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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-32514
DIAMONDROCK HOSPITALITY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
20-1180098
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
2 Bethesda Metro Center, Suite 1400,
 Bethesda,
Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)

(240744-1150
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
DRH
New York Stock Exchange
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. Yes 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company o
Emerging growth company o
 
 
 

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 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 No
The registrant had 199,243,338 shares of its $0.01 par value common stock outstanding as of May 11, 2020.
 



Table of Contents
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION
Item I.
Financial Statements

DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
March 31, 2020
 
December 31, 2019
ASSETS
(unaudited)
 
 
Property and equipment, net
$
3,047,009

 
$
3,026,769

Right-of-use assets
97,538

 
98,145

Restricted cash
47,072

 
57,268

Due from hotel managers
72,396

 
91,207

Prepaid and other assets
19,201

 
29,853

Cash and cash equivalents
387,825

 
122,524

Total assets
$
3,671,041

 
$
3,425,766

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage and other debt, net of unamortized debt issuance costs
$
613,067

 
$
616,329

Unsecured term loans, net of unamortized debt issuance costs
398,841

 
398,770

Senior unsecured credit facility
400,000


75,000

Total debt
1,411,908


1,090,099

 
 
 
 
Deferred income related to key money, net
11,243

 
11,342

Unfavorable contract liabilities, net
66,856

 
67,422

Deferred rent
53,050

 
52,012

Lease liabilities
102,923

 
103,625

Due to hotel managers
69,514

 
72,445

Distributions declared and unpaid
143

 
25,815

Accounts payable and accrued expenses
78,807

 
81,944

Total liabilities
1,794,444

 
1,504,704

Equity:
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 199,243,338 and 200,207,795 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
1,992

 
2,002

Additional paid-in capital
2,079,534

 
2,089,349

Accumulated deficit
(213,420
)
 
(178,861
)
Total stockholders’ equity
1,868,106

 
1,912,490

Noncontrolling interests
8,491

 
8,572

Total equity
1,876,597

 
1,921,062

Total liabilities and equity
$
3,671,041

 
$
3,425,766


The accompanying notes are an integral part of these consolidated financial statements.

- 1-




DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended March 31,
 
 
 
 
 
2020
 
2019
Revenues:
 
 
 
Rooms
$
111,801

 
$
136,653

Food and beverage
43,905

 
50,465

Other
14,289

 
15,257

Total revenues
169,995

 
202,375

Operating Expenses:
 
 
 
Rooms
35,653

 
38,819

Food and beverage
31,087

 
33,150

Management fees
3,477

 
5,340

Franchise fees
5,796

 
5,859

Other hotel expenses
77,843

 
75,479

Depreciation and amortization
30,100

 
28,996

Corporate expenses
5,557

 
7,064

Business interruption insurance income

 
(8,822
)
Total operating expenses, net
189,513

 
185,885

Interest and other expense (income), net
399

 
(303
)
Interest expense
21,218

 
11,662

Total other expenses, net
21,617

 
11,359

(Loss) income before income taxes
(41,135
)
 
5,131

Income tax benefit
6,443

 
3,849

Net (loss) income
(34,692
)
 
8,980

Less: Net loss (income) attributable to noncontrolling interests
133

 
(35
)
Net (loss) income attributable to common stockholders
$
(34,559
)
 
$
8,945

(Loss) earnings per share:
 
 
 
Net (loss) income per share available to common stockholders—basic
$
(0.17
)
 
$
0.04

Net (loss) income per share available to common stockholders—diluted
$
(0.17
)
 
$
0.04












The accompanying notes are an integral part of these consolidated financial statements.

- 2-





DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
(unaudited)


Common Stock











Shares

Par Value

Additional Paid-In Capital

Accumulated Deficit

Total Stockholders' Equity

Noncontrolling Interests

Total Equity
Balance at December 31, 2019
200,207,795


$
2,002


$
2,089,349


$
(178,861
)

$
1,912,490


$
8,572


$
1,921,062

Share-based compensation
154,981


1


189




190


238


428

Redemption of Operating Partnership units

 

 
(15
)
 

 
(15
)
 
(186
)
 
(201
)
Common stock repurchased and retired
(1,119,438
)

(11
)

(9,989
)



(10,000
)



(10,000
)
Net loss






(34,559
)

(34,559
)

(133
)

(34,692
)
Balance at March 31, 2020
199,243,338


$
1,992


$
2,079,534


$
(213,420
)

$
1,868,106


$
8,491


$
1,876,597


 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2018
204,536,485

 
$
2,045

 
$
2,126,472

 
$
(245,620
)
 
$
1,882,897

 
$
7,696

 
$
1,890,593

Cumulative effect of ASC 842 adoption

 

 

 
(15,286
)
 
(15,286
)
 

 
(15,286
)
Distributions on common stock/units ($0.125 per share)

 

 
113

 
(25,483
)
 
(25,370
)
 
(134
)
 
(25,504
)
Share-based compensation
55,916

 
1

 
1,073

 

 
1,074

 
83

 
1,157

Common stock repurchased and retired
(3,143,922
)
 
(31
)
 
(29,967
)
 

 
(29,998
)
 

 
(29,998
)
Net income

 

 

 
8,945

 
8,945

 
35

 
8,980

Balance at March 31, 2019
201,448,479

 
$
2,015

 
$
2,097,691

 
$
(277,444
)
 
$
1,822,262

 
$
7,680

 
$
1,829,942










The accompanying notes are an integral part of these consolidated financial statements.

- 3-




DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
 
 
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(34,692
)
 
$
8,980

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
30,100

 
28,996

Corporate asset depreciation as corporate expenses
58

 
55

Non-cash lease expense and other amortization
1,750

 
1,715

Non-cash interest rate swap fair value adjustment
11,312

 
572

Amortization of debt issuance costs
453

 
482

Amortization of deferred income related to key money
(99
)
 
(99
)
Share-based compensation
1,561

 
1,454

Changes in assets and liabilities:
 
 
 
Prepaid expenses and other assets
(207
)
 
(5,445
)
Due to/from hotel managers
15,821

 
(6,850
)
Accounts payable and accrued expenses
(15,794
)
 
(7,998
)
Net cash provided by operating activities
10,263

 
21,862

Cash flows from investing activities:
 
 
 
Capital expenditures for operating hotels
(19,617
)
 
(21,081
)
Capital expenditures for Frenchman's Reef
(29,156
)
 
(9,208
)
Acquisition of interest in the land underlying the Shorebreak Hotel
(1,585
)
 

Proceeds from property insurance
10,663

 

Net cash used in investing activities
(39,695
)
 
(30,289
)
Cash flows from financing activities:
 
 
 
Scheduled mortgage debt principal payments
(3,457
)
 
(3,389
)
Draws on senior unsecured credit facility
400,000

 
60,000

Repayments of senior unsecured credit facility
(75,000
)
 

Distributions on common stock and units
(25,557
)
 
(26,110
)
Repurchase of common stock
(10,000
)
 
(29,998
)
Redemption of Operating Partnership units
(201
)
 

Shares redeemed to satisfy tax withholdings on vested share-based compensation
(1,248
)
 
(296
)
Net cash provided by financing activities
284,537

 
207

Net increase (decrease) in cash, cash equivalents, and restricted cash
255,105

 
(8,220
)
Cash, cash equivalents, and restricted cash at beginning of period
179,792

 
91,598

Cash, cash equivalents, and restricted cash at end of period
$
434,897

 
$
83,378













The accompanying notes are an integral part of these consolidated financial statements.

- 4-





DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(in thousands)
(unaudited)


Supplemental Disclosure of Cash Flow Information:
 
Three Months Ended March 31,
 
2020
 
2019
Cash paid for interest
$
10,036

 
$
10,122

Cash (refunded) paid for income taxes, net
$
(306
)
 
$
20

Capitalized interest
$
1,006

 
$
152

Non-cash cumulative effect of ASC 842 accounting standard adoption
$

 
$
15,286

Non-cash Investing and Financing Activities:
 
 
 
Unpaid dividends and distributions declared
$
143

 
$
25,734


The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amount shown within the consolidated statements of cash flows:

 
March 31, 2020
 
December 31, 2019
Cash and cash equivalents
$
387,825

 
$
122,524

Restricted cash (1)
47,072

 
57,268

Total cash, cash equivalents and restricted cash
$
434,897

 
$
179,792

_____________________________

(1)
Restricted cash primarily consists of reserves for replacement of furniture and fixtures held by our hotel managers and cash held in escrow pursuant to lender requirements.


























The accompanying notes are an integral part of these consolidated financial statements.

- 5-




DIAMONDROCK HOSPITALITY COMPANY

Notes to the Consolidated Financial Statements
(Unaudited)

1.
Organization

DiamondRock Hospitality Company (the “Company” or “we”) is a lodging-focused real estate company that owns a portfolio of premium hotels and resorts. Our hotels are concentrated in key gateway cities and in destination resort locations, and the majority of our hotels are operated under a brand owned by one of the leading global lodging brand companies (Marriott International, Inc. (“Marriott”) or Hilton Worldwide (“Hilton”)). We are an owner, as opposed to an operator, of the hotels in our portfolio. As an owner, we receive all of the operating profits or losses generated by our hotels after we pay fees to the hotel managers, which are based on the revenues and profitability of the hotels.

As of March 31, 2020, we owned 31 hotels with 10,102 guest rooms, located in the following markets: Atlanta, Georgia; Boston, Massachusetts (2); Burlington, Vermont; Charleston, South Carolina; Chicago, Illinois (2); Denver, Colorado (2); Fort Lauderdale, Florida; Fort Worth, Texas; Huntington Beach, California; Key West, Florida (2); New York, New York (4); Phoenix, Arizona; Salt Lake City, Utah; San Diego, California; San Francisco, California (2); Sedona, Arizona (2); Sonoma, California; South Lake Tahoe, California; Washington D.C. (2); St. Thomas, U.S. Virgin Islands; and Vail, Colorado. Our hotel located in St. Thomas, U.S. Virgin Islands, Frenchman's Reef & Morning Star Beach Resort (“Frenchman's Reef”) is closed as a result of damage caused by Hurricane Irma in September 2017.

We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT, in which our hotel properties are owned by our operating partnership, DiamondRock Hospitality Limited Partnership, or subsidiaries of our operating partnership. The Company is the sole general partner of our operating partnership and owns 99.6% of the limited partnership units (“common OP units”) of our operating partnership. The remaining 0.4% of the common OP units are held by third parties. See Note 5 for additional disclosures related to common OP units.

COVID-19 Pandemic and Management's Response

In March 2020, the World Health Organization declared the novel coronavirus, or COVID-19, a global pandemic. Since then, the virus has continued to spread throughout the United States and globally. As a result of the pandemic, government mandates and health official recommendations, the demand for lodging has materially decreased. We have suspended operations at 20 of our hotels, and the hotels that remain open are operating at historically low occupancy levels. As a result, the COVID-19 pandemic had a negative impact on the operations and financial results of the Company for the quarter ended March 31, 2020. The severity and duration of the COVID-19 pandemic cannot be reasonably estimated at this time, but we expect it to ultimately have a material adverse impact on our results of operations, financial position and cash flow in 2020.

We have taken aggressive steps in order to mitigate the ongoing operational and financial impacts on our business. We have fully drawn down on our $400 million senior unsecured credit facility, suspended our quarterly dividend commencing with the first quarter dividend that would have been paid in April 2020, canceled or deferred a significant portion of our capital expenditures planned for 2020, paused the reconstruction of Frenchman's Reef and reduced corporate expenses through decreases in executive compensation, employee headcount and other expenses. Additionally, in coordination with our hotel operators, we have developed and implemented action plans to significantly reduce operating costs at each of our hotels.

As of March 31, 2020, the Company had unrestricted cash of $387.8 million. We have evaluated the current business environment and its effect on our results of operations, the actions we have taken and the other options available to us and have determined that we have sufficient liquidity in the event of a prolonged decline in hotel demand without issuing additional equity, obtaining debt financing or selling properties.

Although we are in compliance with the financial covenants of our debt as of March 31, 2020, we have determined that it is probable the continuing effect of the COVID-19 pandemic on our hotel operating results will lead to our inability to satisfy certain financial covenants under the credit agreements for our senior unsecured credit facility and unsecured term loans beginning with the quarter ending June 30, 2020. If we were to violate a covenant, the lenders have the right to declare us in default and require repayment of the outstanding amounts under the credit agreements. We are in negotiations with our lenders to obtain a waiver of the financial covenants prior to any violation. However, because any required waiver would be granted at the sole discretion of the lenders, and such waivers may not be granted, there is substantial doubt about the Company’s ability to continue as a going concern, within one year from the date of these financial statements, without additional equity or debt financing or property sales. As of May 11, 2020, we have a term sheet for an amendment to our credit agreements that provides for covenant

- 6-




waivers for the subsequent four quarters through March 31, 2021 and certain other modifications to the covenants thereafter. We expect the amendment to be approved by a majority of our lenders and executed prior to any covenant violation, although we can provide no assurances that such amendment will be executed. If we are successful in obtaining the waivers, the substantial doubt about the Company's ability to continue as a going concern without additional equity or debt financing or property sales will be removed.

The consolidated financial statements do not include any adjustments that would be required if the Company were not to continue as a going concern.

2.
Summary of Significant Accounting Policies

Basis of Presentation

Our financial statements include all of the accounts of the Company and its subsidiaries in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation. If the Company determines that it has an interest in a variable interest entity within the meaning of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Our operating partnership meets the criteria of a variable interest entity. The Company is the primary beneficiary and, accordingly, we consolidate our operating partnership.

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of March 31, 2020, the results of our operations for the three months ended March 31, 2020 and 2019, the statements of equity for the three months ended March 31, 2020 and 2019, and the cash flows for the three months ended March 31, 2020 and 2019. Interim results are not necessarily indicative of full-year performance because of the impact of seasonal and short-term variations. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed on February 28, 2020.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Risks and Uncertainties

The state of the overall economy can significantly impact hotel operational performance and thus, impact our financial position. Should any of our hotels experience a significant decline in operational performance, it may affect our ability to make distributions to our stockholders and service debt or meet other financial obligations.

Currently, one of the most significant risks and uncertainties is the potential adverse effect of the COVID-19 pandemic. The COVID-19 pandemic has reduced travel and adversely affected the hospitality industry in general. We believe that the actual and threatened spread of COVID-19 globally or in the regions in which we operate, or the future widespread outbreak of infectious or contagious disease, will continue to reduce national and international travel in general. The extent to which our business will continue to be affected by COVID-19 will largely depend on future developments, which we cannot predict with a high degree of confidence, and its impact on customer travel, including the duration of the outbreak, the continued spread and treatment of COVID-19, new information and developments that may emerge concerning the severity of COVID-19 and the actions of governments and individuals to contain COVID-19 or treat its impact, among others. To the extent that travel activity in the U.S. continues to be materially and adversely affected by COVID-19, the overall business and financial results of the hospitality industry, as well as the business and financial results of the Company, would similarly continue to be materially and adversely impacted. See Note 1 for additional disclosures related to COVID-19 and its impact on our Company.

Property and Equipment

Investment purchases of hotel properties, land, land improvements, building and furniture, fixtures and equipment and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based upon total accumulated cost of the acquisition. Direct acquisition-related costs are capitalized as a component of the acquired

- 7-




assets. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 5 to 40 years for buildings, land improvements, and building improvements and 1 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties, current or projected losses from operations, and an expectation that the property is more likely than not to be sold significantly before the end of its useful life. Management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel, less costs to sell, exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized. As a result of the COVID-19 pandemic, we reviewed each of our hotel properties for impairment as of March 31, 2020 and concluded the carrying value of each of the hotel properties is recoverable. Due to the continuing effects of the pandemic, however, estimated future cash flows could further decline and result in the recognition of an impairment charge on one or more of our hotel properties in future periods.

We will classify a hotel as held for sale in the period that we have made the decision to dispose of the hotel, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing or other contingencies exist which could cause the transaction to not be completed in a timely manner. If these criteria are met, we will record an impairment loss if the fair value less costs to sell is lower than the carrying amount of the hotel and related assets and will cease recording depreciation expense. We will classify the assets and related liabilities as held for sale on the balance sheet.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Revenue Recognition

Revenues from operations of the hotels are recognized when the goods or services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and resort fees. Rooms revenue is recognized over the length of stay that the hotel room is occupied by the customer. Food and beverage revenue is recognized at the point in time in which the goods and/or services are rendered to the customer, such as for restaurant dining services or banquet services. Other revenues are recognized at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and we assess whether we are the principal or agent in these arrangements. If we are the principal, we recognize revenue based upon the gross sales price.

Advance deposits are recorded as liabilities when a customer or group of customers provides a deposit for a future stay or banquet event at our hotels. Advance deposits are converted to revenue when the services are provided to the customer or when a customer with a noncancelable reservation fails to arrive for part or all of the reservation. Conversely, advance deposits are generally refundable upon guest cancellation of the related reservation within an established period of time prior to the reservation.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants or shares issuable in the event of conversion of common OP units. No adjustment is made for shares that are anti-dilutive during a period.

Share-based Compensation

We account for share-based employee compensation using the fair value based method of accounting. We record the cost of awards with service or market conditions based on the grant-date fair value of the award. That cost is recognized over the

- 8-




period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service.

Income Taxes

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings during the period in which the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We have elected to be treated as a real estate investment trust (“REIT”) under the provisions of the Internal Revenue Code of 1986, as amended, which requires that we distribute at least 90% of our taxable income annually to our stockholders and comply with certain other requirements. In addition to paying federal and state taxes on any retained income, we may be subject to taxes on “built-in gains” on sales of certain assets. Our taxable REIT subsidiaries will generally be subject to federal, state, local, and/or foreign income taxes.

In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, we lease each of our hotel properties to a wholly owned subsidiary of Bloodstone TRS, Inc., our taxable REIT subsidiary (“TRS”), except for Frenchman’s Reef, which is owned by a Virgin Islands corporation that we have elected to be treated as a TRS, and Cavallo Point, The Lodge at the Golden Gate (“Cavallo Point”), which is leased to a wholly owned subsidiary of the Company, which we have elected to be treated as a TRS.

We had no accruals for tax uncertainties as of March 31, 2020 and December 31, 2019.

Fair Value Measurements

In evaluating fair value, U.S. GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the observability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:

Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 - Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical
or similar assets in markets that are not active and model-derived valuations whose inputs are observable
Level 3 - Model-derived valuations with unobservable inputs

Intangible Assets and Liabilities

Intangible assets and liabilities are recorded on non-market contracts assumed as part of the acquisition of certain hotels. We review the terms of agreements assumed in conjunction with the purchase of a hotel to determine if the terms are favorable or unfavorable compared to an estimated market agreement at the acquisition date. Favorable contract assets or unfavorable contract liabilities are recorded at the acquisition date and amortized using the straight-line method over the term of the agreement. We do not amortize intangible assets with indefinite useful lives, but we review these assets for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired.

Comprehensive Income

We do not have any comprehensive income other than net income. If we have any comprehensive income in future periods, such that a statement of comprehensive income would be necessary, such statement will be reported as one statement with the consolidated statement of operations.

Derivative Instruments


- 9-




In the normal course of business, we are exposed to the effects of interest rate changes. We may enter into derivative instruments, including interest rate swaps and caps, to manage or hedge interest rate risk. Derivative instruments are recorded at fair value on the balance sheet date. We have not elected hedge accounting treatment for the changes in the fair value of derivatives. Changes in the fair value of derivatives are recorded each period and are included in interest expense in the consolidated statements of operations.

Noncontrolling Interests

The noncontrolling interest is the portion of equity in our consolidated operating partnership not attributable, directly or indirectly, to the Company. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from our less-than-wholly-owned operating partnership are reported within the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Income or loss is allocated to noncontrolling interests based on their weighted average ownership percentage for the applicable period. Consolidated statements of equity include beginning balances, activity for the period and ending balances for stockholders’ equity, noncontrolling interests and total equity.

Restricted Cash

Restricted cash primarily consists of reserves for replacement of furniture and fixtures generally held by our hotel managers and cash held in escrow pursuant to lender requirements.

Debt Issuance Costs

Financing costs are recorded at cost as a component of the debt carrying amount and consist of loan fees and other costs incurred in connection with the issuance of debt. Amortization of debt issuance costs is computed using a method that approximates the effective interest method over the remaining life of the debt and is included in interest expense in the accompanying consolidated statements of operations. Debt issuance costs related to our senior unsecured credit facility are included within prepaid and other assets on the accompanying consolidated balance sheets. These debt issuance costs are amortized ratably over the term of the credit facility, regardless of whether there are any outstanding borrowings, and the amortization is included in interest expense in the accompanying consolidated statements of operations.

Due to/from Hotel Managers

The due from hotel managers consists of hotel level accounts receivable, periodic hotel operating distributions receivable from managers and prepaid and other assets held by the hotel managers on our behalf. The due to hotel managers represents liabilities incurred by the hotel on behalf of us in conjunction with the operation of our hotels which are legal obligations of the Company.

Key Money

Key money received in conjunction with entering into hotel management or franchise agreements or completing specific capital projects is deferred and amortized over the term of the hotel management agreement, the term of the franchise agreement, or other systematic and rational period, if appropriate. Deferred key money is classified as deferred income in the accompanying consolidated balance sheets and amortized as an offset to management fees or franchise fees.

Leases

We determine if an arrangement is a lease or contains an embedded lease at inception. For agreements with both lease and nonlease components (e.g., common-area maintenance costs), we do not separate the nonlease components from the lease components, but account for these components as one. We determine the lease classification (operating or finance) at lease inception.

Right-of-use assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. The discount rate used to determine the present value of the lease payments is our incremental borrowing rate as of the lease commencement date, as the implicit rate is not readily determinable. The right-of-use assets also include any initial direct costs and any lease payments made at or before the commencement date, and is reduced for any unrestricted incentives received at or before the commencement date.

Options to extend or terminate the lease are included in the recognition of our right-of-use assets and lease liabilities when it is reasonably certain that we will exercise the option. Variable payments that are based on an index or a rate are included in the

- 10-




recognition of our right-of-use assets and lease liabilities using the index or rate at lease commencement; however, changes to these lease payments due to rate or index updates are recorded as rent expense in the period incurred. Contingent rentals based on a percentage of sales in excess of stipulated amounts are not included in the measurement of the lease liability and right-of-use asset but will be recognized as variable lease expense when they are incurred. Leases that contain provisions that increase the fixed minimum lease payments based on previously incurred variable lease payments related to performance will be remeasured, as these payments now represent an increase in the fixed minimum payments for the remainder of the lease term. However, leases with provisions that increase minimum lease payments based on changes in a reference index or rate (e.g. Consumer Price Index) will not be remeasured as such changes do not constitute a resolution of a contingency.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of our cash and cash equivalents. We maintain cash and cash equivalents with various financial institutions. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution.

Segment Reporting

Each one of our hotels is an operating segment. We evaluate each of our properties on an individual basis to assess performance, the level of capital expenditures, and acquisition or disposition transactions. Our evaluation of individual properties is not focused on property type (e.g. urban, suburban, or resort), brand, geographic location, or industry classification.

We aggregate our operating segments using the criteria established by U.S. GAAP, including the similarities of our product offering, types of customers and method of providing service. All of our properties react similarly to economic stimulus, such as business investment, changes in Gross Domestic Product, and changes in travel patterns. As such, all our operating segments meet the aggregation criteria, resulting in a single reportable segment represented by our consolidated financial results.

Accounting for Impact of Natural Disasters

Assets destroyed or damaged as a result of natural disasters or other involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved. Income resulting from business interruption insurance is not recognized until all contingencies related to the insurance recoveries are resolved.

Frenchman's Reef has been closed since September 2017, when the hotel was significantly damaged by Hurricane Irma. For the three months ended March 31, 2019, we recognized $8.8 million of business interruption insurance income related to Frenchman's Reef. We settled our insurance claim for Hurricane Irma in December 2019 and for the three months ended March 31, 2020, we did not recognize any business interruption insurance income.

3.
Property and Equipment

Property and equipment as of March 31, 2020 and December 31, 2019 consists of the following (in thousands):

 
March 31, 2020
 
December 31, 2019
Land
$
618,210

 
$
617,695

Land improvements
7,994

 
7,994

Buildings and site improvements
2,759,936

 
2,751,590

Furniture, fixtures and equipment
538,974

 
534,802

Construction in progress
163,828

 
126,464

 
4,088,942

 
4,038,545

Less: accumulated depreciation
(1,041,933
)
 
(1,011,776
)
 
$
3,047,009

 
$
3,026,769




- 11-




On March 2, 2020, we acquired the remaining 4.5% interest in the land underlying the Shorebreak Hotel located in Huntington Beach, California, for a purchase price of $1.6 million. We now own 100% of the interest in the land underlying the hotel.

As of March 31, 2020 and December 31, 2019, we had accrued capital expenditures of $14.1 million and $13.1 million, respectively.

4. Leases

We are subject to operating leases, the most significant of which are ground leases. We are the lessee to ground leases under eight of our hotels and one parking garage as of March 31, 2020. The lease liabilities for our operating leases assume the exercise of all available extension options, as we believe they are reasonably certain to be exercised. As of March 31, 2020, our operating leases have a weighted-average remaining lease term of 67 years and a weighted-average discount rate of 5.77%.

The components of operating lease expense, which is included in other hotel expenses in our consolidated statements of operations, and cash paid for amounts included in the measurement of lease liabilities, are as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Operating lease cost
 
$
2,808

 
$
2,751

Variable lease payments
 
$
237

 
$
337

Cash paid for amounts included in the measurement of operating lease liabilities

 
$
807

 
$
788



Maturities of lease liabilities are as follows (in thousands):
Year Ending December 31,
 
As of March 31, 2020
2020 (excluding the three months ended March 31, 2020)
 
$
2,402

2021
 
3,496

2022
 
3,940

2023
 
3,997

2024
 
3,976

Thereafter
 
759,124

Total lease payments
 
776,935

Less imputed interest
 
(674,012
)
Total lease liabilities
 
$
102,923



5. Equity

Common Shares

We are authorized to issue up to 400 million shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of our common stock are entitled to receive dividends out of assets legally available for the payment of dividends when authorized by our board of directors.

We have an “at-the-market” equity offering program (the “ATM Program”), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200 million. We did not sell any shares of common stock during the three months ended March 31, 2020, and the full amount remains available under the ATM Program.

Our board of directors has approved a share repurchase program (the “Share Repurchase Program”) authorizing us to repurchase shares of our common stock having an aggregate price of up to $250 million. Repurchases under the Share Repurchase Program are made in open market or privately negotiated transactions as permitted by federal securities laws and other legal requirements. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing, manner, price and actual number of shares repurchased will depend on a variety of factors, including stock price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The Share Repurchase Program may be suspended or terminated at any time without prior notice. During the three months ended March 31, 2020, we repurchased 1,119,438 shares of our common stock at an average price of $8.91 per share for a total purchase price of $10.0 million. These shares were all repurchased prior to March 4, 2020. We retired all repurchased shares

- 12-




on their respective settlement dates. We have suspended share repurchases and anticipate the suspension will remain in effect for the remainder of 2020.

Preferred Shares

We are authorized to issue up to 10 million shares of preferred stock, $0.01 par value per share. Our board of directors is required to set for each class or series of preferred stock the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption. As of March 31, 2020 and December 31, 2019, there were no shares of preferred stock outstanding.

Operating Partnership Units

In connection with our acquisition of Cavallo Point in December 2018, we issued 796,684 common OP units to third parties, otherwise unaffiliated with the Company, at $11.76 per unit. Each common OP unit is redeemable at the option of the holder. Holders of common OP units have certain redemption rights, which enable them to cause our operating partnership to redeem their units in exchange for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option, for shares of our common stock on a one-for-one basis, subject to adjustment upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions. As of March 31, 2020, there were 773,736 common OP units held by unaffiliated third parties.

Long-Term Incentive Partnership units (“LTIP units”), which are also referred to as profits interest units, may be issued to eligible participants under the 2016 Plan (as defined in Note 6 below) for the performance of services to or for the benefit of our operating partnership. LTIP units are a class of partnership unit in our operating partnership and will receive, whether vested or not, the same per-unit distributions as the outstanding common OP units, which equal per-share dividends on shares of our common stock. Initially, LTIP units have a capital account balance of zero, do not receive an allocation of operating income (loss), and do not have full parity with common OP units with respect to liquidating distributions. If such parity is reached, vested LTIP units may be converted, at any time, into an equal number of common OP units, and thereafter will possess all of the rights and interests of common OP units, including the right to exchange the common OP units for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option, for shares of our common stock on a one-for-one basis, subject to adjustment upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions. See Note 6 for additional disclosures related to LTIP units.

Dividends and Distributions

We have paid the following dividends to holders of our common stock and distributions to holders of common OP units and LTIP units during 2020:
Payment Date
 
Record Date
 
Dividend
per Share
January 13, 2020
 
January 2, 2020
 
$
0.125



Our board of directors suspended the quarterly dividend commencing with the first quarter dividend that would have been paid in April 2020. We expect to pay a dividend in January 2021 sufficient to cover 100% of our taxable income, if any, for the year ending December 31, 2020.

6. Stock Incentive Plans

We are authorized to issue up to 6,082,664 shares of our common stock under our 2016 Equity Incentive Plan (the “2016 Plan”), of which we have issued or committed to issue 2,883,223 shares as of March 31, 2020.

Restricted Stock Awards

Restricted stock awards issued to our officers and employees generally vest over a three-year period from the date of the grant based on continued employment. We measure compensation expense for the restricted stock awards based upon the fair market value of our common stock at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period and is included in corporate expenses in the accompanying consolidated statements of operations. A summary of our restricted stock awards from January 1, 2020 to March 31, 2020 is as follows:

- 13-




 
Number of
Shares
 
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2020
472,999

 
$
10.40

Granted
331,942

 
9.58

Vested
(229,664
)
 
10.55

Forfeited
(11,983
)
 
10.01

Unvested balance at March 31, 2020
563,294

 
$
9.87



The remaining share awards are expected to vest as follows: 8,202 shares during 2020, 243,872 shares during 2021, 138,689 during 2022 and 172,531 during 2023. As of March 31, 2020, the unrecognized compensation cost related to restricted stock awards was $5.2 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 29 months. We recorded $0.7 million of compensation expense related to restricted stock awards for the three months ended March 31, 2020 and 2019.

Performance Stock Units

Performance stock units (“PSUs”) are restricted stock units that vest three years from the date of grant. Each executive officer is granted a target number of PSUs (the “PSU Target Award”). The actual number of shares of common stock issued to each executive officer is based on the Company's achievement of certain performance targets. Under this framework, 50% of the PSUs are based on relative total stockholder return and 50% on hotel market share improvement. The achievement of certain levels of total stockholder return relative to the total stockholder return of a peer group of publicly-traded lodging REITs is measured over a three-year performance period. There is no payout of shares of our common stock if our total stockholder return falls below the 30th percentile of the total stockholder returns of the peer group. The maximum number of shares of common stock issued to an executive officer is equal to 150% of the PSU Target Award and is earned if our total stockholder return is equal to or greater than the 75th percentile of the total stockholder returns of the peer group. The number of PSUs earned is limited to 100% of the PSU Target Award if the Company's total stockholder return is negative for the three-year performance period. The improvement in market share for each of our hotels is measured over a three-year performance period based on a report prepared for each hotel by STR Global, a well-recognized and universally accepted benchmarking service for the hospitality industry.

We measure compensation expense for the PSUs based upon the fair market value of the award at the grant date. Compensation expense is recognized on a straight-line basis over the three-year performance period and is included in corporate expenses in the accompanying consolidated statements of operations. The grant date fair value of the portion of the PSUs based on our relative total stockholder return is determined using a Monte Carlo simulation performed by a third-party valuation firm. The grant date fair value of the portion of the PSUs based on hotel market share improvement is the closing price of our common stock on the grant date.

On February 25, 2020, our board of directors granted 352,035 PSUs to our executive officers. The grant date fair value of the portion of the PSUs based on our relative total stockholder return was $8.52 using the assumptions of volatility of 21.4% and a risk-free rate of 1.16%. The grant date fair value of the portion of the PSUs based on hotel market share was $9.58, which was the closing stock price of our common stock on such date.

A summary of our PSUs from January 1, 2020 to March 31, 2020 is as follows:
 
Number of
Target Units
 
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2020
796,532

 
$
11.16

Granted
352,035

 
9.02

Additional units from dividends
9,556

 
10.42

Vested (1)
(245,937
)
 
11.00

Unvested balance at March 31, 2020
912,186

 
$
9.63


______________________
(1)
The number of shares of common stock earned for the PSUs vested in 2020 was equal to 123.07% of the PSU Target Award.


- 14-




The remaining unvested PSUs are expected to vest as follows: 290,927 units during 2021, 269,224 units during 2022 and 352,035 during 2023. The number of shares earned upon vesting is subject to the attainment of the performance goals described above. As of March 31, 2020, the unrecognized compensation cost related to the PSUs was $5.5 million and is expected to be recognized on a straight-line basis over a weighted average period of 28 months. We recorded $0.7 million and $0.6 million of compensation expense related to the PSUs for the three months ended March 31, 2020 and 2019, respectively.

LTIP Units

In 2019, instead of granting restricted stock for the time-based portion of the annual long-term incentive award, we granted LTIP units to our executive officers. In 2020, executive officers could elect to be granted restricted stock or LTIP units for the time-based portion of the annual long-term incentive award. LTIP units are designed to offer executives a long-term incentive comparable to restricted stock, while allowing them to enjoy a more favorable income tax treatment. Each LTIP unit awarded is deemed equivalent to an award of one share of common stock reserved under the 2016 Plan. At the time of award, LTIP units do not have full economic parity with common OP units, but can achieve such parity over time upon the occurrence of specified events in accordance with partnership tax rules.
On February 25, 2020, our board of directors granted 80,898 LTIP units to certain of our executive officers. Other executive officers of the Company elected to receive restricted stock in lieu of LTIP units. The grant date fair value of the LTIP unit was the closing price of our common stock on the grant date.

A summary of our LTIP units from January 1, 2020 to March 31, 2020 is as follows:

 
Number of Units
 
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2020
244,366

 
$
10.65

Granted
80,898

 
9.58

Vested (1)
(81,455
)
 
10.65

Unvested balance at March 31, 2020
243,809

 
$
10.29

______________________
(1)
As of March 31, 2020, none of the vested LTIP units have been converted to common OP units.

The remaining unvested LTIP units are expected to vest as follows: 108,421 units during 2021, 108,422 units during 2022 and 26,966 units during 2023. As of March 31, 2020, of the 325,264 LTIP units outstanding, 81,455 LTIP units have vested.

As of March 31, 2020, the unrecognized compensation cost related to LTIP unit awards was $2.4 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 27 months. We recorded $0.2 million and $0.1 million of compensation expense related to LTIP unit awards for the three months ended March 31, 2020 and 2019, respectively.

7. Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders that has been adjusted for dilutive securities, by the weighted-average number of common shares outstanding including dilutive securities.

Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested share-based compensation (participating securities) have been excluded, as applicable, from net income or loss available to common stockholders used in the basic and diluted earnings per share calculations.

The following is a reconciliation of the calculation of basic and diluted earnings (loss) per share (in thousands, except share and per share data):

- 15-




 
Three Months Ended March 31,
 
2020
 
2019
Numerator:
 
 
 
Net (loss) income attributable to common stockholders
$
(34,559
)
 
$
8,945

Dividends declared on unvested share-based compensation

 
(35
)
Net (loss) income available to common stockholders
$
(34,559
)
 
$
8,910

Denominator:
 
 
 
Weighted-average number of common shares outstanding—basic
201,207,835

 
202,817,124

Effect of dilutive securities:
 
 
 
Unvested restricted common stock

 
49,761

Shares related to unvested PSUs

 
670,944

Weighted-average number of common shares outstanding—diluted
201,207,835

 
203,537,829

Earnings (loss) per share:


 
 
Net (loss) income per share available to common stockholders—basic
$
(0.17
)
 
$
0.04

Net (loss) income per share available to common stockholders—diluted
$
(0.17
)
 
$
0.04



For the three months ended March 31, 2020, 168,270 of unvested restricted common shares and 375,602 of unvested PSUs were excluded from diluted weighted-average common shares outstanding, as their effect would be anti-dilutive.

The common OP units held by the noncontrolling interest holders have been excluded from the denominator of the diluted earnings (loss) per share calculation as there would be no effect on the amounts since the common OP units' share of income or loss would also be added or subtracted to derive net income (loss) available to common stockholders.

8. Debt

The following table sets forth information regarding the Company’s debt as of March 31, 2020 and December 31, 2019 (dollars in thousands):

- 16-




 
 
 
 
 
 
Principal Balance as of
Loan
 
Interest Rate as of March 31, 2020
 
Maturity Date
 
March 31, 2020
 
December 31, 2019
Salt Lake City Marriott Downtown mortgage loan
 
4.25%
 
November 2020 (1)
 
$
52,968

 
$
53,273

Westin Washington D.C. City Center mortgage loan
 
3.99%
 
January 2023
 
59,988

 
60,550

The Lodge at Sonoma, a Renaissance Resort & Spa mortgage loan
 
3.96%
 
April 2023
 
26,846

 
26,963

Westin San Diego mortgage loan
 
3.94%
 
April 2023
 
61,456

 
61,851

Courtyard Manhattan / Midtown East mortgage loan
 
4.40%
 
August 2024
 
80,716

 
81,107

Renaissance Worthington mortgage loan
 
3.66%
 
May 2025
 
80,483

 
80,904

JW Marriott Denver at Cherry Creek mortgage loan
 
4.33%
 
July 2025
 
60,954

 
61,253

Boston Westin mortgage loan
 
4.36%
 
November 2025
 
189,759

 
190,725

New Market Tax Credit loan (2)
 
5.17%
 
December 2020
 
2,943

 
2,943

Unamortized debt issuance costs
 
 
 
 
 
(3,046
)
 
(3,240
)
Total mortgage and other debt, net of unamortized debt issuance costs
 
 
 
 
 
613,067

 
616,329

 
 
 
 
 
 
 
 
 
Unsecured term loan
 
LIBOR + 1.35% (3)
 
October 2023
 
50,000

 
50,000

Unsecured term loan
 
LIBOR + 1.35% (4)
 
July 2024
 
350,000

 
350,000

Unamortized debt issuance costs
 
 
 
 
 
(1,159
)
 
(1,230
)
Unsecured term loans, net of unamortized debt issuance costs
 
 
 
 
 
398,841

 
398,770

 
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
LIBOR + 1.40%
 
July 2023 (5)
 
400,000

 
75,000

 
 
 
 
 
 
 
 
 
Total debt, net of unamortized debt issuance costs
 
 
 
 
 
$
1,411,908

 
$
1,090,099

Weighted-Average Interest Rate
 
3.24%
 
 
 
 
 
 

_______________________

(1)
We have agreed to a term sheet to extend the maturity of the mortgage loan secured by the Salt Lake City Marriott Downtown to January 2022, subject to due diligence and other customary conditions.
(2)
Assumed in connection with the acquisition of the Hotel Palomar Phoenix on March 1, 2018.
(3)
We entered into an interest rate swap agreement on January 7, 2019 to fix LIBOR at 2.41% through October 2023.
(4)
We entered into an interest rate swap agreement on July 25, 2019 to fix LIBOR at 1.70% through July 2024 for $175 million of the loan.
(4)
The credit facility may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions.

Mortgage and Other Debt

We have incurred limited recourse, property specific mortgage debt secured by certain of our hotels. In the event of default, the lender may only foreclose on the secured assets; however, in the event of fraud, misapplication of funds or other customary recourse provisions, the lender may seek payment from us. As of March 31, 2020, eight of our 31 hotels were secured by mortgage debt.

Our mortgage debt contains certain property specific covenants and restrictions, including minimum debt service coverage ratios or debt yields that trigger “cash trap” provisions, as well as restrictions on incurring additional debt without lender consent. Such cash trap provisions are triggered when the hotel’s operating results fall below a certain debt service coverage ratio or debt yield. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio or debt yield is reached and

- 17-




maintained for a certain period of time. Such provisions do not provide the lender the right to accelerate repayment of the underlying debt. As of March 31, 2020, the debt service coverage ratio for the Courtyard Manhattan Midtown East and the debt yield for the JW Marriott Denver at Cherry Creek were below the minimum thresholds such that the cash trap provision on each of the loans were triggered. We expect that the cash trap provisions on the remaining loans will be triggered during 2020 as a result of the continuing negative impact of the COVID-19 pandemic on our hotel operations. There are no cash balances held in cash trap reserves as of March 31, 2020.

Senior Unsecured Credit Facility and Unsecured Term Loans

We are party to a $400 million senior unsecured credit facility (the “Revolving Credit Facility”), which matures in July 2023. The maturity date may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions. The interest rate on the Revolving Credit Facility is based upon LIBOR, plus an applicable margin based upon the Company’s leverage ratio, as follows:

Leverage Ratio
 
Applicable Margin
Less than 30%
 
1.40
%
Greater than or equal to 30% but less than 35%
 
1.45
%
Greater than or equal to 35% but less than 40%
 
1.50
%
Greater than or equal to 40% but less than 45%
 
1.55
%
Greater than or equal to 45% but less than 50%
 
1.70
%
Greater than or equal to 50% but less than 55%
 
1.90
%
Greater than or equal to 55%
 
2.05
%

In addition to the interest payable on amounts outstanding under the Revolving Credit Facility, we are required to pay an amount equal to 0.20% of the unused portion of the Revolving Credit Facility if the average usage is greater than 50% or 0.30% of the unused portion of the Revolving Credit Facility if the average usage is less than or equal to 50%. As of March 31, 2020, we had $400 million in borrowings outstanding under the Revolving Credit Facility and the Company's leverage ratio was 34.5%. Accordingly, interest on our borrowings under the Revolving Credit Facility will be based on LIBOR plus 145 basis points for the following quarter. We incurred interest and unused fees on the applicable facility of $0.7 million for each of the three months ended March 31, 2020 and 2019.

We are party to two five-year unsecured term loans totaling $400 million. The interest rate on each of the unsecured term loans is based on LIBOR plus an applicable margin based upon the Company’s leverage ratio, as follows:
Leverage Ratio
 
Applicable Margin
Less than 30%
 
1.35
%
Greater than or equal to 30% but less than 35%
 
1.40
%
Greater than or equal to 35% but less than 40%
 
1.45
%
Greater than or equal to 40% but less than 45%
 
1.50
%
Greater than or equal to 45% but less than 50%
 
1.65
%
Greater than or equal to 50% but less than 55%
 
1.85
%
Greater than or equal to 55%
 
2.00
%


As of March 31, 2020, the Company's leverage ratio was 34.5%. Accordingly, interest on our borrowings under the unsecured term loans will be based on LIBOR plus 140 basis points for the following quarter. We incurred interest on the unsecured term loans of $3.2 million and $3.4 million for the three months ended March 31, 2020 and 2019, respectively.

The Revolving Credit Facility and unsecured term loan agreements contain various corporate financial covenants. A summary of the most restrictive covenants is as follows:

- 18-




 
 
 
Actual at
 
Covenant
 
March 31, 2020
Maximum leverage ratio (1)
60%
 
34.5%
Minimum fixed charge coverage ratio (2)
1.50x
 
2.92x
Secured recourse indebtedness
Less than 45% of Total Asset Value
 
20.9%
Unencumbered leverage ratio
60.0%
 
50.3%
Unencumbered implied debt service coverage ratio
1.2x
 
1.49x
_____________________________
(1)
Leverage ratio is net indebtedness, as defined in the Credit Agreement, divided by total asset value, defined in the credit agreement as the value of our owned hotels based on hotel net operating income divided by a defined capitalization rate.
(2)
Fixed charge coverage ratio is Adjusted EBITDA, generally defined in the Credit Agreement as EBITDA less FF&E reserves, for the most recently ending 12 months, to fixed charges, which is defined in the Credit Agreement as interest expense, all regularly scheduled principal payments and payments on capitalized lease obligations, for the same most recently ending 12-month period.

Although we were in compliance with the financial covenants of our Revolving Credit Facility and unsecured term loan agreements as of March 31, 2020, we have determined that it is probable the continuing effect of the COVID-19 pandemic on our hotel operating results will lead to our inability to satisfy certain financial covenants beginning with the quarter ending June 30, 2020. See Note 1 for a description of the Company's recent actions in seeking waivers prior to the violations of such covenants.

9. Fair Value Measurements and Interest Rate Swaps

The fair value of certain financial assets and liabilities and other financial instruments as of March 31, 2020 and December 31, 2019, in thousands, is as follows:
 
March 31, 2020
 
December 31, 2019
 
Carrying
Amount (1)
 
Fair Value
 
Carrying
Amount (1)
 
Fair Value
Debt
$
1,411,908

 
$
1,414,122

 
$
1,090,099

 
$
1,110,353

Interest rate swap liabilities
$
13,858

 
$
13,858

 
$
2,545

 
$
2,545


_______________
(1)
The carrying amount of debt is net of unamortized debt issuance costs.

The fair value of our debt is a Level 2 measurement under the fair value hierarchy (see Note 2). We estimate the fair value of our debt by discounting the future cash flows of each instrument at estimated market rates. The fair value of our interest rate swaps is a Level 2 measurement under the fair value hierarchy. We estimate the fair value of the interest rate swap based on the interest rate yield curve and implied market volatility as inputs and adjusted for the counterparty's credit risk. We concluded the inputs for the credit risk valuation adjustment are Level 3 inputs, however these inputs are not significant to the fair value measurement in its entirety. The carrying value of our other financial instruments approximate fair value due to the short-term nature of these financial instruments.

Interest Rate Swaps

The Company's interest rate derivatives, which are not designated or accounted for as cash flow hedges, consisted of the following as of March 31, 2020 and December 31, 2019, in thousands:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Assets (Liabilities)
Hedged Debt
 
Type
 
Rate Fixed
 
Index
 
Effective Date
 
Maturity Date
 
Notional Amount
 
March 31, 2020
 
December 31, 2019
$50 million term loan
 
Swap
 
2.41
%
 
1-Month LIBOR
 
January 7, 2019
 
October 18, 2023
 
$
50,000

 
$
(3,741
)
 
$
(1,597
)
$350 million term loan
 
Swap
 
1.70
%
 
1-Month LIBOR
 
July 25, 2019
 
July 25, 2024
 
$
175,000

 
(10,117
)
 
(948
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(13,858
)
 
$
(2,545
)


The fair values of the interest rate swap agreements are included in accounts payable and accrued expenses on the accompanying consolidated balance sheets as of March 31, 2020 and December 31, 2019.


- 19-




10. Commitments and Contingencies

Litigation

We are subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of our hotels and Company matters. While it is not possible to ascertain the ultimate outcome of such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on our financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings brought against the Company, however, is subject to significant uncertainties.



- 20-




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. These forward-looking statements are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risks discussed herein and the risk factors discussed from time to time in our periodic filings with the Securities and Exchange Commission, including in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 as updated by our Quarterly Reports on Form 10-Q. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect events, circumstances or changes in expectations after the date of this report.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

negative changes in the economy, including, but not limited to, a reversal of current job growth trends, an increase in unemployment or a decrease in corporate earnings and investment;
increased competition in the lodging industry and from alternative lodging channels or third party internet intermediaries in the markets in which we own properties;
failure to effectively execute our long-term business strategy and successfully identify and complete acquisitions;
risks and uncertainties affecting hotel renovations and management (including, without limitation, construction delays, increased construction costs, disruption in hotel operations and the risks associated with our franchise agreements);
risks associated with the availability and terms of financing and the use of debt to fund acquisitions and renovations or refinance existing indebtedness, including the impact of higher interest rates on the cost and/or availability of financing;
risks associated with our level of indebtedness and our ability to obtain covenant waivers on our credit agreements for our senior unsecured credit facility and unsecured term loans;
risks associated with the lodging industry overall, including, without limitation, an increase in alternative lodging channels, decreases in the frequency of business travel and increases in operating costs;
risks associated with natural disasters;
the adverse impact of the novel coronavirus (COVID-19) on the U.S., regional and global economies, travel, the hospitality industry, and the financial condition and results of operations of the Company and its hotels;
costs of compliance with government regulations, including, without limitation, the Americans with Disabilities Act;
potential liability for uninsured losses and environmental contamination;
risks associated with security breaches through cyber-attacks or otherwise, as well as other significant disruptions of our information technologies and systems, which support our operations and our hotel managers;
risks associated with our potential failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended;
possible adverse changes in tax and environmental laws; and
risks associated with our dependence on key personnel whose continued service is not guaranteed.

Overview

DiamondRock Hospitality Company is a lodging-focused Maryland corporation operating as a real estate investment trust (“REIT”). As of March 31, 2020, we owned a portfolio of 31 premium hotels and resorts that contain 10,102 guest rooms located in 21 different markets in North America and the U.S. Virgin Islands. Our hotel in the U.S. Virgin Islands, Frenchman's Reef & Morning Star Beach Resort (“Frenchman's Reef”), remains closed due to damage incurred from Hurricane Irma in September 2017.

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

Our strategy is to apply aggressive asset management, conservative leverage, and disciplined capital allocation to high quality lodging properties in North American urban and resort markets with superior growth prospects and high barriers-to-entry. Our goal is to deliver long-term stockholder returns that exceed those generated by our peers through a combination of dividends and enduring capital appreciation.


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Our primary business is to acquire, own, asset manage and renovate premium hotel properties in the United States. Our portfolio is concentrated in key gateway cities and destination resort locations. Each of our hotels is managed by a third party— either an independent operator or a brand operator, such as Marriott International, Inc. (“Marriott”).

We critically evaluate each of our hotels to ensure that we own a portfolio of hotels that conforms to our vision, supports our mission and corresponds with our strategy. On a regular basis, we analyze our portfolio to identify opportunities to invest capital in certain projects or market non-core assets for sale in order to increase our portfolio quality. We are committed to a conservative capital structure with prudent leverage. We regularly assess the availability and affordability of capital in order to maximize stockholder value and minimize enterprise risk. In addition, we are committed to following sound corporate governance practices and to being open and transparent in our communications with our stockholders.

Key Indicators of Financial Condition and Operating Performance

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

Occupancy percentage;

Average Daily Rate (or ADR);

Revenue per Available Room (or RevPAR);

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

Funds From Operations (or FFO) and Adjusted FFO.

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 66% of our total revenues for the three months ended March 31, 2020 and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms.

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

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

COVID-19 Pandemic

In March 2020, the World Health Organization declared COVID-19 a global pandemic. The pandemic has reduced travel and adversely affected the hospitality industry in general. We have seen a significant reduction in or elimination of lodging demand generators, including city-wide conferences, sporting and entertainment events, corporate and leisure travel, and overall domestic airlift capacity. Consumer spending decreased in March 2020 and we expect further decreases into the second quarter of 2020.

In response to COVID-19, we have taken the following aggressive actions at the property and corporate levels:


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In coordination with our hotel operators, we suspended operations at 18 of our hotels in March and another two of our hotels in April. The operations of these hotels remain suspended as of May 11, 2020. We maintain a limited staffing presence at these hotels, such as security and engineering personnel.
We have developed and implemented action plans with our hotel operators to significantly reduce operating costs at each of our hotels.
We are cultivating alternative demand for our hotels, including by accommodating first responders and quarantined military personnel.
We have reduced corporate expenses through decreases in executive compensation, employee headcount and other expenses.
We have canceled or deferred over 70% of our capital expenditures planned for the remainder of 2020.
We have paused the rebuild of Frenchman's Reef, which we had expected to open as two separate hotels in late 2020.
We suspended our quarterly dividend commencing with the first quarter dividend that would have been paid in April 2020. We expect to pay a dividend in January 2021 sufficient to cover 100% of our taxable income, if any, for the year ending December 31, 2020.
We fully drew down our $400 million senior unsecured credit facility to enhance our liquidity. As of March 31, 2020, we had $387.8 million of unrestricted cash on hand.
We are working with our lenders to provide flexibility on certain financial covenants under our senior unsecured credit facility and unsecured term loans. Refer to Note 1 to the accompanying consolidated financial statements for more information.

The timing of re-opening our hotels will depend primarily on federal, state, and local government guidance, health official recommendations and market demand. We currently anticipate phased re-openings will start at our hotels this summer. We expect lodging demand will first return for the leisure segment, followed by business transient, and lastly by the group segment. As demand slowly returns, we will continue to aggressively asset manage our hotels. We expect to carefully assess staffing needs, cleanliness and safety protocols, business mix, and other initiatives. We expect that the COVID-19 pandemic will decrease the pipeline of supply of new hotel rooms within the markets we operate, which will further stabilize RevPAR and profitability.

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

Our Hotels

The following table sets forth certain operating information for the three months ended March 31, 2020 for each of our hotels. The table indicates the operating status of each hotel.

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Property (1)
 
Location
 
Status of Operation (2)
 
Number of
Rooms
 
Occupancy (%)
 
ADR ($)
 
RevPAR($)
 
% Change
from 2019 RevPAR
Chicago Marriott Downtown
 
Chicago, Illinois
 
Open (3)
 
1,200

 
43.0
%
 
$
164.30

 
$
70.59

 
(13.7
)%
Westin Boston Waterfront Hotel
 
Boston, Massachusetts
 
Closed 3/25
 
793

 
59.9
%
 
196.54

 
117.65

 
(11.1
)%
Lexington Hotel New York
 
New York, New York
 
Closed 3/29
 
725

 
61.5
%
 
183.27