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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 September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________

Commission File Number 001-32514
DIAMONDROCK HOSPITALITY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Maryland20-1180098
(State of Incorporation)(I.R.S. Employer Identification No.)
  
2 Bethesda Metro Center, Suite 1400, Bethesda,Maryland20814
(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 classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.01 par value per shareDRHNew York Stock Exchange
8.250% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per shareDRH Pr ANew 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 filerNon-accelerated filerSmaller reporting company
 Emerging growth company

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.



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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 199,518,880 shares of its $0.01 par value common stock outstanding as of November 6, 2020.



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INDEX
  
 Page No.
  
 
  
 
 
 
  
  
  
  
  
  
  
  
  
  
  
  



Table of Contents

PART I. FINANCIAL INFORMATION
Item I.Financial Statements

DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2020December 31, 2019
ASSETS(unaudited) 
Property and equipment, net$3,013,989 $3,026,769 
Right-of-use assets96,956 98,145 
Restricted cash31,478 57,268 
Due from hotel managers67,951 91,207 
Prepaid and other assets33,194 29,853 
Cash and cash equivalents110,555 122,524 
Total assets$3,354,123 $3,425,766 
LIABILITIES AND EQUITY  
Liabilities:  
Mortgage and other debt, net of unamortized debt issuance costs$601,715 $616,329 
Unsecured term loans, net of unamortized debt issuance costs398,443 398,770 
Senior unsecured credit facility99,985 75,000 
Total debt1,100,143 1,090,099 
Deferred income related to key money, net11,045 11,342 
Unfavorable contract liabilities, net64,564 67,422 
Deferred rent55,270 52,012 
Lease liabilities104,275 103,625 
Due to hotel managers94,473 72,445 
Distributions declared and unpaid138 25,815 
Accounts payable and accrued expenses82,026 81,944 
Total liabilities1,511,934 1,504,704 
Equity:  
Preferred stock, $0.01 par value; 10,000,000 shares authorized:
8.250% Series A Cumulative Redeemable Preferred Stock (liquidation preference $25.00 per share), 4,760,000 and no shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
48  
Common stock, $0.01 par value; 400,000,000 shares authorized; 199,518,880 and 200,207,795 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
1,995 2,002 
Additional paid-in capital2,198,376 2,089,349 
Accumulated deficit(366,635)(178,861)
Total stockholders’ equity1,833,784 1,912,490 
Noncontrolling interests8,405 8,572 
Total equity1,842,189 1,921,062 
Total liabilities and equity$3,354,123 $3,425,766 
The accompanying notes are an integral part of these consolidated financial statements.
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DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues:  
Rooms$33,166 $174,113 $158,066 $492,395 
Food and beverage9,586 50,624 56,529 161,803 
Other7,315 15,542 25,846 46,374 
Total revenues50,067 240,279 240,441 700,572 
Operating Expenses:  
Rooms11,792 42,840 54,588 124,581 
Food and beverage10,043 34,262 45,845 103,868 
Management fees(755)6,088 2,644 18,745 
Franchise fees1,813 6,894 8,402 19,961 
Other hotel expenses53,196 85,157 171,759 241,955 
Depreciation and amortization28,514 29,474 87,397 87,805 
Corporate expenses7,267 6,318 19,650 20,785 
Business interruption insurance income   (8,822)
Total operating expenses, net111,870 211,033 390,285 608,878 
Interest and other (income) expense, net(191)(102)58 (510)
Interest expense10,818 14,184 43,665 38,264 
Loss on early extinguishment of debt 2,373  2,373 
Total other expenses, net10,627 16,455 43,723 40,127 
(Loss) income before income taxes(72,430)12,791 (193,567)51,567 
Income tax (expense) benefit(7,205)(1,217)5,853 (1,939)
Net (loss) income(79,635)11,574 (187,714)49,628 
Less: Net loss (income) attributable to noncontrolling interests43 (45)781 (194)
Net (loss) income attributable to the Company(79,592)11,529 (186,933)49,434 
Distributions to preferred stockholders(845) (845) 
Net (loss) income attributable to common stockholders$(80,437)$11,529 $(187,778)$49,434 
(Loss) earnings per share: 
Net (loss) income per share available to common stockholders—basic$(0.40)$0.06 $(0.93)$0.24 
Net (loss) income per share available to common stockholders—diluted$(0.40)$0.06 $(0.93)$0.24 





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

CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
(unaudited)
Preferred StockCommon Stock
SharesPar ValueSharesPar ValueAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders' EquityNoncontrolling InterestsTotal 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 
Share-based compensation— — 137,616 2 2,054 4 2,060 281 2,341 
Sale of common stock in follow-on offerings, net of placement fees and expenses of $10
— — 135,481 1 1,013 — 1,014 — 1,014 
Net (loss)— — — — — (72,782)(72,782)(605)(73,387)
Balance at June 30, 2020 $ 199,516,435 $1,995 $2,082,601 $(286,198)$1,798,398 $8,167 $1,806,565 
Distributions on preferred stock— — — — — (845)(845)— (845)
Share-based compensation— — 2,445 — 1,352 — 1,352 281 1,633 
Sale of preferred stock, net of placement fees and expenses of $4,529
47,600 48 — — 114,423 — 114,471 — 114,471 
Net (loss) income— — — — — (79,592)(79,592)(43)(79,635)
Balance at September 30, 202047,600 $48 199,518,880 $1,995 $2,198,376 $(366,635)$1,833,784 $8,405 $1,842,189 












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



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Common Stock
SharesPar ValueAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders' EquityNoncontrolling InterestsTotal Equity
Balance at December 31, 2018204,536,485 $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 compensation55,916 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, 2019201,448,479 $2,015 $2,097,691 $(277,444)$1,822,262 $7,680 $1,829,942 
Distributions on common stock/units ($0.125 per share)
— — 120 (25,365)(25,245)(134)(25,379)
Share-based compensation33,396 1 1,955 — 1,956 249 2,205 
Common stock repurchased and retired(1,004,589)(11)(10,021)— (10,032)— (10,032)
Net income— — — 28,960 28,960 114 29,074 
Balance at June 30, 2019200,477,286 $2,005 $2,089,745 $(273,849)$1,817,901 $7,909 $1,825,810 
Distributions on common stock ($0.125 per share)
— — 122 (25,321)(25,199)(130)(25,329)
Share-based compensation— — 866 59 925 173 1,098 
Common stock repurchased and retired(280,436)(3)(2,796)— (2,799)— (2,799)
Net income— — — 11,529 11,529 45 11,574 
Balance at September 30, 2019200,196,850 $2,002 $2,087,937 $(287,582)$1,802,357 $7,997 $1,810,354 











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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:  
Net (loss) income$(187,714)$49,628 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization87,397 87,805 
Corporate asset depreciation as corporate expenses174 170 
Loss on early extinguishment of debt 2,373 
Non-cash lease expense and other amortization3,744 5,247 
Non-cash interest rate swap fair value adjustment11,329 4,790 
Amortization of debt issuance costs1,480 1,432 
Amortization of deferred income related to key money(297)(297)
Share-based compensation5,536 4,882 
Changes in assets and liabilities:
Prepaid expenses and other assets(13,927)(5,623)
Due to/from hotel managers45,084 (18,119)
Accounts payable and accrued expenses(7,509)3,420 
Net cash (used in) provided by operating activities(54,703)135,708 
Cash flows from investing activities:  
Capital expenditures for operating hotels(39,916)(75,595)
Capital expenditures for Frenchman's Reef(38,312)(65,208)
Acquisition of interest in the land underlying the Kimpton Shorebreak Resort(1,585) 
Proceeds from property insurance10,663  
Net cash used in investing activities(69,150)(140,803)
Cash flows from financing activities:  
Scheduled mortgage debt principal payments(10,594)(10,374)
Proceeds from sale of common stock, net1,015  
Proceeds from sale of preferred stock, net114,471  
Proceeds from mortgage debt48,000  
Repayments of mortgage debt(52,517) 
Proceeds from senior unsecured term loan 350,000 
Repayments of senior unsecured term loans (300,000)
Draws on senior unsecured credit facility400,000 125,000 
Repayments of senior unsecured credit facility(375,015)(50,000)
Payment of debt financing costs(1,410)(4,796)
Distributions on common stock and units(25,557)(76,751)
Distributions on preferred stock(845) 
Repurchase of common stock(10,000)(42,828)
Redemption of Operating Partnership units(201) 
Shares redeemed to satisfy tax withholdings on vested share-based compensation(1,253)(452)
Net cash provided by (used in) financing activities86,094 (10,201)
Net decrease in cash, cash equivalents, and restricted cash(37,759)(15,296)
Cash, cash equivalents, and restricted cash at beginning of period179,792 91,598 
Cash, cash equivalents, and restricted cash at end of period$142,033 $76,302 


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

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


Supplemental Disclosure of Cash Flow Information:
Nine Months Ended September 30,
20202019
Cash paid for interest$33,017 $32,604 
Cash paid for income taxes, net$32 $1,310 
Capitalized interest$2,136 $1,119 
Non-cash cumulative effect of ASC 842 accounting standard adoption$ $15,286 
Non-cash Investing and Financing Activities:
Unpaid dividends and distributions declared$138 $25,771 

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:
September 30, 2020December 31, 2019
Cash and cash equivalents$110,555 $122,524 
Restricted cash (1)31,478 57,268 
Total cash, cash equivalents and restricted cash$142,033 $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.
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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 September 30, 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 Marriott 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 and executive officers of the Company. 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 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. Throughout March and April 2020, we suspended operations at 20 of our 30 previously operating hotels. As of September 30, 2020, we had reopened 17 of those hotels, leaving three of our previously operating hotels unopened. The hotels that remained open and the hotels that have reopened are operating at historically low occupancy levels. As a result, the COVID-19 pandemic has had a material adverse impact on our operations and financial results for the three and nine months ended September 30, 2020. The severity and duration of the COVID-19 pandemic cannot be reasonably estimated at this time, but we expect it will continue to have a material adverse impact on our results of operations, financial position and cash flow into 2021.

We have taken aggressive steps in order to mitigate the ongoing operational and financial impacts on our business. We drew down funds on our $400 million senior unsecured credit facility, suspended our quarterly common dividend, 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. On June 9, 2020, we executed amendments to the credit agreements for our $400 million senior unsecured credit facility and $400 million of unsecured term loans. The amendments provide a waiver of the quarterly tested financial covenants beginning with the second quarter of 2020 through the first quarter of 2021 and certain other modifications to the covenants thereafter through the fourth quarter of 2021. See Note 8 for more information about these amendments. There can be no assurance that we will meet our financial covenants in the future or that we will be able to obtain additional waivers from our lenders, if needed. Further, during the third quarter of 2020, we issued 4,760,000 shares of 8.250% Series A Cumulative Redeemable Preferred Stock, for net proceeds of $114.5 million. See Note 5 for more information about the preferred stock issuance.

As of September 30, 2020, the Company had unrestricted cash of $110.6 million and $300.0 million of borrowing capacity on our senior unsecured credit facility.

2.Summary of Significant Accounting Policies

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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 September 30, 2020, the results of our operations for the three and nine months ended September 30, 2020 and 2019, the statements of equity for the three and nine months ended September 30, 2020 and 2019, and the cash flows for the nine months ended September 30, 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 length and severity of the ongoing 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, has impeded and will continue to impede national and international travel in general compared to pre-pandemic levels. 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 mitigate its impact, as well as the effect of any relaxation of current restrictions, 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 the Company.

Going Concern

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 making our evaluation, we considered our financial position and liquidity sources, including forecasted future cash flows and our ability to meet contractual obligations that are due or may become due over the next 12 months. As of November 6, 2020, we determined that there is not substantial doubt about our ability to continue as a going concern over the next 12 months.

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 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
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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 September 30, 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 in future periods of an impairment charge on one or more of our hotel properties, including Frenchman's Reef, which is not yet fully reconstructed.

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 ("EPS") is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants. 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
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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. Due to the negative financial impact of the COVID-19 pandemic, we reassessed the realizability of deferred tax assets in each quarter of 2020. As a result of our analysis in the third quarter of 2020, we recorded a valuation allowance of $12.4 million in the three months ended September 30, 2020 on our deferred tax assets given our financial results and uncertainty about our ability to utilize our net operating loss carryforwards in future years.

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 September 30, 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

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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

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 Revolving Credit Facility (defined in Note 8) 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 Revolving 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.

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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 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 nine months ended September 30, 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 nine months ended September 30, 2020, we did not recognize any business interruption insurance income.

3.Property and Equipment

Property and equipment as of September 30, 2020 and December 31, 2019 consists of the following (in thousands):
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September 30, 2020December 31, 2019
Land$618,210 $617,695 
Land improvements7,994 7,994 
Buildings and site improvements2,778,571 2,751,590 
Furniture, fixtures and equipment541,810 534,802 
Construction in progress166,751 126,464 
 4,113,336 4,038,545 
Less: accumulated depreciation(1,099,347)(1,011,776)
 $3,013,989 $3,026,769 

On March 2, 2020, we acquired the remaining 4.5% interest in the land underlying the Kimpton Shorebreak Resort 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 September 30, 2020 and December 31, 2019, we had accrued capital expenditures of $8.9 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 September 30, 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 September 30, 2020, our operating leases have a weighted-average remaining lease term of 66 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 September 30,Nine Months Ended September 30,
 2020201920202019
Operating lease cost$2,760 $2,834 $8,331 $8,417 
Variable lease payments$17 $311 $256 $1,137 
Cash paid for amounts included in the measurement of operating lease liabilities$802 $835 $2,412 $2,421 

Maturities of lease liabilities are as follows (in thousands):
Year Ending December 31,As of September 30, 2020
2020 (excluding the nine months ended September 30, 2020)$802 
20213,496 
20223,940 
20233,997 
20243,976 
Thereafter759,124 
Total lease payments775,335 
Less imputed interest(671,060)
Total lease liabilities$104,275 

5. Equity

Common Shares

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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. In June 2020, we sold 135,481 shares of common stock at an average price of $7.56 per share for proceeds of $1.0 million, net of approximately $10 thousand in fees paid to the applicable sales agent. We did not sell any shares during the three months ended September 30, 2020. As of November 6, 2020, shares of common stock having an aggregate offering price of up to $199.0 million remained available for sale 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 first quarter of 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 on their respective settlement dates. We have suspended share repurchases and, pursuant to our Amended Credit Agreements (as defined in Note 8), may not repurchase shares while our financial covenant requirements are waived on our senior unsecured credit facility and unsecured term loans. The Share Repurchase Program expired on November 5, 2020. At the time of expiration, we had $165.2 million of unused repurchase capacity under the Share Repurchase Program.

Preferred Shares

We are authorized to issue up to 10,000,000 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.

In August and September 2020, we issued a total of 4,760,000 shares of 8.250% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") with a liquidation preference of $25.00 per share, for gross proceeds of $119.0 million. In connection with the offering, we incurred $4.5 million of offering costs. On or after August 31, 2025, the Series A Preferred Stock will be redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.

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.

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 are converted 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.

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There were 855,191 and 792,131 common OP units held by unaffiliated third parties and executive officers of the Company as of September 30, 2020 and December 31, 2019, respectively. There were 243,809 and 244,366 LTIP units outstanding as of September 30, 2020 and December 31, 2019, respectively. All vested LTIP units have reached economic parity with common OP units and have been converted into common OP 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 DateRecord DateDividend
per Share
January 13, 2020January 2, 2020$0.125 

Our board of directors has suspended the quarterly common dividend commencing with the first quarter dividend that would have been paid in April 2020. The resumption in quarterly common dividends will be determined by our board of directors after considering our projected taxable income, obligations under our financing agreements, expected capital requirements, and risks affecting our business.

We have paid the following dividends to holders of our Series A Preferred Stock during 2020:
Payment DateRecord DateDividend
per Share
September 30, 2020September 20, 2020$0.178 

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 3,053,153 shares as of September 30, 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 September 30, 2020 is as follows:
Number of
Shares
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2020472,999 $10.40 
Granted343,410 9.41 
Vested(229,664)10.55 
Forfeited(13,683)9.99 
Unvested balance at September 30, 2020573,062 $9.76 

The remaining share awards are expected to vest as follows: 8,202 shares during 2020, 247,019 shares during 2021, 141,836 during 2022 and 176,005 during 2023. As of September 30, 2020, the unrecognized compensation cost related to restricted stock awards was $4.0 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 25 months. We recorded $0.7 million and $0.6 million of compensation expense related to restricted stock awards for the three months ended September 30, 2020 and 2019, respectively. We recorded $2.0 million and $1.9 million of compensation expense related to restricted stock awards for the nine months ended September 30, 2020 and 2019, respectively.
Performance Stock Units

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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. Fifty percent 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 September 30, 2020 is as follows:
Number of
Target Units
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2020796,532 $11.16 
Granted352,035 9.02 
Additional units from dividends9,556 10.42 
Vested (1)(245,937)11.00 
Unvested balance at September 30, 2020912,186 $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.

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 September 30, 2020, the unrecognized compensation cost related to the PSUs was $4.1 million and is expected to be recognized on a straight-line basis over a weighted average period of 23 months. We recorded $