NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
General
Summit Hotel Properties, Inc. (the “Company”) is a self-managed lodging property investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
We primarily focus on owning lodging properties with efficient operating models that generate strong margins and investment returns. At March 31, 2023, our portfolio consisted of 103 lodging properties with a total of 15,334 guestrooms located in 24 states. As of March 31, 2023, we own 100% of the outstanding equity interests in 61 of our 103 lodging properties. We own a 51% controlling interest in 39 lodging properties through a joint venture that was formed in July 2019 with GIC (the “GIC Joint Venture”), Singapore’s sovereign wealth fund. We also own 90% equity interests in two separate joint ventures (the "Brickell Joint Venture" and the "Onera Joint Venture"). The Brickell Joint Venture owns two lodging properties, and the Onera Joint Venture owns one lodging property.
As of March 31, 2023, 86% of our guestrooms were located in the top 50 metropolitan statistical areas (“MSAs”), 91% were located within the top 100 MSAs and over 99% of our guestrooms operated under premium franchise brands owned by Marriott® International, Inc. (“Marriott”), Hilton® Worldwide (“Hilton”), Hyatt® Hotels Corporation (“Hyatt”), and InterContinental® Hotels Group (“IHG”).
Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership, Summit Hotel OP, LP (the “Operating Partnership”). Through a wholly-owned subsidiary, we are the sole general partner of the Operating Partnership. At March 31, 2023, we owned, directly and indirectly, approximately 87.0% of the Operating Partnership’s issued and outstanding common units of limited partnership interest (“Common Units”), and all of the Operating Partnership’s issued and outstanding Series E and Series F preferred units of limited partnership interest. NewcrestImage Holdings, LLC owns all of the issued and outstanding 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation preference $25 per unit) of the Operating Partnership ("Series Z Preferred Units"), which was issued as part of the NCI Transaction (described below in "Note 3 - Investments in Lodging Property, net"). We collectively refer to preferred units of limited partnership interests of our Operating Partnership as "Preferred Units."
Pursuant to the Operating Partnership’s partnership agreement, we have full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions and refinancings, to make distributions to partners and to cause changes in the Operating Partnership’s business activities.
We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our lodging properties. Accordingly, all of our lodging properties are leased to our taxable REIT subsidiaries (“TRS Lessees”).
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenues and expenses in the reporting period. Actual results could differ from those estimates. As interim statements, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three months ended March 31, 2023 may not be indicative of the results that may be expected for the full year of 2023. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
The accompanying Condensed Consolidated Financial Statements consolidate the accounts of all entities in which we have a controlling financial interest, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.
We evaluate joint venture partnerships to determine if they should be consolidated based on whether the partners exercise joint control. For a joint venture where we exercise primary control and we also own a majority of the equity interests, we consolidate the joint venture partnership. We have consolidated the accounts of our joint venture partnerships in our accompanying Condensed Consolidated Financial Statements.
Real Estate Development Loans
We selectively provide mezzanine financing to developers where we also have the opportunity to acquire the lodging property at or after the completion of the development project. We classify mezzanine loans as Investments in lodging property, net or Investments in real estate loans, net based on the terms of the loan agreements and criteria for classifying an arrangement as a loan or an investment in real estate under Accounting Standards Codification ("ASC") No. 310, Receivables. At March 31, 2023, we have one mezzanine loan that we have classified in Investments in lodging property, net on our Condensed Consolidated Balance Sheet.
Current Estimate of Credit Losses
Financial assets (or a group of financial assets) such as real estate development loans and other notes receivable are measured at amortized cost and presented at the net amount expected to be collected in accordance with ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). We record an allowance for credit losses as a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We routinely evaluate our real estate development loans, notes receivable and interest receivables for collectability. Probable losses on loans are recognized in a valuation account that is deducted from the amortized cost basis of the loans and recorded as Provision for credit losses in our condensed Consolidated Statements of Operations. When we place a loan on non-accrual status, we suspend the recognition of interest income until cash interest payments are received. Generally, we return loans to accrual status when all delinquent interest becomes current, and collectability of interest is reasonably assured. We do not measure an allowance for credit losses for accrued interest receivable. Accrued interest receivable is written-off to bad debt expense when collection is not reasonably assured.
Financial Guarantee
On occasion, we may provide a financial guarantee on behalf of a mezzanine borrower. We record the non-contingent portion of financial guarantees made on behalf of third-parties as a liability at an amount equal to the premium receivable for the guarantee payable to us by the borrower under the practical expedient provided by ASC No. 460, Guarantees. We periodically evaluate the contingent component of a financial guarantee based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that may require us to record a liability related to the contingent component of a guarantee. We will record a liability for the contingent component of the guarantee when a payment by us under the guarantee is probable and reasonably estimable in accordance with ASC No. 326, Financial Instruments - Credit Losses.
Purchase Option
When we provide mezzanine financing to a developer, we will generally take a purchase option to acquire a majority interest in the property upon completion of construction. We record purchase options at their estimated fair values on the transaction date in accordance with ASC No. 820, Fair Value Measurement, under a closed-form model such as the Black-Scholes model or a binomial lattice model such as the Monte Carlo simulation model. Purchase options received in connection with a mezzanine loan are recorded as a discount on the note receivable or a contra-asset, depending on the classification of the financial instrument, and amortized over the term of the mezzanine loan using the straight-line method, which approximates the interest method, as non-cash interest income on our Condensed Consolidated Statement of Operations. We elected to account for purchase options using the measurement alternative, which is cost, less any impairment, adjusted for changes in fair value resulting from observable transactions for identical or similar investments of the same issuer as of the respective transaction dates.
Non-controlling Interests
Non-controlling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Non-controlling interests are reported in the Condensed Consolidated Balance Sheets within equity, separately from stockholders’ equity. Revenues, expenses and net income attributable to both the Company and the non-controlling interests are reported in the Condensed Consolidated Statements of Operations.
Our Condensed Consolidated Financial Statements include non-controlling interests related to Common Units held by unaffiliated third parties and third-party minority ownership interests in our joint ventures.
Redeemable Non-controlling Interests
Redeemable non-controlling interests represent redeemable preferred units issued by our Operating Partnership ("Redeemable Preferred Units"). The Redeemable Preferred Units are presented as temporary equity related to our Operating Partnership on our Condensed Consolidated Balance Sheets under the caption of "Redeemable Non-controlling Interests." See "Note 9 - Equity" for further information. We record Redeemable non-controlling interests at fair value on the issuance date of the securities. When the carrying value (the acquisition date fair value adjusted for the non-controlling interest’s share of net income (loss) and dividends) is less than the redemption value, we adjust the redeemable non-controlling interest to equal the redemption value with changes recognized as an adjustment to Accumulated deficit and distributions in excess of retained earnings. Any such adjustment, when necessary, is recorded as of the applicable balance sheet date.
Trade Receivables and Credit Policies
We grant credit to qualified customers, generally without collateral, in the form of trade accounts receivable. Trade receivables result from the rental of guestrooms and the sales of food, beverage, and banquet services and are payable under normal trade terms. Trade receivables also include credit and debit card transactions that are in the process of being settled. Trade receivables are stated at the amount billed to the customer and do not accrue interest. We regularly review the collectability of our trade receivables. A provision for losses is determined on the basis of previous loss experience and current economic conditions. Our allowance for doubtful accounts was $0.1 million at March 31, 2023 and December 31, 2022. Bad debt expense was $0.1 million for each of the three months ended March 31, 2023 and 2022.
Earnings Per Share
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. We apply the two-class method of computing earnings (loss) per share, which requires the calculation of separate earnings (loss) per share amounts for participating securities. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Any anti-dilutive securities are excluded from the basic per-share calculation.
Diluted EPS is computed by dividing net income (loss) available to common stockholders, as adjusted for dilutive securities, by the weighted-average number of shares of common stock outstanding plus dilutive securities. Any anti-dilutive securities are excluded from the diluted per-share calculation.
Basic and diluted loss per share for the three months ended March 31, 2023 and 2022 are calculated as Net loss attributable to common stockholders for each respective period divided by weighted-average shares of common stock outstanding for each respective period as all other securities are antidilutive. Potentially dilutive shares include unvested restricted share grants, unvested performance share grants, shares of common stock issuable upon conversion of convertible debt and shares of common stock issuable upon conversion of Common Units of our Operating Partnership.
Use of Estimates
Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP, which requires us to make estimates based on assumptions about current and, for some estimates, future economic and market conditions that affect reported amounts and related disclosures in our Condensed Consolidated Financial Statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations, which could materially affect our consolidated financial position and results of operations.
New Accounting Standards
In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, Reference Rate Reform (Topic 848). ASU No. 2020-04 contains practical expedients for reference rate reform related activities that affect debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the year ended December 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The implementation of ASU No. 2020-04 did not have a material effect on our consolidated financial position or results of operations.
In September 2022, the Financial Accounting Standards Board issued ASU No. 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, to enhance transparency around the use of supplier finance programs. The provisions for this update are effective for annual and interim periods beginning after December 31, 2022. Effective January 1, 2023, the Company adopted ASU 2022-04. The standard did not have a material effect on the Company's condensed consolidated financial statements.
NOTE 3 - INVESTMENTS IN LODGING PROPERTY, NET
Investments in Lodging Property, net
Investments in lodging property, net is as follows (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Lodging buildings and improvements | | $ | 2,776,110 | | | $ | 2,764,355 | |
| Land | | 365,770 | | | 365,770 | |
| Furniture, fixtures and equipment | | 256,681 | | | 250,575 | |
| Construction in progress | | 65,252 | | | 62,471 | |
| Intangible assets | | 39,954 | | | 39,954 | |
| Real estate development loan, net | | 519 | | | — | |
| | 3,504,286 | | | 3,483,125 | |
| Less accumulated depreciation | | (727,339) | | | (690,573) | |
| | $ | 2,776,947 | | | $ | 2,792,552 | |
Depreciation and amortization expense related to our lodging properties was $36.8 million and $36.1 million for the three months ended March 31, 2023 and 2022, respectively.
Real Estate Development Loans
Onera Mezzanine Loan
In January 2023, we entered into an agreement with affiliates of Onera Opportunity Fund I, LP ("Onera") to provide a mezzanine loan to fund up to $4.6 million for the development of a glamping property (the "Onera Mezzanine Loan"). The Onera Mezzanine Loan is secured by a second mortgage on the property that is subordinate to the senior lender for the development project. The loan matures 24 months from the closing date of the transaction and may be extended for an additional 12 months at the borrower's option. Additionally, we issued a $3.0 million letter of credit to the senior lender of the project as additional support for Onera's construction loan. We also have an option to purchase 90% of the equity of the entity that owns the development property upon completion of construction or upon the one-year anniversary of such completion at a pre-determined price (the "Onera Purchase Option"). The development is expected to be completed in the second half of 2024. As of March 31, 2023, we funded $1.3 million of our total $4.6 million commitment under the mezzanine loan. The balance of the Onera Mezzanine Loan is recorded net of the unamortized discount related to the carrying amount of the Onera Purchase Option of $0.8 million at March 31, 2023, and is classified as Investments in lodging property, net in our Condensed Consolidated Balance Sheets at March 31, 2023.
We recorded the Onera Purchase Option related to the Onera Mezzanine Loan at its estimated fair value of $0.9 million on the transaction date using the Black-Scholes model in Other assets and as a contra-asset to Investments in lodging property, net. The recorded amount of the Onera Purchase Option is being amortized over the term of the Onera Mezzanine Loan using the straight-line method, which approximates the interest method, as non-cash interest income. For the three months ended March 31, 2023, we amortized $0.1 million of the carrying amount of the Onera Purchase Option as non-cash interest income.
Brickell Mezzanine Loan
During the year ended December 31, 2019, we executed a mezzanine loan, as amended, to a developer (the "Brickell Mezzanine Loan") to fund up to $29.9 million for a mixed-use development project that included the AC Hotel by Marriott and Element Miami Brickell Hotel in Miami, FL (together the "AC/Element Hotel"), retail space, and parking. As of March 31, 2022, we had funded $29.6 million of our total $29.9 million commitment, and we funded the full commitment thereafter. In connection with the Brickell Mezzanine Loan, we received an option to purchase a 90% interest in the AC/Element Hotel (the “Initial Purchase Option”). We also have the right to purchase the remaining interest in the property five years after the completion of construction. The Brickell Mezzanine Loan was classified as Investments in lodging property, net in our Condensed Consolidated Balance Sheets. We exercised the Initial Purchase Option in the second quarter of 2022, which resulted in the repayment in full of the Brickell Mezzanine Loan.
We recorded the Brickell Purchase Option at its estimated fair value of $2.8 million on the transaction date using the Black-Scholes model in Other assets and as a contra-asset to Investment in lodging property, net. The contra-asset was amortized as a component of non-cash interest income over the term of the Brickell Mezzanine Loan, using the straight-line method, which approximates the interest method. For the three months ended March 31, 2022, we amortized $0.1 million of the carrying amount of the Brickell Purchase Option as non-cash interest income.
Our estimate of the fair values of the Onera Purchase Option and the Brickell Purchase Option under the Black-Scholes model requires significant judgment and estimates primarily related to the volatility of our stock price and expected levels of future dividends on our common stock. Although our estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations.
Lodging Property Acquisitions
NCI Transaction
During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on a transaction (the "NCI Transaction") with NewcrestImage Holdings, LLC and NewcrestImage Holdings II, LLC (together, "NewcrestImage"), to purchase from NewcrestImage a portfolio of 27 lodging properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces, and various financial incentives for an aggregate purchase price of $822.0 million, paid in the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 Series Z Preferred Units, cash draws totaling $410.0 million from a term loan entered into by subsidiaries of the GIC Joint Venture, the assumption by a subsidiary of the GIC Joint Venture of approximately $6.5 million in PACE loan debt, $5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the Joint Venture, and approximately $185.2 million cash contributed by GIC at closing. GIC also contributed to the GIC Joint Venture an additional $18.5 million in cash for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating Partnership as reimbursement for transaction costs paid by the Operating Partnership.
We valued the Common Units and Series Z Preferred Units at fair market value on the closing dates of the NCI Transaction, which resulted in us recording the issued Common Units and Series Z Preferred Units at $157.5 million and $50.0 million, respectively. The Common Units were recorded at the closing prices of our common stock on the closing dates since the Common Units are redeemable for shares of our common stock on a 1:1 basis. We estimated the fair value of the Series Z Preferred Units based on the features and stated dividend coupon of the Series Z Preferred Units relative to similar securities with more readily determinable market values. We recorded the Series Z Preferred Units at their redemption value of $50.0 million which approximates fair value on the closing dates.
The GIC Joint Venture assumed $335.2 million of debt in connection with the NCI Transaction and immediately repaid $328.7 million of the assumed debt on the closing date using proceeds from borrowings on the GIC Joint Venture Term Loan (as described in Note 5 - Debt). We recorded debt assumed in connection with the NCI Transaction at its face amount, which approximated fair market value on the closing date.
The GIC Joint Venture recorded the NCI Transaction as an asset acquisition and allocated the aggregate purchase price paid for the NCI Transaction to the net assets acquired based on their relative fair values. In determining relative fair values, we made significant estimates regarding replacement costs for the buildings and furniture, fixtures and equipment, and judgments related to certain market assumptions. Incentives and other intangibles include tax incentives totaling approximately $19.8 million associated with certain of the acquired properties in the NCI Transaction and are being amortized over a weighted-average amortization period of approximately 9.1 years, which is the period which we expect to meet the requirements to receive payment of the tax incentives. Other intangible assets totaling approximately $3.9 million are related to key money associated with certain of the lodging properties acquired in the NCI Transaction and are being amortized over a weighted-average amortization period of approximately 19.7 years, which is the remaining key money contract period with the franchisor.
A summary of the lodging properties acquired during the three months ended March 31, 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date Acquired | | Franchise/Brand | | Location | | Guestrooms | | Purchase
Price |
| January 13, 2022 | | Portfolio of properties - twenty-six lodging properties and two parking garages (1) | | Various | | 3,533 | | $ | 766,000 | |
| March 23, 2022 | | Canopy Hotels by Hilton (1) | | New Orleans, LA | | 176 | | 56,000 | |
| | | | | | | | |
| | | | | | 3,709 | | | $ | 822,000 | |
(1) On January 13, 2022, we acquired a portfolio of twenty-six lodging properties and two parking garages for an aggregate purchase price of $766.0 million. The lodging properties acquired included 21 hotels and two parking garages in Texas, two hotels in Louisiana and three hotels in Oklahoma under the following brands: Marriott (13), Hilton (7), Hyatt (4), and IHG (2). On March 23, 2022, we acquired the Canopy New Orleans upon completion of its construction for a purchase price of $56.0 million.
The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands):
| | | | | | | | |
| Land | | $ | 52,797 | |
| Lodging buildings and improvements | | 676,607 | |
| Furniture, fixtures and equipment | | 76,729 | |
| Incentives and other intangibles | | 23,670 | |
| Other assets | | 5,318 | |
Total assets acquired (1) | | 835,121 | |
| Less debt assumed | | (335,205) | |
| Less lease liabilities assumed | | (5,441) | |
| Less other liabilities | | (3,920) | |
| Net assets acquired | | $ | 490,555 | |
(1) Total assets acquired is based on an aggregate purchase price of $822.0 million plus the following items related to the NCI Transaction: interest swap breakage fees and debt defeasance costs of $3.5 million, a reduction to the value of the Common Units issued on the closing date of $2.5 million, plus transaction costs of $3.0 million, and intangible assets totaling $9.1 million acquired outside of escrow.
Acquisition costs related to the NCI Transaction have been capitalized as part of the recorded amounts of the acquired assets.
There were no acquisitions during the three months ended March 31, 2023.
Intangible Assets
Intangible assets, net is as follows (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Indefinite-lived intangible assets: | | | | |
| Air rights | | $ | 10,754 | | | $ | 10,754 | |
| Other | | 80 | | | 80 | |
| | 10,834 | | | 10,834 | |
| Finite-lived intangible assets: | | | | |
| | | | |
| Tax incentives | | 19,750 | | | 19,750 | |
| Key money | | 9,370 | | | 9,370 | |
| | | | |
| | | | |
| | 29,120 | | | 29,120 | |
| Intangible assets | | 39,954 | | | 39,954 | |
| Less accumulated amortization | | (6,149) | | | (5,110) | |
| Intangible assets, net | | $ | 33,805 | | | $ | 34,844 | |
We recorded amortization expense related to intangible assets of approximately $1.0 million and $0.9 million for the three months ended March 31, 2023 and 2022, respectively.
Future amortization expense related to intangible assets is as follows (in thousands):
| | | | | | | | |
For the Year Ending
December 31, | | Amount |
| 2023 | | $ | 4,331 | |
| 2024 | | 3,620 | |
| 2025 | | 1,625 | |
| 2026 | | 1,625 | |
| 2027 | | 1,506 | |
| Thereafter | | 10,264 | |
| | $ | 22,971 | |
Assets Held for Sale
Assets held for sale, net at March 31, 2023 and December 31, 2022 include certain properties that are under contract for sale and expected to close during the second or third quarters of 2023 or are being marketed for sale as follows (in thousands):
| | | | | |
| Net Carrying Amount |
| Under Contract For Sale: | |
| Portfolio of four lodging properties | $ | 27,669 | |
| Portfolio of two lodging properties | 49,853 | |
| Parcel of undeveloped land - San Antonio, TX | 1,225 | |
| 78,747 | |
| Marketed For Sale: | |
| Parcel of undeveloped land - Flagstaff, AZ | 425 | |
| $ | 79,172 | |
We continue to incur limited renovation costs for certain properties recorded as Assets held for sale, net. During the three months ended March 31, 2023, we incurred approximately $0.6 million of such renovation costs that have been capitalized during the period as part of the carrying amounts of the related properties recorded as Assets held for sale, net.
NOTE 4 — REAL ESTATE LOANS, NET
Investment in real estate loans, net is as follows (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Real estate loan | | $ | 1,250 | | | $ | 1,250 | |
| Allowance for credit losses | | (1,000) | | | (1,250) | |
| | | | |
| | $ | 250 | | | $ | — | |
On June 29, 2018, we sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling price of $24.9 million. We provided seller financing totaling $3.6 million on the sale of these properties under two, 3.5-year second mortgage notes with a blended interest rate of 7.38% that are further collateralized by a personal guarantee from the principal of the borrower. During the year ended December 31, 2020, we recorded an allowance for credit losses in an amount equal to the outstanding balance of the loans due to a borrower default caused by the negative effects of the COVID-19 pandemic. On June 1, 2021, we amended the terms of the seller-financing loans and extended the maturity dates of each loan to December 31, 2022. Under the modified loan terms, interest accrues monthly at a rate of 9.00% per annum, including 5.00% payable in cash and 4.00% paid-in-kind.
On September 15, 2022, we received a $0.6 million payment to repay one of the two loans in full. We also extended the maturity date of the remaining loan to December 31, 2023. During the year ended December 31, 2022, the remaining loan and underlying collateral were transferred to the control of the estate of the principal borrower who was also the personal guarantor on the loan. The outstanding principal balance of the remaining seller-financing loan continues to be fully reserved pending further performance by the borrower under the modified terms of the loan. In April 2023, we received a scheduled principal payment of $0.3 million on the loan.
The seller-financing loan,net is included in Prepaid expenses and other in our Condensed Consolidated Balance Sheets at March 31, 2023 and December 31, 2022.
NOTE 5 - DEBT
Debt, net of debt issuance costs, is as follows (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Revolving debt | | $ | 155,000 | | | $ | 140,000 | |
| Term loans | | 910,000 | | | 910,000 | |
| Convertible notes | | 287,500 | | | 287,500 | |
| Mortgage loans | | 124,932 | | | 125,624 | |
| | | 1,477,432 | | | 1,463,124 | |
| Unamortized debt issuance costs | | (10,309) | | | (11,328) | |
| Debt, net of debt issuance costs | | $ | 1,467,123 | | | $ | 1,451,796 | |
The weighted-average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 5.35% at March 31, 2023 and 5.04% at December 31, 2022. There are currently no defaults under any of the Company's mortgage loan agreements.
We have entered into interest rate swaps to fix the interest rates on a portion of our variable interest rate indebtedness. In March 2023, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into two $100.0 million interest rate swaps to fix one-month term SOFR until January 2026. The interest rate swaps have an effective date of July 1, 2023 and a termination date of January 13, 2026. See "Note 7 - Derivative Financial Instruments and Hedging" to the Condensed Consolidated Financial Statements for additional information.
Our total fixed-rate and variable-rate debt, after considering our interest rate derivative agreements that are currently effective, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | Percentage | | December 31, 2022 | | Percentage |
Fixed-rate debt (1) | | $ | 757,808 | | | 51% | | $ | 758,433 | | | 52% |
| Variable-rate debt | | 719,624 | | | 49% | | 704,691 | | | 48% |
| | $ | 1,477,432 | | | | | $ | 1,463,124 | | | |
(1) At March 31, 2023, debt related to our wholly-owned properties and our pro rata share of joint venture debt has a fixed-rate debt ratio of approximately 73% of our total pro rata indebtedness when taking into consideration interest rate swaps entered into during the three months ended March 31, 2023 when they become effective in July 2023.
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | |
| | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value | | Valuation Technique |
| Convertible notes | | $ | 287,500 | | | $ | 246,750 | | | $ | 287,500 | | | $ | 247,126 | | | Level 1 - Market approach |
| Mortgage loans | | 70,307 | | | 61,999 | | | 70,933 | | | 61,447 | | | Level 2 - Market approach |
| | $ | 357,807 | | | $ | 308,749 | | | $ | 358,433 | | | $ | 308,573 | | | |
Detailed information about our gross debt at March 31, 2023 and 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lender | | Interest Rate | | | | Maturity Date | | Number of
Encumbered Properties | | March 31, 2023 | | December 31, 2022 |
| OPERATING PARTNERSHIP DEBT: | | | | | | | | | | | | |
| 2018 Senior Credit Facility | | | | | | | | | | | | |
| Bank of America, NA | | | | | | | | | | | | |
$400 Million Revolver (1)(2) | | 6.86% Variable | | | | September 30, 2023 | | n/a | | $ | 30,000 | | | $ | 15,000 | |
$200 Million Term Loan (1)(3) | | 6.81% Variable | | | | April 1, 2024 | | n/a | | 200,000 | | | 200,000 | |
| Total Senior Credit and Term Loan Facility | | | | | | 230,000 | | | 215,000 | |
| | | | | | | | | | | | |
| Term Loans | | | | | | | | | | | | |
| | | | | | | | | | | | |
KeyBank National Association Term Loan (1) | | 6.64% Variable | | | | February 14, 2025 | | n/a | | 225,000 | | | 225,000 | |
| | | | | | | | | | | | |
| Convertible Notes | | 1.50% Fixed | | | | February 15, 2026 | | n/a | | 287,500 | | | 287,500 | |
| | | | | | | | | | | | |
| Secured Mortgage Indebtedness | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| MetaBank | | 4.44% Fixed | | | | July 1, 2027 | | 3 | | | 43,518 | | | 43,917 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Bank of the Cascades (First Interstate Bank) (4) | | 6.60% Variable | | | | December 19, 2024 | | 1 | | | 7,624 | | | 7,691 | |
| | 4.30% Fixed | | | | December 19, 2024 | | — | | | 7,624 | | | 7,691 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total Mortgage Loans | | | | | | | | 4 | | | 58,766 | | | 59,299 | |
| | | | | | | | | | 801,266 | | | 786,799 | |
| | | | | | | | | | | | |
| JOINT VENTURE DEBT: | | | | | | | | | | | | |
| Brickell Joint Venture Mortgage Loan | | | | | | | | | | | | |
| City National Bank of Florida | | 7.86% Variable | | | | June 30, 2025 | | 2 | | | 47,000 | | | 47,000 | |
| | | | | | | | | | | | |
| GIC Joint Venture Credit Facility and Term Loans | | | | | | | | | | | | |
| Bank of America, N.A. | | | | | | | | | | | | |
$125 Million Revolver (5) | | 6.99% Variable | | | | October 8, 2023 | | n/a | | 125,000 | | | 125,000 | |
$75 Million Term Loan (5) | | 6.94% Variable | | | | October 8, 2023 | | n/a | | 75,000 | | | 75,000 | |
Bank of America, N.A. (6) | | 7.63% Variable | | | | January 13, 2026 | | n/a | | 410,000 | | | 410,000 | |
| Wells Fargo | | 4.99% Fixed | | | | June 6, 2028 | | 1 | | 12,969 | | | 13,032 | |
| PACE loan | | 6.10% Fixed | | | | July 31, 2040 | | 1 | | 6,197 | | | 6,293 | |
| Total GIC Joint Venture Credit Facility and Term Loans | | | | | | | | 2 | | 629,166 | | | 629,325 | |
| Total Joint Venture Debt | | | | | | | | 4 | | | $ | 676,166 | | | $ | 676,325 | |
| Total Debt | | | | | | | | 8 | | | $ | 1,477,432 | | | $ | 1,463,124 | |
(1) The 2018 Senior Credit Facility and Term Loans are supported by a borrowing base of 57 unencumbered hotel properties and a pledge of the equity securities of the entities that own and operate the 57 unencumbered hotels.
(2) We have exercised our option to extend the maturity date for the $400 Million Revolver to September 30, 2023 and we have additional options to extend the maturity date to March 31, 2025, subject to certain conditions.
(3) The maturity date for the $200 Million Term Loan can be extended to April 1, 2025 at the Company’s option, subject to certain conditions.
(4) The Bank of Cascades mortgage loan is comprised of two promissory notes that are secured by the same collateral and cross-defaulted.
(5) The $125 million Revolver and the $75 million Term Loan are secured by pledges of the equity in the entities (and affiliated entities) that own 11 lodging properties.
(6) The GIC Joint Venture's $410 million term loan with Bank of America, N.A. is secured by pledges of the equity in the entities (and affiliated entities) that own 27 lodging properties.
2018 Senior Credit Facility
On December 6, 2018, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into a $600.0 million senior credit facility (the “2018 Senior Credit Facility”) with Deutsche Bank AG New York Branch, as administrative agent, and a syndicate of lenders. The 2018 Senior Credit Facility is comprised of a $400.0 million revolver (the "$400 Million Revolver") and a $200.0 million term loan facility (the “$200 Million Term Loan”). The 2018 Senior Credit Facility has an accordion feature which allows the Company to increase the total commitments by an aggregate of up to $300.0 million. At March 31, 2023, our $200 million Term Loan was fully funded, and our $400 Million Revolver had $30.0 million in outstanding borrowings. As of April 30, 2023, our $400 Million Revolver had $25.0 million in outstanding borrowings due to repayments subsequent to March 31, 2023. Borrowings under the 2018 Senior Credit Facility are limited by the value of the Unencumbered Assets, detailed below. On July 21, 2022, Bank of America, N.A. entered into successor administrative agent documentation to succeed Deutsche Bank AG New York Branch as administrative agent on the 2018 Senior Credit Facility.
Amendments to the 2018 Senior Credit Facility
Between May 2020 and July 2022, the Company entered into several amendments to the 2018 Senior Credit Facility (the “Credit Facility Amendments”).
The Credit Facility Amendments provided two additional six-month maturity date extension options, subject to certain conditions for the $400 Million Revolver and $200 Million Term Loan. The $400 Million Revolver had an original maturity date of March 31, 2023, but we have exercised our option to extend the maturity date to September 30, 2023. We have additional options to extend the maturity date to March 31, 2025, subject to certain conditions. The $200 million Term Loan will mature on April 1, 2024 and can be extended to April 1, 2025 at the Company's option, subject to certain conditions.
On July 21, 2022, the interest rate on the 2018 Senior Credit Facility was transitioned from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The interest rate on the 2018 Senior Credit Facility is based on a pricing grid ranging from 140 basis points to 240 basis points plus SOFR plus a 10 basis point credit spread adjustment for the $400 Million Revolver and 135 basis points to 235 basis points plus SOFR plus a 10 basis point credit spread adjustment for the $200 Million Term Loan, depending on the Company's leverage ratio (as defined in the loan documents). For purposes of the 2018 Senior Credit Facility, SOFR is subject to a floor of 25 basis points.
The Credit Facility Amendments require the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own all properties included in the unencumbered asset pool supporting the facility (“Unencumbered Properties”), as well as the equity interests in the TRS Lessees related to such Unencumbered Properties until the borrower meets certain conditions for their release. The Credit Facility Amendments also permitted the Company to complete the Convertible Notes Offering (defined below), the Series F preferred shares offering (defined below), close on the NCI Transaction and enter into equity transactions and indebtedness related thereto.
2018 Term Loan
On February 15, 2018, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a $225.0 million term loan (the “2018 Term Loan”) with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documents, which is fully drawn as of March 31, 2023. The 2018 Term Loan has an accordion feature that allows us to increase the total commitments by $150.0 million prior to the maturity date of February 14, 2025, subject to certain conditions.
Amendments to the 2018 Term Loan. Between May 2020 and July 2022, the Company entered into several amendments to the 2018 Term Loan. The amendments to the 2018 Term Loan are substantially the same as the Credit Facility Amendments described above. There was no modification to the maturity date of the 2018 Term Loan.
We pay interest on advances at varying rates, based upon, at our option, either (i) daily, 1-, 3-, or 6-month SOFR (subject to a floor of 25 basis points), plus a SOFR adjustment equal to 10 basis points and an applicable margin between 135 and 215 basis points, depending upon our leverage ratio (as defined in the loan documents). We are required to pay other fees, including arrangement and administrative fees.
Financial and Other Covenants. We are required to comply with various financial and other covenants to draw and maintain borrowings under the 2018 Term Loan. The 2018 Term Loan Amendments provided for certain financial and other covenants under the 2018 Term Loan to be waived or adjusted. The waivers and adjustments were the same as under the amendments to the Company’s 2018 Senior Credit Facility. At March 31, 2023, we were in compliance with all financial covenants.
Unencumbered Assets. The 2018 Term Loan Amendments require the borrower and certain subsidiaries to pledge to the secured parties all of the equity interests in the entities that own the Unencumbered Properties, as well as the equity interests in the TRS Lessees related to such Unencumbered Properties until the borrower meets certain conditions for the release of such pledges. During the period that the pledges are in place, as well as at all other times during the term of the facility, borrowings under the 2018 Term Loan are limited by the value of the Unencumbered Assets.
Convertible Senior Notes and Capped Call Options
On January 7, 2021, we entered into an underwriting agreement (the “Convertible Notes Offering”) pursuant to which the Company agreed to offer and sell $287.5 million aggregate principal amount of 1.50% convertible senior notes due 2026 (the “Convertible Notes"). The net proceeds from the Convertible Notes Offering, after deducting underwriting discounts and commissions and offering expenses payable by the Company (including net proceeds from the full exercise by the underwriters of their over-allotment option to purchase additional Convertible Notes), were approximately $280.0 million before consideration of the Capped Call Transactions (as described below). These proceeds were used to pay the cost of the Capped Call Transactions and to partially repay outstanding obligations under the 2018 Senior Credit Facility and another term loan.
The Convertible Notes bear interest at a rate of 1.50% per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. The Convertible Notes will mature on February 15, 2026 (the “Maturity Date”), unless earlier converted, purchased or redeemed. Prior to August 15, 2025, the Convertible Notes will be convertible only upon certain circumstances and during certain periods. On or after August 15, 2025 and through the Maturity Date, holders may convert any of their Convertible Notes into shares of the Company’s common stock, at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day prior to the Maturity Date, unless the Convertible Notes have been previously purchased or redeemed by the Company. The Company recorded coupon interest expense of $1.1 million for each of the three months ended March 31, 2023 and 2022. The Company incurred debt issuance costs related to the Convertible Notes Offering of $7.6 million of which $0.4 million was amortized for each of the three months ended March 31, 2023 and 2022. Including the amortization of the debt issuance costs, the effective interest rate on the Convertible Notes was approximately 2.00% for the three months ended March 31, 2023 and 2022. The unamortized discount related to the Convertible Notes was $4.3 million and $4.7 million at March 31, 2023 and December 31, 2022, respectively.
The initial conversion rate of the Convertible Notes is 83.4028 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of $11.99 per share of common stock based on the 37.5% base conversion premium on the reference price of $8.72 per share. In no event will the conversion rate exceed 114.6788 shares of common stock per $1,000 principal amount of Convertible Notes, subject to certain adjustments defined in the Convertible Notes Offering. Commensurate with the declaration of dividends on our common stock and Common Units on February 28, 2023, the conversion rate of the Convertible Notes was adjusted to 84.6064 shares of common stock per $1,000 principal amount of Convertible Notes.
On January 7, 2021, in connection with the pricing of the Convertible Notes, and on January 8, 2021, in connection with the full exercise by the Underwriters of their option to purchase additional Convertible Notes pursuant to the Underwriting Agreement, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters or their respective affiliates and another financial institution (the “Capped Call Counterparties”). The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of shares of common stock underlying the Convertible Notes. The Capped Call Transactions are generally expected to reduce the potential dilution to holders of shares of common stock upon conversion of the Convertible Notes or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction or offset subject to a cap.
The effective strike price of the Capped Call Transactions was initially $15.26, which represented a premium of 75.0% over the last reported sale price of our common stock on the New York Stock Exchange on January 7, 2021 and is subject to certain adjustments under the terms of the Capped Call transactions. The current strike price is $15.04 due to the adjustments related to the dividends paid during the three months ended March 31, 2023 and the year ended December 31, 2022.
MetaBank and Other Mortgage Loans
At March 31, 2023 and December 31, 2022, we had mortgage loans totaling $124.9 million and $125.6 million, respectively, that are secured primarily by first mortgage liens on eight lodging properties.
Metabank Loan
On June 30, 2017, Summit Meta 2017, LLC (“SM-17”), a subsidiary of our Operating Partnership, entered into a $47.6 million secured, non-recourse loan with MetaBank (the "MetaBank Loan"). The MetaBank Loan provides for a fixed interest rate of 4.44%, amortizes over 25 years, and matures on July 1, 2027. The MetaBank Loan is secured by three lodging properties and is subject to a prepayment penalty if prepaid prior to April 1, 2027. In or around December 2021, MetaBank sold the MetaBank Loan to Bayside MB CRE Loans, LLC (“Bayside”). On October 25, 2022, SM-17 received a letter from Bayside’s counsel alleging various events of default under the MetaBank Loan, primarily related to certain non-monetary covenants. SM-17 engaged legal counsel which sent a written response to Bayside disputing that any events of default have occurred. On April 18, 2023, SM-17 received a second letter from Bayside's counsel reasserting their allegations of default. SM-17 continues to dispute that any events of default have occurred.
Commercial Mortgage-backed Securities Mortgage Loans
During 2022, we entered into agreements to fully defease four commercial mortgage-backed securities ("CMBS") mortgage loans that were outstanding at March 31, 2022. The aggregate outstanding balances of the loans at the defeasance dates totaled $87.3 million. The loans were defeased by placing into trust an amount sufficient to cover future principal and interest payments. The defeasance resulted in the 11 lodging properties that collateralized the CMBS mortgage loans becoming unencumbered.
GIC Joint Venture Credit Facility
On October 8, 2019, Summit JV MR 1, LLC (the “Borrower”), as borrower, and Summit Hospitality JV, LP (the “Parent” or "GIC Joint Venture"), as parent of the Borrower, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $200.0 million credit facility (the “GIC Joint Venture Credit Facility”) with Bank of America, N.A., as administrative agent and sole initial lender, and BofA Securities, Inc., as sole lead arranger and sole bookrunner. The Operating Partnership and the Company are not borrowers or guarantors of the GIC Joint Venture Credit Facility. The GIC Joint Venture Credit Facility is guaranteed by all of the Borrower’s existing and future subsidiaries, subject to certain exceptions.
The GIC Joint Venture Credit Facility is comprised of a $125.0 million revolving credit facility (the “$125 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). The GIC Joint Venture Credit Facility has an accordion feature which allows us to increase the total commitments by up to $300.0 million, for aggregate potential borrowings of up to $500.0 million. At March 31, 2023, we had $125.0 million outstanding under the $125 Million Revolver.
The $125 Million Revolver and the $75 Million Term Loan will mature on October 8, 2023. Each individually can be extended for a single consecutive twelve-month period at the option of the GIC Joint Venture, subject to certain conditions.
Amendment to $200 Million GIC Joint Venture Credit Facility
On February 15, 2023, the Borrower entered into the Fifth Amendment to Credit Agreement (the "Fifth Amendment") to, among other things, convert the reference rate used in interest rate calculations from LIBOR to adjusted term or daily SOFR (using a 10-basis point credit spread adjustment), with Borrower's option to borrow base rate advances, term SOFR advances or daily SOFR advances.
Revolving advances using adjusted term SOFR and adjusted daily SOFR have an interest rate margin of 2.15%, and term loan advances using adjusted term SOFR and adjusted daily SOFR have an interest rate margin of 2.1%. Both adjusted daily SOFR and adjusted term SOFR have a floor of zero percent.
The GIC Joint Venture Credit Facility is secured primarily by a first priority pledge of the Borrower's equity interests in the subsidiaries that own the 11-lodging property borrowing base assets, and the related TRS entities, which wholly own the TRS Lessees that lease each of the borrowing base assets.
GIC Joint Venture Term Loan
In connection with the NCI Transaction, on January 13, 2022, Summit JV MR 2, LLC, Summit JV MR 3, LLC and Summit NCI NOLA BR 184, LLC (each of which is a subsidiary of the GIC Joint Venture, and are collectively, the “Term Loan Borrower”), the GIC Joint Venture, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $410.0 million senior secured term loan facility (the “GIC Joint Venture Term Loan”) with Bank of America, N.A., as administrative agent and initial lender, Wells Fargo Bank, National Association, as syndication agent and an initial lender, and BofA Securities, Inc. and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners.
Neither the Operating Partnership nor the Company are borrowers or guarantors of the GIC Joint Venture Term Loan. The GIC Joint Venture Term Loan is guaranteed by the GIC Joint Venture and all of the Term Loan Borrower's existing and future subsidiaries, subject to certain exceptions.
The GIC Joint Venture Term Loan provides for a $410.0 million term loan and has an accordion feature which permits an increase in the total commitments by up to $190.0 million, for aggregate potential borrowings of up to $600.0 million. The GIC Joint Venture Term Loan will mature on January 13, 2026 and can be extended for one 12-month period at the option of the GIC Joint Venture, subject to certain conditions.
As of March 31, 2023, we had $410.0 million outstanding on the GIC Joint Venture Term Loan bearing interest at a floating rate of SOFR plus 2.86%.
The GIC Joint Venture Term Loan is secured primarily by a first priority pledge of the Term Loan Borrower's equity interests in the subsidiaries that hold a direct or indirect interest in the 27 lodging properties and two parking facilities purchased in the NCI Transaction that constitute borrowing base assets. The GIC Joint Venture Term Loan contains terms, conditions and covenants for typical for similar credit facilities.
PACE Loan
As part of the NCI Transaction, a subsidiary of the GIC Joint Venture assumed a Property Assessed Clean Energy ("PACE") loan of approximately $6.5 million. The loan bears fixed interest at 6.10%, has an amortization period of 20 years, and matures on July 31, 2040. The PACE loan is secured by an assessment lien imposed by the County of Tarrant, Texas for the benefit of the lender. As of March 31, 2023, we had $6.2 million outstanding on the PACE loan.
Brickell Mortgage Loan
In June 2022, the Company entered into a joint venture (the "Brickell Joint Venture") with C-F Brickell, LLC, a Delaware limited liability company ("C-F Brickell") that was the developer of the AC/Element Hotel, to facilitate the exercise of the Initial Purchase Option to acquire a 90% equity interest in the Brickell Joint Venture, which owned a 100% interest in the AC/Element Hotel. On June 10, 2022, the Brickell Joint Venture entered into a $47.0 million mortgage loan and non-recourse guaranty with City National Bank of Florida (the "City National Bank Loan") to finance the dual-branded 264-guestroom AC/Element Hotel. The City National Bank Loan provides for an interest rate equal to one-month LIBOR plus 300 basis points. Payment terms include an interest-only period through June 30, 2024 and the loan will amortize based on a 25-year schedule from July 1, 2024 through the maturity date of June 30, 2025. The City National Bank Loan is prepayable at any time without penalty.
Financial Guarantee
During the three months ended March 31, 2023, we issued a $3.0 million letter of credit to the senior lender of a glamping project for which we provided the Onera Mezzanine Loan as additional support on behalf of the developer. We recorded the non-contingent portion of financial guarantee as a liability of $0.2 million on the transaction date, which is the premium receivable for the guarantee payable to us by the borrower. The liability is being amortized using the straight-line method into interest income over the term of the letter of credit and is recorded in Accrued expenses and other in our Condensed Consolidated Balance Sheet at March 31, 2023.
At March 31, 2023, any payment under the contingent portion of the guarantee is not probable nor reasonably estimable. Therefore, no liability for the contingent portion of the guarantee is recorded at March 31, 2023.
Property and Casualty Insurance Premium Financing
During the three months ended March 31, 2023, we financed our property and casualty insurance premium totaling $10.9 million through our insurance broker. The financing arrangement requires monthly payments of $1.0 million over an 11-month period at an annual financing rate of 4.89%. The outstanding principal amount of the financing may be prepaid at any time prior to the end of the financing period. The balance of the financing is $9.9 million at March 31, 2023 and is recorded in Accrued expenses and other in our Condensed Consolidated Balance Sheet.
NOTE 6 - LEASES
The Company has operating leases related to the land under certain lodging properties, conference centers, parking spaces, automobiles, our corporate office and other miscellaneous office equipment. These leases have remaining terms of 1 year to 75.3 years, some of which include options to extend the leases for additional years. The exercise of lease renewal options is at our sole discretion. As of March 31, 2023 and December 31, 2022, the weighted-average operating lease term was approximately 33 and 34 years, respectively. Certain leases also include options to purchase the leased property. As of March 31, 2023 and December 31, 2022, our weighted-average incremental borrowing rate for leases was 4.8%.
Certain of our lease agreements include rental payments based on a percentage of revenue over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or restrictive covenants that materially affect our business. In addition, we lease certain owned real estate to third parties. We recorded gross third-party tenant income of $0.7 million and $0.5 million during the three months ended March 31, 2023 and 2022, respectively, which were recorded in Other income, net in our Condensed Consolidated Statement of Operations.
During the three months ended March 31, 2023 and 2022, the Company's total operating lease cost was $1.1 million and $1.0 million, respectively, and the operating cash payments on operating leases were $1.0 million and $0.9 million, respectively. Operating lease maturities as of March 31, 2023 are as follows (in thousands):
| | | | | | | | |
For the Year Ending
December 31, | | Amount |
| 2023 | | $ | 1,637 | |
| 2024 | | 2,144 | |
| 2025 | | 2,165 | |
| 2026 | | 2,199 | |
| 2027 | | 2,282 | |
| Thereafter | | 37,955 | |
Total lease payments (1) | | 48,382 | |
| Less: Imputed interest | | (22,073) | |
| Total | | $ | 26,309 | |
(1)Certain payments above include future increases to the minimum fixed rent based on the Consumer Price Index in effect at the initial measurement of the lease balances.
NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Information about our derivative financial instruments at March 31, 2023 and December 31, 2022 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Notional Amount | | Fair Value |
| Contract date | | Effective Date | | Expiration Date | | Average Annual Effective Fixed Rate | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| October 2, 2017 | | January 29, 2018 | | January 31, 2023 | | 1.98% | | $ | — | | | $ | 100,000 | | | $ | — | | | $ | 208 | |
| October 2, 2017 | | January 29, 2018 | | January 31, 2023 | | 1.98% | | — | | | 100,000 | | | — | | | 210 | |
| June 11, 2018 | | September 28, 2018 | | September 30, 2024 | | 2.86% | | 75,000 | | | 75,000 | | | 1,674 | | | 2,219 | |
| June 11, 2018 | | December 31, 2018 | | December 31, 2025 | | 2.92% | | 125,000 | | | 125,000 | | | 2,924 | | | 4,211 | |
| July 26, 2022 | | January 31, 2023 | | January 31, 2027 | | 2.60% | | 100,000 | | | 100,000 | | | 3,060 | | | 4,366 | |
| July 26, 2022 | | January 31, 2023 | | January 31, 2029 | | 2.56% | | 100,000 | | | 100,000 | | | 3,723 | | | 5,627 | |
| March 24, 2023 | | July 1, 2023 | | January 13, 2026 | | 3.35% | | 100,000 | | | — | | | 541 | | | — | |
| March 24, 2023 | | July 1, 2023 | | January 13, 2026 | | 3.35% | | 100,000 | | | — | | | 532 | | | — | |
| | | | | | | | $ | 600,000 | | | $ | 600,000 | | | $ | 12,454 | | | $ | 16,841 | |
At March 31, 2023 and December 31, 2022, we had $400.0 million of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date.
On March 24, 2023, subsidiaries of the GIC Joint Venture that are the borrowers under the GIC Joint Venture Term Loan entered into two $100.0 million interest rate swaps to fix one-month term SOFR until January 2026. The interest rate swaps have an effective date of July 1, 2023 and a termination date of January 13, 2026. Pursuant to the interest rate swaps, we will pay a fixed rate of 3.354% and receive the one-month term SOFR floating rate index.
Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At March 31, 2023 and December 31, 2022 our interest rate swaps were in an asset position. Derivative assets related to our interest rate swaps are recorded in Other assets in our Condensed Consolidated Balance Sheets. We are not required to post any collateral related to these agreements and are not in breach of any financial provisions of the agreements.
Changes in the fair value of the hedging instruments are deferred in Other comprehensive income and are reclassified as Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings. In the next twelve months, we estimate that $9.2 million will be reclassified from Other comprehensive income and recorded as a decrease to interest expense.
The table below details the location in the financial statements of the realized and unrealized gain or loss related to derivative financial instruments designated as cash flow hedges (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, | | |
| | | 2023 | | 2022 | | | | |
| (Loss) gain recognized in Accumulated other comprehensive loss on derivative financial instruments | | $ | (2,439) | | | $ | 9,813 | | | | | |
| Gain (loss) reclassified from Accumulated other comprehensive loss to Interest expense | | $ | 1,949 | | | $ | (2,300) | | | | | |
| Total interest expense and other finance expense presented in the Condensed Consolidated Statement of Operations in which the effects of cash flow hedges are recorded | | $ | 20,909 | | | $ | 13,439 | | | | | |
| | | | | | | | |
NOTE 8 - EQUITY
Common Stock
The Company is authorized to issue up to 500,000,000 shares of common stock, $0.01 par value per share ("Common Stock"). Each outstanding share of our Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power.
On May 9, 2022, the Company and the Operating Partnership entered into an equity distribution agreement (the “Equity Distribution Agreement”) with a group of underwriters as sales agents for the Company, principals and with certain exceptions, forward sellers (collectively the “Managers”) and certain banks as forward purchasers, providing for the offer and sale of shares of the Company’s Common Stock, having a maximum aggregate offering price of up to $200,000,000 through or to the Managers, as the Company’s sales agents or, if applicable, as forward sellers, or directly to the Managers, as principals (the “2022 ATM Program”). To date, we have not sold any shares of our Common Stock under the 2022 ATM Program.
Changes in Common Stock during the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | |
| For the Three Months Ended
March 31, |
| 2023 | | 2022 |
| Beginning shares of Common Stock outstanding | 106,901,576 | | | 106,337,724 | |
| | | |
| | | |
| Grants under the Equity Plan | 873,563 | | | 626,312 | |
| | | |
| | | |
| | | |
| Performance share and other forfeitures | (137,193) | | | (3,173) | |
| Shares retained for employee tax withholding requirements | (168,083) | | | — | |
| Ending shares of Common Stock outstanding | 107,469,863 | | | 106,960,863 | |
Preferred Stock
The Company is authorized to issue up to 100,000,000 shares of preferred stock, $0.01 par value per share, of which 89,600,000 is currently undesignated, 6,400,000 shares have been designated as 6.25% Series E Cumulative Redeemable Preferred Stock (the "Series E Preferred Stock") and 4,000,000 shares have been designated as 5.875% Series F Cumulative Redeemable Preferred Stock (the "Series F Preferred Stock").
The Company's outstanding shares of preferred stock (collectively, “Preferred Shares”) rank senior to our Common Stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have maturity dates and are not subject to mandatory redemption or sinking fund requirements. The Series E Preferred Stock is redeemable by the Company at its election. The Company may not redeem the Series F Preferred Stock prior to August 12, 2026, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. When redeemable, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25 per share, plus any accumulated, accrued and unpaid distributions up to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s Common Stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series E Preferred Stock is 3.1686 shares of Common Stock and each share of Series F Preferred Stock is 5.875 shares of Common Stock, all subject to certain adjustments.
The Company pays dividends at an annual rate of $1.5625 for each Series E Preferred Stock and $1.46875 for each share of Series F Preferred Stock. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
NOTE 9 - NON-CONTROLLING INTERESTS AND REDEEMABLE NON-CONTROLLING INTERESTS
Non-controlling Interests in Operating Partnership
Pursuant to the limited partnership agreement of our Operating Partnership, the unaffiliated third parties who hold Common Units have the right to cause us to request that we redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of Common Stock at the time of redemption; however, the Company has the option to redeem Common Units with shares of our Common Stock on a one-for-one basis. The number of shares of our Common Stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations. On January 13, 2022 and March 23, 2022, in connection with the NCI Transaction, the Operating Partnership issued an aggregate of 15,864,674 Common Units as partial consideration for the purchase.
At both March 31, 2023 and December 31, 2022, NewcrestImage and other unaffiliated third parties collectively owned 15,976,807 Common Units, which represents approximately 13% of the outstanding Common Units.
We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests, a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (loss) allocated to these Common Units is included on the Company’s Condensed Consolidated Statements of Operations as Net income (loss) attributable to non-controlling interests.
Non-controlling Interests in Consolidated Joint Ventures
At March 31, 2023, the Company is a partner with a majority equity interest in three joint ventures as described below. We classify the non-controlling interests in our joint ventures as a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (loss) allocated to these non-controlling interests is included on the Company’s Condensed Consolidated Statements of Operations as Net income (loss) attributable to non-controlling interests.
GIC Joint Venture
In July 2019, the Company entered into the GIC Joint Venture to acquire assets that align with the Company’s current investment strategy and criteria. The Company serves as general partner and asset manager of the GIC Joint Venture and intends to invest 51% of the equity capitalization of the limited partnership, with GIC investing the remaining 49%. The Company earns fees for providing services to the GIC Joint Venture and has the potential to earn incentive fees based on the GIC Joint Venture achieving certain return thresholds. As of March 31, 2023, the GIC Joint Venture owns 39 lodging properties containing 5,414 guestrooms in nine states.
The GIC Joint Venture owns the lodging properties through master REITs (“Master REIT”) and subsidiary REITs (“Subsidiary REIT”). All of the lodging properties owned by the GIC Joint Venture are leased to taxable REIT subsidiaries of the Subsidiary REITs (“Subsidiary REIT TRSs”). To qualify as a REIT, the Master REIT and each Subsidiary REIT must meet all of the REIT requirements provided in the Internal Revenue Code. Taxable income related to the Subsidiary REIT TRSs is subject to federal, state and local income taxes at applicable tax rates.
Brickell Joint Venture
In June 2022, the Company entered into the Brickell Joint Venture to facilitate the exercise of the Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. Our joint venture partner, C-F Brickell, owns the remaining 10% equity interest in the Brickell Joint Venture. The Company has an option to purchase the remaining 10% equity interest in the Brickell Joint Venture from C-F Brickell in December 2026 with the exercise of a second purchase option at its market value on the exercise date. The Company serves as the managing member of the Brickell Joint Venture.
Onera Joint Venture
In October 2022, the Company entered into a joint venture with Onera (the "Onera Joint Venture"), developers of alternative accommodation properties, with the acquisition of a 90% equity interest in the Onera Joint Venture for $5.2 million in cash, plus additional contingent consideration limited to a maximum of $1.8 million, payable to the seller based on performance of the property for the 12-month period ending July 31, 2023. The Onera Joint Venture owns a 100% fee simple interest in real property and improvements located in Fredericksburg, Texas consisting of 11 glamping lodging units and a 6.4-acre parcel of
undeveloped land that will be developed as phase two of the lodging site in the future. The Company serves as the managing member of the Onera Joint Venture.
Redeemable Non-controlling Interests
In connection with the NCI Transaction, Summit Hotel GP, LLC, a wholly-owned subsidiary of the Company and the sole general partner of the Operating Partnership, on its own behalf as general partner of the Operating Partnership and on behalf of the limited partners of the Operating Partnership, on January 13, 2022, entered into the Tenth Amendment (the “Tenth Amendment”) to the First Amended and Restated Agreement of Limited Partnership of the Operating Partnership, to provide for the issuance of up to 2,000,000 Series Z Preferred Units. The Series Z Preferred Units rank on a parity with the Operating Partnership’s Series E and Series F Preferred Units and holders will receive quarterly distributions at a rate of 5.250% per year. From issuance until the tenth anniversary of their issuance, the Series Z Preferred Units will be redeemable at the holder’s request at any time, or in connection with a change of control of the Company, for, at the Company’s election, cash or shares of the Company’s 5.250% Series Z Cumulative Perpetual Preferred Stock (which will be designated and authorized following notice of redemption by holder of the Series Z Preferred Units) on a one-for-one basis. After the fifth anniversary of their issuance, the Company may redeem the Series Z Preferred Units for cash at a redemption amount of $25 per unit. For a 90-day period immediately following both the tenth and the eleventh anniversaries of their issuance or in connection with a change of control of the Company, the Series Z Preferred Units will be redeemable at the holder’s request for cash at a redemption amount of $25 per unit. On January 13, 2022 and March 23, 2022, in connection with the NCI Transaction, the Operating Partnership issued an aggregate of 2,000,000 Series Z Preferred Units as partial consideration for the purchase. At March 31, 2023, the redeemable Series Z Preferred Units issued in connection with the NCI Transaction are recorded as temporary equity and reflected as Redeemable non-controlling interests on our Consolidated Condensed Balance Sheet.
NOTE 10 - FAIR VALUE MEASUREMENT
The following table presents information about our financial instruments measured at fair value on a recurring basis at March 31, 2023 and December 31, 2022. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2023 using |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Interest rate swaps | | $ | — | | | $ | 12,454 | | | $ | — | | | $ | 12,454 | |
| Purchase options related to real estate loans | | — | | | — | | | 931 | | | 931 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2022 using |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Interest rate swaps | | $ | — | | | $ | 16,841 | | | $ | — | | | $ | 16,841 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The Onera Purchase Option does not have a readily determinable fair value. The fair value was estimated using the Black-Scholes model and was based on unobservable inputs for which there is little or no market information available. As such, we were required to develop assumptions to determine the fair value of the Onera Purchase Option as follows (dollar amounts in thousands):
| | | | | | | | |
| | |
| Exercise price | | $ | 8,206 | |
First option exercise date (1) | | 10/1/2024 |
| Expected volatility | | 52.20 | % |
| Risk free rate | | 4.15 | % |
| Expected annualized equity dividend yield | | — | % |
(1)The first option exercise date is the date used for estimating the fair value of the purchase option. The Onera Purchase Option is exercisable when the lodging facility is fully constructed and open for business and expires one year from the date that it is initially exercisable.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Franchise Agreements
All of our lodging properties (with the exception of the Onera Joint Venture property) operate under franchise agreements with major hotel franchisors. The terms of our franchise agreements generally range from 10 to 20 years with various extension provisions. Each franchisor receives franchise fees ranging from 2% to 6% of each lodging property’s gross revenue, and some agreements require that we pay marketing fees of up to 4% of gross revenue. In addition, some of these franchise agreements require that we deposit a percentage of the hotel property’s gross revenue, generally not more than 5%, into a reserve fund for capital expenditures. We also pay fees to our franchisors for services related to reservation and information systems. We expensed fees related to our franchise agreements of $13.0 million and $10.1 million for the three months ended March 31, 2023 and 2022, respectively.
Management Agreements
Our lodging properties operate pursuant to management agreements with various professional third-party management companies. The terms of our management agreements range from month-to-month to twenty-five years with various extension provisions. Each management company receives a base management fee, which is a percentage of total lodging property revenues. In some cases, there are also monthly fees for certain services, such as accounting, based on the number of guestrooms. Generally, there are also incentive fees based on attaining certain financial thresholds. Management fee expenses were $4.8 million and $3.8 million for the three months ended March 31, 2023 and 2022, respectively.
Litigation
We are involved from time to time in litigation arising in the ordinary course of business. There are currently no pending legal actions that we believe would have a material effect on our financial position or results of operations.
NOTE 12 - EQUITY-BASED COMPENSATION
Our currently outstanding equity-based awards were issued under the Summit Hotel Properties, Inc. 2011 Equity Incentive Plan, as amended and restated effective May 13, 2021 (the "Equity Plan"), which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive awards. Stock options granted may be either incentive stock options or non-qualified stock options. Vesting terms may vary with each grant. At March 31, 2023, we only have outstanding restricted stock awards. All of our outstanding equity-based awards are classified as equity awards.
Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes time-based restricted stock award activity under our Equity Plan for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| | | Number
of Shares | | Weighted-Average
Grant Date
Fair Value | | Aggregate
Current Value |
| | | | | (per share) | | (in thousands) |
| Non-vested at December 31, 2022 | | 654,804 | | | $ | 9.85 | | | $ | 5,909 | |
| Granted | | 447,656 | | | 7.66 | | | |
| Vested | | (193,144) | | | 9.71 | | | |
| | | | | | |
| Non-vested at March 31, 2023 | | 909,316 | | | $ | 8.83 | | | $ | 6,229 | |
The awards granted to our non-executive employees prior to 2022 vest over a four-year period based on continuous service (20% on the first, second and third anniversary of the grant date and 40% on the fourth anniversary of the grant date). The awards granted to our non-executive employees in 2022 and thereafter vest over a three-year period based on continuous service (25% on the first and second anniversary of the grant date and 50% on the third anniversary of the grant date).
The awards granted to our executive officers generally vest over a three-year period based on continuous service (25% on the first and second anniversary of the grant date and 50% on the third anniversary of the grant date) or in certain circumstances upon a change in control.
The holders of these awards have the right to vote their unvested restricted shares of Common Stock and receive all dividends declared and paid whether or not vested. The fair value of time-based restricted stock awards granted is calculated based on the market value of our Common Stock on the date of grant.
Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
The following table summarizes performance-based restricted stock activity under the Equity Plan for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| | | Number
of Shares | | Weighted-Average
Grant Date
Fair Value (1) | | Aggregate
Current Value |
| | | | | (per share) | | (in thousands) |
| Non-vested at December 31, 2022 | | 1,006,974 | | | $ | 11.76 | | | $ | 7,270 | |
| Granted | | 425,907 | | | 10.08 | | | |
| Vested | | (239,416) | | | 9.38 | | | |
| Forfeited | | (137,193) | | | 9.38 | | | |
| Non-vested at March 31, 2023 | | 1,056,272 | | | $ | 11.93 | | | $ | 7,235 | |
(1) The amounts included in this column represent the expected future value of the performance-based restricted stock awards calculated using the Monte Carlo simulation valuation model.
Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our Common Stock on the grant date. The fair value of the performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model. These awards cliff vest on the third anniversary of the grants based on our total shareholder return relative to the total shareholder return of companies within the Dow Jones U.S. Hotels Index at the end of the period or upon a change in control. The awards generally require continuous service during the measurement period and are subject to the other conditions described in the Equity Plan or award document.
The number of shares the executive officers may earn under these awards range from zero shares to twice the number of shares granted based on our percentile ranking within the index at the end of the measurement period. In addition, a portion of the performance-based shares may be earned based on the Company's absolute total shareholder return calculated during the performance period.
The holders of these awards have the right to vote their unvested restricted shares of Common Stock and any dividends declared accrue and will be subject to the same vesting conditions as the awards. Further, if additional shares are earned based on our percentile ranking within the index, dividend payments will be issued as if the additional shares had been held throughout the measurement period.
Equity-Based Compensation Expense
Equity-based compensation expense included in Corporate general and administrative expenses in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Time-based restricted stock | | $ | 690 | | | $ | 992 | | | | | |
| Performance-based restricted stock | | 778 | | | 2,674 | | | | | |
| Director stock | | — | | | 32 | | | | | |
| | $ | 1,468 | | | $ | 3,698 | | | | | |
The Company's former Executive Vice President and Chief Operating Officer departed the Company in March 2022. The Company recorded $1.3 million of additional stock-based compensation expense during the period related to the modification of certain stock award agreements. This amount was comprised of $0.4 million related to time-based restricted stock awards and $0.9 million related to performance-based restricted stock awards.
Additionally, during the three months ended March 31, 2022, we granted a new member of our Board of Directors 3,234 shares of fully vested shares of our Common Stock at $9.94 per share.
We recognize equity-based compensation expense ratably over the vesting periods. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions.
Unrecognized equity-based compensation expense for all non-vested awards pursuant to our Equity Plan was $14.5 million at March 31, 2023 and will be recorded as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2023 | | 2024 | | 2025 | | 2026 | |
| Time-based restricted stock | | $ | 6,721 | | | $ | 2,565 | | | $ | 2,586 | | | $ | 1,359 | | | $ | 211 | | |
| Performance-based restricted stock | | 7,780 | | | 2,950 | | | 2,914 | | | 1,654 | | | 262 | | |
| | | $ | 14,501 | | | $ | 5,515 | | | $ | 5,500 | | | $ | 3,013 | | | $ | 473 | | |
NOTE 13 - INCOME TAXES
We have elected to be taxed as a REIT. As a REIT, we are generally not subject to corporate-level income taxes on taxable income we distribute to our shareholders.
Income related to our TRS Lessees is subject to federal, state and local taxes at applicable corporate tax rates. Our consolidated tax provision includes the income tax provision related to the operations of the TRS Lessees as well as state and local income taxes related to the Operating Partnership.
Where required, we account for federal and state income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for: i) the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and the respective carrying amounts for tax purposes, and ii) operating losses and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized based on consideration of available evidence. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. Certain of our TRS Lessees have incurred operating losses and are in a three-year cumulative loss measured on a rolling twelve quarter basis. A cumulative loss is significant negative evidence that the realizability of our deferred tax assets at March 31, 2023 is not reasonably assured. Therefore, we have recorded a valuation allowance against substantially all our deferred tax assets at March 31, 2023.
The Company recorded an income tax benefit of $0.5 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively.
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. In general, we are not subject to tax examinations by tax authorities for years before 2018. In the normal course of business, we are subject to examination by federal, state, and local jurisdictions where applicable. We had no unrecognized tax benefits at March 31, 2023. We expect no significant increase or decrease in unrecognized tax benefits due to changes in tax positions within the next year.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures.
Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the
restricted cash reserves.
Supplemental cash flow information for the three months ended March 31, 2023 and 2022 is as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| | 2023 | | 2022 |
| | | | |
| Cash payments for interest | | $ | 21,436 | | | $ | 11,213 | |
| Accrued acquisitions and improvements to lodging properties | | $ | 5,384 | | | $ | 3,749 | |
| | | | |
| Cash payments for income taxes, net of refunds | | $ | 110 | | | $ | 60 | |
| Debt assumed to complete acquisition of properties | | $ | — | | | $ | 335,205 | |
| Assumption of leases and other assets and liabilities in connection with the acquisition of a portfolio of properties | | $ | — | | | $ | 9,206 | |
| | | | |
| | | | |
| Insurance premium financing | | $ | 10,877 | | | $ | — | |
| | | | |
| Non-controlling interests in operating partnership issued to complete acquisition of a portfolio of properties | | $ | — | | | $ | 157,513 | |
| Redeemable non-controlling interests in operating partnership issued to complete acquisition of a portfolio of properties | | $ | — | | | $ | 50,000 | |
NOTE 15 - SUBSEQUENT EVENTS
Dividends
On April 27, 2023, our Board of Directors declared quarterly cash dividends and distributions of $0.06 per share on our Common Stock and per Common Unit of the Operating Partnership and cash dividends of $0.390625 per share of 6.25% Series E Cumulative Redeemable Preferred Stock and $0.3671875 per share of 5.875% Series F Cumulative Redeemable Preferred Stock. The Board of Directors also declared on behalf of the Operating Partnership, a cash distribution of $0.328125 per share of the Operating Partnership's unregistered 5.25% Series Z Cumulative Perpetual Preferred Units. The dividends and distributions are payable on May 31, 2023 to holders of record as of May 17, 2023.
PART I - FINANCIAL INFORMATION
