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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, 2014

 

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 001-32319

 


 

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

 

 

 

Maryland

 

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

120 Vantis, Suite 350
Aliso Viejo, California

 

92656

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (949) 330-4000

 


 

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 Web site, 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

                                               205,431,629 shares of Common Stock, $0.01 par value, as of August 1, 2014

 

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2014

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013

 

 

 

 

Consolidated Statement of Equity for the six months ended June 30, 2014

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

44 

 

 

 

Item 4. 

Controls and Procedures

44 

 

 

 

PART II—OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

44 

 

 

 

Item 1A. 

Risk Factors

44 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

44 

 

 

 

Item 3. 

Defaults Upon Senior Securities

44 

 

 

 

Item 4. 

Mine Safety Disclosures

44 

 

 

 

Item 5. 

Other Information

44 

 

 

 

Item 6. 

Exhibits

45 

 

 

 

SIGNATURES 

46 

 

 

 

1


 

 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2014

    

2013

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

360,702 

 

$

104,363 

Restricted cash

 

 

87,975 

 

 

89,306 

Accounts receivable, net

 

 

43,093 

 

 

29,941 

Inventories

 

 

1,275 

 

 

1,464 

Prepaid expenses

 

 

11,571 

 

 

12,612 

Total current assets

 

 

504,616 

 

 

237,686 

Investment in hotel properties, net

 

 

3,230,895 

 

 

3,231,382 

Deferred financing fees, net

 

 

7,747 

 

 

9,219 

Goodwill

 

 

9,405 

 

 

9,405 

Other assets, net

 

 

30,297 

 

 

21,106 

Total assets

 

$

3,782,960 

 

$

3,508,798 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

30,192 

 

$

25,116 

Accrued payroll and employee benefits

 

 

26,463 

 

 

29,933 

Dividends payable

 

 

12,370 

 

 

11,443 

Other current liabilities

 

 

38,173 

 

 

30,288 

Current portion of notes payable

 

 

122,835 

 

 

23,289 

Total current liabilities

 

 

230,033 

 

 

120,069 

Notes payable, less current portion

 

 

1,269,587 

 

 

1,380,786 

Capital lease obligations, less current portion

 

 

15,576 

 

 

15,586 

Other liabilities

 

 

34,106 

 

 

39,958 

Total liabilities

 

 

1,549,302 

 

 

1,556,399 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value, 100,000,000 shares authorized.

 

 

 

 

 

 

8.0% Series D Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at June 30, 2014 and December 31, 2013, stated at liquidation preference of $25.00 per share

 

 

115,000 

 

 

115,000 

Common stock, $0.01 par value, 500,000,000 shares authorized, 199,447,209 shares issued and outstanding at June 30, 2014 and 180,858,699 shares issued and outstanding at December 31, 2013

 

 

1,994 

 

 

1,809 

Additional paid in capital

 

 

2,335,709 

 

 

2,068,721 

Retained earnings

 

 

260,518 

 

 

224,364 

Cumulative dividends

 

 

(535,281)

 

 

(511,444)

Total stockholders’ equity

 

 

2,177,940 

 

 

1,898,450 

Non-controlling interest in consolidated joint ventures

 

 

55,718 

 

 

53,949 

Total equity

 

 

2,233,658 

 

 

1,952,399 

Total liabilities and equity

 

$

3,782,960 

 

$

3,508,798 

 

See accompanying notes to consolidated financial statements.

2


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2014

    

June 30, 2013

    

June 30, 2014

    

June 30, 2013

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

$

214,940 

 

$

168,260 

 

$

383,067 

 

$

300,883 

Food and beverage

 

 

68,733 

 

 

52,842 

 

 

128,644 

 

 

102,470 

Other operating

 

 

17,179 

 

 

13,536 

 

 

32,624 

 

 

26,206 

Total revenues

 

 

300,852 

 

 

234,638 

 

 

544,335 

 

 

429,559 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

 

53,418 

 

 

40,537 

 

 

102,337 

 

 

77,991 

Food and beverage

 

 

45,109 

 

 

35,058 

 

 

88,017 

 

 

70,154 

Other operating

 

 

5,006 

 

 

3,887 

 

 

10,001 

 

 

8,129 

Advertising and promotion

 

 

13,655 

 

 

11,240 

 

 

26,626 

 

 

22,505 

Repairs and maintenance

 

 

10,706 

 

 

8,275 

 

 

21,587 

 

 

16,649 

Utilities

 

 

7,788 

 

 

6,129 

 

 

16,077 

 

 

12,312 

Franchise costs

 

 

10,261 

 

 

8,771 

 

 

18,338 

 

 

15,249 

Property tax, ground lease and insurance

 

 

21,413 

 

 

19,297 

 

 

40,465 

 

 

37,765 

Property general and administrative

 

 

31,963 

 

 

25,288 

 

 

60,885 

 

 

48,894 

Corporate overhead

 

 

7,674 

 

 

7,359 

 

 

14,233 

 

 

13,530 

Depreciation and amortization

 

 

37,973 

 

 

32,175 

 

 

75,588 

 

 

66,191 

Total operating expenses

 

 

244,966 

 

 

198,016 

 

 

474,154 

 

 

389,369 

Operating income

 

 

55,886 

 

 

36,622 

 

 

70,181 

 

 

40,190 

Interest and other income

 

 

891 

 

 

788 

 

 

1,607 

 

 

1,351 

Interest expense

 

 

(18,331)

 

 

(17,272)

 

 

(36,614)

 

 

(34,686)

Loss on extinguishment of debt

 

 

—  

 

 

—  

 

 

—  

 

 

(44)

Income before income taxes and discontinued operations

 

 

38,446 

 

 

20,138 

 

 

35,174 

 

 

6,811 

Income tax provision

 

 

(110)

 

 

(129)

 

 

(334)

 

 

(6,286)

Income from continuing operations

 

 

38,336 

 

 

20,009 

 

 

34,840 

 

 

525 

Income from discontinued operations

 

 

5,199 

 

 

—  

 

 

5,199 

 

 

48,410 

NET INCOME

 

 

43,535 

 

 

20,009 

 

 

40,039 

 

 

48,935 

Income from consolidated joint venture attributable to non-controlling interest

 

 

(1,659)

 

 

(1,226)

 

 

(3,885)

 

 

(1,523)

Distributions to non-controlling interest

 

 

(8)

 

 

(8)

 

 

(16)

 

 

(16)

Dividends paid on unvested restricted stock compensation

 

 

(97)

 

 

 

 

(197)

 

 

Preferred stock dividends and redemption charges

 

 

(2,300)

 

 

(3,510)

 

 

(4,600)

 

 

(14,413)

Undistributed income allocated to unvested restricted stock compensation

 

 

(206)

 

 

(126)

 

 

(87)

 

 

(264)

INCOME AVAILABLE TO COMMON STOCKHOLDERS

 

$

39,265 

 

$

15,139 

 

$

31,254 

 

$

32,719 

COMPREHENSIVE INCOME AVAILABLE TO COMMON STOCKHOLDERS

 

$

39,265 

 

$

15,139 

 

$

31,254 

 

$

32,719 

Basic and diluted per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations available (attributable) to common stockholders

 

$

0.19 

 

$

0.09 

 

$

0.14 

 

$

(0.10)

Income from discontinued operations

 

 

0.03 

 

 

—  

 

 

0.03 

 

 

0.31 

Basic and diluted income available to common stockholders per common share

 

$

0.22 

 

$

0.09 

 

$

0.17 

 

$

0.21 

Basic and diluted weighted average common shares outstanding

 

 

182,604 

 

 

160,843 

 

 

181,836 

 

 

155,987 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.05 

 

$

 

$

0.10 

 

$

 

See accompanying notes to consolidated financial statements. 

 

 

3


 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Controlling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest in

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Additional

 

 

 

 

 

Consolidated

 

 

 

 

    

Number of Shares

    

Amount

    

Number of Shares

    

Amount

    

Paid in Capital

    

Retained Earnings

    

Cumulative Dividends

    

    Joint Ventures    

    

Total

Balance at December 31, 2013

 

4,600,000 

 

$

115,000 

 

180,858,699 

 

$

1,809 

 

$

2,068,721 

 

$

224,364 

 

$

(511,444)

 

$

53,949 

 

$

1,952,399 

Net proceeds from sale of common stock (unaudited)

 

 

 

 

18,099,460 

 

 

181 

 

 

263,442 

 

 

 

 

 

 

 

 

263,623 

Vesting of restricted common stock (unaudited)

 

 

 

 

489,050 

 

 

 

 

3,546 

 

 

 

 

 

 

 

 

3,550 

Distributions to non-controlling interests (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,116)

 

 

(2,116)

Common stock dividends and dividends payable at $0.10 per share year to date (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

(19,237)

 

 

 

 

(19,237)

Series D preferred dividends and dividends payable at $1.00 per share year to date (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

(4,600)

 

 

 

 

(4,600)

Net income (unaudited)

 

 

 

 

 

 

 

 

 

 

36,154 

 

 

 

 

3,885 

 

 

40,039 

Balance at June 30, 2014 (unaudited)

 

4,600,000 

 

$

115,000 

 

199,447,209 

 

$

1,994 

 

$

2,335,709 

 

$

260,518 

 

$

(535,281)

 

$

55,718 

 

$

2,233,658 

 

See accompanying notes to consolidated financial statements.

 

4


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2014

    

June 30, 2013

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

40,039 

 

$

48,935 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Bad debt expense

 

 

148 

 

 

96 

Gain on sales of assets

 

 

(5,254)

 

 

(51,625)

Loss on extinguishment of debt

 

 

—  

 

 

3,159 

Gain on derivatives, net

 

 

(234)

 

 

(417)

Depreciation

 

 

74,228 

 

 

62,055 

Amortization of franchise fees and other intangibles

 

 

3,510 

 

 

6,421 

Amortization of deferred financing fees

 

 

1,472 

 

 

1,485 

Amortization of loan discounts

 

 

—  

 

 

Amortization of deferred stock compensation

 

 

3,316 

 

 

2,316 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

(1,992)

 

 

(8,875)

Accounts receivable

 

 

(13,300)

 

 

(5,560)

Inventories

 

 

189 

 

 

1,628 

Prepaid expenses and other assets

 

 

6,055 

 

 

8,149 

Accounts payable and other liabilities

 

 

13,129 

 

 

12,697 

Accrued payroll and employee benefits

 

 

(3,470)

 

 

(6,414)

Discontinued operations

 

 

—  

 

 

432 

Net cash provided by operating activities

 

 

117,836 

 

 

74,485 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sales of hotel properties and other assets

 

 

72 

 

 

195,621 

Cash proceeds held by accommodator

 

 

—  

 

 

(72,287)

Restricted cash — replacement reserve

 

 

3,323 

 

 

11,054 

Acquisitions of hotel properties and other assets

 

 

(11,000)

 

 

(59,137)

Acquisition deposits

 

 

(15,000)

 

 

(20,000)

Renovations and additions to hotel properties

 

 

(65,836)

 

 

(69,089)

Payment for interest rate derivative

 

 

—  

 

 

(12)

Net cash used in investing activities

 

 

(88,441)

 

 

(13,850)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Redemption of preferred stock

 

 

—  

 

 

(276,250)

Proceeds from common stock offering

 

 

264,192 

 

 

295,251 

Payment of common stock offering costs

 

 

(569)

 

 

(376)

Proceeds from credit facility

 

 

10,750 

 

 

30,000 

Payments on notes payable and credit facility

 

 

(22,403)

 

 

(124,465)

Payments for costs related to extinguishment of notes payable

 

 

—  

 

 

(3,108)

Payments of deferred financing costs

 

 

—  

 

 

(5)

Dividends paid

 

 

(22,910)

 

 

(14,780)

Distributions to non-controlling interests

 

 

(2,116)

 

 

(902)

Net cash provided by (used in) financing activities

 

 

226,944 

 

 

(94,635)

Net increase (decrease) in cash and cash equivalents

 

 

256,339 

 

 

(34,000)

Cash and cash equivalents, beginning of period

 

 

104,363 

 

 

157,217 

Cash and cash equivalents, end of period

 

$

360,702 

 

$

123,217 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

34,187 

 

$

34,858 

Cash paid for income taxes

 

$

106 

 

$

5,115 

NONCASH INVESTING ACTIVITY

 

 

 

 

 

 

Accounts payable related to renovations and additions to hotel properties

 

$

7,259 

 

$

5,093 

Amortization of deferred stock compensation — construction activities

 

$

234 

 

$

193 

NONCASH FINANCING ACTIVITY

 

 

 

 

 

 

Dividends payable

 

$

12,370 

 

$

2,300 

See accompanying notes to consolidated financial statements.

5


 

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

 

Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004. The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in acquiring, owning, asset managing and renovating hotel properties. The Company may also sell certain hotel properties from time to time. The Company operates as a real estate investment trust (“REIT”) for federal income tax purposes.

 

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. As a result, the Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels. As of June 30, 2014, the Company had interests in 29 hotels (the “29 hotels”) held for investment, and the Company’s third-party managers included the following:

 

 

 

 

 

 

 

 

 

    

Number of Hotels

Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”)

 

10 

Interstate Hotels & Resorts, Inc.

 

Highgate Hotels L.P. and an affiliate

 

Davidson Hotels & Resorts

 

Hilton Worldwide

 

Hyatt Corporation

 

Crestline Hotels & Resorts

 

Dimension Development Company

 

Fairmont Hotels & Resorts (U.S.)

 

 

 

 

Total hotels held for investment

 

29 

 

In addition, as of June 30, 2014, the Company owned BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements as of June 30, 2014 and December 31, 2013, and for the three and six months ended June 30, 2014 and 2013, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company consolidates subsidiaries when it has the ability to direct the activities that most significantly impact the economic performance of the entity. The Company also evaluates its subsidiaries to determine if they should be considered variable interest entities (“VIEs”). Typically, the entity that has the power to direct the activities that most significantly impact economic performance would consolidate the VIE. The Company considers an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In accordance with the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company reviewed its subsidiaries to determine if (i) they should be considered VIEs, and (ii) whether the Company should change its consolidation determination based on changes in the characteristics of these entities. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of June 30, 2014 and December 31, 2013, and for the three and six months ended June 30, 2014 and 2013.

 

Non-controlling interests at both June 30, 2014 and December 31, 2013 represent the outside equity interests in various consolidated affiliates of the Company.

 

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission on February 25, 2014.

 

6


 

The Company has evaluated subsequent events through the date of issuance of these financial statements.

 

Use of Estimates

 

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Reporting Periods

 

The results the Company reports in its consolidated statements of operations and comprehensive income are based on results reported to the Company by its hotel managers, all of whom currently use a standard monthly calendar. Prior to 2013, however, Marriott used a 13-period fiscal calendar with the year ending on the Friday closest to December 31. Since Marriott’s 2012 fiscal year ended on December 28, 2012, Marriott’s 2013 first quarter and calendar year contain an additional three days, December 29, 2012 through December 31, 2012.

 

Fair Value of Financial Instruments

 

As of June 30, 2014 and December 31, 2013, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

 

The Company follows the requirements of the Fair Value Measurements and Disclosure Topic of the FASB ASC, which establishes a framework for measuring fair value and disclosing fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

 

Level 2

Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

 

Level 3

Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

As discussed in Note 5, at June 30, 2014 and December 31, 2013, the Company held two interest rate cap agreements and one interest rate swap agreement to manage, or hedge, interest rate risks related to its floating rate debt. The Company records interest rate protection agreements on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in the consolidated statements of operations and comprehensive income as they are not designated as hedges. In accordance with the Fair Value Measurements and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate protection agreements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. The Company has valued the derivative interest rate cap agreements using Level 2 measurements as an asset of $2,000 and $16,000 as of June 30, 2014 and December 31, 2013, respectively. The interest rate cap agreements are included in other assets, net on the accompanying consolidated balance sheets. The Company has valued the derivative interest rate swap agreement using Level 2 measurements as a liability of $0.8 million and $1.1 million as of June 30, 2014 and December 31, 2013, respectively. The interest rate swap agreement is included in other liabilities on the accompanying consolidated balance sheets.

 

On an annual basis and periodically when indicators of impairment exist, the Company analyzes the carrying values of its hotel properties and other assets using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its hotel properties and other assets taking into account each property’s expected cash flow from operations, holding period and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company did not identify any properties or other assets with indicators of impairment during either the three or six months ended June 30, 2014 and 2013.

 

On an annual basis and periodically when indicators of impairment exist, the Company also analyzes the carrying value of its goodwill using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its reporting units. The Company did not identify any properties or other assets with indicators of goodwill impairment during either the three or six months ended June 30, 2014 and 2013.

 

7


 

As of both June 30, 2014 and December 31, 2013, 70.7% of the Company’s outstanding debt had fixed interest rates, including the effect of an interest rate swap agreement. The Company’s carrying value of its debt totaled $1.4 billion as of both June 30, 2014 and December 31, 2013. Using Level 3 measurements, including the Company’s weighted average cost of debt of 5.0%, the Company estimates that the fair market value of its debt totaled $1.4 billion as of both June 30, 2014 and December 31, 2013.

 

The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at June 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

 

$

 

$

 

$

Life insurance policy (1)

 

 

1,214 

 

 

 

 

1,214 

 

 

Total assets at June 30, 2014

 

$

1,216 

 

$

 

$

1,216 

 

$

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

16 

 

$

 

$

16 

 

$

Life insurance policy (1)

 

 

1,385 

 

 

 

 

1,385 

 

 

Total assets at December 31, 2013

 

$

1,401 

 

$

 

$

1,401 

 

$

 

(1)

Includes the split life insurance policy for one of the Company’s former associates, which the Company has valued using Level 2 measurements. These amounts are included in other assets, net on the accompanying consolidated balance sheets, and will be used to reimburse the Company for payments made to the former associate from the related retirement benefit agreement included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

 

The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at June 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative agreement

 

$

818 

 

$

 

$

818 

 

$

Retirement benefit agreement (1)

 

 

1,214 

 

 

 

 

1,214 

 

 

Total liabilities at June 30, 2014

 

$

2,032 

 

$

 

$

2,032 

 

$

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative agreement

 

$

1,066 

 

$

 

$

1,066 

 

$

Retirement benefit agreement (1)

 

 

1,385 

 

 

 

 

1,385 

 

 

Total liabilities at December 31, 2013

 

$

2,451 

 

$

 

$

2,451 

 

$

 

(1)

Includes the retirement benefit agreement for one of the Company’s former associates, which the Company has valued using Level 2 measurements. The agreement calls for the balance of the retirement benefit to be paid out to the former associate in 10 annual installments, beginning in 2011. As such, the Company has paid the former associate a total of $0.8 million through June 30, 2014, which was reimbursed to the Company using funds from the related split life insurance policy. These amounts are included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

 

Accounts Receivable

 

Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. Accounts receivable also includes, among other things, receivables from customers who utilize purchase volume rebates through BuyEfficient, as well as tenants who lease space in the Company’s hotels. The Company maintains an allowance for doubtful accounts sufficient to cover potential credit losses. The Company’s accounts receivable includes an allowance for doubtful accounts of $0.2 million at both June 30, 2014 and December 31, 2013.

 

Acquisitions of Hotel Properties and Other Entities

 

Accounting for the acquisition of a hotel property or other entity as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, intangible assets and any capital lease obligations that are assumed as part of the acquisition of a leasehold interest. During 2013, the Company used all available information to make these fair value determinations, and engaged independent valuation specialists to assist in the fair value

8


 

determination of the long-lived assets acquired and the liabilities assumed in the Company’s purchases of the Hilton New Orleans St. Charles, the Boston Park Plaza and the Hyatt Regency San Francisco. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, the Company believes that the recording of acquired assets and liabilities is a critical accounting policy.

 

Assets Held for Sale

 

The Company considers a hotel or other asset held for sale if it is probable that the sale will be completed within twelve months, among other requirements. A sale is determined to be probable once the buyer completes its due diligence of the asset, there is an executed purchase and sale agreement between the Company and the buyer, and the Company has received a substantial non-refundable deposit. Depreciation ceases when a property is held for sale. Should an impairment loss be required for assets held for sale, the related assets are adjusted to their estimated fair values, less costs to sell. Should the sale of a hotel or other asset represent a strategic shift that will have a major effect on the Company’s operations and financial results, the hotel or other asset is included in discontinued operations, and operating results are removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented must also be reclassified as discontinued operations. As of both June 30, 2014 and December 31, 2013, the Company had no hotels or other assets held for sale.

 

Deferred Financing Fees

 

Deferred financing fees consist of loan fees and other financing costs related to the Company’s outstanding indebtedness and credit facility commitments, and are amortized to interest expense over the terms of the related debt or commitment. Upon repayment or refinancing of the underlying debt, any related unamortized deferred financing fee is charged to interest expense. Upon any loan modification, any related unamortized deferred financing fee is amortized over the remaining terms of the modified loan.

 

The Company did not incur or pay any deferred financing fees during the three and six months ended June 30, 2014. The Company paid deferred financing fees of $5,000 during the three and six months ended June 30, 2013 related to the purchase of an interest rate cap derivative agreement on the Hilton San Diego Bayfront mortgage.

 

Total amortization of deferred financing fees for the three and six months ended June 30, 2014 and 2013 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2014

    

June 30, 2013

    

June 30, 2014

    

June 30, 2013

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred financing fees

 

$

736 

 

$

725 

 

$

1,472 

 

$

1,483 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred financing fees

 

 

 

 

 

 

 

 

Total amortization of deferred financing fees

 

$

736 

 

$

725 

 

$

1,472 

 

$

1,485 

 

Earnings Per Share

 

The Company applies the two-class method when computing its earnings per share as required by the Earnings Per Share Topic of the FASB ASC, which requires the net income per share for each class of stock (common stock and convertible preferred stock) to be calculated assuming all of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights. To the extent the Company has undistributed earnings in any calendar quarter, the Company will follow the two-class method of computing earnings per share.

 

The Company follows the requirements of the Earnings Per Share Topic of the FASB ASC, which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. For the three months ended June 30, 2014 and 2013, distributed earnings representing nonforfeitable dividends of $0.1 million and zero, respectively, were allocated to the participating securities. For the six months ended June 30, 2014 and 2013, distributed earnings representing nonforfeitable dividends of $0.2 million and zero, respectively, were allocated to the participating securities. Undistributed earnings representing nonforfeitable dividends of $0.2 million and $0.1 million, respectively, were allocated to the participating securities for the three months ended June 30, 2014 and 2013. Undistributed earnings representing nonforfeitable dividends of $0.1 million and $0.3 million, respectively, were allocated to the participating securities for the six months ended June 30, 2014 and 2013.

 

9


 

In accordance with the Earnings Per Share Topic of the FASB ASC, basic earnings available (loss attributable) to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings available (loss attributable) to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock awards, the incremental common shares issuable upon the exercise of stock options, using the more dilutive of either the two-class method or the treasury stock method.

 

The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2014

    

June 30, 2013

    

June 30, 2014

    

June 30, 2013

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

43,535 

 

$

20,009 

 

$

40,039 

 

$

48,935 

Income from consolidated joint venture attributable to non-controlling interest

 

 

(1,659)

 

 

(1,226)

 

 

(3,885)

 

 

(1,523)

Distributions to non-controlling interest

 

 

(8)

 

 

(8)

 

 

(16)

 

 

(16)

Dividends paid on unvested restricted stock compensation

 

 

(97)

 

 

 

 

(197)

 

 

Preferred stock dividends and redemption charges

 

 

(2,300)

 

 

(3,510)

 

 

(4,600)

 

 

(14,413)

Undistributed income allocated to unvested restricted stock compensation

 

 

(206)

 

 

(126)

 

 

(87)

 

 

(264)

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted earnings available to common stockholders

 

$

39,265 

 

$

15,139 

 

$

31,254 

 

$

32,719 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

 

182,604 

 

 

160,843 

 

 

181,836 

 

 

155,987 

Basic and diluted earnings available to common stockholders per common share

 

$

0.22 

 

$

0.09 

 

$

0.17 

 

$

0.21 

 

The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings per share for the three and six months ended June 30, 2014 and 2013, as their inclusion would have been anti-dilutive. Prior to their redemption in May 2013, shares of the Company’s Series C preferred stock issuable upon conversion were excluded from the above calculation of earnings per share for the three and six months ended June 30, 2013, as their inclusion would have been anti-dilutive.

 

Goodwill

 

The Company follows the requirements of the Intangibles — Goodwill and Other Topic of the FASB ASC, which states that goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. As a result, the carrying value of goodwill allocated to hotel properties and other assets is reviewed at least annually for impairment. In addition, when facts and circumstances suggest that the Company’s goodwill may be impaired, an interim evaluation of goodwill is prepared. Such review entails comparing the carrying value of the individual hotel property or other asset (the reporting unit) including the allocated goodwill to the fair value determined for that reporting unit (see Fair Value of Financial Instruments for detail on the Company’s valuation methodology). If the aggregate carrying value of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired to the extent of the difference between the fair value and the aggregate carrying value, not to exceed the carrying amount of the allocated goodwill. The Company’s annual impairment evaluation is performed each year as of December 31.

10


 

Non-Controlling Interests

 

The Company’s financial statements include entities in which the Company has a controlling financial interest. Non-controlling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such non-controlling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations and comprehensive income, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and non-controlling interests. Income or loss is allocated to non-controlling interests based on their weighted average ownership percentage for the applicable period. The consolidated statements of equity include beginning balances, activity for the period and ending balances for each component of shareholders’ equity, non-controlling interests and total equity.

 

At both June 30, 2014 and December 31, 2013, the non-controlling interest reported in the Company’s financial statements includes Hilton Worldwide’s 25.0% ownership in the partnerships that own the Hilton San Diego Bayfront (the “Hilton San Diego Bayfront Partnership”). In addition, the Company is the sole common stockholder of the captive REIT that owns the Doubletree Guest Suites Times Square; however, there are also preferred investors in the captive REIT whose preferred dividends less administrative fees during the three and six months ended June 30, 2014 and 2013 are represented as distributions to non-controlling interests on the Company’s consolidated statements of operations and comprehensive income.

 

Segment Reporting

 

The Company reports its consolidated financial statements in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, operations held for investment.

3. Investment in Hotel Properties

 

Investment in hotel properties, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2014

    

2013

 

 

(unaudited)

 

 

 

Land

 

$

450,304 

 

$

439,304 

Buildings and improvements

 

 

3,013,911 

 

 

2,977,458 

Furniture, fixtures and equipment

 

 

432,572 

 

 

414,192 

Intangibles

 

 

171,889 

 

 

171,889 

Franchise fees

 

 

1,167 

 

 

1,346 

Construction in process

 

 

45,244 

 

 

34,643 

 

 

 

4,115,087 

 

 

4,038,832 

Accumulated depreciation and amortization

 

 

(884,192)

 

 

(807,450)

 

 

$

3,230,895 

 

$

3,231,382 

 

In June 2014, the Company acquired approximately seven acres of land underlying the Fairmont Newport Beach for $11.0 million, using net proceeds from the March 2014 issuance of its common stock in connection with its Equity Distribution Agreements, combined with cash on hand. Prior to the Company’s acquisition, the land was leased to the Company by a third party.

 

The Company acquired three hotels in 2013: the Hilton New Orleans St. Charles in May 2013; the Boston Park Plaza in July 2013; and the Hyatt Regency San Francisco in December 2013. Acquired properties are included in the Company’s results of operations and comprehensive income from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisitions of the Hilton New Orleans St. Charles, the Boston Park Plaza, and the Hyatt Regency San Francisco during 2013, as well as the acquisition of the land underlying the Fairmont Newport Beach during 2014, had occurred on

11


 

January 1, 2013. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2014

    

June 30, 2013

    

June 30, 2014

    

June 30, 2013

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Revenues

 

$

300,852 

 

$

281,393 

 

$

544,335 

 

$

509,319 

Income available (loss attributable) to common stockholders from continuing operations

 

$

34,179 

 

$

23,844 

 

$

26,334 

 

$

(10,314)

Income (loss) per diluted share available (attributable) to common stockholders from continuing operations

 

$

0.19 

 

$

0.15 

 

$

0.14 

 

$

(0.07)

 

 

 

4. Discontinued Operations

 

In January 2013, the Company sold a four-hotel, 1,222-room portfolio (the “Rochester Hotels”) and a commercial laundry facility (together with the Rochester Hotels, the “Rochester Portfolio”) in Rochester, Minnesota, to an unaffiliated third party, for net proceeds of $195.6 million, of which $145.7 million was deposited with an accommodator in order to facilitate tax-deferred exchanges. The Rochester Hotels include the 660-room Kahler Grand, the 271-room Kahler Inn & Suites, the 202-room Marriott Rochester and the 89-room Residence Inn by Marriott Rochester. The Company recognized a net gain on the sale of $51.6 million. The Company retained a $25.0 million preferred equity investment (the “Preferred Equity Investment”) in the Rochester Hotels that yields an 11% dividend, resulting in a deferred gain on the sale of $25.0 million. The $25.0 million gain will be deferred until the Preferred Equity Investment is redeemed. The Preferred Equity Investment is recorded at face value on the Company’s consolidated balance sheets net of the deferred gain, resulting in a net book value of zero on the Company’s consolidated balance sheets as of both June 30, 2014 and December 31, 2013. During both the three months ended June 30, 2014 and 2013, the Company recognized $0.7 million in dividends on the Preferred Equity Investment. During the six months ended June 30, 2014 and 2013, the Company recognized $1.4 million and $1.2 million, respectively, in dividends on the Preferred Equity Investment. All of the dividends earned on the Preferred Equity Investment are included in interest and other income on the Company’s consolidated statements of operations and comprehensive income. The Company also provided a $3.7 million working cash advance to the buyer, resulting in a deferred gain on the sale of $3.7 million. The $3.7 million gain will be deferred until the Company is repaid from the Rochester Portfolio’s available cash flow. The working cash advance is recorded at face value on the Company’s consolidated balance sheets net of the deferred gain, resulting in a net book value of zero on the Company’s consolidated balance sheets as of both June 30, 2014 and December 31, 2013.

 

Concurrent with the Rochester Portfolio sale, the Company extinguished the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of $29.8 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and recorded a loss on extinguishment of debt of $3.1 million which is included in discontinued operations on the Company’s consolidated statements of operations and comprehensive income. The Company reclassified the Rochester Portfolio’s results of operations for January 2013 to discontinued operations on its consolidated statements of operations and comprehensive income.

 

In addition, at the time the Company sold the Rochester Portfolio, the Company retained a liability not to exceed $14.0 million related to the Rochester Portfolio’s pension plan, which could be triggered in certain circumstances, including termination of the pension plan. The recognition of the $14.0 million pension plan liability reduced the Company’s gain on the sale of the Rochester Portfolio. In May 2014, the Company was released from $7.0 million of its pension plan liability, causing the Company to recognize additional gain on the sale of the Rochester Portfolio of $7.0 million, which is included in discontinued operations for the three and six months ended June 30, 2014. The pension plan liability, totaling $7.0 million as of June 30, 2014 and $14.0 million as of December 31, 2013, is included in other liabilities on the Company’s consolidated balance sheets. The remaining $7.0 million gain will be recognized, if at all, when and to the extent the Company is released from any potential liability related to the Rochester Portfolio’s pension plan.

 

In accordance with the Contingencies Topic of the FASB ASC, which requires a liability be recorded based on the Company’s estimate of the probable cost of the resolution of a contingency, the Company accrued $0.3 million when it sold the Rochester Portfolio related to potential future costs for certain capital expenditures at one of the hotels in the Rochester Portfolio. During the second quarter of 2014, the Company determined that its total costs for these capital expenditures may range from $2.0 million to $3.0 million. As such, the Company accrued an additional $1.8 million during the second quarter of 2014 in accordance with the Contingencies Topic of the FASB ASC, which is included in discontinued operations for the three and six months ended June 30, 2014, bringing the total amount accrued for this contingency to $2.1 million as of June 30, 2014.

 

12


 

The following table sets forth the discontinued operations for the three and six months ended June 30, 2014 and 2013 for the four hotels and the commercial laundry facility sold in 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2014

    

June 30, 2013

    

June 30, 2014

    

June 30, 2013

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Operating revenues

 

$

—  

 

$

—  

 

$

—  

 

$

3,690 

Operating expenses

 

 

—  

 

 

—  

 

 

—  

 

 

(3,686)

Interest expense

 

 

—  

 

 

—  

 

 

—  

 

 

(99)

Loss on extinguishment of debt

 

 

—  

 

 

—  

 

 

—  

 

 

(3,115)

Gain on sale of assets, net

 

 

5,199 

 

 

—  

 

 

5,199 

 

 

51,620 

Income from discontinued operations

 

$

5,199 

 

$

—  

 

$

5,199 

 

$

48,410 

 

 

 

5. Interest Rate Derivative Agreements

 

At June 30, 2014 and December 31, 2013, the Company held two interest rate cap agreements and one interest rate swap agreement to manage its exposure to the interest rate risks related to its floating rate debt. The first interest rate cap agreement is on the Hilton San Diego Bayfront mortgage, which mortgage bears an interest rate of 3-month LIBOR plus 325 basis points. The initial interest rate cap agreement, whose strike rate was 3.75%, matured in April 2013. In April 2013, the Company purchased a new interest rate cap agreement on the Hilton San Diego Bayfront mortgage for a cost of $12,000, which extended the maturity date from April 2013 to April 2015. The new interest rate cap agreement on the Hilton San Diego Bayfront continues to cap the 3-month LIBOR rate at 3.75%. The notional amount of the related debt capped totaled $117.0 million at both June 30, 2014 and December 31, 2013. The second interest rate cap agreement is on the Doubletree Guest Suites Times Square mortgage, which mortgage currently bears an interest rate of 1-month LIBOR plus 325 basis points. The Doubletree Guest Suites Times Square cap agreement caps the LIBOR rate at 4.0% until October 2015. The notional amount of the related debt capped totaled $178.5 million and $179.6 million at June 30, 2014 and December 31, 2013, respectively.

 

The interest rate swap agreement is on the JW Marriott New Orleans mortgage. The interest rate swap agreement caps the LIBOR interest rate on the underlying debt at a total interest rate of 5.45%, and the maturity date is in September 2015. The notional amount of the related debt totaled $39.3 million and $39.8 million at June 30, 2014 and December 31, 2013, respectively.

 

None of the interest rate derivative agreements qualify for effective hedge accounting treatment. Accordingly, changes in the fair value of the Company’s interest rate derivative agreements resulted in net gains of $0.1 million and $0.3 million for the three months ended June 30, 2014 and 2013, respectively, which are reflected as decreases in interest expense for both the three months ended June 30, 2014 and 2013. For the six months ended June 30, 2014 and 2013, changes in the fair value of the Company’s interest rate derivative agreements resulted in net gains of $0.2 million and $0.4 million, respectively, which are reflected as decreases in interest expense for both the six months ended June 30, 2014 and 2013. As of June 30, 2014 and December 31, 2013, the fair values of the interest rate cap agreements totaled an asset of $2,000 and $16,000, respectively. The interest rate cap agreements are included in other assets, net on the Company’s consolidated balance sheets. The fair value of the interest rate swap agreement was a liability of $0.8 million and $1.1 million as of June 30, 2014 and December 31, 2013, respectively, and is included in other liabilities on the Company’s consolidated balance sheets.

6. Other Assets

 

Other assets, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2014

    

2013

 

 

(unaudited)

 

 

 

Acquisition deposit

 

$

15,000 

 

$

Property and equipment, net

 

 

2,308 

 

 

2,478 

Land held for development

 

 

188 

 

 

188 

Intangibles, net

 

 

6,977 

 

 

7,277 

Interest rate cap derivative agreements

 

 

 

 

16 

Cash trap receivables

 

 

 

 

4,443 

Interest receivable

 

 

229 

 

 

Other receivables

 

 

2,270 

 

 

3,942 

Other

 

 

3,323 

 

 

2,762 

 

 

$