NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Organization
Organization
Watermark Lodging Trust, Inc. (“WLT” or the “Company”), is a self-managed, publicly owned, non-traded real estate investment trust (“REIT”) that, together with its consolidated subsidiaries, invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States.
Substantially all of our assets and liabilities are held by, and all of our operations are conducted through CWI 2 OP, LP (the “Operating Partnership”) and we are a general partner and a limited partner of, and owned a 99.0% capital interest in, the Operating Partnership, as of December 31, 2021. Watermark Capital Partners, LLC (“Watermark Capital”), which is 100% owned by Mr. Michael G. Medzigian, our Chief Executive Officer, held the remaining 1.0% in the Operating Partnership as of December 31, 2021.
On April 13, 2020, a direct, wholly-owned subsidiary (“Merger Sub”) of Carey Watermark Investors 2 Incorporated (“CWI 2”) merged with and into Carey Watermark Investors Incorporated (“CWI 1”) in an all-stock transaction in which the former stockholders of CWI 1 became stockholders of CWI 2 (the “Merger”). After giving effect to the Merger, CWI 1 became a wholly owned subsidiary of CWI 2 and CWI 2 changed its name to WLT. Concurrently with the closing of the Merger, CWI 2 completed an internalization transaction through which it became self-managed.
Until April 13, 2020, we were managed by Carey Lodging Advisors, LLC (the “Advisor”), an indirect subsidiary of W. P. Carey Inc. (“WPC”). The Advisor managed our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that managed our hotels. CWA, LLC (the “CWI 1 Subadvisor”), a subsidiary of Watermark Capital, provided services to the Advisor, primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that managed the day-to-day operations of our hotels. In addition, the CWI 1 Subadvisor provided us with the services of our Chief Executive Officer, subject to the approval of our independent directors.
We held ownership interests in 25 hotels as of December 31, 2021, including 24 hotels that we consolidated (“Consolidated Hotels”) and one hotel that we recorded as an equity investment (“Unconsolidated Hotel”).
COVID-19, Management’s Plans and Liquidity
The novel coronavirus (“COVID-19”) pandemic has had a material adverse effect on our business, results of operations, financial condition and cash flows and will continue to do so for the reasonably foreseeable future. As of March 28, 2022, all of our hotels are open but many are operating at significantly reduced levels of occupancy and staffing. Although results improved relative to 2020, we cannot estimate with certainty when travel demand will fully recover or how new variants of COVID-19 could impact recovery. We have generally seen improving demand at our properties as government-imposed restrictions and limitations on travel and large gatherings have loosened and as the vaccines have become more widely available. We expect the recovery to occur unevenly across our portfolio, with hotels that cater to business travel recovering more slowly than resort properties. Governmental and business efforts to encourage or mandate vaccinations, and public adoption rates of vaccines, impact the recovery from the COVID-19 pandemic and may have disruptive effects on certain segments of the labor market. Individual ability or desire to travel and corporate travel policies will continue to be impacted by the COVID-19 pandemic and affect the recovery of our properties. The ultimate severity and duration of the COVID-19 pandemic and its effects, and the emergence of variants, are uncertain, including whether COVID-19 will become endemic or cyclical in nature. Given these uncertainties, we cannot estimate with reasonable certainty the impact on our business, financial condition or near- or long-term financial or operational results.
As of December 31, 2021, we had cash and cash equivalents of $249.5 million. As of December 31, 2021, the mortgage loans for our Consolidated Hotels had an aggregate principal balance totaling $2.0 billion outstanding, all of which is mortgage indebtedness and is generally non-recourse, subject to customary non-recourse carve-outs, except that we have provided certain lenders with limited corporate guaranties aggregating $17.0 million for items such as property taxes, deferred debt service and amounts drawn from furniture, fixtures and equipment reserves to pay expenses, in connection with loan modification agreements. We have continued to work with our lenders to address loans with near-term mortgage maturities and during the year ended December 31, 2021, have refinanced or extended the maturity date of 11 Consolidated Hotel mortgage loans, aggregating $1.0 billion of indebtedness. Of the $2.0 billion aggregate principal balance indebtedness outstanding as of
Notes to Consolidated Financial Statements
December 31, 2021, approximately $1.2 billion is scheduled to mature during the 12 months after the date of this Report, which included a total of $121.7 million that has been refinanced subsequent to December 31, 2021 (Note 16). If the Company is unable to repay, refinance or extend maturing mortgage loans, we may choose to market these assets for sale or the lenders may declare events of default and seek to foreclose on the underlying hotels or we may also seek to surrender properties back to the lender.
Our primary cash uses through December 31, 2022 are expected to be payment of debt service, costs associated with the refinancing or restructuring of indebtedness, funding corporate and hotel level operations, payment of real estate taxes and insurance, payment of preferred stock dividends and redemption of the Series A Preferred Stock, as defined in Note 14. Our primary capital sources to meet such uses are expected to be funds generated by hotel operations, cash on hand and proceeds from additional asset sales.
We cannot predict with reasonable certainty when our hotels will return to normalized levels of operations after the effects of the COVID-19 pandemic subside or whether hotels will be forced to shut down operations or impose additional restrictions due to a resurgence of COVID-19 cases in the future. Therefore, as a consequence of these unprecedented trends resulting from the impact of the COVID-19 pandemic, we are unable to estimate future financial performance with reasonable certainty.
Note 2. Summary of Significant Accounting Policies
Critical Accounting Policies and Estimates
Accounting for Acquisitions
In accordance with the guidance for business combinations, we determine whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. Each business combination is then accounted for by applying the acquisition method. If the assets acquired are not a business, we account for the transaction or other event as an asset acquisition. Under both methods, we recognize the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, we evaluate the existence of goodwill or a gain from a bargain purchase. We capitalize acquisition-related costs and fees associated with asset acquisitions. We immediately expense acquisition-related costs and fees associated with business combinations, which are included in Transaction costs in the consolidated statements of operations.
See Note 3 for the valuation methodologies, inputs, and assumptions used to estimate the fair value of the assets acquired, the liabilities assumed, and the noncontrolling interests acquired in the Merger (as defined in Note 3). See Note 4 for the valuation methodologies, inputs, and assumptions used to estimate the fair value of the assets acquired and the liabilities assumed in the acquisition of the remaining 20% interest in the Hyatt Centric French Quarter Venture.
Impairments
We periodically assess whether there are any indicators that the value of our long-lived real estate and related intangible assets may be impaired and that their carrying value may not be recoverable. These impairment indicators include, but are not limited to, when a hotel property experiences a current or projected loss from operations, when it becomes more likely than not that a hotel property will be sold before the end of its useful life, or when there are adverse changes in the demand for lodging due to declining national or local economic conditions. We may incur impairment charges on long-lived assets, including real estate, related intangible assets and equity investments. Our policies and estimates for evaluating whether these assets are impaired are presented below.
Notes to Consolidated Financial Statements
Real Estate — For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future net undiscounted cash flow that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. The undiscounted cash flow analysis requires us to make our best estimate of, among other things, net operating income (“NOI”), residual values and holding periods.
Our investment objective is to hold properties on a long-term basis. Depending on the assumptions made and estimates used, the future cash flow projected in the evaluation of long-lived assets and associated intangible assets can vary within a range of outcomes. We consider the likelihood of possible outcomes in determining our estimate of future cash flows and, if warranted, we apply a probability-weighted method to the different possible scenarios. If the future net undiscounted cash flow of the property’s asset group is less than the carrying value, the carrying value of the property’s asset group is considered not recoverable. We then measure the loss as the excess of the carrying value of the property’s asset group over its estimated fair value. The estimated fair value of the property’s asset group is primarily determined using market information from outside sources such as broker quotes or recent comparable sales. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for the inherent risk associated with each investment, using estimates such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth.
Equity Investments in Real Estate — We evaluate our equity investments in real estate on a periodic basis to determine if there are any indicators that the value of our equity investment may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, we measure the charge as the excess of the carrying value of our investment over its estimated fair value. We estimate the fair value of the hotel property using the methodologies discussed above and estimate the fair value of the debt using a discounted cash flow model with rates that take into account the interest rate risk. We also consider the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.
Other Accounting Policies
Basis of Presentation and Consolidation — The consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.
When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity (“VIE”), and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply the accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Certain decision-making rights within a loan or joint-venture agreement can cause us to consider an entity a VIE. Limited partnerships and other similar entities that operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.
Notes to Consolidated Financial Statements
As of December 31, 2021 and 2020, we considered one and three entities to be VIEs, all of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Net investments in hotels | $ | 264,984 | | | $ | 461,142 | |
Intangible assets, net | 28,819 | | | 36,234 | |
Total assets | 315,088 | | | 520,833 | |
| | | |
Non-recourse debt, net | $ | 178,029 | | | $ | 327,597 | |
Total liabilities | 201,557 | | | 354,193 | |
Reclassifications — Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents and Restricted Cash — Our cash is held in the custody of several financial institutions, and these balances, at times, exceed federally-insurable limits. We seek to mitigate this risk by depositing funds only with major financial institutions. Restricted cash consists primarily of amounts escrowed pursuant to the terms of our mortgage debt to fund planned renovations and improvements, property taxes, insurance, and normal replacement of furniture, fixtures and equipment at our hotels. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Cash and cash equivalents | $ | 249,478 | | | $ | 160,383 | | | $ | 70,605 | |
Restricted cash | 99,000 | | | $ | 91,081 | | | 54,699 | |
Total cash and cash equivalents and restricted cash | $ | 348,478 | | | $ | 251,464 | | | $ | 125,304 | |
Share Repurchases — Share repurchases are recorded as a reduction of common stock par value and additional paid-in capital under our redemption plan, pursuant to which we may elect to redeem shares at the request of our stockholders, subject to certain exceptions, conditions, and limitations. The maximum amount of shares purchasable by us in any period depends on a number of factors and is at the discretion of our board of directors.
Real Estate — We carry land, buildings and personal property at cost less accumulated depreciation. We capitalize improvements and we expense replacements, maintenance and repairs that do not improve or extend the life of the respective assets as incurred. Renovations and/or replacements at the hotel properties that improve or extend the life of the assets are capitalized and depreciated over their useful lives, and repairs and maintenance are expensed as incurred. We capitalize interest and certain other costs, such as incremental labor costs relating to hotels undergoing major renovations and redevelopments.
Gain/Loss on Sale — We recognize gains and losses on the sale of properties when the transaction meets the definition of a contract, criteria are met for the sale of one or more distinct assets and control of the properties is transferred.
Equity Investments in Real Estate — We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.
Other Assets and Liabilities — Other assets consists primarily of prepaid expenses, costs related to the internalization of Watermark Capital representing goodwill as of December 31, 2021 (Note 15) and hotel inventories in the consolidated financial statements. Other liabilities, which are included in Accounts payable, accrued expenses and other liabilities, consists primarily
Notes to Consolidated Financial Statements
of unamortized key money, hotel advance deposits, sales and use and occupancy taxes payable, deferred tax liabilities and accrued income taxes.
Deferred Financing Costs — Deferred financing costs represent costs to obtain mortgage financing. We amortize these charges to interest expense over the term of the related mortgage using a method which approximates the effective interest method. Deferred financing costs are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability.
Segments — We operate in one business segment, hospitality, with domestic investments.
Leases — Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. We determine if an arrangement contains a lease at contract inception and determine the classification of the lease at commencement. Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We do not include renewal options in the lease term when calculating the lease liability unless we are reasonably certain we will exercise the option. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our variable lease payments may consist of payments based on a percentage of revenue and increases as a result of Consumer Price Index or other comparable indices. Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease.
The implicit rate within our operating leases is generally not determinable and, as a result, we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using estimated baseline mortgage rates. These baseline rates are determined based on a review of current mortgage debt market activity for benchmark securities utilizing a yield curve. The rates are then adjusted for various factors, including level of collateralization and lease term.
Hotel Revenue Recognition — Revenue consists of amounts derived from hotel operations, including the sale of rooms, food and beverage and revenue from other operating departments, such as parking, spa, resort fees and gift shops, and is presented on a disaggregated basis on the consolidated statements of operations. These revenues are recorded net of any sales or occupancy taxes, which are collected from our guests as earned. All rebates or discounts are recorded as a reduction in revenue and there are no material contingent obligations with respect to rebates or discounts offered by us.
We recognize revenue when control of the promised good or service is transferred to the guest, in an amount that reflects the consideration we expect to receive in exchange for the promised good or service. Room revenue is generated through contracts with guests whereby the guest agrees to pay a daily rate for the right to use a hotel room and applicable amenities for an agreed upon length of stay. Our contract performance obligations are fulfilled at the end of the day that the guest is provided the room and revenue is recognized daily at the contract rate. Food and beverage revenue, including restaurant and banquet and catering services, are recognized at a point in time once food and beverage has been provided. Other operating department revenue for services such as parking, spa and other ancillary services, is recognized at a point in time when the goods and services are provided to the guest. We may engage third parties to provide certain services at the hotel, for example, audiovisual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenues as appropriate (i.e., gross vs. net).
Payment is due at the time that goods or services are rendered or billed. For room revenue, payment is typically due and paid in full at the end of the stay with some guests prepaying for their rooms prior to the stay. For package revenue, where ancillary guest services are included with the guests’ hotel reservations in a package arrangement, we allocate revenue based on the stand-alone selling price for each of the components of the package. We applied a practical expedient to not disclose the value of unsatisfied performance obligations for contracts that have an original expected length of one year or less. Any contracts that have an original expected length of greater than one year are insignificant.
Capitalized Costs — We capitalize interest and certain other costs, such as property taxes, land leases, property insurance and incremental labor costs relating to hotels undergoing major renovations and redevelopments. We begin capitalizing interest as we incur disbursements, and capitalize other costs when activities necessary to prepare the asset ready for its intended use are underway. We cease capitalizing these costs when construction is substantially complete.
Depreciation and Amortization — We compute depreciation for hotels and related building improvements using the straight-line method over the estimated useful lives of the properties (limited to 40 years for buildings and ranging from four years up to
Notes to Consolidated Financial Statements
the remaining life of the building at the time of addition for building improvements), site improvements (generally four to 15 years), and furniture, fixtures and equipment (generally one to 12 years).
Derivative Instruments — We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated and qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive loss until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. In accordance with fair value measurement guidance, counterparty credit risk is measured on a net portfolio position basis.
Income Taxes — We elect to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code. In order to maintain our qualification as a REIT, we are required, among other things, to distribute at least 90% of our REIT net taxable income to our stockholders and meet certain tests regarding the nature of our income and assets. As a REIT, we are not subject to federal income taxes on our income and gains that we distribute to our stockholders as long as we satisfy certain requirements, principally relating to the nature of our income and the level of our distributions, as well as other factors. We believe that we have operated, and we intend to continue to operate, in a manner that allows us to continue to qualify as a REIT.
We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.
We elect to treat certain of our corporate subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may perform additional services for our investments and generally may engage in any real estate or non-real estate-related business (except for the operation or management of health care facilities or lodging facilities or providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal, state and local income taxes.
Significant judgment is required in determining our tax provision and in evaluating our tax positions. We establish tax reserves based on a benefit recognition model, which could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. We derecognize the tax position when it is no longer more likely than not of being sustained.
Our earnings and profits, which determine the taxability of distributions to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in depreciation and timing differences of certain income and expense recognitions, for federal income tax purposes. Deferred income taxes relate primarily to our TRSs and are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities of our TRSs and their respective tax bases and for their operating loss and tax credit carry forwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. 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 available evidence, including tax planning strategies and other factors (Note 13).
We recognize deferred income taxes in certain of our subsidiaries taxable in the United States. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes as described in Note 13). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years. Deferred income taxes are computed under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial bases of assets and liabilities. We provide a valuation allowance against our deferred income tax assets when we believe that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).
Notes to Consolidated Financial Statements
Share-Based Payments — We have granted restricted stock units (“RSUs”) to certain employees (and prior to the Merger, employees of our former subadvisor). RSUs issued to employees generally vest over three years, and are subject to continued employment. We also issued Class A common stock to our directors as part of their director compensation. The expense recognized for share-based payment transactions for awards made to directors is based on the grant date fair value estimated in accordance with current accounting guidance for share-based payments. Share-based payment transactions for awards made to employees are based on the fair value of the shares on the date of grant. We recognize these compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the award. We include share-based payment transactions within Corporate general and administrative expense.
Loss (Income) Attributable to Noncontrolling Interests — Earnings attributable to noncontrolling interests are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.
Loss Per Share — Loss per share, as presented, represents both basic and diluted per-share amounts for all periods presented in the consolidated financial statements. We calculate loss per share using the two-class method to reflect the different classes of our outstanding common stock. Loss per basic share of common stock is calculated by dividing Net loss attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during the year. The allocation of Net loss attributable to common stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the years ended December 31, 2021, 2020 and 2019, as applicable.
Note 3. Merger of CWI 1 and CWI 2
On April 13, 2020, Merger Sub merged, with and into CWI 1, in an all-stock transaction to create WLT. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of October 22, 2019 (as amended, the “Merger Agreement”), by and among CWI 2, CWI 1 and Merger Sub.
In accordance with the Merger Agreement, at the effective time of the Merger (the “effective time”) each issued and outstanding share of CWI 1’s common stock (or fraction thereof), $0.001 par value per share (“CWI 1 common stock”), was converted into the right to receive 0.9106 shares (the “exchange ratio”) of WLT Class A common stock, $0.001 par value per share (“WLT Class A common stock”). Also at the effective time, all RSUs of CWI 1 outstanding and unvested immediately prior to the effective time were converted into an RSU of WLT with respect to a whole number of shares of WLT Class A common stock equal to (i) the number of shares of CWI 1 common stock subject to such unvested RSU of CWI 1, multiplied by (ii) the exchange ratio.
Immediately following the effective time of the Merger, the internalization of the management of the Company (the “Internalization”) was consummated pursuant to the Internalization Agreement, dated as of October 22, 2019 (as amended, the “Internalization Agreement”), by and among CWI 1, CWI OP, LP, the Operating Partnership, WPC, Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, the Advisor, Watermark Capital, the CWI 1 Subadvisor and CWA2, LLC (the “CWI 2 Subadvisor” and together with CWI 1 Subadvisor, the “Subadvisors”).
In accordance with the Internalization Agreement, CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively (the “Redemption”). As consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, WLT or the Operating Partnership (as applicable) issued equity consisting of (x) 2,840,549 shares of CWI 2 Class A common stock, to affiliates of WPC, (y) 1,300,000 shares of WLT Series A preferred stock, $0.001 par value per share, to affiliates of WPC, with a liquidation preference of $50.00 per share ($65,000,000 in the aggregate) (Note 14), and (z) 2,417,996 limited partnership units in the Operating Partnership, to affiliates of Watermark Capital. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively.
Immediately following the Redemption, the existing advisory agreements, as amended, between CWI 1 or CWI 2 (as applicable) and the Advisor, and the existing sub‑advisory agreements, as amended, between the Advisor and the Subadvisors (as applicable), were automatically terminated. The secured credit facilities entered into by CWI OP, LP or the Operating Partnership (as applicable) as borrower, and CWI 1 or CWI 2 (as applicable) as guarantor, with WPC as lender, each matured at the time of the expiration of such existing advisory agreements and the applicable loan agreements and loan documents were terminated. Neither CWI 1 nor CWI 2 had any outstanding obligations under the respective facilities.
Notes to Consolidated Financial Statements
The Merger was accounted for as a business combination in accordance with current authoritative accounting guidance. CWI 1 was the accounting acquirer in the Merger as (i) CWI 1’s pre-merger stockholders had a majority of the voting power in the Company after the Merger and (ii) CWI 1 was significantly larger than CWI 2 when considering assets and revenues. As CWI 1 was the accounting acquirer while CWI 2 was the legal acquirer, the Merger was accounted for as a reverse acquisition, and therefore, the historical financial information included in the Company’s financial statements as of any date, or for any periods prior to April 13, 2020, represents the pre-merger information of CWI 1. The financial statements of the Company, as set forth herein, represent a continuation of the financial information of CWI 1 as the accounting acquirer, except that the equity structure of WLT is adjusted to reflect the equity structure of the legal acquirer, CWI 2, including for comparative periods, by applying the exchange ratio of 0.9106.
As a result of the Merger, the Company acquired an ownership interest in the following 12 hotel properties: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Hotels | | State | | Number of Rooms | | % Acquired | | Hotel Type |
Charlotte Marriott City Center | | NC | | 446 | | 100% | | Full-Service |
Courtyard Nashville Downtown | | TN | | 192 | | 100% | | Select-Service |
Embassy Suites by Hilton Denver-Downtown/Convention Center | | CO | | 403 | | 100% | | Full-Service |
Le Méridien Arlington | | VA | | 154 | | 100% | | Full-Service |
Marriott Sawgrass Golf Resort & Spa (a) | | FL | | 514 | | 50% | | Resort |
Renaissance Atlanta Midtown Hotel | | GA | | 304 | | 100% | | Full-Service |
Ritz-Carlton Bacara, Santa Barbara (a) | | CA | | 358 | | 60% | | Resort |
Ritz-Carlton Key Biscayne (b) | | FL | | 443 | | 19.3% | | Resort |
Ritz-Carlton San Francisco | | CA | | 336 | | 100% | | Full-Service |
San Diego Marriott La Jolla | | CA | | 376 | | 100% | | Full-Service |
San Jose Marriott | | CA | | 510 | | 100% | | Full-Service |
Seattle Marriott Bellevue | | WA | | 384 | | 100% | | Full-Service |
| | | | 4,420 | | | | |
___________ (a)Upon closing of the Merger, the Company owned 100% of this hotel.
(b)Upon closing of the Merger, the Company owned 66.7% of this hotel.
As the Merger is accounted for as a reverse acquisition, the fair value of the consideration transferred is measured based upon the number of shares of CWI 1 common stock, as the accounting acquirer, would theoretically have to issue to the stockholders of CWI 2 to achieve the same ratio of ownership in the combined company upon completion of the Merger and applying the fair value per implied share of CWI 1 common stock issued in consideration.
As a result, the implied shares of CWI 1 common stock issued in consideration was computed based on the number of outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger divided by the exchange ratio of 0.9106.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) | | | | | |
Total Merger Consideration | |
Outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger | 94,480,247 | |
Exchange ratio | 0.9106 | |
Implied shares of CWI 1 common stock issued in consideration | 103,756,037 | |
Fair value per implied share of CWI 1 common stock issued in consideration | $ | 4.83271 | |
Fair value of implied shares of CWI 1 common stock issued in consideration | 501,423 | |
Fair value of noncontrolling interest acquired | (39,414) | |
Fair value of purchase consideration | $ | 462,009 | |
The following tables present a summary of assets acquired and liabilities assumed in this business combination, at the date of acquisition; as well as and revenues and earnings thereon, from the date of acquisition through December 31, 2020 (in thousands): | | | | | |
| Purchase Price Allocation |
Assets | |
Net investments in hotels | $ | 1,556,383 | |
Operating lease right-of-use assets | 974 | |
Cash and cash equivalents | 71,881 | |
Intangible assets | 10,200 | |
Restricted cash | 37,594 | |
Accounts receivable, net | 25,664 | |
Other assets | 15,593 | |
Total Assets | 1,718,289 | |
Liabilities | |
Non-recourse debt, net | (1,002,753) | |
Accounts payable, accrued expenses and other liabilities | (97,843) | |
Operating lease liabilities | (1,874) | |
Due to related parties and affiliates | (1,520) | |
Total Liabilities | (1,103,990) | |
Total Identifiable Net Assets | 614,299 | |
Fair value of CWI 1's equity interests in jointly-owned investments with CWI 2 prior to the merger | (73,594) | |
Bargain purchase gain | (78,696) | |
Fair value of purchase consideration | $ | 462,009 | |
| | | | | |
| From April 13, 2020 through December 31, 2020 |
Revenues | $ | 69,545 | |
Net loss | $ | (150,176) | |
We recognized a bargain purchase gain of $78.7 million in connection with the Merger resulting from the estimated fair values of the assets acquired net of liabilities assumed exceeding the consideration paid.
The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the noncontrolling interests acquired:
Net investments in hotels — The Company estimated the fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the income capitalization and sales comparison approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth.
Notes to Consolidated Financial Statements
Intangible assets — The Company estimated the fair market value of the trade name through a relief-from-royalty discounted cash flow method whereby the Company valued the avoided third-party license payment for the right to employ the asset to earn benefits. Our intangibles are included in Intangible assets, net in the consolidated financial statements. Amortization of intangibles is included in Depreciation and amortization in the consolidated financial statements.
In connection with the Merger, we have recorded intangibles comprised as follows (life in years, dollars in thousands): | | | | | | | | | | | |
| Weighted-Average Life | | Amount |
Amortizable Intangible Assets | | | |
Trade name | 8.0 | | $ | 9,400 | |
In-place leases | 3.2 | | 800 | |
Total intangible assets | | | $ | 10,200 | |
Non-recourse debt — We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate, which are Level 3 inputs in the fair value hierarchy. We recognized a discount of approximately $69.5 million on the mortgage loans assumed in the Merger, which is included in non-recourse debt, net in the consolidated balance sheet. The discount is amortized over the remaining terms of the respective debt instruments as adjustments to interest expense in the consolidated statements of operations.
Noncontrolling interest — The Company estimated the fair value of the consolidated joint venture by using the same valuation methodologies for the investment in hotel properties noted above. The Company then recognized the fair value of the noncontrolling interest in the consolidated joint venture based on the joint venture partner's ownership interest in the consolidated joint venture. This valuation methodology is based on Level 3 inputs and assumptions in the fair value hierarchy.
Cash and cash equivalents, restricted cash, accounts receivable, net, other assets, accounts payable, accrued expenses and other liabilities, and due to related parties and affiliates —The carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities.
The fair value per implied share of CWI 1 common stock issued in consideration was calculated using estimated fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment of the CWI 1 hotel properties as of April 13, 2020 and estimates of the fair market value of the CWI 1 mortgage debt at the same date, based upon the methodologies discussed above, then adjusted to reflect CWI 1’s ownership interest in joint venture properties, including adjustments to appropriately capture specific joint venture promote structures. The shares used in the calculation represent the outstanding shares of CWI 1 immediately prior to the Merger.
Transaction costs incurred in connection with the Merger and related transactions included legal, accounting, financial advisory and other transaction costs. These costs were expensed as incurred in the consolidated statements of operations.
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | | 2020 | | 2019 |
Transaction costs | | | $ | 18,448 | | | $ | 2,783 | |
Notes to Consolidated Financial Statements
Note 4. Net Investments in Hotels
Net investments in hotels are summarized as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Buildings | $ | 2,002,614 | | | $ | 2,289,031 | |
Land | 574,648 | | | 627,296 | |
Building and site improvements | 187,019 | | | 194,162 | |
Furniture, fixtures and equipment | 166,316 | | | 193,517 | |
Construction in progress | 26,332 | | | 11,786 | |
Hotels, at cost | 2,956,929 | | | 3,315,792 | |
Less: Accumulated depreciation | (383,337) | | | (356,328) | |
Net investments in hotels | $ | 2,573,592 | | | $ | 2,959,464 | |
During the years ended December 31, 2021 and 2020, we retired fully depreciated furniture, fixtures and equipment aggregating $22.6 million and $24.9 million, respectively, and recorded net write-offs of fixed assets resulting from property damage insurance claims of $8.5 million and $5.5 million, respectively.
Depreciation expense was $114.4 million, $111.8 million and $75.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Notes to Consolidated Financial Statements
As of December 31, 2021, 2020 and 2019, accrued capital expenditures were $1.0 million, $0.5 million and $2.5 million, respectively, representing non-cash investing activity.
2021 Hotel Acquisition
On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party for $2.1 million, which includes real estate and other hotel assets, net of assumed liabilities with a fair value totaling $11.3 million, as detailed in the table that follows, bringing our ownership interest to 100%. We also refinanced the $29.7 million non-recourse mortgage loan on the property (Note 9). Subsequent to the acquisition, we consolidated our real estate interest in the hotel. We previously accounted for our interest in this venture under the equity method of accounting. Due to the change in control of this investment, we recorded a net gain on change in control of interest of $8.6 million, reflecting the difference between our carrying value and the preliminary estimated fair value of our previously held equity investment on April 6, 2021. This acquisition was accounted for as a business combination in accordance with authoritative accounting guidance. We allocated the fair value of the hotel at acquisition based on the estimated fair value of the assets acquired and the liabilities assumed.
The following tables present a summary of assets acquired and liabilities assumed in this business combination, at the date of acquisition; as well as and revenues and earnings thereon, from the date of acquisition through December 31, 2021 (in thousands):
| | | | | |
| Purchase Price Allocation |
| |
Assets acquired at fair value: | |
Net investment in hotel | $ | 39,500 | |
Operating lease right-of-use assets | 9,302 | |
Cash and cash equivalents | 529 | |
Intangible assets | 500 | |
Restricted cash | 2,372 | |
Accounts receivable, net | 967 | |
Other assets | 1,292 | |
Total Assets | 54,462 | |
Liabilities assumed at fair value: | |
Non-recourse debt, net | (29,698) | |
Accounts payable, accrued expenses and other liabilities | (4,177) | |
Operating lease liabilities | (9,302) | |
Total Liabilities | (43,177) | |
Total Identifiable Net Assets acquired at fair value | 11,285 | |
Fair value of WLT’s equity interest in jointly-owned investment prior to acquisition | (9,187) | |
Total cash consideration | $ | 2,098 | |
| | | | | |
| From April 6, 2021 through December 31, 2021 |
Revenues | $ | 6,116 | |
Net loss | $ | (3,936) | |
The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the noncontrolling interests acquired:
Net investments in hotel — The Company estimated the fair values of the land, building and site improvement, and furniture, fixtures, and equipment at the hotel property by using a combination of the income capitalization and sales comparison approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as capitalization rates, discount rates, and net operating income at the respective hotel properties, including estimates of future income growth.
Notes to Consolidated Financial Statements
Non-recourse debt — We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate, which are Level 3 inputs in the fair value hierarchy.
Leases — The estimated fair value of operating lease ROU assets and lease liabilities was based on the present value of lease payments over the lease term at the date of acquisition. We used our incremental borrowing rate at the date of acquisition to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determined our incremental borrowing rate for each lease using estimated baseline mortgage rates. These baseline rates are determined based on a review of current mortgage debt market activity for benchmark securities utilizing a yield curve. The rates are then adjusted for various factors, including level of collateralization and lease term.
Cash and cash equivalents, restricted cash, accounts receivable, net, other assets and accounts payable, accrued expenses and other liabilities —The carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities.
2021 Property Dispositions
On May 5, 2021, the Sheraton Austin Hotel at the Capitol Venture sold the Sheraton Austin Hotel at the Capitol to an unaffiliated third-party. The venture received net proceeds of approximately $36.4 million from the sale after the repayment of the related mortgage loan. We previously owned an 80% controlling interest in the venture and consolidated our real estate interest in the hotel. During the year ended December 31, 2021, we recognized a gain on sale of $18.1 million and a loss on extinguishment of debt of $0.7 million in connection with this transaction.
On July 7, 2021, we sold our 100% ownership interest in the Courtyard Pittsburgh Shadyside to an unaffiliated third-party and received net proceeds after the repayment of the related mortgage loan of approximately $3.2 million. During the year ended December 31, 2021, we recognized a gain on sale of $5.2 million and a loss on extinguishment of debt of $1.1 million in connection with this transaction.
On October 19, 2021, we sold our 100% ownership interest in the Westin Minneapolis to an unaffiliated third-party and received net proceeds after the repayment of the related mortgage loan of approximately $8.7 million. During the year ended December 31, 2021, we recognized a gain on sale of $18.5 million and a loss on extinguishment of debt of $0.7 million in connection with this transaction.
On December 16, 2021, we sold our 100% ownership interest in the Hilton Garden Inn/Homewood Suites Atlanta Midtown, Hyatt Place Austin Downtown and Courtyard Nashville Downtown to an unaffiliated third-party and received net proceeds after the repayment of the related mortgage loans of approximately $127.8 million. During the year ended December 31, 2021, we recognized a gain on sale of $66.4 million and a loss on extinguishment of debt of $6.3 million in connection with this transaction.
Notes to Consolidated Financial Statements
2020 Property Dispositions
On June 8, 2020, we sold our 100% ownership interest in the Hutton Hotel Nashville to an unaffiliated third party and received net proceeds after the repayment of the related mortgage loan of approximately $26.8 million. We recognized a loss on sale of $0.5 million during the year ended December 31, 2020 in connection with this transaction.
On August 27, 2020, the Lake Arrowhead Resort and Spa Venture sold the Lake Arrowhead Resort and Spa to an unaffiliated third party and received net proceeds after the repayment of the related mortgage loan of approximately $8.0 million. We owned a 97.35% controlling ownership interest in the venture. We recognized a gain on sale of $3.2 million during the year ended December 31, 2020 in connection with this transaction.
Impairments
As a result of the adverse effect the COVID-19 pandemic has had, and continues to have, on our hotel operations, we reviewed all of our hotel properties for impairment and recognized impairment charges during the year ended December 31, 2020 totaling $120.2 million on six Consolidated Hotels with an aggregate fair value measurement of $266.6 million before impairment charges in order to reduce the carrying value of the properties to their estimated fair values. For five of the hotel properties, the fair value measurements were determined using a future net cash flow analysis, discounted for the inherent risk associated with each investment and for one property, the fair value measurement approximated its estimated selling price. No impairments were recognized during the years ended December 31, 2021 and 2019.
Pro Forma Financial Information
The following unaudited consolidated pro forma financial information presents the results of operations as if the Merger had taken place on January 1, 2019 and as if the acquisition of the remaining 20% interest in the Hyatt Centric French Quarter Venture, had occurred on January 1, 2020. The unaudited consolidated pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming these transactions had taken place on the date listed above, nor is it indicative of the results of operations for future periods. The unaudited consolidated pro forma financial information is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Pro forma total revenues | $ | 657,194 | | | $ | 373,071 | | | $ | 1,061,517 | |
| | | | | |
Pro forma net (loss) income | $ | (95,829) | | | $ | (450,464) | | | $ | 62,039 | |
Pro forma net (loss) income attributable to Common Stockholders | $ | (91,608) | | | $ | (429,607) | | | $ | 59,120 | |
| | | | | |
Pro forma (loss) income per Class A share: | | | | | |
Net (loss) income attributable to Common Stockholders | $ | (67,136) | | | $ | (314,636) | | | $ | 43,657 | |
Basic and diluted pro forma weighted-average shares outstanding | 167,609,507 | | | 167,566,465 | | | 166,464,081 | |
Basic and diluted pro forma (loss) income per share | $ | (0.40) | | | $ | (1.88) | | | $ | 0.26 | |
| | | | | |
Pro forma (loss) income per Class T share: | | | | | |
Net (loss) income attributable to Common Stockholders | $ | (24,472) | | | $ | (114,971) | | | $ | 15,463 | |
Basic and diluted pro forma weighted-average shares outstanding | 61,096,711 | | | 61,173,069 | | | 60,499,745 | |
Basic and diluted pro forma (loss) income per share | $ | (0.40) | | | $ | (1.88) | | | $ | 0.26 | |
Pro forma net (loss) income attributable to Common Stockholders reflects the following income and expenses related to the Merger as if the Merger had taken place on January 1, 2019: (i) bargain purchase gain of $78.7 million, (ii) transaction costs of $27.5 million through December 31, 2020 and (iii) net gain on change in control of interests of $22.3 million and the following income and expenses related to the acquisition of the remaining interest in the Hyatt Centric French Quarter Venture as if it had taken place on January 1, 2020: (i) gain on change in control of interests of $8.6 million.
Notes to Consolidated Financial Statements
Note 5. Equity Investments in Real Estate
As of December 31, 2021, we owned an equity interest in one Unconsolidated Hotel with an unrelated third party. We did not control the venture that owns this hotel, but we exercised significant influence over it. We accounted for this investment under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our former advisor that we incur and other-than-temporary impairment charges, if any).
Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income or loss to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate if the venture’s capital structure gives different rights and priorities to its investors. Therefore, we followed the hypothetical liquidation at book value (“HLBV”) method in determining our share of the ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments were recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.
The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unconsolidated Hotels | | State | | Number of Rooms | | % Owned | | Hotel Type | | Carrying Value at December 31, |
| | | | | 2021 | | 2020 |
Ritz-Carlton Philadelphia Venture (a) | | PA | | 301 | | 60.0 | % | | Full-service | | $ | 12,705 | | | $ | 18,157 | |
Hyatt Centric French Quarter Venture (b) | | LA | | 254 | | 80.0 | % | | Full-service | | — | | | 482 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | 555 | | | | | | | $ | 12,705 | | | $ | 18,639 | |
___________
(a)We contributed $1.0 million to this investment during the year ended December 31, 2021. During the year ended December 31, 2021, we also received distributions totaling $1.8 million representing a return of previous capital contributions.
(b)We contributed $0.9 million to this investment during the first quarter of 2021. On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party. Upon completion of the acquisition, the Company consolidates its 100% interest in this hotel (Note 4).
The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which is based on the HLBV model, as well as amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Unconsolidated Hotels | | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Ritz-Carlton Philadelphia Venture | | $ | (4,718) | | | $ | (13,038) | | | $ | (513) | |
Hyatt Centric French Quarter Venture (a) | | (857) | | | (962) | | | 1,137 | |
Ritz-Carlton Bacara, Santa Barbara Venture (b) (c) | | — | | | (20,968) | | | (3,947) | |
Marriott Sawgrass Golf Resort & Spa Venture (b) | | — | | | (58) | | | 2,305 | |
Total equity in losses of equity method investments in real estate, net | | $ | (5,575) | | | $ | (35,026) | | | $ | (1,018) | |
___________
(a) On April 6, 2021, we acquired the remaining 20% interest in the Hyatt Centric French Quarter Venture from an unaffiliated third party. Upon completion of the acquisition, the Company consolidates its 100% interest in this hotel and consolidates its real estate interest in this hotel therefore these amounts represent the equity in (losses) earnings for the respective periods prior to the acquisition. (Note 4). (b) Upon closing of the Merger on April 13, 2020, the Company owns 100% of this hotel and consolidates its real estate interest in this hotel therefore these amounts represent the equity in (losses) earnings for the respective periods prior to the Merger.
(c) Includes an other-than-temporary impairment charge of $17.8 million recognized on this investment during the year ended December 31, 2020 to reduce the carrying value of our equity investment in the venture to its estimated fair value.
Notes to Consolidated Financial Statements
No other-than-temporary impairment charges were recognized during the years ended December, 31, 2021 or December 31, 2019.
As of December 31, 2021 and 2020, the unamortized basis differences on our equity investments were $1.5 million and $2.1 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $0.2 million, $0.2 million and $0.3 million during the years ended December 31, 2021, 2020 and 2019, respectively.
The following tables present combined summarized financial information of our equity method investment entities. Summarized financial information provided represents the total amounts attributable to the investment and does not represent our proportionate share (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Real estate, net | $ | 77,164 | | | $ | 111,405 | |
Other assets | 5,596 | | | 12,467 | |
Total assets | 82,760 | | | 123,872 | |
Debt | 63,916 | | | 94,105 | |
Other liabilities | 7,347 | | | 21,723 | |
Total liabilities | 71,263 | | | 115,828 | |
Members’ equity | $ | 11,497 | | | $ | 8,044 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Revenues | $ | 22,834 | | | $ | 19,444 | | | $ | 201,570 | |
Expenses | 29,571 | | | 37,227 | | | 207,987 | |
Net loss attributable to equity method investments | $ | (6,737) | | | $ | (17,783) | | | $ | (6,417) | |
Note 6. Intangible Assets
Intangible assets are summarized as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-Lived Intangible Assets | | | | | | | | | | | | | |
Villa/condo rental programs | 45 - 55 | | $ | 72,400 | | | $ | (11,037) | | | $ | 61,363 | | | $ | 72,400 | | | $ | (9,529) | | | $ | 62,871 | |
Trade name | 8 | | 9,400 | | | (2,024) | | | 7,376 | | | 9,400 | | | (844) | | | 8,556 | |
Other intangible assets | 5 - 17 | | 1,013 | | | (288) | | | 725 | | | 1,633 | | | (775) | | | 858 | |
Total intangible assets, net | | | $ | 82,813 | | | $ | (13,349) | | | $ | 69,464 | | | $ | 83,433 | | | $ | (11,148) | | | $ | 72,285 | |
Net amortization of intangibles was $3.0 million, $2.7 million and $1.5 million for the years ended December 31, 2021, 2020 and 2019, respectively. Amortization of intangibles is included in Depreciation and amortization in the consolidated financial statements.
Notes to Consolidated Financial Statements
Based on the intangible assets recorded as of December 31, 2021, scheduled annual amortization of intangibles for each of the next five calendar years and thereafter is as follows (in thousands):
| | | | | | | | |
Years Ending December 31, | | Total |
2022 | | $ | 2,811 | |
2023 | | 2,808 | |
2024 | | 2,808 | |
2025 | | 2,726 | |
2026 | | 2,709 | |
Thereafter | | 55,602 | |
Total | | $ | 69,464 | |
Note 7. Fair Value Measurements
The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which inputs are unobservable and are corroborated by little or no market data, therefore requiring us to develop our own assumptions.
Items Measured at Fair Value on a Recurring Basis
Derivative Assets and Liabilities — Our derivative assets, which are included in Other assets in the consolidated financial statements, are comprised of interest rate caps and our derivative liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements, are comprised of interest rate swaps (Note 8).
The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.
We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the years ended December 31, 2021 or 2020. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income and (expenses) in the consolidated financial statements.
Our non-recourse debt, which we have classified as Level 3, had a carrying value of $2.0 billion and $2.2 billion as of December 31, 2021 and 2020, respectively, and an estimated fair value of $2.0 billion and $2.2 billion as of December 31, 2021 and 2020, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.
Our Series A and Series B preferred stock, which we have classified as Level 3, had carrying values of $55.1 million and $201.7 million as of December 31, 2021, respectively, and $52.0 million and $162.1 million, respectively, as of December 31, 2020, respectively, and estimated fair values of $65.0 million and $247.0 million as of December 31, 2021, respectively, and $54.2 million and $194.9 million, respectively, as of December 31, 2020. We determined the estimated fair value using a discounted cash flow analysis of the interest and anticipated redemption payments associated with the preferred stock.
Notes to Consolidated Financial Statements
We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both December 31, 2021 and 2020.
Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
We estimated the fair values of our long-lived real estate and related intangible assets either using Level 3 inputs or the selling price of a hotel property based upon an executed purchase and sales agreement, using a combination of the income capitalization and sales comparison approaches, specifically utilizing a discounted cash flow analysis and recent comparable sales transactions. The estimate of the fair value of the assets acquired in the Merger, as discussed in Note 3 and the evaluation of the assets for potential impairment, as discussed below, required our management to exercise significant judgment and make certain key assumptions, including, but not limited to, the following: (i) capitalization rate; (ii) discount rate; (iii) net operating income; and (iv) number of years the property will be held or benefit realized. There are inherent uncertainties in making these estimates, including the impact of the COVID-19 pandemic. For our estimate of the fair value of the assets acquired in the Merger and impairment tests for our long-lived real estate and related intangible assets during the year ended December 31, 2020, we used discount rates ranging from 7.0% to 10.5%, with a weighted-average rate of 8.4%, and capitalization rates ranging from 5.0% to 8.5%, with a weighted-average rate of 6.5%.
We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated cost to sell. See Note 4 and Note 5 for a description of impairment charges recognized during the year ended December 31, 2020. No impairments were recognized during the years ended December 31, 2021 or 2019.
Note 8. Risk Management and Use of Derivative Financial Instruments
Risk Management
In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.
Derivative Financial Instruments
When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment, as well as the approval, reporting and monitoring of derivative financial instrument activities.
We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive (loss) income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.
Notes to Consolidated Financial Statements
The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives Designated as Hedging Instruments | | | | Asset Derivatives Fair Value at December 31, | | Liability Derivatives Fair Value at December 31, |
| Balance Sheet Location | | 2021 | | 2020 | | 2021 | | 2020 |
Interest rate caps | | Other assets | | $ | 381 | | | $ | 9 | | | $ | — | | | $ | — | |
Interest rate swaps | | Accounts payable, accrued expenses and other liabilities | | — | | | — | | | (2,023) | | | (5,080) | |
| | | | $ | 381 | | | $ | 9 | | | $ | (2,023) | | | $ | (5,080) | |
All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both December 31, 2021 and 2020, no cash collateral had been posted nor received for any of our derivative positions.
We recognized unrealized income of $0.2 million and unrealized losses of $1.0 million and $0.2 million in Other comprehensive income (loss) on derivatives in connection with our interest rate swaps and caps during the years ended December 31, 2021, 2020, and 2019, respectively.
We reclassified $0.7 million, $0.4 million, and $0.3 million from Other comprehensive income (loss) on derivatives into Interest expense during the years ended December 31, 2021, 2020 and 2019, respectively.
Amounts reported in Other comprehensive income (loss) related to our interest rate swaps and caps will be reclassified to Interest expense as interest expense is incurred on our variable-rate debt. As of December 31, 2021, we estimated that $0.1 million will be reclassified as Interest expense during the next 12 months related to our interest rate swaps and caps.
Interest Rate Swaps and Caps
We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.
The interest rate swaps and caps that we had outstanding on our Consolidated Hotels as of December 31, 2021 were designated as cash flow hedges and are summarized as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Number of | | Notional | | Fair Value at |
Interest Rate Derivatives | | Instruments | | Amount | | December 31, 2021 |
Interest rate swaps | | 2 | | | $ | 185,295 | | | $ | (2,023) | |
Interest rate caps | | 10 | | | 627,955 | | | 381 | |
| | | | | | $ | (1,642) | |
Credit Risk-Related Contingent Features
Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. As of December 31, 2021, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $2.3 million and $5.3 million as of December 31, 2021 and 2020, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these
Notes to Consolidated Financial Statements
provisions as of December 31, 2021 or 2020, we could have been required to settle our obligations under these agreements at their aggregate termination value of $2.3 million and $5.6 million, respectively.
Note 9. Debt
Our debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Carrying Amount at December 31, |
| | Interest Rate Range | | Current Maturity Date Range (a) | | 2021 | | 2020 |
Fixed rate | | 3.8% – 4.9% | | 06/21(b) – 08/23 | | $ | 951,318 | | | $ | 1,286,839 | |
Variable rate (c) | | 2.3%– 9.0% | | 03/22 – 12/24 | | 1,007,423 | | | 883,063 | |
| | | | | | $ | 1,958,741 | | | $ | 2,169,902 | |
___________ (a)Many of our mortgage loans have extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.
(b)See discussion below on the Courtyard Times Square West mortgage loan, which matured on June 1, 2021.
(c)The interest rate range presented for these mortgage loans reflect the rates in effect as of December 31, 2021 through the use of an interest rate swap or cap, when applicable.
Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. As of December 31, 2021, we have effectively entered into cash management agreements with the lenders on 18 of our 24 Consolidated Hotel mortgage loans either because the minimum debt service coverage ratio was not met or as a result of a loan modification agreement. The cash management agreements generally permit cash generated from the operations of each hotel to fund the hotel’s operating expenses, debt service, taxes and insurance but restrict distributions of excess cash flow, if any, to the Company to fund corporate expenses.
Financing Activity During 2021
On March 5, 2021, we refinanced the $190.0 million Ritz-Carlton Key Biscayne non-recourse mortgage loan, which extended the maturity date of the loan from August 1, 2021 to August 1, 2023. The principal balance and interest rate remain unchanged. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
On March 15, 2021, we refinanced the $45.5 million Equinox Golf Resort & Spa non-recourse mortgage loan, which extended the maturity date of the loan from March 1, 2021 to March 1, 2023. The principal balance and interest rate remain unchanged. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
On April 6, 2021, we refinanced the $29.7 million Hyatt Centric French Quarter New Orleans non-recourse mortgage loan, which extended the maturity date of the loan from April 26, 2021 to April 6, 2023 and provides for a one-year extension option, subject to certain conditions. The principal balance remains unchanged and the loan has a floating annual interest rate that is subject to an interest rate cap. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
On May 7, 2021, we refinanced the Ritz-Carlton Fort Lauderdale $47.0 million senior mortgage loan and the $28.3 million mezzanine loan with new mortgage loans of up to $61.1 million for the senior mortgage loan and up to $16.9 million for the mezzanine loan, with an aggregate $76.0 million funded at closing, comprised of $59.5 million for the senior mortgage loan and $16.5 million for the mezzanine loan. The loans have a maturity date of June 1, 2024, with two one-year extension options, subject to certain conditions. We recognized a loss on extinguishment of debt of $0.1 million during the year ended December 31, 2021.
On June 8, 2021, we refinanced the Seattle Marriott Bellevue $96.1 million non-recourse mortgage loan with a new mortgage loan of $104.8 million with a floating annual interest rate that is subject to an interest rate cap and a maturity date of June 8,
Notes to Consolidated Financial Statements
2024, with two one-year extension options, subject to certain conditions. We recognized a loss on extinguishment of debt of $4.8 million during the year ended December 31, 2021.
On June 9, 2021, we refinanced the Ritz-Carlton Santa Barbara, Bacara $175.0 million senior mortgage loan and the $55.0 million mezzanine loan, which extended the maturity dates of each loan from September 28, 2021 to September 28, 2022, and included principal paydowns of $4.2 million and $1.3 million, respectively. The interest rates remain unchanged. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
On August 12, 2021, we refinanced the $49.0 million Renaissance Atlanta Midtown Hotel non-recourse mortgage loan, which extended the maturity date of the loan from August 8, 2021 to August 8, 2022 and provided for a one-year extension option, subject to certain conditions. The principal balance and interest rate remained unchanged. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
On November 10, 2021, we refinanced the $140.9 million Ritz Carlton San Francisco mortgage loan with a $149.2 million mortgage loan. The loan has a maturity date of November 1, 2024, with two one-year extension options, subject to certain conditions. This refinancing was accounted for as a loan modification and no gain or loss was recognized.
Financing Activity During 2020
During the fourth quarter of 2020, we refinanced the $43.6 million Le Meridien Dallas, The Stoneleigh non-recourse mortgage loan with a new mortgage loan totaling $47.0 million. The loan has a floating annual interest rate, subject to an interest rate cap, and a maturity date of October 1, 2023, with one one-year extension option, which is subject to certain conditions. We recognized a loss on extinguishment of debt of less than $0.1 million on this refinancing.
During the fourth quarter of 2020, we also refinanced the $27.3 million Sanderling Resort and Spa non-recourse mortgage loan with a new mortgage loan totaling $30.8 million. The loan has a floating annual interest rate, subject to an interest rate cap, and a maturity date of November 1, 2023, with two one-year extension options, which are subject to certain conditions. We recognized a loss on extinguishment of debt of less than $0.1 million on this refinancing.
Courtyard Times Square West
The $58.6 million outstanding mortgage loan on Courtyard Times Square West matured on June 1, 2021 and we have not paid off the outstanding principal balance. The loan does not have any cross-default provisions with our other mortgage obligations. We are currently in the process of exploring various options as it relates to this asset, including but not limited to, surrendering the property back to the lender.
Scheduled Debt Principal Payments
Scheduled debt principal payments during each of the next five calendar years following December 31, 2021 are as follows (in thousands):
| | | | | | | | |
Years Ending December 31, | | Total |
2022 | | $ | 1,117,973 | |
2023 | | 531,889 | |
2024 | | 329,910 | |
2025 | | — | |
2026 | | — | |
Total principal payments | | 1,979,772 | |
Unamortized debt discount | | (13,411) | |
Unamortized deferred financing costs | | (7,620) | |
Total | | $ | 1,958,741 | |
Note 10. Commitments and Contingencies
As of December 31, 2021, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, including liens for which we may obtain a bond, provide collateral or provide an
Notes to Consolidated Financial Statements
indemnity, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Hotel Management Agreements
As of December 31, 2021, our hotel properties were operated pursuant to long-term management agreements with nine
different management companies, with initial terms ranging from five to 40 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.5% to 3.5% of hotel revenues. 11 of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee ranging from 3.0% to 4.0% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. We incurred management fee expense, including amortization of deferred management fees, of $20.3 million, $6.4 million and $16.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Franchise Agreements
11 of our hotel properties operated under franchise or license agreements with national brands that are separate from our management agreements. As of December 31, 2021, we had eight franchise agreements with Marriott-owned brands, one with Hilton-owned brands, one with InterContinental Hotels-owned brands and one with a Hyatt-owned brand related to our hotels. Our typical franchise agreement provides for a term of 15 to 25 years. Three of our hotels are not operated with a hotel brand so the hotels do not have franchise agreements. Generally, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.0% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. We incurred franchise fee expense, including amortization of deferred franchise fees, of $8.7 million, $4.7 million and $16.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Capital Expenditures and Reserve Funds
With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of December 31, 2021 and 2020, $58.7 million and $51.0 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures and is included in Restricted cash in the consolidated financial statements. In addition, due to the effects of the COVID-19 pandemic on our operations, we have been working with the brands, management companies and lenders and had used a portion of the available restricted cash reserves to cover operating costs at our properties, of which $1.3 million is subject to replenishment requirements as of December 31, 2021.
Renovation Commitments
Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. As of December 31, 2021, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts as of December 31, 2021 totaled $39.1 million. Funding for a renovation will first come from our furniture, fixtures and equipment reserve accounts, to the extent permitted by the terms of the management agreement. Should these reserves be unavailable or insufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with existing cash resources or other sources of available capital, including cash flow from operations.
Notes to Consolidated Financial Statements
Leases
Lease Obligations
We recognize an operating ROU asset and a corresponding lease liability for ground lease arrangements, hotel parking leases and various hotel equipment leases for which we are the lessee. Our leases have remaining lease terms ranging from less than one year to 89 years (excluding extension options not reasonably certain of being exercised).
Lease Cost
Certain information related to the total lease cost for operating leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Years Ended December 31, | | | | |
| | 2021 | | 2020 | | | | |
Fixed lease cost | | $ | 13,307 | | | $ | 11,911 | | | | | |
Variable lease cost (a) | | 416 | | | 125 | | | | | |
Total lease cost | | $ | 13,723 | | | $ | 12,036 | | | | | |
___________
(a)Our variable lease payments consist of payments based on a percentage of revenue.
Other Information
Supplemental balance sheet information related to ROU assets and lease liabilities is as follows (dollars in thousands):
| | | | | | | | | | | | | | | |
| December 31, | | | | |
| 2021 | | 2020 | | | | |
Operating lease ROU assets | $ | 43,671 | | | $ | 40,729 | | | | | |
Operating lease liabilities | 83,089 | | | $ | 74,633 | | | | | |
| | | | | | | |
Weighted-average remaining lease term | 66.7 years | | 67.0 years | | | | |
Weighted-average discount rate | 9.6 | % | | 9.1 | % | | | | |
Cash paid for operating lease liabilities included in Net cash provided by (used in) operating activities totaled $6.8 million and $6.0 million for the years ended December 31, 2021 and 2020, respectively.
Undiscounted Cash Flows
A reconciliation of the undiscounted cash flows for operating leases recorded on the consolidated balance sheet as of December 31, 2021 is as follows (in thousands):
| | | | | | | | |
Years Ending December 31, | | Total |
2022 | | $ | 6,949 | |
2023 | | 6,391 | |
2024 | | 6,233 | |
2025 | | 6,324 | |
2026 | | 6,474 | |
Thereafter through 2110 | | 1,068,232 | |
Total lease payments | | 1,100,603 | |
Less: amount of lease payments representing interest | | (1,017,514) | |
Present value of future lease payments/lease obligations | | $ | 83,089 | |
Notes to Consolidated Financial Statements
Note 11. Loss Per Share and Equity
Loss Per Share
The computation of basic and diluted loss per share is as follows (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net loss attributable to the Company | $ | (82,771) | | | $ | (350,128) | | | $ | (10,898) | |
Preferred dividends | — | | | (1,742) | | | — | |
Fair value adjustment on reclassification of Series A Preferred Stock | — | | | 2,754 | | | — | |
Net loss attributable to Common Stockholders including amounts attributable to fair value adjustment | $ | (82,771) | | | $ | (349,116) | | | $ | (10,898) | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Basic and Diluted Weighted-Average Shares Outstanding | | Allocation of Loss | | Basic and Diluted Loss Per Share |
Class A common stock | 167,609,507 | | | $ | (60,659) | | | $ | (0.36) | |
Class T common stock | 61,096,711 | | | (22,112) | | | (0.36) | |
Net loss attributable to Common Stockholders | | | $ | (82,771) | | | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Basic and Diluted Weighted-Average Shares Outstanding | | Allocation of Loss | | Basic and Diluted Loss Per Share |
Class A common stock (a) | 157,288,346 | | | $ | (272,776) | | | $ | (1.73) | |
Class T common stock | 43,957,081 | | | (76,340) | | | (1.74) | |
Net loss attributable to Common Stockholders including amounts attributable to fair value adjustment | | | $ | (349,116) | | | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Basic and Diluted Weighted-Average Shares Outstanding | | Allocation of Loss | | Basic and Diluted Loss Per Share |
Class A common stock (a) | 128,978,410 | | | $ | (10,898) | | | $ | (0.08) | |
Class T common stock | — | | | $ | — | | | — | |
Net loss attributable to Common Stockholders | | | $ | (10,898) | | | |
___________
(a)For purposes of determining the weighted-average number of shares of Class A common stock outstanding and loss per share, amounts for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3).
The allocation of Net loss attributable to common stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the period. The allocation for the Class A common stock excludes the accretion of interest on the distribution and shareholder servicing fee of $0.1 million for the year ended December 31, 2020 since this fee is only applicable to holders of Class T common stock. No such fees were incurred for the years ended December 31, 2021 or December 31, 2019.
The distribution and shareholder servicing fee was 1.0% of the estimated net asset value of our Class T common stock; it accrued daily and was payable quarterly in arrears. We ceased incurring the distribution and shareholder servicing fee during the fourth quarter of 2020, at which time the total underwriting compensation paid in respect of the offering reached 10.0% of the gross offering proceeds. We paid distribution and shareholder servicing fees to selected dealers of $3.4 million during the year ended December 31, 2020.
Notes to Consolidated Financial Statements
Purchase of Membership Interest
On November 9, 2021, we acquired the remaining 30% membership interest in the Ritz-Carlton Fort Lauderdale Venture from an unaffiliated third party for $23.9 million bringing our ownership interest to 100%. Our acquisition of the additional interest in the venture is accounted for as an equity transaction, and we recorded an adjustment of $15.7 million to Additional paid-in capital in our consolidated statement of equity for the year ended December 31, 2021 reflecting to the difference between the carrying value and the purchase price. No gain or loss was recognized in the consolidated statement of operations related to the acquisition of the remaining interest. In connection with the acquisition, we incurred costs associated with the termination of related agreements totaling $1.2 million, which are included in transaction costs in our consolidated statement of operations for the year ended December 31, 2021.
Noncontrolling Interest in the Operating Partnership
We consolidate the Operating Partnership, which is a majority-owned limited partnership that has a noncontrolling interest. As of December 31, 2021 the Operating Partnership had 231,202,933 OP Units outstanding, of which 99.0% of the outstanding OP Units were owned by the Company, and the noncontrolling 1.0% ownership interest was owned by Mr. Medzigian.
As of December 31, 2021, Mr. Medzigian owned 2,417,996 OP Units. The outstanding OP Units held by Mr. Medzigian are exchangeable on a one-for-one basis into shares of WLT Class A common stock. Additionally, we had 16,778,446 Warrant Units outstanding as of December 31, 2021. The noncontrolling interest is included in noncontrolling interest on the consolidated balance sheet as of December 31, 2021.
Reclassifications Out of Accumulated Other Comprehensive Loss
The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
Gains and Losses on Derivative Instruments | | 2021 | | 2020 | | 2019 |
Beginning balance | | $ | (724) | | | $ | (172) | | | $ | (286) | |
Other comprehensive income (loss) before reclassifications | | 206 | | | (959) | | | (153) | |
Amounts reclassified from accumulated other comprehensive loss to: | | | | | | |
Interest expense | | 669 | | | 421 | | | 280 | |
Equity in losses of equity method investments in real estate, net | | — | | | 6 | | | 3 | |
Total | | 669 | | | 427 | | | 283 | |
Net current period other comprehensive income (loss) | | 875 | | | (532) | | | 130 | |
Net current period other comprehensive income attributable to noncontrolling interests | | (22) | | | (20) | | | (16) | |
Reclassification to additional-paid in capital relating to purchase of remaining 30% membership interest in Ritz-Carlton Fort Lauderdale Venture | | 19 | | | — | | | — | |
Ending balance | | $ | 148 | | | $ | (724) | | | $ | (172) | |
Notes to Consolidated Financial Statements
Distributions
Distributions paid to stockholders consist of ordinary income, capital gains, return of capital or a combination thereof for income tax purposes. Our distributions per share are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | 2020 | | 2019 |
| | Class A (a) | | Class T | | Class A (a) | | Class T |
Return of capital | | $ | 0.1565 | | | $ | — | | | $ | 0.4125 | | | $ | — | |
Capital gain | | — | | | — | | | 0.1556 | | | — | |
Ordinary income | | — | | | — | | | 0.0579 | | | — | |
Total distributions paid | | $ | 0.1565 | | | $ | — | | | $ | 0.6260 | | | $ | — | |
___________
(a)The distributions per share for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3).
No distributions were declared or paid during the year ended December 31, 2021.
Note 12. Share-Based Payments
Prior to the Merger, we maintained the 2010 Equity Incentive Plan, which authorized the issuance of stock-based awards to the officers and employees of our former Subadvisor, who performed services on our behalf. The 2010 Equity Incentive Plan provided for the grant of RSUs and dividend equivalent rights. We also maintained the Directors Incentive Plan — 2010 Incentive Plan, which authorized the issuance of stock-based awards to our independent directors. The Directors Incentive Plan — 2010 Incentive Plan provided for the grant of RSUs and dividend equivalent rights.
Subsequent to the Merger, we maintain the 2015 Equity Incentive Plan, which authorizes the issuance of Class A shares of stock-based awards to our officers and employees. The 2015 Equity Incentive Plan provides for the grant of RSUs and dividend equivalent rights. A maximum of 5,500,000 shares may be granted, of which 3,488,337 shares remained available for future grants as of December 31, 2021.
A summary of the stock-based award activity for the years ended December 31, 2021, 2020 and 2019 follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Former Subadvisor/WLT Employees | | Independent Directors |
| Shares (a) | | Weighted-Average Grant Date Fair Value (a) | | Shares (a) | | Weighted-Average Grant Date Fair Value (a) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Nonvested at January 1, 2019 | 79,944 | | | $ | 11.56 | | | — | | | $ | — | |
Granted | 63,932 | | | 11.41 | | | 18,400 | | | 11.41 | |
Vested(b) | (33,686) | | | 11.61 | | | (18,400) | | | 11.41 | |
Forfeited | (2,399) | | | 11.81 | | | — | | | — | |
Nonvested at January 1, 2020 | 107,791 | | | 11.45 | | | — | | | — | |
RSU’s of CWI 2 acquired in the Merger | 74,075 | | | 11.23 | | | | | |
Granted | 808,970 | | | 9.35 | | | 35,111 | | | 6.84 | |
Vested(b) | (92,020) | | | 11.35 | | | (35,111) | | | 6.84 | |
Forfeited | (51,486) | | | 11.38 | | | — | | | — | |
Nonvested at January 1, 2021 | 847,330 | | | 9.44 | | | — | | | — | |
Granted | 1,136,106 | | | 5.51 | | | 18,148 | | | 5.51 | |
Vested(b) | (253,011) | | | 6.21 | | | (18,148) | | | 5.51 | |
Forfeited | (116,213) | | | 5.64 | | | — | | | — | |
Nonvested at December 31, 2021(c) | 1,614,212 | | | 7.45 | | | — | | | — | |
___________
Notes to Consolidated Financial Statements
(a)The number of shares and the weighted-average grant date fair value for the periods prior to the Merger have been adjusted to give effect to the exchange ratio of 0.9106 (Note 3). (b)RSUs issued to employees (and prior to the Merger, employees of the former Subadvisor) generally vest over three years, subject to continued employment and are forfeited if the recipient’s employment terminates prior to vesting. RSUs issued to independent directors vest immediately. The total fair value of shares vested that were issued to employees (and prior to the Merger, employees of the former Subadvisor) and directors was $1.7 million, $1.3 million and $0.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(c)We currently expect to recognize compensation expense totaling approximately $8.8 million over the vesting period. The awards to employees (and prior to the Merger, employees of the former Subadvisor) of the Subadvisor had a weighted-average remaining contractual term of 2.17 years as of December 31, 2021.
Stock-Based Compensation Expense
For the years ended December 31, 2021, 2020, and 2019, we recognized share-based compensation expense related to RSU awards to employees of the Subadvisor under the 2010 Equity Incentive Plan, 2015 Equity Incentive Plan and equity compensation issued to our independent directors aggregating $3.3 million, $1.8 million and $0.7 million, respectively. Share-based compensation expense is included within Corporate general and administrative expenses in the consolidated financial statements. We have not recognized any income tax benefit in earnings for our share-based compensation arrangements since the inception of this plan.
Note 13. Income Taxes
As a REIT, we are permitted to own lodging properties but are prohibited from operating these properties. In order to comply with applicable REIT qualification rules, we enter into leases for each of our lodging properties with TRSs (“TRS lessees”). The TRS lessees in turn contract with independent hotel management companies that manage day-to-day operations of our hotels under our oversight.
Certain of our subsidiaries have elected TRS status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. On April 20, 2020, the TRSs that were previously wholly-owned by CWI 1 were contributed into the wholly-owned WLT combined TRS in a tax-free restructuring. This restructuring results in a single federal tax filing for the WLT combined TRS, which includes the contributed entities. The WLT combined TRS measures the deferred tax assets and liabilities of the combined entities based on the WLT combined TRS’s deferred tax rate.
The components of our provision for (benefit from) income taxes for the periods presented are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Federal | | | | | | |
Current | | $ | 114 | | | $ | (8,165) | | | $ | 1,415 | |
Deferred | | 1,985 | | | 581 | | | 1,168 | |
| | 2,099 | | | (7,584) | | | 2,583 | |
| | | | | | |
State and Local | | | | | | |
Current | | 2,687 | | | 180 | | | 427 | |
Deferred | | (1,233) | | | (526) | | | 142 | |
| | 1,454 | | | (346) | | | 569 | |
Total Provision (Benefit) | | $ | 3,553 | | | $ | (7,930) | | | $ | 3,152 | |
Notes to Consolidated Financial Statements
Deferred income taxes as of December 31, 2021 and 2020 consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Deferred Tax Assets | | | |
Net operating loss carryforwards | $ | 48,801 | | | $ | 40,224 | |
Accrued vacation payable and deferred rent | 9,533 | | | 9,369 | |
Interest expense limitation | 2,116 | | | 1,286 | |
Deferred revenue — key money | 1,217 | | | 1,128 | |
Operating lease liabilities | 1,109 | | | 1,329 | |
Gift card liability | 184 | | | 531 | |
Other | — | | | — | |
Total deferred income taxes | 62,960 | | | 53,867 | |
Valuation allowance | (53,301) | | | (42,047) | |
Total deferred tax assets | 9,659 | | | 11,820 | |
Deferred Tax Liabilities | | | |
Villa rental management agreement | (7,140) | | | (6,967) | |
Fixed assets and intangibles | (2,103) | | | (4,676) | |
Operating lease ROU assets | (1,062) | | | (1,244) | |
Business interruption insurance proceeds | (559) | | | (555) | |
Other | (276) | | | — | |
Deferred rent | (10) | | | — | |
Total deferred tax liabilities | (11,150) | | | (13,442) | |
Net Deferred Tax Liability | $ | (1,491) | | | $ | (1,622) | |
A reconciliation of the provision for income taxes with the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the periods presented is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Pre-tax (loss) income from taxable subsidiaries | $ | (31,387) | | | $ | (139,598) | | | $ | 6,674 | |
| | | | | |
Federal provision at statutory tax rate (a) | $ | (6,591) | | | $ | (29,315) | | | $ | 1,402 | |
Valuation allowance | 11,673 | | | 22,726 | | | 2,418 | |
Income not subject to federal tax | (3,319) | | | 3,152 | | | 210 | |
State and local taxes, net of federal provision | 1,454 | | | (6,207) | | | (122) | |
Return to provision true-up | 965 | | | 1,731 | | | (469) | |
Rate change | (436) | | | 2,438 | | | — | |
Other | (219) | | | (472) | | | (1) | |
Non-deductible expenses | 26 | | | 25 | | | 81 | |
Tax benefit net operating loss carryback | — | | | (2,008) | | | — | |
Tax credit | — | | | — | | | (367) | |
Total provision (benefit) | $ | 3,553 | | | $ | (7,930) | | | $ | 3,152 | |
___________
(a)The applicable statutory tax rate was 21% for the years ended December 31, 2021, 2020 and 2019.
The utilization of net operating losses may be subject to certain limitations under the tax laws of the relevant jurisdiction. If not utilized, our federal and state and local net operating losses will begin to expire in 2028. As of December 31, 2021 and 2020, we recorded a valuation allowance of $53.3 million and $42.0 million, respectively, related to these net operating loss carryforwards and other deferred tax assets.
Notes to Consolidated Financial Statements
The net deferred tax liabilities in the table above are comprised of deferred tax asset balances, net of certain deferred tax liabilities and valuation allowances, of less than $0.1 million as of both December 31, 2021 and 2020, which are included in Other assets in the consolidated balance sheets, and other deferred tax liability balances of $1.5 million and $1.3 million as of December 31, 2021 and 2020, respectively, which are included in Accounts payable, accrued expenses and other liabilities in the consolidated balance sheets.
Our taxable subsidiaries recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.
Our tax returns are subject to audit by taxing authorities. The statute of limitations varies by jurisdiction and ranges from three to four years. Such audits can often take years to complete and settle. The tax years 2017 through 2020 remain open to examination by the major taxing jurisdictions in which we are subject to income taxes.
Note 14. Mandatorily Redeemable Preferred Stock
At both December 31, 2021 and 2020, we had authorized 50,000,000 shares of preferred stock, $0.001 par value per share.
Series A Preferred Stock
As discussed in Note 3, as consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, affiliates of WPC were issued 1,300,000 shares of WLT Series A preferred stock, $0.001 par value per share, with a liquidation preference of $50.00 per share (the “Series A Preferred Stock”).
Dividends
Dividends are comprised of cumulative preferential dividends that holders of the Series A Preferred Stock are entitled to receive at a rate of 5% per year, with the rate increasing to 7% on the second anniversary of the Merger and increasing to 8% on the third anniversary of the Merger. Dividends accrue annually. Any dividend payable on the Series A Preferred Stock will be computed on the basis of a 360-day year consisting of twelve 30-day months.
Redemption
Partial Redemption – On both April 13, 2023 and April 13, 2024, the holders of the Series A Preferred Stock may elect to have the Company redeem 25% of the shares of the Series A Preferred Stock outstanding as of the respective dates for cash at a redemption price per share equal to $50.00, plus all accrued and unpaid dividends thereon up to and including the date of redemption, without interest, to the extent the Company has funds legally available therefor.
Full Redemption – At the earlier of April 13, 2025 or a redemption event (as defined in the Articles Supplementary governing the Series A Preferred Stock), the holders of the Series A Preferred Stock may elect to have the Company redeem all of the outstanding shares of the Series A Preferred Stock for cash at a redemption price per share equal to $50.00, plus all accrued and unpaid dividends thereon up to and including the date of redemption, without interest, to the extent the Company has funds legally available therefor.
On January 25, 2022, the Company redeemed the 1,300,000 shares of Series A Preferred Stock at the liquidation preference of $50.00 per share for a total of $65.0 million. All accrued and unpaid dividends, which totaled $0.1 million, were paid at closing.
Notes to Consolidated Financial Statements
Series B Preferred Stock and Warrants
On July 21, 2020, we entered into a securities purchase agreement (the “Purchase Agreement”) with ACP Watermark Investment LLC (the “Purchaser”) and, solely with respect to a guaranty, certain other parties thereto. Pursuant to the Purchase Agreement, the Company, in a private placement made in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, agreed to issue and sell to the Purchaser 200,000 shares of our 12% Series B Cumulative Redeemable Preferred Stock, liquidation preference $1,000.00 per share and Warrants (the “Warrants”) to purchase 16,778,446 units of limited partnership interest of the Operating Partnership (“OP Units”) (“Warrant Units”), for an aggregate purchase price of $200.0 million, (the “July 2020 Capital Raise”), both of which were issued on July 24, 2020. The Warrant exercise price is $0.01 per Warrant Unit, and the Warrants expire on July 24, 2027. The Warrant Units are recorded as noncontrolling interest in the consolidated balance sheet totaling $13.7 million and $19.8 million as of December 31, 2021 and December 31, 2020, respectively. The Warrants require that, if the Operating Partnership pays any distribution to holders of OP Units, then the Operating Partnership shall concurrently distribute the same securities, cash, indebtedness, rights or other property to the holders of Warrants as if the Warrants had been exercised into Warrant Units on the date of such distribution. The Warrants include a call option that will allow the Company to purchase Warrants, Warrant Units and Common Stock issued on redemption of Warrant Units from the Purchaser or its transferees at a specified call price until the Common Stock is approved for trading on any securities exchange registered as a national securities exchange under Section 6 of the Securities and Exchange Act of 1934, as amended (or the equivalent thereof in a jurisdiction outside the United States).
The purchaser had also committed to provide, upon satisfaction of certain conditions, up to an additional $250.0 million to purchase additional shares of the Series B Preferred Stock during the 18 months following the consummation of the July 2020 Capital Raise, although no additional purchase of shares were made. Among other terms of the Series B Preferred Stock, the Series B Preferred Stock generally prohibits the Company from paying distributions on common stock or redeeming common stock unless the Company has first paid all accrued dividends (and dividends thereon) on the Series B Preferred Stock in cash for all past dividend periods and the current dividend period. There are certain exceptions for the payment of dividends on common stock required for the Company to maintain its REIT qualification, special circumstances redemptions of common stock and redemptions of common stock that are funded with proceeds from issuances of common stock under the Company's distribution reinvestment plan.
Dividends
The holders are entitled to receive cumulative dividends per share of Series B Preferred Stock at the rate of 12% per year. Dividends can be paid in cash or in the form of additional shares of Series B Preferred Stock with the value thereof equal to the liquidation preference of such shares, at the option of the Company. The dividends are cumulative, compound quarterly and accrue, whether or not earned or declared, from and after the date of issue. During the year ended December 31, 2021, we declared and paid dividends totaling $31.3 million, which approximated fair value, in the form of 31,255 additional shares of Series B Preferred Stock.
Redemption
On July 24, 2025, the Company is obligated to redeem all shares of Series B Preferred Stock at a redemption price, payable in cash, equal to the then applicable liquidation preference plus all accrued and unpaid dividends. The Company, at its option, may redeem for cash, in whole or in part from time to time, any or all of the outstanding shares of Series B Preferred Stock upon giving the notice described in the Articles Supplementary governing the Series B Preferred Stock at a price determined in the Articles Supplementary.
Accounting Treatment
ASC 480, “Distinguishing Liabilities from Equity”, generally requires liability classification for financial instruments that are certain to be redeemed, represent obligations to purchase shares of stock or represent obligations to issue a variable number of common shares. Upon issuance of the Series A Preferred Stock during the second quarter of 2020, we concluded that the Series A Preferred Stock was not within the scope of ASC 480 because none of the three conditions for liability classification was present and we recorded it in the mezzanine equity section and accreted it to its redemption value through charges to stockholders’ equity using the effective interest method as redemption was probable. As a result of the issuance of the Series B Preferred Stock during the third quarter of 2020, which we concluded was within the scope of ASC 480 and recorded it as a liability as a result of its certainty to be redeemed, we reevaluated the classification of our Series A Preferred Stock and because of certain protective provisions that prohibit the Company from purchasing or redeeming capital stock of the Company for as long as any shares of Series A Preferred Stock remain outstanding (as more fully described in the Articles Supplementary
Notes to Consolidated Financial Statements
governing the Series A Preferred Stock), we concluded that Series A Preferred Stock was now certain to be redeemed and this modification resulted in the reclassification of the Series A Preferred Stock from mezzanine to a liability and we recognized a decrease to distributions and accumulated losses of $2.8 million representing the difference between the carrying value and estimated fair value during the year ended December 31, 2020.
Dividends accrued included in interest expense in the consolidated financial statements related to our Series A and Series B Preferred Stock as of December 31, 2021 and 2020 totaled $6.5 million and $12.0 million, respectively.
The following table presents the carrying value of our Series A and Series B Preferred Stock:
| | | | | | | | | | | | | | | | | | | | | | | |
| Series A Preferred Stock at | | Series B Preferred Stock at |
| December 31, | | December 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Liquidation value | $ | 65,000 | | | $ | 65,000 | | | $ | 231,255 | | | $ | 200,000 | |
Fair value discount | (14,310) | | (14,310) | | (30,358) | | (30,358) |
| 50,690 | | 50,690 | | 200,897 | | 169,642 |
Accumulated amortization of fair value discount | 4,364 | | | 1,336 | | | 8,740 | | | 2,675 | |
Deferred financing costs | — | | | — | | | (11,177) | | | (11,169) | |
Accumulated amortization of deferred financing costs | — | | | — | | | 3,217 | | | 984 | |
| $ | 55,054 | | | $ | 52,026 | | | $ | 201,677 | | | $ | 162,132 | |
Note 15. Agreements and Transactions with Related Parties
Pre-Merger Agreements with Our Advisor and Affiliates
Prior to the Merger, we had an advisory agreement with the Advisor (the “Advisory Agreement”) to perform certain services for us under a fee arrangement, including managing our overall business, our investments and certain administrative duties. The Advisor also had a subadvisory agreement with the CWI 1 Subadvisor (the “Subadvisory Agreement”) whereby the Advisor paid 20% of its fees earned under the Advisory Agreement to the CWI 1 Subadvisor in return for certain personnel services. Upon completion of the Merger on April 13, 2020 (Note 3), both the Advisory Agreement and Subadvisory Agreement were terminated.
Notes to Consolidated Financial Statements
The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to our Advisor, the CWI 1 Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Amounts Included in the Consolidated Statements of Operations | | | | | |
Personnel and overhead reimbursements | $ | 279 | | | $ | 3,567 | | | $ | 6,571 | |
Asset management fees | — | | | 3,795 | | | 14,052 | |
Available Cash Distributions | — | | | — | | | 7,095 | |
Interest expense | — | | | — | | | 1,319 | |
Disposition fees | — | | | — | | | 130 | |
| $ | 279 | | | $ | 7,362 | | | $ | 29,167 | |
| | | | | |
Other Transaction Fees Incurred | | | | | |
Watermark commitment agreement | $ | — | | | $ | — | | | $ | 4,101 | |
Capitalized loan refinancing fees | — | | | — | | | 1,235 | |
| $ | — | | | $ | — | | | $ | 5,336 | |
Personnel and Overhead Reimbursements
Prior to the Merger, under the terms of the Advisory Agreement, the Advisor generally allocated expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and CWI 2, based on total pro rata hotel revenues on a quarterly basis. Pursuant to the Subadvisory Agreement, after we reimbursed the Advisor, it would subsequently reimburse the CWI 1 Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our Board of Directors. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements. We also granted RSUs to employees of the CWI 1 Subadvisor pursuant to our 2010 Equity Incentive Plan. Upon completion of the Merger on April 13, 2020 (Note 3), both the Advisory Agreement and Subadvisory Agreement were terminated and those expenses ceased being incurred. Subsequent to the Merger, subject to the terms of the Transition Services Agreement, as discussed below, WPC is paid its costs of providing services under this agreement and will be reimbursed for all expenses of providing the services.
Asset Management Fees, Disposition Fees and Loan Refinancing Fees
Prior to the Merger, we paid the Advisor an annual asset management fee equal to 0.50% of the aggregate average market value of our investments, as described in the Advisory Agreement. The Advisor was also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement were met. If the Advisor elected to receive all or a portion of its fees in shares of our common stock, the number of shares issued was determined by dividing the dollar amount of fees by the most recently published estimated net asset value per share. Upon completion of the Merger on April 13, 2020 (Note 3), the Advisory Agreement was terminated and these fees ceased being incurred. For the years ended December 31, 2020 and 2019, we settled $4.8 million and $14.1 million, respectively, of asset management fees in shares of our common stock at the Advisor’s election. No such fees were earned during the year ended December 31, 2021.
Notes to Consolidated Financial Statements
Available Cash Distributions
Prior to the Merger, Carey Watermark Holdings, LLC’s special general partner interest entitled it to receive distributions of 10% of Available Cash (as defined in the limited partnership agreement of CWI OP, LP) (“Available Cash Distributions”) generated by CWI OP, LP, subject to certain limitations. Available Cash Distributions are included in (Income) loss attributable to noncontrolling interests in the consolidated financial statements. In connection with the Internalization (Note 3), the CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively, as further described in Note 3. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively.
Other Transactions with Affiliates
Watermark Commitment Agreement
On October 1, 2019, we, CWI 2, Watermark Capital and Mr. Medzigian, entered into a commitment agreement pursuant to which we and CWI 2 agreed to pay Watermark Capital a total of $6.95 million in consideration of the commitments of Watermark Capital and Mr. Medzigian to wind down and ultimately liquidate a private fund that was formed to raise capital to invest in lodging properties, and to devote their business activities exclusively to the affairs of us and CWI 2 and certain other activities set forth in the commitment agreement, with the exception of the wind-down of the private fund and performing asset management services for two hotels owned by WPC (one of which was subsequently sold). As of both December 31, 2021 and December 31, 2020, $6.95 million was included in Other assets in the consolidated balance sheet, representing goodwill related to the internalization of Watermark Capital. We performed our annual test for impairment as of December 31, 2021 for goodwill recorded and found no impairment indicated.
Post-Merger Transactions with Affiliates
Transition Services Agreement
Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and WPC, WPC continued to make available to the Company all of the services that WPC provided to CWI 2 prior to the Merger and was paid its costs of providing the services and reimbursed for all expenses of providing the services. The term of the Transition Services Agreement was generally 12 months from the effective date of the internalization transaction, with certain services surviving for up to 18 months. The Transition Services Agreement expired on October 13, 2021; however, WPC and WLT entered into a side letter to address certain ongoing matters of an administrative nature. As of December 31, 2020, the amount due to WPC was $0.2 million. No amounts were outstanding as of December 31, 2021.
Pursuant to the Transition Services Agreement dated as of October 22, 2019 entered into between CWI 2 and Watermark Capital, Watermark Capital will continue to make available to the Company all of the services that Watermark Capital provided to CWI 2 prior to the Merger and for the Company to provide certain services to Watermark Capital or its affiliates. Except with respect to particular services provided by the Company to Watermark Capital, the term of the Transition Services Agreement has expired. The Company, in its respective capacity as service provider under such Transition Services Agreement, will be paid its respective costs of providing the services and will be reimbursed for all expenses of providing the services.
Notes to Consolidated Financial Statements
Note 16. Subsequent Events
On January 14, 2022, we refinanced the $81.4 million San Diego Marriott La Jolla non-recourse mortgage loan with a new mortgage loan of $97.7 million, of which $83.2 million was funded at closing. The loan has a maturity date of January 2025, with two one-year extension options, subject to certain conditions.
On January 21, 2022, we refinanced the $87.1 million San Jose Marriott non-recourse mortgage loan and the $34.6 million Le Méridien Arlington non-recourse mortgage loan with a new mortgage loan of $135.5 million encumbering both hotels, with $126.2 million funded at closing. The hotels encumbered by the mortgage loan are cross-collateralized. The loan has a floating annual interest rate, subject to an interest rate cap, and a maturity date of January 2025, with two one-year extension options, subject to certain conditions.
On January 25, 2022, the Company redeemed the 1,300,000 shares of Series A Preferred Stock at the liquidation preference of $50.00 per share for a total of $65.0 million. All accrued and unpaid dividends, which totaled $0.1 million, were paid at closing.
On March 14, 2022, the $80.0 million outstanding non-recourse mortgage loan on Renaissance Chicago Downtown was modified to extend the maturity date from July 1, 2022 to January 1, 2023 and included a principal paydown of $4.0 million.