What is the relationship between depreciation/amortization and the profitability of a Sonesta Simply Suites location?

According to Sonesta Simply Suites's 2025 Franchise Disclosure Document, depreciation is an expense that reflects the reduction in value of assets over time, while amortization is the process of spreading the cost of intangible assets over their useful life. These are non-cash expenses that impact the net income of a Sonesta Simply Suites location. The document states that property and equipment are recorded at cost less accumulated depreciation, and improvements that extend the life of the property are capitalized. Repairs and maintenance are expensed as incurred.

Depreciation expense for property and equipment was $0.2 million in 2024, $1.4 million in 2023, and $3.2 million in 2022. The company retired $0.1 million and $3.4 million of fully depreciated assets in 2024 and 2023, respectively, and the depreciation impact of sold assets was $0.4 million. These figures indicate how depreciation expenses can vary year to year, affecting the reported profits for those periods. Lower depreciation expenses can increase net income, while higher expenses decrease it.

Amortization is also mentioned in the context of franchise contracts. Consideration paid to incentivize hotel owners is capitalized and reduces revenues as amortized over the contract length. Application fees are also capitalized and amortized to revenues. Furthermore, commissions and direct costs of acquiring a contract are amortized as a reduction of franchise fees and system, reservation, and marketing fees. These amortization practices affect how revenue and expenses are recognized over time, influencing the profitability of Sonesta Simply Suites.

In summary, depreciation and amortization are accounting methods that spread the cost of assets over their useful lives. For a Sonesta Simply Suites franchisee, understanding these non-cash expenses is crucial because they directly impact the reported net income and, consequently, the perceived profitability of the business. While these expenses do not involve an immediate cash outflow, they reflect the wearing down of assets and the consumption of intangible benefits, which are important factors in assessing the long-term financial health of the franchise.