RLJ Lodging Trust - FORM 10-Q

RLJ Lodging Trust - FORM 10-Q - November 4, 2014

Attached files

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

Table of Contents

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



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.

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.

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		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements.

	Consolidated Financial Statements (unaudited)
	Balance Sheets as of September 30, 2014 and December 31, 2013	1
	Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013	2
	Statements of Changes in Equity for the nine months ended September 30, 2014 and 2013	4
	Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	6
	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	37
Item 4.	Controls and Procedures.	37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings.	37
Item 1A.	Risk Factors.	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	37
Item 3.	Defaults Upon Senior Securities.	37
Item 4.	Mine Safety Disclosures.	37
Item 5.	Other Information.	37
Item 6.	Exhibits.	37

Signatures		38

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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.

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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

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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.

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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.

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	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.

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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.

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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.

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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.

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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

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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

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

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

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.

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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

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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

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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

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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

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(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.

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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.

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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.

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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.

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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.

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13. Earnings per Common Share

Basic earnings per common share is calculated by dividing income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties, 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 income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties, 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.

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating shares and are considered in the computation of earnings per share pursuant to the two-class method. If there were any undistributed earnings allocable to participating shares, they would be deducted from net income attributable to common shareholders utilized in the basic and diluted earnings per share calculations.

For the three and nine months ended September 30, 2014, zero and $39,000, respectively, represented undistributed earnings that were allocated to participating shares. For the three and nine months ended September 30, 2013, $0.1 million and $0.1 million, respectively, represented undistributed earnings that were allocated to participating shares.

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