UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2022
OR
For the transition period from _________ to _________
Commission File Number: 001-32514
(Exact Name of Registrant as Specified in Its Charter)
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||||||||
| | ||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
(240 ) 744-1150
(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 | ||||||
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.
☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller 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. ☐
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 210,923,015 shares of its $0.01 par value common stock outstanding as of August 4, 2022.
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)
| June 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Property and equipment, net | $ | $ | |||||||||
| Right-of-use assets | |||||||||||
| Restricted cash | |||||||||||
| Due from hotel managers | |||||||||||
| Prepaid and other assets | |||||||||||
| Cash and cash equivalents | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Mortgage and other debt, net of unamortized debt issuance costs | $ | $ | |||||||||
| Unsecured term loans, net of unamortized debt issuance costs | |||||||||||
| Senior unsecured credit facility | |||||||||||
| Total debt | |||||||||||
| Lease liabilities | |||||||||||
| Deferred rent | |||||||||||
| Due to hotel managers | |||||||||||
| Unfavorable contract liabilities, net | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Deferred income related to key money, net | |||||||||||
| Total liabilities | |||||||||||
| Equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Distributions in excess of earnings | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rooms | $ | $ | $ | $ | |||||||||||||||||||
| Food and beverage | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Operating Expenses: | |||||||||||||||||||||||
| Rooms | |||||||||||||||||||||||
| Food and beverage | |||||||||||||||||||||||
| Management fees | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Other hotel expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Impairment losses | |||||||||||||||||||||||
| Corporate expenses | |||||||||||||||||||||||
| Business interruption insurance income | ( | ||||||||||||||||||||||
| Total operating expenses, net | |||||||||||||||||||||||
| Interest and other expense (income), net | ( | ( | |||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Total other expenses, net | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax (expense) benefit | ( | ( | |||||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||
| Less: Net (income) loss attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income (loss) attributable to the Company | ( | ( | |||||||||||||||||||||
| Distributions to preferred stockholders | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Earnings (loss) per share available to common stockholders—basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings (loss) per share available to common stockholders—diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
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 Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership Units | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
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)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Corporate asset depreciation as corporate expenses | |||||||||||
| Non-cash lease expense and other amortization | |||||||||||
| Non-cash interest rate swap fair value adjustment | ( | ||||||||||
| Amortization of debt issuance costs | |||||||||||
| Impairment losses | |||||||||||
| Amortization of deferred income related to key money | ( | ( | |||||||||
| Share-based compensation | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Due to/from hotel managers | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Extension of the Salt Lake City Marriott Downtown ground lease | ( | ||||||||||
| Property acquisitions | ( | ||||||||||
| Net proceeds from sale of hotel properties | |||||||||||
| Receipt of deferred key money | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Scheduled mortgage debt principal payments | ( | ( | |||||||||
| Draws on senior unsecured credit facility | |||||||||||
| Repayments of senior unsecured credit facility | ( | ||||||||||
| Payment of debt financing costs | ( | ( | |||||||||
| Distributions on common stock and units | ( | ( | |||||||||
| Distributions on preferred stock | ( | ( | |||||||||
| Shares redeemed to satisfy tax withholdings on vested share-based compensation | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Net increase in cash, cash equivalents, and restricted cash | |||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||||||
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:
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes, net | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Unpaid dividends and distributions declared | $ | $ | |||||||||
| Accrued capital expenditures | $ | $ | |||||||||
| Transfer of land interest in consideration for extension of ground lease (see Note 4) | $ | $ | |||||||||
| Redemption of Operating Partnership units for common stock | $ | $ | |||||||||
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:
| June 30, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
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 major urban markets 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. or Hilton Worldwide). 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 and hotel brands, which are based on the revenues and profitability of the hotels.
As of June 30, 2022, we owned 34 hotels with 9,567 guest rooms, located in the following markets: Atlanta, Georgia; Boston, Massachusetts (2 ); Burlington, Vermont; Charleston, South Carolina; Chicago, Illinois (2 ); Denver, Colorado (2 ); Destin, Florida (2 ); Fort Lauderdale, Florida (2 ); Fort Worth, Texas; Huntington Beach, California; Key West, Florida (2 ); Marathon, Florida; New Orleans, Louisiana; New York, New York (3 ); 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 ); and Vail, Colorado.
During the six months ended June 30, 2022, we acquired the Tranquility Bay Beachfront Resort located in Marathon, Florida and Kimpton Fort Lauderdale Beach Resort located in Fort Lauderdale, Florida. See Note 9 for further discussion of these acquisitions.
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 99.7 % of the limited partnership units (“common OP units”) of our operating partnership as of June 30, 2022. The remaining 0.3 % 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.
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, the results of our operations, the statements of equity, and cash flows. 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, 2021, included in our Annual Report on Form 10-K filed on February 22, 2022.
Change in Presentation
We have made certain financial statement line item reclassifications from prior year in order to conform to current year presentation. The changes in presentation are not material to the financial statements.
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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.
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
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 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 amount 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. If present, 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 amount. 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.
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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 hotel operations 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 agent, revenue is recognized based upon the commission earned from the third party. 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.
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. As of June 30, 2022 and December 31, 2021, we had a valuation allowance of $13.7 million and $14.9 million, respectively, on our deferred tax assets.
We have elected to be treated as a real estate investment trust, or 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 wholly owned taxable REIT subsidiaries.
We may recognize a tax benefit from an uncertain tax position when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite our belief that our filing position is supportable, the benefit of that tax position is not recognized in the consolidated statements of operations. We recognize interest and penalties, as applicable, related to unrecognized tax benefits as a component of income tax expense. We recognize unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the applicable taxing authority, or by expiration of the applicable statute of limitation.
We had no
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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 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.
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
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. The noncontrolling interests are classified as permanent equity as we have the right to choose to settle each holder's redemption of the interest in either cash or delivery of shares of our common stock. See Note 5 for additional details. 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 cash held in reserve for replacement of furniture and fixtures generally held by our hotel managers and cash held in escrow pursuant to lender requirements.
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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. 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.
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
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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.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued Accounting Standard Update 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions to the guidance in U.S. GAAP on contract modifications to ease reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. ASU 2020-04 permits a contract with a modified reference rate to be accounted for as a continuation of the existing contract. We have not entered into any contract modifications yet as it directly relates to reference rate reform, but we anticipate undertaking such modifications in the future related to our variable rate debt and interest rate swaps indexed to LIBOR. The adoption of ASU 2020-04 is not expected to have a material impact on our consolidated financial statements.
3.Property and Equipment
Property and equipment as of June 30, 2022 and December 31, 2021 consists of the following (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Land improvements | |||||||||||
| Buildings and site improvements | |||||||||||
| Furniture, fixtures and equipment | |||||||||||
| Construction in progress | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| $ | $ | ||||||||||
As of June 30, 2022 and December 31, 2021, we had accrued capital expenditures of $8.7 million and $7.3 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 two parking garages as of June 30, 2022. 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 June 30, 2022, our operating leases have a weighted-average remaining lease term of 65 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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Variable lease payments | $ | $ | $ | $ | ||||||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
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| Year Ending December 31, | ||||||||
| 2022 (excluding the six months ended June 30, 2022) | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest | ( | |||||||
| Total lease liabilities | $ | |||||||
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.
In August 2021, we implemented an “at-the-market” equity offering program (the “ATM Program”), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200.0 million. We have not sold any shares under the ATM Program.
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 June 30, 2022 and December 31, 2021, there were 4,760,000 25.00 per share. 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 741,044 and 639,622 common OP units held by unaffiliated third parties and executive officers of the Company as of June 30, 2022 and December 31, 2021, respectively. There were 26,966 and 135,388 LTIP units outstanding as of June 30, 2022 and December 31, 2021, respectively. All vested LTIP units have reached economic parity with common OP units and have been converted into common OP units.
Dividends and Distributions
Our board of directors suspended our quarterly common dividend commencing with the first quarter dividend that would have been paid in April 2020 and did not resume quarterly common dividends through the quarter ended June 30, 2022. On August 2, 2022, our board of directors declared a quarterly common dividend of $0.03 per share to shareholders of record on September 30, 2022.
We have paid the following dividends to holders of our Series A Preferred Stock during 2022:
| Payment Date | Record Date | Dividend per Share | ||||||||||||
| March 31, 2022 | March 18, 2022 | $ | ||||||||||||
| June 30, 2022 | June 17, 2022 | $ | ||||||||||||
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 4,959,309 shares as of June 30, 2022. In addition to these shares, additional shares of common stock may be issued from time to time in connection with the performance stock unit awards as further described below.
Restricted Stock Awards
Restricted stock awards issued to our officers and employees generally vest over a to five year period from the date of 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, 2022 to June 30, 2022 is as follows:
| Number of Shares | Weighted- Average Grant Date Fair Value | ||||||||||
| Unvested balance at January 1, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Unvested balance at June 30, 2022 | $ | ||||||||||
The total unvested share awards as of June 30, 2022 are expected to vest as follows: 8,202 shares during 2022, 378,709 shares during 2023, 439,379 shares during 2024, 255,232 shares during 2025, and 271,278 shares during 2026. As of June 30, 2022, the unrecognized compensation cost related to restricted stock awards was $9.6 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 32 months. We recorded $1.2 million and $1.0 million of compensation expense related to restricted stock awards for each of the three months ended June 30, 2022 and 2021, respectively. We recorded $2.0 million and $1.8 million of compensation expense related to restricted stock awards for each of the six months ended June 30, 2022 and 2021, respectively. The compensation expense recorded for the six months ended June 30, 2022 includes the reversal of $0.2 million of previously recognized compensation expense in connection with the resignation of our former Executive Vice President, Asset Manager and Chief Operating Officer, as well as other employees.
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. 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 30 th 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 75 th 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 benchmarking service for the hospitality industry. There is no payout of shares of our common stock if the percentage of our hotels with market share improvements is less than 30 %. 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 the percentage of our hotels with market share improvements is greater than or equal to 75 %.
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 22, 2022, our board of directors granted 337,702 PSUs to our executive officers. The grant date fair value of the portion of the PSUs based on our relative total stockholder return was $9.84 using the assumptions of volatility of 71.4 % and a risk-free rate of 1.74 %. The grant date fair value of the portion of the PSUs based on hotel market share was $9.56 , which was the closing stock price of our common stock on such date.
A summary of our PSUs from January 1, 2022 to June 30, 2022 is as follows:
| Number of Target Units | Weighted- Average Grant Date Fair Value | ||||||||||
| Unvested balance at January 1, 2022 | $ | ||||||||||
| Granted | |||||||||||
Vested (1) | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Unvested balance at June 30, 2022 | $ | ||||||||||
______________________
(1)The number of shares of common stock earned for the PSUs vested in 2022 was equal to 100.0 % of the PSU Target Award.
The total unvested PSUs as of June 30, 2022 are expected to vest as follows: 296,596 units during 2023, 294,445 units during 2024 and 286,144 units during 2025. The number of shares earned upon vesting is subject to the attainment of the performance goals described above. As of June 30, 2022, the unrecognized compensation cost related to the PSUs was $4.6 million and is expected to be recognized on a straight-line basis over a weighted average period of 25 months. We recorded $0.7 million and $0.8 million of compensation expense related to the PSUs for the three months ended June 30, 2022 and 2021, respectively. We recorded $0.9 million and $1.5 million of compensation expense related to the PSUs for the six months ended June 30, 2022 and 2021, respectively. The compensation expense recorded for the six months ended June 30, 2022 includes the reversal of $0.5 million of previously recognized compensation expense in connection with the resignation of our former Executive Vice President, Asset Management and Chief Operating Officer.
LTIP Units
LTIP units are designed to offer executives a long-term incentive comparable to restricted stock, while potentially 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
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with common OP units, but can achieve such parity over time upon the occurrence of specified events in accordance with partnership tax rules.
A summary of our LTIP units from January 1, 2022 to June 30, 2022 is as follows:
| Number of Units | Weighted- Average Grant Date Fair Value | ||||||||||
| Unvested balance at January 1, 2022 | $ | ||||||||||
Vested (1) | ( | ||||||||||
| Unvested balance at June 30, 2022 | $ | ||||||||||
______________________
The total remaining unvested LTIP units as of June 30, 2022 of 26,966 are expected to vest in 2023.
As of June 30, 2022, the unrecognized compensation cost related to LTIP unit awards was $0.2 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately eight months . We recorded $0.1 million and $0.3 million of compensation expense related to LTIP unit awards for the three months ended June 30, 2022 and 2021, respectively. We recorded $0.3 million and $0.6 million of compensation expense related to LTIP unit awards for the six months ended June 30, 2022 and 2021, respectively.
7. Earnings (Loss) Per Share
Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS 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 EPS 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 EPS calculations.
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Dividends declared on unvested share-based compensation | |||||||||||||||||||||||
| Net income (loss) available to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding—basic | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Unvested restricted common stock | |||||||||||||||||||||||
| Shares related to unvested PSUs | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding—diluted | |||||||||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Earnings (loss) per share available to common stockholders—basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings (loss) per share available to common stockholders—diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
For the three and six months ended June 30, 2021, 213,125 and 469,776 of unvested restricted common shares, respectively, were excluded from diluted weighted-average common shares outstanding, as their effect would be anti-dilutive. For the three months and six months ended June 30, 2021, 281,201 and 335,070 of unvested PSUs, respectively, were excluded from the diluted weighted-average common shares outstanding, as their effect would be anti-dilutive. There were no
8. Debt
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| Principal Balance as of | ||||||||||||||||||||||||||
| Loan | Interest Rate as of June 30, 2022 | Maturity Date | June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Salt Lake City Marriott Downtown at City Creek mortgage loan | LIBOR + | January 2023 | $ | $ | ||||||||||||||||||||||
| Westin Washington, D.C. City Center mortgage loan | January 2023 | |||||||||||||||||||||||||