Summit Hotel Properties, Inc. (INN) FY 2023 MD&A

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

Industry Trends and Outlook

Room-night demand in the U.S. lodging industry is generally correlated to certain macroeconomic trends. Key drivers of lodging demand, and therefore hotel revenues, include changes in GDP, corporate profits, capital investments, and employment. From a cost perspective, elevated inflation has been pervasive since 2022, increasing the cost of salaries, wages, supplies, material, freight, insurance and energy. Higher costs from broad inflationary pressures have been partially offset by lodging price increases. While growth rates have decelerated, inflation is still increasing faster than historical norms, which may continue in 2024.

During the year ended December 31, 2023, we experienced a continued recovery from the Pandemic driven increasingly by strong group travel and improvements in business transient demand, in addition to continued strength in leisure travel. From an industry perspective, the year ended December 31, 2023 represented a new high in lodging demand, further evidence that businesses and individual consumers alike are increasingly traveling. Strong room night demand coupled with minimal forecasted growth in supply over the next several years positions the industry for continued growth. Based on the trends noted above, we expect positive comparable hotel RevPAR growth for our portfolio for the year ended December 31, 2024.

Operating Performance Metrics

We use a variety of performance indicators 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 GAAP, as well as other financial information that is not prepared in accordance with 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 lodging properties, groups of lodging properties 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 — Occupancy represents the total number of guestrooms occupied divided by the total number of guestrooms available.

•Average Daily Rate — ADR represents total room revenues divided by the total number of paid occupied guestrooms.

•Revenue Per Available Room — RevPAR is the product of ADR and Occupancy.

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important metric for monitoring operating performance at the individual lodging property level and across our business as a whole. We evaluate individual lodging property RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and market-by-market basis. ADR and RevPAR are based only on room revenue. Room revenue depends on demand (as measured by occupancy), pricing (as measured by ADR), and our available supply of lodging property guestrooms. Our ADR, occupancy and RevPAR performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, air travel and other business and leisure travel, new lodging property construction, and the pricing strategies of competitors. In addition, our ADR, occupancy and RevPAR performance is dependent on the continued success of our partners, franchisors and brands.

Lodging Property Portfolio Activity

We continuously evaluate alternatives to refine our portfolio to drive growth and create value. In the normal course of business, we evaluate opportunities to acquire additional properties that meet our investment criteria and opportunities to recycle capital through the disposition of properties. As such, the composition and size of our portfolio of properties may change materially over time. Significant changes to our portfolio of properties could have a material effect on our Consolidated Financial Statements.

During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on the NCI Transaction for the acquisition of a portfolio of 27 lodging properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces, and various financial incentives for an aggregate purchase price of $822.0 million.

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In May 2022, the GIC Joint Venture completed the sale of the 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture.

In June 2022, we formed the Brickell Joint Venture (see "See Part II – Item 8. – Financial Statements and Supplementary Data - Note 10 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the exercise of our purchase option to acquire a 90% equity interest in the AC Hotel by Marriott and Element Miami Brickell Hotel in Miami, FL (together the "AC/Element Hotel"). The exercise price of the purchase option was $89.0 million and was primarily funded with the conversion of the mezzanine loan of $29.9 million to equity, $7.9 million in cash and the assumption of debt.

In October 2022, we completed the acquisition of a 90% equity interest in the Onera Joint Venture that owns an 11-unit glamping property for $5.2 million in cash, plus additional contingent consideration of $1.8 million paid in September 2023. The Onera Joint Venture has a 100% fee simple interest in a lodging property consisting of an 11-unit glamping property and a 6.4-acre parcel of land.

In May 2023, we completed the sale of four lodging properties for an aggregate gross selling price of $28.1 million. The sale included two Hyatt Place hotels in the Chicago area containing a total of 277 guestrooms, a Hilton Garden Inn in the Minneapolis area containing 97 guestrooms, and a Holiday Inn Express & Suites in the Minneapolis area containing 93 guestrooms. These lodging properties were classified as Assets Held for Sale at December 31, 2022 and their carrying values during the year then ended were reduced by $2.9 million to bring the carrying value of the properties to their net selling price less estimated costs to sell.

In June 2023, the GIC Joint Venture acquired the Residence Inn by Marriott located in Scottsdale, AZ containing 120 guestrooms for a purchase price of approximately $29.0 million and the Nordic Lodge located in Steamboat Springs, CO containing 47 guestrooms for a purchase price of approximately $13.7 million.

In December 2023, we completed the sale of the 123-guestroom Hyatt Place in Baltimore (Owings Mills), MD for a gross selling price of $8.3 million. The net selling price less costs to sell approximated the net book value of the hotel property on the sale date resulting in a nominal gain that was recorded in the fourth quarter of 2023.

During the fourth quarter of 2023, the GIC Joint Venture entered into a purchase and sale agreement with a third-party to sell the 127-guestroom Hyatt Place Dallas (Plano), TX for $10.3 million. We reclassified the property in Assets Held for sale, net at December 31, 2023 and recorded a write-down of $4.0 million in the fourth quarter of 2023 for the excess of the net carrying amount of the portfolio of properties over the net selling price less estimated costs to sell. We completed the sale of the property on February 15, 2024 under the terms described above.

During the first quarter of 2024, we entered into two separate purchase and sale agreements with two unrelated third-parties to sell one individual lodging property and a portfolio of two lodging properties with an aggregate 529-guestrooms for an aggregate selling price of $84.0 million. We reclassified all three of the properties to Assets Held for sale, net at December 31, 2023 and recorded a write-down of $1.4 million in the fourth quarter of 2023 for the excess of the net carrying amount of one of the lodging properties over its net selling price less estimated costs to sell. We expect to complete the transactions during the first half of 2024.

At December 31, 2023, we have a lodging property with 101-guestrooms being marketed for sale. We have reclassified the property to Assets Held for Sale, net at December 31, 2023 and recorded a write-down of $11.3 million in the fourth quarter of 2023 for the excess of the net carrying amount of the lodging property over its net selling price less estimated costs to sell.

During the first quarter of 2023, we entered into a purchase and sale agreement with a third-party to sell a 5.99-acre parcel of undeveloped land in San Antonio, TX for $1.3 million. We expect to complete the transaction during the first half of 2024.

See “Part II – Item 8. – Financial Statements and Supplementary Data –Note 3 - Investments in Lodging Property, net” to the Consolidated Financial Statements for additional information concerning our asset acquisitions, development, and dispositions.

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Revenues and Operating Expenses

Our revenues are derived from lodging operations and consist of room revenue, food and beverage revenue and other revenue. As a result of our focus on lodging properties with efficient operating models, substantially all of our revenues are related to the sales of guestrooms. Our other revenue consists of ancillary revenues related to meeting rooms, parking and other guest services provided at certain of our properties.

Our property operating expenses consist primarily of expenses incurred in the day-to-day operation of our lodging properties. Many of our expenses are fixed, such as essential lodging property staff, real estate taxes, insurance, and depreciation. These expenses generally do not decrease even if the revenues at our lodging properties decrease. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with administrative departments, sales and marketing, repair and maintenance, utility costs and franchise fees.

Results of Operations

The comparisons that follow should be reviewed in conjunction with the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Comparison of 2023 to 2022

The following table contains key operating metrics for our total portfolio and our same-store portfolio for the year ended December 31, 2023 compared with the year ended December 31, 2022 (dollars in thousands, except ADR and RevPAR). Our same-store portfolio consists of properties that we owned as of December 31, 2023 and that we have owned at all times since January 1, 2022, except as noted below.

The total portfolio information above includes revenues and expenses from the lodging properties that we acquired during the year ended December 31, 2023 (the “2023 Acquired Properties”) from the date of acquisition through December 31, 2023, and operating information (occupancy, ADR, and RevPAR) for the period each lodging property was owned. Accordingly, the information does not reflect a full 12 months of operations for the year ended December 31, 2023 for the 2023 Acquired Properties. The total portfolio information above includes revenues and expenses from the lodging properties that we acquired during the year ended December 31, 2022 (the “2022 Acquired Properties”) from the date of acquisition through December 31, 2022, and operating information (occupancy, ADR, and RevPAR) for the period each lodging property was owned. Accordingly, the information does not reflect a full 12 months of operations for the year ended December 31, 2022 for the 2022 Acquired Properties.

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Operating results for the same-store portfolio of 94 properties for the year ended December 31, 2022 include the 26 hotel properties and two parking garages acquired in the first closing of the NCI Transaction on January 13, 2022 (the "First Closing Hotels") and exclude the acquisition of the Canopy New Orleans (the "Canopy"), which was acquired upon completion of construction in the second closing of the NCI Transaction on March 23, 2022. As such, the same-store operating results for the First Closing Hotels for the year ended December 31, 2022 include the operating results related to the prior owner for the period from January 1, 2022 through the first closing date of the NCI Transaction of January 13, 2022 (the "Pre-Ownership Results"). Operating results for the total portfolio of 100 properties for the year ended December 31, 2022 include actual operating results for the First Closing Hotels and the Canopy only from the closing dates of the NCI Transaction through December 31, 2022.

Changes from the year ended December 31, 2023 compared with the year ended December 31, 2022 were due to the following:

•Revenues and RevPAR. The increase in total revenues and RevPAR for our total portfolio for the year ended December 31, 2023 compared with the year ended December 31, 2022 was due to improving corporate and group demand and continued strength in leisure travel. We generated additional revenues during the year ended December 31, 2023 as a result of the acquisition of the Canopy New Orleans hotel in the second closing of the NCI Transaction at the end of March 2022 and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio. These revenue increases were partially offset by the disposition of properties during the years ended December 31, 2023 and 2022. Additionally, revenues for the year ended December 31, 2022 were negatively affected by the effect of the Omicron variant of COVID-19 in the first quarter of 2022. On a same store basis, the improvements in our business resulted in an increase of approximately 3.3% in occupancy and a 3.2% in ADR during the year ended December 31, 2023, which resulted in an 6.6% increase in same-store RevPAR. For the total portfolio, we experienced an increase of approximately 3.3% in occupancy and an increase of 4.1% in ADR during the year ended December 31, 2023. This resulted in an increase in RevPAR of 7.6% over the same period in the prior year.

•Room Expenses. The increase in room expenses for both our total and the same-store portfolio is highly correlated to the increase in room revenues driven by increasing occupancy across our portfolio. Additional factors contributing to higher room expenses include higher wage rates, training, and contract labor needed to meet room demand. We also incurred additional operating expenses during the year ended December 31, 2023 as a result of the acquisition of the Canopy upon completion of the second closing of the NCI Transaction at the end of March 2022, and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio. These operating expense increases were partially offset by the disposition of properties during the years ended December 31, 2023 and 2022.

•Food and Beverage Revenues and Expenses. Total portfolio and same-store food and beverage revenues increased during the year ended December 31, 2023 as a result of an expanded food and beverage offering and an increase in occupancy across our portfolio during the period. During the year ended December 31, 2022, we were still providing a limited food and beverage offering due to the effects of the Omicron variant of the COVID-19 virus. Additionally, we acquired the AC/Element Hotel in June 2022, which resulted in additional food and beverage revenues and related expenses during the year ended December 31, 2023.

The increases in food and beverage expenses were generally consistent with the increases in food and beverage revenues as we have been able to increase food and beverage prices commensurate with the inflationary and other increases in food and beverage costs.

•Other Hotel Operating Revenues and Expenses. The increase in other lodging property operating revenues for the total portfolio and same-store resulted from miscellaneous revenues, such as cancellation fees and marketplace purchases, related to increased occupancy, an increase in parking and resort fees, and ancillary revenues driven by increased group demand. The increase in other lodging property operating expenses was attributable to increased marketing costs, labor costs, credit card commissions and other expenses resulting primarily from increased occupancy as compared with the same period of the prior year.

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The following table includes other consolidated income and expenses for 2023 compared with 2022 (dollars in thousands):

(1)    Not meaningful

Changes from the year ended December 31, 2023 compared with the year ended December 31, 2022 were due to the following:

•Property Taxes, Insurance and Other. The increase in Property taxes, insurance and other is primarily due to an increase in franchise taxes and property and casualty insurance and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio, partially offset by a reduction in property tax expense due to the disposition of properties during the years ended December 31, 2023 and 2022, and successful appeal efforts to reduce property tax assessments.

•Management Fees. The increase in Management fees during the current period is primarily due to an increase in revenues for the year ended December 31, 2023 compared with the same period of the prior year and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio, partially offset by the disposition of properties during the years ended December 31, 2023 and 2022 and a re-negotiation of property management agreements with two of our property managers that resulted in reduced property management fees.

•Depreciation and Amortization. Depreciation and amortization remained consistent between the year ended December 31, 2023 and 2022, which is the net result of additional depreciation expense related to the acquisition of the Canopy Hotel in March 2022 and the addition of the 2023 Acquired Properties and 2022 Acquired Properties to our portfolio offset by a reduction in depreciation related to the disposition of the properties during the years ended December 31, 2023 and 2022, and the reclassification of six hotel properties to Assets Held for Sale on December 31, 2022, which suspended depreciation expense from January 2023 to May 2023.

•Corporate General and Administrative. The increase in Corporate general and administrative expenses is primarily due to an increase in compensation expenses related to higher corporate headcount during the year ended December 31, 2023 to support our investment strategies and initiatives and an increase in professional fees for the year ended December 31, 2023 compared with the year ended December 31, 2022.

•Transaction Costs. Transactions costs for the years ended December 31, 2023 and 2022 relate to certain one-time costs and other expenses incurred in pursuit of potential lodging property acquisitions that ultimately were not consummated. Transaction costs will vary from year to year based on the level of acquisition activities that we undertake and the outcomes of such activities. Transaction costs were negligible for the year ended December 31, 2023.

•Recoveries of Credit Losses. Recoveries of credit losses for the year ended December 31, 2023 related to the payment in full of our seller-financing loan that was fully reserved. Recoveries of credit losses for the year ended December 31, 2022 related to principal payments received related to our seller-financing loans. See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 4 – Investment in Real Estate Loans" for further information.

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•Loss on Write-down of Assets. During the year ended December 31, 2023, the Company recorded a Loss on write-down of assets of $16.7 million to reduce the carrying amounts of the Hyatt Place - Dallas (Plano), TX, and two additional lodging properties that are under contract to sell or being marketed for sale to their expected net selling prices less estimated costs to sell. During the year ended December 31, 2022, the Company recorded a Loss on write-down of assets of $2.9 million to reduce the carrying amounts of the Hilton Garden Inn - Eden Prairie, MN, Holiday Inn Express & Suites - Minnetonka, MN, and the Hyatt Place - Hoffman Estates, IL and the Hyatt Place - Lombard, IL to their net selling prices less estimated costs to sell. Additionally, during the year ended December 31, 2022, the Company recorded a Loss on write-down of assets of $7.2 million to reduce the carrying amounts of two lodging properties to their expected net selling prices less estimated costs to sell. The proposed sale of these two lodging properties was terminated during the year ended December 31, 2023

•Loss (Gain) on Disposal of Assets. The loss on disposal of assets, net for the year ended December 31, 2023 relates to the write-off of the remaining undepreciated book values of disposed assets as a result of renovation activities. The gain on disposal of assets, net for the year ended December 31, 2022 is due to the sale of the Hilton Garden Inn San Francisco Airport North in San Francisco, CA in May 2022 for a gross selling price of $75.0 million.

•Interest Expense. Interest expense increased during the year ended December 31, 2023 due to higher base rates on our floating rate debt that is not hedged in comparison with the year ended December 31, 2022, and the additional debt related to the Brickell Transaction which closed in June 2022.

•Other Income, net. The decrease in Other income, net for the year ended December 31, 2023 is due primarily to reduced debt transaction costs incurred during the year ended December 31, 2023 offset by a reduction in net tenant income.

•Income Tax Expense. We recorded a $2.8 million income tax expense during the year ended December 31, 2023, a decrease of $0.8 million from the $3.6 million income tax expense recorded during the year ended December 31, 2022. Our income tax expense relates to federal and state income taxes on the earnings of our TRS Lessees. The decrease in income tax expense relates to a decrease in the taxable income of our TRS Lessees.

For information about our key operating metrics and results of operations for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management's Discussion and Analysis of Financial Conditions and Results of Operations - Results of Operations" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

Non-GAAP Financial Measures

We disclose certain “non-GAAP financial measures,” which are measures of our historical financial performance. Non-GAAP financial measures are financial measures not prescribed by GAAP. These measures are as follows: (i) Funds From Operations (“FFO”) and Adjusted Funds from Operations ("AFFO"), (ii) EBITDA, Earnings before Interest, Taxes, Depreciation and Amortization for Real Estate ("EBITDAre") and Adjusted EBITDAre (as described below). We caution investors that amounts presented in accordance with our definitions of non-GAAP financial measures may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP financial measures in the same manner. Our non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss) as a measure of our operating performance. Our non-GAAP financial measures may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, debt service obligations and other commitments and uncertainties. Although we believe that our non-GAAP financial measures can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures are not necessarily better indicators of any trend as compared to a comparable measure prescribed by GAAP such as net income (loss).

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FFO and AFFO

As defined by Nareit, FFO represents net income or loss (computed in accordance with GAAP), excluding preferred dividends, gains (or losses) from sales of real property, impairment losses on real estate assets, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization related to real estate assets, and adjustments for unconsolidated partnerships, and joint ventures. AFFO represents FFO excluding amortization of deferred financing costs, franchise fees, equity-based compensation expense, transaction costs, debt transaction costs, premiums on redemption of preferred shares, losses from net casualties, non-cash interest income and non-cash income tax related adjustments to our deferred tax asset. Unless otherwise indicated, we present FFO and AFFO applicable to our common shares and common units. We present FFO and AFFO because we consider FFO and AFFO an important supplemental measure of our operational performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO and AFFO when reporting their results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and AFFO exclude depreciation and amortization related to real estate assets, gains and losses from real property dispositions and impairment losses on real estate assets, and certain transaction costs related to lodging property acquisition activities and debt, FFO and AFFO provide performance measures that, when compared year over year, reflect the effect to operations from trends in occupancy, guestroom rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. Our computation of FFO differs slightly from the computation of Nareit-defined FFO related to the reporting of depreciation and amortization expense on assets at our corporate offices, which is de minimus. Our computation of FFO may also differ from the methodology for calculating FFO used by other equity REITs and, accordingly, may not be comparable to such other REITs. FFO and AFFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP), as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. Where indicated in this Annual Report on Form 10-K, FFO is based on our computation of FFO and not the computation of Nareit-defined FFO unless otherwise noted.

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The following is a reconciliation of our GAAP net income to FFO and AFFO for the years ended December 31, 2023, 2022 and 2021 (in thousands, except per common share/common unit amounts):

(1)      The total equity-based compensation expense for the years ended December 31, 2022 and 2021 includes $1.3 million and $2.9 million, respectively, of incremental expense related to the modification of certain restricted stock awards as a result of the departure of our Chief Operating Officer and Executive Chairman.

(2)      Executive transition costs are cash payments due to our former Executive Chairman as a result of the non-renewal of his employment contract in December 2021.

(3)    During the year ended December 31, 2022, we earned a $0.4 million promote related to the sale by the GIC Joint Venture of the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture. Our promote is earned when the internal rate of return to GIC related to capital transactions exceeds a specified investment hurdle rate. We have adjusted this amount from our calculation of AFFO because it relates to the gain on the sale of the property and not on-going operations.

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(4)      AFFO for the years ended December 31, 2023, 2022 and 2021 has not been adjusted for interest related to the Convertible Notes for purposes of calculating AFFO per common share/common unit because we intend to settle the principal portion of the Convertible Notes in cash and we did not include in the denominator of our calculation of AFFO per common share/common unit the potential dilutive effect of shares that would be issued if the principal portion of the Convertible Notes were converted into shares of our common stock.

(5)       Includes Common Units in the Operating Partnership held by limited partners (other than us and our subsidiaries) because the Common Units are redeemable for cash or, at our election, shares of our common stock.

(6)      The weighted average diluted common shares/common units used to calculate FFO and AFFO per common share/common unit for the years ended December 31, 2023, 2022 and 2021 includes the dilutive effect of our outstanding restricted stock awards. These shares were excluded from our weighted average shares outstanding used to calculate net loss per share because they would have been antidilutive. The weighted average common shares/common units used to calculate FFO and AFFO per common share/common unit for the year ended December 31, 2021 exclude the potential dilution related to our Convertible Notes as we intend to settle the principal value of the Convertible Notes in cash.

A reconciliation of weighted average diluted common shares to non-GAAP weighted average diluted common shares/common units for FFO and AFFO is as follows (in thousands):

During the year ended December 31, 2023, AFFO applicable to common stock and Common Units decreased $1.1 million due to an increase in interest expense as a result of rising interest rates and disposition activity, partially offset by an improvement in our business. The improvement in our business was primarily driven by improving demand for corporate transient and group travel and continued strength in leisure travel coupled with increases in our operating results due to acquisitions, partially offset by disposition activity.

For information about our AFFO for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

EBITDA, EBITDAre and Adjusted EBITDAre

EBITDA

EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management team also uses EBITDA as one measure in determining the value of acquisitions and dispositions.

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EBITDAre and Adjusted EBITDAre

In September 2017, Nareit proposed a standardized performance measure, called EBITDAre, which is based on EBITDA and is expected to provide additional relevant information about REITs as real estate companies in support of growing interest among generalist investors. The conclusion was reached that, while dedicated REIT investors have long been accustomed to utilizing the industry’s supplemental measures such as FFO and net operating income to evaluate the investment quality of REITs as real estate companies, it would be helpful to generalist investors for REITs as real estate companies to also present EBITDAre as a more widely known and understood supplemental measure of performance. EBITDAre is intended to be a supplemental non-GAAP performance measure that is independent of a company’s capital structure and will provide a uniform basis for one measurement of the enterprise value of a company compared to other REITs.

EBITDAre, as defined by Nareit, is calculated as EBITDA, excluding: (i) loss and gains on disposition of property and (ii) asset impairments, if any. We believe EBITDAre is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.

We make additional adjustments to EBITDAre when evaluating our performance because we believe that the exclusion of certain additional non-recurring or unusual items described below provides useful supplemental information to investors regarding our ongoing operating performance. We believe that the presentation of Adjusted EBITDAre, when combined with the primary GAAP presentation of net income, is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results.

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The following is a reconciliation of our GAAP net income to EBITDAre for the years ended December 31, 2023, 2022 and 2021 (in thousands):

(1)      The total equity-based compensation expense for the years ended December 31, 2022 and 2021 includes $1.3 million and $2.9 million of incremental expense related to the modification of certain restricted stock awards as a result of the departure of our Chief Operating Officer and Executive Chairman, respectively.

(2)      Executive transition costs are cash payments to our former Executive Chairman as a result of the non-renewal of his employment contract in December 2021.

(3)    During the year ended December 31, 2022, we earned a $0.4 million promote related to the sale by the GIC Joint Venture of the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture. Our promote is earned when the internal rate of return to GIC related to capital transactions exceeds a specified investment hurdle rate. We have adjusted this amount from our calculation of AFFO because it relates to the gain on the sale of the property and not on-going operations.

During the year ended December 31, 2023, Adjusted EBITDAre increased $9.1 million from the prior year due to an improvement in our business that was primarily driven by improving demand for corporate transient and group travel and continued strength in leisure travel coupled with increases in our operating results due to acquisitions, partially offset by disposition activity.

For information about our Adjusted EBITDAre for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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Liquidity and Capital Resources

Our short-term cash obligations consist primarily of operating expenses and other expenditures directly associated with our lodging properties, recurring maintenance and capital expenditures necessary to maintain our lodging properties in accordance with internal and brand standards, capital expenditures to improve our lodging properties, interest payments, settlement of any applicable interest rate swaps, scheduled principal payments on outstanding indebtedness, restricted cash funding obligations, our joint venture acquisitions and capital requirements, contractual lease payments, corporate overhead, and distributions to our stockholders and holders of Common and Preferred Units in our Operating Partnership when declared. Our corporate overhead primarily consists of employee compensation expenses, professional fees, corporate insurance and rent expenses. Cash requirements for our corporate overhead expenses (excluding non-cash stock-based compensation), which are generally paid from operating cash flows, were $24.8 million, $22.3 million and $21.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. We generally expect our corporate overhead expenses to remain consistent with the level of our operating activities and market conditions for goods and services.

Our long-term cash obligations consist primarily of the costs of acquiring additional lodging properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our lodging properties, dividends and distributions to our stockholders and holders of Common and Preferred Units in our Operating Partnership when declared, and scheduled debt payments, including maturing loans.

In May 2023, the Company completed the disposition of four wholly-owned hotels containing an aggregate of 467 guestrooms for a gross sales price of $28.1 million.

In June 2023, the GIC Joint Venture acquired the Residence Inn by Marriott located in Scottsdale, AZ containing 120 guestrooms for a purchase price of approximately $29.0 million. GIC made a capital contribution of $13.7 million, or 49% of the purchase price, to the GIC Joint Venture, and the Operating Partnership made a capital contribution of $14.3 million, or 51% of the purchase price, to the GIC Joint Venture to fund the purchase price. The Operating Partnership made its capital contribution to the GIC Joint Venture with available cash on hand and borrowings on the $400 Million Revolver.

In June 2023, the GIC Joint Venture acquired the Nordic Lodge containing 47 guestrooms located in Steamboat Springs, CO for a purchase price of approximately $13.7 million. GIC made a capital contribution of $6.7 million, or 49% of the purchase price, to the GIC Joint Venture and the Operating Partnership made a capital contribution of $7.0 million, or 51% of the purchase price, to the GIC Joint Venture to fund the purchase price. The Operating Partnership made its capital contribution to the GIC Joint Venture with available cash on hand and borrowings on the $400 Million Revolver.

In December 2023, we completed the sale of the 123-guestroom Hyatt Place in Owings Mills (Baltimore), MD for a gross selling price of $8.3 million. The net selling price less costs to sell approximated the net book value of the lodging property on the sale date resulting in a nominal gain that was recorded in the fourth quarter of 2023.

During the first quarter of 2022, we completed the NCI Transaction for an aggregate purchase price of $822.0 million paid in the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 Preferred Units of limited partnership of the Operating Partnership newly designated as 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation Preference $25 Per Unit) (the “Series Z Preferred Units”), cash draws totaling $410.0 million from a term loan entered into by subsidiaries of the GIC Joint Venture, the assumption by a subsidiary of the GIC Joint Venture of approximately $6.5 million in PACE loan debt, $5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the GIC Joint Venture, and approximately $185.2 million cash contributed by GIC at closing. GIC also contributed to the GIC Joint Venture an additional $18.5 million in cash for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating Partnership as reimbursement for transaction costs paid by the Operating Partnership.

In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture.

Additionally, in June 2022, we exercised our purchase option to acquire a 90% equity interest in the AC/Element Hotel based on a gross hotel option exercise price of $89.0 million. The Brickell Joint Venture assumed $47.0 million of debt as part of the transaction.

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In October 2022, the Company entered into the Onera Joint Venture with the acquisition of a 90% equity interest in the Onera Joint Venture for $5.2 million in cash, plus additional contingent consideration of $1.8 million paid in September 2023. The Onera Joint Venture has a 100% fee simple interest in real property and improvements located in Fredericksburg, Texas consisting of an 11-unit glamping property and a 6.4-acre parcel of land.

In July 2023, we entered into the 2023 Senior Credit Facility to recast our prior senior credit facility, including certain key financial covenants, and renewal of our full access to our $400 Million Revolver. The 2023 Senior Credit Facility provides for fully extended maturities in June 2028. See “Part II - Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt,” for additional information concerning our prior senior credit facility and subsequent amendments thereto.

In September 2023, the GIC Joint Venture entered into a recast of the GIC Joint Venture Credit Facility (the "GIC Joint Venture Credit Recast"). The GIC Joint Venture Credit Recast extends the maturity of the $125 Million Revolver and the $75 Million Term Loan to an initial maturity date of September 2027, which may be extended for a single 12-month period at the option of the GIC Joint Venture, subject to certain conditions. As such, the GIC Joint Venture Credit Recast has a fully extended maturity date of September 2028.

To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to distribute a sufficient amount of our taxable income to maintain our status as a REIT and to avoid tax on undistributed income. Because we anticipate distributing a substantial amount of our available cash from operations, if sufficient funds are not available to us from lodging property dispositions, our senior revolving credit and term loan facilities and other loans, we may need to raise additional capital to grow our business.

Outstanding Indebtedness

At December 31, 2023, we had no balance outstanding on our $400 Million Revolver, $200.0 million outstanding on our $200 Million Term Loan and $225.0 million outstanding on our 2018 Term Loan (as defined under "Part II - Item 8. - Financial Statements and Supplementary Data - Note 6 – Debt”). Each of the credit facilities is currently supported by the 52 lodging properties included in the credit facility borrowing base. We also had $287.5 million of Convertible Notes outstanding and $57.5 million of Secured Mortgage Indebtedness.

At December 31, 2023, the GIC Joint Venture had $200.0 million outstanding under our GIC Joint Venture Credit Facility, which included borrowings of a $75.0 million term loan and a $125.0 million revolving line of credit. The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the equity interests in the subsidiaries that hold the 13 lodging property borrowing base assets, and the related TRS entities, which wholly own the TRS Lessees.

To complete the NCI Transaction, the GIC Joint Venture entered into the GIC Joint Venture Term Loan, which is secured by the 27 lodging properties and two parking garages acquired in the transaction and assumed a PACE loan totaling $6.5 million. The GIC Joint Venture Term Loan has an accordion feature which will permit an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan will mature in January 2026 and can be extended for a single 12-month period at the Company’s option, subject to certain conditions. As such, the GIC Joint Venture Term Loan has a fully extended maturity date of January 2027. The GIC Joint Venture Term Loan is interest-only and provides for a floating interest rate equal to SOFR plus 2.86%. In February 2023, we entered into an amendment to the GIC Joint Venture Term Loan to amend certain definitions, revise the minimum borrowing base interest coverage ratio thresholds and make certain other changes. The outstanding balance of the PACE loan is $6.1 million at December 31, 2023.

Additionally, the GIC Joint Venture has a mortgage loan outstanding totaling $12.8 million at December 31, 2023 related to the acquisition of the Embassy Suites in Tucson, AZ in December 2021.

In June 2022, the Brickell Joint Venture, as borrower, and the Operating Partnership, as the non-recourse guarantor, entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida to finance the dual-branded 264-guestroom AC/Element Hotel. The City National Bank Loan provides for an interest rate equal to one-month term SOFR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank Loan is prepayable at any time without penalty.

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In August 2022, we entered into agreements to fully defease three commercial mortgage-backed securities ("CMBS") mortgage loans totaling $54.9 million. In December 2022, we entered into an agreement to fully defease a fourth commercial mortgage-backed securities ("CMBS") mortgage loan totaling $32.3 million. To defease the CMBS mortgage loans, we were required to place into trust an amount sufficient to cover future principal and interest payments related to the loans. As a result, we are no longer obligated to make future interest payments of approximately $2.4 million between the defeasance dates and maturity dates. Finally, as part of the defeasances, $26.8 million of restricted cash reserves were returned to us.

At December 31, 2023, we have scheduled debt principal payments during the next 12 months totaling $16.9 million, when taking into consideration the refinancing of the Company's $225 Million Term Loan subsequent to year end.

Subsequent to year-end, the Company successfully completed a new $200 million senior unsecured term loan financing (the "2024 Term Loan") that refinanced and replaced the 2018 Term Loan. The 2024 Term Loan has an initial maturity date of February 2027 and can be extended for two 12-month periods at the Company’s option, subject to certain conditions, for a fully extended maturity date of February 2029.The 2024 Term Loan provides for interest rate pricing ranging from 135 basis points to 235 basis points over the applicable adjusted term SOFR or 35 basis points to 135 basis points over base rate, at the Company's option. Proceeds from the 2024 Term Loan financing and advances on our $400 Million Revolver were used to repay in full the Company’s $225 million 2018 Term Loan that was scheduled to mature in February 2025. In connection with the closing of the 2024 Term Loan, the collateral securing the Company’s 2023 Senior Credit Facility was released. As a result of the 2024 Term Loan financing, the Company has significantly reduced debt maturities until 2026 and has an average length to maturity of approximately 3.6 years. Other terms of the agreement are similar to the Company’s 2023 Senior Credit Facility.

Currently, we have the capacity to pay scheduled principal payments using cash on hand or draws under our $400 Million Revolver. We have obtained financing through debt instruments having staggered maturities and intend to continue to do so in the future. Our debt includes, and may include in the future, debt secured by first priority mortgage liens on certain lodging properties, debt secured by equity pledges, and unsecured debt. We believe that we will have adequate liquidity to meet the requirements for scheduled maturities and principal repayments. However, we can provide no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable terms.

At December 31, 2023, we and our GIC Joint Venture are in compliance with all of our loan agreements.

See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 6 – Debt" for additional information concerning our loans, loan amendments and our financing arrangements.

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A summary of our debt at December 31, 2023 is as follows (dollars in thousands):

(1) The 2023 Senior Credit Facility and Term Loans are supported by a borrowing base of 52 unencumbered hotel properties.

(2) The $125 Million Revolver and the $75 Term Loan are secured by pledges of the equity in the entities (and affiliated entities) that own 13 lodging properties.

(3) The $410 million term loan with Bank of America, N.A. is secured by pledges of the equity in the entities (and affiliated entities) that own 27 lodging properties.

(4) The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.

(5) These loans are subject to mortgage debt and secured by the same collateral.

(6) As part of the NCI Transaction, a subsidiary of the GIC Joint Venture assumed a PACE loan of approximately $6.5 million. The loan bears fixed interest at 6.10%, has an amortization period of 20 years, and matures on July 31, 2040. The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender.

(7)    In February 2024, we successfully closed the 2024 Term Loan. Proceeds from the 2024 Term Loan financing and advances on our $400 Million Revolver were used to repay in full this $225 million term loan that was scheduled to mature in February 2025. The 2024 Term Loan provides for a fully extended maturity date of February 2029. See "Part II - Item 8. - Financial Statement and Supplementary Information - Note 6 - Debt."

Capital Expenditures

During the year ended December 31, 2023, we funded $89.6 million of capital expenditures on a consolidated basis. When taking into consideration only our pro rata portion related to our joint ventures, capital expenditures for the year ended December 31, 2023 was $73.4 million.

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We anticipate spending an estimated $65.0 million to $85.0 million in capital expenditures across our portfolio (excluding the pro rata portion related to our joint venture partners) during the year ended December 31, 2024. We expect to fund these expenditures through a combination of cash on hand, working capital, cash flows from operations, restricted cash, borrowings under our $400 Million Revolver, or other potential sources of capital, to the extent available to us.

Cash Flow Analysis

The following table summarizes changes in cash flows for the years ended December 31, 2023 and December 31, 2022 (in thousands):

Changes from the year ended December 31, 2023 compared to the year ended December 31, 2022 were due to the following:

•Net cash provided by operating activities. Cash provided by operating activities for the year ended December 31, 2023 was the result of net income of $153.0 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a change in working capital of $0.7 million. Cash provided by operating activities for the year ended December 31, 2022 was the result of net income of $156.1 million, after adjusting for non-cash items such as depreciation and amortization and equity-based compensation, and a change in working capital of $13.5 million.

•Net cash used in investing activities. The decrease in cash used in investing activities for the year ended December 31, 2023 was primarily due to the net effect of property acquisitions and dispositions and capital expenditures related to lodging property renovations during each period. We closed the NCI Transaction in the first quarter of 2022 and the sale of the Hilton Garden Inn San Francisco Airport North in May 2022. Cash used in investing activities during the year ended December 31, 2023 primarily related to renovation capital during the period, the funding of the Onera Mezzanine Loan (see "Part II - Item 8. - Financial Statements and Supplementary Data - Note 3 - Investments in Lodging Property, net"), and the acquisitions during the year ended December 31, 2023 of the Residence Inn by Marriott in Scottsdale, AZ and the Nordic Lodge in Steamboat, CO, partially offset by the sale of a portfolio of four lodging properties in May 2023 and the sale of Hyatt Place in Baltimore (Owings Mills), MD in December 2023.

•Net cash (used in) provided by financing activities. Cash used in financing activities for the year ended December 31, 2023 was primarily related to the net decrease in debt principal payments of $17.3 million, the payment of dividends and distributions of approximately $45.8 million and financing costs of approximately $10.3 million related to the closing of our 2023 Senior Credit Facility and the recast of our $200 Million GIC Joint Venture Credit Facility, partially offset by contributions by our GIC Joint Venture partner of $20.4 million.

Cash provided by financing activities during the year ended December 31, 2022 was primarily the result of contributions from our joint venture partners of $204.1 million for the NCI Transaction and the Brickell Transaction, borrowings of $410.0 million under the GIC Joint Venture Term Loan for the NCI Transaction, offset by debt repayments, including the repayment of $328.7 million of debt assumed as part of the NCI Transaction, the repayment of a $62.0 million term loan in May 2022, debt defeasances of $87.3 million and distributions to our joint venture partner of $80.4 million during the year ended December 31, 2022.

For information about our consolidated cash flows for the year ended December 31, 2022 compared with the year ended December 31, 2021, refer to "Part II – Item 7. – Management's Discussion and Analysis of Financial Conditions and Results of Operations – Cash Flow Analysis" of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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Critical Accounting Estimates

We consider the following policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and evaluating our reported consolidated financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements.

Asset Impairment

Each quarter, we evaluate the net carrying amounts of our long-term assets for impairment when impairment indicators are present. We evaluate for impairment triggers based on qualitative factors such as macroeconomic trends, trends related to demand for travel and lodging, and current and projected trends related to local market conditions. We also evaluate for impairment triggers based on quantitative factors such as historical and projected revenue and profitability performance trends. When an impairment indicator is identified, we perform a recoverability analysis based on estimated future undiscounted cash flows for the asset. Forecasted undiscounted cash flows require substantial management judgment related to estimates of future revenues, which is based on historical results, our expectations related to revenue trends and future performance of the asset, our assessment of current and future market conditions and competition, our expectations related to performance of the overall economy, and third-party industry published forecasts. If we determine that an asset impairment exists, we will estimate the fair value of the asset and record a loss on impairment to record the asset at the lower of cost or fair value.

Purchase Price Allocation

Our acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment, inventory, and assumed debt. We allocate the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. We estimate the fair values of the assets acquired and the liabilities assumed by using a combination of the market, cost and income approaches. We determine the fair value by using market data and independent appraisals available to us and by making numerous estimates and assumptions, such as estimates of future income growth, replacement cost per unit, value per acre or buildable square foot, capitalization rates, discount rates, borrowing rates, market rental rates, capital expenditures and cash flow projections at the respective hotel properties. The determination of fair value is subjective and is based in part on assumptions and estimates that could differ materially from actual results in future periods.

Critical Accounting Policies and New Accounting Standards

See "Part II – Item 8. – Financial Statements and Supplementary Data – Note 2 – Basis of Presentation and Significant Accounting Policies."

Recent Developments

None

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