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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019

OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                to                               
 
Commission File Number:  001-35074
 
SUMMIT HOTEL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________________________________
Maryland
 
27-2962512
(State or other jurisdiction
 
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 
 
13215 Bee Cave Parkway, Suite B-300
Austin, TX  78738
(Address of principal executive offices, including zip code)
 
(512) 538-2300
(Registrant’s telephone number, including area code)
________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each class

 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
INN
 
New York Stock Exchange
Series D Cumulative Redeemable Preferred Stock, $0.01 par value
 
INN-PD
 
New York Stock Exchange
Series E Cumulative Redeemable Preferred Stock, $0.01 par value
 
INN-PE
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No
 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
 
As of July 24, 2019, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 105,126,626.
 
 
 
 
 



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
i




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Summit Hotel Properties, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
 
 
 
June 30, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Investment in hotel properties, net
 
$
1,941,674

 
$
2,065,554

Undeveloped land
 
2,267

 
2,267

Assets held for sale, net
 
493

 
7,633

Investment in real estate loans, net
 
31,856

 
30,700

Right-of-use assets
 
29,313

 

Cash and cash equivalents
 
48,796

 
44,088

Restricted cash
 
27,066

 
28,468

Trade receivables, net
 
21,253

 
13,978

Prepaid expenses and other
 
7,634

 
10,111

Deferred charges, net
 
4,118

 
4,691

Other assets
 
8,751

 
14,807

Total assets
 
$
2,123,221

 
$
2,222,297

LIABILITIES AND EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Debt, net of debt issuance costs
 
$
829,001

 
$
958,712

Lease liabilities
 
18,887

 

Accounts payable
 
5,288

 
5,391

Accrued expenses and other
 
72,988

 
66,050

Total liabilities
 
926,164

 
1,030,153

Commitments and contingencies (Note 10)
 


 


Equity:
 
 

 
 

Preferred stock, $0.01 par value per share, 100,000,000 shares authorized:
 
 

 
 

6.45% Series D - 3,000,000 shares issued and outstanding at June 30, 2019 and December 31, 2018 (aggregate liquidation preference of $75,403 and $75,417 at June 30, 2019 and December 31, 2018, respectively)
 
30

 
30

6.25% Series E - 6,400,000 shares issued and outstanding at June 30, 2019 and December 31, 2018 (aggregate liquidation preference of $160,833 and $160,861 at June 30, 2019 and December 31, 2018, respectively)
 
64

 
64

Common stock, $0.01 par value per share, 500,000,000 shares authorized, 105,126,626 and 104,783,179 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
 
1,051

 
1,048

Additional paid-in capital
 
1,187,715

 
1,185,310

Accumulated other comprehensive loss
 
(16,236
)
 
(1,441
)
Retained earnings
 
22,179

 
4,838

Total stockholders’ equity
 
1,194,803

 
1,189,849

Non-controlling interests in operating partnership
 
2,254

 
2,295

Total equity
 
1,197,057

 
1,192,144

Total liabilities and equity
 
$
2,123,221

 
$
2,222,297

 
See Notes to the Condensed Consolidated Financial Statements

1


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
 
 
For the
Three Months Ended
June 30,
 
For the
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 

 
 

 
 

 
 

Room
 
$
131,656

 
$
140,650

 
$
259,756

 
$
270,222

Food and beverage
 
6,280

 
6,517

 
12,442

 
12,846

Other
 
4,994

 
5,055

 
9,684

 
9,353

Total revenues
 
142,930

 
152,222

 
281,882

 
292,421

Expenses:
 
 

 
 

 
 

 
 

Room
 
28,413

 
31,113

 
56,253

 
60,118

Food and beverage
 
4,688

 
5,107

 
9,288

 
10,106

Other hotel operating expenses
 
39,422

 
41,578

 
79,219

 
81,036

Property taxes, insurance and other
 
10,695

 
11,032

 
22,103

 
22,030

Management fees
 
4,458

 
5,388

 
9,604

 
10,740

Depreciation and amortization
 
23,779

 
24,954

 
49,315

 
50,200

Corporate general and administrative
 
5,920

 
5,620

 
11,910

 
12,227

Loss on impairment of assets
 
1,685

 

 
1,685

 

Total expenses
 
119,060

 
124,792

 
239,377

 
246,457

Gain on disposal of assets, net
 
35,520

 
17,331

 
39,686

 
17,288

Operating income
 
59,390

 
44,761

 
82,191

 
63,252

Other income (expense):
 
 

 
 

 
 

 
 

Interest expense
 
(9,766
)
 
(10,402
)
 
(20,618
)
 
(19,731
)
Other income, net
 
146

 
3,470

 
1,447

 
4,259

Total other income (expense)
 
(9,620
)
 
(6,932
)
 
(19,171
)
 
(15,472
)
Income from continuing operations before income taxes
 
49,770

 
37,829

 
63,020

 
47,780

Income tax expense (Note 12)
 
(701
)
 
(152
)
 
(1,051
)
 
(412
)
Net income
 
49,069

 
37,677

 
61,969

 
47,368

Non-controlling interest in Operating Partnership
 
(112
)
 
(101
)
 
(135
)
 
(104
)
Net income attributable to Summit Hotel Properties, Inc.
 
48,957

 
37,576

 
61,834

 
47,264

Preferred dividends
 
(3,709
)
 
(3,709
)
 
(7,418
)
 
(9,252
)
Premium on redemption of preferred stock
 

 

 

 
(3,277
)
Net income attributable to common stockholders
 
$
45,248

 
$
33,867

 
$
54,416

 
$
34,735

Earnings per share:
 
 
 
 
 
 
 
 

Basic
 
$
0.43

 
$
0.33

 
$
0.52

 
$
0.33

Diluted
 
$
0.43

 
$
0.32

 
$
0.52

 
$
0.33

Weighted average common shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
103,896

 
103,643

 
103,823

 
103,572

Diluted
 
103,937

 
103,883

 
103,888

 
103,892

 
See Notes to the Condensed Consolidated Financial Statements

2


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
 
 
For the
Three Months Ended
June 30,
 
For the
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
49,069

 
$
37,677

 
$
61,969

 
$
47,368

Other comprehensive income, net of tax:
 
 

 
 

 
 

 
 

Changes in fair value of derivative financial instruments
 
(9,274
)
 
362

 
(14,832
)
 
4,106

Comprehensive income
 
39,795

 
38,039

 
47,137

 
51,474

Comprehensive income attributable to non-controlling interests:
 
 

 
 

 
 

 
 

Less - Comprehensive income attributable to non-controlling interest in Operating Partnership
 
(89
)
 
(101
)
 
(98
)
 
(116
)
Comprehensive income attributable to Summit Hotel Properties, Inc.
 
39,706

 
37,938

 
47,039

 
51,358

Preferred dividends
 
(3,709
)
 
(3,709
)
 
(7,418
)
 
(9,252
)
Premium on redemption of preferred stock
 

 

 

 
(3,277
)
Comprehensive income attributable to common stockholders
 
$
35,997

 
$
34,229

 
$
39,621

 
$
38,829

 
See Notes to the Condensed Consolidated Financial Statements


3


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Changes in Equity
For the Three Months Ended June 30, 2019 and 2018
(Unaudited)
(in thousands, except share amounts)
 
 
Shares
 of Preferred
Stock
 
Preferred
Stock
 
Shares
of Common
Stock
 
Common
Stock
 
Additional
Paid-In Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained Earnings
(Deficit) and
Distributions
 
Total
Stockholders’
Equity
 
Non-controlling Interests in Operating
Partnership
 
Total
Equity
Balance at March 31, 2019
 
9,400,000

 
$
94

 
105,080,113

 
$
1,051

 
$
1,185,790

 
$
(6,985
)
 
$
(4,241
)
 
$
1,175,709

 
$
2,260

 
$
1,177,969

Common stock redemption of common units
 

 

 
6,076

 

 
53

 

 

 
53

 
(53
)
 

Dividends
 

 

 

 

 

 

 
(22,537
)
 
(22,537
)
 
(47
)
 
(22,584
)
Equity-based compensation
 

 

 
40,885

 

 
1,959

 

 

 
1,959

 
5

 
1,964

Shares acquired for employee withholding requirements
 

 

 
(448
)
 

 
(5
)
 

 

 
(5
)
 

 
(5
)
Other
 

 

 

 

 
(82
)
 

 

 
(82
)
 

 
(82
)
Other comprehensive loss
 

 

 

 

 

 
(9,251
)
 

 
(9,251
)
 
(23
)
 
(9,274
)
Net income
 

 

 

 

 

 

 
48,957

 
48,957

 
112

 
49,069

Balance at June 30, 2019
 
9,400,000

 
$
94

 
105,126,626

 
$
1,051

 
$
1,187,715

 
$
(16,236
)
 
$
22,179

 
$
1,194,803

 
$
2,254

 
$
1,197,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2018
 
9,400,000

 
$
94

 
104,683,798

 
$
1,047

 
$
1,180,421

 
$
5,183

 
$
(8,710
)
 
$
1,178,035

 
$
2,838

 
$
1,180,873

Common stock redemption of common units
 

 

 
25,839

 

 
227

 

 

 
227

 
(227
)
 

Dividends
 

 

 

 

 

 

 
(22,556
)
 
(22,556
)
 
(55
)
 
(22,611
)
Equity-based compensation
 

 

 
34,464

 

 
1,816

 

 

 
1,816

 
5

 
1,821

Other
 

 

 

 

 
(66
)
 

 

 
(66
)
 

 
(66
)
Other comprehensive income
 

 

 

 

 

 
362

 

 
362

 

 
362

Net income
 

 

 

 

 

 

 
37,576

 
37,576

 
101

 
37,677

Balance at June 30, 2018
 
9,400,000

 
$
94

 
104,744,101

 
$
1,047

 
$
1,182,398

 
$
5,545

 
$
6,310

 
$
1,195,394

 
$
2,662

 
$
1,198,056

 
See Notes to the Condensed Consolidated Financial Statements


4


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Changes in Equity
For the Six Months Ended June 30, 2019 and 2018
(Unaudited)
(in thousands, except share amounts)
 
 
Shares
 of Preferred
Stock
 
Preferred
Stock
 
Shares
of Common
Stock
 
Common
Stock
 
Additional
Paid-In Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained Earnings
(Deficit) and
Distributions
 
Total
Stockholders’
Equity
 
Non-controlling Interests in Operating
Partnership
 
Total
Equity
Balance at December 31, 2018
 
9,400,000

 
$
94

 
104,783,179

 
$
1,048

 
$
1,185,310

 
$
(1,441
)
 
$
4,838

 
$
1,189,849

 
$
2,295

 
$
1,192,144

Common stock redemption of common units
 

 

 
6,076

 

 
53

 

 

 
53

 
(53
)
 

Dividends
 

 

 

 

 

 

 
(44,493
)
 
(44,493
)
 
(94
)
 
(44,587
)
Equity-based compensation
 

 

 
411,711

 
4

 
3,304

 

 

 
3,308

 
8

 
3,316

Shares acquired for employee withholding requirements
 

 

 
(74,340
)
 
(1
)
 
(838
)
 

 

 
(839
)
 

 
(839
)
Other
 

 

 

 

 
(114
)
 

 

 
(114
)
 

 
(114
)
Other comprehensive loss
 

 

 

 

 

 
(14,795
)
 

 
(14,795
)
 
(37
)
 
(14,832
)
Net income
 

 

 

 

 

 

 
61,834

 
61,834

 
135

 
61,969

Balance at June 30, 2019
 
9,400,000

 
$
94

 
105,126,626

 
$
1,051

 
$
1,187,715

 
$
(16,236
)
 
$
22,179

 
$
1,194,803

 
$
2,254

 
$
1,197,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
12,800,000

 
$
128

 
104,287,128

 
$
1,043

 
$
1,262,679

 
$
1,451

 
$
9,201

 
$
1,274,502

 
$
2,874

 
$
1,277,376

Redemption of preferred stock
 
(3,400,000
)
 
(34
)
 

 

 
(81,689
)
 

 
(3,277
)
 
(85,000
)
 

 
(85,000
)
Common stock redemption of common units
 

 

 
25,839

 

 
227

 

 

 
227

 
(227
)
 

Dividends
 

 

 

 

 

 

 
(46,878
)
 
(46,878
)
 
(113
)
 
(46,991
)
Equity-based compensation
 

 

 
618,984

 
6

 
4,030

 

 

 
4,036

 
12

 
4,048

Shares acquired for employee withholding requirements
 

 

 
(187,850
)
 
(2
)
 
(2,722
)
 

 

 
(2,724
)
 

 
(2,724
)
Other
 

 

 

 

 
(127
)
 

 

 
(127
)
 

 
(127
)
Other comprehensive income
 

 

 

 

 

 
4,094

 

 
4,094

 
12

 
4,106

Net income
 

 

 

 

 

 

 
47,264

 
47,264

 
104

 
47,368

Balance at June 30, 2018
 
9,400,000

 
$
94

 
104,744,101

 
$
1,047

 
$
1,182,398

 
$
5,545

 
$
6,310

 
$
1,195,394

 
$
2,662

 
$
1,198,056

 
See Notes to the Condensed Consolidated Financial Statements


5


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
 
For the
Six Months Ended
June 30,
 
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
 

Net income
 
$
61,969

 
$
47,368

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
49,315

 
50,200

Amortization of deferred financing costs
 
714

 
998

Loss on impairment of assets
 
1,685

 

Equity-based compensation
 
3,316

 
4,048

Gain on disposal of assets, net
 
(39,686
)
 
(17,288
)
Non-cash interest income
 
(1,019
)
 
(1,011
)
Debt transaction costs
 
1,835

 
217

Other
 
261

 
386

Changes in operating assets and liabilities:
 
 

 
 

Trade receivables, net
 
(7,301
)
 
(4,057
)
Prepaid expenses and other
 
2,596

 
1,545

Accounts payable
 
(169
)
 
(33
)
Accrued expenses and other
 
1,784

 
2,041

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
75,300

 
84,414

INVESTING ACTIVITIES
 
 

 
 

Acquisition of land under ground lease
 
(4,178
)
 

Investment in hotel properties under development
 

 
(10,828
)
Improvements to hotel properties
 
(32,576
)
 
(30,648
)
Proceeds from asset dispositions, net
 
143,957

 
41,735

Funding of real estate loans
 
(500
)
 
(15,245
)
Proceeds from collection of real estate loans
 
550

 

Increase in escrow deposits for acquisitions
 
(825
)
 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
106,428

 
(14,986
)
FINANCING ACTIVITIES
 
 

 
 

Proceeds from issuance of debt
 
100,000

 
420,000

Principal payments on debt
 
(230,562
)
 
(337,297
)
Redemption of preferred stock
 

 
(85,000
)
Dividends paid
 
(45,210
)
 
(47,265
)
Financing fees on debt and other issuance costs
 
(1,811
)
 
(1,785
)
Repurchase of common shares for withholding requirements
 
(839
)
 
(2,724
)
NET CASH USED IN FINANCING ACTIVITIES
 
(178,422
)
 
(54,071
)
Net change in cash, cash equivalents and restricted cash
 
3,306

 
15,357

CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
 

 
 

Beginning of period
 
72,556

 
66,007

End of period
 
$
75,862

 
$
81,364

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 

 
 

Cash payments for interest
 
$
21,463

 
$
18,638

Accrued acquisition costs and improvements to hotel properties
 
$
5,018

 
$
5,765

Capitalized interest
 
$

 
$
446

Net cash (refunds) payments for income taxes
 
$
(802
)
 
$
622

 
See Notes to the Condensed Consolidated Financial Statements

6


SUMMIT HOTEL PROPERTIES, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 - DESCRIPTION OF BUSINESS
 
Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
 
We focus on owning primarily premium-branded, select-service hotels. At June 30, 2019, our portfolio consisted of 69 hotels with a total of 10,715 guestrooms located in 24 states. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to subsidiaries (“TRS Lessees”) of our taxable REIT subsidiary (“TRS”). We indirectly own 100% of the outstanding equity interests in all of our TRS Lessees.
 
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying Condensed Consolidated Financial Statements of the Company consolidate the accounts of the Company and all entities that are controlled by the Company’s ownership of a majority voting interest in such entities, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.
 
We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Act of 1934 (the “Exchange Act”). Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three and six months ended June 30, 2019 may not be indicative of the results that may be expected for the full year of 2019. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
 
Investment in Hotel Properties
 
The Company allocates the purchase price of acquired hotel properties based on the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Intangible assets may include certain value associated with the on-going operations of the hotel business being acquired as part of the hotel property acquisition. We determine the acquisition-date fair values of all assets and assumed liabilities using methods similar to those used by independent appraisers, including using a discounted cash flow analysis that uses appropriate discount or capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. 

If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the asset or asset group is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.

Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize hotel development costs and the costs of significant additions and improvements that materially upgrade, increase the value or extend the useful life of the property. These costs may include hotel development, refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. If an asset requires a period of time in which to carry out the activities necessary to bring it to the condition necessary for its intended use, the interest cost incurred during that period as a result of expenditures for the asset is capitalized as part of the cost of the asset. We expense the cost of repairs and maintenance as incurred.


7


On a limited basis, we provide financing to developers of hotel properties for development projects. We evaluate these arrangements to determine if we participate in residual profits of the hotel property through the loan provisions or other agreements. Where we conclude that these arrangements are more appropriately treated as an investment in the hotel property, we reflect the loan as an investment in hotel properties under development in our Condensed Consolidated Balance Sheets. If classified as hotel properties under development, no interest income is recognized on the loan and interest expense is capitalized as part of our investment in the hotel property during the construction period. 

We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or undeveloped land may be impaired. Additionally, we perform at least annual reviews to monitor the factors that could trigger an impairment.  Factors that we consider for an impairment analysis include, among others: i) significant underperformance relative to historical or anticipated operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, including changes in the estimated holding periods for hotel properties and land parcels, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, v) changes in values of comparable land or hotel sales, and vi) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows of the specific property and determine if the carrying amount of the asset is recoverable. If an impairment is identified, we estimate the fair value of the property based on discounted cash flows or sales price if the property is under contract and an adjustment is made to reduce the carrying value of the property to its estimated fair value.
 
Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which changed lessee accounting to reflect the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet. We adopted ASU No. 2016-02 on January 1, 2019. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of ASC No. 842, Leases. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption. The Company elected certain practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. The Company also elected not to restate prior periods for the effect of the adoption of the new standard. In accordance with ASU No. 2016-02, we reclassified certain existing lease-related assets and liabilities to Right-of-use assets as of January 1, 2019. The adoption of ASU No. 2016-02 resulted in the recognition of incremental right-of-use assets and related lease liabilities of $23.6 million on the Condensed Consolidated Balance Sheet as of January 1, 2019.

Notes Receivables

We selectively provide mezzanine lending to developers, where we also have the opportunity to acquire the hotel at or after the completion of the development project, and we also may provide seller financing under limited circumstances. We classify notes receivable as held-to-maturity and carry the notes receivable at cost less the unamortized discount, if any. We routinely evaluate our notes receivable for potential credit or collection issues that may indicate an impairment. Losses on notes receivable are recognized when incurred based on our best estimate of probable impairment.

Cash and Cash Equivalents
 
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may exceed the federally insured limit. We maintain our cash with high credit quality financial institutions.
 
Restricted Cash
 
Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
 
Revenue Recognition
 
In accordance with ASU No. 2014-09, revenues from the operation of our hotels are recognized when guestrooms are occupied, services have been rendered or fees have been earned. Revenues are recorded net of any discounts and sales and

8


other taxes collected from customers. Revenues consist of room sales, food and beverage sales, and other hotel revenues and are presented on a disaggregated basis on our Condensed Consolidated Statements of Operations.

Room revenue is generated through short-term contracts with customers whereby customers agree to pay a daily rate for the right to occupy hotel rooms for one or more nights. Our performance obligations are fulfilled at the end of each night that the customers have the right to occupy the rooms. Room revenues are recognized daily at the contracted room rate in effect for each room night.

Food and beverage