Note 8. Management Agreements and Leases

As of March 31, 2019, we owned 327 hotels and 179 travel centers, which were included in 13 operating agreements. We do not operate any of our properties.

As of March 31, 2019, 325 of our hotels were leased to our TRSs and managed by independent hotel operating companies and two hotels were leased to third parties. As of March 31, 2019, our hotel properties were managed by or leased to separate subsidiaries of Marriott International, Inc., or Marriott, IHG, Sonesta International Hotels Corporation, or Sonesta, Wyndham Hotels & Resorts, Inc., or Wyndham, Hyatt Hotels Corporation, or Hyatt, and Radisson Hospitality, Inc., or Radisson, under eight agreements. These hotel agreements have initial terms expiring between 2019 and 2038. Each of these agreements is for between one and 101 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, and the renewal terms range between 20 to 60 years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, funding of the FF&E reserves, payment of our minimum returns, payment of certain management fees and replenishment of security deposits or guarantees. Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us.

Marriott No. 1 agreement. Our management agreement with Marriott for 53 hotels, or our Marriott No. 1 agreement, provides that, as of March 31, 2019, we are to be paid an annual minimum return of $71,496 to the extent that gross revenues of the hotels, after payment of hotel operating expenses and funding of the FF&E reserve, are sufficient to do so. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. We realized minimum returns of $15,712 and $16,083 during the three months ended March 31, 2019 and 2018, respectively, under this agreement. We do not have any security deposits or guarantees for our minimum returns from the 53 hotels included in our Marriott No. 1 agreement. Accordingly, the minimum returns we receive from these hotels managed by Marriott are limited to the hotels' available cash flows after payment of operating expenses and funding of the FF&E reserve.

We funded $13,593 and $177 for capital improvements to certain of the hotels included in our Marriott No. 1 agreement during the three months ended March 31, 2019 and 2018, respectively, which resulted in increases in our contractual annual minimum returns of $1,359 and $18, respectively.

Marriott No. 234 agreement. Our management agreement with Marriott for 68 hotels, or our Marriott No. 234 agreement, provides that, as of March 31, 2019, we are to be paid an annual minimum return of $108,160. We realized minimum returns of $26,893 and $26,710 during the three months ended March 31, 2019 and 2018, respectively, under this agreement. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a security deposit to cover minimum return payment shortfalls, if any. Under this agreement, this security deposit may be replenished and increased up to $64,700 from a share of hotel cash flows in excess of the minimum returns due to us. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. During the three months ended March 31, 2019, we reduced the available security deposit by $2,113 to cover shortfalls in hotel cash flows available to pay the minimum returns due to us for the period. The available balance of this security deposit was $30,598 as of March 31, 2019. Pursuant to our Marriott No. 234 agreement, Marriott has also provided us with a limited guaranty which expires in 2019 for shortfalls up to 90% of our minimum returns, if and after the available security deposit has been depleted. The available balance of the guaranty was $30,672 as of March 31, 2019.

We funded $9,000 and $3,680 for capital improvements to certain of the hotels included in our Marriott No. 234 agreement during the three months ended March 31, 2019 and 2018, respectively, which resulted in increases in our contractual annual minimum returns of $810 and $331, respectively.

Marriott No. 5 agreement. We lease one hotel in Kauai, HI to Marriott which requires that, as of March 31, 2019, we are paid annual minimum rents of $10,518. This lease is guaranteed by Marriott and we realized $2,630 and $2,580 of rent for this hotel during the three months ended March 31, 2019 and 2018, respectively. The guaranty provided by Marriott with respect to this leased hotel is unlimited. Marriott has four renewal options for 15 years each. On August 31, 2016, Marriott notified us that it will not exercise its renewal option at the expiration of the current lease term ending on December 31, 2019.

IHG agreement. Our IHG agreement, provides that, as of March 31, 2019, we are to be paid annual minimum returns and rents of $205,011. We realized minimum returns and rents of $49,584 and $47,315 during the three months ended March 31, 2019 and 2018, respectively, under this agreement.

Pursuant to our IHG agreement, IHG has provided us with a security deposit to cover minimum payment shortfalls, if any. Under this agreement, IHG is required to maintain a minimum security deposit of $37,000 and this security deposit may be replenished and increased up to $100,000 from a share of future cash flows from the hotels in excess of our minimum returns and rents. During the three months ended March 31, 2019, we reduced the available security deposit by $14,255 to cover shortfalls in hotel cash flows available to pay the minimum returns and rents due to us for the period. The available balance of this security deposit was $85,745 as of March 31, 2019. In connection with the February 2019 acquisition of the Hotel Palomar described in Note 7, IHG agreed to provide us $5,000 to supplement the existing security deposit.

We did not fund any capital improvements to our IHG hotels during each of the three months ended March 31, 2019 and 2018.

Sonesta agreement. As of March 31, 2019, Sonesta managed 12 of our full service hotels and 39 of our limited service hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a pooling agreement, which combines those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us.

Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to 8% of our invested capital, as defined therein, 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. Our fixed annual minimum return under our Sonesta agreement was $127,573 as of March 31, 2019. Our Sonesta agreement further provides that we are paid an additional return based upon operating profits, as defined therein, after payment of Sonesta’s incentive fee, if applicable. We realized returns of $14,161 and $11,972 during the three months ended March 31, 2019 and 2018, respectively, under our Sonesta agreement. 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 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 $8,523 and $7,325 for the three months ended March 31, 2019 and 2018, respectively. In addition, we incurred procurement and construction supervision fees of $405 for each of the three months ended March 31, 2019 and 2018, respectively, under our Sonesta agreement. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

Our Sonesta agreement does not require FF&E escrow deposits, but does require us to fund capital expenditures at our Sonesta hotels. We funded $10,467 and $13,132 for renovations and other capital improvements to certain hotels included in our Sonesta agreement during the three months ended March 31, 2019, and 2018, respectively, which resulted in increases in our contractual annual minimum returns of $484 and $747, respectively. The annual minimum returns due to us under our Sonesta agreement increase by 8% of the capital expenditure amounts we fund in excess of threshold amounts, as defined therein. We owed Sonesta $9,226 and $5,419 for capital expenditure and other reimbursements at March 31, 2019 and 2018, 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 condensed consolidated balance sheets.

See Note 10 for further information regarding our relationship, agreements and transactions with Sonesta.

Wyndham agreements. Our management agreement with Wyndham for 22 hotels, or our Wyndham agreement, provides that, as of March 31, 2019, we are to be paid annual minimum returns of $27,873. Pursuant to our Wyndham agreement, Wyndham has provided us with a guaranty, which was limited to $35,656, subject to an annual payment limit of $17,828, and expires on July 28, 2020. This guaranty was depleted during 2017 and remained depleted as of March 31, 2019. This guaranty may be replenished from a share of future cash flows from these hotels in excess of our minimum returns. The Wyndham agreement provides that if the hotel cash flows available after payment of hotel operating expenses are less than the minimum returns due to us and if the guaranty is depleted, to avoid a default Wyndham is required to pay us the greater of the available hotel cash flows after payment of hotel operating expenses and 85% of the contractual amount due to us. We cannot be sure as to whether Wyndham will continue to pay at least the greater of available hotel cash flows after payment of hotel operating expenses and 85% of the minimum returns due to us or if Wyndham will default on its payments. During the three months ended March 31, 2019 and 2018, we realized returns of $5,907 and $5,856, respectively, which represents 85% of the minimum returns due for the period, under this agreement.

Our Wyndham agreement requires FF&E escrow deposits equal to 5% of total hotel sales for all hotels included in the agreement subject to available cash flows after payment of our minimum return. No FF&E escrow deposits were made during the three months ended March 31, 2019.

We funded $1,022 for capital improvements to certain of the hotels included in our Wyndham agreement during the three months ended March 31, 2019, which resulted in increases in our contractual annual minimum returns of $82. We did not fund any capital improvements to the hotels included in our Wyndham agreement during the three months ended March 31, 2018.

We also lease 48 vacation units in one of our hotels to a subsidiary of Wyndham Destinations, Inc. (NYSE: WYND), or Destinations, which requires that, as of March 31, 2019, we are paid annual minimum rents of $1,493. The guaranty provided by Destinations with respect to the Destinations lease for part of one hotel is unlimited. We recognized the contractual rents of $454 during the three months ended March 31, 2019 and 2018 under our Destinations lease agreement. Rental income for the three months ended March 31, 2019 and 2018 for this lease includes $80 and $91, respectively, of adjustments necessary to record rent on a straight line basis.

Hyatt agreement. Our management agreement with Hyatt for 22 hotels, or our Hyatt agreement, provides that, as of March 31, 2019, we are to be paid an annual minimum return of $22,037. We realized minimum returns of $5,509 during each of the three months ended March 31, 2019 and 2018 under this agreement. Pursuant to our Hyatt agreement, Hyatt has provided us with a guaranty, which is limited to $50,000. During the three months ended March 31, 2019, the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period, and Hyatt made $430 of guaranty payments to cover the shortfall. The available balance of the guaranty was $21,485 as of March 31, 2019.

Radisson agreement. Our management agreement with Radisson for nine hotels, or our Radisson agreement, provides that, as of March 31, 2019, we are to be paid an annual minimum return of $19,769. We realized minimum returns of $4,831 and $3,230 during the three months ended March 31, 2019 and 2018, respectively, under this agreement. Pursuant to our Radisson agreement, Radisson has provided us with a limited guaranty which, as a result of amounts funded by us during the three months ended March 31, 2019, as described below, was increased $849 to a total of $46,849. During the three months ended March 31, 2019, the hotels under this agreement generated cash flows that were less than the minimum returns due to us for the period, and Radisson made $2,646 of guaranty payments to cover the shortfall. The available balance of the guaranty was $39,913 as of March 31, 2019.

We funded $10,611 for capital improvements at certain of the hotels included in our Radisson agreement during the three months ended March 31, 2019, which resulted in increases in our contractual annual minimum returns of $849. We did not fund any capital improvements to the hotels included in our Radisson agreement during the three months ended March 31, 2018.

TA leases. On January 16, 2019, we entered agreements with TA, pursuant to which in January 2019:


•	We sold to TA 20 travel center properties, which TA previously leased from us, for a total purchase price of $308,200.


•	Upon completing these transactions, these travel center properties were removed from the TA leases.


•	Commencing on April 1, 2019, TA paid us the first of 16 quarterly installments of approximately $4,400 each (an aggregate of $70,458) to fully satisfy and discharge its $150,000 deferred rent obligation to us that otherwise would have become due in five installments between 2024 and 2030.


•	Commencing with the year ending December 31, 2020, TA will be obligated to pay to us an additional amount of percentage rent equal to one-half percent (0.5%) of the excess of its annual non-fuel revenues at leased sites over the non-fuel revenues for each respective site for the year ending December 31, 2019.


•	The term of each TA lease was extended by three years.


•	Certain of the 179 travel center properties that TA continues to lease from us were reallocated among the TA leases.

See Note 7 for further information regarding the effects of certain of our property dispositions on our leases with TA.

As of March 31, 2019, we leased to TA a total of 179 travel centers under five leases that expire between 2029 and 2035 and require annual minimum returns of $246,083.

We recognized rental income from TA of $63,075 and $74,193 for the three months ended March 31, 2019 and 2018, respectively. Rental income for the three months ended March 31, 2019 and 2018 includes $1,214 and $2,984, 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 March 31, 2019 and December 31, 2018, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $79,710 and $91,212, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets.

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 may request that we fund capital improvements in return for increases in TA’s annual minimum rent equal to 8.5% of the amounts funded. We did not fund any capital improvements to our properties that we leased to TA during the three months ended March 31, 2019. We funded $13,137 for the three months ended March 31, 2018 of capital improvements to our properties that we leased to TA. As a result, TA’s annual minimum rent payable to us increased by $1,117.

In addition to the rental income that we recognized during the three months ended March 31, 2019 and 2018 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $1,069 and $835 for the three months ended March 31, 2019 and 2018, respectively.

See Note 10 for further information regarding our relationship with TA.

Additional lease information (as lessor). As of March 31, 2019, 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:




2019	$	281,956
2020	273,098
2021	272,801
2022	271,222
2023	258,065
Thereafter	2,357,802
Total	$	3,714,944

Additional lease information (as lessee). As of January 1, 2019, 14 of our hotels and one of our travel centers 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 condensed consolidated balance sheets.

At March 31, 2019, our right of use assets and related lease liabilities totaled $76,148, which represented our future obligations under our operating lease agreements. Our operating leases require minimum fixed rent payments, percentage rent payments based on a percentage of hotel revenues in excess of certain thresholds, or rent payments equal to the greater of a minimum fixed rent or percentage rent. For the three months ended March 31, 2019, $3,397 of rental expense related to our operating leases is included in hotel operating expenses within our condensed consolidated statements of comprehensive income. As of March 31, 2019, our operating leases provide for contractual minimum rent payments to third parties during the remaining lease terms, as follows:



2019	$	7,165
2020	6,850
2021	6,127
2022	5,632
2023	5,614
Thereafter	159,731
Total lease payments	191,119
Less: imputed interest	(114,971		)
Present value of lease liabilities ⁽¹⁾	$	76,148


(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 5.50% and 32 years (range of 12 to 69 years) and 5.63% and 29 years (range of 9 months to 55 years), respectively.

As of March 31, 2019, 14 of our travel centers are on land we leased partially or entirely from unrelated third parties. We are not required to record right of use assets and lease liabilities for these properties as we are not the primary obligor under the leases. The average remaining terms of the ground leases on these 14 travel centers was 12 years (range of one month to 32 years) with rents averaging $429 per year.

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.

Guarantees and security deposits generally. When we reduce the amounts of the security deposits we hold for any of our operating agreements for payment deficiencies, it does not result in additional cash flows to us of the deficiency amounts, but reduces the refunds due to the respective tenants or managers who have provided us with these security deposits upon expiration of the respective operating agreement. The security deposits are non-interest bearing and are not held in escrow. Under these agreements, any amount of the security deposits which are applied to payment deficits may be replenished from a share of future cash flows from the applicable hotel operations pursuant to the terms of the respective agreements.

Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $42,839 and $27,586 less than the minimum returns due to us for the three months ended March 31, 2019 and 2018, respectively. When managers of these hotels are required to fund the shortfalls under the terms of our management agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of comprehensive income as a reduction of hotel operating expenses. The reduction to hotel operating expenses was $22,465 and $10,851 for the three months ended March 31, 2019 and 2018, respectively. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our management agreements of $20,676 and $17,769 for the three months ended March 31, 2019, and 2018, respectively, which represent the unguaranteed portions of our minimum returns from our Marriott No. 1, Sonesta and Wyndham agreements.

Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $1,275 more than the minimum returns due to us for the three months ended March 31, 2018. The net operating results of our managed hotel portfolios did not exceed the minimum returns due to us for the three months ended March 31, 2019. Certain of our guarantees and our security deposits may be replenished by a share of future cash flows from the applicable hotel operations in excess of the minimum returns due to us pursuant to the terms of the respective agreements. When our guarantees and our security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses. We had $1,275 of guaranty and security deposit replenishments for the three months ended March 31, 2018. There were no replenishments for the three months ended March 31, 2019.