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EXCEL - IDEA: XBRL DOCUMENT - LaSalle Hotel PropertiesFinancial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 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 1-14045 
___________________________________
LASALLE HOTEL PROPERTIES
(Exact name of registrant as specified in its charter) 
___________________________________
Maryland
 
36-4219376
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
7550 Wisconsin Avenue, 10th Floor
Bethesda, Maryland
 
20814
(Address of principal executive offices)
 
(Zip Code)
(301) 941-1500
(Registrant’s telephone number, including area code) 
___________________________________
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  x    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  x    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. Check one:
Large accelerated filer
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
  
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  x
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred shares as of the latest practicable date.
Class
 
Outstanding at October 22, 2014
Common Shares of Beneficial Interest ($0.01 par value)
 
104,068,251

7 ½% Series H Cumulative Redeemable Preferred Shares ($0.01 par value)
 
2,750,000

6 ⅜% Series I Cumulative Redeemable Preferred Shares ($0.01 par value)
 
4,400,000




LASALLE HOTEL PROPERTIES
INDEX




PART I.
Financial Information
 
Item 1.
Financial Statements
LASALLE HOTEL PROPERTIES
Consolidated Balance Sheets
(in thousands, except share data)
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
Assets:
 
 
 
Investment in hotel properties, net (Note 3)
$
3,378,293

 
$
3,383,188

Note receivable (net of unamortized discount of zero and $986, respectively) (Note 3)
0

 
71,014

Property under development
19,233

 
15,394

Cash and cash equivalents
17,084

 
13,388

Restricted cash reserves (Note 5)
22,642

 
19,724

Hotel receivables (net of allowance for doubtful accounts of $433 and $344, respectively)
52,921

 
30,661

Deferred financing costs, net
7,075

 
6,050

Deferred tax assets
1,561

 
1,497

Prepaid expenses and other assets
36,599

 
40,122

Total assets
$
3,535,408

 
$
3,581,038

Liabilities:
 
 
 
Borrowings under credit facilities (Note 4)
$
158,000

 
$
220,606

Term loans (Note 4)
477,500

 
477,500

Bonds payable (Note 4)
42,500

 
42,500

Mortgage loans (including unamortized premium of zero and $41, respectively) (Note 4)
502,257

 
514,456

Accounts payable and accrued expenses
165,426

 
161,085

Advance deposits
23,896

 
18,301

Accrued interest
3,530

 
3,828

Distributions payable
42,179

 
33,299

Total liabilities
1,415,288

 
1,471,575

Commitments and contingencies

 

Equity:
 
 
 
Shareholders’ Equity:
 
 
 
Preferred shares of beneficial interest, $0.01 par value (liquidation preference of $178,750 and $237,472, respectively), 40,000,000 shares authorized; 7,150,000 and 9,498,888 shares issued and outstanding, respectively (Note 6)
72

 
95

Common shares of beneficial interest, $0.01 par value, 200,000,000 shares authorized; 104,088,536 shares issued and 104,068,251 shares outstanding, respectively, and 103,963,828 shares issued and 103,963,318 shares outstanding, respectively (Note 6)
1,040

 
1,039

Treasury shares, at cost (Note 6)
(712
)
 
(14
)
Additional paid-in capital, net of offering costs of $76,416 and $77,316, respectively
2,324,633

 
2,379,246

Accumulated other comprehensive income (Note 4)
3,183

 
4,603

Distributions in excess of retained earnings
(214,391
)
 
(281,578
)
Total shareholders’ equity
2,113,825

 
2,103,391

Noncontrolling Interests:
 
 
 
Noncontrolling interests in consolidated entities
17

 
18

Noncontrolling interests of common units in Operating Partnership (Note 6)
6,278

 
6,054

Total noncontrolling interests
6,295

 
6,072

Total equity
2,120,120

 
2,109,463

Total liabilities and equity
$
3,535,408

 
$
3,581,038

The accompanying notes are an integral part of these consolidated financial statements.

1


LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share data)
(unaudited)
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Hotel operating revenues:
 
 
 
 
 
 
 
Room
$
222,006

 
$
189,619

 
$
587,705

 
$
495,696

Food and beverage
63,399

 
60,022

 
189,921

 
175,397

Other operating department
21,291

 
18,289

 
56,105

 
48,001

Total hotel operating revenues
306,696

 
267,930

 
833,731

 
719,094

Other income
1,306

 
2,056

 
6,240

 
6,156

Total revenues
308,002

 
269,986

 
839,971

 
725,250

Expenses:
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Room
52,344

 
44,911

 
147,495

 
124,789

Food and beverage
45,986

 
41,886

 
137,830

 
121,871

Other direct
6,772

 
6,146

 
18,500

 
17,166

Other indirect (Note 8)
69,722

 
62,121

 
199,924

 
175,045

Total hotel operating expenses
174,824

 
155,064

 
503,749

 
438,871

Depreciation and amortization
38,821

 
40,634

 
115,887

 
107,182

Real estate taxes, personal property taxes and insurance
13,878

 
13,489

 
43,210

 
38,623

Ground rent (Note 5)
4,279

 
3,249

 
11,019

 
8,535

General and administrative
6,278

 
5,513

 
17,804

 
16,224

Acquisition transaction costs (Note 3)
0

 
2,687

 
1,851

 
2,687

Other expenses
573

 
1,749

 
6,830

 
3,918

Total operating expenses
238,653

 
222,385

 
700,350

 
616,040

Operating income
69,349

 
47,601

 
139,621

 
109,210

Interest income
2

 
2,448

 
1,801

 
7,212

Interest expense
(14,499
)
 
(14,737
)
 
(43,043
)
 
(42,517
)
Loss from extinguishment of debt (Note 4)
0

 
0

 
(2,487
)
 
0

Income before income tax expense
54,852

 
35,312

 
95,892

 
73,905

Income tax expense (Note 9)
(2,997
)
 
(2,564
)
 
(1,488
)
 
(2,481
)
Income before gain on sale of properties
51,855

 
32,748

 
94,404

 
71,424

Gain on sale of properties (Note 3)
49,657

 
0

 
93,205

 
0

Net income
101,512

 
32,748

 
187,609

 
71,424

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
0

 
0

 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(297
)
 
(108
)
 
(557
)
 
(243
)
Net income attributable to noncontrolling interests
(297
)
 
(108
)
 
(565
)
 
(251
)
Net income attributable to the Company
101,215

 
32,640

 
187,044

 
71,173

Distributions to preferred shareholders
(3,042
)
 
(4,106
)
 
(11,291
)
 
(13,278
)
Issuance costs of redeemed preferred shares (Note 6)
(9
)
 
0

 
(951
)
 
(1,566
)
Net income attributable to common shareholders
$
98,164

 
$
28,534

 
$
174,802

 
$
56,329


2



LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income - Continued
(in thousands, except share data)
(unaudited)

 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Earnings per Common Share - Basic:
 
 
 
 
 
 
 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.94

 
$
0.30

 
$
1.68

 
$
0.59

Earnings per Common Share - Diluted:
 
 
 
 
 
 
 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.94

 
$
0.30

 
$
1.67

 
$
0.59

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
103,798,853

 
95,890,474

 
103,730,007

 
95,510,088

Diluted
104,133,553

 
96,082,340

 
104,059,030

 
95,681,763

 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
Net income
$
101,512

 
$
32,748

 
$
187,609

 
$
71,424

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate derivative instruments (Note 4)
2,664

 
(2,345
)
 
(1,424
)
 
10,255

Comprehensive income
104,176

 
30,403

 
186,185

 
81,679

Comprehensive income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
(8
)
 
0

 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(305
)
 
(101
)
 
(553
)
 
(275
)
Comprehensive income attributable to noncontrolling interests
(313
)
 
(101
)
 
(561
)
 
(283
)
Comprehensive income attributable to the Company
$
103,863

 
$
30,302

 
$
185,624

 
$
81,396

The accompanying notes are an integral part of these consolidated financial statements.

3


LASALLE HOTEL PROPERTIES
Consolidated Statements of Equity
(in thousands, except per share/unit data)
(unaudited)
 
Preferred
Shares of Beneficial Interest
 
Common
Shares of
Beneficial
Interest
 
Treasury
Shares
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Distributions
in Excess of
Retained
Earnings
 
Total
Shareholders'
Equity
 
Noncontrolling
Interests in
Consolidated
Entities
 
Noncontrolling Interests of Common Units in Operating Partnership
 
Total Noncontrolling Interests
 
Total Equity
Balance, December 31, 2012
$
91

 
$
955

 
$
(886
)
 
$
2,118,705

 
$
(7,735
)
 
$
(258,004
)
 
$
1,853,126

 
$
18

 
$
5,786

 
$
5,804

 
$
1,858,930

Issuance of shares, net of offering costs
44

 
7

 
262

 
125,813

 
0

 
0

 
126,126

 
0

 
0

 
0

 
126,126

Redemption of preferred shares
(40
)
 
0

 
0

 
(98,394
)
 
0

 
(1,566
)
 
(100,000
)
 
0

 
0

 
0

 
(100,000
)
Repurchase of common shares into treasury
0

 
0

 
(3
)
 
0

 
0

 
0

 
(3
)
 
0

 
0

 
0

 
(3
)
Deferred compensation, net
0

 
0

 
613

 
3,475

 
0

 
0

 
4,088

 
0

 
0

 
0

 
4,088

Adjustments to noncontrolling interests
0

 
0

 
0

 
1

 
0

 
0

 
1

 
0

 
(1
)
 
(1
)
 
0

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(20
)
 
(20
)
 
0

 
0

 
0

 
(20
)
Distributions on common shares/units ($0.68 per share/unit)
0

 
0

 
0

 
0

 
0

 
(65,394
)
 
(65,394
)
 
0

 
(201
)
 
(201
)
 
(65,595
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(13,278
)
 
(13,278
)
 
(8
)
 
0

 
(8
)
 
(13,286
)
Net income
0

 
0

 
0

 
0

 
0

 
71,173

 
71,173

 
8

 
243

 
251

 
71,424

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on interest rate derivative instruments
0

 
0

 
0

 
0

 
10,223

 
0

 
10,223

 
0

 
32

 
32

 
10,255

Balance, September 30, 2013
$
95

 
$
962

 
$
(14
)
 
$
2,149,600

 
$
2,488

 
$
(267,089
)
 
$
1,886,042

 
$
18

 
$
5,859

 
$
5,877

 
$
1,891,919

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
$
95

 
$
1,039

 
$
(14
)
 
$
2,379,246

 
$
4,603

 
$
(281,578
)
 
$
2,103,391

 
$
18

 
$
6,054

 
$
6,072

 
$
2,109,463

Issuance of shares, net of offering costs
0

 
1

 
0

 
560

 
0

 
0

 
561

 
0

 
0

 
0

 
561

Redemption of preferred shares
(23
)
 
0

 
0

 
(57,757
)
 
0

 
(951
)
 
(58,731
)
 
0

 
0

 
0

 
(58,731
)
Repurchase of common shares into treasury
0

 
0

 
(2,936
)
 
0

 
0

 
0

 
(2,936
)
 
0

 
0

 
0

 
(2,936
)
Deferred compensation, net
0

 
0

 
2,238

 
2,560

 
0

 
0

 
4,798

 
0

 
0

 
0

 
4,798

Adjustments to noncontrolling interests
0

 
0

 
0

 
24

 
0

 
0

 
24

 
0

 
(24
)
 
(24
)
 
0

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(314
)
 
(314
)
 
0

 
0

 
0

 
(314
)
Distributions on common shares/units ($1.03 per share/unit)
0

 
0

 
0

 
0

 
0

 
(107,301
)
 
(107,301
)
 
0

 
(305
)
 
(305
)
 
(107,606
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(11,291
)
 
(11,291
)
 
(9
)
 
0

 
(9
)
 
(11,300
)
Net income
0

 
0

 
0

 
0

 
0

 
187,044

 
187,044

 
8

 
557

 
565

 
187,609

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments
0

 
0

 
0

 
0

 
(1,420
)
 
0

 
(1,420
)
 
0

 
(4
)
 
(4
)
 
(1,424
)
Balance, September 30, 2014
$
72

 
$
1,040


$
(712
)

$
2,324,633


$
3,183


$
(214,391
)

$
2,113,825


$
17


$
6,278


$
6,295


$
2,120,120

The accompanying notes are an integral part of these consolidated financial statements.

4


LASALLE HOTEL PROPERTIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the nine months ended
 
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
187,609

 
$
71,424

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
115,887

 
107,182

Amortization of deferred financing costs, mortgage premium and note receivable discount
599

 
(215
)
Loss from extinguishment of debt
2,487

 
0

Gain on sale of properties
(93,205
)
 
0

Amortization of deferred compensation
4,798

 
4,088

Deferred income tax (benefit) expense
(64
)
 
89

Allowance for doubtful accounts
89

 
251

Other
404

 
449

Changes in assets and liabilities:
 
 
 
Restricted cash reserves
(80
)
 
738

Hotel receivables
(22,893
)
 
(18,982
)
Prepaid expenses and other assets
622

 
(12,379
)
Accounts payable and accrued expenses
4,419

 
15,615

Advance deposits
5,834

 
3,081

Accrued interest
(298
)
 
(567
)
Net cash provided by operating activities
206,208

 
170,774

Cash flows from investing activities:
 
 
 
Additions to properties
(57,480
)
 
(34,776
)
Improvements to properties
(4,583
)
 
(53,054
)
Acquisition of properties
(127,002
)
 
(302,135
)
Purchase of office furniture and equipment
(94
)
 
(40
)
Repayment of note receivable
72,000

 
0

Restricted cash reserves
(2,838
)
 
(22
)
Proceeds from sale of properties
167,838

 
0

Property insurance proceeds
1,438

 
436

Net cash provided by (used in) investing activities
49,279

 
(389,591
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facilities
468,820

 
466,406

Repayments under credit facilities
(531,426
)
 
(158,406
)
Repayments of mortgage loans
(12,158
)
 
(63,511
)
Payment of deferred financing costs
(5,138
)
 
(4
)
Purchase of treasury shares
(2,936
)
 
(3
)
Proceeds from issuance of preferred shares
0

 
110,000

Payment of preferred offering costs
0

 
(3,648
)
Proceeds from issuance of common shares
0

 
19,943

Payment of common offering costs
(20
)
 
(588
)
Distributions on earned shares from share awards with market conditions
(314
)
 
(20
)
Redemption of preferred shares
(58,722
)
 
(100,000
)
Distributions on preferred shares
(12,363
)
 
(13,345
)
Distributions on common shares/units
(97,534
)
 
(57,626
)
Net cash (used in) provided by financing activities
(251,791
)
 
199,198

Net change in cash and cash equivalents
3,696

 
(19,619
)
Cash and cash equivalents, beginning of period
13,388

 
35,090

Cash and cash equivalents, end of period
$
17,084

 
$
15,471

The accompanying notes are an integral part of these consolidated financial statements.

5


LASALLE HOTEL PROPERTIES
Notes to Consolidated Financial Statements
(in thousands, except share/unit data)
(unaudited)
1.
Organization
LaSalle Hotel Properties (the “Company”), a Maryland real estate investment trust organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. The income of LaSalle Hotel Lessee, Inc. (together with its wholly owned subsidiaries, “LHL”), the Company’s wholly owned taxable REIT subsidiary (“TRS”), is subject to taxation at normal corporate rates.
As of September 30, 2014, the Company owned interests in 44 hotels with over 11,100 guest rooms located in nine states and the District of Columbia. Each hotel is leased to LHL (see Note 8) under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between December 2014 and December 2016. Lease revenue from LHL is eliminated in consolidation. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement.
Substantially all of the Company’s assets are held directly or indirectly by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests, 99.7% of the common units of the Operating Partnership at September 30, 2014. The remaining 0.3% is held by limited partners who held 296,300 common units of the Operating Partnership at September 30, 2014. See Note 6 for additional disclosures related to common units of the Operating Partnership.
2.
Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of equity and consolidated statements of cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 due to seasonal and other factors. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and their subsidiaries in which they have a controlling interest, including joint ventures. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Substantially all of the Company’s revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators and reviewed by the Company to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its Quarterly Reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and estimated revenue and expense amounts for the last month of each quarter. Each quarter, the Company reviews

6


the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company’s consolidated statements of operations and comprehensive income (loss) based on an aggregate estimate, are fairly stated.
Share-Based Compensation
From time to time, the Company awards shares under the 2014 Equity Incentive Plan (“2014 Plan”), which has approximately nine years remaining, as compensation to executives, employees and members of the Board of Trustees (see Note 7). The shares issued to executives and employees generally vest over three years. The shares issued to members of the Board of Trustees vest immediately upon issuance. The Company recognizes compensation expense for nonvested shares on a straight-line basis over the vesting period based upon the fair value of the shares on the date of issuance, adjusted for forfeitures or as the estimated number of shares expected to vest is revised for awards with performance conditions. The 2014 Plan replaced the 2009 Equity Incentive Plan ("2009 Plan") in May 2014.
Noncontrolling Interests
The Company's financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling 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 (loss), 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 noncontrolling interests. Income or loss is allocated to noncontrolling interests based on their weighted average ownership percentage for the applicable period. Consolidated statements of equity include beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
However, the Company’s noncontrolling interests that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company evaluates whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract.
As of September 30, 2014, the consolidated results of the Company include the following ownership interests held by owners other than the Company: (i) the common units in the Operating Partnership held by third parties, (ii) the outside preferred ownership interests in a subsidiary and (iii) the outside ownership interest in a joint venture.
Notes Receivable
Notes receivable are carried at cost, net of any premiums or discounts which are recognized as an adjustment of yield over the remaining life of the note using the effective interest method. Interest income is recorded on the accrual basis consistent with the terms of the notes receivable. A note is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all principal and interest contractually due. Interest previously accrued but not collected becomes part of the Company's recorded investment in the note receivable for purposes of assessing impairment. The Company applies interest payments received on non-accrual notes receivable first to accrued interest and then as interest income. Notes receivable return to accrual status when contractually current and the collection of future payments is reasonably assured.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends GAAP to require reporting of discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This pronouncement will be effective for the first annual reporting period beginning after December 15, 2015 with early adoption permitted. The Company adopted this accounting pronouncement effective January 1, 2014.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is

7


effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
Reclassification
Certain amounts in the 2013 financial statements have been reclassified to conform with the 2014 presentation.
3.
Investment in Hotel Properties
Investment in hotel properties as of September 30, 2014 and December 31, 2013 consists of the following:
 
September 30, 2014
 
December 31, 2013
Land
$
591,666

 
$
602,697

Buildings and improvements
3,238,711

 
3,191,286

Furniture, fixtures and equipment
575,004

 
557,090

Investment in hotel properties, gross
4,405,381

 
4,351,073

Accumulated depreciation
(1,027,088
)
 
(967,885
)
Investment in hotel properties, net
$
3,378,293

 
$
3,383,188

As of September 30, 2014 and December 31, 2013, buildings and improvements included capital lease assets of $186,711 and accumulated depreciation included amounts related to capital lease assets of $14,161 and $10,104, respectively. Depreciation of the capital lease assets is included in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive income for all periods presented.
Depreciation expense was $38,715 and $115,573 for the three and nine months ended September 30, 2014, respectively, and $40,521 and $106,854 for the three and nine months ended September 30, 2013, respectively.
Acquisitions
During the third quarter of 2013, the Company acquired 100% interests in four full-service hotels, each of which is leased to LHL. The Company recorded the acquisitions at fair value using model-derived valuations, with the estimated fair value recorded to investment in hotel properties, capital lease obligations, and hotel working capital assets and liabilities. In connection with the acquisitions, the Company incurred acquisition transaction costs that were expensed as incurred. The following is a summary of the acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition
Transaction Costs
Hotel Name
 
Acquisition Date
 
Number of
Rooms
 
Location
 
Purchase
Price
 
Manager
 
For the three and nine months ended September 30, 2013
Harbor Court Hotel
 
August 1, 2013
 
131

 
San Francisco, CA
 
$
36,875

 
Kimpton Hotel & Restaurant Group, L.L.C.
 
$
578

Hotel Triton
 
August 1, 2013
 
140

 
San Francisco, CA
 
10,900

 
Kimpton Hotel & Restaurant Group, L.L.C.
 
115

Serrano Hotel
 
August 21, 2013
 
236

 
San Francisco, CA
 
71,500

 
Kimpton Hotel & Restaurant Group, L.L.C. (1)
 
1,010

Southernmost Hotel Collection
 
August 27, 2013
 
260

 
Key West, FL
 
184,500

 
Highgate Hotels
 
984

Total
 
 
 
 
 
 
 
$
303,775

 
 
 
$
2,687

(1) Effective January 29, 2014, management transitioned to Access Hotels & Resorts.

8


Harbor Court Hotel and Hotel Triton are subject to leases of land and building, which were determined to be capital leases (see Note 5). Accordingly, at acquisition, the Company recorded capital assets related to its leasehold interests of $54,563 and $37,253 for Harbor Court Hotel and Hotel Triton, respectively, based upon the estimated fair values of the rights to use the leased properties for the remaining terms. The capital assets, net of accumulated depreciation, are included within investment in hotel properties, net, in the accompanying consolidated balance sheets. Additionally, the Company recorded furniture, fixtures and equipment and inventory of $736 and $1,399 for Harbor Court Hotel and Hotel Triton, respectively, as part of the acquisitions.
The sources of the funding for the above acquisitions were borrowings under the Company’s senior unsecured credit facility. Total revenues and net loss from the hotels acquired during 2013 of $8,570 and $682, respectively, are included in the accompanying consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2013.
On April 2, 2014, the Company acquired a 100% interest in Hotel Vitale, a 200-room urban, full-service hotel located in San Francisco, CA for $130,000. The source of the funding for the acquisition was borrowings under the Company's senior unsecured credit facility. The property is leased to LHL and Commune Hotels and Resorts manages the property. The Company recorded the acquisition at fair value using model-derived valuations, with the estimated fair value recorded to investment in hotel property and hotel working capital assets and liabilities. In connection with the acquisition, the Company incurred acquisition transaction costs of zero and $1,787 that were expensed as incurred during the three and nine months ended September 30, 2014, respectively, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
On April 30, 2014, the Company acquired a parcel of land located adjacent to the Company's Onyx Hotel in Boston, MA for $2,500. The land is available for future use. The Company incurred transaction costs of zero and $64 in connection with the land purchase, which were expensed as incurred during the three and nine months ended September 30, 2014, respectively. These expenses are included in acquisition transaction costs, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
Dispositions
Effective January 1, 2014, the Company adopted ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (see Note 2). As a result, operations of hotels sold subsequent to December 31, 2013 will continue to be reported in continuing operations, while gains (losses) on sale will be included in gain on sale of property, after continuing operations.
On June 17, 2014, the Company sold the Hilton Alexandria Old Town for $93,380. This sale does not represent a strategic shift in the Company's business plan or primary markets, and therefore, does not qualify as discontinued operations. The Company recognized a gain of zero and $43,548 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2014, respectively.
On September 10, 2014, the Company sold the Hotel Viking for $77,000. This sale does not represent a strategic shift in the Company's business plan or primary markets, and therefore, does not qualify as discontinued operations. The Company recognized a gain of $49,657 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2014. In conjunction with the sale of Hotel Viking, the Company executed a reverse 1031 exchange with Hotel Vitale, which was purchased on April 2, 2014. The reverse 1031 exchange has no effect on the Company’s GAAP financial reporting and does not have a material impact on the Company’s tax positions and expected tax expense.
Note Receivable
On February 10, 2014, the Company received $72,000 in early repayment of its mezzanine loan, which was secured by pledges of ownership interests of the entities that own the underlying hotel properties, Shutters on the Beach and Casa Del Mar, in Santa Monica, CA. The mezzanine loan was due to mature on May 11, 2014. The proceeds were used to pay down amounts outstanding under the Company’s senior unsecured credit facility and under the LHL unsecured credit facility.
Condensed Pro Forma Financial Information
The results of operations of acquired properties are included in the consolidated statements of operations and comprehensive income beginning on their respective acquisition dates. The following condensed pro forma financial information is presented as if the following 2013 acquisitions had been consummated on January 1, 2012, the beginning of the reporting period prior to acquisition. In addition, for purposes of the condensed pro forma financial information only, the May 24, 2013 through May 31, 2013 issuance of 721,706 common shares of beneficial interest and the October 25, 2013 issuance of 7,705,000 common shares of beneficial interest are presented as if the issuances had occurred as of January 1, 2012. No adjustments have been made to the condensed pro forma financial information presented below for the 2013 preferred share issuance and redemption, since those

9


transactions have no relation to the acquisitions. The condensed pro forma financial information is for comparative purposes only and not necessarily indicative of what actual results of operations of the Company would have been had the 2013 acquisitions been consummated on January 1, 2012, nor does it purport to represent the results of operations for future periods.
Adjustments have been made to the pro forma financial information for the following acquisitions:
Property                                                                          
 
Acquisition Date
Harbor Court Hotel
 
August 1, 2013
Hotel Triton
 
August 1, 2013
Serrano Hotel
 
August 21, 2013
Southernmost Hotel Collection
 
August 27, 2013
The condensed pro forma financial information for the three and nine months ended September 30, 2013 is as follows:
 
For the three months ended
 
For the nine months ended
 
September 30, 2013
 
September 30, 2013
Total revenues
$
279,155

 
$
771,010

Net income
$
33,703

 
$
77,179

Net income attributable to common shareholders
$
29,489

 
$
62,084

Earnings per common share - basic
$
0.28

 
$
0.60

Earnings per common share - diluted
$
0.28

 
$
0.60

Weighted average number of common shares outstanding:
 
 
 
Basic
103,595,474

 
103,594,692

Diluted
103,787,340

 
103,766,368


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4.
Long-Term Debt
Debt Summary
Debt as of September 30, 2014 and December 31, 2013 consisted of the following:
 
 
 
 
 
 
Balance Outstanding as of
Debt                                                                                  
 
Interest
Rate
 
Maturity
Date
 
September 30,
2014
 
December 31,
2013
Credit facilities
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
Floating (a)
 
January 2018 (a)
 
$
158,000

 
$
220,000

LHL unsecured credit facility
 
Floating (b)
 
January 2018 (b)
 
0

 
606

Total borrowings under credit facilities
 
 
 
 
 
158,000

 
220,606

Term loans
 
 
 
 
 
 
 
 
First Term Loan
 
Floating (c)
 
May 2019
 
177,500

 
177,500

Second Term Loan
 
Floating (c)
 
January 2019
 
300,000

 
300,000

Total term loans
 
 
 
 
 
477,500

 
477,500

Massport Bonds
 
 
 
 
 
 
 
 
Hyatt Boston Harbor (taxable)
 
Floating (d)
 
March 2018
 
5,400

 
5,400

Hyatt Boston Harbor (tax exempt)
 
Floating (d)
 
March 2018
 
37,100

 
37,100

Total bonds payable
 
 
 
 
 
42,500

 
42,500

Mortgage loans
 
 
 
 
 
 
 
 
Hotel Deca
 
6.28%
 
August 2014 (e)
 
0

 
8,809

Westin Copley Place
 
5.28%
 
September 2015 (f)
 
210,000

 
210,000

Westin Michigan Avenue
 
5.75%
 
April 2016
 
133,856

 
135,315

Indianapolis Marriott Downtown
 
5.99%
 
July 2016
 
97,876

 
98,875

Hotel Roger Williams
 
6.31%
 
August 2016
 
60,525

 
61,416

Mortgage loans at stated value
 
 
 
 
 
502,257

 
514,415

Unamortized loan premium (g)
 
 
 
 
 
0

 
41

Total mortgage loans
 
 
 
 
 
502,257

 
514,456

Total debt
 
 
 
 
 
$
1,180,257

 
$
1,255,062


(a) 
Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of September 30, 2014, the rate, including the applicable margin, for the Company’s outstanding LIBOR borrowings of $158,000 was 1.86%. As of December 31, 2013, the rate, including the applicable margin, for the Company's outstanding LIBOR borrowing of $220,000 was 1.92%. The Company has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(b) 
Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. There were no borrowings outstanding at September 30, 2014. As of December 31, 2013, the rate, including the applicable margin, for LHL's outstanding LIBOR borrowings of $606 was 1.92%. LHL has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(c) 
Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into separate interest rate swap agreements for the full seven-year term of the First Term Loan (as defined below) and a five-year term ending in August 2017 for the Second Term Loan (as defined below), resulting in fixed all-in interest rates at September 30, 2014 of 3.62% and 2.38%, respectively, and at December 31, 2013 of 3.62% and 2.43%, respectively, at the Company's current leverage ratio (as defined in the swap agreements).
(d) 
The Massport Bonds are secured by letters of credit issued by U.S. Bank National Association ("U.S. Bank"), effective September 30, 2014, that expire in September 2016, which replaced similar letters of credit held by the Royal Bank of Scotland. The letters of credit have two one-year extension options and are secured by the Hyatt Boston Harbor. The bonds bear interest based on weekly floating rates. The interest rates as of September 30, 2014 were 0.85% and 0.40% for the $5,400 and $37,100 bonds, respectively. The interest rates as of December 31, 2013 were 0.70% and 0.40% for the $5,400 and $37,100 bonds, respectively. Effective October 1, 2014, the interest rates under the U.S. Bank letters of credit are 0.12% and 0.04% for the $5,400 and $37,100 bonds, respectively. The Company also incurred an annual letter of credit fee of a variable rate based on an applicable margin as defined in the Company's senior unsecured credit agreement through September 29, 2014. Effective September 30, 2014, the Company incurs an annual letter of credit fee of 1.35%.

11


(e) 
The Company repaid the mortgage loan on May 1, 2014 through borrowings under its senior unsecured credit facility.
(f) 
The Company intends to repay the mortgage loan upon maturity through either borrowings on its credit facilities, placement of corporate-level debt or proceeds from a property-level mortgage financing.
(g) 
Mortgage debt includes an unamortized loan premium on the mortgage loan on Hotel Deca of $41 as of December 31, 2013.
A summary of the Company’s interest expense and weighted average interest rates for variable rate debt for the three and nine months ended September 30, 2014 and 2013 is as follows:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Interest Expense:
 
 
 
 
 
 
 
Interest incurred
$
14,003

 
$
14,271

 
$
41,545

 
$
41,342

Amortization of deferred financing costs
545

 
556

 
1,626

 
1,696

Capitalized interest
(49
)
 
(90
)
 
(128
)
 
(521
)
Interest expense
$
14,499

 
$
14,737

 
$
43,043

 
$
42,517

 
 
 
 
 
 
 
 
Weighted Average Interest Rates for Variable Rate Debt:
 
 
 
 
 
 
 
Senior unsecured credit facility
1.9
%
 
2.1
%
 
1.9
%
 
2.1
%
LHL unsecured credit facility
1.9
%
 
1.2
%
 
1.9
%
 
2.0
%
Massport Bonds
0.5
%
 
0.2
%
 
0.5
%
 
0.2
%
Credit Facilities
On January 8, 2014, the Company refinanced its $750,000 senior unsecured credit facility with a syndicate of banks. The credit facility matures on January 8, 2018, subject to two six-month extensions that the Company may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. The credit facility includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $1,050,000. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of 0.25% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.
On January 8, 2014, LHL also refinanced its $25,000 unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. The LHL credit facility matures on January 8, 2018, subject to two six-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of 0.25% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the LHL credit facility.
The Company's senior unsecured credit facility and LHL's unsecured credit facility contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company's ability to make distributions or other payments to its shareholders upon events of default.
Term Loans
On May 16, 2012, the Company entered into a $177,500 unsecured term loan with a seven-year term maturing on May 16, 2019 (the “First Term Loan”). The First Term Loan bears interest at a variable rate, but was hedged to a fixed interest rate based on the Company's current leverage ratio (as defined in the swap agreements), which interest rate was 3.62% at September 30, 2014, for the full seven-year term (see “Derivative and Hedging Activities” below).
On January 8, 2014, the Company refinanced its $300,000 unsecured term loan (the "Second Term Loan"). The Second Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $500,000. The Second Term Loan has a five-year term maturing on January 8, 2019 and bears interest at variable rates, but was hedged to a fixed interest rate based on the Company's current leverage ratio (as

12


defined in the swap agreements), which interest rate was 2.38% at September 30, 2014, through August 2, 2017 (see "Derivative and Hedging Activities" below).
The Company's term loans contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company's ability to make distributions or other payments to its shareholders upon events of default.
Derivative and Hedging Activities
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) ("OCI"). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Amounts reported in accumulated other comprehensive income (loss) ("AOCI") related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company's variable rate debt. Effective May 16, 2012, the Company entered into three interest rate swap agreements with an aggregate notional amount of $177,500 for the First Term Loan's full seven-year term, resulting in a fixed all-in interest rate based on the Company's current leverage ratio (as defined in the swap agreements), which interest rate was 3.62% at September 30, 2014. Effective August 2, 2012, the Company entered into five interest rate swap agreements with an aggregate notional amount of $300,000 for the Second Term Loan through August 2, 2017, resulting in a fixed all-in interest rate based on the Company's current leverage ratio (as defined in the swap agreements), which interest rate was 2.38% at September 30, 2014. The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges.
The following tables present the effect of derivative instruments on the Company's consolidated statements of operations and comprehensive income, including the location and amount of unrealized gain (loss) on outstanding derivative instruments in cash flow hedging relationships, for the three and nine months ended September 30, 2014 and 2013:
 
 
Amount of Gain (Loss) Recognized in OCI on Derivative Instruments
 
Location of Loss Reclassified from AOCI into Income
 
Amount of Loss Reclassified from AOCI into Income
 
 
 
 
 
 (Effective Portion)
 
 (Effective Portion)
 
 (Effective Portion)
 
 
For the three months ended
 
 
 
 
For the three months ended
 
 
September 30,
 
 
 
 
September 30,
 
 
2014
 
2013
 
 
 
 
2014
 
2013
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
2,664

 
$
(2,345
)
 
Interest expense
 
$
1,113

 
$
1,072

 
 
Amount of (Loss) Gain Recognized in OCI on Derivative Instruments
 
Location of Loss Reclassified from AOCI into Income
 
Amount of Loss Reclassified from AOCI into Income
 
 
 
 
 
 (Effective Portion)
 
 (Effective Portion)
 
 (Effective Portion)
 
 
For the nine months ended
 
 
 
 
For the nine months ended
 
 
September 30,
 
 
 
 
September 30,
 
 
2014
 
2013
 
 
 
 
2014
 
2013
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(1,424
)
 
$
10,255

 
Interest expense
 
$
3,297

 
$
3,153

During the three and nine months ended September 30, 2014 and 2013, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
As of September 30, 2014 and December 31, 2013, there was $3,192 and $4,616 in cumulative unrealized gain, respectively, of which $3,183 and $4,603 was included in AOCI, respectively, and $9 and $13 was attributable to noncontrolling interests, respectively. The Company expects that approximately $4,417 will be reclassified from AOCI and noncontrolling interests and recognized as a reduction to income in the next 12 months, calculated as estimated interest expense using the interest rates on the derivative instruments as of September 30, 2014.

13


Extinguishment of Debt
As discussed above, the Company refinanced its senior unsecured credit facility and Second Term Loan and LHL refinanced its unsecured revolving credit facility on January 8, 2014. The refinancing arrangements for the senior unsecured credit facility and Second Term Loan were considered substantial modifications. In accordance with GAAP guidance, the Company recognized a loss from extinguishment of debt of $2,487, which is included in the accompanying consolidated statements of operations and comprehensive income. The loss from extinguishment of debt represents a portion of the unamortized deferred financing costs from the original agreements.
Mortgage Loans
The Company’s mortgage loans are secured by the respective properties. The mortgages are non-recourse to the Company except for fraud or misapplication of funds.
On May 1, 2014, the Company repaid without fee or penalty the Hotel Deca mortgage loan in the amount of $8,703 plus accrued interest through borrowings under its senior unsecured credit facility. The loan was due to mature in August 2014.
The mortgage loans contain debt service coverage ratio tests related to the mortgaged properties. If the debt service coverage ratio for a specific property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel will automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows may be directed to the lender ("cash trap") until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.
Financial Covenants
Failure of the Company to comply with the financial covenants contained in its credit facilities, term loans and non-recourse secured mortgages could result from, among other things, changes in its results of operations, the incurrence of additional debt or changes in general economic conditions.
If the Company violates the financial covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.
A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.
As of September 30, 2014, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans, bonds payable or mortgage loans.
5.
Commitments and Contingencies
Ground, Land and Building, and Air Rights Leases
Eight of the Company’s hotels, San Diego Paradise Point Resort and Spa, Hyatt Boston Harbor, Indianapolis Marriott Downtown, The Hilton San Diego Resort and Spa, Hotel Solamar, Viceroy Santa Monica, The Liberty Hotel and Hotel Vitale, are subject to ground leases under non-cancelable operating leases expiring from March 2026 to December 1, 2102. Additionally, the restaurant facility for Southernmost Hotel Collection is subject to a ground lease, which expires in April 2019, but the Company can begin negotiating a renewal one year in advance of the lease expiration. The ground lease at Hyatt Boston Harbor expires in March 2026, but the Company has options to extend for over 50 years to 2077. None of the remaining ground leases expire prior to 2045. The Westin Copley Place is subject to a long term air rights lease which expires in December 2077 and requires no payments through maturity. The ground lease related to the Indianapolis Marriott Downtown requires future ground rent paymen

14


ts of one dollar per year. The ground leases at Viceroy Santa Monica, The Liberty Hotel and Hotel Vitale are subject to minimum annual rent increases, resulting in noncash straight-line rent expense of $498 and $1,323 for the three and nine months ended September 30, 2014, respectively, and $327 and $981 for the three and nine months ended September 30, 2013, respectively, which is included in total ground rent expense below.
Hotel Roger Williams, Harbor Court Hotel and Hotel Triton are subject to capital leases of land and building which expire in December 2044, April 2048 and January 2048, respectively. At acquisition, the estimated fair value of the remaining rent payments of $4,892, $18,424 and $27,752, respectively, were recorded as capital lease obligations. These obligations, net of amortization, are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Total ground rent expense for the the three and nine months ended September 30, 2014 was $4,279 and $11,019, respectively. Total ground rent expense for the three and nine months ended September 30, 2013 was $3,249 and $8,535, respectively. Certain rent payments are based on the hotel’s performance. Actual payments of rent may exceed the minimum required rent due to meeting specified thresholds.
Future minimum rent payments, including capital lease payments, (without reflecting future applicable Consumer Price Index increases) are as follows:
2014
$
2,836

2015
11,552

2016
11,775

2017
12,044

2018
12,231

Thereafter
537,361

 
$
587,799

Reserve Funds for Future Capital Expenditures
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally 4.0% to 5.0% of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of September 30, 2014, $16,100 was available in restricted cash reserves for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.
Restricted Cash Reserves
At September 30, 2014, the Company held $22,642 in restricted cash reserves. Included in such amounts are (i) $16,100 of reserve funds for future capital expenditures, (ii) $4,566 deposited in mortgage escrow accounts pursuant to mortgage obligations to pre-fund a portion of certain operating expenses and debt payments and (iii) $1,976 held by insurance and management companies on the Company’s behalf to be refunded or applied to future liabilities.
Litigation
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
6.
Equity
Common Shares of Beneficial Interest
On January 1, 2014, the Company issued 13,948 common shares of beneficial interest and authorized an additional 6,064 deferred shares to the independent members of its Board of Trustees for their earned 2013 compensation pursuant to award arrangements existing on or before January 1, 2013. These common shares of beneficial interest were issued under the 2009 Plan.

15


On January 1, 2014, the Company issued 35,652 nonvested shares with service conditions to executives related to the nonvested share awards with market conditions granted on January 24 and 26, 2011 (see Note 7 for additional details including vesting information). These common shares of beneficial interest were issued under the 2009 Plan.
On January 22, 2014, the Company issued 9,385 common shares of beneficial interest related to the resignation of a former Board of Trustees member who retired from the Board of Trustees for a portion of his accumulated deferred shares granted as compensation for years 1999 through 2013. The accumulated deferred shares balance will be issued in five annual installments beginning January 22, 2014. These common shares of beneficial interest were issued under the 2009 Plan.
On March 20, 2014, the Company issued 77,564 nonvested shares with service conditions to the Company’s executives and employees. The nonvested shares will vest in three annual installments starting January 1, 2015, subject to continued employment. These common shares of beneficial interest were issued under the 2009 Plan.
On July 1, 2014, the Company issued 59,778 shares to an executive related to the nonvested share awards with market conditions granted on May 31, 2008 (see Note 7 for additional details including vesting information). All of the issued shares vested immediately on July 1, 2014. These common shares of beneficial interest were issued under the 2009 Plan.
On February 20, 2013, the Company entered into an equity distribution agreement (the "2013 Agreement") with Raymond James & Associates, Inc. (the "Manager"). Under the terms of the 2013 Agreement, the Company may issue from time to time through or to the Manager, as sales agent or principal, the Company’s common shares of beneficial interest with aggregate gross proceeds totaling up to $250,000. The offering of the Company’s common shares of beneficial interest under the 2013 Agreement will terminate upon the earlier of (i) the sale of common shares having an aggregate offering price of $250,000 or (ii) the termination of the 2013 Agreement by the Manager or Company. As of September 30, 2014, the Company had availability under the 2013 Agreement to issue and sell common shares of beneficial interest having an aggregate offering price of up to $230,057.
Common Dividends
The Company paid the following dividends on common shares/units during the nine months ended September 30, 2014:
Dividend per
Share/Unit
 (1)
 
For the Quarter Ended
 
Record Date
 
Payable Date
$
0.28

 
December 31, 2013
 
December 31, 2013
 
January 15, 2014
$
0.28

 
March 31, 2014
 
March 31, 2014
 
April 15, 2014
$
0.38

 
June 30, 2014
 
June 30, 2014
 
July 15, 2014
(1) Amounts are rounded to the nearest whole cent for presentation purposes.
Treasury Shares
Treasury shares are accounted for under the cost method. During the nine months ended September 30, 2014, the Company received 91,394 common shares of beneficial interest related to employees surrendering shares to pay taxes at the time nonvested shares vested and forfeiting nonvested shares upon resignation.
On August 29, 2011, the Company’s Board of Trustees authorized a share repurchase program (the “Repurchase Program”) to acquire up to $100,000 of the Company’s common shares of beneficial interest, with repurchased shares recorded at cost in treasury. As of September 30, 2014, the Company had availability under the Repurchase Program to acquire up to $75,498 of common shares of beneficial interest. However, the Company is not currently authorized by its Board of Trustees to repurchase or offer to repurchase any common shares. If authorized by its Board of Trustees, the Company may resume using the Repurchase Program on a future date.
During the nine months ended September 30, 2014, the Company re-issued 71,619 treasury shares related to the grants of nonvested shares.
At September 30, 2014, there were 20,285 common shares of beneficial interest in treasury.

16


Preferred Shares
The following preferred shares of beneficial interest were outstanding as of September 30, 2014:
Security Type                                             
 
Number of
Shares
7 ½% Series H Preferred Shares
 
2,750,000

6 ⅜% Series I Preferred Shares
 
4,400,000

On April 5, 2013, the Company redeemed 4,000,000 of the 6,348,888 outstanding 7 ¼% Series G Cumulative Redeemable Preferred Shares ("Series G Preferred Shares") for $100,000 ($25.00 per share) plus accrued and unpaid dividends through the redemption date, April 5, 2013, of $1,913. The redemption value of the Series G Preferred Shares exceeded their carrying value by $1,566, which is included in the determination of net income attributable to common shareholders for the nine months ended September 30, 2013. The $1,566 represents the offering costs related to the redeemed Series G Preferred Shares.
On July 3, 2014, the Company redeemed the remaining 2,348,888 Series G Preferred Shares for $58,722 ($25.00 per share) plus accrued and unpaid dividends through the redemption date, July 3, 2014, of $1,100. The redemption value of the Series G Preferred Shares exceeded their carrying value by $951, which is included in the determination of net income attributable to common shareholders for the nine months ended September 30, 2014. The $951 represents the offering costs related to the redeemed Series G Preferred Shares.
The 7 ½% Series H Cumulative Redeemable Preferred Shares (“Series H Preferred Shares”) and the 6 ⅜% Series I Cumulative Redeemable Preferred Shares (“Series I Preferred Shares”) (collectively, the “Preferred Shares”) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions; the Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares of beneficial interest unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for all past dividend periods and, with respect to the Series H Preferred Shares, for the current dividend period. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. The difference between the carrying value and the redemption amount of the Preferred Shares are the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares.
The Company may not optionally redeem the Series H Preferred Shares and Series I Preferred Shares prior to January 24, 2016 and March 4, 2018, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After those dates, the Company may, at its option, redeem the Series H Preferred Shares and Series I Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. In addition, upon the occurrence of a change of control (as defined in the Company's charter), the result of which the Company’s common shares of beneficial interest and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT LLC or the NASDAQ Stock Market, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days after the change of control occurred, by paying $25.00 per share, plus any accrued and unpaid distributions to and including the date of redemption. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of Series H Preferred Shares and Series I Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares of beneficial interest based on a defined formula subject to a cap of 4,680,500 common shares and 8,835,200 common shares, respectively.

17


Preferred Dividends
The Company paid the following dividends on preferred shares during the nine months ended September 30, 2014:
 
 
Dividend per
 
For the
 
 
 
 
Security Type        
 
Share (1)
 
Quarter Ended
 
Record Date
 
Payable Date
7 ¼% Series G
 
$
0.45

 
December 31, 2013
 
January 1, 2014
 
January 15, 2014
7 ½% Series H
 
$
0.47

 
December 31, 2013
 
January 1, 2014
 
January 15, 2014
6 ⅜% Series I
 
$
0.40

 
December 31, 2013
 
January 1, 2014
 
January 15, 2014
7 ¼% Series G
 
$
0.45

 
March 31, 2014
 
April 1, 2014
 
April 15, 2014
7 ½% Series H
 
$
0.47

 
March 31, 2014
 
April 1, 2014
 
April 15, 2014
6 ⅜% Series I
 
$
0.40

 
March 31, 2014
 
April 1, 2014
 
April 15, 2014
7 ¼% Series G
 
$
0.47

(2) 
June 30, 2014
 
July 1, 2014
 
July 3, 2014
7 ½% Series H
 
$
0.47

 
June 30, 2014
 
July 1, 2014
 
July 15, 2014
6 ⅜% Series I
 
$
0.40

 
June 30, 2014
 
July 1, 2014
 
July 15, 2014
(1) 
Amounts are rounded to the nearest whole cent for presentation purposes.
(2) 
Final dividend is through redemption date.
Noncontrolling Interests of Common Units in Operating Partnership
As of September 30, 2014, the Operating Partnership had 296,300 common units of limited partnership interest outstanding, representing a 0.3% partnership interest held by the limited partners. As of September 30, 2014, approximately $10,145 of cash or the equivalent value in common shares, at the Company's option, would be paid to the limited partners of the Operating Partnership if the partnership were terminated. The approximate value of $10,145 is based on the Company's closing common share price of $34.24 on September 30, 2014, which is assumed to be equal to the value provided to the limited partners upon liquidation of the Operating Partnership. The outstanding common units of limited partnership interest are redeemable for cash, or at the Company's option, for a like number of common shares of beneficial interest of the Company.
The following schedule presents the effects of changes in the Company's ownership interest in the Operating Partnership on the Company's equity:
 
For the nine months ended
 
September 30,
 
2014
 
2013
Net income attributable to common shareholders
$
174,802

 
$
56,329

Increase in additional paid-in capital from adjustments to noncontrolling interests of common units in Operating Partnership
24

 
1

Change from net income attributable to common shareholders and adjustments to noncontrolling interests
$
174,826

 
$
56,330

7.
Equity Incentive Plan
The common shareholders approved the 2014 Plan at the 2014 Annual Meeting held on May 7, 2014, which permits the Company to issue equity-based awards to executives, employees, non-employee members of the Board of Trustees and any other persons providing services to or for the Company and its subsidiaries. The 2014 Plan provides for a maximum of 2,900,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted or unrestricted share awards, phantom shares, performance awards, incentive awards, other share-based awards, or any combination of the foregoing. In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2014 Plan during any fiscal year to any one individual is limited to 500,000 shares. The 2014 Plan terminates on February 17, 2024. The 2014 Plan authorized, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of common shares in lieu of cash for trustees’ fees, (iv) grants of common shares in lieu of cash compensation and (v) the making of loans to acquire common shares in lieu of compensation (to the extent permitted by law and applicable provisions of the Sarbanes Oxley Act of 2002). The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than 100% of the fair value of the common shares on the date of grant. Restricted share awards and options under the 2014 Plan vest over a period determined by the Compensation Committee of the Board of Trustees, generally a three year period. The duration of each option is also determined by the Compensation Committee, subject to applicable laws and regulations. At September 30, 2014, there were 2,898,666 common shares available for future grant under the 2014 Plan. Upon the approval of the 2014 Plan by the common shareholders on May

18


7, 2014, the 2014 Plan replaced the 2009 Plan. The Company will no longer make any grants under the 2009 Plan (although awards previously made under the 2009 Plan that are outstanding will remain in effect in accordance with the terms of that plan and the applicable award agreements).
Nonvested Share Awards with Service Conditions
From time to time, the Company awards nonvested shares under the 2014 Plan to executives, employees and members of the Board of Trustees. The nonvested shares issued to executives and employees generally vest over three years based on continued employment. The shares issued to the members of the Board of Trustees vest immediately upon issuance. The Company determines the grant date fair value of the nonvested shares based upon the grant date stock price of its common shares and target number of shares per the award agreements. Compensation costs are recognized on a straight-line basis over the requisite service period and are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
A summary of the Company’s nonvested share awards with service conditions as of September 30, 2014 is as follows:
 
Number of
Shares
 
Weighted -
Average Grant
Date Fair Value
Nonvested at January 1, 2014
333,417

 
$
29.11

Granted
77,564

 
31.82

Vested
(167,108
)
 
28.53

Forfeited
(3,751
)
 
29.19

Nonvested at September 30, 2014 (1)
240,122

 
$
30.39

(1) 
Amount excludes 29,276 share awards with market conditions which were earned but nonvested due to a service condition as of September 30, 2014.
As of September 30, 2014 and December 31, 2013, there were $5,186 and $5,160, respectively, of total unrecognized compensation costs related to nonvested share awards with service conditions. As of September 30, 2014 and December 31, 2013, these costs were expected to be recognized over a weighted–average period of 1.9 and 2.3 years, respectively. The total intrinsic value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three and nine months ended September 30, 2014 was zero and $5,602, respectively, and during the three and nine months ended September 30, 2013 was $4 and $8, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with service conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $740 and $2,220 for the three and nine months ended September 30, 2014, respectively, and $751 and $2,171 for the three and nine months ended September 30, 2013, respectively.
Nonvested Share Awards with Market or Performance Conditions
On January 24 and January 26, 2011, the Company’s Board of Trustees granted a target of 8,925 and 35,920 nonvested share awards with market conditions to executives, respectively. The actual number of the shares awarded was determined on January 1, 2014, based on the performance measurement period of January 1, 2011 through December 31, 2013, in accordance with the terms of the agreements. On January 1, 2014, the executives earned 79.5% of the target number of shares, or 35,652 shares. The shares representing the difference between 79.5% and 100.0% of the target, or 9,193 shares, were forfeited on January 1, 2014. Of the earned shares, 11,885 shares vested immediately on January 1, 2014 and the remaining 23,767 shares will vest in equal amounts on January 1, 2015 and January 1, 2016 based on continued employment. The executives received cash payments of $75 on the earned shares equal to the value of all dividends paid on common shares from December 31, 2010 until the determination date, January 1, 2014. As of January 1, 2014, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares, including those shares subject to further vesting.
On July 1, 2014, the Company issued 59,778 shares to an executive who earned 119.6% of the 50,000 target number of shares from the nonvested share awards with market conditions granted on May 31, 2008. All of the shares earned, or 59,778 shares, vested immediately on July 1, 2014. The executive received a cash payment of $239 on the earned shares equal to the value of all dividends paid on common shares from May 31, 2008 until the determination date, July 1, 2014. As of July 1, 2014, the executive is entitled to receive dividends as declared and paid on the earned shares and to vote the shares. These common shares of beneficial interest were issued under the 2009 Plan.
On March 20, 2014, the Company’s Board of Trustees granted a target of 71,967 nonvested share awards with either market or performance conditions to executives (the "March 20, 2014 Awards"). The actual amounts of the shares awarded with respect

19


to 35,983 of the 71,967 shares will be determined on January 1, 2017, based on the performance measurement period of January 1, 2014 through December 31, 2016, in accordance with the terms of the agreements. The actual amounts of the shares awarded with respect to the remaining 35,984 of the 71,967 shares will be determined on July 1, 2017, based on the performance measurement period of July 1, 2014 through June 30, 2017, in accordance with the terms of the agreements. The actual amounts of the shares awarded will range from 0% to 200% of the target amounts, depending on the performance analysis stipulated in the agreements, and none of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual amounts of the awards are determined (or earned) at the end of the respective performance measurement period, all of the earned shares will be issued and outstanding on those dates. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the respective determination date. Such amounts will be paid to the awardees on or about January 1, 2017 and July 1, 2017, respectively. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to 35,983 shares, amortization commenced on March 20, 2014, the beginning of the requisite service period, and, with respect to 35,984 shares, amortization commenced on July 1, 2014, the beginning of the requisite service period.
The terms stipulated in the March 20, 2014 Awards used to determine the total amount of the shares consist of the following three tranches: (1) a comparison of the Company’s total return to the total returns’ of six companies in a designated peer group of the Company, (2) the Company’s actual performance as compared to a Board-established total return goal and (3) a comparison of the Company’s return on invested capital to the return on invested capital of six companies in a designated peer group of the Company.
The tranches described in (1) and (2) are nonvested share awards with market conditions. For the March 20, 2014 Awards, the grant date fair value of the awards with market conditions were estimated by the Company using historical data under the Monte Carlo valuation method provided by a third party consultant. The final values were determined during the second quarter of 2014 with an insignificant cumulative adjustment to compensation cost recorded. The third tranche is based on “return on invested capital” discussed below, which is a performance condition. For the March 20, 2014 Awards, the grant date fair values of the tranches with performance conditions were calculated based on the targeted awards, and the valuation is adjusted on a periodic basis.
The capital market assumptions used in the valuations consisted of the following:
Factors associated with the underlying performance of the Company’s share price and shareholder returns over the term of the awards including total share return volatility and risk-free interest.
Factors associated with the relative performance of the Company’s share price and shareholder returns when compared to those companies which compose the index including beta as a means to breakdown total volatility into market-related and company specific volatilities.
The valuation has been performed in a risk-neutral framework.
Return on invested capital is a performance condition award measurement. The estimated value was calculated based on the initial face value at the date of grant. The valuation will be adjusted on a periodic basis as the estimated number of awards expected to vest is revised.

The assumptions used were as follows for each performance measure:
 
Volatility
 
Interest
Rates
 
Dividend
Yield
 
Stock
Beta
 
Fair Value of
Components
of Award
 
Weighting
of Total
Awards
March 20, 2014 Awards (performance period starting January 1, 2014)
 
 
 
 
 
 
 
 
Target amounts
33.70
%
 
0.90
%
 
N/A
 
N/A

 
$
31.94

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
31.82

 
33.30
%
Peer companies
33.70
%
 
0.90
%
 
N/A
 
0.938

 
$
31.02

 
33.30
%
March 20, 2014 Awards (performance period starting July 1, 2014)
 
 
 
 
 
 
 
 
Target amounts
33.70
%
 
0.90
%
 
N/A
 
N/A

 
$
31.23

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
31.82

 
33.30
%
Peer companies
33.70
%
 
0.90
%
 
N/A
 
0.938

 
$
34.53

 
33.30
%

20


A summary of the Company’s nonvested share awards with either market or performance conditions as of September 30, 2014 is as follows:
 
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
Nonvested at January 1, 2014
289,545

 
$
33.02

Granted (1)
131,745

 
34.52

Vested
(100,472
)
 
32.46

Forfeited
(9,193
)
 
(40.17
)
Nonvested at September 30, 2014
311,625

 
$
33.62

(1) 
Amount includes 50,000 shares from a May 2008 award agreement, for which fair value was determined at the beginning of the performance measurement period on July 1, 2014.
As of September 30, 2014 and December 31, 2013, there were $7,244 and $5,260, respectively, of total unrecognized compensation costs related to nonvested share awards with market or performance conditions. As of September 30, 2014 and December 31, 2013, these costs were expected to be recognized over a weighted–average period of 2.2 years. As of September 30, 2014 and December 31, 2013, there were 254,415 and 153,943 share awards with market or performance conditions vested, respectively. Additionally, there were 29,276 and 34,318 nonvested share awards with market or performance conditions earned but nonvested due to a service condition as of September 30, 2014 and December 31, 2013, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with market or performance conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $924 and $2,578 for the three and nine months ended September 30, 2014, respectively, and $703 and $1,917 for the three and nine months ended September 30, 2013, respectively.
8.
LHL
Substantially all of the Company’s revenues are derived from operating revenues generated by the hotels, all of which are leased by LHL.
Other indirect hotel operating expenses consist of the following expenses incurred by the hotels:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
General and administrative
$
22,270

 
$
19,913

 
$
64,965

 
$
56,234

Sales and marketing
15,832

 
14,096