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Management Agreements and Leases | 12 Months Ended
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Dec. 31, 2022
Leases [Abstract] |
Management Agreements and Leases | Note 5. Management Agreements and Leases As of December 31, 2022, we owned 238 hotels included in six operating agreements and 765 service-oriented retail properties net leased to 180 tenants. We do not operate any of our properties. Hotel agreements Sonesta agreement. As of December 31, 2022, Sonesta operated 196 of the 238 hotels we then owned, which comprised approximately 47.6% of our total historical real estate investments, including 40 of our full-service hotels, 111 extended stay hotels, and 45 select service hotels pursuant to management agreements for each of the hotels. We are also party to pooling agreements that combine certain of our management agreements with Sonesta for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and owner’s priority returns due to us. See Notes 4 and 10 for further information regarding our relationship, agreements and transactions with Sonesta. On February 27, 2020, we entered into a transaction agreement with Sonesta pursuant to which we and Sonesta restructured our business arrangements with respect to our hotels then managed by Sonesta as follows: •We and Sonesta agreed to sell, rebrand or repurpose our 39 extended stay hotels then managed by Sonesta. We subsequently decided to suspend pursuing the sale of these 39 hotels based on market conditions; however, as noted below, we and Sonesta later decided to sell 68 of our hotels managed by Sonesta, which includes many of these 39 hotels we had previously targeted for sale, rebranding or repurposing; we subsequently sold 66 of those 68 hotels as of December 31, 2022; see Note 4 for further information regarding those sales; •The annual owner’s priority returns for the 14 full-service hotels that Sonesta then managed and continues to manage were reduced from $99,013 to $69,013 as of that date; •Sonesta issued to us approximately 34% of its outstanding shares of common stock (post-issuance) and we entered into a stockholders agreement with Sonesta, Adam Portnoy and the other stockholder of Sonesta and a registration rights agreement with Sonesta; •We and Sonesta modified our then existing management agreements and pooling agreement so that 5% of the hotel gross revenues of each of our 14 full-service hotels then managed by Sonesta will be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the annual owner’s priority returns due to us under the management agreements; •We and Sonesta modified the termination provisions of our then existing management agreements and pooling agreement and removed the provisions in our pooling agreement that allowed either us or Sonesta to require the marketing for sale of non-economic hotels; and •We and Sonesta extended the initial expiration date of the then existing management agreements for our full-service hotels managed by Sonesta located in Chicago, IL and Irvine, CA to January 2037 to align with the initial expiration date for our other full-service hotels then managed by Sonesta. We refer to the management agreements and pooling agreements in effect as of February 27, 2020 as the legacy agreements. Amended and Restated Management and Pooling Agreements with Sonesta Effective January 1, 2022, we and Sonesta amended our management agreements. We refer to these management agreements with Sonesta collectively as our Sonesta agreement. As of that date, we owned 261 hotels managed by Sonesta and 67 of these hotels were expected to be sold, or the Sale Hotels. Among other things, the amendments to the agreements between us and Sonesta for 194 hotels, or the Retained Hotels, were as follows: •The term for the Retained Hotels expires on January 31, 2037 and includes two 15-year renewal options. •All Retained Hotels are subject to a pooling agreement that combines the management agreements for the Retained Hotels for purposes of calculating gross revenues, hotel operating expenses, fees and distributions and the owner’s priority return due to us. •The owner’s priority return for the Retained Hotels was initially set at $325,200 annually. We have the right to terminate Sonesta’s management of specific hotels if minimum performance thresholds are not met starting in 2023. •We agreed to renovate the Retained Hotels to comply with agreed upon brand standards. As we advance such funding or fund other capital expenditures, the aggregate annual owner’s priority return due to us will increase by 6% of the amounts funded. •Trade area restrictions by hotel brand have been added to define boundaries to protect our owned hotels in response to Sonesta increasing its franchising and third-party management activities. In general, we and Sonesta may terminate a management agreement for a Retained Hotel for events of default, casualty and condemnation events, although Sonesta may not terminate for certain events of default. We also have the right to terminate a management agreement for a Retained Hotel if minimum performance thresholds are not met starting in 2023 for any three of four applicable consecutive years. Pursuant to the management agreement, we or Sonesta may be obligated to pay the other party damages if the terminating party terminates a management agreement due to the other party’s event of default. For the Sale Hotels, the term was extended to December 31, 2022 (or, if earlier, the date the applicable hotel was sold) and the FF&E reserve funding requirement was removed. We sold 65 of the Sale Hotels as of December 31, 2022 and the total annual owner’s priority return was reduced by $77,033 in connection with these sales. As of December 31, 2022, the total priority return for the remaining two Sale Hotels was $7,238. Effective December 31, 2022, the terms of the management agreements for the remaining two Sale Hotels were extended to January 31, 2023 and automatically renew for successive one month periods until the applicable hotel is sold or the agreement is terminated. The Sale Hotels are subject to a pooling agreement that combines the management agreements for the Sale Hotels for purposes of calculating gross revenues, hotel operating expenses, fees and distributions and the owner’s priority return due to us. We sold one of the two remaining Sale Hotels in January 2023 and expect the remaining sale to be completed in March 2023. Our Sonesta agreement provides that we are paid an annual owner’s priority return if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta’s incentive fee, if applicable), are sufficient to do so. The aggregate owner’s priority return for the 196 hotels Sonesta manages as of December 31, 2022 was $337,652. Our Sonesta agreement further provides that we are paid an additional return equal to 80% of the remaining operating profits, as defined therein, after reimbursement of owner or manager advances, and with respect to the Retained Hotels, FF&E reserve escrows and Sonesta’s incentive fee, if applicable. We realized returns of $196,721 and $53,853 during the years ended December 31, 2022 and 2021, respectively, under our Sonesta agreement. Our Sonesta hotels generated net operating losses of $65,277 during the year ended December 31, 2020. We do not have any security deposits or guarantees for our Sonesta hotels. Accordingly, the returns we receive from our Sonesta hotels are limited to the hotels’ available cash flows, if any, after payment of operating expenses, including management and related fees. Pursuant to our Sonesta agreement, we incurred management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third-party reservation transmission fees of $114,563, $84,926 and $17,734 for the years ended December 31, 2022, 2021 and 2020, respectively. These fees and costs are included in hotel operating expenses in our consolidated statements of comprehensive income (loss). In addition, we recognized procurement and construction supervision fees of $1,331 and $2,196 for the years ended December 31, 2022 and 2021, respectively, under our Sonesta agreements. These amounts have been capitalized in our consolidated balance sheets and are depreciated over the estimated useful lives of the related capital assets. Our Sonesta agreement requires us to fund capital expenditures that we approve at our Sonesta hotels. We incurred capital expenditures for hotels included in our Sonesta agreement of $94,479 and $93,472 during the years ended December 31, 2022 and 2021, respectively, which resulted in increases in our contractual annual owner’s priority returns of $5,416 and $7,488, respectively. We owed Sonesta $8,889 and $17,248 for capital expenditures and other reimbursements at December 31, 2022, and 2021, respectively. Sonesta owed us $2,975 and $4,592 for owner’s priority returns as of December 31, 2022 and 2021, respectively. Amounts due from Sonesta are included in due from related persons and amounts owed to Sonesta are included in due to related persons in our consolidated balance sheets, respectively. The management agreements for the Retained Hotels require that 5% of the hotel gross revenues at each of the hotels be escrowed for future capital expenditures as FF&E reserves, subject to available cash flows after payment of the owner’s priority returns due to us. No FF&E escrow deposits were required during the years ended December 31, 2022, 2021 or 2020. We are required to maintain working capital for each of our hotels managed by Sonesta and have advanced a fixed amount based on the number of rooms in each hotel to meet the cash needs for hotel operations. The sales of the hotels managed by Sonesta referenced above resulted in a return to us of working capital amounts we had previously advanced with respect to those hotels. We had advanced $48,580 and $56,697 of initial working capital to Sonesta as of December 31, 2022 and 2021, respectively, net of any working capital returned to us on termination of the applicable management agreements in connection with such sales. These amounts are included in other assets in our consolidated balance sheets. Any remaining working capital would be returned to us upon termination in accordance with the terms of our Sonesta agreement. See Notes 4, 6 and 10 for further information regarding our relationship, agreements and transactions with Sonesta. Between September 18, 2020 and December 15, 2020, we transferred the branding and management of 115 hotels previously managed by IHG, Marriott and Wyndham to Sonesta. In February and March 2021, we transitioned the branding and management of 88 hotels to Sonesta from Marriott. In June 2021, we transitioned the branding and management of five hotels to Sonesta from Hyatt and in November 2021, we transitioned the branding and management of one additional hotel to Sonesta from Radisson. We entered into management agreements with Sonesta with respect to these hotels on terms substantially consistent with our legacy agreements and added them to our applicable pooling agreement. These hotel management agreements were further amended as part of the amendments we entered into with Sonesta in February 2022 and were included in our applicable pooling agreements with Sonesta. Hyatt agreement. As of December 31, 2022, Hyatt managed 17 of our select service hotels pursuant to a portfolio management agreement that expires on March 31, 2031, or our Hyatt agreement, and provides that, as of December 31, 2022, we are to be paid an annual owner’s priority return of $12,773. Any returns we receive from Hyatt are currently limited to the hotels’ available cash flows, if any, after payment of operating expenses. Hyatt has provided us with a $30,000 limited guarantee for 75% of the aggregate annual owner's priority returns due to us that will become effective upon substantial completion of planned renovations of the hotels which we currently expect to occur in 2023. We realized returns of $12,281, $9,388 and $22,037 for the years ended December 31, 2022, 2021 and 2020, respectively, under our Hyatt agreement. During the year ended December 31, 2020, the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period and we exhausted the remaining $19,200 limited guaranty available to us to cover the shortfall. During the year ended December 31, 2021, we expensed $3,700 of working capital we previously funded under our Hyatt agreement because the amount was no longer expected to be recoverable. This amount is included in transaction related costs in our consolidated statement of income (loss). We incurred capital expenditures for certain hotels included in our Hyatt agreement of $11,845 during the year ended December 31, 2022, which resulted in an aggregate increase in our contractual annual owner’s priority returns of $754. We did not incur capital expenditures for any of the hotels included in our Hyatt agreement during the year ended December 31, 2021. Radisson agreement. As of December 31, 2022, Radisson managed eight of our full service hotels pursuant to a portfolio management agreement that expires on July 31, 2031, or our Radisson agreement, and provides that we are to be paid an annual owner’s priority return of $10,200. Any returns we receive from Radisson are currently limited to the hotels’ available cash flows, if any, after payment of operating expenses. Radisson has provided us with a $22,000 limited guarantee for 75% of the aggregate annual owner's priority returns due to us that became effective on January 1, 2023 subject to adjustment for the planned renovations of certain of the hotels we currently expect to occur in 2023. We realized returns of $6,387, $11,364 and $20,456 for the years ended December 31, 2022, 2021 and 2020, respectively, under our Radisson agreement. Radisson had previously provided us with a guaranty, which was limited to $47,253. During the year ended December 31, 2021, the hotels under our Radisson agreement generated cash flows that were less than the minimum returns due to us and Radisson made $13,238 of guaranty payments to cover part of the shortfall and the Radisson guaranty was exhausted. We incurred capital expenditures of $3,433 for the hotels included in our Radisson agreement for the year ended December 31, 2022. We did not incur capital expenditures for any of the hotels included in our Radisson agreement during the year ended December 31, 2021. Marriott agreement. As of December 31, 2022, Marriott managed 16 of our hotels. We were previously in arbitration proceedings with Marriott regarding, among other things, the validity of the timing of the termination of the Marriott agreements in 2020. During the period of arbitration, we entered into an agreement with Marriott regarding the 16 hotels currently managed by Marriott, pursuant to which we agreed to have these hotels remain Marriott branded until the arbitration was resolved. On January 18, 2022, the arbitration concluded. As of February 24, 2023, we have sold seven Marriott branded hotels and we have entered agreements to sell the remaining nine hotels for an aggregate sales price of $88,476, excluding closing costs. These pending sales are subject to conditions; as a result, these sales may not occur, may be delayed or their terms may change. See Note 4 for further information regarding these sales. We realized returns of $8,942, $2,830 and $93,593 during the years ended December 31, 2022, 2021 and 2020, respectively, under our Marriott agreement. Marriott had previously provided a limited guaranty and security deposit, which were both exhausted in 2020 to cover shortfalls between cash flows from our hotels and our minimum returns. Any returns we receive from Marriott are limited to the hotels’ available cash flows, if any, after payment of operating expenses. We did not incur capital expenditures for any of the hotels included in our Marriott agreement during the year ended December 31, 2022. We incurred capital expenditures of $7,394 and $65,840 for the hotels included in our Marriott agreement during the years ended December 31, 2021 and 2020, respectively. Other. Our management agreement with IHG for one hotel expires on January 31, 2026. We realized returns of $3,561 and $337 for the years ended December 31, 2022 and 2021, respectively, under our IHG agreement. Any returns we receive from IHG are limited to the hotel’s available cash flows, if any, after payment of operating expenses. We realized returns and rents of $107,888 during the year ended December 31, 2020 under our then agreement with IHG. During the year ended December 31, 2021, we expensed $16,711 of working capital we previously funded under our IHG agreement because the amount was no longer expected to be recoverable. This amount is included in transaction related costs in our consolidated statement of income (loss). Net lease portfolio As of December 31, 2022, we owned 765 net lease service-oriented retail properties with 13,374,325 square feet with annual minimum rent of $372,418 with a weighted (by annual minimum rents) average lease term of 9.6 years. The portfolio was 97.6% leased by 180 tenants operating under 138 brands in 21 distinct industries. TA Leases As of December 31, 2022, TA was our largest tenant, leasing 29.3% of our gross carrying value of real estate properties. The number of travel centers, the terms, the annual minimum rent and the deferred rent balances owed to us by TA under our TA leases as of December 31, 2022, were as follows:
|  | Number of Travel Centers |  | Initial Term End (1) |  | Annual Minimum Rent |  | Deferred Rent (2)
TA No. 1 Lease |  | 36 |  | December 31, 2032 |  | $ | 49,707 |  |  | $ | 1,165 |
TA No. 2 Lease |  | 36 |  | December 31, 2031 |  | 44,077 |  |  | 1,082 |
TA No. 3 Lease |  | 34 |  | December 31, 2029 |  | 42,409 |  |  | 1,067 |
TA No. 4 Lease |  | 37 |  | December 31, 2033 |  | 48,263 |  |  | 1,090 |
TA No. 5 Lease |  | 34 |  | June 30, 2035 |  | 61,654 |  |  | — |
|  | 177 |  |  |  | $ | 246,110 |  |  | $ | 4,404 |
(1)TA has two renewal options of 15 years each under each of our TA leases. (2)Commencing April 1, 2019, TA was required to pay us $70,458 in 16 quarterly installments of $4,404 for deferred rent TA owes us. Represents the balance as of December 31, 2022. We received the remaining balance of deferred rent due to us from TA in January 2023. Our TA leases are “triple net” leases that require TA to pay all costs incurred in the operation of the leased travel centers, including personnel, utility, inventory, customer service and insurance expenses, real estate and personal property taxes, environmental related expenses, underground storage tank removal costs and ground lease payments at those travel centers at which we lease the property and sublease it to TA. Our TA leases generally require TA to indemnify us for certain environmental matters and for liabilities that arise during the terms of the leases from ownership or operation of the leased travel centers. In addition, TA is obligated to pay us at lease expiration an amount equal to an estimate of the cost of removing underground storage tanks on the leased properties. Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under our TA leases, TA generally cannot own, franchise, finance, operate, lease or manage any travel center or similar property that is not owned by us within 75 miles in either direction along the primary interstate on which a travel center owned by us is located without our consent. We recognized rental income from TA of $259,093, $248,291 and $250,573 for the years ended December 31, 2022, 2021 and 2020, respectively. Rental income for the years ended December 31, 2022, 2021 and 2020 includes $13,143, $13,237 and $13,156, respectively, of adjustments to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis. As of December 31, 2022 and 2021, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $30,764 and $48,168, respectively. These amounts are included in due from related persons in our consolidated balance sheets. Our recognition of the deferred rent obligations are recorded on a straight line basis over the terms of our TA leases. TA paid us $17,616 in respect of such obligation for each of the years ended December 31, 2022 and 2021. In addition to the payment of annual minimum rent, our TA Nos. 1, 2, 3 and 4 leases provide for payment to us of percentage rent based on increases in total non-fuel revenues over base year levels (3% of non-fuel revenues above 2015 non-fuel revenues, and, beginning with the year ended December 31, 2021, an additional half percent (0.5%) of non-fuel revenues above 2019 non-fuel revenues) and our TA No. 5 lease provides for payment to us of percentage rent based on increases in total non-fuel revenues over base year levels (3% of non-fuel revenues above 2012 non-fuel revenues, and, beginning with the year ended December 31, 2020, an additional 0.5% of non-fuel revenues above 2019 non-fuel revenues). The total amount of percentage rent from TA that we recognized was $10,578, $7,085 and $2,764 for the years ended December 31, 2022, 2021 and 2020, respectively. Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent according to the following formula: the annual minimum rent is increased by an amount equal to the amount funded by us multiplied by the greater of 8.5% or a benchmark U.S. Treasury interest rate plus 3.5%. TA is not obligated to request and we are not obligated to fund any such improvements. We did not fund any improvements under these leases during the years ended December 31, 2022 or 2021. See Notes 4, 10 and 15 for further information regarding our relationship with TA. Our other net lease agreements generally provide for minimum rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight-line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We recognized rental income from our other net lease properties (excluding TA) of $135,522, $140,803 and $137,111 for the years ended December 31, 2022, 2021 and 2020 respectively, which included $5,367, $10,616 and $14,345 respectively, of adjustments to record scheduled rent changes under certain of our leases on a straight-line basis. We continually review receivables related to rent, straight-line rent and property operating expense reimbursements and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. The review includes an assessment of whether substantially all of the amounts due under a tenant’s lease are probable of collection. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as cash is received. We recognize all changes in the collectability assessment for an operating lease as an adjustment to rental income. We reduced our reserves for uncollectible amounts by $320 and $9 during the years ended December 31, 2022 and 2021, respectively, and recorded reserves for uncollectible amounts of $9,892 during the year ended December 31, 2020. We had reserves for uncollectible rents of $7,697 and $15,519 as of December 31, 2022 and 2021, respectively, included in other assets in our consolidated balance sheets. Additional lease information (as lessor). As of December 31, 2022, our leases with parties other than our TRSs provide for contractual minimum rents to be paid to us during the remaining current terms as follows:
2023 | $ | 371,090 |
2024 | 363,449 |
2025 | 354,941 |
2026 | 343,134 |
2027 | 333,397 |
Thereafter | 1,849,439 |
Total | $ | 3,615,450 |
Additional lease information (as lessee). As of December 31, 2022, 13 of our hotels were subject to ground leases where we are the lessee. In addition, our hotel operators enter various leases on our behalf in the normal course of business at our hotels, or our hotel operating leases. We calculated right of use assets and lease liabilities as the present value of the remaining lease payment obligations for our operating leases, which include the ground leases and hotel operating leases, over the remaining lease term using our estimated incremental borrowing rate. The right of use assets and related lease liabilities are included within other assets, net and accounts payable and other liabilities, respectively, in our consolidated balance sheets. At December 31, 2022 and 2021, our right of use assets and related lease liabilities each totaled $177,264 and $177,346, respectively, which represented our future obligations under our operating leases and are included in other assets and other liabilities, respectively, in our consolidated balance sheets. Our operating leases require minimum fixed rent payments, percentage rent payments based on a percentage of hotel revenues in excess of certain thresholds and rent payments equal to the greater of a minimum fixed rent or percentage rent. Rental expense related to our hotel operating leases of $11,148 for the year ended December 31, 2022 is included in hotel operating expenses within our consolidated statements of comprehensive income (loss). For operating leases related to our net lease properties, our tenants are required to pay the rental expense. As of December 31, 2022, our operating leases provide for contractual minimum rent payments to third parties during the remaining lease terms, as follows:
2023 | $ | 15,278 |
2024 | 15,556 |
2025 | 15,622 |
2026 | 15,740 |
2027 | 15,628 |
Thereafter | 247,213 |
Total lease payments | 325,037 |
Less: imputed interest | (147,773) |
Present value of lease liabilities (1) | $ | 177,264 |
(1) The weighted average discount rate used to calculate the lease liability and the weighted average remaining term for our ground leases (assuming all extension options) and our hotel operating leases are approximately 5.30% and 21 (range of 15 months to 65 years) and 5.70% and 32 years (range of 1 month to 51 years), respectively. Generally, payments of ground lease obligations are made by our managers or tenants. However, if a manager or tenant did not perform obligations under a ground lease or did not renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected property.

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