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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
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: 000-54263
CAREY WATERMARK INVESTORS INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
26-2145060
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive offices)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
(Do not check if a smaller reporting company)

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

Registrant has 100,510,918 shares of common stock, $0.001 par value, outstanding at October 31, 2014.
 




INDEX


Forward-Looking Statements

This Quarterly Report on Form 10-Q, or the Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements as they involve known and unknown risks, uncertainties and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors which could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K/A for the year ended December 31, 2013 as filed with the SEC on March 21, 2014, or the 2013 Annual Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).



CWI 9/30/2014 10-Q 1



PART I
Item 1. Financial Statements.

CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2014
 
December 31, 2013
Assets
 
 
 
Investments in real estate:
 
 
 
   Hotels, at cost
$
1,312,177

 
$
871,682

   Accumulated depreciation
(49,982
)
 
(18,397
)
         Net investments in hotels
1,262,195

 
853,285

Equity investments in real estate
14,170

 
14,915

         Net investments in real estate
1,276,365

 
868,200

Cash
130,270

 
109,373

Intangible assets, net
41,825

 
42,795

Due from related parties and affiliates

 
12

Accounts receivable
13,498

 
8,332

Restricted cash
47,461

 
42,151

Other assets
29,968

 
12,505

Total assets
$
1,539,387

 
$
1,083,368

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Non-recourse debt
$
828,008

 
$
563,058

Accounts payable, accrued expenses and other liabilities
57,090

 
31,491

Due to related parties and affiliates
2,052

 
5,225

Distributions payable
11,803

 
9,309

Total liabilities
898,953

 
609,083

Commitments and contingencies (Note 10)


 


Equity:
 
 
 
Carey Watermark Investors Incorporated stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 300,000,000 shares authorized; 91,803,186 and
67,759,026 shares issued, respectively; and 91,491,484 and
67,703,835 shares outstanding, respectively
92

 
68

Additional paid-in capital
741,607

 
525,000

Distributions and accumulated losses
(112,402
)
 
(62,868
)
Accumulated other comprehensive income (loss)
74

 
(136
)
Less: treasury stock at cost, 311,702 and 55,191 shares, respectively
(3,000
)
 
(525
)
Total Carey Watermark Investors Incorporated stockholders’ equity
626,371

 
461,539

Noncontrolling interests
14,063

 
12,746

Total equity
640,434

 
474,285

Total liabilities and equity
$
1,539,387

 
$
1,083,368


See Notes to Consolidated Financial Statements.


CWI 9/30/2014 10-Q 2



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Hotel Revenues
 
 
 
 
 
 
 
Rooms
$
71,732

 
$
29,882

 
$
174,302

 
$
56,067

Food and beverage
17,123

 
7,597

 
47,085

 
11,480

Other hotel income
8,276

 
3,535

 
22,286

 
5,781

Total Hotel Revenues
97,131

 
41,014

 
243,673

 
73,328

Operating Expenses
 
 
 
 
 
 
 
Hotel Expenses
 
 
 
 
 
 
 
Rooms
17,578

 
6,680

 
46,063

 
12,665

Food and beverage
13,065

 
5,593

 
35,272

 
8,470

Other hotel operating expenses
4,580

 
2,016

 
12,273

 
3,093

Sales and marketing
8,922

 
3,592

 
21,838

 
7,058

General and administrative
7,312

 
3,219

 
19,217

 
5,941

Property taxes, insurance and rent
7,203

 
1,974

 
17,609

 
3,630

Repairs and maintenance
3,338

 
1,409

 
8,862

 
2,664

Utilities
2,914

 
1,399

 
7,431

 
2,538

Management fees
2,309

 
796

 
5,550

 
1,506

Depreciation and amortization
12,721

 
5,376

 
32,207

 
10,155

Total Hotel Expenses
79,942

 
32,054

 
206,322

 
57,720

 
 
 
 
 
 
 
 
Other Operating Expenses
 
 
 
 
 
 
 
Acquisition-related expenses
1,477

 
5,384

 
16,854

 
17,250

Corporate general and administrative expenses
2,547

 
1,619

 
8,062

 
3,989

Asset management fees to affiliate and other
1,912

 
833

 
4,931

 
1,783

Total Other Operating Expenses
5,936

 
7,836

 
29,847

 
23,022

Operating Income (Loss)
11,253

 
1,124

 
7,504

 
(7,414
)
Other Income and (Expenses)
 
 
 
 
 
 
 
Interest expense
(9,951
)
 
(4,356
)
 
(25,248
)
 
(8,192
)
Net (loss) income from equity investments in real estate
(858
)
 
117

 
(460
)
 
599

Interest income
10

 
1

 
36

 
2

 
(10,799
)
 
(4,238
)
 
(25,672
)
 
(7,591
)
Income (Loss) from Operations Before Income Taxes
454

 
(3,114
)
 
(18,168
)
 
(15,005
)
Provision for income taxes
(918
)
 
(392
)
 
(3,019
)
 
(939
)
Net Loss
(464
)
 
(3,506
)
 
(21,187
)
 
(15,944
)
Loss attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $1,193, $0, $2,247, and $0, respectively)
3,294

 
451

 
3,318

 
529

Net Income (Loss) Attributable to CWI Stockholders
$
2,830

 
$
(3,055
)
 
$
(17,869
)
 
$
(15,415
)
Basic and Diluted Income (Loss) Per Share
$
0.03

 
$
(0.05
)
 
$
(0.23
)
 
$
(0.36
)
Basic and Diluted Weighted-Average Shares Outstanding
86,081,584

 
59,342,524

 
76,978,784

 
42,300,081

 
 
 
 
 
 
 
 
Distributions Declared Per Share
$
0.1375

 
$
0.1500

 
$
0.4125

 
$
0.4500


See Notes to Consolidated Financial Statements.


CWI 9/30/2014 10-Q 3



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net Loss
$
(464
)
 
$
(3,506
)
 
$
(21,187
)
 
$
(15,944
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications — unrealized gain (loss) on derivative instruments
592

 
(1,925
)
 
(1,637
)
 
(962
)
Amounts reclassified from accumulated other comprehensive (loss) income to interest expense — unrealized loss on derivative instruments
418

 
272

 
1,244

 
490

Amounts reclassified from accumulated other comprehensive (loss) income to net (loss) income from equity investments — unrealized loss on derivative instruments
136

 
48

 
403

 
48

Comprehensive Income (Loss)
682

 
(5,111
)
 
(21,177
)
 
(16,368
)
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net loss
3,294

 
451

 
3,318

 
529

Change in unrealized (gain) loss on derivative instruments
(328
)
 
139

 
200

 
139

Comprehensive loss attributable to noncontrolling interests
2,966

 
590

 
3,518

 
668

Comprehensive Income (Loss) Attributable to CWI Stockholders
$
3,648

 
$
(4,521
)
 
$
(17,659
)
 
$
(15,700
)

See Notes to Consolidated Financial Statements.


CWI 9/30/2014 10-Q 4



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 2014 and Year Ended December 31, 2013
(in thousands, except share and per share amounts)
 
CWI Stockholders
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Distributions
and Accumulated
Losses
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Treasury
Stock
 
Total CWI
Stockholders
 
Noncontrolling
Interests
 
Total
Balance at January 1, 2013
16,299,940

 
$
16

 
$
142,645

 
$
(9,166
)

$
(299
)
 
$
(331
)
 
$
132,865

 
$
517

 
$
133,382

Net loss
 
 
 
 
 
 
(31,906
)
 
 
 
 
 
(31,906
)
 
1,507

 
(30,399
)
Shares issued, net of offering costs
42,696,113

 
43

 
379,678

 
 
 
 
 
 
 
379,721

 
 
 
379,721

Shares issued to affiliates
251,071

 
1

 
2,510

 
 
 
 
 
 
 
2,511

 
 
 
2,511

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
12,917

 
12,917

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(2,067
)
 
(2,067
)
Shares issued under share incentive plans
9,841

 

 
127

 
 
 
 
 
 
 
127

 
 
 
127

Stock-based compensation to directors
4,000

 

 
40

 
 
 
 
 
 
 
40

 
 
 
40

Stock dividends issued ($0.2125 per share) (a) (b)
8,463,537

 
8

 

 
 
 
 
 
 
 
8

 
 
 
8

Distributions declared ($0.5875 per share)
 
 
 
 
 
 
(21,796
)
 
 
 
 
 
(21,796
)
 
 
 
(21,796
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

   Change in net unrealized gain (loss) on derivative instruments
 
 
 
 
 
 
 
 
163

 
 
 
163

 
(128
)
 
35

Repurchase of shares
(20,667
)
 
 
 
 
 
 
 
 
 
(194
)
 
(194
)
 
 
 
(194
)
Balance at December 31, 2013
67,703,835

 
68

 
525,000

 
(62,868
)
 
(136
)
 
(525
)
 
461,539

 
12,746

 
474,285

Net loss
 
 
 
 
 
 
(17,869
)
 
 
 
 
 
(17,869
)
 
(3,318
)
 
(21,187
)
Shares issued, net of offering costs
23,364,851

 
23

 
209,740

 
 
 
 
 
 
 
209,763

 
 
 
209,763

Shares issued to affiliates
652,647

 
1

 
6,526

 
 
 
 
 
 
 
6,527

 
 
 
6,527

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
7,886

 
7,886

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(3,051
)
 
(3,051
)
Shares issued under share incentive plans
8,662

 

 
161

 
 
 
 
 
 
 
161

 
 
 
161

Stock-based compensation to directors
18,000

 

 
180

 
 
 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.4125 per share)

 

 

 
(31,665
)
 
 
 
 
 
(31,665
)
 
 
 
(31,665
)
Other comprehensive income:

 
 
 
 
 
 
 
 
 
 
 

 
 
 

   Change in net unrealized gain (loss) on derivative instruments

 
 
 
 
 
 
 
210

 
 
 
210

 
(200
)
 
10

Repurchase of shares
(256,511
)
 
 
 
 
 
 
 
 
 
(2,475
)
 
(2,475
)
 
 
 
(2,475
)
Balance at September 30, 2014
91,491,484

 
$
92

 
$
741,607

 
$
(112,402
)
 
$
74

 
$
(3,000
)
 
$
626,371

 
$
14,063

 
$
640,434

___________
(a)
Inclusive of 34,270 shares related to the stock distribution declared in the fourth quarter of 2012 and reflected as issued in the first quarter of 2013.
(b)
Inclusive of a special stock dividend equivalent to $0.1375 per share issued during the fourth quarter of 2013.

See Notes to Consolidated Financial Statements.


CWI 9/30/2014 10-Q 5



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013 (a)
Cash Flows — Operating Activities
 
 
 
Net loss
$
(21,187
)
 
$
(15,944
)
Adjustments to net loss:
 
 
 
Depreciation and amortization
32,207

 
10,155

Asset management fees and reimbursable costs to affiliates settled in shares
7,517

 
1,783

(Decrease) increase in due to related parties and affiliates
(4,312
)
 
1,382

Straight-line rent adjustments
2,853

 

Amortization of deferred financing costs, ground lease intangible and other
1,549

 
557

Loss from equity investments in real estate in excess of distributions received
460

 
741

Amortization of share incentive plans
341

 
126

Net changes in other operating assets and liabilities
3,719

 
3,622

Net Cash Provided by Operating Activities
23,147

 
2,422

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Acquisition of hotels
(415,278
)
 
(482,743
)
Funds placed in escrow
(46,523
)
 
(19,386
)
Funds released from escrow
43,718

 
11,077

Capital expenditures
(17,752
)
 
(9,060
)
Deposits for hotel investments
(15,149
)
 
(10,623
)
Deposits released for hotel investments
8,230

 
8,503

Distributions received from equity investments in excess of equity income
298

 
28,221

Net Cash Used in Investing Activities
(442,456
)
 
(474,011
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Proceeds from mortgage financing
266,548

 
305,241

Proceeds from issuance of shares, net of offering costs
206,068

 
376,431

Distributions paid
(29,171
)
 
(7,900
)
Proceeds from note payable to affiliate
11,000

 

Repayment of note payable to affiliate
(11,000
)
 

Contributions from noncontrolling interest
7,886

 
12,892

Distributions to noncontrolling interests
(3,051
)
 

Purchase of treasury stock
(2,475
)
 
(184
)
Deferred financing costs
(2,089
)
 
(3,363
)
Deposits for mortgage financing
(1,867
)
 
(576
)
Repayment of mortgage financing
(1,664
)
 
(324
)
Deposits released for mortgage financing
183

 

Purchase of interest rate cap
(113
)
 

Withholding on restricted stock units
(49
)
 
(46
)
Net Cash Provided by Financing Activities
440,206

 
682,171

 
 
 
 
Change in Cash During the Period
 
 
 
Net increase in cash
20,897

 
210,582

Cash, beginning of period
109,373

 
30,729

Cash, end of period
$
130,270

 
$
241,311

___________
(a)
Reflects a revised cash flow statement for the nine months ended September 30, 2013, as further discussed in Note 2.

See Notes to Consolidated Financial Statements.



CWI 9/30/2014 10-Q 6



CAREY WATERMARK INVESTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business

Organization

Carey Watermark Investors Incorporated, or CWI, and, together with its consolidated subsidiaries, we, us, or our, is a publicly-owned, non-listed real estate investment trust, or REIT, formed as a Maryland corporation in March 2008 for the purpose of acquiring, owning, disposing of and, through our advisor, managing and seeking to enhance the value of interests in lodging and lodging-related properties primarily in the United States, or U.S. We conduct substantially all of our investment activities and own all of our assets through CWI OP, LP, or our Operating Partnership. We are a general partner and a limited partner and own a 99.985% capital interest in the Operating Partnership. Carey Watermark Holdings, LLC, or Carey Watermark Holdings, which is owned indirectly by both W. P. Carey Inc., or WPC, and Watermark Capital Partners, LLC, or Watermark Capital Partners, holds a special general partner interest in the Operating Partnership.

We are managed by our advisor, Carey Lodging Advisors, LLC, an indirect subsidiary of WPC. Our advisor manages our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. Our subadvisor, CWA, LLC, a subsidiary of Watermark Capital Partners, provides services to the advisor primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that manage the day-to-day operations of our hotels. In addition, the subadvisor provides us with the services of our chief executive officer during the term of the subadvisory agreement, subject to the approval of our independent directors.

We held ownership interests in 23 hotels at September 30, 2014. See Note 4 for a complete listing of the hotels that we consolidate, or our Consolidated Hotels, and Note 5 for a complete listing of the hotels that we record as equity investments, or our Unconsolidated Hotels, at September 30, 2014.

Public Offerings

We raised $586.2 million in our initial public offering, which closed in September 2013. The proceeds from our initial public offering were fully invested by the end of the second quarter of 2014.

On October 25, 2013, we filed a registration statement on Form S-11 (File No. 333-191913) with the SEC for a continuous public offering of up to an additional $350.0 million of our common stock at $10.00 per share, which was declared effective by the SEC on December 20, 2013. The registration statement also covered the offering of up to $300.0 million of our common stock at $9.50 per share pursuant to our distribution reinvestment plan, or DRIP. We refer to this continuous public offering as the “follow-on offering.” We began selling shares in our follow-on offering in January 2014 and have raised $214.4 million through September 30, 2014. The gross offering proceeds raised exclude reinvested distributions through the DRIP of $17.7 million. We currently intend to close the follow-on offering on or about December 19, 2014 and in order to facilitate the final sales of shares, we have reallocated $200.0 million of the shares previously reserved for our DRIP to our follow-on offering. We intend to continue to invest the proceeds from our follow-on offering in lodging and lodging-related properties.

Note 2. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the U.S., or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2013, which are included in our 2013 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.


CWI 9/30/2014 10-Q 7


Notes to Consolidated Financial Statements (Unaudited)


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

For purposes of determining the weighted-average number of shares of common stock outstanding, amounts for the three and nine months ended September 30, 2013 have been adjusted to treat stock distributions declared and effective through the date of filing, including a special stock dividend declared on December 19, 2013, as if they were outstanding as of January 1, 2013. No adjustment is required for the three or nine months ended September 30, 2014 as no stock distributions were declared either during the three or nine months ended September 30, 2014 or subsequent to that date through our filing date.

Reclassifications 

Certain prior period amounts within operating cash flow and the consolidated statements of operations have been reclassified to conform to the current period presentation. These reclassifications had no impact on net loss for the periods presented.

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portion of equity in a consolidated subsidiary that is not attributable, directly or indirectly, to us is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it is a variable interest entity, or VIE, and, if so, whether we are deemed to be the primary beneficiary and are therefore required to consolidate the entity. We performed an analysis of all of our subsidiary entities to determine whether they qualify as VIEs and whether they should be consolidated or accounted for as equity investments in an unconsolidated venture. As a result of our assessment, we have concluded that none of our subsidiaries qualified as a VIE. All our subsidiaries are either consolidated or accounted for as equity investments under the voting interest entity model.

We account for the capital interest held by Carey Watermark Holdings in the Operating Partnership as a noncontrolling interest. Based on the terms of the Operating Partnership agreement and that the initial investors are not yet earning their minimal return, the noncontrolling interest representing Carey Watermark Holding’s interest in the Operating Partnership has absorbed the operating losses to the extent of its original investment, and accordingly, no losses were allocated to Carey Watermark Holdings during the nine months ended September 30, 2014 or 2013.

Revision of Previously Issued Financial Statements

Following the issuance of our consolidated financial statements for the year ended December 31, 2013, we identified an error in the cash flow statement affecting how we presented cash flows provided by or used in operating, investing and financing activities for the periods shown below. This error was the result of treating deposits on hotel acquisitions and loan commitments as a reduction in operating cash flow during the periods in which the deposits were made instead of as investing and financing cash flows, respectively.

We assessed the materiality of the error described above on prior periods’ financial statements in accordance with Accounting Standards Codification 250 and the SEC’s Staff Accounting Bulletin No. 99, “Materiality,” and concluded that the impact of the error was not material to any previously issued financial statements. We have properly reflected the correction below in this Report. In addition, we have added supplemental disclosure of this non-cash financing activity. The error impacted the presentation of cash flow (used in) provided by operating activities, net cash used in investing activities and net cash provided by financing activities, and did not affect our consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive loss, consolidated statements of equity or cash balances for any reporting periods.

(in thousands)
 
Net Cash (Used in) Provided by
Operating Activities
 
Net Cash Used in
Investing Activities
 
Net Cash Provided by
Financing Activities
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
 
As Reported
 
Adjustment
 
As Revised
Nine Months Ended 
 September 30, 2013
$
(274
)
 
$
2,696

 
$
2,422

 
$
(471,891
)
 
$
(2,120
)
 
$
(474,011
)
 
$
682,747

 
$
(576
)
 
$
682,171



CWI 9/30/2014 10-Q 8


Notes to Consolidated Financial Statements (Unaudited)


Recent Accounting Requirements

The following Accounting Standards Updates, or ASUs, promulgated by the Financial Accounting Standards Board are applicable to us:

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Additionally, this guidance modifies disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective beginning in 2017, and early adoption is not permitted. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360). ASU 2014-08 changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business. Under this new guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a “strategic shift that has or will have a major effect on an entity’s operations and financial results.” The new guidance also requires disclosures including pre-tax profit or loss and significant gains or losses arising from dispositions that represent an “individually significant component of an entity,” but do not meet the criteria to be reported as discontinued operations under ASU 2014-08. In the ordinary course of business we may sell properties, which, under prior accounting guidance, would have been reported each as discontinued operations; however, under ASU 2014-08 such property dispositions typically would not meet the criteria to be reported as discontinued operations. We elected to early adopt ASU 2014-08 prospectively for any dispositions after December 31, 2013. Consequently, individually significant operations that are sold or classified as held-for-sale during 2014 will not be reclassified to discontinued operations in the consolidated financial statements, but will be disclosed in the Notes to the consolidated financial statements. This ASU did not have any impact on our financial position or results of operations for any of the periods presented.

Note 3. Agreements and Transactions with Related Parties

Agreements with the Advisor and Affiliates

We have an advisory agreement with the advisor to perform certain services for us under a fee arrangement, including managing our overall business, the identification, evaluation, negotiation, purchase and disposition of lodging-related properties and the performance of certain administrative duties. The agreement that is currently in effect is scheduled to expire on September 30, 2015, unless renewed pursuant to its terms. The advisor has entered into a subadvisory agreement with the subadvisor, whereby the advisor pays 20% of the fees earned under the advisory agreement to the subadvisor and the subadvisor provides certain personnel services to us.



CWI 9/30/2014 10-Q 9


Notes to Consolidated Financial Statements (Unaudited)

The following tables present a summary of fees we paid and expenses we reimbursed to the advisor, subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Acquisition fees
$

 
$
4,072

 
$
10,749

 
$
12,427

Asset management fees
1,906

 
833

 
4,905

 
1,783

Personnel and overhead reimbursements
1,240

 
342

 
3,828

 
974

Available Cash Distribution
1,193

 

 
2,247

 

Interest expense
8

 

 
10

 

 
$
4,347

 
$
5,247

 
$
21,739

 
$
15,184

 
 
 
 
 
 
 
 
Other Transaction Fees Incurred
 
 
 
 
 
 
 
Selling commissions and dealer manager fees
$
10,012

 
$
20,139

 
$
20,857

 
$
40,444

Offering costs
488

 
2,080

 
2,805

 
6,247

 
$
10,500

 
$
22,219

 
$
23,662

 
$
46,691

 
September 30, 2014
 
December 31, 2013
Amounts Due to Related Parties and Affiliates
 
 
 
Organization and offering costs due (from) to the advisor
$
(22
)
 
$
62

Reimbursable costs
890

 
270

Other amounts due to the advisor
635

 
4,563

Due to joint venture partners
304

 
330

Due to Carey Financial
245

 

 
$
2,052

 
$
5,225


Acquisition Fees

The advisor receives acquisition fees of 2.5% of the total investment cost of the properties acquired, including on our proportionate share of equity method investments, and loans originated by us, not to exceed 6% of the aggregate contract purchase price of all investments and loans. We expense acquisition-related costs and fees on acquisitions deemed to be business combinations and capitalize those costs on acquisitions of equity method investments.

Asset Management Fees, Dispositions Fees and Loan Refinancing Fees

We pay the advisor an annual asset management fee equal to 0.50% of the aggregate Average Market Value of our Investments, both as defined in our advisory agreement with the advisor. The advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property as well as a loan refinancing fee of up to 1% of a refinanced loan, if certain conditions described in the advisory agreement are met. If the advisor elects to receive all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our offering price of $10.00 per share. We paid all asset management fees for the three and nine months ended September 30, 2014 and 2013 in shares of our common stock rather than in cash at the election of the advisor. For the nine months ended September 30, 2014, $4.7 million in asset management fees were settled in shares. At September 30, 2014, the advisor owned 1,017,067 shares (1.1%) of our outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other in the consolidated financial statements.

Personnel and Overhead Reimbursements

Pursuant to the subadvisory agreement, we reimburse the advisor, which subsequently reimburses the subadvisor, for personnel costs and other charges. We also grant restricted stock units to employees of the subadvisor pursuant to our 2010 Equity Incentive Plan. The subadvisor provides us with the services of Michael G. Medzigian, our chief executive officer, during the term of the subadvisory agreement, subject to the approval of our board of directors. Additionally, commencing in the first quarter of 2014, pursuant to the advisory agreement, we began reimbursing the advisor for the actual cost of personnel allocable


CWI 9/30/2014 10-Q 10


Notes to Consolidated Financial Statements (Unaudited)

to their time devoted to providing administrative services to us, which totaled $0.8 million and $2.4 million, respectively, for the three and nine months ended September 30, 2014, as well as rent expense that totaled less than $0.1 million and $0.3 million, respectively. Prior to the first quarter of 2014, the advisor had voluntarily foregone the reimbursement of these expenses, to which it was entitled under the advisory agreement. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements and, with the approval of the independent members of our board of directors, are being settled in shares of our common stock at the election of the advisor. For the nine months ended September 30, 2014, $1.8 million of such fees were settled in shares.

Available Cash Distributions

Carey Watermark Holdings’ special general partner interest entitles it to receive distributions of 10% of Available Cash, as defined in the agreement of limited partnership of the Operating Partnership, or Available Cash Distributions, generated by the Operating Partnership, subject to certain limitations. In addition, in the event of the dissolution of the Operating Partnership, Carey Watermark Holdings will be entitled to receive distributions of up to 15% of net proceeds, provided certain return thresholds are met for the initial investors in the Operating Partnership. Available Cash Distributions by the Operating Partnership aggregated $1.2 million and $2.2 million during the three and nine months ended September 30, 2014 and is included in Loss attributable to noncontrolling interests in the consolidated financial statements.

Selling Commissions and Dealer Manager Fees

We have a dealer manager agreement with Carey Financial, LLC, or Carey Financial, whereby Carey Financial receives a selling commission of up to $0.70 per share sold and a dealer manager fee of up to $0.30 per share sold, a portion of which may be re-allowed to selected broker dealers. These amounts are recorded in Additional paid-in capital in the consolidated financial statements.

Organization and Offering Costs

Pursuant to our advisory agreement with the advisor, we are liable for certain expenses related to our public offerings, which include filing, legal, accounting, printing, advertising, transfer agent, and escrow fees and are to be deducted from the gross proceeds of the offering. We will reimburse Carey Financial or selected dealers for reasonable bona fide due diligence expenses incurred that are supported by a detailed and itemized invoice. The total underwriting compensation to Carey Financial and selected dealers in connection with the offerings cannot exceed limitations prescribed by the Financial Industry Regulatory Authority, Inc. The advisor agreed to be responsible for the repayment of organization and offering expenses (excluding selling commissions and dealer manager fees paid to Carey Financial and selected dealers and fees paid and expenses reimbursed to selected dealers) that exceed in the aggregate 2% of the gross proceeds from the initial public offering and 4% of the gross proceeds from the follow-on offering.

Through September 30, 2014, the advisor incurred organization and offering costs on our behalf related to our follow-on offering of approximately $2.8 million, all of which we were obligated to pay and have been reimbursed as of September 30, 2014. During the nine months ended September 30, 2014, we charged $1.4 million of deferred offering costs to stockholder’s equity.

Other Amounts Due to the Advisor

At September 30, 2014, the balance primarily represented asset management fees payable. At December 31, 2013, this balance primarily represented acquisition fees of $4.1 million payable to the advisor related to the Renaissance Chicago Downtown hotel acquired on December 20, 2013, which was paid in the first quarter of 2014.

Due to Joint Venture Partners

This balance is primarily comprised of amounts due from consolidated joint ventures to our joint venture partners related to hotel operating expenses paid by hotel managers that are affiliates of our joint venture partners, which will be reimbursed.

Other Transactions with Affiliates

In January 2013, our board of directors and the board of directors of WPC approved unsecured loans to us of up to $50.0 million in the aggregate, at a rate equal to the rate at which WPC is able to borrow funds under its senior unsecured credit facility, for the purpose of facilitating acquisitions approved by our investment committee. Any such loans may be made solely


CWI 9/30/2014 10-Q 11


Notes to Consolidated Financial Statements (Unaudited)

at the discretion of WPC’s management. On June 25, 2014, we obtained a loan from WPC to fund, in part, our acquisition of the Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center. The loan was for $11.0 million at a rate of 1.25% with a maturity date of June 30, 2015. The loan was repaid in full with interest on July 22, 2014. In September 2014, both our board of directors and the board of directors of WPC approved an increase in the aggregate available loan amount to $75.0 million.

Note 4. Net Investments in Hotels

Net investments in hotels is summarized as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
Buildings
$
1,042,327

 
$
685,108

Land
168,922

 
124,450

Furniture, fixtures and equipment
73,207

 
46,757

Building and site improvements
16,063

 
11,993

Construction in progress
11,658

 
3,374

Hotels, at cost
1,312,177

 
871,682

Less: Accumulated depreciation
(49,982
)
 
(18,397
)
Net investments in hotels
$
1,262,195

 
$
853,285




CWI 9/30/2014 10-Q 12


Notes to Consolidated Financial Statements (Unaudited)

Summarized Acquisition Data

The following table sets forth acquisition data for our Consolidated Hotels and therefore excludes subsequent improvements and capitalized costs. Amounts for our initial investment represent the fair value of net assets acquired less the fair value of noncontrolling interests, exclusive of acquisition expenses and the fair value of any debt assumed, at time of acquisition.

(Dollars in thousands)
Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Our
Initial
Investment
 
Acquisition Date
 
Hotel Type
 
Renovation
Status at
September 30, 2014
Consolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hampton Inn Boston Braintree (a)
 
Massachusetts
 
103

 
100
%
 
$
12,500

 
5/31/2012
 
Select-service
 
Completed
Hilton Garden Inn New Orleans French Quarter/CBD (a)
 
Louisiana
 
155

 
88
%
 
16,176

 
6/8/2012
 
Select-service
 
Completed
Lake Arrowhead Resort and Spa (a)
 
California
 
173

 
97
%
 
24,039

 
7/9/2012
 
Resort
 
Completed
Courtyard San Diego Mission Valley (a)
 
California
 
317

 
100
%
 
85,000

 
12/6/2012
 
Select-service
 
Planned future
Hampton Inn Atlanta Downtown (b)
 
Georgia
 
119

 
100
%
 
18,000

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Frisco Legacy Park (b)
 
Texas
 
105

 
100
%
 
16,100

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Memphis Beale Street (b)
 
Tennessee
 
144

 
100
%
 
30,000

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Birmingham Colonnade (b)
 
Alabama
 
133

 
100
%
 
15,500

 
2/14/2013
 
Select-service
 
Completed
Hilton Garden Inn Baton Rouge
Airport (b)
 
Louisiana
 
131

 
100
%
 
15,000

 
2/14/2013
 
Select-service
 
Completed
Courtyard Pittsburgh Shadyside (b)
 
Pennsylvania
 
132

 
100
%
 
29,900

 
3/12/2013
 
Select-service
 
Completed
Hutton Hotel Nashville (b)
 
Tennessee
 
247

 
100
%
 
73,600

 
5/29/2013
 
Full-service
 
None planned
Holiday Inn Manhattan 6th Avenue Chelsea (b)
 
New York
 
226

 
100
%
 
113,000

 
6/6/2013
 
Full-service
 
Completed
Fairmont Sonoma Mission Inn & Spa (b)
 
California
 
226

 
75
%
 
76,647

 
7/10/2013
 
Resort
 
Planned future
Marriott Raleigh City Center (b)
 
North Carolina
 
400

 
100
%
 
82,193

 
8/13/2013
 
Full-service
 
In progress
Hawks Cay Resort (b) (c)
 
Florida
 
429

 
100
%
 
131,301

 
10/23/2013
 
Resort
 
In progress
Renaissance Chicago Downtown (b)
 
Illinois
 
553

 
100
%
 
134,939

 
12/20/2013
 
Full-service
 
In progress
Hyatt Place Austin Downtown (b) (d)
 
Texas
 
296

 
100
%
 
86,673

 
4/1/2014
 
Select-service
 
None planned
Courtyard Times Square West (b) (d)
 
New York
 
224

 
100
%
 
87,443

 
5/27/2014
 
Select-service
 
None planned
Sheraton Austin Hotel at the Capitol (b) (d)
 
Texas
 
363

 
80
%
 
90,220

 
5/28/2014
 
Full-service
 
Planned future
Marriott Boca Raton at Boca Center (b) (d)
 
Florida
 
256

 
100
%
 
61,794

 
6/12/2014
 
Full-service
 
Planned future
Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center (b) (d)
 
Colorado
 
302

 
100
%
 
81,262

 
6/25/2014
 
Select-service
 
None planned
 
 
 
 
5,034

 
 
 
$
1,281,287

 
 
 
 
 
 
_________
(a)
These hotels were acquired prior to January 1, 2013 and are referred to, collectively, as our Same Store Hotels.
(b)
These hotels were acquired subsequent to December 31, 2012 and are referred to, collectively, as our Recently Acquired Hotels.
(c)
Includes 252 two-, three-, and four-bedroom privately-owned villas that participate in the resort residential management program at this hotel, or the Villa Rental Program.
(d)
These hotels were acquired during the nine months ended September 30, 2014 and are referred to, collectively, as our 2014 Acquisitions.



CWI 9/30/2014 10-Q 13


Notes to Consolidated Financial Statements (Unaudited)

2014 Acquisitions

During the nine months ended September 30, 2014, we acquired five hotels with real estate and other hotel assets, net of assumed liabilities and inclusive of contributions from noncontrolling interests totaling $415.3 million. In connection with these acquisitions, we expensed acquisition costs of $15.4 million, including acquisition fees of $10.8 million paid to the advisor. See Note 9 for information about mortgage financing obtained in connection with these acquisitions and Note 10 for information about planned renovations on these hotels, as applicable.

The following tables present a summary of assets acquired and liabilities assumed in these business combinations, each at the date of acquisition, and revenues and earnings to the Company thereon, since their respective dates of acquisition through September 30, 2014 (in thousands):
 
2014 Acquisitions
 
Hyatt Place Austin Downtown
 
Courtyard Times Square West
 
Sheraton Austin Hotel at the Capitol
 
Marriott Boca Raton at Boca Center
 
Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center
Cash consideration
$
86,673

 
$
87,443

 
$
90,220

 
$
61,794

 
$
81,262

Assets acquired at fair value:
 
 
 
 
 
 
 
 
 
Land
$
9,100

 
$

 
$
18,210

 
$
11,500

 
$
5,663

Building
73,700

 
87,437

 
78,703

 
46,149

 
71,598

Furniture, fixtures and equipment
4,187

 
3,968

 
1,983

 
4,237

 
4,228

Accounts receivable
98

 

 
92

 
55

 

Other assets
179

 
368

 
373

 
295

 
362

Liabilities assumed at fair value:
 
 
 
 
 
 
 
 
 
Accounts payable, accrued expenses and other liabilities
(591
)
 
(4,330
)
 
(1,255
)
 
(442
)
 
(589
)
Contributions from noncontrolling interests at fair value

 

 
(7,886
)
 

 

Net assets acquired at fair value
$
86,673

 
$
87,443

 
$
90,220

 
$
61,794

 
$
81,262

 
For the Period from
 
April 1, 2014
through
September 30, 2014
 
May 27, 2014
through
September 30, 2014
 
May 28, 2014
through
September 30, 2014
 
June 12, 2013
through
September 30, 2014
 
June 25, 2014 through
September 30, 2014
Revenues
$
9,337

 
$
6,909

 
$
8,106

 
$
3,462

 
$
4,728

Net income (loss)
$
2,618

 
$
594

 
$
1,504

 
$
(72
)
 
$
1,464


Asset Retirement Obligation

We have recorded an asset retirement obligation for the removal of asbestos and environmental waste in connection with one of our hotels. We estimated the fair value of the asset retirement obligation based on the estimated economic life of the hotel and the estimated removal costs. The liability was discounted using the weighted-average interest rate on the associated fixed-rate mortgage loan at the time the liability was incurred. At September 30, 2014 and December 31, 2013, our asset retirement obligation was $0.5 million and $0.4 million, respectively, and is included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.



CWI 9/30/2014 10-Q 14


Notes to Consolidated Financial Statements (Unaudited)

Pro Forma Financial Information

The following unaudited consolidated pro forma financial information presents our financial results as if our 2014 Hotel Acquisitions, and the new financings related to these acquisitions, had occurred on January 1, 2013. These transactions were accounted for as business combinations. The pro forma financial information is not necessarily indicative of what the actual results would have been had the acquisitions actually occurred on January 1, 2013, nor does it purport to represent the results of operations for future periods.

(Dollars in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Pro forma total revenues
$
97,131

 
$
63,016

 
$
281,829

 
$
168,638

 
 
 
 
 
 
 
 
Pro forma net (loss) income
$
(464
)
 
$
1,228

 
$
(2,629
)
 
$
(15,086
)
Pro forma loss (income) from continuing operations attributable to noncontrolling interests
3,294

 
(976
)
 
2,721

 
2,128

Pro forma income (loss) from continuing operations attributable to CWI stockholders
$
2,830

 
$
252

 
$
92

 
$
(12,958
)
Pro forma income (loss) per share:
 
 
 
 
 
 
 
Net income (loss) attributable to CWI stockholders
$
0.03

 
$

 
$

 
$
(0.22
)
Pro forma weighted-average shares outstanding (a)
86,081,584

 
70,848,034

 
87,457,096

 
59,300,854

___________
(a)
The pro forma weighted-average shares outstanding were determined as if the number of shares issued in our public offering in order to raise the funds used for our 2014 and 2013 acquisitions were issued on January 1, 2013 and January 1, 2012, respectively. All acquisition costs for our acquisitions completed during the nine months ended September 30, 2014 and 2013 are presented as if they were incurred on January 1, 2013 and 2012, respectively.

Construction in Progress

At September 30, 2014 and December 31, 2013, construction in progress was $11.7 million and $3.4 million, recorded at cost, respectively, and related primarily to renovations at Renaissance Chicago Downtown, Hawks Cay Resort and Marriott Raleigh City Center at September 30, 2014 and Courtyard Pittsburgh Shadyside and Hampton Inn Memphis Beale Street at December 31, 2013 (Note 10). We capitalize interest expense and certain other costs, such as property taxes, property insurance and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.2 million and $0.1 million during the three months ended September 30, 2014 and 2013, respectively, and $0.3 million during each of the nine months ended September 30, 2014 and 2013.

At September 30, 2014 and December 31, 2013, accrued capital expenditures of $4.8 million and $2.5 million, respectively, were included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.

Note 5. Equity Investments in Real Estate

At September 30, 2014, together with unrelated third parties, we owned equity interests in two Unconsolidated Hotels. We do not control the ventures that own these hotels, but we exercise significant influence over them. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to the advisor that we incur and other-than-temporary impairment charges, if any).

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate to use if the venture’s capital structure gives different rights and priorities to its investors. We have priority returns on our equity method investments. Therefore, we follow the hypothetical liquidation at book value method in determining our share of the ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments are recognized in accordance with each


CWI 9/30/2014 10-Q 15


Notes to Consolidated Financial Statements (Unaudited)

respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period.

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):
Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Our Initial
Investment (a)
 
Acquisition Date
 
Hotel Type
 
Renovation
Status at
September 30, 2014
 
Carrying Value at
 
 
 
 
 
 
 
 
September 30, 2014
 
December 31, 2013
Unconsolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt French Quarter Venture (b) (c)
 
Louisiana
 
254

 
80
%
 
$
13,000

 
9/6/11
 
Full-service
 
Completed
 
$
4,553

 
$
4,395

Westin Atlanta
Venture (d)
 
Georgia
 
372

 
57
%
 
13,170

 
10/3/12
 
Full-service
 
Completed
 
9,617

 
10,520

 
 
 
 
626

 
 
 
$
26,170

 
 
 
 
 
 
 
$
14,170

 
$
14,915

___________
(a)
This amount represents purchase price plus capitalized costs, inclusive of fees paid to the advisor, at the time of acquisition.
(b)
The decrease from our initial investment as compared to our carrying value at September 30, 2014 was primarily a result of our receipt of a distribution totaling $6.2 million representing a return of capital for our share of mortgage refinancing proceeds during the third quarter of 2013.
(c)
We received cash distributions of $0.3 million from this investment during the nine months ended September 30, 2014.
(d)
We received cash distributions of less than $0.1 million from this investment during the nine months ended September 30, 2014.

The following table sets forth our share of equity (loss) earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model as well as certain depreciation and amortization adjustments related to basis differentials from acquisitions of certain investments (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Venture
 
2014
 
2013
 
2014
 
2013
Long Beach Venture (a)
 
$

 
$
1,928

 
$

 
$
2,601

Hyatt French Quarter Venture
 
(529
)
 
(1,524
)
 
401

 
(1,006
)
Westin Atlanta Venture
 
(329
)
 
(287
)
 
(861
)
 
(996
)
 
 
$
(858
)
 
$
117

 
$
(460
)
 
$
599

___________
(a)
We sold our 49% interest in the Long Beach Venture in July 2013. Both the three and nine months ended September 30, 2013 include the gain on the sale of our investment, which was $1.8 million.

No other-than-temporary impairment charges were recognized during either the three or nine months ended September 30, 2014 or 2013.



CWI 9/30/2014 10-Q 16


Notes to Consolidated Financial Statements (Unaudited)

Note 6. Intangible Assets and Liability

In connection with our investment activity during the nine months ended September 30, 2014, we recorded an above-market hotel ground lease for $2.1 million with a weighted-average life of 85 years.

Intangible assets and liabilities, included in Intangible assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are summarized as follows (dollars in thousands):
 
 
 
September 30, 2014
 
December 31, 2013
 
Amortization Period (years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Amortizable Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Villa Rental Program
45
 
$
31,700

 
$
(660
)
 
$
31,040

 
$
31,700

 
$
(133
)
 
$
31,567

Below-market hotel ground leases
10 92.5
 
9,446

 
(389
)
 
9,057

 
9,446

 
(52
)
 
9,394

Below-market hotel parking garage lease
92.5
 
1,490

 
(19
)
 
1,471

 
1,490

 
(7
)
 
1,483

In-place leases
1 – 21
 
398

 
(141
)
 
257

 
398

 
(47
)
 
351

Total intangible assets
 
 
$
43,034

 
$
(1,209
)
 
$
41,825

 
$
43,034

 
$
(239
)
 
$
42,795

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizable Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease
85
 
$
(2,100
)
 
$
9

 
$
(2,091
)
 
$

 
$

 
$


Net amortization of intangibles was $0.3 million and less than $0.1 million for the three months ended September 30, 2014 and 2013, respectively, and $1.0 million and less than $0.1 million for the nine months ended September 30, 2014 and 2013, respectively. Amortization of in-place lease intangibles and the Villa Rental Program is included in Depreciation and amortization, and amortization of hotel parking garage lease, hotel ground lease and above-market ground lease intangibles is included in Property taxes, insurance and rent in the consolidated financial statements.

Based on the intangible assets recorded at September 30, 2014, scheduled annual amortization of intangibles for the remainder of 2014, each of the next four calendar years following December 31, 2014, and thereafter is as follows (in thousands):
Years Ending December 31,
 
Increase to Depreciation and Amortization
 
Increase to Property Taxes, Insurance and Rent
 
Total
2014 (remainder)
 
$
196

 
$
114

 
$
310

2015
 
778

 
421

 
1,199

2016
 
766

 
413

 
1,179

2017
 
731

 
407

 
1,138

2018
 
720

 
387

 
1,107

Thereafter
 
28,106

 
6,695

 
34,801

Total
 
$
31,297

 
$
8,437

 
$
39,734




CWI 9/30/2014 10-Q 17


Notes to Consolidated Financial Statements (Unaudited)

Note 7. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Derivative Assets and Liabilities — Our derivative assets and liabilities are comprised of interest rate swaps and an interest rate cap. These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market (Note 8).

We did not have any transfers into or out of Level 1, Level 2 and Level 3 measurements during either the three or nine months ended September 30, 2014 or 2013. Gains and losses (realized and unrealized) included in earnings are reported in Other income and (expenses) in the consolidated financial statements.

Our non-recourse debt, which we have classified as Level 3, had a carrying value of $828.0 million and $563.1 million, and an estimated fair value of $836.9 million and $565.1 million, at September 30, 2014 and December 31, 2013, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both September 30, 2014 and December 31, 2013.

Note 8. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered, and do not plan to enter, into financial instruments for trading or speculative purposes. In addition to derivative instruments that we entered into on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include default by a counterparty to a hedging arrangement on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with counterparties that are large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities.

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated and that qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.



CWI 9/30/2014 10-Q 18


Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
Derivatives Designated
 
 
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
as Hedging Instruments 
 
Balance Sheet Location
 
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
Interest rate swaps
 
Other assets
 
$
583

 
$
664

 
$

 
$

Interest rate cap
 
Other assets
 
74

 

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(453
)
 
(605
)
 
 
 
 
$
657

 
$
664

 
$
(453
)
 
$
(605
)

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both September 30, 2014 and December 31, 2013, no cash collateral had been posted nor received for any of our derivative positions.

We recognized a gain of $0.6 million and a loss of $1.9 million in Other comprehensive income (loss) on derivatives in connection with our interest rate swaps during the three months ended September 30, 2014 and 2013, respectively, and losses of $1.6 million and $1.0 million during the nine months ended September 30, 2014 and 2013, respectively.

We reclassified losses of $0.4 million and $0.3 million from Other comprehensive income (loss) on derivatives into interest expense during the three months ended September 30, 2014 and 2013, respectively, and losses of $1.2 million and $0.5 million during the nine months ended September 30, 2014 and 2013, respectively, in connection with our interest rate swaps.

Amounts reported in Other comprehensive income (loss) related to interest rate swaps will be reclassified to interest expense as interest payments are made on our variable-rate debt. At September 30, 2014, we estimate that an additional $1.5 million, inclusive of amounts attributable to noncontrolling interests of $0.2 million, will be reclassified as Interest expense during the next 12 months related to our interest rate swaps.

Interest Rate Swaps and Cap

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate, non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of the loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and cap that we had outstanding on our Consolidated Hotel investments at September 30, 2014 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 
Notional
 
Fair Value at
Interest Rate Derivatives
 
Instruments
 
Amount
 
September 30, 2014
Interest rate swaps
 
5
 
$
204,240

 
$
130

Interest rate cap
 
1
 
34,000

 
74

 
 
 
 
 
 
$
204


Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of collateral received, if any. No collateral was received as of September 30, 2014. At September 30, 2014, our total credit exposure was $0.6 million and the maximum exposure to any single counterparty was $0.5 million.



CWI 9/30/2014 10-Q 19


Notes to Consolidated Financial Statements (Unaudited)

Some of the agreements we have with our derivative counterparties contain certain credit contingent provisions that could result in a declaration of default against us regarding our derivative obligations if we either default or are capable of being declared in default on certain of our indebtedness. At September 30, 2014, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives that were in a net liability position was $0.5 million and $0.7 million at September 30, 2014 and December 31, 2013, respectively, which included accrued interest and any adjustment for nonperformance risk. If we had breached any of these provisions at either September 30, 2014 or December 31, 2013, we could have been required to settle our obligations under these agreements at their aggregate termination value of $0.6 million and $0.7 million, respectively.

Note 9. Debt

The following table presents the non-recourse debt on our Consolidated Hotel investments (in thousands):
 
 
 
 
 
 
 
 
Carrying Amount at
Consolidated Hotels
 
Interest Rate
 
Rate Type
 
Current Maturity Date
 
September 30, 2014
 
December 31, 2013
Hampton Inn Boston Braintree (a) (b)
 
5.00%
 
Variable
 
5/2015
 
$
9,550

 
$
9,653

Lake Arrowhead Resort and Spa (c)
 
4.34%
 
Fixed
 
7/2015
 
17,933

 
17,865

Hawks Cay Resort (a) (b)
 
5.74%
 
Variable
 
11/2016
 
79,000

 
79,000

Courtyard Pittsburgh Shadyside (a) (b) (d)
 
4.09%
 
Variable
 
3/2017
 
20,750

 
20,750

Courtyard San Diego Mission Valley (a) (b)
 
4.60%
 
Variable
 
12/2017
 
50,690

 
51,230

Hampton Inn Memphis Beale Street
 
4.07%
 
Fixed
 
3/2018
 
21,720

 
22,118

Hampton Inn Atlanta Downtown
 
4.12%
 
Fixed
 
3/2018
 
13,449

 
13,600

Hampton Inn Birmingham Colonnade
 
4.12%
 
Fixed
 
3/2018
 
9,296

 
9,400

Hampton Inn Frisco Legacy Park
 
4.12%
 
Fixed
 
3/2018
 
9,098

 
9,200

Hilton Garden Inn Baton Rouge Airport
 
4.12%
 
Fixed
 
3/2018
 
9,691

 
9,800

Fairmont Sonoma Mission Inn & Spa (b)
 
4.13%
 
Variable
 
7/2018
 
44,000

 
44,000

Sheraton Austin Hotel at the Capitol
 
3.96%
 
Fixed
 
6/2019
 
67,000

 

Marriott Boca Raton at Boca Center (b) (e)
 
3.40%
 
Variable
 
7/2019
 
34,000