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2: EX-4.21 Instrument Defining the Rights of Security Holders HTML 26K
3: EX-4.24 Instrument Defining the Rights of Security Holders HTML 26K
4: EX-10.2 Material Contract HTML 793K
5: EX-10.3 Material Contract HTML 96K
6: EX-22.1 Published Report re: Matters Submitted to a Vote HTML 24K
of Security Holders
7: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
8: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
9: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
16: R1 Cover Page HTML 75K
17: R2 Condensed Consolidated Balance Sheets HTML 105K
18: R3 Condensed Consolidated Balance Sheets HTML 27K
(Parenthetical)
19: R4 Condensed Consolidated Statements of Income (Loss) HTML 117K
20: R5 Condensed Consolidated Statements of Income (Loss) HTML 22K
(Parenthetical)
21: R6 Condensed Consolidated Statements of Shareholders' HTML 74K
Equity
22: R7 Condensed Consolidated Statements of Cash Flows HTML 121K
23: R8 Condensed Consolidated Statements of Cash Flows - HTML 41K
Supplemental Information
24: R9 Organization and Basis of Presentation HTML 28K
25: R10 Revenue Recognition HTML 25K
26: R11 Weighted Average Common Shares HTML 31K
27: R12 Real Estate Properties HTML 43K
28: R13 Management Agreements and Leases HTML 48K
29: R14 Indebtedness HTML 31K
30: R15 Shareholders' Equity HTML 35K
31: R16 Business and Property Management Agreements with HTML 26K
RMR LLC
32: R17 Related Person Transactions HTML 26K
33: R18 Income Taxes HTML 25K
34: R19 Segment Information HTML 209K
35: R20 Fair Value of Assets and Liabilities HTML 68K
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Hotel Agreements (Details)
48: R33 Management Agreements and Leases - Sonesta HTML 108K
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50: R35 Management Agreements and Leases - Radisson HTML 35K
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Lease Portfolio and TA Leases (Details)
53: R38 Management Agreements and Leases - Other Net Lease HTML 26K
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(Exact Name
of Registrant as Specified in Its Charter)
iMaryland
i04-3262075
(State
or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
iTwo Newton Place, i255 Washington Street, iSuite
300, iNewton, iMassachusetts, i02458-1634
(Address of Principal Executive Offices) (Zip Code)
i617-i964-8389
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of Each Class
Trading Symbol
Name of each Exchange on which Registered
iCommon Shares of Beneficial Interest
iSVC
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of August 4, 2021: i164,857,754
References
in this Quarterly Report on Form 10-Q to the Company, SVC, we, us or our include Service Properties Trust and our consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.
Acquired
real estate leases and other intangibles, net
i302,358
i325,845
Assets
held for sale
i4,259
i13,543
Cash
and cash equivalents
i915,330
i73,332
Restricted
cash
i1,295
i18,124
Due
from related persons
i49,636
i55,530
Other
assets, net
i424,434
i318,783
Total
assets
$
i9,415,735
$
i8,687,319
LIABILITIES
AND SHAREHOLDERS’ EQUITY
Revolving credit facility
$
i1,000,000
$
i78,424
Senior
unsecured notes, net
i6,136,554
i6,130,166
Accounts
payable and other liabilities
i441,276
i345,373
Due
to related persons
i23,254
i30,566
Total
liabilities
i7,601,084
i6,584,529
Commitments
and contingencies
i
i
Shareholders’
equity:
Common shares of beneficial interest, $ii.01/
par value; ii200,000,000/ shares authorized; ii164,857,754/
and ii164,823,833/, shares issued and outstanding, respectively
i1,649
i1,648
Additional
paid in capital
i4,551,641
i4,550,385
Cumulative
other comprehensive loss
(i760)
(i760)
Cumulative
net income available for common shareholders
i2,894,163
i3,180,263
Cumulative
common distributions
(i5,632,042)
(i5,628,746)
Total
shareholders’ equity
i1,814,651
i2,102,790
Total
liabilities and shareholders’ equity
$
i9,415,735
$
i8,687,319
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Unrealized
gain (losses) on equity securities, net
i2,500
i3,848
(i3,981)
(i1,197)
Interest
income
i225
i15
i282
i277
Interest
expense (including amortization of debt issuance costs and debt discounts and premiums of $i4,891, $i3,486, $i9,247
and $i6,774, respectively)
(i91,378)
(i72,072)
(i180,769)
(i143,147)
Loss
on early extinguishment of debt
i—
(i6,970)
i—
(i6,970)
Loss
before income taxes and equity in earnings (losses) of an investee
(i91,634)
(i18,471)
(i282,928)
(i51,061)
Income
tax expense
(i211)
(i16,660)
(i1,064)
(i17,002)
Equity
in earnings (losses) of an investee
i735
(i2,218)
(i2,108)
(i2,936)
Net
loss
(i91,110)
(i37,349)
(i286,100)
(i70,999)
Weighted
average common shares outstanding (basic and diluted)
ii164,506/
ii164,382/
ii164,502/
ii164,376/
Net
loss per common share (basic and diluted)
$
(ii0.55/)
$
(ii0.23/)
$
(ii1.74/)
$
(ii0.43/)
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Adjustments
to reconcile net loss to cash (used in) provided by operating activities:
Depreciation and amortization
i246,045
i255,353
Net
amortization of debt issuance costs, discounts and premiums as interest
i9,247
i6,774
Straight-line
rental income
i2,181
i2,669
Security
deposits utilized
i—
(i100,170)
Loss
on early extinguishment of debt
i—
i6,970
Loss
on asset impairment
i2,110
i45,254
Unrealized
losses on equity securities, net
i3,981
i1,197
Equity
in losses of an investee
i2,108
i2,936
(Gain)
loss on sale of real estate
(i10,840)
i9,764
Gain
on insurance settlement
i—
(i62,386)
Deferred
income taxes
i—
i15,650
Other
non-cash income, net
(i1,363)
(i1,919)
Changes
in assets and liabilities:
Due from related persons
(i628)
i1,070
Other
assets
i17,588
(i69,351)
Accounts
payable and other liabilities
(i245)
i7,858
Due
to related persons
(i5,290)
(i1,873)
Net
cash (used in) provided by operating activities
(i21,206)
i48,797
Cash
flows from investing activities:
Real estate acquisitions and deposits
(i7,649)
(i7,090)
Real
estate improvements
(i42,295)
(i45,858)
Hotel
managers’ purchases with restricted cash
(i22,959)
(i95,744)
Hotel
manager’s deposit of insurance proceeds into restricted cash
i—
i15,000
Net
proceeds from sale of real estate
i33,128
i63,960
Investment
in Sonesta
(i25,443)
(i5,314)
Distributions
in excess of earnings from Affiliates Insurance Company
i—
i286
Net
cash used in investing activities
(i65,218)
(i74,760)
Cash
flows from financing activities:
Proceeds from issuance of senior unsecured notes, after discounts and premiums
i—
i800,000
Repurchase
of senior unsecured notes
i—
(i355,971)
Borrowings
under revolving credit facility
i984,027
i656,000
Repayments
of revolving credit facility
(i62,451)
(i999,873)
Deferred
financing costs
(i6,497)
(i15,015)
Repurchase
of common shares
(i190)
(i70)
Distributions
to common shareholders
(i3,296)
(i90,509)
Net
cash provided by (used in) financing activities
i911,593
(i5,438)
Increase
(decrease) in cash and cash equivalents and restricted cash
i825,169
(i31,401)
Cash
and cash equivalents and restricted cash at beginning of period
i91,456
i81,259
Cash
and cash equivalents and restricted cash at end of period
$
i916,625
$
i49,858
Supplemental
disclosure of cash and cash equivalents and restricted cash:
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the condensed consolidated statements of cash flows:
Cash and cash equivalents
$
i915,330
$
i20,206
Restricted
cash
i1,295
i29,652
Total
cash and cash equivalents and restricted cash
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
i
Note
1. Organization and Basis of Presentation
Service Properties Trust, or we, us or our, is a real estate investment trust, or REIT, organized on February 7, 1995 under the laws of the State of Maryland, which invests in hotels and net lease service oriented retail properties. At June 30, 2021, we owned, directly and through our subsidiaries, i304 hotels and i796
net lease properties.
At June 30, 2021, all i304 of our hotels were operated by subsidiaries of the following companies: Sonesta Holdco Corporation, or Sonesta (i261
hotels), Hyatt Hotels Corporation, or Hyatt (i17 hotels), Radisson Hospitality, Inc., or Radisson (inine hotels), Marriott International, Inc., or Marriott (i16
hotels), and InterContinental Hotels Group, plc, or IHG (ione hotel). At June 30, 2021, we owned i796 net lease properties with i171
tenants, including i179 travel centers leased to TravelCenters of America Inc., or TA, our largest tenant. Hereinafter, these companies are sometimes referred to as managers and/or tenants, or collectively, operators.
Impact of COVID-19
Since March 2020, the lodging industry and other industries in which our managers and tenants operate have been adversely impacted by the novel coronavirus, or COVID-19, global pandemic along with the federal, state and local government mandates intended to
contain and mitigate the spread of COVID-19 and market reactions to the pandemic. The effects of COVID-19 continue to have a significant negative impact on our results of operations, financial position and cash flow. Although lodging demand has improved through the second quarter of 2021 when compared to 2020 levels, we cannot predict with certainty when business levels may return to historical levels. Under the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. In applying the accounting guidance, we considered our current financial condition and liquidity sources, including current funds available, forecasted
future cash flows and our unconditional obligations due over the next 12 months. As of June 30, 2021, we were not in compliance with one of our debt covenants necessary to incur additional debt, and as a result, we will not be able to incur additional debt until we meet the required covenant level. Based on our cash on hand, the cash flows we expect to receive from our operators, improving lodging trends and asset dispositions we expect to complete, we believe we will have sufficient liquidity to meet our obligations for at least the next twelve months.
Basis of Presentation
iThe
accompanying condensed consolidated financial statements of us are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020, or our 2020 Annual Report. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair statement of results for the interim period, have been included. These condensed consolidated financial statements include our accounts and the accounts of our subsidiaries,
all of which are i100% owned directly or indirectly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods and those of our managers and tenants are not necessarily indicative of the results that may be expected for the full year./
iThe
preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include the allowance for credit losses, purchase price allocations, useful lives of fixed assets, impairment of real estate and related intangibles.
Notes
to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
iWe have determined that each of our wholly owned taxable REIT subsidiaries, or TRSs, is a variable interest entity, or VIE, as defined under the Consolidation Topic of
the Financial Accounting Standards Board, or FASB, Accounting Standards Codification™. We have concluded that we must consolidate each of our wholly owned TRSs because we are the entity with the power to direct the activities that most significantly impact such VIEs’ performance and we have the obligation to absorb losses or the right to receive benefits from each VIE that could be significant to the VIE and are, therefore, the primary beneficiary of each VIE. The assets of our TRSs were $i151,773 and $i118,862
as of June 30, 2021 and December 31, 2020, respectively, and consist primarily of amounts due from and working capital advances to certain of our hotel managers. The liabilities of our TRSs were $i80,888 and $i70,240
as of June 30, 2021 and December 31, 2020, respectively, and consist primarily of amounts payable to certain of our hotel managers. The assets of our TRSs are available to satisfy our TRSs’ obligations and we have guaranteed certain obligations of our TRSs.
i
Note 2. Revenue Recognition
iWe
report hotel operating revenues for managed hotels in our condensed consolidated statements of income (loss). We generally recognize hotel operating revenues, consisting primarily of room and food and beverage sales, when goods and services are provided.
iWe report rental income for leased properties in our condensed consolidated statements of income (loss). We recognize rental income from operating leases on a straight line basis over the term of the lease agreements. We reduced rental income by $i299
for the three months ended June 30, 2021, increased rental income by $i875 for the three months ended June 30, 2020 and reduced rental income by $i2,181
and $i2,669 for the six months ended June 30, 2021 and 2020, respectively, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight line basis. See Notes 5 and 9 for further information regarding our TA leases. Due from related persons
includes $i27,379 and $i33,902 and other assets, net, includes $i22,594
and $i16,264 of straight line rent receivables at June 30, 2021 and December 31, 2020, respectively.
Certain of our lease agreements require additional percentage rent if gross revenues of our properties exceed certain thresholds defined in our lease agreements. We may determine percentage rent due to us under our leases monthly, quarterly or annually, depending on the specific lease terms, and recognize it when all contingencies are met and
the rent is earned. We had deferred estimated percentage rent of $i1,591 and $i124 for the three months ended June 30, 2021 and 2020, respectively,
and $i2,977 and $i849 for the six months ended June 30, 2021 and 2020, respectively.
/i
Note
3. Weighted Average Common Shares
i
The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share:
Weighted average common shares for basic earnings per share
ii164,506/
ii164,382/
ii164,502/
ii164,376/
Effect
of dilutive securities: Unvested share awards
i—
i—
i—
i—
Weighted
average common shares for diluted earnings per share
ii164,506/
i164,382
i164,502
i164,376
//i
Note
4. Real Estate Properties
At June 30, 2021, we owned i304 hotels with an aggregate of i48,439
rooms or suites and i796 service-oriented retail properties with an aggregate of i13,440,784 square feet that are primarily subject to “triple net” leases, or net leases where the tenant is generally responsible
for payment of operating expenses and capital expenditures of the property during the lease term. Our properties had an aggregate undepreciated carrying value of $i11,152,330, including $i4,259
classified as held for sale as of June 30, 2021.
Capital expenditures made at certain of our properties were $i53,431 and $i78,500
during the six months ended June 30, 2021 and 2020, respectively.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Acquisitions
On
March 9, 2021, we acquired a land parcel adjacent to a property we own in Nashville, TN for a purchase price of $i7,709, including acquisition related costs. We accounted for this transaction as an acquisition of assets.
Dispositions
During the six months ended June 30, 2021, we sold inine
properties for an aggregate sales price of $i34,051, excluding closing costs, as presented in the table below. The sales of these properties do not represent significant dispositions individually or in the aggregate nor do they represent a strategic shift. As a result, the results of the operations of these properties are included in continuing operations through the date of sale in our condensed consolidated statements of income (loss).
i
Date
of Sale
Number of Properties
Location
Property Type
Rooms/ Square Feet
Gross Sales Price
Gain/(Loss) on Sale
3/16/2021
i1
Chattanooga,
TN
Net Lease
i2,797
$
i375
$
(i9)
4/1/2021
i1
Jacksonville,
FL
Hotel
i146
i9,753
i49
4/6/2021
i1
Colorado
Springs, CO
Net Lease
i32,130
i1,300
(i10)
5/20/2021
i5
Various
Hotel
i430
i22,263
i10,763
6/11/2021
i1
Emmitsburg,
MD
Net Lease
i3,114
i360
i47
i9
i576/i38,041
$
i34,051
$
i10,840
/
We
are currently marketing for sale i69 Sonesta branded hotels (i46 extended stay hotels with i5,404
keys, i19 select service hotels with i2,461 keys and ifour
full service hotels with i1,098 keys) located in i27 states with an aggregate net carrying value of $i627,302
as of June 30, 2021. We expect these sales to be completed by the end of the first quarter of 2022.
We have also entered into agreements to sell ifour net lease properties with an aggregate of i20,712
square feet and an aggregate carrying value of $i1,678 for an aggregate sales price of $i2,165, excluding closing costs. We currently expect these sales to be
completed by the end of the third quarter of 2021.
As of June 30, 2021, we had ieight net lease properties with an aggregate of i31,966
square feet and an aggregate carrying value of $i4,259 classified as held for sale. See Note 12 for further information on these properties.
i
Note
5. Management Agreements and Leases
As of June 30, 2021, we owned i304 hotels which were included in isix
operating agreements and i796 service oriented retail properties net leased to i171 tenants. We do not operate any of our properties.
Hotel agreements
As of June 30,
2021, all i304 of our hotels were leased to our TRSs and managed by independent hotel operating companies. As of June 30, 2021, our hotel properties were managed by separate subsidiaries of Sonesta, Hyatt, Radisson, Marriott and IHG under isix
agreements. These hotel agreements had initial terms expiring between 2021 and 2037. Each of these agreements is for between ione and i208
of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between one to i60 years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, payment of certain
management fees, payment of our minimum returns, reimbursement of certain advances, funding of our FF&E reserves and replenishment of guarantees. Some of our managers or tenants or their affiliates provided deposits or guarantees to secure their obligations to pay us.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Sonesta
agreement. As of June 30, 2021, Sonesta managed i41 of our full-service hotels, i157
extended stay hotels and i63 select service hotels pursuant to management agreements for each of the hotels. We are also party to pooling agreements that combine certain of our management agreements with Sonesta for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us. Our agreements with Sonesta for i53
hotels expire in January 2037, which we refer to as our legacy management and pooling agreements. As of June 30, 2021, i208 of our hotels were managed by Sonesta under agreements that expire on December 31, 2021 and automatically renew for successive ione-year
terms unless terminated earlier, which we refer to as our conversion hotel management and pooling agreements or collectively with our legacy management and pooling agreements, our Sonesta agreement.
In February and March 2021, we transitioned the branding and management of i88 hotels to Sonesta from Marriott and in June 2021 we transitioned the branding and management of ifive
hotels to Sonesta from Hyatt. We added these hotels to our conversion hotel management and pooling agreements with Sonesta. Following this transfer and rebranding, Sonesta operates i261 of the i304 hotels we currently own, which comprised approximately
i52.8% of our total historical real estate investments as of June 30, 2021.
Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to i8%
of our invested capital, as defined therein, if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. Our fixed annual minimum return under our Sonesta agreement was $i509,621 as of June 30, 2021. Our Sonesta agreement further provides that we are paid an additional return equal to i80%
of the operating profits, as defined therein, after reimbursement of owner or manager advances, FF&E reserve escrows and Sonesta’s incentive fee, if applicable. Our Sonesta hotels generated net operating cash flow of $i25,198 and a net operating cash flow deficit of $i17,666
during the three months ended June 30, 2021 and 2020, respectively, and net operating cash flow deficit of $i12,196 and $i25,814
for the six months ended June 30, 2021 and 2020, respectively. The returns we receive from our Sonesta hotels are limited to the hotels’ available cash flows, if any, after payment of operating expenses, including management and related fees.
Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third-party reservation transmission fees of $i22,046and $i2,147 for the three months ended June 30, 2021 and 2020, respectively, and $i33,321
and $i8,925 for the six months ended June 30, 2021 and 2020, respectively. These fees and costs are included in hotel operating expenses in our condensed consolidated statements of income (loss). In addition, we incurred procurement and construction supervision fees of $i643
and $i270 for the three months ended June 30, 2021 and 2020, respectively, and $i1,387
and $i902 for the six months ended June 30, 2021 and 2020, respectively, which amounts have been capitalized in our condensed consolidated balance sheets and are depreciated over the estimated useful lives of the related capital assets.
Our Sonesta agreement requires us to fund capital expenditures that we approve at our Sonesta hotels. Each of our i14
full-service hotels operated under the legacy management agreements and all the hotels operated under the conversion hotel management agreements require that i5% of the hotel gross revenues be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the annual minimum returns due to us. Our legacy management agreements do not require FF&E escrow deposits for i39
extended stay hotels. No FF&E escrow deposits were required during the three and six months ended June 30, 2021. We incurred capital expenditures for certain hotels included in our Sonesta agreement of $i56,452 and $i40,088
during the six months ended June 30, 2021 and 2020, respectively, which resulted in increases in our contractual annual minimum returns of $i3,990 and $i2,934,
respectively. We owed Sonesta $i18,433 and $i7,154 for
operating losses generated by our Sonesta hotels, capital expenditures, and other reimbursements at June 30, 2021 and 2020, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our condensed consolidated balance sheets.
We are required to maintain working capital for each of our hotels managed by Sonesta and have advanced a fixed amount based on the number of rooms in each hotel to meet the cash needs for hotel operations. We had advanced $i55,977
and $i41,514 of initial working capital to Sonesta as of June 30, 2021 and December 31, 2020, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. Any remaining working capital would be returned to us upon termination in accordance with the terms of our Sonesta agreement.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Accounting for Investment in Sonesta:
We account for our i34%
non-controlling interest in Sonesta under the equity method of accounting. In March 2021, we funded a $i25,443 capital contribution to Sonesta related to its acquisition of Red Lion Hotels Corporation. We continue to maintain our i34%
ownership in Sonesta after giving effect to this funding. As of June 30, 2021, our investment in Sonesta had a carrying value of $i59,981. This amount is included in other assets, net in our condensed consolidated balance sheets. The cost basis of our investment in Sonesta exceeded our proportionate share of Sonesta’s total shareholders’ equity book value on the date of acquisition of our initial equity interest in Sonesta, February 27, 2020, by an aggregate of $i8,000.
As required under GAAP, we are amortizing this difference to equity in earnings of an investee over i31 years, the weighted average remaining useful life of the real estate assets and intangible assets and liabilities owned by Sonesta as of the date of our acquisition. We recorded amortization of the basis difference of $ii65/
in each of the three months ended June 30, 2021 and 2020 and $i130 and $i65 for the six months ended June 30,
2021 and 2020, respectively. We recognized income of $i800 and a loss of $i2,218
related to our investment in Sonesta for the three months ended June 30, 2021 and 2020, respectively, and losses of $i1,978 and $i2,936
for the six months ended June 30, 2021 and 2020, respectively. These amounts are included in equity in earnings (losses) of an investee in our condensed consolidated statements of income (loss).
We recorded a liability for the fair value of our initial investment in Sonesta, as no cash consideration was exchanged related to the modification of our management agreement with, and investment in, Sonesta. This liability for our investment in Sonesta is included in accounts payable and other liabilities in our condensed consolidated balance sheet and is being amortized on a straight-line basis through January 31, 2037, as a reduction to hotel operating expenses in our condensed consolidated statements of income (loss). We reduced hotel operating expenses by $ii621/
for each of the three months ended June 30, 2021 and 2020, and $i1,242 and $i828
for the six months ended June 30, 2021 and 2020, respectively, for amortization of this liability. As of June 30, 2021, the unamortized balance of this liability was $i38,690.
See Note 9 for further information regarding our relationship, agreements and transactions with Sonesta.
Hyatt agreement. On June 7, 2021,
we and Hyatt amended our previous agreement for i22 hotels we own, or our Hyatt agreement. Under the amended agreement, Hyatt will continue to manage i17 of the hotels we own for a i10
year term effective April 1, 2021. The amended agreement sets our annual minimum return at $i12,000 and Hyatt provided us with a new $i30,000
limited guarantee for i75% of the aggregate annual minimum returns due to us beginning in 2023. Under the amended agreement, a management fee of i5%
of gross room revenues payable to Hyatt will be an operating cost paid senior to our minimum return. Hyatt may also earn a i20% incentive management fee after payment of our annual minimum return and reimbursement of certain advances, if any. We also agreed to fund approximately $i50,000
of renovations that are expected to be completed by the end of 2022. As described above, we transitioned the branding and management of the remaining ifive hotels to Sonesta in June 2021.
We realized returns of $i2,311
and $i5,509 during the three months ended June 30, 2021 and 2020, respectively, and returns of $i3,867
and $i11,019 during the six months ended June 30, 2021 and 2020, respectively, under our Hyatt agreement. Any returns we receive from Hyatt are currently limited to the hotels’ available cash flows, if any, after payment of operating expenses. During the three months ended June 30, 2021, we expensed $i3,700
of working capital we previously funded under our Hyatt agreement because the amount is no longer expected to be recoverable. This amount is included in transaction related costs in our condensed consolidated statement of income (loss).
Radisson agreement. Our management agreement with Radisson for inine hotels, or our Radisson agreement, which expires in 2037, provides that, as of June 30, 2021, we are to be paid an annual minimum return of $i20,601.
We realized minimum returns of $i4,906 and $i5,111 during the three months ended June 30,
2021 and 2020, respectively, and $i10,056 and $i10,221 during the six months
ended June 30, 2021 and 2020, respectively, under our Radisson agreement. Pursuant to our Radisson agreement, Radisson has provided us with a guaranty, which is limited to $i47,523. During the three and six months ended June 30, 2021, the hotels under our Radisson agreement generated cash flows that were less than the minimum returns due to us for the periods and Radisson
made $i5,306 and $i13,238, respectively, of guaranty payments to cover part of the shortfall and the Radisson guaranty was exhausted as of June 30,
2021. In addition to our minimum returns, our Radisson agreement provides for payment to us of i50% of the hotels’ available cash flows after payment of operating expenses, funding the required FF&E reserve, payment of our minimum returns, reimbursement of our working capital advances and reimbursement to Radisson of working capital and guaranty advances, if any. We and Radisson are currently in discussions regarding possible changes to our Radisson agreement that may result in some or all of the hotels remaining Radisson managed. However, if such discussions do
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
not result in a mutually acceptable agreement for Radisson to continue to manage some or all of these hotels, we expect to transition management of those hotels to Sonesta.
Marriott agreement. As of January 1, 2021, Marriott managed i105
of our hotels under agreements we had terminated in 2020 for Marriott’s failure to pay the cumulative shortfall between the payments we had received and i80% of the cumulative priority returns due to us in accordance with the agreement. We transitioned the branding and management of i88
Marriott managed hotels to Sonesta in February and March 2021. We sold ione hotel that Marriott managed in April 2021 (see Note 4 for further information regarding this sale). As of June 30, 2021, Marriott managed i16
of our hotels. We are in arbitration proceedings with Marriott regarding, among other things, the timing and characterization of certain payments made to us, including Marriott’s assertion we are required to refund $i19,120 of minimum return advances made to us in 2020, and the validity of the timing of the termination of the Marriott agreements, including an exit hotel agreement which, if not terminated, would require us to sell the i16
hotels encumbered with a Marriott brand. We are also seeking repayment of certain working capital advances we made to Marriott during 2020. We have entered an agreement with Marriott regarding the i16 hotels noted above, pursuant to which we agreed to have these hotels remain Marriott branded hotels until the arbitration is resolved.
Our Marriott hotels generated net operating cash flow of $i2,341
and a net operating cash flow deficit of $i12,580 during the three and six months ended June 30, 2021, respectively. Any returns we receive from Marriott are limited to the hotels’ available cash flows, if any, after payment of operating expenses. Marriott managed i122
of our hotels during the three and six months ended June 30, 2020. We realized returns of $i28,789 and $i76,437
from our Marriott branded hotels during the three and six months ended June 30, 2020, respectively.
Other. Our management agreement with IHG for one hotel expires on January 31, 2026. Our IHG hotel generated net operating cash flow of $i156 and a cash flow deficit of $i1,344
during the three and six months ended June 30, 2021, respectively. Any returns we receive from IHG are limited to the hotels’ available cash flows, if any, after payment of operating expenses. IHG managed or leased i103 of our hotels during the three and six months ended June 30, 2020. We realized returns of $i54,138
and $i108,223 under our IHG agreement during the three and six months ended June 30, 2020, respectively.
Net lease portfolio
As of June 30, 2021, we owned i796
net lease service-oriented retail properties with i13,440,784 square feet with leases requiring annual minimum rents of $i371,907 with a weighted (by annual minimum
rents) average remaining lease term of i10.5 years. The portfolio was i98.5% leased by i171
tenants operating under i130 brands in i21 distinct industries.
As a result of the COVID-19 pandemic, some of our tenants requested rent assistance. During the three months ended June 30,
2021, we entered into rent deferral agreements for $i1,121 of rent with itwo net lease tenants. As of June 30,
2021, we had $i10,564 of deferred rents outstanding related to i35 tenants we granted rent relief to pursuant to these requests who represent approximately i2.9%
of our annualized rental income of our net lease retail portfolio as of June 30, 2021. These deferred rents are included in other assets, net in our condensed consolidated balance sheets. These tenants are obligated to pay, in most cases, the deferred rent over a i12 months to i24
months period. We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic and account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance as the resulting cash flows from the modified lease are substantially the same as or less than the original lease. The deferred amounts did not impact our operating results for the three or six months ended June 30, 2021.
We continually review receivables related to rent, straight-line rent and property operating expense reimbursements and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the
property is located. The review includes an assessment of whether substantially all of the amounts due under a tenant’s lease are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as cash is received. We recognize all changes in the collectability assessment for an operating lease as an adjustment to rental income. We recorded reserves for uncollectible amounts against rental income of $i1,176
and $i4,995 for the three months ended June 30, 2021 and 2020, respectively, and $i5,960
and $i5,905 for the six months ended June 30, 2021 and 2020, respectively. We had reserves for uncollectible rents of $i23,786
and $i18,230 as of June 30, 2021 and December 31, 2020, respectively, included in other assets in our condensed consolidated balance sheets.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
TA is our largest tenant, leasing i26.7% of our gross carrying value or real estate properties as of June 30, 2021. We lease to TA a total of i179
travel centers under ifive leases that expire between 2029 and 2035, subject to TA’s right to extend those leases, and require annual minimum rents of $i246,110
as of June 30, 2021. In addition, TA is required to pay us previously deferred rent obligations in quarterly installments of $ii4,404/
through January 31, 2023. TA paid $ii4,404/
and $i8,808 of deferred rent to us for the three and six months ended June 30, 2021 and 2020, respectively. The remaining balance of previously deferred rents was $i30,824
and $i39,632 as of June 30, 2021 and December 31, 2020, respectively.
We recognized rental income from TA of $i62,077
and $i61,528 for the three months ended June 30, 2021 and 2020, respectively, and $i124,154
and $i123,055 for the six months ended June 30, 2021 and 2020, respectively. Rental income was reduced by $i3,217
and $i3,236 for the three months ended June 30, 2021 and 2020, respectively, and $i6,522
and $i6,584 for the six months ended June 30, 2021 and 2020, respectively, to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight-line basis. As of June 30, 2021 and December 31, 2020, we had receivables for current rent amounts owed to
us by TA and straight-line rent adjustments of $i49,636 and $i55,530,
respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.
In addition to the rental income that we recognized during the three months ended June 30, 2021 and 2020 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $i1,591
and $i124 for the three months ended June 30, 2021 and 2020, respectively, and $i2,977
and $i849 for the six months ended June 30, 2021 and 2020, respectively.
Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to i8.5%
of the amounts funded. We did not fund any capital improvements to our properties that we leased to TA during each of the three and six months ended June 30, 2021 or 2020.
See Note 9 for further information regarding our relationship with TA.
Our other net lease agreements generally provide for minimum rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight-line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We recognized rental income from our net lease properties
(excluding TA) of $i33,479 and $i32,386 for the three months ended June 30,
2021 and 2020, respectively, which included $i2,919 and $i4,099, respectively, of adjustments to record scheduled
rent changes under certain of our leases on a straight-line basis and $i63,163 and $i69,039 for the six months
ended June 30, 2021 and 2020, respectively, which included $i6,523 and $i5,800,
respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis.
i
Note 6. Indebtedness
Our principal debt obligations at June 30, 2021 were: (1) $i1,000,000
of outstanding borrowings under our $ii1,000,000/
revolving credit facility; and (2) $i6,200,000 aggregate outstanding principal amount of senior unsecured notes. Our revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders.
The maturity date of our revolving credit facility is July 15, 2022, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the maturity date of the facility for itwo
additional isix-month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium, which was i235
basis points per annum, subject to a LIBOR floor of i0.50%, as of June 30, 2021. We also pay a facility fee, which was i30
basis points per annum at June 30, 2021, on the total amount of lending commitments under our revolving credit facility. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. As of June 30, 2021, the annual interest rate payable on borrowings under our revolving credit facility was i2.85%. The weighted average annual interest rate for borrowings under our revolving credit facility was i2.85%
and i2.00% for the three months ended June 30, 2021 and 2020, respectively, and i2.85%
and i2.30% for the six months ended
We and our lenders amended our credit agreement governing our $ii1,000,000/
revolving credit facility in 2020. Among other things, the amendments waived all of the then existing financial covenants through the end of the agreement term, or July 15, 2022, or the Waiver Period. As a result of the amendments, among other things:
•we pledged certain equity interests of subsidiaries owning properties and provided first mortgage liens on i74
properties owned by certain of the pledged subsidiaries with an undepreciated book value of $i1,834,420 as of June 30, 2021 to secure our obligations under the credit agreement;
•we have the ability to fund up to $i250,000
of capital expenditures per year and up to $i50,000 of certain other investments per year as defined in the credit agreement;
•we agreed to certain covenants and restrictions on distributions to common shareholders, share repurchases, incurring indebtedness, and acquiring real property (in each case subject to various exceptions);
•we agreed to maintain
minimum liquidity of $i125,000;
•we are generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions and debt refinancings to repay outstanding amounts under the credit agreement, and then to other debt maturities; and
•we may not, during the Waiver Period and until we demonstrate compliance with certain covenants, utilize the feature in our credit
agreement pursuant to which maximum aggregate borrowings may be increased to up to $i2,300,000 on a combined basis in certain circumstances.
Our credit agreement and our unsecured senior notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of
our credit agreement, a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager. Our credit agreement and our unsecured senior notes indentures and their supplements also contain covenants, including those that restrict our ability to incur debts or to make distributions under certain circumstances and generally require us to maintain certain financial ratios. As of June 30, 2021, we were not in compliance with one of our debt covenants necessary to incur additional debt, and as a result, we will not be able to incur additional debt until we meet the required covenant level.
i
Note
7. Shareholders' Equity
Distributions
i
During the three months ended June 30, 2021, we declared and paid regular quarterly distributions to common shareholders as follows:
On
July 15, 2021, we declared a regular quarterly distribution to common shareholders of record as of July 26, 2021 of $i0.01 per share, or $i1,648.
We expect to pay this amount on or about August 19, 2021.
Share Awards
On June 16, 2021, in accordance with our Trustee compensation arrangements, we awarded iiiiiii7,000//////
of our common shares, valued at $iiiiiii13.94//////
per common share, the closing price of our common shares on The Nasdaq Stock Market, or Nasdaq, on that day, to each of our iseven Trustees as part of their annual compensation.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
Share Purchases
During the six months ended June 30, 2021, we purchased an aggregate of i15,079
of our common shares valued at a weighted average share price of $i12.60 per share, from a former officer and a former officer and employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
i
Note
8. Business and Property Management Agreements with RMR LLC
We have ino employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have itwo
agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally, and (2) a property management agreement, which relates to our property level operations of our net lease portfolio, excluding properties leased to TA, the office building component of one of our hotels and to major renovation or repositioning activities at our hotels.
We recognized net business management fees payable to RMR LLC of $i10,743 and $i8,411
for the three months ended June 30, 2021 and 2020, respectively, and $i21,042 and $i18,971
for the six months ended June 30, 2021 and 2020, respectively. Based on our common share total return, as defined in our business management agreement, as of each of June 30, 2021 and 2020, no incentive fees are included in the net business management fees we recognized for the three and six months ended June 30, 2021 or 2020. The actual amount of annual incentive fees for 2021, if any, will be based on our common share total return, as defined in our business management agreement, for the ithree-year
period ending December 31, 2021, and will be payable in January 2022. We did not incur an incentive fee payable to RMR LLC for the year ended December 31, 2020. We include business management fee amounts in general and administrative expenses in our condensed consolidated statements of income (loss).
We recognized property management and construction supervision fees payable to RMR LLC of $i1,077
and $i921 for the three months ended June 30, 2021 and 2020, respectively, and $i1,881
and $i1,941 for the six months ended June 30, 2021 and 2020, respectively. Of those amounts, for the three months ended June 30, 2021 and 2020, $i875
and $i913, respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of income (loss) and $i202
and $i8, respectively, of construction and supervision fees were capitalized and included in building, improvements and equipment in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets. For the six months ended June 30, 2021 and 2020, $i1,678
and $i1,929, respectively, of property management fees were expensed to other operating expenses in our condensed consolidated statements of income (loss) and $i203
and $i12, respectively, of construction and supervision fees were capitalized and included in building, improvements and equipment in our condensed consolidated balance sheets and are being depreciated over the estimated useful lives of the related capital assets.
We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative
expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC employees assigned to work exclusively or partly at our net lease properties, our share of the wages, benefits and other related costs of RMR LLC's centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function, and as otherwise agreed. We reimbursed RMR LLC $i734 and $i139
for these expenses and costs for the three months ended June 30, 2021 and 2020, respectively, and $i1,478 and $i266
for the six months ended June 30, 2021 and 2020, respectively. We included these amounts in other operating expenses and selling, general and administrative expenses, as applicable, in our condensed consolidated statements of income (loss).
On June 22, 2021, we and RMR LLC amended our property management agreement to, among other things, provide for RMR LLC's oversight of any major capital projects and repositioning activities at our hotels, including our hotels that are managed by Sonesta, as we may request from time to time. RMR LLC will receive the same fee previously paid to Sonesta for these services, which is equal to i3%
of the cost of any such major capital project or repositioning activity.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
i
Note
9. Related Person Transactions
We have relationships and historical and continuing transactions with TA, Sonesta, RMR LLC, The RMR Group, Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned operating subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. John
G. Murray, our other Managing Trustee and our President and Chief Executive Officer also serves as an officer and employee of RMR LLC. In addition, each of our other officers serves as an officer of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these public companies. Other officers of RMR LLC, including Mr. Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies.
TA. We lease i179
of our travel centers to TA under our TA leases. As of June 30, 2021, we owned i1,184,797 shares of TA common stock, representing approximately i8.1%
of TA’s outstanding shares of common stock. RMR LLC provides management services to both us and TA, and Adam D. Portnoy, also serves as the chair of the board of directors and as a managing director of TA and, as of June 30, 2021, beneficially owned i658,506 shares of TA common stock (including through RMR LLC), representing approximately i4.5%
of TA’s outstanding shares of common stock. See Note 5 for further information regarding our relationships, agreements and transactions with TA and Note 12 for further information regarding our investment in TA.
Sonesta.Sonesta is a private company. One of our Managing Trustees, Mr. Portnoy, is the controlling shareholder and a director of Sonesta. One of Sonesta’s other directors is our other Managing Trustee, President and Chief Executive Officer and Sonesta’s other director serves as RMR LLC’s and RMR Inc.’s executive vice president, general counsel and secretary, as a managing director of RMR Inc. and as our Secretary. Sonesta’s chief executive officer and chief financial officer are officers of RMR LLC. Certain other officers and employees of Sonesta are former employees of RMR LLC. RMR LLC also provides certain services to Sonesta.
As of June 30, 2021, we owned approximately i34% of Sonesta which managed i261 of our hotels. See Note 5 for further information
regarding our relationships, agreements and transactions with Sonesta.
Our Manager, RMR LLC. We have itwo agreements with RMR LLC to provide management services to us. See Note 8 for further information regarding our management agreements with RMR LLC.
For further information about these and certain other such relationships and certain other related person transactions, refer to our 2020 Annual Report.
/
i
Note
10. Income Taxes
We have elected to be taxed as a REIT under the United States Internal Revenue Code of 1986, as amended, or the IRC, and, as such, are generally not subject to federal and most state income taxation on our operating income provided we distribute our taxable income to our shareholders and meet certain organization and operating requirements. We are subject to income tax in Canada, Puerto Rico and certain states despite our qualification for taxation as a REIT. Further, we lease our managed hotels to our wholly owned TRSs that, unlike most of our subsidiaries, file a separate consolidated tax return and are subject to federal, state and foreign income taxes. Our consolidated income tax provision includes the income tax provision related to the operations of our TRSs and certain state and foreign income taxes incurred by
us despite our qualification for taxation as a REIT.
During the three months ended June 30, 2021, we recognized income tax expense of $i211, which includes $i70
of foreign taxes and $i141 of state taxes. During the three months ended June 30, 2020, we recognized income tax expense of $i16,660 which
includes $i451 of foreign taxes and $i559 of state taxes and a $i15,650
deferred tax liability recorded as a result of the book value to tax basis difference related to the accounting of an insurance settlement at one of our hotels. During the six months ended June 30, 2021, we recognized income tax expense of $i1,064, which includes $i170
of foreign taxes and $i894 of state taxes. During the six months ended June 30, 2020, we recognized income tax expense of $i17,002 which
includes $i502 of foreign taxes, $i850 of state taxes and the $i15,650
deferred tax liability described above.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
(Unaudited)
i
Note
11. Segment Information
We aggregate our hotels and net lease portfolio into itwo reportable segments, hotel investments and net lease investments, based on their similar operating and economic characteristics.
iThe table below presents certain of our assets carried at fair value at June 30, 2021, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.
(1)As
of June 30, 2021 and December 31, 2020, we owned ii1,184,797/
shares of TA common stock, which are included in other assets in our condensed consolidated balance sheets and reported at fair value based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares was $ii24,418/
as of both June 30, 2021 and December 31, 2020. We recorded unrealized gains of $i2,500 and $i3,848
during the three months ended June 30, 2021 and 2020, respectively, and unrealized losses of $i3,981 and $i1,197
during the six months ended June 30, 2021 and 2020, respectively, to adjust the carrying value of our investment in shares of TA common stock to its fair value.
(2)As of June 30, 2021, we owned ieight net lease properties located in isix
states with an aggregate carrying value of $i4,259 classified as held for sale. These properties are recorded at their estimated fair value less costs to sell based on information derived from offers received from prospective buyers of the properties (Level 2 inputs as defined in the fair value hierarchy under GAAP). We recorded a $i899
loss on asset impairment during the three months ended June 30, 2021 to reduce the carrying value of ithree of these properties to their estimated fair value less costs to sell. As of December 31, 2020, we owned ifive
hotels in ifour states with an aggregate carrying value of $i10,699 and isix
net lease properties located in isix states with an aggregate carrying value of $i2,844 classified
as held for sale.
In addition to the assets included in the table above, our financial instruments include our cash and cash equivalents, restricted cash, rents receivable, revolving credit facility and senior notes. iAt June 30, 2021 and December 31, 2020, the fair values of these additional financial instruments approximated their carrying values in our condensed consolidated balance sheets due to their
short-term nature or floating interest rates, except as follows:
(1)Carrying
value includes unamortized discounts and premiums and issuance costs.
At June 30, 2021 and December 31, 2020, we estimated the fair values of our senior notes using an average of the bid and ask price of our then outstanding issuances of senior notes (Level 2 inputs).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2020 Annual Report.
Overview (dollar amounts in thousands, except share amounts and per-room hotel data)
We are a REIT organized under the laws of the State of Maryland. As of June 30, 2021, we owned 1,100 properties in 47 states, the District of Columbia, Canada and Puerto Rico.
Business Environment and Outlook. Since March 2020, the lodging industry and other industries in which our managers and tenants operate have been adversely impacted by the COVID-19
global pandemic, along with federal, state and local government mandates intended to contain and mitigate the spread of COVID-19 and market reactions to the pandemic. The effects of COVID-19 continue to have a significant negative impact on our results of operations, financial position and cash flow. Although lodging demand improved during the second quarter of 2021 when compared to 2020 levels, we cannot predict with certainty when business levels may return to historical levels. We currently expect that the recovery with respect to business transient and group business will be gradual and likely inconsistent. We currently expect the recovery of the U.S. hospitality industry to be a multi-year process and to remain uneven. In addition, consumer confidence and lodging demand will continue to be affected by unemployment, perceptions of the safety of returning to normal activities, the continued use of video conferencing technologies rather than in person meetings and
broader macroeconomic trends. For more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1, “Business—Impact of COVID-19” and Part I, Item 1A, “Risk Factors”, of our 2020 Annual Report. Our manager, RMR LLC, has taken various actions in response to the COVID-19 pandemic to address its operating and financial impact on us. In addition, we are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. For more information regarding these actions and monitoring activities, see our 2020 Annual Report.
Management agreements and leases. At June 30, 2021, we owned 304 hotels operated under six agreements. We leased these hotels to our wholly owned TRSs that are managed by hotel operating companies. We own 796 service-oriented properties with 171 tenants subject
to “triple net” leases, where the tenants are generally responsible for the payment of operating expenses and capital expenditures. Our condensed consolidated statements of income (loss) include hotel operating revenues and hotel operating expenses from our managed hotels and rental income and other operating expenses from our leased hotels and net lease properties.
In February and March 2021, we transitioned the branding and management of 88 hotels to Sonesta from Marriott and, in June 2021, we transitioned the branding and management of five hotels to Sonesta from Hyatt. For further information regarding these transfers, see Note 5 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
On June 7, 2021, we and Hyatt amended our Hyatt agreement. Under the amended agreement,
Hyatt will continue to manage 17 of the 22 hotels we own for a 10-year term effective April 1, 2021. For further information regarding our Hyatt agreement, see Note 5 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We and Radisson are currently in discussions regarding possible changes to our Radisson agreement that may result in some or all of the hotels remaining Radisson managed. However, if such discussions do not result in a mutually acceptable agreement for Radisson to continue to manage some or all of these hotels, we expect to transition management of those hotels to Sonesta. For further information on our Radisson and Sonesta agreements, see Notes 5 and 9 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Hotel Portfolio. As of June 30, 2021, we owned 304 hotels. In the second quarter of 2021, the U.S. hotel industry generally realized increases in average daily rate, or ADR, revenue per available room, or RevPAR, and occupancy compared to 2020. During the quarter ended June 30, 2021, our 304 hotels that we owned as of June 30, 2021 produced aggregate quarter over quarter increases in ADR, RevPAR and occupancy. The following table provides a summary of these revenue metrics for the periods presented which we believe are key indicators of performance at our hotels.
Comparable hotels data. We present RevPAR, ADR and occupancy
for the periods presented on a comparable basis to facilitate comparisons between periods. We generally define comparable hotels as those that were owned by us and were open and operating for the entire periods being compared. For the three months ended June 30, 2021 and 2020, our comparable results exclude 21 hotels that had suspended operations during part of the periods presented. For the six months ended June 30, 2021 and 2020, SVC’s comparable results exclude 22 hotels that had suspended operations during part of the periods presented. The following table provides a summary of these revenue metrics for the periods presented.
We
believe these results are primarily due to the improved lodging fundamentals in the current year periods and disruption and displacement at certain of our hotels as a result of the COVID-19 pandemic that negatively affected results in the prior year periods.
Net Lease Portfolio. As of June 30, 2021, we owned 796 net lease service-oriented retail properties with 13,440,784 square feet leased to 171 tenants subject to “triple net” leases (where the tenants are responsible for payments of operating expenses and capital expenditures) requiring annual minimum rent of $371,907. Our net lease portfolio was 98.5% occupied as of June 30, 2021 with a weighted (by annual minimum rent) lease term of 10.5 years, operating under 130 brands in 21 distinct industries. TA is our largest tenant. As of June 30,
2021, we leased 179 travel centers to TA under five master leases that expire between 2029 and 2035 and require annual minimum rents of $246,110.
Additional details of our hotel operating agreements and our net lease agreements are set forth in Notes 5 and 9 to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q and in the tables and notes thereto below.
Acquisitions and Dispositions. In March 2021, we acquired a land parcel adjacent to a property we own in Nashville, TN for a purchase price of $7,709, including acquisition related costs.
During the six months ended June 30, 2021, we sold six hotels with 576 rooms for $32,016, excluding closing costs, and three net lease properties with 38,041 square feet for
$2,035, excluding closing costs.
Loss
before income taxes and equity in earnings (losses) of an investee
(91,634)
(18,471)
(73,163)
(396.1)
%
Income tax expense
(211)
(16,660)
16,449
98.7
%
Equity
in earnings (losses) of an investee
735
(2,218)
2,953
133.1
%
Net
loss
$
(91,110)
$
(37,349)
$
(53,761)
(143.9)
%
Weighted average shares outstanding (basic and diluted)
164,506
164,382
124
0.1
%
Net
loss per common share (basic and diluted)
$
(0.55)
$
(0.23)
$
(0.32)
(139.1)
%
References to changes in the income and expense categories below relate to the comparison of consolidated results for the three months ended June 30, 2021, compared to the three months ended June 30, 2020.
Hotel
operating revenues. The increase in hotel operating revenues is primarily as a result of higher occupancies at certain of our hotels in the 2021 period and the negative impact the COVID-19 pandemic had on our hotels in the 2020 period ($168,408), partially offset by the sale of certain hotels since April 1, 2020 ($5,629). Additional operating statistics of our hotels are included in the table on page 29.
Rental income - hotels. The decrease in rental income – hotels is primarily the result of the conversion of one hotel from a leased to managed property during 2020.
Rental income - net lease. The decrease in rental income - net lease is primarily the result of certain vacancies and lease restructurings ($2,885) and the sale of certain net lease properties since
April 1, 2020 ($898), partially offset by of lower reserves for uncollectible rents in the 2021 period ($3,819).
Hotel operating expenses. The increase in hotel operating expenses is a result of an increase in occupancy at certain managed hotels ($60,867), an increase in wages and benefits ($24,422) and a decrease in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($115,848), partially offset by the sale of certain hotels since April 1, 2020 ($4,911). Hotel operating expenses were
decreased by $5,306 and $121,155 during the three months ended June 30, 2021 and 2020, respectively, as a result of such guaranty and security deposit utilization.
Other operating expenses. The increase in other operating expenses is primarily the result of higher carrying costs at vacant properties.
Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is a result of certain of our depreciable assets becoming fully depreciated since April 1, 2020 ($4,006) and the sale of certain hotels since April 1, 2020 ($1,591), partially offset by an increase in depreciation expense from capital improvements
made since April 1, 2020 ($4,281).
Depreciation and amortization - net lease. The decrease in depreciation and amortization - net lease is a result of our net lease dispositions since April 1, 2020 ($3,668) and certain of our depreciable assets becoming fully depreciated since April 1, 2020 ($766).
General and administrative. The increase in general and administrative costs is primarily due to an increase in business management fees as a result of an increase in market capitalization ($2,331) and professional service expenses ($319) in the 2021 period.
Transaction related costs. Transaction related costs for the three months
ended June 30, 2021 includes $3,700 of working capital we previously funded under our Hyatt agreement as a result of the amount no longer expected to be recoverable, $1,110 of legal costs related to the arbitration claim against Marriott and $1,341 of costs related to the rebranding of certain hotels.
Loss on asset impairment. We recorded a $899 loss on asset impairment during the three months ended June 30, 2021 to reduce the carrying value of three net lease properties to their estimated fair value less costs to sell and a $28,514 loss on asset impairment during the three months ended June 30, 2020 to reduce the carrying value of 17 hotels and four net lease properties to their estimated fair value less costs to sell.
Gain
(loss) on sale of real estate, net. We recorded a $10,849 net gain on sale of real estate during the three months ended June 30, 2021 in connection with the sale of six hotels and two net lease properties and a $2,853 net loss on sale of real estate during the three months ended June 30, 2020 in connection with the sales of four net lease properties.
Gain on insurance settlement. We recorded a $62,386 gain on insurance settlement during the three months ended June 30, 2020 for insurance proceeds received for our then leased hotel in San Juan, PR related to Hurricane Maria. Under GAAP, we were required to increase the building basis of this hotel for the amount of the insurance proceeds.
Unrealized
gain on equity securities, net. Unrealized gain on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value as of June 30, 2021 and 2020.
Interest income. The increase in interest income is due to higher average cash balances during the 2021 period.
Interest expense. The increase in interest expense is due to higher average outstanding borrowings and a higher weighted average interest rate in the 2021 period.
Loss on early extinguishment of debt. Loss on early extinguishment of debt represents costs incurred in 2020 for our repurchase of certain unsecured
senior notes.
Income tax expense. We recognized lower income taxes during the 2021 period primarily due to a decrease in the amount of state and foreign sourced income subject to income taxes. We recorded a $15,650 deferred tax liability as a result of the book value to tax basis difference related to the accounting of an insurance settlement during the three months ended June 30, 2020.
Equity in earnings (losses) of an investee. Equity in earnings (losses) of an investee represents our proportionate share of the earnings and losses of Sonesta.
Net loss. Our net loss and net loss per common share (basic and diluted) each increased in the 2021 period compared to the 2020 period primarily due to the revenue and expense
changes discussed above.
Depreciation and amortization - net lease portfolio
111,338
119,915
(8,577)
(7.2)
%
Total
depreciation and amortization
246,045
255,353
(9,308)
(3.6)
%
General and administrative
26,609
25,326
1,283
5.1
%
Transaction
related costs
25,785
—
25,785
n/m
Loss on asset impairment
2,110
45,254
(43,144)
95.3
%
Total
expenses
746,406
651,362
95,044
14.6
%
Other operating income:
Gain
(loss) on sale of real estate, net
10,840
(9,764)
20,604
211.0
%
Gain on insurance settlement
—
62,386
(62,386)
(100.0)
%
Unrealized
loss on equity securities, net
(3,981)
(1,197)
(2,784)
(232.6)
%
Interest income
282
277
5
1.8
%
Interest
expense
(180,769)
(143,147)
(37,622)
(26.3)
%
Loss on early extinguishment of debt
—
(6,970)
6,970
100.0
%
Income
before income taxes and equity in losses of an investee
(282,928)
(51,061)
(231,867)
n/m
Income tax expense
(1,064)
(17,002)
15,938
n/m
Equity
in losses of an investee
(2,108)
(2,936)
828
n/m
Net loss
$
(286,100)
$
(70,999)
$
(215,101)
n/m
Weighted
average shares outstanding (basic and diluted)
164,502
164,376
126
0.1
%
Net
loss per common share (basic and diluted)
$
(1.74)
$
(0.43)
$
(1.31)
n/m
References to changes in the income and expense categories below relate to the comparison of consolidated results for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.
Hotel operating
revenues. The decrease in hotel operating revenues is a result of decreased occupancies at certain of our managed hotels primarily as a result of the impact of the COVID-19 pandemic starting in March 2020 ($37,718) and the sale of certain of our hotels since January 1, 2020 ($14,053). Additional operating statistics of our hotels are included in the table on page 29.
Rental income - hotels. The decrease in rental income - hotels is primarily a result of the conversion of one hotel from a leased to managed property during 2020.
Rental income - net lease portfolio. The decrease in rental income - net lease is primarily the result of the sale of properties since January 1, 2020 ($4,765), rent adjustments and restructuring
and a decrease in below market lease revenue amortizations ($2,849) and certain tenant vacancies ($353).
Hotel operating expenses. The increase in hotel operating expenses is primarily as a result of a decrease in the amount of guaranty and security deposit utilization under certain of our hotel management agreements ($175,962), partially offset by a decrease in hotel operating expenses as a result of a decrease in occupancy at certain managed hotels primarily as a result of the COVID-19 pandemic ($49,361), a decrease in wage and benefit costs, sales and marketing expenses at certain of our managed hotels ($3,746), and a decrease in
real estate taxes at certain of our hotels ($2,424). Hotel operating expenses were decreased by $15,696 and $191,661 during the six months ended June 30, 2021 and 2020, respectively, as a result of such guaranty and security deposit utilization.
Other operating expenses. The decrease in other operating expenses is primarily the result of sale of certain net lease properties since January 1, 2020.
Depreciation and amortization - hotels. The decrease in depreciation and amortization - hotels is a result of certain of our depreciable assets becoming fully depreciated since January 1, 2020 ($8,371) and our hotel dispositions since January
1, 2020 ($3,030), partially offset by depreciation and amortization of improvements acquired with funds from our FF&E reserves or directly funded by us since January 1, 2020 ($10,670).
Depreciation and amortization - net lease portfolio. The decrease in depreciation and amortization - net lease portfolio is a result of the depreciation and amortization of properties that were sold since January 1, 2020 ($7,024) and by certain of our depreciable assets becoming fully depreciated since January 1, 2020 ($1,553).
General and administrative. The increase in general and administrative costs is primarily due to higher business management fees as a result of increase in our market capitalization
($2,070), partially offset by lower professional fees ($787) in the 2021 period.
Transaction related costs. Transaction related costs for the six months ended June 30, 2021 includes $3,700 of working capital we previously funded under our Hyatt agreement as a result of the amount no longer expected to be recoverable, $2,257 of legal costs related to the arbitration claim against Marriott and $19,828 of costs related to rebranding certain hotels.
Loss on asset impairment. We recorded a $2,110 loss on asset impairment during the six months ended June 30, 2021 to reduce the carrying value of five net lease properties to their estimated fair value less costs to sell. We recorded a $45,254 loss on asset impairment during the six months ended
June 30, 2020 to reduce the carrying value of 17 hotels and six net lease properties to their estimated fair value.
Gain (loss) on sale of real estate, net. We recorded a $10,840 net gain on sale of real estate in the 2021 period in connection with the sales of six hotels and three net lease properties and a $9,764 net loss on sale of real estate in connection with the sales of ten net lease properties during the six months ended June 30, 2020.
Gain on insurance settlement. In the 2020 period we recorded a $62,386 gain on insurance settlement as a result of insurance proceeds received for our then leased hotel in San Juan, PR related to Hurricane Maria.
Unrealized loss on equity securities,
net. Unrealized loss on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value as of June 30, 2021 and 2020.
Interest income. The increase in interest income is due to higher average cash balances during the 2021 period.
Interest expense. The increase in interest expense is due to higher average outstanding borrowings and weighted average interest rates in the 2021 period.
Loss on early extinguishment of debt. Loss on early extinguishment of debt represents losses incurred in the 2020 period for our repurchase of certain unsecured senior notes.
Income
tax expense. We recorded a $15,650 deferred tax liability as a result of the book value to tax basis difference related to the accounting of an insurance settlement in the 2020 period.
Equity in earnings (losses) of an investee. Equity in earnings (losses) of an investee represents our proportionate share of the earnings (losses) of Sonesta.
Net loss. Our net loss and net loss per common share (basic and diluted) each increased in the 2021 period compared to the 2020 period primarily due to the revenue and expense changes discussed above.
Liquidity and Capital Resources (dollar amounts in thousands, except share amounts)
Our Managers and Tenants
As of June 30, 2021, 304 of our hotels were managed by five hotel operating companies pursuant to six combination portfolio agreements. Our 796 net lease properties were leased to 171 tenants as of June 30, 2021. The costs of operating and maintaining our properties are generally paid by the hotel managers as agents for us or by our tenants for their own account. Our hotel managers and tenants derive their funding for property operating expenses and for returns and rents due to us generally from property operating revenues and, to the extent that these parties themselves fund our minimum returns and rents, from
their separate resources. As of June 30, 2021, our hotel managers included Sonesta (261 hotels), Hyatt (17 hotels), Radisson (nine hotels), Marriott (16 hotels) and IHG (one hotel). TA is our largest tenant (179 travel centers).
The COVID-19 pandemic has had a material and adverse effect on the lodging and service industries and on our hotel managers’ and tenants’ businesses, which may reduce their ability or willingness to pay us our minimum returns and rents, increase the likelihood they will default in paying us returns and rent and reduce the value of those properties. We continue to carefully monitor the effects of the COVID-19 pandemic and its impact on our operators and our other stakeholders.
As of January 1, 2021, Marriott managed 105 of our hotels under agreements we had terminated
in 2020 for Marriott’s failure to pay the cumulative shortfall between the payments we had received and 80% of the cumulative priority returns due to us in accordance with the agreement. We transitioned the branding and management of 88 Marriott hotels to Sonesta in February 2021 and March 2021. We sold one Marriott hotel in April 2021. As of June 30, 2021, Marriott managed 16 of our hotels. For further information regarding this sale, see the Notes to condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We are in arbitration proceedings with Marriott regarding, among other things, the timing and characterization of certain payments made to us, including Marriott’s assertion that we are required to refund $19,120 of minimum return advances made to us in 2020, and the validity
of the timing of the termination of the Marriott agreements, including an exit hotel agreement which, if not terminated, would require us to sell the 16 hotels encumbered with a Marriott brand. We are also seeking repayment of certain working capital advances we made to Marriott during 2020. We have entered an agreement with Marriott regarding the 16 hotels noted above, pursuant to which we agreed to have these hotels remain Marriott branded hotels until the arbitration is resolved.
On June 7, 2021, we and Hyatt amended our Hyatt agreement. Under the amended agreement, Hyatt will continue to manage 17 of the 22 hotels we own for a 10-year term effective April 1, 2021. The agreement sets our annual minimum return at $12,000, and Hyatt provided us with a new $30,000 limited guarantee for 75% of the aggregate
annual minimum returns due to us beginning in 2023. Under the amended agreement a management fee of 5% of gross room revenues payable to Hyatt will be an operating cost paid senior to our minimum return. Hyatt may also earn a 20% incentive management fee after payment of our annual minimum return and reimbursement of certain advances, if any. We also agreed to fund approximately $50,000 of renovations that are expected to be completed by the end of 2022. We transitioned the branding and management of the remaining five hotels to Sonesta in June 2021.
During the three months ended June 30, 2021, we entered into rent deferral agreements for $1,121 of rent with two net lease tenants. We had $10,564 of deferred rents outstanding related to 35 tenants who represent approximately 2.9% of our annualized rental income of our net lease retail portfolio as of June 30,
2021. Generally, these rent deferrals are payable by the tenants over a 12 months to 24 months period. We may receive additional similar requests in the future, and we may determine to grant additional relief in the future, which may vary from the type of relief we have granted to date, and could include more substantial relief, if we determine it prudent or appropriate to do so. In addition, if any of our tenants are unable to continue as going concerns as a result of the current economic conditions or otherwise, we will experience a reduction in rents received and we may be unable to find suitable replacement tenants for an extended period or at all and the terms of our leases with those replacement tenants may not be as favorable to us as the terms of our agreements with our existing tenants. As a result of these uncertainties surrounding the COVID-19 pandemic and the duration and extent of the resulting economic conditions, we are unable to determine what the
ultimate impact will be on our tenants and their ability and willingness to pay us rent and any additional impact this pandemic will have on our future cash flows. During the three months ended June 30, 2021 and 2020, we recorded reserves for uncollectible rents of $1,176 and $4,995, respectively, and for the six months ended June 30, 2021 and 2020, we recorded reserves for uncollectible rents of $5,960 and $5,905, respectively, based on our assessment of whether amounts due under certain tenants’ leases are probable of collection. We had reserves for uncollectible rents of $23,786 and $18,230 as of June 30, 2021 and December 31, 2020, respectively.
We define net lease coverage as earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, divided by the annual minimum rent due to us weighted by the minimum rent of the property to total minimum rents of the net lease portfolio. EBITDAR amounts used to determine rent coverage are generally for the latest twelve month period reported based on the most recent operating information, if any, furnished by the tenant. Operating statements furnished by the tenant often are unaudited and, in certain cases, may not have been prepared in accordance with GAAP and are not independently verified by us. Tenants that do not report operating information are excluded from the coverage calculations. In instances where we do not have financial information for our portion of the measurement period from our tenants, we have calculated an implied EBITDAR for the period using industry benchmark data
to more accurately reflect the impact of COVID-19 on our tenants’ operations. We believe using only financial information from the earlier periods could be misleading as it would not reflect the negative impact those tenants experienced as a result of the COVID-19 pandemic. As a result, we believe using this industry benchmark data provides a more accurate estimated representation of recent operating results and coverage for those tenants. Our net lease properties generated coverage of 2.29x and 2.16x as of June 30, 2021 and 2020, respectively.
Our Operating Liquidity and Capital Resources
Our principal sources of funds to meet operating and capital expenses, debt service obligations and distributions to our shareholders are minimum returns and rents from our hotels and net lease
portfolio and borrowings under our revolving credit facility. We receive minimum returns and rents from our managers and tenants monthly. We may receive additional returns, percentage rents and our share of the operating profits of our managed hotels after payment of management fees and other deductions, if any, either monthly or quarterly, and these amounts are usually subject to annual reconciliations. We believe we have sufficient liquidity to withstand the current decline in operating cash flow, fund our capital expenditures, pay debt service obligations and make distributions to our shareholders for the next twelve months and for the foreseeable future thereafter. However, our managers and tenants may become further or increasingly unable or unwilling to pay minimum returns and rents to us when due as a result of current economic conditions and, as a result, our revenue, cash flow, and net income could decline. Under the challenging operating environment posed by
the COVID-19 pandemic and the slowdown in U.S. economic activity and lodging demand beginning in March 2020, we have taken steps to preserve liquidity by drawing down the remaining capacity on our $1,000,000 revolving credit facility, maintaining our quarterly distribution to our shareholders at $0.01 per share, which we expect to continue at that rate for the foreseeable future, subject to applicable REIT tax requirements, by selectively making capital expenditures, and by continuing to work with our hotel operators to reduce hotel operating expenses. We intend to use available cash in the near term predominantly to fund any operating losses at our hotels, to pay corporate expenses, including debt service, fund capital expenditures, and to pay distributions to our shareholders. As of June 30, 2021, we were not in compliance with one of our debt covenants necessary to incur additional debt, and as a result, we will not
be able to incur additional debt until we meet the required covenant level. We may access equity markets or seek other sources of capital if favorable conditions exist for us in order to enhance our liquidity, reduce debt and to fund cash needs.
The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands):
Cash
and cash equivalents and restricted cash at the beginning of the period
$
91,456
81,259
Net cash provided by (used in):
Operating activities
(21,206)
48,797
Investing activities
(65,218)
(74,760)
Financing
activities
911,593
(5,438)
Cash and cash equivalents and restricted cash at the end of the period
$
916,625
$
49,858
The change from cash flows provided by operating activities in the 2020 period to cash flows used in operating activities in the 2021 period is primarily due to lower returns earned from our hotel portfolio and higher interest expense in the 2021 period. The decrease
in cash flows used in investing activities in the 2021 period is primarily due to a decrease in hotel managers’ purchases with restricted cash and a decrease in real estate dispositions in the 2021 period, partially offset by an investment in Sonesta we made in the 2021 period and our receipt of a hotel manager’s deposit of insurance proceeds into restricted cash during the 2020 period. The increase in cash provided by financing activities for the 2021 period as compared to the prior year period is primarily due to a draw down of the remaining capacity on our $1,000,000 revolving credit facility, a decrease in net senior notes issuances and lower common share distributions compared to the 2020 period.
We
maintain our qualification for taxation as a REIT under the IRC by meeting certain requirements. We lease 304 hotels to our wholly owned TRSs that are managed by hotel operating companies. As a REIT, we do not expect to pay federal income taxes on the majority of our income; however, the income realized by our TRSs in excess of the rent they pay to us is subject to U.S. federal income tax at corporate income tax rates. In addition, the income we receive from our hotels in Canada and Puerto Rico is subject to taxes in those jurisdictions and we are subject to taxes in certain states where we have properties despite our qualification for taxation as a REIT.
Our Investment and Financing Liquidity and Capital Resources
Various percentages of total sales at some of our hotels are escrowed as FF&E reserves to fund future capital improvements. We own all the FF&E escrows for our
hotels. During the six months ended June 30, 2021, our hotel managers and tenants deposited $1,469 to these accounts and spent $22,959 from the FF&E reserve escrow accounts to renovate and refurbish our hotels. As of June 30, 2021, there was $1,295 on deposit in these escrow accounts, which was held directly by us and is reflected in our condensed consolidated balance sheets as restricted cash. As a result of the COVID-19 pandemic and the adverse impact on the lodging industry and our properties, we and certain of our hotel operators agreed to temporarily suspend the required contribution to our FF&E reserves under certain of our agreements. As a result, less cash will be available to us to fund future capital improvements and we may be required to provide additional fundings that may have otherwise been available in escrowed FF&E reserves. Such fundings are
unlikely to materially increase in the near term above what we currently expect, as reduced occupancies are resulting in less usage and less wear and tear of our properties.
Our hotel operating agreements generally provide that, if necessary, we may provide our managers and tenants with funding for capital improvements to our hotels in excess of amounts otherwise available in escrowed FF&E reserves or when no FF&E reserves are available. During the six months ended June 30, 2021, capital improvements in excess of FF&E reserves available to our hotels were $53,431. We currently expect to fund $100,000 for capital improvements to certain hotels during the last six months of 2021 using cash on hand.
Our net lease portfolio leases do not require FF&E escrow deposits. However, tenants under these leases are required to
maintain the leased properties, including structural and non-structural components. Tenants under certain of our net lease portfolio leases, including TA, may request that we purchase qualifying capital improvements to the leased facilities in return for minimum rent increases or we may agree to provide allowances for tenant improvements upon execution of new leases or when renewing our existing leases. We funded $227 of capital improvements to properties under these lease provisions during the six months ended June 30, 2021. Tenants are not obligated to request and we are not obligated to purchase any such improvements. As of June 30, 2021, we had $4,470 of unspent leasing-related obligations related to certain net lease tenants.
In March 2021, we funded a $25,443 capital contribution to Sonesta related to its acquisition of
Red Lion Hotels Corporation using cash on hand.
In March 2021, we acquired a parcel of land adjacent to a property we own in Nashville, TN for a purchase price of $7,709 using cash on hand, including acquisition related costs of $109.
During the six months ended June 30, 2021, we sold six hotels with an aggregate of 576 rooms for net proceeds of $31,214 in two separate transactions and we also sold three net lease properties with 38,041 square feet for net proceeds of $1,914. We used the net proceeds from these sales to repay amounts outstanding under our revolving credit facility and for general business purposes.
We are currently marketing for sale 69 Sonesta branded hotels (46 extended stay hotels with 5,404 keys, 19 select service hotels with 2,461 keys and four full service hotels
with 1,098 keys) located in 27 states with an aggregate net carrying value of $627,302 as of June 30, 2021. We expect these sales to be completed by the end of the first quarter of 2022. We also entered into agreements to sell four net lease properties with an aggregate of 20,712 square feet and an aggregate carrying value of $1,678 for an aggregate sales price of $2,165, excluding closing costs. We currently expect these sales to be completed by the end of the third quarter of 2021. We expect to use the net sales proceeds from these sales for general business purposes or to repay debt.
During the six months ended June 30, 2021, we declared and paid regular quarterly distributions to common shareholders using cash on hand as follows:
On
July 15, 2021, we declared a regular quarterly distribution to common shareholders of record on July 26, 2021 of $0.01 per share, or $1,648. We expect to pay this amount on or about August 19, 2021 using cash on hand.
In order to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a $1,000,000 revolving credit facility which is governed by a credit agreement with a syndicate of institutional lenders. The maturity date of our revolving credit facility is July 15, 2022, and, subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the maturity date of this facility by two additional six-month periods. We
are required to pay interest at the rate of LIBOR plus a premium, which was 235 basis points per annum, subject to a LIBOR floor of 0.50% at June 30, 2021, on the amount outstanding under our revolving credit facility. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 30 basis points per annum at June 30, 2021. Both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings. We can borrow, subject to meeting certain financial covenants, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of June 30, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 2.85%. On January
19, 2021, we borrowed $972,793 under our revolving credit facility as a precautionary measure to preserve financial flexibility. As of June 30, 2021, we were fully drawn under our $1,000,000 revolving credit facility and remain fully drawn as of August 4, 2021.
We and our lenders amended our credit agreement governing our $1,000,000 revolving credit facility in 2020. Among other things, the amendments waived all of the then existing financial covenants through the Waiver Period. As a result of the amendments, among other things:
•we pledged certain equity interests of subsidiaries owning properties and provided first mortgage liens on 74 properties owned by certain
of the pledged subsidiaries with an undepreciated book value of $1,834,420 as of June 30, 2021 to secure our obligations under the credit agreement;
•we have the ability to fund up to $250,000 of capital expenditures per year and up to $50,000 of certain other investments per year as defined in the credit agreement;
•we agreed to certain covenants and restrictions on distributions to common shareholders, share repurchases, incurring indebtedness, and acquiring real property (in each case subject to various exceptions);
•we agreed to maintain
minimum liquidity of $125,000;
•we are generally required to apply the net cash proceeds from the disposition of assets, capital markets transactions and debt refinancings to repay outstanding amounts under the credit agreement, and then to other debt maturities; and
•we may not, during the Waiver Period and until we demonstrate compliance with certain covenants, utilize the feature in our credit agreement pursuant to which maximum aggregate borrowings may be increased to up to $2,300,000 on a combined basis in certain circumstances.
Our term debt maturities (other than our revolving credit facility) as of June 30, 2021 were as follows:
None
of our unsecured debt obligations require principal or sinking fund payments prior to their maturity dates.
We currently expect to use cash on hand, the cash flows from our operations, borrowings under our revolving credit facility (when available), net proceeds from any asset sales and net proceeds of offerings of equity or debt securities, as allowed by our existing credit agreement, to fund our operations, capital expenditures, future debt maturities, distributions to our shareholders and other general business purposes.
When significant amounts are outstanding for an extended period of time under our revolving credit facility, or the maturities of our indebtedness approach, we currently expect to explore refinancing alternatives. Such alternatives may include incurring additional debt when permitted under our debt agreements, issuing new equity securities and the sale of properties.
We have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. We may also seek to participate in joint ventures or other arrangements that may provide us additional sources of financing. Although we have not historically done so, we may also assume mortgage debt on properties we may acquire or obtain mortgage financing on our existing properties.
While we believe we will generally have access to various types of financings, including debt or equity, to fund our future acquisitions and to pay our debts and other obligations, we cannot be sure that we will be able to complete any debt or equity offerings or other types of financings or that our cost of any future public or private financings will not increase. Also, as noted above, we are limited in our ability to incur additional debt pursuant to our debt
agreements and are not permitted under our debt agreements to incur any debt while below the 1.5x debt service coverage ratio requirement under our public debt covenants as described below.
Our ability to complete, and the costs associated with, future debt transactions depends primarily upon credit market conditions and our then perceived creditworthiness. We have no control over market conditions. Our credit ratings depend upon evaluations by credit rating agencies of our business practices and plans, including our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain
and grow our operating cash flows. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investment and financing activities. However, as discussed elsewhere in this Quarterly Report on Form 10-Q, the continued duration and severity of the current economic conditions resulting from the COVID-19 pandemic are uncertain and may have various negative consequences on us and our operations including a decline in financing availability and increased costs for financing. Further, such conditions could also disrupt the capital markets generally and limit our access to financing from public sources or on favorable terms, particularly if the global financial markets experience significant disruptions.
Off Balance Sheet Arrangements
As of June 30, 2021, we had no off balance sheet arrangements
that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Our debt obligations at June 30, 2021 consisted of outstanding borrowings under our $1,000,000 revolving credit facility and $6,200,000 of publicly issued term debt. Our publicly issued term debt is governed by our indentures
and related supplements. These indentures and related supplements and our credit agreement contain covenants that generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, and require us to maintain various financial ratios and our credit agreement currently restricts our ability to make certain investments and limits our distributions under certain circumstances. Our credit agreement and our unsecured senior notes, indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includes RMR LLC ceasing to act as our business manager. As of
June 30, 2021, we believe we were in compliance with all of the covenants under our indentures and their supplements and our credit agreement, subject to the waivers and except as noted above and below.
The following table summarizes the results of the financial tests required by the indentures and related supplements for our senior unsecured notes as of June 30, 2021:
Actual
Results
Covenant Requirement
Total debt / adjusted total assets
55.6%
Maximum of 60%
Secured debt / adjusted total assets
7.7%
Maximum of 40%
Consolidated income available for debt service / debt service
1.00x
Minimum
of 1.50x
Total unencumbered assets / unsecured debt
179.1%
Minimum 150%
The above consolidated income available for debt service to debt service ratio as of June 30, 2021 is based on results for the first and second quarters of 2021 and third and fourth quarters of 2020. This ratio was 2.05x as of September 30, 2020, 1.56x as of December
31, 2020, 1.12x as of March 31, 2021 and 1.00x as of June 30, 2021, which is below the required level. We are not permitted under our debt agreements to incur additional debt while we remain below the required covenant level.
Acceleration and Cross-Default
Neither our indentures and their supplements nor our credit agreement contain provisions for acceleration which could be triggered by a change in our debt ratings. However, under our credit agreement, our highest senior debt rating is used to determine the fees and interest rates we pay. Accordingly, if that debt rating is downgraded, our interest expense and related costs under our revolving credit facility would increase.
Our
public debt indentures and their supplements contain cross default provisions to any other debt of $20,000 or more ($50,000 or more in the case of our indenture entered into in February 2016 and its supplements). Similarly, our credit agreement has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $75,000 or more.
Supplemental Guarantor Information
Our $800,000 of 7.50% unsecured senior notes due 2025, or the 2025 Notes, and our $450,000 of 5.5% unsecured senior notes due 2027, or the 2027 Notes, are fully and unconditionally guaranteed, on a joint and several basis and on a senior unsecured basis, by all of our subsidiaries,
except for certain excluded subsidiaries, including our foreign subsidiaries and our subsidiaries pledged under our credit agreement. The notes and the guarantees will be effectively subordinated to all of our and the subsidiary guarantors' secured indebtedness, respectively, to the extent of the value of the collateral securing such secured indebtedness, and will be structurally subordinated to all indebtedness and other liabilities and any preferred equity of any of our subsidiaries that do not guarantee the notes. Our remaining $4,950,000 of senior unsecured notes do not have the benefit of any guarantees.
A
subsidiary guarantor's guarantee of the 2025 Notes and 2027 Notes and all other obligations of such subsidiary guarantor under the indentures governing the notes will automatically terminate and such subsidiary guarantor will automatically be released from all of its obligations under such subsidiary guarantee and such indenture under certain circumstances, including on or after the date on which (a) the notes have received a rating equal to or higher than Baa2 (or the equivalent) by Moody’s Investors Service, or Moody’s, or BBB (or the equivalent) by Standard & Poor’s, or S&P, or if Moody’s or S&P ceases to rate the notes for reasons outside of our control, the equivalent investment grade rating from any other rating agency and (b) no
default or event of default has occurred and is continuing under the indenture. Our non-guarantor subsidiaries are separate and distinct legal entities and will have no obligation, contingent or otherwise, to pay any amounts due on these notes or the guarantees, or to make any funds available therefor, whether by dividend, distribution, loan or other payments. The rights of holders of these notes to benefit from any of the assets of our non-guarantor subsidiaries are subject to the prior satisfaction of claims of those subsidiaries' creditors and
any preferred equity holders. As a result, these notes and the related guarantees will be structurally subordinated to all indebtedness, guarantees and other liabilities of our subsidiaries that do not guarantee these notes, including guarantees of or pledges under other indebtedness of ours, payment obligations under lease agreements, trade payables and preferred equity.
The following table presents summarized financial information for us and the subsidiary guarantors, on a combined basis after elimination of (i) intercompany transactions and balances among us and the subsidiary guarantors and (ii) equity in earnings from, and any investments in, any of our non-guarantor subsidiaries:
(1)Real estate properties, net as of June 30, 2021 includes $770,507 of properties owned directly by us and not
included in the assets of the subsidiary guarantors.
(2)Intercompany balances represent receivables from non-guarantor subsidiaries.
Management Agreements, Leases and Operating Statistics (dollar amounts in thousands, except hotel statistics)
As of June 30, 2021, we owned and managed a diverse portfolio of hotels and net lease properties across the United States and in Puerto Rico and Canada with 142 brands across 22 industries.
Hotel Portfolio
The following tables summarize
the operating statistics, including ADR, occupancy and RevPAR reported to us by our hotel managers or tenants by hotel brand for the periods indicated. All operating data presented are based upon the operating results provided by our hotel managers and tenants for the indicated periods. We have not independently verified our managers’ or tenants’ operating data.
*We
generally define comparable hotels as those that were owned by us and were open and operating for the entire periods being compared. For the three months ended June 30, 2021 and 2020, our comparable results excluded 21 hotels that had suspended operations during part of the periods presented and for the six months ended June 30, 2021 and 2020, our comparable results excluded 22 hotels that had suspended operations during part of the periods presented.
(1)Includes
operator data for periods prior to when certain hotels were managed by Sonesta.
Net Lease Portfolio
As of June 30, 2021, our net lease properties were 98.5% occupied and we had 32 properties available for lease. During the six months ended June 30, 2021, we entered into lease renewals for 352,284 rentable square feet at weighted (by rentable square feet) average rents that were 5.1% below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 11.7 years. Also during the six months ended June 30, 2021, we entered into new leases for an aggregate of 65,551 rentable square feet at weighted (by rentable square feet) average rents that were 58.4%
below prior rents for the same space. The weighted (by rentable square feet) average lease term for these leases was 11.0 years.
As of June 30, 2021, our net lease tenants operated across more than 130 brands. The following table identifies the top ten brands based on investment.
Brand
No.
of Buildings
Investment (1) (3)
Percent of Total Investment (3)
Annualized
Minimum Rent (2) (3)
Percent of Total Annualized
Minimum Rent (2) (3)
Coverage (4)
1.
TravelCenters
of America
134
$
2,289,189
44.4
%
$
168,012
45.2
%
2.11
x
2.
Petro Stopping Centers
45
1,021,226
19.8
%
78,099
21.0
%
1.78
x
3.
AMC
Theatres
11
102,580
2.0
%
7,809
2.1
%
-0.31x
4.
The Great Escape
14
98,242
1.9
%
7,140
1.9
%
1.96x
5.
Life
Time Fitness
3
92,617
1.8
%
5,770
1.6
%
1.12x
6.
Buehler's Fresh Foods
5
76,536
1.5
%
5,657
1.5
%
5.90x
7.
Heartland
Dental
59
61,120
1.2
%
4,561
1.2
%
4.01x
8.
Norms
10
53,673
1.0
%
1,584
0.4
%
0.47x
9.
Express
Oil Change
23
49,724
1.0
%
3,717
1.0
%
3.91x
10.
Pizza Hut
43
48,833
0.9
%
3,453
0.9
%
1.67x
11.
Other
(5)
449
1,265,538
24.5
%
86,105
23.2
%
3.11
x
Total
796
$
5,159,278
100.0
%
$
371,907
100.0
%
2.29
x
(1)Represents
historical cost of our properties plus capital improvements funded by us less impairment write-downs, if any.
(2)Each of our leases provides for payment to us of minimum rent. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight-line basis, or any reimbursement of expenses paid by us.
(3)As of June 30, 2021, we have eight net lease properties with a carrying value of $4,259 and
annual minimum rent of $255 classified as held for sale.
(4)See page 28 for our definition of coverage.
(5)Other includes 120 distinct brands with an average investment of $10,546 and average annual minimum rent of $718.
As of June 30, 2021, our top 10 net lease tenants based on annualized minimum rent are listed below.
Tenant
Brand
Affiliation
No. of Buildings
Investment (1) (2)
Percent of Total Investment
Annualized
Minimum Rent (2) (3)
Percent of Total Annualized
Minimum Rent (2) (3)
Coverage (4)
1.
TravelCenters
of America
TravelCenters of America/ Petro Shopping Centers
179
$
3,310,415
64.2
%
$
246,110
66.2
%
2.00x
(5)
2.
American
Multi-Cinema, Inc.
AMC Theatres
11
102,580
2.0
%
7,809
2.1
%
-0.31x
3.
Universal Pool Co., Inc.
The
Great Escape
14
98,242
1.9
%
7,140
1.9
%
1.96x
4.
Healthy Way of Life II, LLC
Life Time Fitness
3
92,617
1.8
%
5,770
1.6
%
1.12x
5.
Styx
Acquisition, LLC
Buehler's Fresh Foods
5
76,536
1.5
%
5,657
1.5
%
5.90x
6.
Professional Resource
Development, Inc.
Heartland Dental
59
61,120
1.2
%
4,561
1.2
%
4.01x
7.
Norms Restaurants, LLC
Norms
10
53,673
1.0
%
1,584
0.4
%
0.47x
8.
Express
Oil Change, L.L.C.
Express Oil Change
23
49,724
1.0
%
3,717
1.0
%
3.91x
9.
Regal Cinemas, Inc.
Regal
Cinemas
6
44,476
0.9
%
3,854
1.0
%
0.01x
10.
Pilot Travel Centers LLC
Flying J Travel Plaza
3
41,681
0.8
%
3,183
0.9
%
4.18x
Subtotal,
top 10
313
3,931,064
76.3
%
289,385
77.8
%
2.04x
11.
Other (6)
Various
483
1,228,214
23.7
%
82,522
22.2
%
3.16x
Total
796
$
5,159,278
100.0
%
$
371,907
100.0
%
2.29x
(1)Represents historical cost of our net lease properties plus
capital improvements funded by us less impairment write-downs, if any.
(2)Each of our leases provides for payment to us of minimum rent. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight-line basis, or any reimbursement of expenses paid by us.
(3)As of June 30, 2021, we have eight net lease properties with an aggregate carrying value of $4,259 and annual minimum rent of $255 classified as held for sale.
(4)See page 28 for our definition of coverage.
(5)TA is our largest tenant. We lease 179 travel centers (134 under the TravelCenters of America brand and 45 under the Petro Stopping Centers brand) to a subsidiary of TA under five master leases that expire in 2029, 2031, 2032, 2033 and 2035, respectively. TA has two renewal options for 15 years each for all of the travel centers. In addition to the payment of our minimum rent, the TA leases provide for payment to us of percentage rent based on increases in total non-fuel revenues over base
levels (3.5% of non-fuel revenues above applicable base years). TA's remaining deferred rent obligation of $30,824 is being paid in quarterly installments of $4,404 through January 31, 2023.
(6)Other includes 161 tenants with an average investment of $7,629 and average annual minimum rent of $513.
As of June 30, 2021, our net lease tenants operated across 21 distinct industries within the service-oriented retail sector of the U.S. economy.
Industry
No.
of Buildings
Investment (1) (2)
Percent of Total Investment
Annualized
Minimum Rent (2) (3)
Percent of Total Annualized Minimum Rent
Coverage (4)
Travel
Centers
182
$
3,352,096
65.0%
$
249,293
67.1
%
2.03x
Restaurants-Quick Service
229
305,257
5.9%
20,643
5.6
%
2.72x
Restaurants-Casual
Dining
57
205,670
4.0%
11,023
3.0
%
1.50x
Health and Fitness
15
197,696
3.8%
11,925
3.2
%
1.05x
Movie
Theaters
22
190,725
3.7%
14,262
3.8
%
-0.18x
Grocery Stores
19
129,219
2.5%
9,123
2.5
%
5.37x
Home
Goods and Leisure
20
118,899
2.3%
9,041
2.4
%
1.96x
Medical, Dental Office
71
118,098
2.3%
9,232
2.5
%
3.98x
Automotive
Equipment & Services
63
96,496
1.9%
6,930
1.9
%
2.85x
Automotive Dealers
9
64,756
1.3%
5,354
1.4
%
7.11x
Entertainment
4
61,436
1.2%
4,265
1.1
%
0.76x
General
Merchandise Stores
5
56,321
1.1%
3,833
1.0
%
3.03x
Educational Services
9
55,647
1.1%
4,226
1.0
%
1.24x
Miscellaneous
Manufacturing
7
32,873
0.6%
2,433
0.7
%
14.49x
Building Materials
26
28,987
0.6%
2,458
0.7
%
4.82x
Car
Washes
5
28,658
0.6%
2,128
0.6
%
4.82x
Drug Stores and Pharmacies
7
19,251
0.4%
1,258
0.3
%
1.77x
Sporting
Goods
2
14,220
0.3%
926
0.2
%
4.42x
Legal Services
5
11,362
0.2%
1,024
0.3
%
-2.50x
Other
4
10,417
0.1%
2,344
0.6
%
5.08x
Dollar Stores
3
2,971
—%
186
0.1
%
3.69x
Vacant
32
58,223
1.1%
—
—
%
n/a
Total
796
$
5,159,278
100.0%
$
371,907
100.0
%
2.29
x
(1)Represents historical cost of our net lease properties plus capital improvements funded by us less impairment write-downs,
if any.
(2)As of June 30, 2021, we have eight net lease properties with an aggregate carrying value of $4,259 and annual minimum rent of $255 classified as held for sale.
(3)Each of our leases provides for payment to us of minimum rent, respectively. Certain of these minimum payment amounts are secured by full or limited guarantees. Annualized minimum rent amounts represent cash rent amounts due to us and exclude adjustments, if any, to record scheduled rent changes under certain of our leases, the deferred rent obligations payable to us under our leases with TA, and the estimated future payments to us under our TA leases for the cost of removing underground storage tanks at our travel centers on a straight-line basis, or any reimbursement of expenses paid by us.
As of June 30, 2021, lease expirations at our net lease properties by year are as follows.
Year(1)
Square
Feet
Annualized Minimum Rent Expiring (2)
Percent of Total Annualized Minimum Rent Expiring
Cumulative % of Total Minimum Rent Expiring
2021
257,250
1,623
0.4%
0.4%
2022
309,867
4,426
1.2%
1.6%
2023
323,785
3,772
1.0%
2.6%
2024
787,547
11,051
3.0%
5.6%
2025
457,960
8,990
2.4%
8.0%
2026
949,023
11,216
3.0%
11.0%
2027
974,398
13,264
3.6%
14.6%
2028
553,330
9,534
2.6%
17.2%
2029
1,321,924
47,728
12.8%
30.0%
2030
207,468
5,010
1.3%
31.3%
2031
1,504,454
51,033
13.7%
45.0%
2032
1,233,445
52,069
14.0%
59.0%
2033
1,140,257
53,382
14.4%
73.4%
2034
104,508
3,709
1.0%
74.4%
2035
2,577,853
84,573
22.7%
97.1%
2036
291,408
4,820
1.3%
98.4%
2037
—
—
0.0%
98.4%
2038
10,183
423
0.1%
98.5%
2039
134,901
3,209
0.9%
99.4%
2040
1,739
153
0.0%
99.4%
2041
29,384
339
0.1%
99.5%
2042
—
—
0.0%
99.5%
2043
—
—
0.0%
99.5%
2044
—
—
0.0%
99.5%
2045
63,490
1,583
0.5%
100.0%
Total
13,234,174
$
371,907
100%
(1)The
year of lease expiration is pursuant to contract terms.
(2)As of June 30, 2021, we have eight net lease properties with an annual minimum rent of $255 classified as held for sale.
As of June 30, 2021, shown below is the list of our top ten states based on annualized minimum rent where our net lease properties were located. No other state represents more than 3% of our net lease annual minimum rents.
We have relationships and historical and continuing transactions with RMR LLC, RMR Inc., TA and Sonesta and others related to them. For further information about these and other such relationships and related person transactions, see Notes 5, 8 and 9 to our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2020 Annual Report, our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, see the section captioned “Risk Factors” in our 2020 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions
with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Non-GAAP Financial Measures
We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, including funds from operations, or FFO, and normalized funds from operations, or Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our condensed consolidated
statements of income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs.
Funds From Operations and Normalized Funds From Operations
We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss), calculated in accordance with GAAP, excluding any gain or loss on sale of properties and loss on impairment of real estate assets, if any, plus real estate depreciation and amortization, less any unrealized
gains and losses on equity securities, as well as adjustments to reflect our share of FFO attributable to an investee and certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the items shown below. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to satisfy our REIT distribution requirements, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and to the dividend yield of other REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized
FFO differently than we do.
Our calculations of FFO and Normalized FFO for the three and six months ended June 30, 2021 and 2020 and reconciliations of net income, the most directly comparable financial measure under GAAP reported in our condensed consolidated financial statements, to those amounts appear in the following table (amounts in thousands, except per share amounts).
Unrealized (gains) loss on equity securities, net (3)
(2,500)
(3,848)
3,981
1,197
Adjustments
to reflect our share of FFO attributable to an investee (4)
1,034
327
1,499
439
FFO
19,151
117,924
(43,305)
241,008
Add
(less):
Loss on early extinguishment of debt (5)
—
6,970
—
6,970
Add
(less):
Gain on insurance settlement, net of tax (6)
—
(46,736)
—
(46,736)
Add (less):
Adjustments to reflect our share of Normalized FFO attributable to an investee (4)
538
—
1,363
—
Transaction
related costs (7)
6,151
—
25,785
—
Normalized FFO
$
25,840
$
78,158
$
(16,157)
$
201,242
Weighted
average shares outstanding (basic and diluted) (8)
164,506
164,382
164,502
164,376
Basic
and diluted per common share amounts:
Net loss
$
(0.55)
$
(0.23)
$
(1.74)
$
(0.43)
FFO
$
0.12
$
0.72
$
(0.26)
$
1.47
Normalized
FFO
$
0.16
$
0.48
$
(0.10)
$
1.22
Distributions
declared per share
$
0.01
$
0.01
$
0.02
$
0.55
(1)We recorded a $899 loss on asset impairment during the three months ended June 30, 2021 to reduce the carrying value of three net lease properties to their estimated fair value less costs to sell and a $28,514 loss on asset impairment during the three
months ended June 30, 2020 to reduce the carrying value of 17 hotel properties and four net lease properties to their estimated fair value less costs to sell. We recorded a $2,110 loss on asset impairment during the six months ended June 30, 2021 to reduce the carrying value of five net lease properties to their estimated fair value less costs to sell and a $45,254 loss on asset impairment during the six months ended June 30, 2020 to reduce the carrying value of 17 hotel properties and six net lease properties to their estimated fair value less costs to sell.
(2)We recorded a $10,849 net gain on sale of real estate during the three months ended June 30, 2021 in connection with the sale of six hotels and
two net lease properties. We recorded a $2,853 net loss on sale of real estate during the three months ended June 30, 2020 in connection with the sale of four net lease properties. We recorded a $10,840 net gain on sale of real estate during the six months ended June 30, 2021 in connection with the sale of six hotels and three net lease properties and recorded a net loss on sale of real estate of $9,764 during the six months ended June 30, 2020 in connection with the sale of ten net lease properties.
(3)Unrealized gains (losses) on equity securities, net represents the adjustment required to adjust the carrying value of our investment in shares of TA common stock to its fair value.
(4)Represents
adjustments to reflect our proportionate share of FFO and normalized FFO related to our equity investment in Sonesta.
(5)We recorded a $6,970 loss on early extinguishment of debt, during the three and six months ended June 30, 2020, related to the repurchase of certain of our senior notes.
(6)We recorded a $62,386 gain on insurance settlement, during the three and six months ended June 30, 2020, for insurance proceeds received for our then leased hotel in San Juan, PR related to Hurricane Maria. Under GAAP, We were required to increase the building basis of this hotel for the amount of the insurance proceeds. We also recorded a $15,650 deferred tax liability as a result of the book value to tax basis difference related to this accounting
during the three and six months ended June 30, 2020.
(7)Transaction related costs for the three months ended June 30, 2021 includes $3,700 of working capital we previously funded under our Hyatt agreement as a result of the amount no longer being expected to be recoverable, $1,110 of legal costs related to our arbitration claim against Marriott and $1,341 of hotel manager transition costs. Transaction costs for the three months ended March 31, 2021 included $19,634 of hotel manager transition related costs resulting from the rebranding of certain hotels during the period.
(8)Represents weighted average common shares adjusted to reflect the potential dilution of unvested share awards.
Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands, except per share amounts)
We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2020. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
Fixed Rate Debt
At June 30, 2021, our outstanding publicly tradable debt consisted of 13 issues
of fixed rate, senior notes:
Principal Balance
Annual Interest Rate
Annual Interest Expense
Maturity
Interest Payments
Due
$
500,000
5.000
%
$
25,000
2022
Semi-Annually
500,000
4.500
%
22,500
2023
Semi-Annually
350,000
4.650
%
16,275
2024
Semi-Annually
825,000
4.350
%
35,888
2024
Semi-Annually
350,000
4.500
%
15,750
2025
Semi-Annually
800,000
7.500
%
60,000
2025
Semi-Annually
350,000
5.250
%
18,375
2026
Semi-Annually
450,000
4.750
%
21,375
2026
Semi-Annually
400,000
4.950
%
19,800
2027
Semi-Annually
450,000
5.500
%
24,750
2027
Semi-Annually
400,000
3.950
%
15,800
2028
Semi-Annually
425,000
4.950
%
21,038
2029
Semi-Annually
400,000
4.375
%
17,500
2030
Semi-Annually
$
6,200,000
$
314,051
No
principal repayments are due under these notes until maturity. Because these notes require interest at fixed rates, changes in market interest rates during the term of these debts will not affect our interest obligations. If these notes were refinanced at interest rates which are one percentage point higher than the rates shown above, our per annum interest cost would increase by approximately $62,000. Changes in market interest rates would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at June 30, 2021 and discounted cash flows analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate
one percentage point change in interest rates would change the fair value of those debt obligations by approximately $246,775.
Each of these fixed rate unsecured debt arrangements allows us to make repayments earlier than the stated maturity date. We are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the noteholder. Also, we have in the past repurchased and retired some of our outstanding debts and we may do so again in the future. These prepayment rights and our ability to repurchase and retire outstanding debt may afford us opportunities to mitigate the risks of refinancing our debts at their maturities at higher rates by refinancing prior to maturity.
At June 30, 2021, our floating rate debt consisted of $1,000,000 outstanding under our $1,000,000 revolving credit facility. The maturity date of our revolving credit facility is July 15, 2022, and, subject to our meeting certain conditions, including our payment of an extension fee, we have an option to extend the stated maturity date of the facility by two additional six month periods. No principal repayments are required under our revolving credit facility prior to maturity and repayments may be made and redrawn subject to conditions at any time without penalty. Borrowings under our revolving credit facility are in U.S. dollars and require annual interest to be paid at the rate of LIBOR plus premiums that are subject to adjustment based upon
changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term interest rates, specifically LIBOR and to changes in our credit ratings. In addition, upon renewal or refinancing of our revolving credit facility, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of this floating rate debt but would affect our operating results.
The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2021:
(1)Weighted average based on the interest rates and the outstanding borrowings as of June 30, 2021.
(2)Based on diluted weighted average common shares outstanding for the three months ended June 30,
2021.
The foregoing table shows the impact of an immediate change in floating interest rates as of June 30, 2021. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amounts under our revolving credit facility or other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.
LIBOR Phase Out
LIBOR is currently expected to be phased out for new contracts by December
31, 2021 and for pre-existing contracts by June 30, 2023. We are required to pay interest on borrowings under our credit facility at floating rates based on LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. We currently expect that, as a result of any phase out of LIBOR, the interest rates under our credit agreement would be revised as provided under the agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR.
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2021 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Warning Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Whenever we use words such as “believe,”“expect,”“anticipate,”“intend,”“plan,”“estimate,”“will,”“may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur.
Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:
•The duration and severity of the COVID-19 pandemic and its impact on us and our managers and tenants, and on our and their ability to operate throughout the pandemic and its aftermath,
•Our expectation about the ability of Sonesta to operate the hotels that have been or may be transitioned and rebranded to it,
•The likelihood and extent to which our managers and tenants will pay the contractual amounts of returns, rents or other obligations due to us,
•Our ability to maintain sufficient liquidity during the duration of the COVID-19 pandemic and any resulting economic conditions,
•Potential
defaults on, or non-renewal of, leases by our tenants,
• Decreased rental rates or increased vacancies,
• Our sales and acquisitions of properties,
• Our policies and plans regarding investments, financings and dispositions,
• Our ability to pay interest on and principal of our debt,
•Our ability to pay distributions to our shareholders and to sustain the amount of such distributions,
• Our ability to raise or appropriately balance the use of debt or equity capital,
• Our intent to make improvements to certain of our properties,
• Our ability to engage and retain qualified
managers and tenants for our hotels and net lease properties on satisfactory terms,
• Our ability to diversify our sources of rents and returns that improve the security of our cash flows,
• The future availability of borrowings under our revolving credit facility,
• Our credit ratings,
• Our expectation that we benefit from our relationships with RMR LLC, Sonesta and TA,
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, FFO, Normalized FFO, cash flows, liquidity and prospects include, but are not limited to:
•The impact of conditions in the economy, including the COVID-19 pandemic and any resulting economic conditions, and the capital markets on us and our managers and tenants,
•Competition within the real estate, hotel, transportation and travel center and other industries
in which our managers and tenants operate, particularly in those markets in which our properties are located,
•Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,
•Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes,
•Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other man-made or natural disasters beyond our control, and
•Actual and potential conflicts of interest with our related parties, including our Managing Trustees, TA, Sonesta, RMR LLC and others affiliated
with them.
For example:
•Our ability to make future distributions to our shareholders and to make payments of principal and interest on our indebtedness depends upon a number of factors, including our future earnings, the capital costs we incur to acquire and maintain our properties and our working capital requirements. We may be unable to pay our debt obligations or to increase or maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated,
•Sonesta operated 261 of our 304 hotels as of June 30, 2021. We are currently negotiating with Radisson its possible continued management of nine of our hotels. If we do not reach an agreement with Radisson, we expect that some or all of these hotels
may transition to Sonesta. Transitioning hotels to another operator is disruptive to the hotels’ operations and requires significant capital investments. If Sonesta were to fail to provide quality services and amenities or to maintain a quality brand, our income from these properties may be adversely affected. There can be no assurance that Sonesta can operate the hotels as effectively or for returns at levels that could otherwise be achieved by other large well known hotel companies. Further, if we were required to replace Sonesta, we could experience significant disruptions in operations at the applicable properties, which could reduce our income and cash flows from, and the value of, those properties. We have no guarantee or security deposit under our Sonesta agreement. Accordingly, the returns we receive from our hotels managed under our Sonesta agreement are dependent upon the financial results of those hotel operations and we may continue to receive amounts from
Sonesta that are less than the contractual minimum returns stated in our Sonesta agreement or we may be requested to fund operating losses for our Sonesta hotels. Further, we own an approximately 34% ownership interest in Sonesta. If Sonesta experiences losses, or requires additional capital, Sonesta may request we fund our share through the contribution of additional capital and if we do not fund those contributions, our equity interest in Sonesta will be diluted if Sonesta obtains such contributions from other shareholders,
•We cannot be sure of the future financial performance of our properties, or regarding our managers’, tenants’ or guarantors’ future actions or their abilities or willingness to pay contracted amounts owed to us. If other operators or guarantors do not honor their obligations, we may seek to terminate our arrangements with them or other actions to enforce our rights,
•Recent
improvements in lodging demand may not be sustained, may stall or could decline,
•If general economic activity in the country declines, the operating results of certain of our properties may decline, the financial results of our managers and our tenants may suffer and these managers and tenants may be unable to pay our returns or rents. Also, depressed operating results from our properties for extended periods may result in the operators of some or all of our properties becoming unable or unwilling to meet their obligations,
•Hotel and other competitive forms of temporary
lodging supply have been increasing and may affect our hotel operators’ ability to grow ADR and occupancy, and ADR and occupancy could decline due to increased competition which may cause our hotel operators to become unable to pay our returns or rents,
•If the current level of commercial activity in the country declines, including as a result of the COVID-19 pandemic, if the price of diesel fuel increases significantly, if fuel conservation measures are increased, if freight business is directed away from trucking, if TA is unable to effectively compete or operate its business, if fuel efficiencies, the use of alternative fuels or transportation technologies reduce the demand for products and services TA sells or for various other reasons, TA may become unable to pay current and deferred rents due to us,
•Our ability to grow our business
and increase our distributions depends in large part upon our ability to buy properties that generate returns or can be leased for rents which exceed our operating and capital costs. We may be unable to identify properties that we want to acquire and we may fail to reach agreement with the sellers and complete the purchases of any properties we do want to acquire. In addition, any properties we may acquire may not generate returns or rents which exceed our operating and capital costs,
•We believe that our portfolio agreements include diverse groups of properties and that this diversity may improve operating results that might be realized from a more concentrated group of properties. However, our operator concentration with respect to our hotel operations has recently increased as a result of our transitioning of a majority of our hotels to Sonesta management, and our travel center properties continue
to be concentrated with TA. As a result, our operating results may not improve,
•Current market conditions may cause the process of selling properties to continue to take longer than previously expected. We may not complete the sales of any properties we currently plan to sell, and we may determine to sell fewer properties. Also, we may sell assets at prices that are less than we expect and less than their carrying values and we may incur losses on these sales or with respect to these assets,
•Contingencies in our pending sale agreements may not be satisfied and any expected sales and any related management or lease arrangements we expect to enter may not occur, may be delayed or the terms of such transactions or arrangements may change,
•As of August 4,
2021, we had approximately $963.1 million of cash or cash equivalents. This statement may imply that we have sufficient working capital and liquidity to meet our obligations for the next twelve months. The amounts we receive from our operators may be insufficient to operate our business profitably. Certain tenants have requested and we have granted certain rent relief and these requests could increase. In addition, our managers and tenants may not be able to fund minimum returns and rents due to us from operating our properties or from other resources. In the past and currently, certain of our tenants and managers have in fact not paid the minimum amounts due to us from their operations of our leased or managed properties and we may be required to fund hotel operating losses and working capital for our hotels. Further, our properties require significant funding for capital improvements and other matters. Accordingly, we may not have sufficient working capital or
liquidity,
•Continued availability of borrowings under our revolving credit facility is subject to our satisfying certain financial covenants and other credit facility conditions. The ratio of income available for debt service to debt service was below the 1.5x requirement under our public debt covenants as of June 30, 2021. We are not permitted under our debt agreements to incur additional debt while this ratio is below 1.5x. As a precautionary measure, we have fully drawn our $1.0 billion credit facility to maintain our financial flexibility. Our ability to incur debt may be limited for an extended period of time. We cannot be certain how long our ratio of income available for debt service to debt service may remain below 1.5x. We may not have any immediately available borrowing capacity to meet any funding needs beyond our cash on hand if our operating
results and financial condition are significantly and adversely impacted by current economic conditions or otherwise. If we cannot incur additional debt, we may be forced to raise additional sources of capital or take other measures to maintain adequate liquidity and we may not succeed in raising any capital we may need,
•We expect the borrowings under our revolving credit facility to strengthen our financial position; however, we may not obtain the financial flexibility we expect due to the ongoing COVID-19 pandemic or for other reasons. We can provide no assurance regarding the duration and severity of the economic conditions resulting from the COVID-19 pandemic and its impact on us and our operators,
•We may be unable to repay our debt obligations when they become due,
•We intend to conduct our business activities in a manner that will afford us reasonable access to capital for investment and financing activities. However, we may not succeed in this regard and we may not have reasonable access to capital, including due to the COVID-19 pandemic and the resulting economic conditions. If challenging market conditions last for a long period or worsen, our managers and tenants may experience liquidity constraints and as a result may be unable or unwilling to pay returns or rents to us and our ability to operate our business effectively may be challenged,
•We currently expect to fund $100 million of capital expenditures during the last six months of 2021. The cost of capital projects may be greater than we anticipate and operating results at our hotels may decline as a result of having
rooms out of service to complete such improvements,
•Actual costs under our revolving credit facility or other floating rate debt will be higher than LIBOR plus a premium because of fees and expenses associated with such debt,
•The premiums used to determine the interest rate and facility fee payable on our revolving credit facility are based on our credit ratings. Changes in our credit ratings may cause the interest and fees we pay to increase,
•We have the option to extend the maturity date of our revolving credit facility upon payment of a fee and meeting other conditions; however, the applicable conditions may not be met,
•The business and property management agreements between us and RMR LLC have
continuing 20 year terms. However, those agreements permit early termination in certain circumstances. Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms,
•We believe that our relationships with our related parties, including RMR LLC, RMR Inc., TA, Sonesta and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, and
•Two of our subsidiaries have initiated arbitration proceedings against Marriott and several of its subsidiaries after Marriott
challenged the efficacy of the termination of our agreement with them. The results of arbitration proceedings are difficult to predict and we can provide no assurances regarding such results. Even if we are successful in such proceedings, the pendency and conduct of such proceedings may be expensive and distracting to our management, and could be disruptive to our operations.
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as pandemics, including the COVID-19 pandemic, acts of terrorism, natural disasters, changes in our managers’ or tenants’ revenues or expenses, changes in our managers’ or tenants’ financial conditions, the market demand for hotel rooms or the goods and services provided at our properties or changes in capital markets or the economy generally.
The information contained elsewhere in this Quarterly
Report on Form 10-Q, our 2020 Annual Report or in our other filings with the SEC, including under the caption “Risk Factors,” or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov.
You should not place undue reliance upon our forward-looking statements.
Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
Statement Concerning Limited Liability
The
Amended and Restated Declaration of Trust establishing Service Properties Trust dated August 21, 1995, as amended and supplemented, as filed with the State Department of Assessments and Taxation of Maryland, provides that no trustee, officer, shareholder, employee or agent of Service Properties Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Service Properties Trust. All persons dealing with Service Properties Trust in any way shall look only to the assets of Service Properties Trust for the payment of any sum or the performance of any obligation.
There have been no material changes to risk factors from those we previously disclosed in our 2020 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended June 30,
2021:
Calendar Month
Number of Shares Purchased (1)
Average
Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
June
2021
15,079
$
12.60
$
—
$
—
(1)These common share withholdings
and purchases were made to satisfy the tax withholding and payment obligations of a former officer and a former officer and employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
