify as a discontinued operation.
Operating Activities
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
? Room revenue, which is the product of the number of rooms sold and the average
daily room rate, or "ADR," as defined below;
? Food and beverage revenue, which is comprised of revenue realized in the hotel
food and beverage outlets as well as banquet and catering events; and
Other operating revenue, which includes ancillary hotel revenue and other items
primarily driven by occupancy such as telephone/internet, parking, spa,
facility and resort fees, entertainment and other guest services. Additionally,
? this category includes, among other things, attrition and cancellation revenue,
tenant revenue derived from hotel space and marina slips leased by third parties and any business interruption proceeds or performance guarantee payments received.
Expenses. Our expenses consist of the following:
? Room expense, which is primarily driven by occupancy and, therefore, has a
significant correlation with room revenue;
Food and beverage expense, which is primarily driven by food and beverage sales
? and banquet and catering bookings and, therefore, has a significant correlation
with food and beverage revenue;
Other operating expense, which includes the corresponding expense of other
? operating revenue, advertising and promotion, repairs and maintenance,
utilities, and franchise costs;
Property tax, ground lease and insurance expense, which includes the expenses
associated with property tax, ground lease and insurance payments, each of
? which is primarily a fixed expense, however property tax is subject to regular
revaluations based on the specific tax regulations and practices of each
municipality, along with our noncash operating lease expenses, general excise
tax assessed byHawaii and city taxes imposed bySan Francisco ;
Other property-level expenses, which includes our property-level general and
administrative expenses, such as payroll, benefits and other employee-related
? expenses, contract and professional fees, credit and collection expenses,
employee recruitment, relocation and training expenses, consulting fees, management fees and other expenses;
Corporate overhead expense, which includes our corporate-level expenses, such
as payroll, benefits and other employee-related expenses, amortization of
? deferred stock compensation, business acquisition and due diligence expenses,
legal expenses, association, contract and professional fees, board of director
expenses, entity-level state franchise and minimum taxes, travel expenses,
office rent and other customary expenses;
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Depreciation and amortization expense, which includes depreciation on our hotel
buildings, improvements, furniture, fixtures and equipment ("FF&E"), along with
? amortization on our finance lease right-of-use assets, franchise fees and
certain intangibles. Additionally, this category includes depreciation and
amortization related to FF&E for our corporate office; and
Impairment loss, which includes the charges we have recognized to reduce the
? carrying values of certain hotels on our balance sheet to their fair values in
association with our impairment evaluations.
Other Revenue and Expense. Other revenue and expense consists of the following:
Interest and other income, which includes interest we have earned on our
restricted and unrestricted cash accounts, as well as any energy or other
? rebates or property insurance proceeds we have received, miscellaneous income
or any gains or losses we have recognized on sales or redemptions of assets
other than real estate investments;
Interest expense, which includes interest expense incurred on our outstanding
? fixed and variable-rate debt and finance lease obligations, gains or losses on
interest rate derivatives, amortization of deferred financing costs, and any
loan fees incurred on our debt;
? Gain on sale of assets, which includes the gains we recognized on our hotel
sales that do not qualify as discontinued operations;
Loss on extinguishment of debt, which includes losses recognized on amendments
? or early repayments of mortgages or other debt obligations from the accelerated
amortization of deferred financing costs, along with any other costs incurred;
Income tax benefit (provision), net which includes federal and state income
taxes related to continuing operations charged to the Company net of any
? refunds received, any adjustments to deferred tax assets, liabilities or
valuation allowance, and any adjustments to unrecognized tax positions, along
with any related interest and penalties incurred;
Income from discontinued operations, which includes the results of operations
for any hotels or other real estate investments sold during the reporting
? period that qualify as a discontinued operation, along with the gain or loss
realized on the sale of these assets and any extinguishments of related debt or
income tax provisions;
Income from consolidated joint venture attributable to noncontrolling interest,
? which includes net income attributable to a third-party's 25.0% ownership
interest in the joint venture that owns the
Preferred stock dividends, which includes dividends accrued on our Series E
? Cumulative Redeemable Preferred Stock ("Series E preferred stock") and our
Series F Cumulative Redeemable Preferred Stock ("Series F preferred stock").
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
? Occupancy, which is the quotient of total rooms sold divided by total rooms
available;
? Average daily room rate ("ADR"), which is the quotient of room revenue divided
by total rooms sold;
Revenue per available room ("RevPAR"), which is the product of occupancy and
? ADR, and does not include food and beverage revenue, or other operating
revenue;
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Comparable RevPAR, which we define as the RevPAR generated by hotels we owned
as of the end of the reporting period, but excluding those hotels that we
classified as held for sale, those hotels that are undergoing a material
renovation or repositioning and those hotels whose room counts have materially
changed during either the current or prior year. For hotels that were not owned
for the entirety of the comparison periods, comparable RevPAR is calculated
using RevPAR generated during periods of prior ownership. We refer to this
? subset of our hotels used to calculate comparable RevPAR as our "Comparable
Portfolio." Currently our Comparable Portfolio is comprised of the 20 Hotels,
and includes both our ownership and prior ownership results for the Oceans Edge
Resort & Marina acquired in
from the
period before acquiring the hotel. We performed a limited review of the
information as part of our analysis of the acquisition. We caution you not to
place undue reliance on the prior ownership information;
RevPAR index, which is the quotient of a hotel's RevPAR divided by the average
RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100
? indicates a hotel is achieving higher RevPAR than the average of its
competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR
index;
EBITDAre, which is net income (loss) excluding: interest expense; benefit or
provision for income taxes, including any changes to deferred tax assets,
? liabilities or valuation allowances and income taxes applicable to the sale of
assets; depreciation and amortization; gains or losses on disposition of
depreciated property (including gains or losses on change in control); and any
impairment write-downs of depreciated property; Adjusted EBITDAre, excluding noncontrolling interest, which is EBITDAre
adjusted to exclude: the net income (loss) allocated to a third-party's 25.0%
ownership interest in the joint venture that owns the
Bayfront, along with the noncontrolling partner's pro rata share of any
EBITDAre components; amortization of deferred stock compensation; amortization
? of favorable and unfavorable contracts; amortization of right-of-use assets and
liabilities; the cash component of ground lease expense for our finance lease
obligations that has been included in interest expense; the impact of any gain
or loss from undepreciated asset sales or property damage from natural
disasters; any lawsuit settlement costs; prior year property tax assessments or
credits; the write-off of development costs associated with abandoned projects;
and any other nonrecurring identified adjustments;
Funds from operations ("FFO") attributable to common stockholders, which is net
income (loss), excluding: preferred stock dividends; gains and losses from
? sales of property; real estate-related depreciation and amortization (excluding
amortization of deferred financing costs and right-of-use assets); any real
estate-related impairment losses; and the noncontrolling partner's pro rata
share of net income (loss) and any FFO components; and
Adjusted FFO attributable to common stockholders, which is FFO attributable to
common stockholders adjusted to exclude: amortization of favorable and
unfavorable contracts; real estate-related amortization of right-of-use assets
and liabilities; noncash interest on our derivative and finance lease
obligations; income tax benefits or provisions associated with any changes to
? deferred tax assets, liabilities or valuation allowances, the application of
net operating loss carryforwards and uncertain tax positions; gains or losses
due to property damage from natural disasters; any lawsuit settlement costs;
prior year property tax assessments or credits; the write-off of development
costs associated with abandoned projects; non-real estate-related impairment
losses; the noncontrolling partner's pro rata share of any Adjusted FFO components; and any other nonrecurring identified adjustments.
Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
Demand. The demand for lodging generally fluctuates with the overall economy.
In 2018, Comparable Portfolio RevPAR , which was impacted by renovations at the
?
Hotels"), increased 2.9% as compared to 2017, with a 30 basis point decrease in
occupancy. In
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2019, Comparable Portfolio RevPAR, which was impacted by renovations at the
Resort & Marina and the Renaissance Harborplace (the "Four 2019 Renovation
Hotels"), increased 1.9% as compared to 2018, with a 10 basis point increase in
occupancy.
Supply. The addition of new competitive hotels affects the ability of existing
hotels to absorb demand for lodging and, therefore, impacts the ability to
drive RevPAR and profits. The development of new hotels is largely driven by
construction costs and expected performance of existing hotels. In aggregate,
we expect the
? market-by-market basis, some markets may experience new hotel room openings at
or greater than historic levels, including in
City,
hotel room openings. Additionally, an increase in the supply of vacation rental
or sharing services such as Airbnb also affects the ability of existing hotels
to drive RevPAR and profits.
Revenues and Expenses. We believe that marginal improvements in RevPAR index,
even in the face of declining revenues, are a good indicator of the relative
quality and appeal of our hotels, and our operators' effectiveness in
? maximizing revenues. Similarly, we also evaluate our operators' effectiveness
in minimizing incremental operating expenses in the context of increasing
revenues or, conversely, in reducing operating expenses in the context of
declining revenues.
With respect to improving RevPAR index, we continually work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Increased capital investment in our properties may lead to short-term revenue disruption and negatively impact RevPAR index. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses such as housekeeping, guest supplies, labor and utilities expense. Our Comparable Portfolio RevPAR index increased 240 basis points during 2019 as compared to 2018. The increase in our Comparable Portfolio RevPAR index was primarily due to increases in the RevPAR index at the following hotels: theWailea Beach Resort post-repositioning; theJW Marriott New Orleans and theMarriott Boston Long Wharf post-renovation; the Renaissance Orlando at SeaWorld® due to the addition of new meeting space at the hotel in 2019; and theMarriott Portland , which added new contract crew business this year, allowing the hotel to charge higher transient rates than its competitor hotels. These increases were partially offset by decreases in the RevPAR index primarily at the following hotels: the Renaissance Harborplace and theHilton San Diego Bayfront , which were both under renovation during 2019; theHilton New Orleans St. Charles due to increased competition and a lack of citywide conventions causing the market to decrease rates; the Renaissance Westchester, where several 2018 groups did not repeat in 2019 and there were no large association or golf events this year; and theHilton Garden Inn Chicago Downtown/Magnificent Mile due to a weak market and the hotel's high exposure to Chicago's volatile transient market. We continue to work with our operators to identify operational efficiencies designed to reduce expenses and our impact on the environment while minimally affecting guest experience and hotel employee satisfaction. Key asset management initiatives include working with our hotel operators to optimize hotel staffing levels (albeit ultimate staffing levels are determined by our operators), increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, eliminating waste and selectively combining certain food and beverage outlets. Our operators may have difficulty implementing certain operational efficiency initiatives and success levels may vary, as most categories of variable operating expenses, such as utilities and housekeeping labor costs, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. Our operators have experienced, either currently or in the past, increases in hourly wages, employee benefits, utility costs and property insurance, which have negatively affected our operating margins. Moreover, our operators are limited in their ability to reduce expenses without affecting brand standards or the competitiveness of our hotels. 42 Table of Contents Operating Results. The following table presents our operating results for our total portfolio for the years endedDecember 31, 2019 and 2018, including the amount and percentage change in the results between the two periods. 2019 2018 Change $ Change % (in thousands, except statistical data) REVENUES Room$ 767,392 $ 799,369 $ (31,977) (4.0) % Food and beverage 272,869 284,668 (11,799) (4.1) % Other operating 74,906 75,016 (110) (0.1) % Total revenues 1,115,167 1,159,053 (43,886) (3.8) % OPERATING EXPENSES Hotel operating 644,748 666,654 (21,906) (3.3) %
Other property-level expenses 130,321 132,419 (2,098) (1.6) % Corporate overhead 30,264 30,247 17 0.1 % Depreciation and amortization 147,748 146,449
1,299 0.9 %
Impairment loss 24,713 1,394 23,319 1,672.8 %
Total operating expenses 977,794 977,163 631 0.1 %
Interest and other income 16,557 10,500 6,057 57.7 %
Interest expense (54,223) (47,690) (6,533) (13.7) %
Gain on sale of assets 42,935 116,961 (74,026) (63.3) %Loss on extinguishment of debt - (835) 835 100.0 % Income before income taxes 142,642 260,826 (118,184) (45.3) % Income tax benefit (provision), net 151 (1,767) 1,918 108.5 % NET INCOME 142,793 259,059 (116,266) (44.9) % Income from consolidated joint venture attributable to noncontrolling interest (7,060) (8,614) 1,554 18.0 % Preferred stock dividends (12,830) (12,830) - - %
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ (114,712) (48.3) % 43 Table of Contents
The following table presents our operating results for our total portfolio for the years endedDecember 31, 2018 and 2017, including the amount and percentage change in the results between the two periods. 2018 2017 Change $ Change % (in thousands, except statistical data) REVENUES Room$ 799,369 $ 829,320 $ (29,951) (3.6) % Food and beverage 284,668 296,933 (12,265) (4.1) % Other operating 75,016 67,385 7,631 11.3 % Total revenues 1,159,053 1,193,638 (34,585) (2.9) % OPERATING EXPENSES Hotel operating 666,654 686,604 (19,950) (2.9) %
Other property-level expenses 132,419 138,525 (6,106) (4.4) % Corporate overhead 30,247 28,817 1,430 5.0 % Depreciation and amortization 146,449 158,634
(12,185) (7.7) % Impairment loss 1,394 40,053 (38,659) (96.5) % Total operating expenses 977,163 1,052,633 (75,470) (7.2) % Interest and other income 10,500 4,340 6,160 141.9 % Interest expense (47,690) (51,766) 4,076 7.9 % Gain on sale of assets 116,961 45,474 71,487 157.2 %
Loss on extinguishment of debt (835) (824) (11) (1.3) % Income before income taxes and discontinued operations 260,826 138,229 122,597 88.7 % Income tax (provision) benefit, net (1,767) 7,775 (9,542) (122.7) % Income from continuing operations 259,059 146,004 113,055 77.4 % Income from discontinued operations - 7,000 (7,000) 100.0 % NET INCOME 259,059 153,004 106,055 69.3 % Income from consolidated joint venture attributable to noncontrolling interest (8,614) (7,628) (986) (12.9) % Preferred stock dividends (12,830) (12,830) - - % INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS$ 237,615 $ 132,546 $
105,069 79.3 % Operating Statistics. The following tables include comparisons of the key operating metrics for our Comparable Portfolio. Operating statistics for our Comparable Portfolio include prior ownership 2017 results for theOceans Edge Resort & Marina, acquired by us inJuly 2017 . 2019 2018 Change Occ% ADR RevPAR Occ% ADR RevPAR Occ% ADR RevPAR Comparable Portfolio 83.7 %$ 234.26 $ 196.08 83.6 %$ 230.13 $ 192.39 10 bps 1.8 % 1.9 % 2018 2017 Change Occ% ADR RevPAR Occ% ADR
RevPAR Occ% ADR RevPAR
Comparable Portfolio 83.6 %
Summary of Operating Results. The year-over-year comparability of our operations is affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. We sold one hotel in 2019 and six hotels in 2018 (together the "SevenSold Hotels "). In addition, renovations at the Four 2019Renovation Hotels and the Four 2018Renovation Hotels negatively impacted our operating results in 2019 and 2018, respectively.
Room Revenue. Room revenue decreased
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Room revenue generated by the 20 Hotels increased
ADR
Increases Decreases
Hyatt Regency San Francisco Chicago hotels
JW Marriott New Orleans Hilton Times Square
Oceans Edge Resort & Marina
Renaissance Long Beach
Renaissance Orlando at SeaWorld®
Wailea Beach Resort The increase in occupancy at the 20 Hotels in 2019 as compared to 2018 was
caused by 21,765 more transient room nights partially offset by 13,925 fewer
group room nights. The overall changes in room nights occurred primarily at the
following hotels:
Transient Room Nights
Increases Decreases
Boston hotels Embassy Suites La Jolla
Chicago hotels Hilton San Diego Bayfront
Hyatt Regency San Francisco Oceans Edge Resort & Marina
JW Marriott New Orleans Renaissance Harborplace
Renaissance Los Angeles Airport Renaissance Orlando at SeaWorld®
Renaissance Washington DC
Wailea Beach Resort
Group Room Nights
Increases Decreases
Boston hotels Chicago hotels
JW Marriott New Orleans Hilton New Orleans St. Charles
Renaissance
Renaissance Washington DC
Renaissance Westchester Room Revenue generated by the 20 Hotels was negatively impacted during 2019 as compared to 2018 by the Four 2019Renovation Hotels , where a combined total of 19,678 room nights were out of service, displacing approximately$4.7 million in room revenue based on the hotels achieving a combined potential 79.1% occupancy rate and RevPAR of$195.63 without the renovations.
Food and Beverage Revenue. Food and beverage revenue decreased
Food and beverage revenue generated by the 20 Hotels increased$6.9 million in 2019 as compared to 2018, primarily due to changes in both banquet and event technology revenue and outlet revenue at the following hotels: Banquet and Event Technology Revenue Increases DecreasesBoston hotels Chicago hotelsJW Marriott New Orleans Hyatt Regency San Francisco Renaissance HarborplaceRenaissance Los Angeles Airport RenaissanceOrlando at SeaWorld® RenaissanceWestchester RenaissanceWashington DC Wailea Beach Resort 45 Table of Contents Outlet Revenue Increases DecreasesBoston hotelsHyatt Regency San Francisco
Other Operating Revenue. Other operating revenue decreased
Other operating revenue generated by the 20 Hotels increased$3.2 million in 2019 as compared to 2018, primarily due to increased facility and resort fees, tenant lease revenue, marina and watersports revenue, commission revenue, group and transient cancellation and attrition revenue, retail revenue and parking revenue. These increases in other operating revenue were partially offset by$5.8 million in business interruption proceeds recognized in 2018 by theOceans Edge Resort & Marina related to Hurricane Irma disruption in 2017 and 2018.Hotel Operating Expenses . Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance, and other hotel operating expenses decreased$21.9 million , or 3.3%, in 2019 as compared to 2018.
Hotel operating expenses generated by the 20 Hotels increased$21.6 million in 2019 as compared to 2018. This increase is primarily related to the corresponding increases in room revenue, food and beverage revenue and other operating revenue. In addition, hotel operating expenses increased in 2019 as compared to 2018 due to the following increased expenses: advertising and promotion due to increased payroll and related expenses, as well as increased general advertising expenses; repairs and maintenance due to increased payroll and related expenses, as well as increased building repairs and contract and professional fees; franchise costs due to increased revenue at the majority of the 20 Hotels; property and liability insurance due to increased rates; property taxes due to increased rates and assessments received at several of our hotels; taxes at theHyatt Regency San Francisco due to new taxes imposed by the city; andHawaii general excise tax due to higher revenue at theWailea Beach Resort . These increases in other operating expenses at the 20 Hotels were partially offset by the following decreased expenses: utilities expense due to environmental and sustainability projects undertaken at our hotels to reduce our overall energy consumption; franchise costs at our Chicago hotels due to decreased revenues; rent expense at the Renaissance Washington DC due to ourMay 2018 purchase of the exclusive perpetual rights to a small portion of the hotel's meeting space, restaurant and fitness center that were previously leased; and ground lease expense at theHilton San Diego Bayfront due to decreased percentage rent and at theJW Marriott New Orleans due to our purchase of the land underlying the hotel inJuly 2018 .
Other Property-Level Expenses. Other property-level expenses decreased
Other property-level expenses generated by the 20 Hotels increased$8.2 million in 2019 as compared to 2018, primarily due to increased computer hardware and software expenses, basic and incentive management fees, payroll and related expenses, credit and collection expenses, employee relocation and training, legal fees and licenses and permits. In addition, other property-level expenses increased in 2019 as compared to 2018 resulting from a one-time$1.0 million rebate received from Marriott in 2018 related to its sale of a hospitality procurement supply company. These increases were partially offset by a decrease in supplies expense. 46 Table of Contents
Corporate Overhead Expense. Corporate overhead expense remained relatively constant in 2019 as compared to 2018, as increased payroll and related expenses, deferred stock compensation and investor relations were mostly offset by decreased legal fees, due diligence expenses and contract and professional fees.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased
Depreciation and amortization expense generated by the 20 Hotels increased$7.3 million in 2019 as compared to 2018, due to increased depreciation and amortization at our newly renovated hotels and corporate office space. These increases were partially offset by decreases in the amortization of intangible assets, consisting of advanced deposits related to our purchases of theBoston Park Plaza and theWailea Beach Resort , which were fully amortized in 2018, as well as by assets at our hotels being fully depreciated.
Impairment Loss. Impairment loss totaled
We recorded impairment losses of
Interest and Other Income. Interest and other income increased$6.1 million , or 57.7%, in 2019 as compared to 2018, primarily due to higher interest rates. During 2019, we recognized$14.1 million in interest income,$1.0 million related to an area of protection agreement withHyatt Corporation for theHyatt Regency San Francisco ,$0.9 million related to a contingency funding payment received from the prior owner of one of our hotels,$0.3 million in energy rebates due to energy efficient renovations at our hotels and$0.3 million in vendor rebates and other miscellaneous income. In 2018, we recognized$9.2 million in interest and miscellaneous income, along with$1.1 million in insurance proceeds for hurricane-related property damage at twoHouston hotels we subsequently sold inOctober 2018 and$0.1 million in energy rebates.
Interest Expense. We incurred interest expense as follows (in thousands):
2019 2018
Interest expense on debt and finance lease
obligations $ 45,381 $ 45,933
Noncash interest on derivatives and finance lease obligations, net 6,051
(1,190)
Amortization of deferred financing costs 2,791
2,947 Total interest expense$ 54,223 $ 47,690
Interest expense increased
Excluding the noncash impact from changes in the fair market value of our derivatives, interest expense would have decreased$0.7 million in 2019 as compared to 2018 due to lower debt balances and deferred financing costs resulting from monthly amortization, lower interest expense on our term loans, which we amended and repriced inOctober 2018 , and lower interest expense on our finance lease obligations due to our sale of the Courtyard byMarriott Los Angeles inOctober 2019 . These decreases were partially offset by higher interest on our variable rate debt during 2019 as compared to 2018. Our weighted average interest rate per annum, including our variable-rate debt obligation, was approximately 4.1% and 4.2% atDecember 31, 2019 and 2018, respectively. Approximately 77.4% and 77.6% of our outstanding notes payable had fixed interest rates, including the effects of interest rate swap agreements, atDecember 31, 2019 and 2018, respectively.
Gain on Sale of Assets. Gain on sale of assets totaled
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In 2019, we recognized a
In 2018, we recognized a$15.7 million net gain on theJanuary 2018 sale of theMarriott Philadelphia and theMarriott Quincy , a$53.1 million net gain on theJuly 2018 sale of theHyatt Regency Newport Beach , a$0.3 million net gain on theOctober 2018 sale of twoHouston hotels, and a$47.8 million net gain on theDecember 2018 sale of theMarriott Tysons Corner .
Loss on Extinguishment of Debt. Loss on extinguishment of debt was zero and
In 2018, we recognized a loss of
Income Tax Benefit (Provision), Net. Income tax benefit (provision), net was incurred as follows (in thousands):
2019 2018
Current $ 839 $ (635)
Deferred (688) (1,132)
Income tax benefit (provision), net
We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, we and theOperating Partnership may also be subject to various state and local income taxes. In 2019, we recognized a current net income tax benefit of$0.8 million , which includes tax credits and refunds available under the Tax Cuts & Jobs Act of 2017 and operating loss carryforwards for our taxable entities, net of combined current federal and state income tax expense based on 2019 projected taxable income. In 2019, we also recognized a net deferred income tax provision of$0.7 million related to adjustments to our deferred tax assets, net. In 2018, we recognized a current net income tax provision of$0.6 million , which includes combined current federal and state income tax expense based on 2018 projected taxable income, net of operating loss carryforwards for our taxable entities. In 2018, we also recognized a net deferred income tax provision of$1.1 million related to adjustments to our deferred tax assets, net. Income from Consolidated Joint Venture Attributable to Noncontrolling Interest. Income from consolidated joint venture attributable to noncontrolling interest, which represents the outside 25.0% interest in the entity that owns theHilton San Diego Bayfront , totaled$7.1 million and$8.6 million in 2019 and 2018, respectively.
Preferred Stock Dividends. Preferred stock dividends totaled
In both 2019 and 2018, we recognized preferred stock dividends of
Non-GAAP Financial Measures. We use the following "non-GAAP financial measures"
that we believe are useful to investors as key supplemental measures of our
operating performance: EBITDAre; Adjusted EBITDAre, excluding noncontrolling
interest; FFO attributable to common stockholders; Adjusted FFO attributable to
common stockholders; and Comparable Portfolio revenues. These measures should
not be considered in isolation or as a substitute for measures of performance in
accordance with GAAP. In addition, our calculation of these measures may not be
comparable to other companies that do not define such terms exactly the same as
the Company. These non-GAAP measures are used in addition to and in conjunction
with results presented in accordance with GAAP. They should not be considered as
alternatives to net income, cash flow from operations, or any other operating
performance measure prescribed by GAAP. These non-GAAP financial measures
reflect additional ways of viewing our operations that we believe, when viewed
with our GAAP results and the reconciliations to the corresponding GAAP
financial measures, provide a more complete understanding of factors and trends
affecting our business than could be obtained absent this disclosure. For
example, we believe that Comparable Portfolio revenues are useful to both us and
investors in evaluating our operating performance by removing the impact of
non-hotel results such as the amortization of favorable and unfavorable tenant
lease contracts. We also believe that our use of Comparable Portfolio revenues
is useful to both us and our investors as it facilitates the
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Table of Contents
comparison of our operating results from period to period by removing fluctuations caused by any acquisitions or dispositions, as well as by those hotels that we classify as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure. We present EBITDAre in accordance with guidelines established by theNational Association of Real Estate Investment Trusts ("NAREIT"), as defined in itsSeptember 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate." We believe EBITDAre is a useful performance measure to help investors evaluate and compare the results of our operations from period to period in comparison to our peers. NAREIT defines EBITDAre as net income (calculated in accordance with GAAP) plus interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change in control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in the value of depreciated property in the affiliate, and adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates. We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDAre, excluding noncontrolling interest, when combined with the primary GAAP presentation of net income, is beneficial to an investor's complete understanding of our operating performance. In addition, we use both EBITDAre and Adjusted EBITDAre, excluding noncontrolling interest as measures in determining the value of hotel acquisitions and dispositions. We adjust EBITDAre for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDAre, excluding noncontrolling interest:
Amortization of deferred stock compensation: we exclude the noncash expense
? incurred with the amortization of deferred stock compensation as this expense
is based on historical stock prices at the date of grant to our corporate
employees and does not reflect the underlying performance of our hotels.
Amortization of favorable and unfavorable contracts: we exclude the noncash
amortization of the favorable management contract asset recorded in conjunction
with our acquisition of the
Mile, along with the favorable and unfavorable tenant lease contracts, as
? applicable, recorded in conjunction with our acquisitions of the
Plaza, the
Resort. We exclude the noncash amortization of favorable and unfavorable
contracts because it is based on historical cost accounting and is of lesser
significance in evaluating our actual performance for the current period.
Amortization of right-of-use assets and liabilities: we exclude the
? amortization of our right-of-use assets and liabilities as these expenses are
based on historical cost accounting and do not reflect the actual rent amounts
due to the respective lessors or the underlying performance of our hotels.
Finance lease obligation interest - cash ground rent: we include an adjustment
for the cash finance lease expenses recorded on the ground lease at the
Courtyard by
and the building lease at the Hyatt Centric Chicago Magnificent Mile. We
? determined that both of these leases are finance leases, and, therefore, we
include a portion of the lease payments each month in interest expense. We
adjust EBITDAre for these two finance leases in order to more accurately
reflect the actual rent due to both hotels' lessors in the current period, as
well as the operating performance of both hotels.
Undepreciated asset transactions: we exclude the effect of gains and losses on
? the disposition of undepreciated assets because we believe that including them
in Adjusted EBITDAre, excluding noncontrolling interest is not consistent with
reflecting the ongoing performance of our assets. Gains or losses from debt transactions: we exclude the effect of finance
charges and premiums associated with the extinguishment of debt, including the
? acceleration of deferred financing costs from the original issuance of the debt
being redeemed or retired because, like interest expense, their removal helps
investors evaluate and compare the results of our operations from period to
period by removing the impact of our capital structure.
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Table of Contents
Acquisition costs: under GAAP, costs associated with completed acquisitions
? that meet the definition of a business are expensed in the year incurred. We
exclude the effect of these costs because we believe they are not reflective of
the ongoing performance of the Company or our hotels.
Noncontrolling interest: we exclude the noncontrolling partner's pro rata share
? of the net income (loss) allocated to the
partnership, as well as the noncontrolling partner's pro rata share of any
EBITDAre and Adjusted EBITDAre components.
Cumulative effect of a change in accounting principle: from time to time, the
FASB promulgates new accounting standards that require the consolidated
? statement of operations to reflect the cumulative effect of a change in
accounting principle. We exclude these one-time adjustments, which include the
accounting impact from prior periods, because they do not reflect our actual
performance for that period.
Other adjustments: we exclude other adjustments that we believe are outside the
ordinary course of business because we do not believe these costs reflect our
actual performance for the period and/or the ongoing operations of our hotels.
? Such items may include: lawsuit settlement costs; prior year property tax
assessments or credits; the write-off of development costs associated with
abandoned projects; property-level restructuring, severance and management
transition costs; lease terminations; and property insurance proceeds or
uninsured losses.
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The following table reconciles our net income to EBITDAre and Adjusted EBITDAre,
excluding noncontrolling interest for our total portfolio for the years ended
December 31, 2019 , 2018 and 2017 (in thousands):
2019 2018 2017
Net income $ 142,793 $ 259,059 $ 153,004
Operations held for investment:
Depreciation and amortization 147,748 146,449 158,634
Interest expense 54,223 47,690 51,766
Income tax (benefit) provision, net (151) 1,767 (7,775) Gain on sale of assets (42,935) (116,916) (45,747) Impairment loss 24,713 1,394 40,053 EBITDAre 326,391 339,443 349,935 Operations held for investment: Amortization of deferred stock compensation 9,313
9,007 8,042 Amortization of favorable and unfavorable contracts, net
- (2) 218
Amortization of right-of-use assets and liabilities (1)
(782) (1,054) (871)
Finance lease obligation interest - cash ground rent (2,175) (2,361) (1,867)
Loss on extinguishment of debt - 835 824
Hurricane-related (insurance proceeds) uninsured
losses, net - (990) 1,690
Closing costs - completed acquisition - - 729
Prior year property tax adjustments, net 168 (203) (800)
Prior owner contingency funding (900) - -
Property-level restructuring, severance and
management transition costs - 29 -
Noncontrolling interest: Income from consolidated joint venture attributable to noncontrolling interest
(7,060) (8,614) (7,628)
Depreciation and amortization (2,875) (2,556) (2,767)
Interest expense (2,126) (1,982) (1,950)
Amortization of right-of-use asset and liability (1) 290 290 290
Loss on extinguishment of debt - - (205)
Discontinued operations:
Gain on sale of assets - - (7,000)
Adjustments to EBITDAre, net (6,147)
(7,601) (11,295)
Adjusted EBITDAre, excluding noncontrolling interest
Amounts originally reported for 2018 and 2017 for amortization of lease
(1) intangibles and noncash ground rent have been reclassified to amortization of
right-of-use assets and liabilities to conform to the current year's
reporting.
Adjusted EBITDAre, excluding noncontrolling interest was$320.2 million in 2019,$331.8 million in 2018 and$338.6 million in 2017. The sale of theSeven Sold Hotels caused Adjusted EBITDAre, excluding noncontrolling interest to decrease by$15.4 million in 2019 as compared to 2018. Excluding the impact of these hotel sales, Adjusted EBITDAre, excluding noncontrolling interest would have increased$3.8 million primarily due to additional EBITDAre generated by theBoston hotels, theJW Marriott New Orleans , the Renaissance Orlando at SeaWorld® and theWailea Beach Resort , combined with an increase in interest and other income. These increases were partially offset by decreased EBITDAre generated by the Chicago hotels, theHilton New Orleans St. Charles , theHilton San Diego Bayfront , theHilton Times Square , theOceans Edge Resort & Marina, the Renaissance Harborplace and the RenaissanceWestchester . We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the NAREIT definition of "FFO applicable to common shares." Our presentation may not be comparable to FFO reported by other REITs that do not define 51 Table of Contents
the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.
We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
Amortization of favorable and unfavorable contracts: we exclude the noncash
amortization of the favorable management contract asset recorded in conjunction
with our acquisition of the
Mile, along with the favorable and unfavorable tenant lease contracts, as
? applicable, recorded in conjunction with our acquisitions of the
Plaza, the
Resort. We exclude the noncash amortization of favorable and unfavorable
contracts because it is based on historical cost accounting and is of lesser
significance in evaluating our actual performance for the current period.
Real estate amortization of right-of-use assets and liabilities: we exclude the
amortization of our real estate right-of-use assets and liabilities, which
? includes the amortization of both our finance and operating lease intangibles
(with the exception of our corporate operating lease), as these expenses are
based on historical cost accounting and do not reflect the actual rent amounts
due to the respective lessors or the underlying performance of our hotels.
Gains or losses from debt transactions: we exclude the effect of finance
charges and premiums associated with the extinguishment of debt, including the
? acceleration of deferred financing costs from the original issuance of the debt
being redeemed or retired, as well as the noncash interest on our derivatives
and finance lease obligations. We believe that these items are not reflective
of our ongoing finance costs.
Acquisition costs: under GAAP, costs associated with completed acquisitions
? that meet the definition of a business are expensed in the year incurred. We
exclude the effect of these costs because we believe they are not reflective of
the ongoing performance of the Company or our hotels.
Noncontrolling interest: we deduct the noncontrolling partner's pro rata share
? of any FFO adjustments related to our consolidated
partnership.
Cumulative effect of a change in accounting principle: from time to time, the
FASB promulgates new accounting standards that require the consolidated
? statement of operations to reflect the cumulative effect of a change in
accounting principle. We exclude these one-time adjustments, which include the
accounting impact from prior periods, because they do not reflect our actual
performance for that period.
Other adjustments: we exclude other adjustments that we believe are outside the
ordinary course of business because we do not believe these costs reflect our
actual performance for that period and/or the ongoing operations of our hotels.
Such items may include: lawsuit settlement costs; prior year property tax
assessments or credits; the write-off of development costs associated with
? abandoned projects; changes to deferred tax assets, liabilities or valuation
allowances; property-level restructuring, severance and management transition
costs; lease terminations; property insurance proceeds or uninsured losses; and
income tax benefits or provisions associated with the application of net
operating loss carryforwards, uncertain tax positions or with the sale of
assets other than real estate investments.
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The following table reconciles our net income to FFO attributable to common
stockholders and Adjusted FFO attributable to common stockholders for our total
portfolio for the years ended December 31, 2019 , 2018 and 2017 (in thousands):
2019 2018 2017
Net income $ 142,793 $ 259,059 $ 153,004
Preferred stock dividends (12,830) (12,830) (12,830)
Operations held for investment:
Real estate depreciation and amortization (1) 145,260 144,358 156,707
Gain on sale of assets (42,935) (116,916) (45,747)
Impairment loss 24,713 1,394 40,053
Noncontrolling interest:
Income from consolidated joint venture
attributable to noncontrolling interest (7,060) (8,614) (7,628)
Real estate depreciation and amortization (2,875) (2,556) (2,767)
Discontinued operations:
Gain on sale of assets - - (7,000)
FFO attributable to common stockholders 247,066 263,895 273,792
Operations held for investment: Amortization of favorable and unfavorable contracts, net - (2) 218 Real estate amortization of right-of-use assets and liabilities (1) 590 415 599 Noncash interest on derivatives and finance lease obligations, net 6,051 (1,190) 3,106 Loss on extinguishment of debt - 835 824 Hurricane-related (insurance proceeds) uninsured losses, net - (990) 1,690 Closing costs - completed acquisition - - 729 Prior year property tax adjustments, net 168 (203) (800) Prior owner contingency funding (900) - - Property-level restructuring, severance and management transition costs - 29 - Noncash income tax provision (benefit), net 688 1,132 (9,235) Noncontrolling interest: Real estate amortization of right-of-use asset and liability (1) 290 290 290 Noncash interest on derivative, net - (1) (30) Loss on extinguishment of debt - - (205) Adjustments to FFO attributable to common stockholders, net 6,887
315 (2,814)
Adjusted FFO attributable to common stockholders
Amounts originally reported for 2018 and 2017 for real estate depreciation
and amortization related to finance leases, amortization of lease intangibles
(1) and noncash ground rent have been reclassified to real estate amortization of
right-of-use assets and liabilities to conform to the current year's
reporting.
Adjusted FFO attributable to common stockholders was $254.0 million in 2019,
$264.2 million in 2018 and $271.0 million in 2017. The sale of the Seven Sold
Hotels caused Adjusted FFO attributable to common stockholders to decrease by
$15.4 million in 2019 as compared to 2018.
Excluding the impact of these hotel sales, Adjusted FFO attributable to common
stockholders would have increased $5.1 million in 2019 as compared to 2018,
primarily due to the same reasons noted in the discussion above regarding
Adjusted EBITDAre, excluding noncontrolling interest. In addition, Adjusted FFO
attributable to common stockholders increased in 2019 as compared to 2018 due to
a decrease in current income tax expense.
Liquidity and Capital Resources
During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from sales of hotels and other assets, property insurance, debt refinancings, and common stock issuances pursuant to separate "At the Market" Agreements (the "ATM Agreements") with each ofMerrill Lynch, Pierce, Fenner & Smith Incorporated ,J.P. Morgan Securities LLC andWells Fargo Securities, LLC . Our primary uses of cash were for capital 53 Table of Contents
expenditures for hotels and other assets, acquisitions of assets, operating expenses, repurchases of our common stock, repayment of notes payable, dividends and distributions on our common and preferred stock and distributions to our joint venture partner. We cannot be certain that traditional sources of funds will be available in the future. Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in hotel revenue and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was$290.9 million in 2019 and$305.3 million in 2018. The net decrease in cash provided by operating activities in 2019 as compared to 2018 was primarily due to the sale of theSeven Sold Hotels and renovation-related disruption at the Four 2019Renovation Hotels , partially offset by increased operating cash generated by the 20 Hotels, including the Four 2018Renovation Hotels , combined with increased interest and other income. Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels and other assets. Net cash (used in) or provided by investing activities in 2019 and 2018 was as follows (in thousands): 2019 2018 Proceeds from sales of assets$ 49,538 $ 348,032
Proceeds from property insurance -
1,100
Acquisitions of hotel property and other assets (705)
(15,147)
Acquisitions of intangible assets (25)
(18,543)
Renovations and additions to hotel properties and other assets (95,958)
(159,076)
Net cash (used in) provided by investing activities
In 2019, we received proceeds of$49.5 million from the sale of the Courtyard byMarriott Los Angeles . This cash inflow was offset as we paid$0.7 million and$25,000 to purchase two additional wet boat slips and an additional dry boat slip, respectively, at theOceans Edge Resort & Marina, and invested$96.0 million for renovations and additions to our portfolio and other assets. In 2018, we received proceeds of$348.0 million from our sales of six hotels and surplus FF&E at our hotels. We also received$1.1 million in insurance proceeds for hurricane-related property damage at our soldHouston hotels. These cash inflows were partially offset as we paid$15.1 million to acquire the land underlying theJW Marriott New Orleans , and a total of$18.5 million for acquisitions of intangible assets, including$18.4 million to purchase the exclusive perpetual rights to certain space at the Renaissance Washington DC and$0.1 million to purchase four additional dry boat slips at theOceans Edge Resort & Marina, and invested$159.1 million for renovations and additions to our hotel portfolio and other assets. Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our distributions paid, issuance and repurchase of common stock, issuance and repayment of notes payable, debt restructurings and issuance and redemption of other forms of capital, including preferred equity. Net cash used in financing activities in 2019 and 2018 was as follows (in thousands): 2019 2018
Proceeds from common stock offerings $ - $
45,125
Payment of common stock offering costs -
(784)
Repurchases of outstanding common stock (50,088)
-
Repurchase of common stock for employee tax obligations (4,435) (4,232) Proceeds from notes payable and debt restructuring
- 65,000
Payments on notes payable and debt restructuring (7,965)
(72,574)
Payments of costs related to extinguishment of debt -
(131)
Payments of deferred financing costs -
(4,012)
Dividends and distributions paid (170,166)
(177,622)
Distributions to noncontrolling interest (8,512)
(9,369)
Net cash used in financing activities$ (241,166) $ (158,599) 54 Table of Contents In 2019, we paid the following:$50.1 million to repurchase 3,783,936 shares of our outstanding common stock;$4.4 million to repurchase common shares to satisfy the tax obligations in connection with the vesting of restricted common shares issued to employees;$8.0 million in principal payments on our notes payable;$170.2 million in dividends and distributions to our common and preferred stockholders; and$8.5 million in distributions to the noncontrolling interest in theHilton San Diego Bayfront . In 2018, we received total net proceeds of$44.3 million from the issuance of our common stock, and$65.0 million from the repricing of our unsecured term loans. These cash inflows were offset as we paid the following:$4.2 million to repurchase common shares to satisfy the tax obligations in connection with the vesting of restricted common shares issued to employees; a total of$72.6 million in payments on our notes payable and debt restructuring, including$7.6 million in principal payments on our notes payable and$65.0 million from the repricing of our unsecured term loans;$0.1 million in unsecured term loan extinguishment costs;$4.0 million in deferred financing costs related to amending our credit facility, repricing our unsecured term loans and refinancing the loan secured by theHilton San Diego Bayfront ;$177.6 million in dividends and distributions to our common and preferred stockholders; and$9.4 million in distributions to the noncontrolling interest in theHilton San Diego Bayfront . Future. We expect our primary uses of cash to be for operating expenses, capital investments in our hotels, repayment of principal on our notes payable and possibly our credit facility, interest expense, dividends and distributions on our common and preferred stock, potential purchases of debt or other securities in other hotels, and acquisitions of hotels or interests in hotels, including possibly hotel portfolios. We may also continue to repurchase shares of our common and/or preferred stock pursuant to theFebruary 2017 stock repurchase program authorized by our board of directors. ThroughDecember 31, 2019 , we have repurchased 3,783,936 shares of our common stock for a total purchase price of$50.1 million , including fees and commissions. InFebruary 2020 , our board of directors authorized an increase to the existing stock repurchase program to acquire up to$500.0 million of our common and preferred stock. The authorization has no stated expiration date. Future repurchases will depend on various factors, including our capital needs, as well as the price of our common and preferred stock. We expect our primary sources of cash will continue to be our operating activities, working capital, notes payable and our credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the maintenance of our credit ratios, appropriate levels of liquidity and continued balance sheet strength. Consistent with maintaining our low leverage and balance sheet strength, in the near-term, we expect to fund future acquisitions, if any, largely through cash on hand, appropriate amounts of newly issued debt, the issuance of common or preferred equity, provided that our stock price is at an attractive level, or by proceeds received from sales of existing assets in order to selectively grow the quality and scale of our portfolio. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility, including under the ATM Agreements we entered into inFebruary 2017 . Under the terms of the ATM Agreements, we may issue and sell from time to time through or to the managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to$300.0 million . ThroughDecember 31, 2019 , we have received$122.3 million in net proceeds from the issuance of 7,467,709 shares of our common stock in connection with the ATM Agreements. InFebruary 2020 , our board of directors reauthorized the ATM Agreements, or new similar agreements, allowing the Company to issue common stock up to an aggregate offering amount of$300.0 million . The reauthorization has no stated expiration date. We have not yet amended the existing ATM Agreements or entered into similar agreements providing for such increased capacity, and will do so if and when our management determines it appropriate. If and when we do seek to amend the ATM Agreements or enter into new similar agreements, there can be no assurance that the capital markets will be available to us on favorable terms or at all. Cash Balance. As ofDecember 31, 2019 , our unrestricted cash balance was$816.9 million . By minimizing our need to access external capital by maintaining higher than typical cash balances, our financial security and flexibility are meaningfully enhanced because we are able to fund our business needs (including payment of cash distributions on our common stock, when declared) and near-term debt maturities with our cash on hand. Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. During 2019, these provisions were triggered by theHilton Times Square , and as ofDecember 31, 2019 ,$1.0 million in excess cash generated by the hotel was held in a lockbox account for the benefit of the lender and included in restricted cash on our consolidated balance sheet. 55 Table of Contents
Debt. As ofDecember 31, 2019 , we had$974.9 million of consolidated debt,$865.0 million of cash and cash equivalents, including restricted cash, and total assets of$3.9 billion . We believe that by controlling debt levels, staggering maturity dates and maintaining a highly flexible structure, we will have lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants. The$77.7 million mortgage secured by theHilton Times Square matures inNovember 2020 , and is available to be repaid without penalty beginning inAugust 2020 . We are exploring various options in advance of the upcoming maturity. In addition, the$220.0 million mortgage secured by theHilton San Diego Bayfront initially matures inDecember 2020 , but has three one-year options to extend. We intend to exercise all three of our available one-year options to extend the maturity toDecember 2023 . As ofDecember 31, 2019 , all of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, except the$220.0 million non-recourse mortgage on theHilton San Diego Bayfront , which is subject to an interest rate cap agreement that caps the interest rate at 6.0% untilDecember 2020 . Our remaining mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to our mortgage debt, as ofDecember 31, 2019 , we have two unsecured corporate-level term loans as well as two unsecured corporate-level senior notes. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt.
As of
We may in the future seek to obtain mortgages on one or more of our 15 unencumbered hotels (subject to certain stipulations under our unsecured term loans and senior notes), 14 of which are currently held by subsidiaries whose interests are pledged to our credit facility. Our 15 unencumbered hotels include:Boston Park Plaza ; Embassy Suites Chicago;Hilton Garden Inn Chicago Downtown/Magnificent Mile ;Hilton New Orleans St. Charles ; Hyatt Centric Chicago Magnificent Mile;Hyatt Regency San Francisco ;Marriott Boston Long Wharf ;Marriott Portland ;Oceans Edge Resort & Marina; Renaissance Harborplace; RenaissanceLong Beach ;Renaissance Los Angeles Airport ; Renaissance Orlando at SeaWorld®; Renaissance Westchester; andWailea Beach Resort . Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility may be reduced. 56 Table of Contents Contractual Obligations
The following table summarizes our payment obligations and commitments as of
Payment due by period
Less Than 1 to 3 3 to 5 More than
Total 1 year years years 5 years
Notes payable (1) $ 974,863 $ 83,975 $ 199,693 $ 399,208 $ 291,987
Interest obligations on notes
payable (2) 172,412 39,840 62,660 41,167 28,745
Finance lease obligation,
including imputed interest (3) 109,415 1,403 2,806 2,806 102,400
Operating lease obligations,
including imputed interest (3)
(4) 112,102 7,519 15,192 15,408 73,983
Payments-in-lieu of taxes
obligation (5) 63,629 894 1,789 1,789 59,157
Construction commitments 47,599 47,599 - - -
Employment obligations 663 663 - - -
Total $ 1,480,683 $ 181,893 $ 282,140 $ 460,378 $ 556,272
Notes payable includes the
options to extend. We expect to exercise all three of our available one-year
options to extend the maturity to
Interest on our variable-rate debt obligation is calculated based on the
(2) variable rate at
rate derivative agreements.
(3) See Note 9 - Leases in the Notes to the Consolidated Financial Statements
(Item 8 of this Form 10-K).
Operating lease obligations on one of our ground leases expiring in 2071 (4) requires a reassessment of rent payments due after 2025, agreed upon by both
us and the lessor; therefore, no amounts are included in the above table for
this ground lease after 2025.
Under the terms of a sublease agreement at the
rent amounts are currently considered to be property taxes under a (5) payment-in-lieu of taxes ("PILOT") program, and will be paid beginning in
2020 through 2029. When the PILOT program ends in 2020, the sublease
agreement will be modified, rent amounts will be reassessed and we will
determine if the sublease agreement qualifies as a lease.
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground, building and airspace leases, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested$96.0 million in our portfolio and other assets during 2019,$159.1 million in 2018 and$115.1 million in 2017. As ofDecember 31, 2019 , we have contractual construction commitments totaling$47.6 million for ongoing renovations. If we renovate or develop additional hotels or other assets in the future, our capital expenditures will likely increase. With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel's applicable annual revenue. As ofDecember 31, 2019 , our balance sheet includes restricted cash of$45.6 million , which was held in FF&E reserve accounts for future capital expenditures at the majority of the 20 Hotels. According to certain loan agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year. 57 Table of Contents Seasonality and Volatility As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong inHawaii ,Key West andOrlando , the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong forHawaii ,Key West andNew York City ). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers' effectiveness in generating business and by events beyond our control, such as extreme weather conditions, natural disasters, terrorist attacks or alerts, civil unrest, public health concerns, government shutdowns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. Revenues for our Comparable Portfolio by quarter for 2017, 2018 and 2019 were as follows (dollars in thousands): First Second Third Fourth Revenues: Quarter Quarter Quarter Quarter Total 2017 Total revenues$ 280,743 $ 318,796 $ 303,909 $ 290,190 $ 1,193,638 Prior ownership revenues (1) 3,980 4,126 1,143 - 9,249 Sold hotel revenues (2) (45,186) (43,733) (41,243) (38,213) (168,375) Non-hotel revenues (3) (18) (22) (22) (20) (82) Total Comparable Portfolio revenues (4)$ 239,519 $ 279,167 $ 263,787 $ 251,957 $ 1,034,430 Quarterly Comparable Portfolio revenues as a percentage of total annual revenues 23.2 % 27.0 % 25.5 % 24.3 % 100 % 2018 Total revenues$ 271,446 $ 317,447 $ 289,308 $ 280,852 $ 1,159,053 Sold hotel revenues (2) (26,735) (27,681) (15,794) (9,417) (79,627) Non-hotel revenues (3) (832) (21) (25) (4,987) (5,865) Total Comparable Portfolio revenues (4)$ 243,879 $ 289,745 $ 273,489 $ 266,448 $ 1,073,561 Quarterly Comparable Portfolio revenues as a percentage of total annual revenues 22.7 % 27.0 % 25.5 % 24.8 % 100 % 2019 Total revenues$ 257,680 $ 302,896 $ 281,639 $ 272,952 $ 1,115,167 Sold hotel revenues (2) (3,070) (3,252) (3,337) (763) (10,422) Non-hotel revenues (3) (23) (25) (22) (22) (92) Total Comparable Portfolio revenues (4)$ 254,587 $ 299,619 $ 278,280 $ 272,167 $ 1,104,653 Quarterly Comparable Portfolio revenues as a percentage of total annual revenues 23.1 % 27.1 % 25.2 % 24.6 % 100 %
Prior ownership revenues include those generated by the
Marina. We obtained prior ownership information from the
hotel. We performed a limited review of the information as part of our
analysis of the acquisition. We caution you not to place undue reliance on
the prior ownership information.
Sold hotel revenues include those generated by the following: the Fairmont
Corner, which we sold in
2018, respectively; and the Courtyard by
in
Non-hotel revenues include the amortization of favorable and unfavorable
tenant lease contracts received in conjunction with our acquisitions of the
quarter of 2018 also include business interruption insurance proceeds of
million and
(4) Total Comparable Portfolio revenues include those generated by our 20 hotel
Comparable Portfolio.
Inflation
Inflation may affect our expenses, including, without limitation, by increasing such costs as labor, employee-related benefits, food, commodities, taxes, property and casualty insurance and utilities.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
("GAAP"). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses and related disclosure of contingent assets and
liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on
historical experience, information that is currently available to us and on
various other assumptions that we believe are reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
affect the most significant judgments and estimates used in the preparation of
our consolidated financial statements.
Impairment of long-lived assets. Impairment losses are recorded on long-lived
assets to be held and used by us when indicators of impairment are present and
the future undiscounted net cash flows, including potential sale proceeds,
expected to be generated by those assets, based on our anticipated investment
horizon, are less than the assets' carrying amount. No single indicator would
necessarily result in us preparing an estimate to determine if a hotel's future
undiscounted cash flows are less than the book value of the hotel. We use
judgment to determine if the severity of any single indicator, or the fact
there are a number of indicators of less severity that when combined, would
result in an indication that a hotel requires an estimate of the undiscounted
cash flows to determine if an impairment has occurred. If a hotel is considered
? to be impaired, the related assets are adjusted to their estimated fair value
and an impairment loss is recognized. The impairment loss recognized is
measured by the amount by which the carrying amount of the assets exceeds the
estimated fair value of the assets. We perform a fair value assessment, using a
discounted cash flow analysis to estimate the fair value of the hotel, taking
into account the hotel's expected cash flow from operations, our estimate of
how long we will own the hotel and the estimated proceeds from the disposition
of the hotel. The factors addressed in determining estimated proceeds from
disposition include anticipated operating cash flow in the year of disposition
and terminal capitalization rate. Our judgment is required in determining the
discount rate applied to estimated cash flows, the estimated growth of revenues
and expenses, net operating income and margins, the need for capital expenditures, as well as specific market and economic conditions.
Acquisition related assets and liabilities. Accounting for the acquisition of a
hotel property or other entity requires an allocation of the purchase price to
the assets acquired and the liabilities assumed in the transaction at their
respective relative fair values for an asset acquisition or at their estimated
fair values for a business combination. The most difficult estimations of
individual fair values are those involving long-lived assets, such as property,
? equipment and intangible assets, together with any finance or operating lease
right-of-use assets and their related obligations. When we acquire a hotel
property or other entity, we use all available information to make these fair
value determinations, and engage independent valuation specialists to assist in
the fair value determinations of the long-lived assets acquired and the
liabilities assumed. Due to the inherent subjectivity in determining the
estimated fair value of long-lived assets, we believe that the recording of
acquired assets and liabilities is a critical accounting policy. In addition, the acquisition of a hotel property or other entity requires an analysis to determine if it qualifies as the purchase of a business or an asset. If the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the transaction is an asset acquisition. Transaction costs associated with asset acquisitions are capitalized and subsequently depreciated over the life of the related asset, while the same costs associated with a business combination are expensed as incurred and included in corporate overhead on our consolidated statements of operations. Also, asset acquisitions are not subject to a measurement period, as are business combinations.
Depreciation and amortization expense. Depreciation expense is based on the
estimated useful life of our assets. The life of the assets is based on a
? number of assumptions, including the cost and timing of capital expenditures to
maintain and refurbish our hotels, as well as specific market and economic
conditions. Hotel properties are depreciated using the straight-line method
over estimated useful lives primarily ranging from
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five to 40 years for buildings and improvements and three to 12 years for FF&E.
Finance lease right-of-use assets other than land are depreciated using the
straight-line method over the shorter of either their estimated useful life or
the life of the related finance lease obligation. Intangible assets are
amortized using the straight-line method over the shorter of their estimated
useful life or the length of the related agreement. While we believe our
estimates are reasonable, a change in the estimated lives could affect
depreciation expense and net income or the gain or loss on the sale of any of
our hotels. We have not changed the estimated useful lives of any of our assets
during the periods discussed.
Income taxes. To qualify as a REIT, we must meet a number of organizational and
operational requirements, including a requirement that we currently distribute
at least 90% of our REIT taxable income (determined without regard to the
deduction for dividends paid and excluding net capital gains) to our
stockholders. As a REIT, we generally will not be subject to federal corporate
income tax on that portion of our taxable income that is currently distributed
to stockholders. We are subject to certain state and local taxes on our income
and property, and to federal income and excise taxes on our undistributed
taxable income. In addition, our wholly owned TRS, which leases our hotels from
the
account for income taxes using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to the differences between the financial
? statement carrying amounts of existing assets and liabilities and their
respective income tax bases, and for net operating loss, capital loss and tax
credit carryforwards. The deferred tax assets and liabilities are measured
using the enacted income tax rates in effect for the year in which those
temporary differences are expected to be realized or settled. The effect on the
deferred tax assets and liabilities from a change in tax rates is recognized in
earnings in the period when the new rate is enacted. However, deferred tax
assets are recognized only to the extent that it is more likely than not that
they will be realized based on consideration of all available evidence,
including the future reversals of existing taxable temporary differences,
future projected taxable income and tax planning strategies. Valuation
allowances are provided if, based upon the weight of the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
We review any uncertain tax positions and, if necessary, we will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements. Tax positions not deemed to meet the "more-likely-than-not" threshold are recorded as a tax benefit or expense in the current year. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal
and certain states.
New Accounting Standards and Accounting Changes
See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.
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