Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2021

Basis of Accounting, Policy [Policy Text Block]

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as percentage ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Real Estate, Policy [Policy Text Block]

Real Estate Investments

The Company allocates the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and furniture, fixtures and equipment. The Company utilizes various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent

third

parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which are recorded at fair value. The Company also considers information obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.

The Company's acquisitions of hotel properties are accounted for as acquisitions of groups of assets rather than business combinations, although the determination will be made on a transaction-by-transaction basis. If the Company concludes that an acquisition will be accounted for as a group of assets, the transaction costs associated with the acquisition will be capitalized as part of the assets acquired.

The Company's investments in real estate, including transaction costs, that are

not

considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of the Company's long-lived assets is computed using the straight-line method over the estimated useful lives of up to

years for buildings,

years for land improvements,

five

years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.

The Company is required to make assessments as to the useful lives of the Company's assets for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company's investments in real estate. These assessments have a direct impact on the Company's net income because if the Company were to shorten the expected useful lives of the Company's investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Impairment of Long-Lived Assets

Upon the occurrence of certain “triggering events” under the provisions of the Accounting Standards Codification ("ASC") section

360

-Property, Plant and Equipment, the Company reviews its hotel investments which are considered to be long-lived assets under GAAP for impairment. These triggering events

may

include various conditions prescribed by GAAP such as the initiation of marketing an asset for sale, significant declines in market value of the asset, significant declines in operating performance, significant adverse changes in economic conditions and potential sales of hotel properties which result in shorter holding periods. If a triggering event occurs and circumstances indicate the carrying amount of the property

may

not

be recoverable, the Company performs a recoverability test which compares the carrying amount to an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If the Company determines it is unable to recover the carrying amount of the asset over the useful life, impairment is deemed to exist, and an impairment loss will be recorded to the extent that the carrying amount exceeds the estimated fair value of the property. See Note

- Impairments for impairment disclosures.

Assets Held for Sale (Long Lived-Assets)

When the Company initiates the sale of long-lived assets, it assesses whether the assets meet the criteria to be considered assets held for sale. The review is based on whether the following criteria are met:

•

Management and the Company's board of directors have committed to a plan to sell the asset group;

•

The subject assets are available for immediate sale in their present condition;

•

The Company is actively locating buyers as well as other initiatives required to complete the sale;

•

The sale is probable and the transfer is expected to qualify for recognition as a complete sale in

one

year;

•

The long-lived asset is being actively marketed for sale at a price that is reasonable in relation to fair value; and

•

Actions necessary to complete the plan indicate it is unlikely significant changes will be made to the plan or the plan will be withdrawn.

If all the criteria are met, a long-lived asset held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and the Company will cease recording depreciation. Any adjustment to the carrying amount is recorded as an impairment loss. See Note

- Sale of Hotels and Assets Held for Sale for assets held for sale disclosures.

If at any point the criteria for assets held for sale are

longer met, the Company reclassifies the long-lived asset from held for sale to held and used, and the Company measures the asset value at the lower of:

• its carrying amount before the asset (disposal group) was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the asset (disposal group) been continuously classified as held and used; or

• its fair value at the date of the subsequent decision

not

to sell.

Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block]

Goodwill

The Company allocates goodwill to each reporting unit. For the Company's purposes, each of its majority-owned hotels is considered a reporting unit. The Company tests goodwill for impairment at least annually, as of

March 31,

or upon the occurrence of any "triggering events" under ASC section

360,

if sooner. Upon the occurrence of any "triggering events," the Company is required to compare the fair value of each reporting unit to which goodwill has been allocated, to the carrying amount of such reporting unit including the allocation of goodwill. If the carrying amount of a reporting unit exceeds its fair value, the Company applies a

one

-step quantitative test and records the amount of goodwill impairment as the excess of the reporting unit's carrying amount over its fair value,

not

to exceed the total amount of goodwill allocated to such reporting unit.

During

2020,

the Company recorded impairments to goodwill of

$3.1

million resulting in a goodwill balance of

$6.8

million as of

December 31, 2020

. The Company recognized goodwill impairment of

$1.2

million during the

three

months ended

March 31, 2021,

resulting in a goodwill balance of

$5.5

million as of

March 31, 2021.

See Note

- Impairments for impairment disclosures.

Cash and Cash Equivalents, Unrestricted Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of

three

months or less at purchase.

Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block]

Restricted Cash

Restricted cash consists of amounts required under mortgage agreements for future capital improvements to owned assets, future interest and property tax payments and cash flow deposits while subject to mortgage agreement restrictions.

Deferred Charges, Policy [Policy Text Block]

Deferred Financing Fees

Deferred financing fees represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized as a component of interest expense over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing fees are expensed in full when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do

not

close are expensed in the period in which it is determined that the financing will

not

be successful. Deferred financing fees are deducted from their related liabilities on the Company's Consolidated Balance Sheets.

Revenue from Contract with Customer [Policy Text Block]

Revenue Recognition

The Company's revenue is primarily from rooms, food and beverage, and other, and is disaggregated on the Company's Consolidated Statement of Operations and Comprehensive Loss.

Room sales are driven by a fixed fee charged to a hotel guest to stay at the hotel property for an agreed-upon period. A majority of the Company's room reservations are cancellable and the Company transfers promised goods and services to the hotel guest as of the date upon which the hotel guest occupies a room and at the same time earns and recognizes revenue. The Company offers advance purchase reservations that are paid for by the hotel guest in advance and the Company recognizes deferred revenue as a result of such reservations. The Company's obligation to the hotel guest is satisfied as of the date upon which the hotel guest occupies a room. The Company's room revenue accounted for

95.9%

and

93.1%

of the Company's total revenue for the quarters ended

March 31, 2021

and

2020

respectively. Food, beverage, and other revenue are recognized at the point of sale on the date of the transaction as the hotel guest simultaneously obtains control of the good or service.

Income Tax, Policy [Policy Text Block]

Income Taxes

The Company elected to be taxed as a REIT under Sections

856

through

860

of the Internal Revenue Code of

1986,

as amended (the "Code") commencing with its tax year ended

December

31,

2014.

In order to continue to qualify as a REIT, the Company must annually distribute to its stockholders

90%

of its REIT taxable income (which does

not

equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. The Company generally will

not

be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. The Company

may

be subject to certain state and local taxes on its income, property taxes and federal income and excise taxes on its undistributed income. The Company's hotels are leased to taxable REIT subsidiaries, which are owned by the OP. The taxable REIT subsidiaries are subject to federal, state and local income taxes.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, capital loss, and tax credit carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. 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 future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.

As of

March 31, 2021,

the Company determined it is more likely than

not

that the deferred tax assets will

not

be realized due to cumulative historical and current tax losses, which are negative evidence about the Company's ability to generate future taxable income. As of

March 31, 2021,

the Company has recorded a full deferred tax valuation allowance of

$10.1

million. The net deferred tax assets are fully offset by the valuation allowance, both are included as part of “Prepaid expenses and other assets” on the Consolidated Balance Sheets and the impact of the valuation allowance in the current period is included as part of the “Income tax expense (benefit)” line item on the Consolidated Statements of Operations and Comprehensive Loss.

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is "more-likely-than-

not"

that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-

not

recognition threshold, the position is measured at the largest amount of benefit that is greater than

50%

likely of being realized upon settlement in order to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes. As of

March 31, 2021,

the Company's tax years that remain subject to examination by major tax jurisdictions are

2016,

2017,

2018,

2019

and

2020.

Earnings Per Share, Policy [Policy Text Block]

Earnings/Loss per Share

The Company calculates basic income or loss per share by dividing net income or loss attributable to common stockholders for the period by the weighted-average shares of its common stock outstanding for such period. Diluted income per share takes into account the effect of dilutive instruments, such as unvested restricted shares of common stock ("restricted shares") and unvested restricted share units in respect of shares of common stock ("RSUs"), except when doing so would be anti-dilutive.

The Company currently has outstanding restricted shares whose holders are entitled to participate in dividends when and if paid on shares of common stock. The Company also currently has outstanding RSUs whose holders generally are credited with dividend or other distribution equivalents when and if paid on shares of common stock. These dividends or other distribution equivalents will be regarded as having been reinvested in RSUs and will only be paid to the extent the corresponding RSUs vest. To the extent the Company were to have distributions in the future, it would be required to calculate earnings per share using the

two

-class method with regard to restricted shares, whereby earnings or losses are reduced by distributed earnings as well as any available undistributed earnings allocable to holders of restricted shares.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements

In accordance with Accounting Standards Codification section

820

- Fair Value Measurement, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When

principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are

not

available, the reporting entity should use valuation models.

Financial instruments recorded or required to be disclosed at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into

three

levels, as follows:

•

Level

- Inputs that are based upon quoted prices for identical instruments traded in active markets.

•

Level

- Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are

not

active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment.

•

Level

- Inputs that are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

See Note

- Fair Value Measurements for fair value disclosures.

Temporary Equity, Policy [Policy Text Block]

Class C Units

The Company initially measured the Class C Units which were issued to the Brookfield Investor at fair value net of issuance costs. The Company is required to accrete the carrying value of the Class C Units to the liquidation preference using the effective interest method over the

five

year period prior to the holder's redemption option becoming exercisable (See "Accretion of Class C Units" on the Company's Consolidated Statements of Operations and Comprehensive Loss). However, if it becomes probable that the Class C Units will become redeemable prior to such date, the Company will adjust the carrying value of the Class C Units to the maximum liquidation preference.

Lessee, Leases [Policy Text Block]

Leases

Effective

January 1, 2019,

the Company adopted ASU

2016

Leases, which requires companies to recognize operating leases under GAAP as “right of use assets” (“ROU assets”) and lease liabilities on the balance sheet. The Company has

$11.9

million of ROU assets and

11.9

illion of lease liabilities as of

March 31, 2021

for its operating leases. The Company's below-market lease intangible, net, of

$1.6

million is also included in the ROU assets on the Company's Consolidated Balance Sheets as of

March

31,

2021.

Prior to

January 1, 2019,

these amounts were recorded in "Below-market lease, net" on the Company's Consolidated Balance Sheet.

The Company's leases are primarily comprised of: ground or operating leases of certain of its hotel properties;

one

corporate office lease; and leases of vans, copiers and other miscellaneous equipment. All of the foregoing are classified as operating leases under GAAP. The Company determines if an agreement is considered a lease under GAAP at commencement of the agreement. The Company determines the lease term by assuming the exercise of all renewal options that are reasonably certain.

The Company includes leases of its hotel properties, and its corporate office space lease, in ROU assets and lease liabilities on the Company's Consolidated Balance Sheet. The Company's below-market lease intangible, net, which is attributed to its ground leases is also included in the ROU assets on the Company's Consolidated Balance Sheet. The Company determined that its vans, copiers, and other miscellaneous equipment were immaterial to the Company's financial statements and therefore they have been excluded from the Company's ROU assets and lease liabilities.

Operating lease ROU assets and lease liabilities are recognized at the commencement date and are calculated using the present value of future lease payments over the lease term. The discount rate used in the present value calculation is the Company's estimate of its incremental borrowing rate based on the information available at the lease commencement date. ASU

2016

did

not

result in any changes to how operating lease payments are expensed under GAAP, and therefore, the Company's total operating lease payments continue to be expensed on a straight-line basis over the life of the lease commencing upon possession of the property. The amortization of the ROU asset and the accretion of the lease liability are combined in a single line item on the Consolidated Statement of Cash Flows which nets to zero. The below-market lease intangible is based on the difference between the market rent and the contractual rent for the Company's ground lease obligations and is discounted to a present value using an interest rate reflecting the Company's assessment of the risk associated with the leases acquired. Acquired lease intangible assets are amortized over the remaining lease term. See Note

- Leases for lease disclosures.

Advertising Cost [Policy Text Block]

Advertising Costs

The Company expenses advertising costs for hotel operations as incurred. These costs were

$2.3

million for the

three

months ended

March 31, 2021,

and

$3.7

million for the

three

months ended

March 31, 2020.

Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful Accounts, Policy [Policy Text Block]

Allowance for Doubtful Accounts

Receivables consist principally of trade receivables from customers and are generally unsecured and are due within

days. The Company records a provision for uncollectible accounts using the allowance method. Expected credit losses associated with trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon a forward-looking assessment of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accounts have been exhausted, the accounts are written off and the associated allowance for doubtful accounts is reduced. Trade receivable balances, net of the allowance for doubtful accounts, are included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets, and are as follows (in thousands):

	March 31, 2021			December 31, 2020
Trade receivables	$	5,221		$	4,041
Allowance for doubtful accounts		(573	)		(566	)
Trade receivables, net of allowance	$	4,648		$	3,475

Segment Reporting, Policy [Policy Text Block]

Reportable Segments

The Company has determined that it has

one

reportable segment, with activities related to investing in real estate. The Company's investments in real estate generate room revenue and other income through the operation of the properties, which comprise

100%

of the total consolidated revenues. Management evaluates the operating performance of the Company's investments in real estate on an individual property level, and therefore each property is considered a reporting unit. Each of the Company's reporting units are also considered to be operating segments, but

none

of these individual operating segments represents a reportable segment and they meet the criteria in GAAP to aggregate all properties into

one

reportable segment.

Derivatives, Policy [Policy Text Block]

Derivative Transactions

The Company at certain times enters into derivative instruments to hedge exposure to changes in interest rates. The Company's derivatives as of

March 31, 2021,

consist of interest rate cap agreements which it believes will help to mitigate its exposure to increasing borrowing costs under floating rate indebtedness, and a variable interest-only bond which it has acquired in connection with the securitization of

one

of its mortgage loans to effectively reduce its borrowing costs. The Company has elected

not

to designate its interest rate cap agreements and the variable interest-only bond as cash flow hedges. The impact of the interest rate caps for the

three

months ended

March 31, 2021

and

March 31, 2020,

was immaterial to the consolidated financial statements. See Note

- Mortgage Notes Payable and Note

- Fair Value Measurements for variable interest-only bond disclosures.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Pronouncements

January 2021,

the FASB issued ASU

2021

Reference Rate Reform (Topic

848

): Scope ("ASU

2021

01"

). ASU

2021

clarifies the scope in that certain optional expedients and exceptions in Topic

848

for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The Company can apply the ASU as of the beginning of the interim period that includes

March 12, 2020

or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The hedging relationship provisions of ASU

2021

are currently

not

applicable as

hedge accounting elections have been made by the Company. The Company is still assessing the impact of ASU

2021

but at this point does

not

anticipate it will have a material impact on the Company's consolidated financial statements.

Hospitality Investors Trust, Inc. 10-Q