Commitments and Contingencies

12 Months Ended

Dec. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Operating Leases

As of December 31, 2020, 12 of Company's hotel properties were subject to ground lease agreements that cover the land underlying the respective hotels. The ground leases are classified as operating leases. The total ground lease expense was $12.4 million for the year ended December 31, 2020, which consisted of $11.6 million of fixed lease expense and $0.8 million of variable lease expense. The total ground lease expense was $15.7 million for the year ended December 31, 2019, which consisted of $11.6 million of fixed lease expense and $4.1 million of variable lease expense. The total ground lease expense was $22.2 million for the year ended December 31, 2018. The total ground lease expense is included in property tax, insurance and other in the accompanying consolidated statements of operations and comprehensive income.

The Company's ground leases consisted of the following (in millions):


			Ground Lease Expense
			For the year ended December 31,
Hotel Property Name	Initial Term Expiration	Extension Term(s) Expiration	2020		2019		2018 (1)

Wyndham Boston Beacon Hill	2028	—	$	0.4	$	0.9	$	0.9
Wyndham San Diego Bayside	2029	—	4.1		4.8		4.8
DoubleTree Suites by Hilton Orlando Lake Buena Vista	2032	2057	0.3		0.9		0.8
Residence Inn Palo Alto Los Altos	2033	—	0.1		0.1		0.1
Wyndham Pittsburgh University Center	2038	2083	0.7		0.7		0.8


Marriott Louisville Downtown	2053	2153 (2)	—		—		—
Embassy Suites San Francisco Airport Waterfront	2059	—	1.2		2.4		2.3
Wyndham New Orleans French Quarter	2065	—	0.5		0.5		0.5

Courtyard Charleston Historic District	2096	—	1.0		1.0		1.0
Courtyard Austin Downtown Convention Center and Residence Inn Downtown Convention Center	2100	—	0.4		0.8		0.9

Courtyard Waikiki Beach	2112	—	3.7		3.6		3.5

			$	12.4	$	15.7	$	15.6

(1) Excludes $6.6 million of ground lease expense related to hotel properties sold during the year ended December 31, 2018.

(2) The lease may be extended up to four twenty-five year terms at the Company's option.

The future lease payments for the Company's operating leases are as follows (in thousands):


	December 31, 2020
2021	$	11,201
2022	11,309
2023	11,405
2024	11,465
2025	11,516
Thereafter	534,621
Total future lease payments	591,517
Imputed interest	(468,924)
Lease liabilities	$	122,593

The following table presents certain information related to the Company's operating leases as of December 31, 2020:


Weighted average remaining lease term	62 years
Weighted average discount rate	7.03	%

Restricted Cash Reserves

The Company is obligated to maintain cash reserve funds for future capital expenditures at the hotels (including the periodic replacement or refurbishment of FF&E) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve cash ranging typically from 3.0% to 5.0% of the individual hotel’s revenues. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. As of December 31, 2020 and 2019, approximately $35.0 million and $44.7 million, respectively, was available in the restricted cash reserves for future capital expenditures, real estate taxes and insurance. In addition, due to the effects of the COVID-19 pandemic on its operations, the Company has worked with the hotel brands, third-party managers and lenders to allow the use of available restricted cash reserves to cover operating shortfalls at certain hotels.

Litigation

Other than the legal proceeding mentioned below, neither the Company nor any of its subsidiaries is currently involved in any regulatory or legal proceedings that management believes will have a material and adverse effect on the Company's financial position, results of operations or cash flows.

Prior to the Company's merger with FelCor Lodging Trust, Inc. ("FelCor"), an affiliate of InterContinental Hotels Group PLC ("IHG"), which was previously the management company for three of FelCor's hotels (two of which were sold in 2006, and one of which was converted by FelCor into a Wyndham brand and operation in 2013), notified FelCor that the National Retirement Fund ("NRF") in which the employees at those hotels had participated had assessed a withdrawal liability of $8.3 million, with required quarterly payments including interest, in connection with the termination of IHG’s operation of those hotels. During the year ended December, 31 2020, the Company settled the dispute with IHG and NRF.

Management Agreements

As of December 31, 2020, 102 of the Company's consolidated hotel properties were operated pursuant to long-term management agreements with initial terms ranging from one to 25 years, with 13 different management companies as noted in the table below. This number includes 29 consolidated hotel properties that receive the benefits of a franchise agreement pursuant to management agreements with Hilton, Hyatt, or Marriott.


Management Company						Number of Hotel Properties
Aimbridge Hospitality						35

Crestline Hotels and Resorts						1
Davidson Hotels and Resorts						1
Hilton Management and affiliates						19
HEI Hotels and Resorts						1
Highgate Hotels						5
Hyatt Corporation and affiliates						11

InnVentures						3


Marriott International, Inc.						3
Sage Hospitality						4
Urgo Hotels						3
White Lodging Services						8
Wyndham						8
						102

Each management company receives a base management fee between 1.75% and 3.5% of hotel revenues. Management agreements that include the benefits of a franchise agreement incur a base management fee between 3.0% and 7.0% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel.

Management fees are included in management and franchise fee expense in the accompanying consolidated statements of operations and comprehensive income. For the years ended December 31, 2020, 2019 and 2018, the Company incurred management fee expense of approximately $13.2 million, $45.5 million and $57.3 million, respectively.

Franchise Agreements

As of December 31, 2020, 72 of the Company's consolidated hotel properties were operated under franchise agreements with initial terms ranging from one to 30 years. This number excludes 29 consolidated hotel properties that receive the benefits of a franchise agreement pursuant to management agreements with Hilton, Hyatt, or Marriott. In addition, The Knickerbocker is not operated with a hotel brand so the hotel does not have a franchise agreement. Franchise agreements allow the hotel properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee of 3.0% of food and beverage revenues.

Franchise fees are included in management and franchise fee expense in the accompanying consolidated statements of operations and comprehensive income. For the years ended December 31, 2020, 2019 and 2018, the Company incurred franchise fee expense of approximately $25.6 million, $75.3 million and $80.8 million, respectively.

Wyndham Agreements

Prior to January 1, 2020, the Wyndham management agreements guaranteed minimum levels of annual net operating income at each of the Wyndham-managed hotels. In 2019, the Company entered into an agreement with Wyndham to terminate the net operating income guarantee effective December 31, 2019 and received termination payments totaling $36.0 million from Wyndham, of which $35.0 million was received in 2019 and $1.0 million was received in 2020. These amounts are included in advance deposits and deferred revenue in the accompanying consolidated balance sheets. In addition, in conjunction with the termination of the net operating income guarantee, the Company entered into transitional franchise and management agreements effective January 1, 2020 through December 31, 2020. During the year ended December 31, 2020, the Company exercised its option to extend the agreements through December 31, 2021. The transitional franchise and management fees are 3% and 2%, respectively, of hotel revenues. Effective January 1, 2020, the Company began recognizing the termination payments over the estimated term of the transitional agreements as a reduction to management and franchise fee expense in the consolidated statements of operations and comprehensive income. For the year ended December 31, 2020, the Company recognized approximately $17.8 million as a reduction to management and franchise fee expense related to the amortization of the termination payments.

Other

During the year ended December 31, 2020, the Company incurred approximately $8.7 million in corporate and property-level severance costs as a result of the COVID-19 pandemic. This amount includes $6.7 million for the year ended December 31, 2020 related to severance for associates at the Company's New York City hotels operating under collective bargaining agreements. The severance costs are included in other operating expense in the accompanying consolidated statement of operations and comprehensive income.