# DiamondRock Hospitality Co (DRH) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DiamondRock Hospitality Co's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1298946/000129894623000015/drh-20221231.htm
Accession: 0001298946-23-000015
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/DRH/
All MD&A years: /company/DRH/mda/
Previous year: /company/DRH/mda/fy2021/ (FY 2021)
Next year: /company/DRH/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements about our business. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in "Special Note About Forward-Looking Statements" and "Risk Factors" contained in this Annual Report on Form 10-K and in our other reports that we file from time to time with the SEC.

Overview

DiamondRock Hospitality Company is a lodging-focused real estate company operating as a REIT for U.S. federal income tax purposes that owns a portfolio of premium hotels and resorts. As of December 31, 2022, we owned a portfolio of 35 premium hotels and resorts that contain 9,607 guest rooms located in 24 different markets in the United States.

As an owner, rather than an operator of lodging properties, we receive all of the operating profits or losses generated by our hotels after the payment of fees due to hotel managers and hotel brands, which are calculated based on the revenues and profitability of each hotel.

Key Indicators of Financial Condition and Operating Performance

We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), as well as other financial information that is not prepared in accordance with U.S. GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:

•Occupancy percentage;

•Average Daily Rate (or ADR);

•Rooms Revenue per Available Room (or RevPAR);

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•Earnings Before Interest, Income Taxes, Depreciation and Amortization (or EBITDA), Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate (or EBITDAre), and Adjusted EBITDA; and

•Funds From Operations (or FFO) and Adjusted FFO.

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 68% of our total revenues for the year ended December 31, 2022 and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms.

Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions generally, increasing inflation, rising interest rates, regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, increased use of lodging alternatives, new hotel construction and the pricing strategies of our competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of our hotels' global brands.

We also use EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO as measures of the financial performance of our business. See “Non-GAAP Financial Measures” for further discussion on these financial measures.

COVID-19 Pandemic

COVID-19 has had and continues to have a significant effect on our industry in general and our business in particular. The demand for lodging materially decreased beginning in March 2020 and remained low throughout 2021. During 2022, demand significantly improved as a result of vaccinations, lifting of governmental restrictions, and an overall increase in public demand for leisure travel, among other factors.

Four of our hotels (one of which was sold on June 30, 2021) had suspended operations for a period of time during the year ended December 31, 2021. All of our hotels were open during the year ended December 31, 2022.

The COVID-19 pandemic is expected to continue to contribute to uncertainty and volatility with respect to our results of operations, financial position and cash flows for 2023 as the recovery continues. We expect that the pace will vary from market to market and may be uneven in nature. Although leisure travel has rebounded and there were signs of a robust recovery in business travel in 2022 relative to 2021, there remains significant uncertainty regarding the future pace of recovery and whether and when business travel and larger group meetings will return to pre-pandemic levels. The emergence of new variant strains of COVID-19 has the potential to slow or reverse positive trends expected in 2023 and beyond.

See also “Risk Factors” in Part I, Item 1A of this report.

Overview of 2022

Key highlights for 2022 include the following:

Hotel Acquisitions. On January 6, 2022, we acquired the Tranquility Bay Beachfront Resort located in Marathon, Florida, for $62.4 million, including prorations and transaction costs. This acquisition included income from 84 units owned by third parties and the majority of the intervals in three units structured as vacation ownership. Subsequent to this purchase, we acquired four of the 84 units. On April 1, 2022, we acquired the Kimpton Shorebreak Fort Lauderdale Beach Resort located in Fort Lauderdale, Florida, for $35.6 million, including prorations and transaction costs. On November 21, 2022, we acquired the Lake Austin Spa Resort located in Austin, Texas, for $75.8 million, including prorations and transaction costs.

Financing Activity. On September 27, 2022, we entered into an amended and restated credit agreement that provides for a $400 million senior unsecured revolving credit facility and two term loan facilities in the aggregate amount of $800 million. We used the proceeds from the new term loans to repay our previously existing terms loans and amounts outstanding on our prior revolving credit facility, as well as four of our outstanding mortgage loans that were schedule to mature in 2023.

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Share Repurchases. On September 29, 2022, our board of directors approved a share repurchase program authorizing us to repurchase up to $200.0 million of our common stock through February 28, 2025. As of December 31, 2022, we have repurchased 1.6 million shares of common stock.

Common Dividends. In the third quarter, we resumed the payment of quarterly common dividends.

Outlook for 2023

Many economists expect that the U.S. economy may contract in the second half of 2023 as a result of actions by the Federal Reserve to restrain inflation. The ultimate timing and magnitude of a potential recession, however, is unknown. Travel demand is highly sensitive to changes in macroeconomic factors and the threat of even a mild recession creates a backdrop of uncertainty for the hospitality industry. The effect is compounded because the industry experienced a disproportionate impact from the COVID-19 pandemic and the subsequent recovery has been uneven across markets and customer segments.

Our portfolio is composed primarily of luxury and upper-upscale resorts and hotels located in popular leisure destinations and major urban markets. Our destination resorts have outperformed the recovery of the broader U.S. hospitality market and, depending on the macroeconomic environment, we expect the strong consumer preference for drive-to destinations will support strong sales and profits at our resorts in 2023. Longer term, we believe robust secular demand for experiential leisure travel, low growth in directly competitive supply, and targeted investments to renovate and reposition destination hotels can extend and intensify our growth. Urban hotels comprise the majority of our portfolio and we believe these hotels are well positioned for outsized growth in 2023 as employers encourage return-to-office and business travel for their employees. Corporate travel across our portfolio has increased steadily from the depths of the global pandemic and is poised to exceed pre-pandemic levels in 2023 based on strong group booking pace and recent business transient demand patterns. We anticipate industry profitability will be challenged by a short booking window and emerging and shifting travel patterns, as well as pressures on property taxes, insurance and overall labor costs. We continue to work closely with our hotel managers to maximize revenue and identify operating efficiencies.

We expect the expansion of corporate travel demand will enable the industry to improve profits in 2023 and we enter the year with several favorable factors, including: (1) ownership of a high-quality portfolio, with a meaningful concentration of experiential destination resorts, (2) internal growth from five recent and two pending hotel upbrandings, (3) internal growth from the continuation of our asset management initiatives and return on investment projects, (4) expense savings from the conversion of six formerly Marriott-managed contracts to Marriott franchises, (5) conservative debt capital structure with limited near-term debt maturities, and (6) liquidity of over $550 million as of December 31, 2022.

Results of Operations

The following table sets forth certain operating information for the year ended December 31, 2022 for each of the hotels we owned during 2022. The table indicates the operating status of each hotel and the occupancy percentage, ADR and RevPAR for each hotel for the portion of the year ended December 31, 2022 that the hotel was owned by the Company.

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[[GREPCENT_TABLE]]
[["Property","","Location","","Number of Rooms","","Occupancy (%)","","ADR ($)","","RevPAR($)","","% Change from 2021 RevPAR"],["Chicago Marriott Downtown Magnificent Mile","","Chicago, Illinois","","1,200","","","54.6","%","","$","242.34","","","$","132.20","","","114.9","%"],["Westin Boston Seaport District","","Boston, Massachusetts","","793","","","75.3","%","","240.49","","","181.09","","","106.9","%"],["Salt Lake City Marriott Downtown at City Creek","","Salt Lake City, Utah","","510","","","59.4","%","","176.24","","","104.70","","","66.1","%"],["Worthington Renaissance Fort Worth Hotel","","Fort Worth, Texas","","504","","","68.9","%","","188.68","","","129.95","","","55.9","%"],["Westin San Diego Bayview","","San Diego, California","","436","","","72.8","%","","201.64","","","146.88","","","75.9","%"],["Westin Fort Lauderdale Beach Resort","","Fort Lauderdale, Florida","","433","","","75.9","%","","269.09","","","204.22","","","39.9","%"],["Westin Washington D.C. City Center","","Washington, D.C.","","410","","","60.1","%","","214.53","","","128.87","","","190.6","%"],["Hilton Boston Downtown/Faneuil Hall","","Boston, Massachusetts","","403","","","77.7","%","","293.11","","","227.79","","","85.2","%"],["The Hythe Vail","","Vail, Colorado","","344","","","53.2","%","","431.18","","","229.35","","","42.3","%"],["Courtyard New York Manhattan/Midtown East","","New York, New York","","321","","","83.8","%","","328.22","","","275.05","","","77.3","%"],["Atlanta Marriott Alpharetta","","Atlanta, Georgia","","318","","","56.0","%","","150.24","","","84.16","","","64.6","%"],["The Gwen Hotel","","Chicago, Illinois","","311","","","73.0","%","","297.88","","","217.59","","","59.2","%"],["Hilton Garden Inn New York/Times Square Central","","New York, New York","","282","","","93.2","%","","276.71","","","257.91","","","121.4","%"],["Embassy Suites by Hilton Bethesda","","Bethesda, Maryland","","272","","","52.2","%","","143.75","","","75.01","","","90.5","%"],["Hilton Burlington Lake Champlain","","Burlington, Vermont","","258","","","73.7","%","","245.87","","","181.23","","","26.0","%"],["Hotel Palomar Phoenix","","Phoenix, Arizona","","242","","","65.8","%","","221.10","","","145.48","","","45.9","%"],["Henderson Beach Resort","","Destin, Florida","","233","","","61.8","%","","473.56","","","292.87","","","3.2","%"],["Bourbon Orleans Hotel","","New Orleans, Louisiana","","220","","","67.1","%","","236.79","","","158.86","","","131.7","%"],["Hotel Clio","","Denver, Colorado","","199","","","69.7","%","","304.01","","","211.87","","","27.0","%"],["Courtyard New York Manhattan/Fifth Avenue","","New York, New York","","189","","","93.3","%","","277.34","","","258.80","","","124.9","%"],["Margaritaville Beach House Key West","","Key West, Florida","","186","","","79.8","%","","449.79","","","358.95","","","10.3","%"],["The Lodge at Sonoma Resort","","Sonoma, California","","182","","","62.6","%","","462.85","","","289.59","","","35.8","%"],["Courtyard Denver Downtown","","Denver, Colorado","","177","","","74.2","%","","204.49","","","151.80","","","61.5","%"],["Renaissance Charleston Historic District Hotel","","Charleston, South Carolina","","167","","","85.4","%","","360.02","","","307.37","","","22.3","%"],["Kimpton Shorebreak Resort","","Huntington Beach, California","","157","","","80.7","%","","345.17","","","278.42","","","33.8","%"],["Cavallo Point, The Lodge at the Golden Gate","","Sausalito, California","","142","","","51.1","%","","700.56","","","358.26","","","20.6","%"],["Havana Cabana Key West","","Key West, Florida","","106","","","85.3","%","","327.22","","","279.15","","","8.3","%"],["Tranquility Bay Beachfront Resort (1)","","Marathon, Florida","","103","","","73.3","%","","742.42","","","544.46","","","3.4","%"],["Hotel Emblem San Francisco","","San Francisco, California","","96","","","72.4","%","","223.96","","","162.14","","","130.4","%"],["Kimpton Shorebreak Fort Lauderdale Beach Resort (2)","","Fort Lauderdale, Florida","","96","","","62.8","%","","207.24","","","130.24","","","18.8","%"],["L'Auberge de Sedona","","Sedona, Arizona","","88","","","71.4","%","","995.34","","","710.81","","","(3.5)","%"],["The Landing Lake Tahoe Resort & Spa","","South Lake Tahoe, California","","82","","","49.0","%","","509.26","","","249.63","","","14.6","%"],["Orchards Inn Sedona","","Sedona, Arizona","","70","","","66.5","%","","303.69","","","201.95","","","(7.7)","%"],["Lake Austin Spa Resort (3)","","Austin, Texas","","40","","","49.0","%","","1,367.03","","","670.18","","","(3.0)","%"],["Henderson Park Inn","","Destin, Florida","","37","","","73.1","%","","642.69","","","469.90","","","4.3","%"],["TOTAL/WEIGHTED AVERAGE","","","","9,607","","","68.3","%","","$","286.50","","","$","195.69","","","51.5","%"]]
[[/GREPCENT_TABLE]]

________________

(1)The operating statistics reflect our ownership period from January 6, 2022 to December 31, 2022 and the comparable period of 2021.

(2)The operating statistics reflect our ownership period from April 1, 2022 to December 31, 2022 and the comparable period of 2021.

(3)The operating statistics reflect our ownership period from November 21, 2022 to December 31, 2022 and the comparable period of 2021.

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

Our results of operations for the year ended December 31, 2022 improved relative to the year ended December 31, 2021 as all of our hotels were open for the entire year and travel increased.

Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (in millions):

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","% Change"],["Rooms","$","681.3","","","$","399.1","","","70.7","%"],["Food and beverage","238.2","","","117.7","","","102.4"],["Other","82.0","","","50.3","","","63.0"],["Total revenues","$","1,001.5","","","$","567.1","","","76.6","%"]]
[[/GREPCENT_TABLE]]

Our total revenues increased $434.4 million from $567.1 million for the year ended December 31, 2021 to $1.0 billion for the year ended December 31, 2022.

Rooms revenues increased by $282.2 million from the year ended December 31, 2021 to the year ended December 31, 2022 primarily due to increases in occupancy and ADR primarily at our resort hotels. Additionally, the acquisitions of the Bourbon Orleans Hotel and Henderson Park Inn in July 2021, Henderson Beach Resort in December 2021, Tranquility Bay Beachfront Resort in January 2022, the Kimpton Shorebreak Fort Lauderdale Beach Resort in April 2022 and Lake Austin Spa Resort in November 2022 (collectively, our “2021/2022 Acquisitions”) accounted for $51.9 million of the increase in rooms revenue.

The following are key hotel operating statistics for the years ended December 31, 2022 and 2021. The 2021 operating statistics reflect the period in 2021 comparable to our ownership period in 2022 for our 2021/2022 Acquisitions.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","% Change"],["Occupancy %","68.3","%","","51.5","%","","16.8","%"],["ADR","$","286.50","","","$","250.73","","","14.3","%"],["RevPAR","$","195.69","","","$","129.18","","","51.5","%"]]
[[/GREPCENT_TABLE]]

Food and beverage revenues increased $120.5 million from the year ended December 31, 2021 to the year ended December 31, 2022, primarily due to increases in occupancy which resulted in an increase in outside the room spend at our hotels. Additionally, our 2021/2022 Acquisitions contributed $16.9 million to the increase in food and beverage revenues.

Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased $31.7 million from the year ended December 31, 2021 to the year ended December 31, 2022, primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic, as well as increases in resort fees, spa revenues, and attrition and cancellation fees. Additionally, our 2021/2022 Acquisitions contributed $9.9 million to the increase in other revenues.

Hotel operating expenses. The operating expenses consisted of the following (in millions):

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","% Change"],["Rooms departmental expenses","$","163.1","","","$","102.2","","","59.6","%"],["Food and beverage departmental expenses","163.6","","","89.8","","","82.2"],["Other departmental expenses","22.8","","","12.3","","","85.4"],["General and administrative","84.4","","","58.9","","","43.3"],["Utilities","23.8","","","18.3","","","30.1"],["Repairs and maintenance","39.3","","","30.7","","","28.0"],["Sales and marketing","63.2","","","37.7","","","67.6"],["Franchise fees","32.7","","","18.7","","","74.9"],["Base management fees","18.6","","","9.7","","","91.8"],["Incentive management fees","4.8","","","0.5","","","860.0"],["Property taxes","33.6","","","50.5","","","(33.5)"],["Other fixed charges","34.1","","","19.4","","","75.8"],["Severance costs","\u2014","","","(0.1)","","","100.0"],["Professional fees and pre-opening costs related to Frenchman's Reef","\u2014","","","1.4","","","(100.0)"],["Lease expense (cash and non-cash)","12.8","","","11.7","","","9.4"],["Total hotel operating expenses","$","696.8","","","$","461.7","","","50.9","%"]]
[[/GREPCENT_TABLE]]

Our hotel operating expenses increased $235.1 million from $461.7 million for the year ended December 31, 2021 to $696.8 million for the year ended December 31, 2022 primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic and other related operating costs stemming from the timing and extent of the COVID-19 pandemic. Additionally, our 2021/2022 Acquisitions contributed to $58.2 million of the increase in hotel operating expenses. The increase in hotel operating expenses was partially offset by a $5.6 million decrease due to our dispositions of Frenchman's Reef & Morning Star Marriott Beach Resort in April 2021 and The Lexington Hotel in June 2021.

Depreciation and amortization. Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $5.9 million from the year ended December 31, 2021 primarily due to our 2021/2022 Acquisitions, as well as the renovations and rebrandings that were completed in 2021 and 2022.

Impairment losses. During the year ended December 31, 2022, we recorded impairment losses of $2.8 million on the right-to-manage intangible asset related to the rental management agreements acquired as part of our acquisition of Tranquility Bay Beachfront Resort. This impairment was a result of the purchase of four third-party owned units subsequent to the purchase of the hotel. During the year ended December 31, 2021, we recorded impairment losses of $126.7 million related to the dispositions of Frenchman's Reef & Morning Star Marriott Beach Resort and The Lexington Hotel.

Corporate expenses. Corporate expenses principally consist of employee-related costs, including base payroll, bonus, restricted stock and severance. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses decreased $0.8 million, from $32.6 million for the year ended December 31, 2021 to $31.8 million for the year ended December 31, 2022. The decrease is primarily due to a decrease in employee-related compensation and other employee-related expenses.

Business interruption insurance income. For the years ended December 31, 2022 and 2021, we recognized $0.5 million and $0.7 million, respectively, of business interruption insurance income related to the Caldor wildfires at The Landing Lake Tahoe Resort & Spa, which caused the hotel to be closed for 21 days in 2021.

Interest expense. Our interest expense increased $1.3 million from $37.0 million for the year ended December 31, 2021 to $38.3 million for the year ended December 31, 2022, and was comprised of the following (in millions):

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["Mortgage debt interest","$","23.3","","","$","24.9"],["Term loan interest","21.2","","","14.8"],["Credit facility interest and unused fees","5.3","","","2.4"],["Amortization of debt issuance costs and debt premium","2.4","","","2.6"],["Interest rate swap mark-to-market","(13.9)","","","(7.7)"],["","$","38.3","","","$","37.0"]]
[[/GREPCENT_TABLE]]

The increase in interest expense is primarily related to the increase in term loan interest due to rising interest rates, partially offset by the mark-to-market of our interest rate swaps.

Loss on early extinguishment of debt. On September 27, 2022, we refinanced our senior unsecured credit facility and unsecured term loans. As a result, we recognized a $9.7 million loss on early extinguishment of debt related to the write-off of certain unamortized debt issuance costs and fees paid to the lenders in consideration for our refinancing. We also recognized $0.1 million of loss on early extinguishment of debt related to the write-off of certain unamortized debt issues costs related to the payoff of four mortgage loans during the year ended December 31, 2022.

Income taxes. We recorded income tax expense of $2.6 million in 2022 and $3.3 million in 2021. The 2022 income tax expense was incurred on the $11.6 million pre-tax income of our TRSs. The 2022 income tax provision includes a change in our valuation allowance of $3.9 million. The 2021 income tax provision includes a change in our valuation allowance of $1.4 million. The valuation allowance was initially recognized based on assessments of our ability to utilize our net operating loss carryforwards in future years.

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

Our results of operations for the year ended December 31, 2021 improved relative to the year ended December 31, 2020 as all but four of our hotels were open for the entire year and the U.S. economy recovered from the impacts of COVID-19, government mandates eased, vaccines were distributed, and travel increased.

Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (in millions):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","% Change"],["Rooms","$","399.1","","","$","196.7","","","102.8","%"],["Food and beverage","117.7","","","68.6","","","71.7"],["Other","50.3","","","34.2","","","47.1"],["Total revenues","$","567.1","","","$","299.5","","","89.3","%"]]
[[/GREPCENT_TABLE]]

Our total revenues increased $267.6 million from $299.5 million for the year ended December 31, 2020 to $567.1 million for the year ended December 31, 2021.

The following are key hotel operating statistics for the years ended December 31, 2021 and 2020. The 2020 amounts reflect the period in 2020 comparable to our ownership period in 2021 for our dispositions of Frenchman's Reef and The Lexington Hotel and the acquisitions of the Bourbon Orleans Hotel, Henderson Park Inn, and Henderson Beach Resort.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","% Change"],["Occupancy %","49.8","%","","28.1","%","","21.7","%"],["ADR","$","237.13","","","$","209.10","","","13.4","%"],["RevPAR","$","118.15","","","$","58.83","","","100.8","%"]]
[[/GREPCENT_TABLE]]

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Food and beverage revenues increased $49.1 million from the year ended December 31, 2020, primarily due to an increase in outlet revenues.

Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased $16.1 million from the year ended December 31, 2020, primarily due to an increase in resort fees and parking.

Hotel operating expenses. The operating expenses consisted of the following (in millions):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","% Change"],["Rooms departmental expenses","$","102.2","","","$","68.6","","","49.0","%"],["Food and beverage departmental expenses","89.8","","","58.4","","","53.8"],["Other departmental expenses","12.3","","","8.3","","","48.2"],["General and administrative","58.9","","","45.0","","","30.9"],["Utilities","18.3","","","16.0","","","14.4"],["Repairs and maintenance","30.7","","","24.1","","","27.4"],["Sales and marketing","37.7","","","28.7","","","31.4"],["Franchise fees","18.7","","","10.1","","","85.1"],["Base management fees","9.7","","","3.6","","","169.4"],["Incentive management fees","0.5","","","\u2014","","","100.0"],["Property taxes","50.5","","","54.5","","","(7.3)"],["Other fixed charges","19.4","","","17.0","","","14.1"],["Severance costs","(0.1)","","","7.6","","","(101.3)"],["Professional fees and pre-opening costs related to Frenchman's Reef","1.4","","","1.0","","","40.0"],["Lease expense (cash and non-cash)","11.7","","","11.4","","","2.6"],["Total hotel operating expenses","$","461.7","","","$","354.3","","","30.3","%"]]
[[/GREPCENT_TABLE]]

Our hotel operating expenses increased $107.4 million from $354.3 million for the year ended December 31, 2020 to $461.7 million for the year ended December 31, 2021. For the year ended December 31, 2020, we recognized $7.6 million of severance costs at our properties in connection with the COVID-19 pandemic.

Depreciation and amortization. Our depreciation and amortization expense decreased $11.8 million from the year ended December 31, 2020. This is primarily due to the timing of fully depreciated capital expenditures and the sale of The Lexington Hotel on June 30, 2021.

Impairment losses. During the year ended December 31, 2021, we recorded impairment losses of $11.5 million related to Frenchman's Reef, which was sold on April 30, 2021, and $115.2 million related to The Lexington Hotel, which was sold on June 30, 2021. During the year ended December 31, 2020, we recorded an impairment loss of $174.1 million related to Frenchman's Reef.

Corporate expenses. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses increased $5.2 million, from $27.4 million for the year ended December 31, 2020 to $32.6 million for the year ended December 31, 2021. The increase is primarily due to an increase in employee-related compensation and other employee-related expenses.

Business interruption insurance income. For the year ended December 31, 2021, we recognized $0.7 million of business interruption insurance income related to the Caldor wildfires at The Landing Lake Tahoe Resort & Spa, which caused the hotel to be closed for 21 days. For the year ended December 31, 2020, we recognized $2.2 million of business interruption insurance income related to lost revenue at the Westin Boston Seaport District due to the COVID-19 pandemic.

Interest expense. Our interest expense was $37.0 million and $54.0 million for the years ended December 31, 2021 and December 31, 2020, respectively, and is comprised of the following (in millions):

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["Mortgage debt interest","$","24.9","","","$","26.2"],["Term loan interest","14.8","","","13.4"],["Credit facility interest and unused fees","2.4","","","4.5"],["Amortization of debt issuance costs and debt premium","2.6","","","2.0"],["Capitalized interest","\u2014","","","(2.1)"],["Interest rate swap mark-to-market","(7.7)","","","10.0"],["","$","37.0","","","$","54.0"]]
[[/GREPCENT_TABLE]]

The decrease in interest expense is primarily related to the mark-to-market of our interest rate swaps and lower average outstanding borrowings on our credit facility in 2021, partially offset by the cessation of interest capitalization due to ceasing reconstruction of Frenchman's Reef.

Income taxes. We recorded income tax expense of $3.3 million in 2021 and income tax benefit of $26.5 million in 2020. The 2021 income tax expense was incurred on the $39.5 million pre-tax income of our TRSs. The 2021 income tax provision includes a valuation allowance of $1.4 million. The 2020 income tax benefit is net of a valuation allowance of $24.9 million. These valuation allowances were recognized based on assessments of our ability to utilize our net operating loss carryforwards in future years.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service, operating expenses, ground lease payments, capital expenditures directly associated with our hotels, any share repurchases, distributions to our common and preferred stockholders, and the cost of acquiring additional hotels. During the year ended December 31, 2022, we repaid four mortgage loans scheduled to mature in 2023 using proceeds from the refinancing of our senior unsecured credit facility and unsecured term loans discussed further below. As a result of these repayments, we have no debt maturities until August 2024.

Our mortgage debt agreements contain “cash trap” provisions that are triggered when the hotel’s operating results fall below a certain debt service coverage ratio. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio is reached and maintained for a certain period of time. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt. As of December 31, 2022, we had $2.9 million held in cash traps, which is included within the restricted cash on the accompanying consolidated balance sheet. We do not expect that such cash traps will affect our ability to satisfy our short-term liquidity requirements.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, certain redemptions of limited operating partnership units (“common OP units”), ground lease payments, and making distributions to our common and preferred stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including common OP units, and/or debt securities and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. 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.

Our Financing Strategy

Since our formation in 2004, we have been committed to a conservative capital structure with prudent leverage. Our outstanding debt consists of fixed interest rate mortgage debt, unsecured term loans and periodic borrowings on our senior unsecured credit facility. We have a preference to maintain a significant portion of our portfolio as unencumbered assets in

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order to provide balance sheet flexibility. We expect that our strategy will enable us to maintain a balance sheet with an appropriate amount of debt throughout all phases of the lodging cycle. We believe that it is prudent to reduce the inherent risk of highly cyclical lodging fundamentals through a low leverage capital structure.

We prefer a relatively simple but efficient capital structure. We generally structure our hotel acquisitions to be straightforward and to fit within our capital structure; however, we will consider a more complex transaction, such as the issuance of common OP units in connection with the acquisition of Cavallo Point, The Lodge at the Golden Gate, if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.

We believe that we maintain a reasonable amount of debt. As of December 31, 2022, we had $1.2 billion of debt outstanding with a weighted average interest rate of 4.83% and a weighted average maturity date of approximately 3.4 years. We have limited near-term mortgage debt maturities and 31 of our 35 hotels are unencumbered by mortgage debt. We remain committed to our core strategy of prudent leverage.

The following table outlines the timing and extent of our debt principal maturities and estimated interest payments for our mortgage debt and unsecured term loans as of December 31, 2022 (in thousands).

[[GREPCENT_TABLE]]
[["","Principal","","Interest (1)","","Total Principal and Interest"],["2023","$","9,545","","","$","57,375","","","$","66,920"],["2024","82,381","","","58,970","","","141,351"],["2025","595,808","","","37,814","","","633,622"],["2026","\u2014","","","29,263","","","29,263"],["2027","\u2014","","","29,263","","","29,263"],["Thereafter","500,000","","","241","","","500,241"],["","$","1,187,734","","","$","212,926","","","$","1,400,660"]]
[[/GREPCENT_TABLE]]

______________

(1)The interest expense for our variable rate unsecured term loans is calculated based on the rate as of December 31, 2022.

Information about our financing activities is available in Note 8 to the accompanying consolidated financial statements.

ATM Program

In August 2021, we implemented an “at-the-market” equity offering program (the “ATM Program”), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200.0 million. We have not sold any shares under the ATM Program.

Share Repurchase Program

On September 29, 2022, our board of directors approved a share repurchase program authorizing us to repurchase up to $200.0 million of our common stock through February 28, 2025. During the year ended December 31, 2022, we repurchased 1.6 million shares of common stock at an average price of $7.81 per share for an aggregate purchase price of $12.3 million. Information about our share repurchase program is in Note 5 to the accompanying consolidated financial statements.

Short-Term Borrowings

Other than borrowings under our senior unsecured credit facility, discussed below, we do not utilize short-term borrowings to meet liquidity requirements.

Senior Unsecured Credit Facility and Unsecured Term Loans

Prior to September 27, 2022, we were party to a $400 million senior unsecured credit facility expiring in July 2023, a $350 million unsecured term loan maturing in July 2024 and a $50 million unsecured term loan maturing in October 2023. On each of June 9, 2020, August 14, 2020, January 20, 2021 and February 4, 2022, we executed amendments to the credit agreements for our corporate credit facility and term loans. These amendments provided for a waiver of the applicable quarterly

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tested financial covenants beginning with the second quarter of 2020 through the first quarter of 2022 and allowed for certain other modifications to the covenants thereafter through the second quarter of 2023. As of June 30, 2022, we were in compliance with all of the original unmodified financial covenants under the credit agreements for two consecutive quarters and had exited the covenant waiver restrictions.

On September 27, 2022, we entered into a Sixth Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $400 million senior unsecured revolving credit facility and two term loan facilities in the aggregate amount of $800 million. The revolving credit facility under the Amended Credit Agreement matures on September 27, 2026. We may extend the maturity date of the revolving credit facility for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions. We also have the right to increase the aggregate amount of the facilities to $1.4 billion upon the satisfaction of certain standard conditions. The term loan facilities consist of a $500 million term loan that matures on January 3, 2028 and a $300 million term loan that matures January 3, 2025. The maturity date of the $300 million term loan may be extended for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions.

We utilized the proceeds from the term loans to repay the $350 million term loan in the prior facility, the $50 million term loan facility that was scheduled to mature in October 2023 and the $150 million that was outstanding on our revolving credit facility. We utilized the proceeds from the Amended Credit Agreement to repay the Westin Washington, D.C. City Center mortgage loan on October 6, 2022, the Salt Lake City Marriott Downtown at City Creek and The Lodge at Sonoma Resort mortgage loans on November 1, 2022 and the Westin San Diego Bayview mortgage loan on December 6, 2022. As a result of these repayments we have no debt maturities until August 2024.

Additional information about the credit agreements, including a summary of significant covenants, can be found in Note 8 to the accompanying consolidated financial statements.

Sources and Uses of Cash

We expect that our principal sources of cash will include one or more of the following: net cash flow from hotel operations, sales of our equity and debt securities, debt financings and proceeds from any hotel dispositions. Our principal uses of cash are acquisitions of hotel properties, debt service and maturities, share repurchases, capital expenditures, operating costs, ground lease payments, corporate expenses, and distributions to holders of common stock, common units and preferred stock. As of December 31, 2022, we had $67.6 million of unrestricted corporate cash and $39.6 million of restricted cash, and no outstanding borrowings on our senior unsecured credit facility.

Our net cash provided by operations was $206.2 million for the year ended December 31, 2022. Our cash from operations generally consists of the net cash flow from hotel operations, offset by cash paid for corporate expenses and other working capital changes.

Our net cash used in investing activities was $248.6 million for the year ended December 31, 2022, which consisted of $67.7 million of capital expenditures and $181.9 million paid for the acquisitions of the Tranquility Bay Beachfront Resort, the subsequent purchase of four third-party owned units at the resort, Kimpton Shorebreak Fort Lauderdale Beach Resort and Lake Austin Spa Resort, offset by $1.0 million of deferred key money received for the Henderson Beach Resort.

Our net cash provided by financing activities was $74.0 million for the year ended December 31, 2022, which consisted of proceeds of $800.0 million from unsecured term loans, offset by net repayments of $90.0 million on our senior unsecured credit facility, $400.0 million of repayments of unsecured term loans, $178.1 million of repayments of mortgage loans, $14.6 million of scheduled mortgage debt principal payments, $13.8 million of financing costs related to the amendment and restatement of our credit agreements and the extension of the Salt Lake City Marriott Downtown at City Center mortgage loan, $12.3 million paid to repurchase shares under our share repurchase program, $0.8 million paid to repurchase shares upon the vesting of restricted stock for the payment of tax withholdings obligations, $6.4 million of distributions paid to holders of common stock and common units, and $9.8 million of distributions paid to holders of preferred stock.

We currently anticipate our significant sources of cash for the year ending December 31, 2023 will be the net cash flow from hotel operations and any potential hotel dispositions. We expect our estimated uses of cash for the year ending December 31, 2023 will be scheduled debt service payments, capital expenditures, distributions to preferred and common stockholders, corporate expenses and potential hotel acquisitions.

Dividend Policy

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We intend to distribute to our stockholders dividends at least equal to our REIT taxable income to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiaries, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:

•90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, plus

•90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus

•any excess non-cash income.

The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including our financial performance, restrictions under applicable law and our current and future loan agreements, our debt service requirements, our capital expenditure requirements, the requirements for qualification as a REIT under the Code and other factors that our board of directors may deem relevant from time to time.

Our board of directors suspended the quarterly common dividend commencing with the quarterly dividend that would have been paid in April 2020 and resumed quarterly common dividends beginning with the quarterly dividend that was paid in October 2022. We have paid the following dividends to holders of our common stock and distributions to holders of common OP units and LTIP units during 2022 and 2021:

[[GREPCENT_TABLE]]
[["Payment Date","","Record Date","","Dividend per Share"],["October 12, 2022","","September 30, 2022","","$","0.03"],["January 12, 2023","","December 30, 2022","","$","0.06"]]
[[/GREPCENT_TABLE]]

We have paid the following dividends to holders of our Series A Preferred Stock during 2020 and 2021, and through the date of this report:

[[GREPCENT_TABLE]]
[["Payment Date","","Record Date","","Dividend per Share"],["March 31, 2021","","March 18, 2021","","$","0.515625"],["June 30, 2021","","June 18, 2021","","$","0.515625"],["September 30, 2021","","September 17, 2021","","$","0.515625"],["December 31, 2021","","December 20, 2021","","$","0.515625"],["March 31, 2022","","March 18, 2022","","$","0.515625"],["June 30, 2022","","June 17, 2022","","$","0.515625"],["September 30, 2022","","September 16, 2022","","$","0.515625"],["December 30, 2022","","December 19, 2022","","$","0.515625"]]
[[/GREPCENT_TABLE]]

Capital Expenditures

The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement reserves to cover, among other things, the cost of replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. Contributions to the property improvement fund are calculated as a percentage of hotel revenues. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement reserves under the applicable management or franchise agreement. As of December 31, 2022, we have set aside $30.6 million for capital projects in property improvement funds, which are included in restricted cash.

We invested approximately $67.7 million in capital improvements at our hotels during the year ended December 31, 2022. Significant projects in 2022 included the following:

•Hotel Clio: We completed renovations in March 2022 to rebrand the JW Marriott Denver Cherry Creek as the Hotel Clio, a Luxury Collection Hotel.

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•Kimpton Hotel Palomar Phoenix: We are in the process of completing a comprehensive rebranding and repositioning of the rooftop bar and pool at the hotel.

In 2023, we expect to spend $100 million to $115 million on capital improvements at our hotels. Significant projects in 2023 are expected to include the following:

•Hilton Boston Downtown/Faneuil Hall: We have commenced a comprehensive renovation in the fourth quarter of 2022 to reposition the hotel as an experiential lifestyle property with completion expected in mid-2023.

•Hilton Burlington Lake Champlain: We have commenced a repositioning of the hotel to rebrand it as a Curio Collection hotel. The repositioning is expected to be completed in early 2023 and includes a new restaurant concept by a well-known and award-winning chef.

Non-GAAP Financial Measures

We use the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with U.S. GAAP. EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company.

Use and Limitations of Non-GAAP Financial Measures

Our management and Board of Directors use EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO to evaluate the performance of our hotels and to facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital intensive companies. The use of these non-GAAP financial measures has certain limitations. These non-GAAP financial measures as presented by us, may not be comparable to non-GAAP financial measures as calculated by other real estate companies. These measures do not reflect certain expenses or expenditures that we incurred and will incur, such as depreciation, interest and capital expenditures. We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparable U.S. GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures.

These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with U.S. GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by U.S. GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our U.S. GAAP results and the reconciliations to the corresponding U.S. GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

EBITDA, EBITDAre and FFO

EBITDA represents net income (calculated in accordance with U.S. GAAP) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. The Company computes EBITDAre in accordance with the National Association of Real Estate Investment Trusts (“Nareit”) guidelines, as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate.” EBITDAre represents net income (calculated in accordance with U.S. GAAP) adjusted for: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization; (4) gains or losses on the disposition of depreciated property, including gains or losses on change of control; (5) impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate; and (6) adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates.

We believe EBITDA and EBITDAre are useful to an investor in evaluating our operating performance because they help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization, and in the case of EBITDAre, impairment and gains or losses on dispositions of depreciated property) from our operating results. In addition, covenants included in our debt agreements use EBITDA as a measure of financial compliance. We also use EBITDA and EBITDAre as measures in determining the value of hotel acquisitions and dispositions.

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The Company computes FFO in accordance with standards established by the Nareit, which defines FFO as net income determined in accordance with U.S. GAAP, excluding gains or losses from sales of properties and impairment losses, plus real estate related depreciation and amortization. The Company believes that the presentation of FFO provides useful information to investors regarding its operating performance because it is a measure of the Company's operations without regard to specified non-cash items, such as real estate related depreciation and amortization and gains or losses on the sale of assets. The Company also uses FFO as one measure in assessing its operating results.

Adjustments to EBITDAre and FFO

We adjust EBITDAre and FFO when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA and Adjusted FFO, when combined with U.S. GAAP net income, EBITDAre and FFO, is beneficial to an investor's complete understanding of our consolidated operating performance. We adjust EBITDAre and FFO for the following items:

•Non-Cash Lease Expense and Other Amortization: We exclude the non-cash expense incurred from the straight line recognition of expense from our ground leases and other contractual obligations and the non-cash amortization of our favorable and unfavorable contracts, originally recorded in conjunction with certain hotel acquisitions. We exclude these non-cash items because they do not reflect the actual cash amounts due to the respective lessors in the current period and they are of lesser significance in evaluating our actual performance for that period.

•Cumulative Effect of a Change in Accounting Principle: The Financial Accounting Standards Board promulgates new accounting standards that require or permit the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude the effect of these adjustments, which include the accounting impact from prior periods, because they do not reflect the Company’s actual underlying performance for the current period.

•Gains or Losses from Early Extinguishment of Debt: We exclude the effect of gains or losses recorded on the early extinguishment of debt because these gains or losses result from transaction activity related to the Company’s capital structure that we believe are not indicative of the ongoing operating performance of the Company or our hotels.

•Hotel Acquisition Costs: We exclude hotel acquisition costs expensed during the period because we believe these transaction costs are not reflective of the ongoing performance of the Company or our hotels.

•Severance Costs: We exclude corporate severance costs, or reversals thereof, incurred with the termination of corporate-level employees and severance costs incurred at our hotels related to lease terminations or structured severance programs because we believe these costs do not reflect the ongoing performance of the Company or our hotels.

•Hotel Manager Transition Items: We exclude the transition items associated with a change in hotel manager because we believe these items do not reflect the ongoing performance of the Company or our hotels.

•Other Items: From time to time we incur costs or realize gains that we consider outside the ordinary course of business and that we do not believe reflect the ongoing performance of the Company or our hotels. Such items may include, but are not limited to the following: pre-opening costs incurred with newly developed hotels; lease preparation costs incurred to prepare vacant space for marketing; management or franchise contract termination fees; gains or losses from legal settlements; costs incurred related to natural disasters; and gains on property insurance claim settlements, other than income related to business interruption insurance.

In addition, to derive Adjusted FFO we exclude any unrealized fair value adjustments to interest rate swaps. We exclude these non-cash amounts because they do not reflect the underlying performance of the Company.

The following table is a reconciliation of our U.S. GAAP net income to EBITDA, EBITDAre and Adjusted EBITDA (in thousands):

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["","","(in thousands)"],["Net income (loss)","","$","109,705","","","$","(195,405)","","","$","(396,027)"],["Interest expense","","38,283","","","37,043","","","53,995"],["Income tax expense (benefit)","","2,607","","","3,267","","","(26,452)"],["Real estate related depreciation and amortization","","108,849","","","102,963","","","114,716"],["EBITDA","","259,444","","","(52,132)","","","(253,768)"],["Impairment losses","","2,843","","","126,697","","","174,120"],["Loss on sale of hotel properties (1)","","1,659","","","\u2014","","","\u2014"],["EBITDAre","","263,946","","","74,565","","","(79,648)"],["Non-cash lease expense and other amortization","","6,226","","","6,673","","","6,910"],["Professional fees and pre-opening costs related to Frenchman's Reef (2)","","\u2014","","","1,388","","","1,012"],["Uninsured costs related to natural disasters (3)","","\u2014","","","298","","","\u2014"],["Loss on early extinguishment of debt","","9,766","","","\u2014","","","\u2014"],["Hotel manager transition items","","1,164","","","651","","","(434)"],["Severance costs (4)","","(532)","","","(37)","","","7,648"],["Adjusted EBITDA","","$","280,570","","","$","83,538","","","$","(64,512)"]]
[[/GREPCENT_TABLE]]

_______________

[[GREPCENT_TABLE]]
[["","(1)","During the year ended December 31, 2022, we recognized an incremental loss of $1.7 million due to post-closing adjustments related to hotels sold in 2021."],["","(2)","Represents pre-opening costs and professional fees relate to the reopening of Frenchman's Reef, as well as legal an other costs incurred at Frenchman's Reef as a result of Hurricane Irma that are not covered by insurance."],["","(3)","Represents costs incurred at the Bourbon Orleans Hotel as a result of Hurricane Ida that were not recovered by insurance."],["","(4)","Consists of severance costs incurred, and adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statement of operations."]]
[[/GREPCENT_TABLE]]

The following table is a reconciliation of our U.S. GAAP net income to FFO, FFO available to common stock and unit holders, and Adjusted FFO available to common stock and unit holders (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["","","(in thousands)"],["Net income (loss)","","$","109,705","","","$","(195,405)","","","$","(396,027)"],["Real estate related depreciation and amortization","","108,849","","","102,963","","","114,716"],["Impairment losses, net of tax","","2,843","","","127,282","","","174,120"],["Loss on sale of hotel properties (1)","","1,659","","","\u2014","","","\u2014"],["FFO","","223,056","","","34,840","","","(107,191)"],["Distributions to preferred stockholders","","(9,817)","","","(9,817)","","","(3,300)"],["FFO available to common stock and unit holders","","213,239","","","25,023","","","(110,491)"],["Non-cash lease expense and other amortization","","6,226","","","6,673","","","6,910"],["Professional fees and pre-opening costs related to Frenchman's Reef (2)","","\u2014","","","1,388","","","1,012"],["Uninsured costs related to natural disasters (3)","","\u2014","","","298","","","\u2014"],["Loss on early extinguishment of debt","","9,766","","","\u2014","","","\u2014"],["Hotel manager transition items","","1,164","","","651","","","(434)"],["Gain on property insurance settlement, net of income tax","","\u2014","","","\u2014","","","\u2014"],["Severance costs (4)","","(532)","","","(37)","","","7,648"],["Fair value adjustments to interest rate swaps","","(13,914)","","","(7,690)","","","10,072"],["Adjusted FFO available to common stock and unit holders","","$","215,949","","","$","26,306","","","$","(85,283)"]]
[[/GREPCENT_TABLE]]

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_______________

[[GREPCENT_TABLE]]
[["","(1)","During the year ended December 31, 2022, we recognized an incremental loss of $1.7 million due to post-closing adjustments related to hotels sold in 2021."],["","(2)","Represents pre-opening costs and professional fees relate to the reopening of Frenchman's Reef, as well as legal an other costs incurred at Frenchman's Reef as a result of Hurricane Irma that are not covered by insurance."],["","(3)","Represents costs incurred at the Bourbon Orleans Hotel as a result of Hurricane Ida that were not recovered by insurance."],["","(4)","Consists of severance costs incurred, and adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statement of operations."]]
[[/GREPCENT_TABLE]]

Critical Accounting Estimates and Policies

Our consolidated financial statements include the accounts of DiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:

Investment in Hotels

Investment purchases of hotel properties, land, land improvements, building and furniture, fixtures and equipment, lease assets and liabilities, and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based upon total accumulated cost of the acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost.

Identifiable intangible assets are typically related to contracts, including ground lease agreements and hotel management agreements, which are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates for corresponding contracts. Contracts acquired that are at market do not have significant value. We enter into a hotel management agreement at the time of acquisition and such agreements are generally based on market terms. Intangible assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.

We review our investments in hotels for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform a review include, but are not limited to, adverse changes in the demand for lodging at our properties, current or projected losses from operations, and an expectation that the property is more likely than not to be sold significantly before the end of its previously estimated useful life. If such events or circumstances are identified, management performs an analysis to compare the estimated undiscounted future cash flows from operations and the net proceeds from the ultimate disposition of a hotel to the carrying amount of the asset. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotels' estimated fair value is recorded and an impairment loss is recognized. The fair value is determined through various valuation techniques, including discounted cash flow models with estimated discount and terminal capitalization rates, comparable market transactions, third-party appraisals, the net sales proceeds from pending offers, or from transactions that closed subsequent to the end of the reporting period.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Generally, our management companies may adjust room rates daily, excluding previous contractually committed reservations. However, competitive pressures or other factors may limit the ability of our management companies to raise room rates. Inflation may

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also affect our expenses and cost of capital improvements, including, without limitation, by increasing the costs of labor, employee-related benefits, food, commodities and other materials, taxes, property and casualty insurance and utilities.

Inflation has increased recently to levels not seen in years. The United States Federal Reserve has raised, and may contine to raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty, and increasing the cost of new indebtedness and servicing our outstanding variable rate debt.

Seasonality

The periods during which our hotels experience higher revenues vary from property to property, depending principally upon location and the customer base served. Accordingly, we expect some seasonality in our business. Volatility in our financial performance from the seasonality of the lodging industry could adversely affect our financial condition and results of operations.

New Accounting Pronouncements Not Yet Implemented

See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.