Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT - RLJ Lodging Trust | exhibit3219302014.htm |
EX-31.2 - EXHIBIT - RLJ Lodging Trust | exhibit3129302014.htm |
EX-31.1 - EXHIBIT - RLJ Lodging Trust | exhibit3119302014.htm |
EXCEL - IDEA: XBRL DOCUMENT - RLJ Lodging Trust | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | 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
o | 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 001-35169
RLJ LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 27-4706509 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
3 Bethesda Metro Center, Suite 1000 | ||
Bethesda, Maryland | 20814 | |
(Address of Principal Executive Offices) | (Zip Code) |
(301) 280-7777
(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. ý Yes o 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). ý Yes o 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 definitions of "large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | o | |||
Non-accelerated filer | o (do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 30, 2014, 132,024,296 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
TABLE OF CONTENTS
Page | ||
Consolidated Financial Statements (unaudited) | ||
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
RLJ Lodging Trust
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
September 30, 2014 | December 31, 2013 | ||||||
(unaudited) | |||||||
Assets | |||||||
Investment in hotels and other properties, net | $ | 3,704,801 | $ | 3,241,163 | |||
Cash and cash equivalents | 274,440 | 332,248 | |||||
Restricted cash reserves | 59,484 | 62,430 | |||||
Hotel and other receivables, net of allowance of $233 and $234, respectively | 37,574 | 22,762 | |||||
Deferred financing costs, net | 9,866 | 11,599 | |||||
Deferred income tax asset | 2,941 | 2,529 | |||||
Purchase deposits | 1,000 | 7,246 | |||||
Prepaid expense and other assets | 43,882 | 37,997 | |||||
Total assets | $ | 4,133,988 | $ | 3,717,974 | |||
Liabilities and Equity | |||||||
Mortgage loans | $ | 533,335 | $ | 559,665 | |||
Term loans | 1,025,000 | 850,000 | |||||
Accounts payable and accrued expense | 125,752 | 115,011 | |||||
Deferred income tax liability | 3,325 | 3,548 | |||||
Advance deposits and deferred revenue | 13,074 | 9,851 | |||||
Accrued interest | 2,711 | 2,695 | |||||
Distributions payable | 41,834 | 30,870 | |||||
Total liabilities | 1,745,031 | 1,571,640 | |||||
Commitments and Contingencies (Note 10) | |||||||
Equity | |||||||
Shareholders’ equity: | |||||||
Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized; zero shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | — | — | |||||
Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 132,024,296 and 122,640,042 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | 1,319 | 1,226 | |||||
Additional paid-in-capital | 2,417,759 | 2,178,004 | |||||
Accumulated other comprehensive loss | (7,287 | ) | (5,941 | ) | |||
Distributions in excess of net earnings | (40,369 | ) | (45,522 | ) | |||
Total shareholders’ equity | 2,371,422 | 2,127,767 | |||||
Noncontrolling interest | |||||||
Noncontrolling interest in joint venture | 6,226 | 7,306 | |||||
Noncontrolling interest in Operating Partnership | 11,309 | 11,261 | |||||
Total noncontrolling interest | 17,535 | 18,567 | |||||
Total equity | 2,388,957 | 2,146,334 | |||||
Total liabilities and equity | $ | 4,133,988 | $ | 3,717,974 |
The accompanying notes are an integral part of these consolidated financial statements.
1
RLJ Lodging Trust
Consolidated Statements of Operations and Comprehensive Income
(Amounts in thousands, except share and per share data)
(unaudited)
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | |||||||||||||||
Operating revenue | |||||||||||||||
Room revenue | $ | 261,895 | $ | 221,318 | $ | 727,367 | $ | 635,157 | |||||||
Food and beverage revenue | 27,076 | 22,907 | 77,924 | 71,206 | |||||||||||
Other operating department revenue | 8,695 | 7,891 | 23,795 | 21,446 | |||||||||||
Total revenue | 297,666 | 252,116 | 829,086 | 727,809 | |||||||||||
Expense | |||||||||||||||
Operating expense | |||||||||||||||
Room expense | 57,012 | 49,388 | 158,669 | 139,550 | |||||||||||
Food and beverage expense | 19,397 | 16,629 | 55,016 | 50,406 | |||||||||||
Management fee expense | 11,569 | 8,773 | 32,639 | 25,524 | |||||||||||
Other operating expense | 83,273 | 74,482 | 234,281 | 213,919 | |||||||||||
Total property operating expense | 171,251 | 149,272 | 480,605 | 429,399 | |||||||||||
Depreciation and amortization | 37,243 | 31,551 | 105,541 | 94,748 | |||||||||||
Impairment loss | 9,200 | — | 9,200 | — | |||||||||||
Property tax, insurance and other | 17,874 | 16,628 | 53,064 | 47,873 | |||||||||||
General and administrative | 11,029 | 8,961 | 31,293 | 26,839 | |||||||||||
Transaction and pursuit costs | 480 | 478 | 4,375 | 2,822 | |||||||||||
Total operating expense | 247,077 | 206,890 | 684,078 | 601,681 | |||||||||||
Operating income | 50,589 | 45,226 | 145,008 | 126,128 | |||||||||||
Other income | 48 | 164 | 563 | 334 | |||||||||||
Interest income | 337 | 241 | 1,622 | 777 | |||||||||||
Interest expense | (13,858 | ) | (16,511 | ) | (42,646 | ) | (50,170 | ) | |||||||
Gain on foreclosure | — | 4,831 | — | 4,831 | |||||||||||
Income from continuing operations before income tax expense | 37,116 | 33,951 | 104,547 | 81,900 | |||||||||||
Income tax expense | (374 | ) | (181 | ) | (1,162 | ) | (752 | ) | |||||||
Income from continuing operations | 36,742 | 33,770 | 103,385 | 81,148 | |||||||||||
Income from discontinued operations | — | 3,158 | — | 5,349 | |||||||||||
Gain (loss) on disposal of hotel properties | 322 | — | (975 | ) | — | ||||||||||
Net income | 37,064 | 36,928 | 102,410 | 86,497 | |||||||||||
Net income attributable to non-controlling interests | |||||||||||||||
Noncontrolling interest in consolidated joint venture | (57 | ) | (166 | ) | (102 | ) | (321 | ) | |||||||
Noncontrolling interest in common units of Operating Partnership | (247 | ) | (293 | ) | (712 | ) | (700 | ) | |||||||
Net income attributable to common shareholders | $ | 36,760 | $ | 36,469 | $ | 101,596 | $ | 85,476 | |||||||
Basic per common share data | |||||||||||||||
Income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties | $ | 0.28 | $ | 0.27 | $ | 0.80 | $ | 0.68 | |||||||
Discontinued operations | — | 0.03 | — | 0.05 | |||||||||||
Net income per share attributable to common shareholders | $ | 0.28 | $ | 0.30 | $ | 0.80 | $ | 0.73 | |||||||
Weighted-average number of common shares | 131,106,440 | 121,594,219 | 126,070,309 | 116,697,417 | |||||||||||
2
Diluted per common share data | |||||||||||||||
Income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties | $ | 0.28 | $ | 0.27 | $ | 0.79 | $ | 0.67 | |||||||
Discontinued operations | — | 0.03 | — | 0.05 | |||||||||||
Net income per share attributable to common shareholders | $ | 0.28 | $ | 0.30 | $ | 0.79 | $ | 0.72 | |||||||
Weighted-average number of common shares | 132,386,843 | 122,750,121 | 127,297,901 | 117,797,670 | |||||||||||
Amounts attributable to the Company’s common shareholders | |||||||||||||||
Income from continuing operations | $ | 36,440 | $ | 33,334 | $ | 102,564 | $ | 80,166 | |||||||
Income from discontinued operations | — | 3,135 | — | 5,310 | |||||||||||
Gain (loss) on disposal of hotel properties | 320 | — | (968 | ) | — | ||||||||||
Net income attributable to common shareholders | $ | 36,760 | $ | 36,469 | $ | 101,596 | $ | 85,476 | |||||||
Comprehensive income | |||||||||||||||
Net income | $ | 37,064 | $ | 36,928 | $ | 102,410 | $ | 86,497 | |||||||
Unrealized gain (loss) on interest rate derivatives | 5,567 | (3,155 | ) | (1,346 | ) | (11,429 | ) | ||||||||
Comprehensive income | 42,631 | 33,773 | 101,064 | 75,068 | |||||||||||
Comprehensive income attributable to consolidated joint venture | (57 | ) | (166 | ) | (102 | ) | (321 | ) | |||||||
Comprehensive income attributable to common units of Operating Partnership | (247 | ) | (293 | ) | (712 | ) | (700 | ) | |||||||
Comprehensive income attributable to the Company | $ | 42,327 | $ | 33,314 | $ | 100,250 | $ | 74,047 |
The accompanying notes are an integral part of these consolidated financial statements.
3
RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
Shareholders’ Equity | Noncontrolling Interests | |||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||
Shares | Par Value | Additional Paid-in Capital | Distributions In Excess Of Net Earnings | Accumulated Other Comprehensive Loss | Operating Partnership | Consolidated Joint Venture | Total Non-controlling Interest | Total Equity | ||||||||||||||||||||||||||
Balance at December 31, 2013 | 122,640,042 | $ | 1,226 | $ | 2,178,004 | $ | (45,522 | ) | $ | (5,941 | ) | $ | 11,261 | $ | 7,306 | $ | 18,567 | $ | 2,146,334 | |||||||||||||||
Net income | — | — | — | 101,596 | — | 712 | 102 | 814 | 102,410 | |||||||||||||||||||||||||
Proceeds from sale of common stock, net | 9,200,000 | 92 | 232,664 | — | — | — | — | — | 232,756 | |||||||||||||||||||||||||
Unrealized loss on interest rate derivative | — | — | — | — | (1,346 | ) | — | — | — | (1,346 | ) | |||||||||||||||||||||||
Distributions to joint venture partner | — | — | — | — | — | — | (1,182 | ) | (1,182 | ) | (1,182 | ) | ||||||||||||||||||||||
Issuance of restricted stock | 343,887 | 3 | (3 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
Amortization of share based compensation | — | — | 11,244 | — | — | — | — | — | 11,244 | |||||||||||||||||||||||||
Share grants to trustees | 3,360 | — | 94 | — | — | — | — | — | 94 | |||||||||||||||||||||||||
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | (154,277 | ) | (2 | ) | (4,244 | ) | — | — | — | — | — | (4,246 | ) | |||||||||||||||||||||
Forfeiture of restricted stock | (8,716 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Distributions on common shares and units | — | — | — | (96,443 | ) | — | (664 | ) | — | (664 | ) | (97,107 | ) | |||||||||||||||||||||
Balance at September 30, 2014 | 132,024,296 | $ | 1,319 | $ | 2,417,759 | $ | (40,369 | ) | $ | (7,287 | ) | $ | 11,309 | $ | 6,226 | $ | 17,535 | $ | 2,388,957 |
The accompanying notes are an integral part of these consolidated financial statements.
4
Shareholders’ Equity | Noncontrolling Interests | |||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||
Shares | Par Value | Additional Paid-in Capital | Distributions In Excess Of Net Earnings | Accumulated Other Comprehensive Income | Operating Partnership | Consolidated Joint Venture | Total Non-controlling Interests | Total Equity | ||||||||||||||||||||||||||
Balance at December 31, 2012 | 106,565,516 | $ | 1,066 | $ | 1,841,449 | $ | (52,681 | ) | $ | — | $ | 11,311 | $ | 6,766 | $ | 18,077 | $ | 1,807,911 | ||||||||||||||||
Net income | — | — | — | 85,476 | — | 700 | 321 | 1,021 | 86,497 | |||||||||||||||||||||||||
Unrealized income on interest rate derivative | — | — | — | — | (11,429 | ) | — | — | — | (11,429 | ) | |||||||||||||||||||||||
Proceeds from sale of common stock, net | 15,870,000 | 159 | 327,386 | — | — | — | — | — | 327,545 | |||||||||||||||||||||||||
Issuance of restricted stock | 377,830 | 3 | (3 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
Amortization of share based compensation | — | — | 9,691 | — | — | — | — | — | 9,691 | |||||||||||||||||||||||||
Share grants to trustees | 4,202 | — | 96 | — | — | — | — | — | 96 | |||||||||||||||||||||||||
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | (125,698 | ) | (1 | ) | (2,870 | ) | — | — | — | — | — | (2,871 | ) | |||||||||||||||||||||
Forfeiture of restricted stock | (4,217 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Distributions on common shares and units | — | — | — | (76,086 | ) | — | (550 | ) | — | (550 | ) | (76,636 | ) | |||||||||||||||||||||
Balance at September 30, 2013 | 122,687,633 | $ | 1,227 | $ | 2,175,749 | $ | (43,291 | ) | $ | (11,429 | ) | $ | 11,461 | $ | 7,087 | $ | 18,548 | $ | 2,140,804 |
The accompanying notes are an integral part of these consolidated financial statements.
5
RLJ Lodging Trust
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
For the nine months ended September 30, | |||||||
2014 | 2013 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 102,410 | $ | 86,497 | |||
Adjustments to reconcile net income to cash flow provided by operating activities: | |||||||
Loss on defeasance | 804 | — | |||||
Loss on disposal of hotel properties | 975 | — | |||||
Impairment loss | 9,200 | — | |||||
Gain on extinguishment of indebtedness | — | (5,702 | ) | ||||
Gain on foreclosure | — | (4,831 | ) | ||||
Depreciation and amortization | 105,541 | 94,940 | |||||
Amortization of deferred financing costs | 3,312 | 3,487 | |||||
Amortization of deferred management fees | 719 | 882 | |||||
Accretion of interest income on investment in loan | (175 | ) | — | ||||
Share grants to trustees | 94 | 96 | |||||
Amortization of share based compensation | 11,244 | 9,691 | |||||
Deferred income taxes | (635 | ) | (316 | ) | |||
Changes in assets and liabilities: | |||||||
Hotel and other receivables, net | (14,005 | ) | (9,183 | ) | |||
Prepaid expense and other assets | (6,912 | ) | (273 | ) | |||
Accounts payable and accrued expense | 8,953 | 5,978 | |||||
Advance deposits and deferred revenue | 2,564 | 3,721 | |||||
Accrued interest | 16 | 230 | |||||
Net cash flow provided by operating activities | 224,105 | 185,217 | |||||
Cash flows from investing activities | |||||||
Acquisition of hotel and other properties, net | (631,640 | ) | (184,165 | ) | |||
Proceeds from the disposal of hotel properties, net | 124,076 | — | |||||
Purchase deposits | 6,246 | 1,914 | |||||
Proceeds from principal payments on investment in loan | — | 103 | |||||
Improvements and additions to hotel and other properties | (70,987 | ) | (41,717 | ) | |||
Additions to property and equipment | (26 | ) | (137 | ) | |||
Releases from restricted cash reserves, net | 2,946 | 10,985 | |||||
Net cash flow used in investing activities | (569,385 | ) | (213,017 | ) | |||
Cash flows from financing activities | |||||||
Borrowings under revolving credit facility | 292,500 | 205,500 | |||||
Repayments under revolving credit facility | (292,500 | ) | (221,500 | ) | |||
Borrowings on term loans | 175,000 | 450,000 | |||||
Proceeds from mortgage loans | — | 150,000 | |||||
Payment of mortgage loans | (27,134 | ) | (575,850 | ) | |||
Repurchase of common shares | (4,246 | ) | (2,871 | ) | |||
Distributions on common shares | (85,532 | ) | (72,170 | ) | |||
Distributions on Operating Partnership units | (611 | ) | (550 | ) | |||
Payment of deferred financing costs | (1,579 | ) | (4,639 | ) | |||
Distribution to noncontrolling interest | (1,182 | ) | — | ||||
Proceeds from issuance of common shares | 232,756 | 327,545 | |||||
Net cash flow provided by financing activities | 287,472 | 255,465 | |||||
Net change in cash and cash equivalents | (57,808 | ) | 227,665 | ||||
Cash and cash equivalents, beginning of period | 332,248 | 115,861 | |||||
Cash and cash equivalents, end of period | $ | 274,440 | $ | 343,526 |
The accompanying notes are an integral part of these consolidated financial statements.
6
RLJ Lodging Trust
Notes to the Consolidated Financial Statements
(unaudited)
1. Organization
RLJ Lodging Trust (the "Company") was formed as a Maryland real estate investment trust ("REIT") on January 31, 2011. The Company is a self-advised and self-administered REIT that acquires primarily premium-branded, focused-service and compact full-service hotels. The Company qualified and elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with the portion of its taxable year ended December 31, 2011.
Substantially all of the Company’s assets are held by, and all of its operations are conducted through, RLJ Lodging Trust, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. As of September 30, 2014, there were 132,918,296 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.3% of the outstanding OP units.
As of September 30, 2014, the Company owned 150 properties, comprised of 148 hotels with approximately 23,300 rooms and two planned hotel conversions, located in 21 states and the District of Columbia, and an interest in one mortgage loan secured by a hotel. The Company owned, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of the DoubleTree Metropolitan Hotel-New York City, in which the Company, through wholly-owned subsidiaries, owned a 98.1% controlling interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in hotel operations related to the DoubleTree Metropolitan Hotel. An independent operator manages each property.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. The unaudited financial statements include adjustments based on management’s estimates (consisting of normal recurring adjustments), which the Company considers necessary for the fair statement of the consolidated balance sheets, statements of operations and comprehensive income, statements of changes in equity and statements of cash flows for the periods presented. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2013, included in the Company's Annual Report on Form 10-K filed with the SEC on February 27, 2014. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of actual operating results for the entire year.
The unaudited consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries, including a consolidated joint venture. All intercompany balances have been eliminated in consolidation.
Reclassifications
Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income, shareholders’ equity or cash flows.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
7
Revenue Recognition
The Company’s revenue comprises hotel operating revenue, such as room revenue, food and beverage revenue and revenue from other hotel operating departments (such as telephone, parking and business centers). These revenues are recorded net of any sales and occupancy taxes collected from guests. All rebates or discounts are recorded as a reduction in revenue, and there are no material contingent obligations with respect to rebates and discounts offered by the hotels. All revenues are recorded on an accrual basis as earned. Appropriate allowances are made for doubtful accounts and are recorded as bad debt expenses. The allowances are calculated as a percentage of aged accounts receivable. Cash received prior to guest arrival is recorded as an advance from the guest and recognized as revenue at the time of occupancy.
Incentive payments received pursuant to entry into management agreements are deferred and amortized into income over the life of the respective agreements. In May 2012, the Company received an incentive payment of $4.0 million related to purchasing a hotel and entering into a franchise agreement, which is being recognized over the remaining term of the franchise agreement. As of September 30, 2014, there was approximately $3.7 million remaining to be recognized.
Investment in Hotels and Other Properties
The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment ("FF&E"), and inventory. The Company may also acquire intangibles related to in-place leases, management agreements and franchise agreements when properties are acquired. The Company allocates the purchase price among the assets acquired and liabilities assumed based on their respective fair values. Transaction costs are expensed for acquisitions that are considered business combinations and capitalized for asset acquisitions.
The Company’s investments in hotels and other properties are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Intangibles arising from acquisitions are amortized using the straight-line method over the non-cancelable portion of the term of the agreement. Maintenance and repairs are expensed and major renewals or improvements are capitalized. Interest used to finance real estate under development is capitalized as an additional cost of development. Upon the sale or disposal of a property, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is recognized.
In accordance with the guidance on impairment or disposal of long-lived assets, the Company does not consider "held for sale" classification until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. The Company does not depreciate properties so long as they are classified as held for sale. Upon designation as held for sale and quarterly thereafter, the Company reviews the realizability of the carrying value, less cost to sell, in accordance with the guidance. Any such adjustment in the carrying value is reflected as an impairment charge.
The Company assesses carrying value whenever events or changes in circumstances indicate that the carrying amounts may not be fully recoverable. Recoverability is measured by comparison of the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and the Company’s intent with respect to holding or disposing of properties. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.
The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and economy in general and the Company’s expected use of the underlying properties. The assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions that occur subsequent to a current impairment analysis and the Company’s ultimate use of the property could impact these assumptions and result in future impairment charges with respect to the properties.
Noncontrolling Interest
The consolidated financial statements include all subsidiaries controlled by the Company. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests in these subsidiaries are presented separately in the consolidated financial statements. As of September 30, 2014 the Company consolidated DBT Met Hotel Venture, LP, a majority-owned partnership that has a third-party, noncontrolling 1.9% ownership interest. The third-party partnership interest is included in noncontrolling interest in joint venture on the consolidated balance sheet. Profits and losses are allocated in proportion to each party's respective ownership interest.
8
Franchise Agreements
As of September 30, 2014, 132 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. The franchise agreements for these hotels allow the properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs that amount to between 1.0% and 4.3% of room revenue. Certain full service hotels are also charged a royalty fee between 1.0% and 3.0% of food and beverage revenues. Franchise fees are included in other hotel operating expenses in the consolidated financial statements.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period excluding the weighted-average number of unvested restricted shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Potential shares consist of unvested restricted share grants and unvested performance units, calculated using the treasury stock method. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.
Share-based Compensation
From time to time, the Company may issue share-based awards under the 2011 Equity Incentive Plan (the "2011 Plan"), as compensation to officers, employees and non-employee trustees (see Note 12). The vesting of awards issued to officers and employees is based on either continued employment (time-based) or based on the relative total shareholder returns of the Company (performance-based) and continued employment, as determined by the board of trustees at the date of grant. The Company recognizes, for time-based awards, compensation expense for non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of grant, adjusted for forfeitures. The Company recognizes, for performance-based awards, compensation expense over the requisite service period for each award, based on the fair market value of the shares on the date of grant, as determined using a Monte Carlo simulation, adjusted for forfeitures.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which significantly changed the requirements for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on operations and final results should be presented as discontinued operations. The guidance also provides additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance applies to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company adopted the new guidance for the quarterly period ended March 31, 2014. Prior to January 1, 2014, properties disposed of were presented in discontinued operations for all periods presented.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is not permitted. The Company is currently evaluating whether this ASU will have a material impact on its financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ended December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The
9
Company is currently evaluating whether this ASU will have a material impact on its financial position, results of operations or cash flows.
3. Acquisition of Hotel and Other Properties
During the nine months ended September 30, 2014, the Company acquired a 100% interest in the following properties:
Property | Location | Acquisition Date | Management Company | Rooms | Purchase Price (in thousands) | ||||||||
Hyatt House Charlotte Center City | Charlotte, NC | March 12, 2014 | Hyatt Affiliate | 163 | $ | 32,496 | |||||||
Hyatt House Cypress Anaheim | Cypress, CA | March 12, 2014 | Hyatt Affiliate | 142 | 14,753 | ||||||||
Hyatt House Emeryville San Francisco Bay Area | Emeryville, CA | March 12, 2014 | Hyatt Affiliate | 234 | 39,274 | ||||||||
Hyatt House San Diego Sorrento Mesa | San Diego, CA | March 12, 2014 | Hyatt Affiliate | 193 | 35,985 | ||||||||
Hyatt House San Jose Silicon Valley | San Jose, CA | March 12, 2014 | Hyatt Affiliate | 164 | 44,159 | ||||||||
Hyatt House San Ramon | San Ramon, CA | March 12, 2014 | Hyatt Affiliate | 142 | 20,833 | ||||||||
Hyatt House Santa Clara | Santa Clara, CA | March 12, 2014 | Hyatt Affiliate | 150 | 40,570 | ||||||||
Hyatt Market Street The Woodlands | The Woodlands, TX | March 12, 2014 | Hyatt Corporation | 70 | 25,817 | ||||||||
Hyatt Place Fremont Silicon Valley | Fremont, CA | March 12, 2014 | Hyatt Affiliate | 151 | 23,525 | ||||||||
Hyatt Place Madison Downtown | Madison, WI | March 12, 2014 | Hyatt Affiliate | 151 | 35,088 | ||||||||
Courtyard Portland City Center | Portland, OR | May 22, 2014 | Sage Hospitality | 256 | 67,000 | ||||||||
Embassy Suites Irvine Orange County | Irvine, CA | May 22, 2014 | Sage Hospitality | 293 | 53,000 | ||||||||
Hilton Cabana Miami Beach | Miami, FL | June 19, 2014 | Highgate Hotels | 231 | 71,700 | ||||||||
Hyatt Atlanta Midtown | Atlanta, GA | July 14, 2014 | Interstate Hotels and Resorts | 194 | 49,500 | ||||||||
DoubleTree Grand Key Resort (1) | Key West, FL | September 11, 2014 | Interstate Hotels and Resorts | 215 | 78,250 | ||||||||
2,749 | $ | 631,950 |
(1) | Purchase price includes $1.3 million paid for five condominium units. |
During the nine months ended September 30, 2013, the Company acquired a 100% interest in the following properties:
Property | Location | Acquisition Date | Management Company | Rooms | Purchase Price (in thousands) | ||||||||
Courtyard Houston Downtown Convention Center | Houston, TX | March 19, 2013 | White Lodging Services | 191 | $ | 34,308 | |||||||
Residence Inn Houston Downtown Convention Center | Houston, TX | March 19, 2013 | White Lodging Services | 171 | 29,421 | ||||||||
Humble Tower Apartments (1) | Houston, TX | March 19, 2013 | n/a | 82 | 15,547 | ||||||||
Courtyard Waikiki Beach | Honolulu, HI | June 17, 2013 | Highgate Hotels | 399 | 75,250 | ||||||||
Vantaggio Suites Cosmo (2) | San Francisco, CA | June 21, 2013 | n/a | 150 | 29,474 | ||||||||
Residence Inn Atlanta Midtown/Georgia Tech (3) | Atlanta, GA | August 6, 2013 | Interstate Hotels and Resorts | 78 | 4,731 | ||||||||
1,071 | $ | 188,731 |
(1) | Conversion to a SpringHill Suites is in progress. |
(2) | Conversion to a Courtyard by Marriott is in progress. |
(3) | The Company was the successful bidder at a foreclosure sale of the property collateralizing a non-performing loan. |
10
The allocation of purchase price for the properties acquired was as follows (in thousands):
For the nine months ended September 30, | |||||||
2014 | 2013 | ||||||
Land and land improvements | $ | 164,335 | $ | 24,132 | |||
Buildings and improvements | 409,506 | 169,070 | |||||
Furniture, fixtures and equipment | 57,571 | 3,151 | |||||
Intangible and other assets | 538 | 342 | |||||
Intangible and other liabilities | — | (3,695 | ) | ||||
631,950 | 193,000 | ||||||
Bargain purchase gain | — | (4,269 | ) | ||||
Total purchase price | $ | 631,950 | $ | 188,731 |
The allocation of the purchase price for the DoubleTree Grand Key Resort is preliminary due to certain market information not yet being available.
For the properties acquired during the nine months ended September 30, 2014, total revenues and net income from the date of acquisition through September 30, 2014 are included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2014, respectively, as follows (in thousands):
2014 acquisitions | |||||||
For the three months ended September 30, 2014 | For the nine months ended September 30, 2014 | ||||||
Revenue | $ | 38,181 | $ | 67,988 | |||
Net income | $ | 8,628 | $ | 11,639 |
For properties acquired during the nine months ended September 30, 2013 total revenues and net income from the date of acquisition through September 30, 2013 are included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2013, respectively, as follows (in thousands):
2013 acquisitions | |||||||
For the three months ended September 30, 2013 | For the nine months ended September 30, 2013 | ||||||
Revenue | $ | 11,179 | $ | 17,741 | |||
Net income | $ | 2,056 | $ | 1,488 |
The following unaudited condensed pro forma financial information presents the results of operations as if the 2014 acquisitions had taken place on January 1, 2013 and the 2013 acquisitions had taken place on January 1, 2012. The unaudited condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the 2014 and 2013 acquisitions had taken place on January 1, 2013 and 2012, respectively, nor does it purport to represent the results of operations for future periods. The unaudited condensed pro forma financial information is as follows (in thousands, except share and per share data):
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | $ | 300,652 | $ | 286,526 | $ | 870,977 | $ | 839,560 | |||||||
Net income attributable to common shareholders | $ | 37,688 | $ | 43,172 | $ | 111,408 | $ | 109,462 | |||||||
Net income per share attributable to common shareholders - basic | $ | 0.29 | $ | 0.36 | $ | 0.88 | $ | 0.94 | |||||||
Net income per share attributable to common shareholders - diluted | $ | 0.28 | $ | 0.35 | $ | 0.88 | $ | 0.93 | |||||||
Weighted-average number of shares outstanding - basic | 131,106,440 | 121,594,219 | 126,070,309 | 116,697,417 | |||||||||||
Weighted-average number of shares outstanding - diluted | 132,386,843 | 122,750,121 | 127,297,901 | 117,797,670 |
11
4. Disposal of Hotel Properties
During the nine months ended September 30, 2014, the Company disposed of 14 hotel properties in four separate transactions for a total sale price of approximately $128.0 million. In conjunction with these transactions, the Company recorded a $1.0 million loss on disposal, which is included in the consolidated statement of operations. Additionally, the Company completed a legal defeasance of the mortgage indebtedness secured by three of the properties that were sold. The cost of the defeasance was approximately $0.8 million, which is included in interest expense in the accompanying consolidated statement of operations.
The following table provides a list of properties that were disposed of during the nine months ended September 30, 2014:
Property Name | Location | Disposal Date | Rooms | ||||
Courtyard Denver Southwest Lakewood | Lakewood, CO | February 20, 2014 | 90 | ||||
Residence Inn Denver Southwest Lakewood | Lakewood, CO | February 20, 2014 | 102 | ||||
Hyatt House Colorado Springs | Colorado Springs, CO | February 20, 2014 | 125 | ||||
SpringHill Suites Gainesville | Gainesville, FL | February 20, 2014 | 126 | ||||
Residence Inn Indianapolis Airport | Indianapolis, IN | February 20, 2014 | 95 | ||||
Fairfield Inn & Suites Indianapolis Airport | Indianapolis, IN | February 20, 2014 | 86 | ||||
Courtyard Grand Rapids Airport | Kentwood, MI | February 20, 2014 | 84 | ||||
Hampton Inn Suites Las Vegas Red Rock Summerlin | Las Vegas, NV | February 20, 2014 | 106 | ||||
Courtyard Austin University Area | Austin, TX | February 20, 2014 | 198 | ||||
Fairfield Inn & Suites Austin University Area | Austin, TX | February 20, 2014 | 63 | ||||
Hyatt House Dallas Richardson | Richardson, TX | February 20, 2014 | 130 | ||||
Hilton Garden Inn St. George | St. George, UT | February 25, 2014 | 150 | ||||
Hilton Mystic | Mystic, CT | March 26, 2014 | 182 | ||||
Holiday Inn Austin NW Arboretum Area | Austin, TX | June 18, 2014 | 194 | ||||
Total | 1,731 |
During 2013, the Company disposed of three properties in three separate transactions. The operating results for the nine months ended September 30, 2013 for these properties is included in discontinued operations in the accompanying consolidated statement of operations.
The following table provides a list of properties that were disposed of during 2013:
Property Name | Location | Disposal Date | Rooms | ||||
SpringHill Suites Southfield | Southfield, MI | May 30, 2013 | 84 | ||||
Courtyard Goshen | Goshen, IN | August 28, 2013 | 91 | ||||
Fairfield Inn & Suites Memphis | Memphis, TN | November 18, 2013 | 63 | ||||
Total | 238 |
12
Operating results of discontinued operations were as follows (in thousands):
For the three months ended September 30, 2013 | For the nine months ended September 30, 2013 | ||||||
Operating revenue | $ | 678 | $ | 2,800 | |||
Operating expense | (766 | ) | (2,780 | ) | |||
Operating income (loss) | (88 | ) | 20 | ||||
Interest expense | (31 | ) | (373 | ) | |||
Loss from discontinued operations before gain on extinguishment of indebtedness | (119 | ) | (353 | ) | |||
Gain on extinguishment of indebtedness | 3,277 | 5,702 | |||||
Net income from discontinued operations | $ | 3,158 | $ | 5,349 |
5. Investment in Hotels and Other Properties
Investment in hotels and other properties as of September 30, 2014 and December 31, 2013 consisted of the following (in thousands):
September 30, 2014 | December 31, 2013 | ||||||
Land and land improvements | $ | 732,935 | $ | 594,402 | |||
Buildings and improvements | 3,186,738 | 2,866,849 | |||||
Furniture, fixtures and equipment | 538,094 | 485,531 | |||||
Intangible assets, net | 3,045 | 2,507 | |||||
4,460,812 | 3,949,289 | ||||||
Accumulated depreciation and amortization | (756,011 | ) | (708,126 | ) | |||
Investment in hotels and other properties, net | $ | 3,704,801 | $ | 3,241,163 |
For the three and nine months ended September 30, 2014, depreciation and amortization expense related to investment in hotels and other properties was approximately $37.1 million and $105.2 million, respectively. For the three and nine months ended September 30, 2013, depreciation and amortization expense related to investment in hotels and other properties, excluding discontinued operations, was approximately $31.4 million and $94.4 million, respectively.
Impairment
In connection with the preparation of the unaudited consolidated financial statements for the three and nine months ended September 30, 2014, the Company evaluated the recoverability of the carrying values of hotels given the current expectation to sell certain hotels before the end of their previously estimated useful lives. Based on an analysis of estimated undiscounted net cash flows, the Company concluded that the carrying values of three hotels were not recoverable. The Company estimated the fair value of the hotels using a widely accepted revenue multiple approach with significant unobservable inputs, including revenue growth projections and prevailing market multiples, from third party sources. During the three and nine months ended September 30, 2014, the Company recorded an impairment loss of $9.2 million related to these hotels.
The Company determined that there was no impairment of any assets for either the three and nine months ended September 30, 2013.
6. Debt
Credit Facilities
The Company has in place credit agreements that provide for (i) an unsecured revolving credit facility of up to $300 million with a scheduled maturity date of November 20, 2016 with a one-year extension option if certain conditions are satisfied (the “Revolver”), (ii) an unsecured term loan of $400 million with a scheduled maturity date of March 20, 2019 (which originally was scheduled to mature in 2017) (the “2012 Five-Year Term Loan”), (iii) an unsecured term loan of $225 million with a scheduled maturity date of November 20, 2019 (the “Seven-Year Term Loan”), and (iv) an unsecured term loan
13
of $400 million with a scheduled maturity date of August 27, 2018 (the “2013 Five-Year Term Loan” and, together with the 2012 Five-Year Term Loan and the Seven-Year Term Loan, the "Term Loans").
The Revolver and Term Loans are subject to customary financial covenants. As of September 30, 2014, the Company was in compliance with all financial covenants.
As of and for the three and nine months ended September 30, 2014 and 2013, details of the Revolver and Term Loans are as follows (in thousands):
Interest expense for the | |||||||||||||||||||||||
three months ended September 30, | nine months ended September 30, | ||||||||||||||||||||||
Outstanding Borrowings at September 30, 2014 | Maturity Date | Interest Rate at September 30, 2014 (1) | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||
Revolver (2) | $ | — | November 2016 | n/a | $ | 287 | $ | 268 | $ | 906 | $ | 885 | |||||||||||
2013 Five-Year Term Loan (3) | 400,000 | August 2018 | 3.07% | 3,137 | 914 | 9,090 | 914 | ||||||||||||||||
2012 Five-Year Term Loan | 400,000 | March 2019 | 1.71% | 1,748 | 1,329 | 4,898 | 4,137 | ||||||||||||||||
Seven-Year Term Loan (4) | 225,000 | November 2019 | 4.04% | 2,320 | 1,073 | 6,870 | 2,596 | ||||||||||||||||
Total | $ | 1,025,000 | $ | 7,492 | $ | 3,584 | $ | 21,764 | $ | 8,532 |
(1) | Interest rate at September 30, 2014 gives effect to interest rate hedges and LIBOR floors, as applicable. |
(2) | Includes the unused facility fee of $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2013, respectively. |
(3) | Includes interest expense related to an interest rate hedge of $1.3 million and $3.8 million for the three and nine months ended September 30, 2014, respectively, and $0.3 million and $0.3 million for the three and nine months ended September 30, 2013, respectively. |
(4) | Includes interest expense related to an interest rate hedge of $1.0 million and $3.1 million for the three and nine months ended September 30, 2014, respectively, and $0.2 million and $0.2 million for the three and nine months ended September 30, 2013, respectively. |
Mortgage Loans
As of September 30, 2014 and December 31, 2013, the Company was subject to the following mortgage loans (in thousands):
Principal balance at, | ||||||||||||||||||||
Lender | Number of Assets Encumbered | Interest Rate at September 30, 2014 (1) | Maturity Date | September 30, 2014 | December 31, 2013 | |||||||||||||||
Wells Fargo | 5 | 3.76% | (2) | Oct 2014 | (3) | $ | 142,000 | $ | 142,000 | |||||||||||
Capmark Financial Group | 1 | 5.55% | May 2015 | (4) | 10,615 | 10,916 | ||||||||||||||
Capmark Financial Group | 1 | 5.55% | June 2015 | (4) | 4,605 | 4,736 | ||||||||||||||
Barclays Bank | 12 | 5.55% | June 2015 | (4) | 108,576 | 111,632 | ||||||||||||||
Barclays Bank | 4 | 5.60% | June 2015 | (4) | 27,030 | 27,804 | ||||||||||||||
Capmark Financial Group | 1 | 5.50% | July 2015 | (4) | 6,273 | 6,450 | ||||||||||||||
Barclays Bank | 1 | 5.44% | Sept 2015 | (4) | 10,236 | 10,521 | ||||||||||||||
PNC Bank (5) | 5 | 2.51% | (2) | May 2016 | (6) | 74,000 | 85,000 | |||||||||||||
Wells Fargo (7) | 4 | 4.19% | (2) | Sept 2016 | (8) | 150,000 | 150,000 | |||||||||||||
Barclays Bank (9) | — | 2,475 | ||||||||||||||||||
Barclays Bank (9) | — | 4,063 | ||||||||||||||||||
Capmark Financial Group (9) | — | 4,068 | ||||||||||||||||||
34 | $ | 533,335 | $ | 559,665 |
14
(1) | Interest rate at September 30, 2014 gives effect to interest rate hedges and LIBOR floors, as applicable. |
(2) | Requires payments of interest only until the commencement of the extension period(s). |
(3) | On October 17, 2014, the Company refinanced these mortgage loans. See Footnote 16 for more information. |
(4) | The Company is currently evaluating its options for repayment of these mortgage loans. |
(5) | The five hotels encumbered by the PNC Bank loan are cross-collateralized. |
(6) | Maturity date may be extended for one one-year term at the Company’s option, subject to certain lender requirements. |
(7) | Two of the four hotels encumbered by the Wells Fargo loan are cross-collateralized. |
(8) | Maturity date may be extended for four one-year terms at the Company’s option, subject to certain lender requirements. |
(9) | Mortgage loan related to a property that was sold during the nine months ended September 30, 2014. |
Some mortgage agreements are subject to customary financial covenants. The Company was in compliance with these
covenants at September 30, 2014 and December 31, 2013.
7. Derivatives and Hedging
The Company employs derivative instruments to hedge against interest rate fluctuations. For derivative instruments designated as cash flow hedges, unrealized gains and losses on the effective portion are reported in accumulated other comprehensive income (loss), a component of shareholders’ equity. Unrealized gains and losses on the ineffective portion of all designated hedges are recognized in earnings in the current period. For derivative instruments not designated as hedging instruments, unrealized gains or losses are recognized in earnings in the current period. At September 30, 2014 and December 31, 2013, all derivative instruments were designated as cash flow hedges.
At September 30, 2014 and December 31, 2013, the fair value of interest rate swap assets of $1.5 million and $3.2 million, respectively, was included in prepaid expense and other assets in the consolidated balance sheets. At September 30, 2014 and December 31, 2013, the aggregate fair value of interest rate swap liabilities of $8.8 million and $9.1 million, respectively, was included in accounts payable and accrued expenses in the consolidated balance sheets.
As of September 30, 2014 and December 31, 2013, the Company had entered into the following derivative instruments (in thousands):
Notional value at | Fair value at | ||||||||||||||||||
Hedge type | September 30, 2014 | December 31, 2013 | Hedge interest rate | Maturity | September 30, 2014 | December 31, 2013 | |||||||||||||
Swap-cash flow | $ | 275,000 | $ | 275,000 | 1.12% | November 2017 | $ | 1,474 | $ | 3,161 | |||||||||
Swap-cash flow | 175,000 | 175,000 | 1.56% | March 2018 | (1,478 | ) | (1,866 | ) | |||||||||||
Swap-cash flow | 175,000 | 175,000 | 1.64% | March 2018 | (1,923 | ) | (2,406 | ) | |||||||||||
Swap-cash flow | 16,500 | 16,500 | 1.83% | September 2018 | (225 | ) | (238 | ) | |||||||||||
Swap-cash flow | 16,500 | 16,500 | 1.75% | September 2018 | (177 | ) | (181 | ) | |||||||||||
Swap-cash flow | 40,500 | 40,500 | 1.83% | September 2018 | (553 | ) | (585 | ) | |||||||||||
Swap-cash flow | 41,500 | 41,500 | 1.75% | September 2018 | (446 | ) | (456 | ) | |||||||||||
Swap-cash flow | 18,000 | 18,000 | 1.83% | September 2018 | (246 | ) | (260 | ) | |||||||||||
Swap-cash flow | 17,000 | 17,000 | 1.75% | September 2018 | (183 | ) | (187 | ) | |||||||||||
Swap-cash flow | 125,000 | 125,000 | 2.02% | March 2019 | (2,145 | ) | (1,838 | ) | |||||||||||
Swap-cash flow | 100,000 | 100,000 | 1.94% | March 2019 | (1,385 | ) | (1,085 | ) | |||||||||||
$ | 1,000,000 | $ | 1,000,000 | $ | (7,287 | ) | $ | (5,941 | ) |
As of September 30, 2014 and December 31, 2013, there was approximately $7.3 million and $5.9 million, respectively, in unrealized losses included in accumulated other comprehensive loss related to interest rate hedges that are effective in offsetting the variable cash flows. There was no ineffectiveness recorded on designated hedges during the three and nine month periods ended September 30, 2014 and 2013. For the nine months ended September 30, 2014 and 2013, approximately $8.7 million and $0.6 million, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense.
15
8. Fair Value
Fair Value Measurement
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The fair value hierarchy has three levels of inputs, both observable and unobservable:
• | Level 1 — Inputs include quoted market prices in an active market for identical assets or liabilities. |
• | Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. |
• | Level 3 — Inputs are unobservable and corroborated by little or no market data. |
Fair Value of Financial Instruments
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methods. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts. The Company used the following market assumptions and/or estimation methods:
• | Cash and cash equivalents, restricted cash, hotel and other receivables, accounts payable and other liabilities - The carrying amounts reported in the consolidated balance sheet for these financial instruments approximate fair value because of their short maturities. |
• | Variable rate mortgage notes payable and borrowings under the Revolver and Term Loans - The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value. The Company estimates the fair value of its variable rate debt by using estimated market rates for similar loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its variable rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy. |
• | Fixed rate mortgage notes payable - The fair value estimated at September 30, 2014 and December 31, 2013 of $172.5 million and $188.0 million, respectively, is calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy. The carrying value of fixed rate mortgage notes payable at September 30, 2014 and December 31, 2013 was $167.3 million and $182.7 million, respectively. |
Recurring Fair Value Measurements
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 (in thousands):
Fair Value at September 30, 2014 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Interest rate swap asset | $ | — | $ | 1,474 | $ | — | $ | 1,474 | |||||||
Interest rate swap liability | $ | — | $ | (8,761 | ) | $ | — | $ | (8,761 | ) | |||||
Total | $ | — | $ | (7,287 | ) | $ | — | $ | (7,287 | ) |
The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The Company determined that the significant inputs, such as interest yield curves and discount rates, used to value its derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.
16
As of September 30, 2014, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Non-recurring Fair Value Measurements
The following table presents the Company's fair value hierarchy for financial assets measured at fair value on a non-recurring basis as of September 30, 2014 (in thousands):
Fair Value at September 30, 2014 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Impaired hotel properties | $ | — | $ | — | $ | 5,685 | $ | 5,685 |
During the three and nine months ended September 30, 2014, the Company recorded an impairment loss of $9.2 million related to three hotels. The Company estimated the fair value of the hotels using a widely accepted revenue multiple approach with significant unobservable inputs, including revenue growth projections and prevailing market multiples, from third party sources.
9. Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code when it filed its U.S. federal tax return for its short taxable year ended December 31, 2011. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its adjusted taxable income to its shareholders, subject to certain adjustments and excluding any net capital gain. The Company’s intention is to adhere to these requirements and maintain the qualification for taxation as a REIT. As a REIT, the Company is not subject to federal corporate income tax on that portion of net income that is currently distributed to its shareholders. However, the Company’s taxable REIT subsidiaries ("TRS") will generally be subject to federal, state, and local income taxes.
17
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.
The Company had no accruals for tax uncertainties as of September 30, 2014 and December 31, 2013.
10. Commitments and Contingencies
Restricted Cash Reserves
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of FF&E) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve restricted cash ranging from 1.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. Additionally, some loan agreements require the Company to reserve restricted cash for the periodic payment of real estate taxes and insurance. As of September 30, 2014 and December 31, 2013, approximately $59.5 million and $62.4 million, respectively, was available in restricted cash reserves for future capital expenditures, real estate taxes and insurance.
Litigation
Neither the Company nor any of its subsidiaries are currently involved in any regulatory or legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.
Data Breach
During the first quarter of 2014, one of the Company's third-party hotel managers notified the Company of a data breach that occurred over a nine-month period ending in December 2013 at 14 of the hotels that it manages, including seven hotels that are owned by the Company. An analysis of the data breach revealed that hackers installed memory scraping malware on food and beverage point of sale systems that was designed to capture credit card data. During the period of the breach, it appears that information from approximately 95,000 credit cards could have been collected by the malware. The third-party hotel manager is cooperating with the relevant authorities in their investigations of this criminal cyber-attack. The Company and its third-party hotel manager are also taking steps to assess and further strengthen information security systems.
The Company believes that each of the credit card companies impacted may seek to impose fines, fees or assessments in connection with the breach against various parties, including the Company. The Company may also incur other costs, including legal fees and other professional services fees, related to investigating the breach. Because the investigation into the matter is ongoing and certain factual and legal questions remain unanswered, the Company is unable to estimate with certainty the total costs, fines, fees or assessments that may be associated with any potential claims; however, the Company currently believes that any amounts that the Company may ultimately be required to pay as a result of this incident will not be material to the results of operations.
11. Equity
On May 22, 2014, the Company issued and sold 9,200,000 common shares of beneficial interest, $0.01 par value per share, at a price per share of $26.45, for total gross proceeds of $243.3 million. The Company received aggregate net proceeds of approximately $232.8 million.
12. Equity Incentive Plan
The Company may issue equity-based awards to officers, employees, non-employee trustees and other eligible persons under the 2011 Plan. The 2011 Plan provides for a maximum of 5,000,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted share awards, unrestricted share awards, share units, dividend equivalent rights, long-term incentive units, other equity-based awards and cash bonus awards.
18
Share Awards
From time to time, the Company may award non-vested restricted shares under the 2011 Plan, as compensation to officers, employees and non-employee trustees. The shares issued to officers and employees vest over a period of time as determined by the board of trustees at the date of grant. The Company recognizes compensation expense for time-based non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.
The Company may also award unrestricted shares under the 2011 Plan as compensation to non-employee trustees that would otherwise be paid in cash for their services. The shares issued to trustees are unrestricted and include no vesting conditions. The Company recognizes compensation expense for the unrestricted shares issued in lieu of cash compensation on the date of issuance based upon the fair market value of the shares on that date.
A summary of the non-vested shares as of September 30, 2014 is as follows:
2014 | ||||||
Number of Shares | Weighted-Average Grant Date Fair Value | |||||
Unvested at January 1, | 932,800 | $ | 18.99 | |||
Granted (1) | 347,247 | 24.44 | ||||
Vested (1) | (398,599 | ) | 19.34 | |||
Forfeited | (8,716 | ) | 23.06 | |||
Unvested at September 30, | 872,732 | $ | 20.96 |
(1) | Includes 3,360 unrestricted shares issued in lieu of cash compensation to non-employee trustees at a weighted-average grant date fair value of $28.07. |
For the three and nine months ended September 30, 2014, the Company recognized approximately $2.7 million and $7.9 million, respectively, of share-based compensation expense related to restricted share awards. For the three and nine months ended September 30, 2013, the Company recognized $2.2 million and $6.3 million, respectively, of share-based compensation expense related to restricted share awards. As of September 30, 2014, there was $17.0 million of total unrecognized compensation costs related to non-vested share awards and these costs were expected to be primarily recognized over a weighted-average period of 2.3 years. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the nine months ended September 30, 2014 was approximately $11.0 million.
Performance Units
The Company awarded performance units to certain employees under the 2011 Plan. The performance units vest over a four-year period, including three years of performance-based vesting ("measurement period") plus an additional one year of time-based vesting.
As of September 30, 2014, there were 1.0 million unvested performance units with a weighted-average grant date fair value of $15.36 per performance unit.
For the three and nine months ended September 30, 2014, the Company recognized $1.1 million and $3.4 million, respectively, of share-based compensation expense related to the performance units. For the three and nine months ended September 30, 2013, the Company recognized $1.1 million and $3.4 million, respectively, of share-based compensation expense related to the performance units. As of September 30, 2014, there was $5.6 million of total unrecognized compensation cost related to the performance units and these costs are expected to be recognized over a weighted-average period of 1.3 years.
As of September 30, 2014, there were 2,739,596 common shares available for future grant under the 2011 Plan. Any performance units that convert into restricted shares will reduce the number of common shares available for future grant under the 2011 Plan.
19
13. Earnings per Common Share